Cross-border challenges

U.S. citizen working here seeks investing tips.

In our Smart Money series, #MillennialMoney, we ask people living in the Greater Toronto Area to record every penny they spend in a typical week. Then, using tips from a financial adviser, we challenge them to cut their spending the following week so they can save more money. Will they fail or succeed?

Just last year, Joe, a 29-year-old United States citizen, moved to Toronto for work and is now starting his career in Canada. Working as a tech analyst for a Canadian firm, he makes $60,000 (Canadian) a year.

Now, he wants tips on how he can smartly invest his money. “What investment products should I avoid to minimize tax headaches and risks? More generally, how should I invest as a U.S. citizen in Canada?” he asks.

Currently working from the office, Joe usually skips breakfast and buys takeout for lunch and dinner from a Subway sandwich shop underneath his workplace.

Another thing that helps is that he was able to find a spot in the city near the downtown core that he shares with a roommate, and pays just $1,000 a month rent.

On the weekends, Joe spends time outdoors — even in the Canadian winter cold — to get some fresh air and exercise as the COVID-19 pandemic numbers continue to rise in Ontario. He also meets up with one or two friends on a patio.

Joe doesn’t have any debt and wrote to Millennial Money to learn optimal investing strategies. That includes whether he should invest in a property in Canada or in the U.S.

“I’m wondering is it preferable to buy a house in Canada rather than the U.S. as the CRA taxes Canadian residents on global income (i.e., U.S. capital gains)?” he said. Also, he wants to know how he can balance his retirement contributions between the two countries.

We asked Joe about his daily spending to get a better idea of his finances.

The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Joe’s situation.

One important consideration for Joe and other U.S. citizens is that they need to continue to file U.S. tax returns while living in Canada. There can also be Canadian investments or accounts that make their U.S. tax filing more complicated or costly. One example is if Joe buys Canadian mutual funds or exchange traded funds (ETFs) in a taxable nonregistered account. These are considered Passive Foreign Investment Corporations (PFICs) and require filing the complex form 8621 with the IRS, driving up tax compliance costs. The tax treatment of PFICs can also be punitive for a U.S. citizen in Canada.

Traditional saving advice for a young person starting to build their investments may include contributing to a Tax Free Savings Account (TFSA). There can be problems for U.S. citizens who contribute to a TFSA because the IRS does not recognize the special status of the accounts. As such, a U.S. taxpayer with a TFSA must generally file form 3520 and 3520-A, leading to increased tax filing complexity and costs that may not be worth it. The IRS does not consider TFSAs to be tax free, so the income is taxable in the U.S.

TFSAs are a lot like Roth Individual Retirement Accounts in the U.S., but the IRS has yet to clarify their position on TFSAs. Joe should not contribute to a Roth IRA either as, once becoming a Canadian resident, the tax-free treatment for new contributions to a Roth IRA will not apply.

So, in Joe’s case, saving in a taxable account or contributing to a Registered Retirement Savings Plan (RRSP) are probably his best options unless he has a pension plan that he can contribute to at work.

The IRS recognizes the tax deferred status of RRSP accounts and company pensions. The thing with Joe is that he may not want to contribute too much money to a RRSP account for a few reasons. For one, his income is in a modest tax bracket at $60,000. If he expects his income to rise as his career progresses, or if he is hoping to buy a car or a home, he may not want to sock away too much money in his RRSP.

When picking his investments, Joe should probably steer clear of Canadian mutual funds or ETFs, and possibly buy individual stocks or U.S.-listed ETFs.

If he hasn’t already, he should consider preparing Canadian estate documents. Given he has no dependants, his main priority should be his powers of attorney.

Ontario has powers of attorney for property (financial matters) and personal care (health-care matters) that appoint someone to make decisions for you if you are sick, have a disability or are otherwise unable to act on your own. If his family is back in the U.S. and he is new to Canada, it could be complicated if something happened to him and he didn’t have his estate planning up to date.

So I’d talk to his accountant, get some validation on the interplay between his Canadian and U.S. taxes, and set up a savings plan for short and long-term financial goals.

The result: He spent more. Spending in week 1: $265 Spending in week 2: $330

How he thinks he did: “All of my expenses this week remain essential,” Joe said, adding that the positive comments from the money coach on his frugality were a “nice morale booster.”

“I had to get more winter clothing from Uniqlo,” he adds, hoping that the layers can help him continue to spend time outside during the pandemic.

The other essential buy? Medicine for his father. “(It’s) cheaper in Canada,” he said.

Take-aways: Clarity. “Upon reading the expert’s advice, there are more ‘do-nots’ than ‘dos’ for U.S. citizens, which may not be a bad thing as it means I can concentrate my funds in just a few investment vehicles,” Joe said.

One thing Joe was surprised about was the expert’s advice on retirement. “I found the expert’s advice regarding RRSPs and Roth IRAs to be unexpected. I was about to max out both accounts but will postpone doing so for now as instructed.”

Finally when it comes to estate planning and powers of attorney, he has a lot to consider.

“As the expert rightly noted: very complicated due to crossborder legal challenges, so I need to find a good time to discuss it with my family.”

Are you a millennial living in Toronto or the GTA and need help with saving your money? Be a part of #MillennialMoney and email ekwong@thestar.ca.