Consequences of Moving

Consequences of Moving - Image of middle aged couple having coffee among moving boxes(a) Leaving the United States

Non U.S. citizens leaving the U.S. during a year and wishing to report their anticipated annual income during the year may file form 1040-C - U.S. Departing Alien Income Tax Return. The 1040-C is not a final return, and a 1040 or 1040NR must still be filed within the required time limits. A non-U.S. citizen who leaves the United States will normally have a dual status tax year in the year of departure.

(b) Leaving Canada – Canadian Taxation of Non-Residents

Persons who are not residents of Canada are taxable in Canada on income from Canadian sources.

(i) Consequences of Leaving Canada

Canadians who give up residence in the year are deemed to have disposed of all of their capital properties at fair market value at the time of departure from Canada, giving rise to deemed capital gains or losses that are reportable in the year of departure. "Taxable Canadian Property" such as Canadian real estate or shares of non-listed corporations, resource property, and trusts is not deemed to be disposed of on departure, but is subject to non-resident withholding tax, and filing requirements upon eventual disposition.

Deemed dispositions of capital property which are not actually disposed of while absent from Canada, may be reversed if the individual returns to Canada as a resident within five years of departure.

Individuals permanently moving to the U.S. should consider disposing of capital property prior to establishing U.S. residence, since unlike Canadian rules, the U.S. will impose a tax on any capital gain based on original cost, from a disposition of capital property by a resident. No provision is made for revaluing the capital property at the time of entry to the U.S., unlike under Canadian capital gains rules.

(ii) Rental Real Estate in Canada

A non-resident who receives Canadian rental income may file a Sec. 216 return to report the rental property under Part I, rather than being taxed under Part XIII (withholding taxes - non residents). Form NR6 is used to undertake to file a Sec. 216 return and to reduce withholding requirements to actual expected profits (rather than gross rents). Even though no personal exemptions may be claimed on such a tax return, an RRSP deduction may be made to the extent a contribution is made within available room. The effect of Para 216 on net income is usually beneficial.

(iii) Registered Retirement Savings Plans

No rollovers of Canadian RRSPs are feasible to U.S. IRAs or similar plans (or visa versa), since such a transfer would be considered a distribution under Canadian law. Accordingly, persons moving to the U.S. after a work period in Canada should consider leaving the RRSP intact, and drawing funds from the plan only upon retirement or as provided for under Canadian law.

Upon withdrawal by non-residents, RRSP funds will be subject to a 25% non-resident withholding tax and a non-resident may improve that tax by electing to file a return under Sec. 217, which taxes RRSP income but considers world income in the tax calculation.

For U.S. tax purposes, RRSP withdrawals are taxable as pension income, and eligible for a foreign tax credit for non resident withholding taxes imposed by Canada.  Income earned within an RRSP is not subject to U.S. tax unless withdrawn.  In the state of California, however, income earned within an RRSP is taxed for state purposes annually, and as a result RRSP withdrawals consisting of contributions prior to entry to California, and income reported in California are not taxable at the state level.

(iv) Other Income

Part XIII of the Income Tax (Canada) imposes a withholding tax on various forms of income from Canadian sources earned by non-residents.