The US-Canada border is one of the friendliest in the world. As a result, many people move back and forth across the border. I am one of those people. I grew up in Canada, went to university and worked in the US, moved back to Canada for a few years, and now live back in the US.
It’s important for people considering moving across the border to understand the difference between the two countries' tax systems and other factors impacting cost of living. Although the principles in each country are similar, the implementation is quite different.
I’ve been writing a series of posts on the topic, including
- Various topics, tax agencies, impact of moving, filing status, and income tax rates
- Deductions and credits
- Payroll tax
- Health care and other insurance
- Capital gains
- Small business tax
In this post I’ll talk about the year of the move. Taxes in the year you move can be complicated and are affected by decisions you make before you move. In this post I’ll give you some things to think about, but I encourage you to get with your tax advisor as long as possible before you move.
When moving to the US, you pick a point in time when you drop Canadian residency and become a US resident. You only file Canada tax returns for the portion of the year you were in Canada, and you file US tax returns for the portion of the year you were in the US. The exception is if you are deemed to be a resident for the entire year, which I talk about below.
When US citizens move to Canada, they still have to file US returns for the entire year (and all future years), and they file in Canada for the portion of the year they were Canadian residents.
The following are things to watch out for:
Residency rules
Normally you are considered to be a resident of the one country to which you have the closest ties. In the simplest situation, on the day you move you cease to be a resident of one country and become a resident of the other.
Of course, real situations are not usually that simple.
One rule that almost got me was the US substantial presence test. You are deemed to be a resident of the US (and are required to file US tax returns for the entire year) if you are in the US a certain number of days over the last three years according to a formula.
I moved in August, so I assumed I would only be a US resident for the part of the year I lived there. However, I spent a lot of time in the US before I moved. As I counted my days for this formula, I realized I would be considered a US resident for the entire year. That was a problem because of the way my Canadian income from a corporation was treated favorably by Canada but treated differently in the US. I had to leave the US for a couple of weeks after I moved to avoid a large tax bill. I would have been in trouble if I didn’t find out until I went to file taxes after the end of the year.
The flip side is that until you meet the substantial presence test, you are considered a nonresident. Nonresidents don’t quality for some tax deductions, such as the standard deduction and child tax credit. However, you can file back to the day you moved as a resident once you meet the test. If the tax return deadline is before you become a resident, you have to file a nonresident alien tax return and then amend it once you become a resident.
I was able to wait until I met the substantial presence test before filing a resident tax return. When I did file, I was called a dual-status alien filing a dual-status return (so you know the terminology for doing your own research).
Residency rules are complicated, and it’s important for your to do your own research on your situation.
Canadian corporations and residency
I mentioned this in my small business tax post, corporation owners who move out of Canada need to be careful. If more than 50% of the ownership becomes non-residents of Canada, the corporation ceases to be a Canadian Controlled Private Corporation (CCPC) and will lose the associated tax benefits.
If you are closing your business as part of your move, it may be wise to dispose of all of the corporation's assets before you move. If your business generates income after you move, such as capital gains from selling assets, it will not qualify for CCPC tax advantages.
Further, as a US resident you are taxed on your worldwide income using US tax laws, including salary or dividends you take from the corporation.
Pro-rated items
Some items on tax returns are based on a full year, such as the standard deduction and personal exemption. When you are filing as a resident for only part of the year, some deductions are prorated and some aren’t. Deductions that aren’t prorated give you an advantage in that year because you get a full year of deductions/credits against a partial year of income. The US personal exemption and child tax credit are examples.
You can be strategic about deductions that are timing based. For example, if you give regular donations to organizations with presence in both Canada and the US, you can maximize your yearly donation in Canada. Canada provides more tax savings on charitable donations.
Health care
I wrote about the differences in health care systems in a previous post. I’ll mention a couple of important points related to when you move.
If you are moving from Canada, the provincial health care system will allow you to keep your coverage for a certain period after your move.
In our case, we were able to keep our Alberta Health coverage for two full months after the month we moved. We purchased inexpensive travel insurance for this period. This saved us three months of US health insurance premiums.
If you are moving to Canada, enjoy universal health care! But make sure you plan ahead because the provincial health care system may require a waiting period before you qualify for coverage.
Moving cross-border involves a lot of preparation, work, and stress. It’s easy to forget about the tax implications until the tax deadlines in the year after you move. You’ll save yourself a lot of headache and probably a lot of money if you plan ahead.
Disclaimer: I am a CPA in both Canada (Chartered Professional Accountant) and the US (Certified Public Accountant), but I am not a tax expert and this post is not meant to be professional advice. My goal is not to write a definitive guide. Rather, my goal is to give you a starting point for your own further research and/or discussions with your tax advisor.