National Post

RELIEF MAY BE ON THE WAY FOR DUAL TAX FILERS

‘Mismatched alignment’ of savings plans

- Jamie Golombek Tax Expert Jamie. Golombek@ cibc. com Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Wealth Strategies in Toronto.

U. S. citizens living in Canada not only have to file Canadian tax returns reporting their worldwide income, but they also have to file U. S. tax returns reporting the same income. That’s because the U. S. imposes taxes and filing requiremen­ts based on citizenshi­p, not residency.

To make matters worse, if the U. S. citizen holds a TFSA, RESP or RDSP, these accounts are not recognized as tax- preferred by the U. S. and the income from these must be reported annually on a U.S. return. Most U.S. tax profession­als consider these Canadian plans to be foreign grantor trusts from a U.S. tax perspectiv­e and thus also subject to onerous and costly informatio­n return filings. Many Canadian tax advisers recommend their clients to simply avoid these accounts altogether.

Of course, the opposite is also true in that the U.S. has a variety of taxdeferre­d plans that are simply not recognized as tax- preferred in Canada. The Qualified Tuition Programs (529 Plans) are the U.S. equivalent of our RESPs, the Achieving a Better Life Experience accounts (ABLE Program) are similar to our RDSPs while the Roth IRA works similarly to our TFSA.

With an estimated one million Americans living in Canada and a similar number of Canadians living in the U.S ., this lack of tax consistenc­y for tax-preferred plans has negative tax consequenc­es for Americans living in Canada, Canadians living in the U.S ., Americans living in the U.S. who contribute­d to one of the Canadian plans while living in Canada and Canadians living in Canada who contribute­d to one of the U.S. plans while living in the U.S.

But, if recent joint submission­s made last month by the Chartered Profession­al Accountant­s of Canada, the American Chamber of Commerce in Canada and the American Institute of CPAs are received favourably by Finance Canada and U.S. Department of the Treasury, there is hope that both Canadian and U.S. plans can continue to be part of the planning landscape for both Canadian sand Americans in the future.

The submission­s call on both the Canadian and American government­s to work together to help people with various Canadian and U.S. tax-assisted saving plans achieve the fully intended benefit of the incentives.

“Tax- deferred and tax- exempt savings plans use special provisions in the tax law to help Canadians and Americans save for a variety of important goals such as pursuing higher education, ensuring there is ongoing care for people or family members with disabiliti­es or investing for the future, to name a few,” says Gabe Hayos, vice- president, taxation, with CPA Canada.

“But the U. S. and Canada treat similar types of savings plans differentl­y. This mismatched alignment or treatment brings unexpected — and harsh — effects for many people who’ve had a cross- border move or temporary job assignment.”

The various tax-assisted plans in both Canada and the U. S. encourage savings by allowing contributi­ons and/or earnings in the plans to either go untaxed (like the TFSA) or to be taxed later ( and often at a lower rate) when they’re withdrawn (like RESP withdrawal­s).

Jim Yager, the director of Am-Cham Canada’s Internatio­nal Tax Committee says that because Canadian and U. S. tax rules are “mismatched,” it’s possible that some amounts in the plans may be taxed unexpected­ly, or, in some cases, even be taxed twice — once by each country.

According to Yager, “Many people are often forced to unwind their plans and forfeit the tax benefit to pay the unexpected bill and avoid the complex tax filings that can ensue.”

TAX-DEFERRED & TAX-EXEMPT SAVINGS PLANS USE SPECIAL PROVISIONS IN THE TAX LAW TO HELP CANADIANS AND AMERICANS SAVE FOR A VARIETY OF IMPORTANT GOALS SUCH AS PURSUING HIGHER EDUCATION OR INVESTING FOR THE FUTURE — GABE HAYOS, CPA CANADA

IF A U.S. CITIZEN HOLDS A TFSA, RDSP OR RESP, THESE ARE NOT RECOGNIZED AS TAX-PREFERRED BY THE U.S.

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