If you have recently become a Canadian resident or are in the process of doing so, you may be wondering if you need to relocate all of your investments to Canada and how taxes will work.
As a Canadian resident, you may be required to report certain foreign financial assets to the CRA, including taxable investment accounts in the United States. If your investments are still held in a US account, this reporting can be time-consuming and costly. If your US investments are held with a Canadian wealth management firm, it will be much easier and may cost less in accounting fees. You are also less likely to make mistakes if you work with a Canadian firm that understands both the Canadian and US sides and can produce the necessary reporting documents.
Here are some of the services provided by Canadian cross-border wealth management firms:
- FOLLOWING THE COST BASE
In most cases, a cross-border wealth management firm will track the cost base for Canadian tax purposes for your Canadian tax return. They will also generally track the cost base for US tax returns. The cost base is the price at which the government acknowledges you bought a share. When you relocate to Canada, your cost base will be the fair market value of the share on the day you become a resident. Canada also differs from the United States in that the cost base is calculated using the weighted average method, whereas in the United States, FIFO is frequently used. As a result, leaving investments in a US account necessitates tracking these cost bases separately for Canadian purposes. If this is not done correctly, you may end up underpaying or overpaying taxes on every investment sale. It saves you and your accountant time to have a professional track the cost base of all your investments. It also saves you money and provides you with peace of mind because you know everything was done correctly and you do not have to worry about it.
- OPTIMIZE INVESTMENTS TO AVOID OVERPAYING TAX IN CANADA
If you leave your taxable investment account in the United States, you will most likely be unable to access investments that are taxed favorably in Canada. In other words, you may not be able to invest in a way that allows you to pay less tax in Canada, which should be your goal given that taxation in Canada is typically higher than in the United States. Because your US advisor is unlikely to be an expert in the Canadian investment market unless they are a cross-border advisor, you may not have an optimal investment mix for Canada. If you sell your investments in a taxable investment account in the United States, the capital gains from a US stock are treated the same as capital gains from a Canadian stock. However, determining the cost base will require significantly more effort because it differs in both countries.
The key is to work with an advisor who understands the tax implications to help you decide where to invest in order to maximize after-tax earnings. Having a company that tracks both cost bases will save you time and money.
If you intend to generate long-term income streams from your investments, leaving them in taxable investment accounts in the United States is not a good idea. Instead, it is critical to work with a cross-border financial advisor and cross-border accountant who can assist you with every aspect of your financial transition and ensure you meet your long-term financial and legacy objectives.
