When you decide to move from Canada to the U.S., one critical step is severing your Canadian tax ties. This ensures that you are no longer considered a Canadian tax resident, simplifying your tax obligations and avoiding dual taxation. The Canada Revenue Agency (CRA) evaluates your residency based on several factors, so it’s essential to take deliberate actions to establish that you have permanently relocated. Below is a detailed guide to help you sever your tax ties with Canada.
Why Severing Canadian Tax Ties is Important
When you permanently move to the U.S., you want to ensure that you are a tax resident of only one country. Remaining a Canadian tax resident means you would be taxed on your worldwide income in Canada, even while living in the U.S. To simplify your life and minimize unnecessary tax liabilities, you need to sever ties with Canada and establish residency in the U.S.
The CRA evaluates a “pattern or group of indicators” rather than one specific item to determine if you’ve effectively moved your community of interest from Canada to the U.S. The CRA evaluates your ties to Canada to determine your residency status for tax purposes. These ties are divided into two categories:
Primary Ties
- Home Ownership: If you own or maintain a home in Canada, the CRA may consider you a resident.
- Spouse or Dependents: If your spouse or children remain in Canada, you may still be considered a resident. Moving your family to the U.S. is key to severing this tie.
Secondary Ties
- Canadian bank accounts, credit cards, or investments.
- Memberships in Canadian organizations, such as gyms, clubs, or professional associations.
- Canadian driver’s license.
- Canadian health insurance coverage.
- Ties to Canadian employment or businesses.
While primary ties are more significant, reducing your secondary ties also strengthens your case for non-residency. Taking the following steps will help build a strong case for your non-residency.
Steps to Sever Your Canadian Tax Ties
1. Canadian Home
If you own a home in Canada, it is best to sell it before or shortly after your move. Keeping a home in Canada could lead the CRA to classify you as a resident for tax purposes. Avoid extended stays in Canada for at least a year after your move to further strengthen your non-residency claim. Selling or renting your home out on a long-term lease helps sever this tie. Be careful if you plan on moving back to Canada and into that home in the future because there will be a change of use deemed disposition tax on the property when you move in.
2. Provincial Health Care
Once you have secured health coverage in the U.S., return your Canadian provincial health care card. Notify the provincial health agency, such as OHIP in Ontario, that you are no longer a Canadian resident. Include a formal letter confirming your departure.
3. Driver’s License
Apply for a U.S. driver’s license as soon as possible. Once obtained, mail your Canadian driver’s license back to the provincial licensing authority with a letter confirming your new residency status in the U.S. It is generally best to get a new driver’s license and register your vehicle within 30 days of your move.
4. Cancel Memberships and Subscriptions
- Memberships: Cancel memberships with Canadian churches, clubs, and professional associations unless they are explicitly required for duties abroad. Where possible, request non-resident status for professional memberships.
- Subscriptions: Cancel Canadian magazine or newspaper subscriptions and terminate safety deposit boxes. Establish similar services in the U.S. where needed.
5. Business and Professional Relationships
Move as many professional relationships as possible to the U.S.:
- Purchase U.S. auto insurance.
- Establish banking and investment accounts in the U.S.
- Create a U.S.-based estate plan with a local attorney.
6. Personal Items
Move valuable personal property, such as collectibles or heirlooms, to the U.S. upon or shortly after your arrival. Storing significant belongings in Canada for extended periods can indicate that you have not fully severed ties.
7. Financial Consolidation
- Bank Accounts: Close unnecessary Canadian accounts and transfer funds to U.S. accounts. Retain only accounts needed for convenience, such as those tied to Canadian pensions or investments.
- Credit Cards: Cancel Canadian credit cards that cannot be transitioned to U.S.-based accounts.
8. Mail Forwarding
Submit a formal address change to Canada Post to forward mail to your U.S. address. Notify financial institutions, government agencies, and other contacts of your new address.
9. Documentation
Keep a personal file documenting your efforts to sever ties with Canada, including:
- Proof of cancellation of health care, driver’s license, and memberships.
- Confirmation of property sales or leases.
- Copies of letters notifying institutions of your non-residency.
The CRA’s Form NR73 – Determination of Residency Status can help you assess your situation. However, we do not recommend submitting this form unless specifically requested by the CRA. It is complex and could lock you into a residency status that may be difficult to dispute later. Always consult a tax professional before filing this form. Form NR73 is most commonly used to establish non-residency status for withholding tax purposes, or to unlock locked-in registered retirement plans.
10. Notification of Non-Residency
Notify all Canadian financial institutions of your departure. Include your new U.S. address and confirm your status as a non-resident. State that you are subject to non-resident withholding tax under the Canada-U.S. Tax Treaty. Typical withholding rates include:
- 15% on dividends and periodic pension payments.
- 0% on CPP/OAS payments.
- 25% on lump-sum RRSP withdrawals.
Keep copies of all correspondence as proof in case of errors or disputes regarding withholding amounts.
11. RRSPs and TFSAs
- RRSPs: Registered accounts are not subject to deemed disposition, but withdrawals will incur withholding taxes. You may leave these accounts in Canada, where they will continue to grow tax deferred. If possible, go to all cash in your registered accounts so you enter the U.S. holding cash only. This will reset your U.S. cost basis so only the growth in the account after your entry date will be taxable in the U.S. in the future. You can reinvest once you have moved.
- TFSAs: TFSAs lose their tax-free status in the U.S. Income earned in these accounts is taxable, and reporting can be burdensome. Closing your TFSA before moving can simplify compliance.
12. Handle Automobiles
It’s advisable to sell your Canadian vehicle before moving to the U.S. due to:
- Speedometer and odometer differences (kilometers vs. miles).
- U.S. emissions and safety standards differences.
- Cumbersome registration and inspection processes.
If you bring your vehicle, register and insure it in the U.S. within 30 days and notify your Canadian insurer of the termination.
13. Plan Your Travel
Spend most of your time in the U.S. after your move.
14. Address Canadian Exit Tax and U.S. Tax Filings
- Canadian Exit Tax: File the necessary Canadian tax forms by April 30 following your year of departure. The CRA considers most non-registered investments to be “deemed disposed of” upon your departure, meaning they are treated as sold at fair market value. This could trigger capital gains taxes. Pay any taxes owed to the Canada Revenue Agency at this time. A cross-border tax advisor can help you minimize this liability if you start planning early.
- U.S. Tax Filings: File your U.S. tax return by April 15 following your arrival in the U.S. or request an extension. Ensure compliance with foreign account reporting requirements and make sure to include your worldwide income.
15. Manage Brokerage Accounts
- Canadian Perspective: Non-registered brokerage accounts are “deemed disposed of” upon exiting Canada, meaning their holdings are treated as sold for tax purposes. Capital gains or losses should be reported on your Canadian exit tax return. Planning can be done to mitigate the deemed disposition.
- U.S. Perspective: The cost basis of these holdings carries over as a U.S. taxpayer. Consider liquidating holdings in a gain position before your move to avoid complications and potential double tax. You are paying capital gains tax on positions with unrealized capital gains anyway because of the deemed disposition tax, so selling will not trigger any additional gains but will put you in a better tax position in the U.S.
Maintain your Canadian account statements from the year of your move for future U.S. tax filings.
16. Move Taxable Brokerage Accounts
Most Canadian brokers are not licensed or registered to manage accounts for U.S. residents. Likewise, many U.S. advisors lack expertise in managing Canadian dollar-denominated investments. Close non-registered Canadian accounts and transition the proceeds to the U.S. The account will be deemed disposed of for tax purposes so capital gains tax will be due and closing the account will not trigger any additional tax unless you do it after you become a U.S. tax resident. Closing the account does not mean you have to convert to USD. If you work with a cross-border specialist, the account can be managed in CAD at a U.S. custodian.
17. Update Your Estate Plan
Work with a cross-border or U.S.-based attorney to update your estate plan, including wills and powers of attorney. Canadian estate documents may not be valid in the U.S. and establishing a cross-border plan ensures your wishes are upheld. Be careful of the Canadian Non-Resident Trust Rules, especially in the first five years after establishing U.S. residency.
18. Work with Cross-Border Experts
- Plan for your departure return.
- Plan for U.S. tax compliance.
- Optimize your taxes and investments in a cross-border context.
Severing your Canadian tax ties is a crucial step when moving to the U.S. By following the steps outlined above you can establish your non-residency and simplify your tax obligations.
Working with cross-border financial and tax experts ensures that your transition is seamless and compliant, leaving you free to enjoy the opportunities that brought you to the United States.
