By: Robert Keats
My 30 years of experience in advising Canadians in international tax and financial planning matters told me that a desired tropical lifestyle and reduction in living expenses is available to most Canadians, literally right beneath their noses in the form of the United States of America. The United States meets virtually all of the requirements of a good tax haven for Canadians, but it is almost never mentioned when discussing worldwide tax havens.
In my latest book, ‘A Canadian’s Best Tax Haven: the U.S., Take Your Money and Drive!,’ I clearly illustrate the tax savings for Canadians using the U.S. as their tax haven and compare it with a traditional tax haven on an island in the middle of nowhere. A retired couple in maximum Canadian brackets with an additional $100,000 each of 11 different types of income (these 11 types are from every different source of income a Canadian is ever likely to have: interest dividends, capital gains, pension, royalties etc.) and a maximum CPP/QPP and OAS, can have a total income of $1,132,000. This couple can save approximately $410,000 in taxes by moving to the U.S., or a total of about $210,000 more tax reduction than the traditional tax haven when foreign tax credits are managed most effectively. Because the Canadians in this example are in the maximum Canadian tax bracket, savings will be roughly the same on this $1,132,000 of income if they take it out all in one year or spread it over a number of years. Of course, the higher the income beyond this example, the more the net tax savings will be. In addition to these income tax savings, Canadians using the U.S. as their tax haven can generally add a lower cost of living, no GST, and access to the full U.S. medical system through reasonably priced guaranteed health insurance coverage.
The Internal Revenue Service (IRS) is one of the main reasons most Canadians, and many of their Canadian advisors, never consider the United States a tax haven where they can receive substantial tax benefits. I cringe every time I hear a Canadian advisor tell his or her clients, ‘You don’t want to move to the U.S. because you’ll have to deal with the IRS.’ This first myth is usually followed by two additional myths which can appear to be insurmountable obstacles to the client. The additional myths are ‘you cannot leave Canada because you are going to pay too much exit tax’ and ‘your estate is too large to move to the U.S. because you will be subject to U.S. estate taxes.’
In ‘A Canadian’s Best Tax Haven: the U.S.,’ I painstakingly debunk these three key myths. In summary, although I don’t particularly enjoy dealing with either the Canadian or U.S. tax authorities, the IRS is actually slightly easier to deal with than the Canada Revenue Agency (CRA), and there are more legislated taxpayer rights in the U.S. Canadians coming to the U.S. need not face an exit tax at all with some basic CRA filings and multiple options to reduce or eliminate this tax, if they are subject to it at all. By establishing proper family trusts before a Canadian enters the U.S., they can entirely eliminate exposure of their assets to U.S. estate tax, regardless of the size of their estate.
In my career, I have spent considerable time as an officer in the Canadian Armed Forces, as an employee of a large international financial conglomerate, and as a small business owner. By far the most rewarding and challenging experience has been as a small business owner.
Being a small-business owner and entrepreneur is no piece of cake. I can identify with the countless hours of trying to climb impossible mountains, putting out fires, handling renegade employees, paying bills, and making payroll. I understand the frustration of dealing with all the government rules and regulations to the extent that sometimes I think I’m actually working for the government! It sometimes feels like the government is making it nearly impossible for business owners to make a profit by conforming to all of its seemingly pointless rules!
I understand the anger and frustration that happens when a business owner goes to sell all or part of his or her business and the government has its hand out to take a substantial chunk of the business owner’s hard-earned equity. This is why it gives me great satisfaction when we can use cross-border strategies to assist in reducing the tax bite business owners face when selling their business, particularly on the proceeds of the sale after taxes.
No other area of cross-border financial planning offers owners of small businesses and farms more income tax-saving potential than moving to the United States. A well thought out cross-border financial plan can save a business owner or farmer several hundreds of thousands of dollars to several million dollars, depending on the size or the nature of the business.
Most of these planning opportunities arise solely because of the Canada-U.S. Tax Treaty. These tax savings would not be available to business owners if they stayed Canadian residents and they were not willing or able to relocate to the U.S. They also will not be available once they are U.S. taxpayers. These strategies must be done in conjunction with a cross-border move.
Unfortunately, the business owner’s trusted advisors, accountants, and lawyers of many years, sometimes become the major deterrent to making savings happen. These business owners are often confronted by one or more of the three common myths outlined earlier in this article. These long-time Canadian advisors are unaware of the U.S. domestic rules and treaty rules required that make it possible to sell a business using treaty planning rather than the normal domestic planning. As a result, the business owner may be inadvertently misled or discouraged from taking advantage of great opportunities such as a much higher after tax value on the sale of their business. I feel this is a great tragedy and when business owners find they could have sold their business at much less tax than they paid, they can get quite upset with the Canadian advisors who were simply unaware of the option of using the U.S. as a tax haven.
Other items that Canadians using the U.S. as a tax haven strategy really enjoy, is being able to withdraw their RRSPs, LIRAs, RRIFs, etc. at the Canada/US Tax Treaty rate of 15 per cent, rather than the regular Canadian rate of close to 50 per cent. In addition, with good planning, the 15 per cent withholding tax on the retirement accounts can often be recovered from the IRS through the use of foreign tax credits, which reduces net taxes on the accounts, sometimes to zero. This works for any size retirement account from a few thousand to several million dollars. How sweet it is to have the Canadian government effectively pay for U.S. healthcare, since retired Canadians becoming U.S. residents are no longer subject to the Old Age Security clawback. This is another benefit of the Canada/U.S. Tax Treaty, since Canada can no longer tax OAS at all, let alone the 100 per cent full clawback level. This means a married couple will have approximately $13,000 of OAS income, in the U.S., that they never would have received as Canadian residents. This is usually enough to cover any U.S. medical insurance costs when establishing a U.S. residence.
Through combining the above tax reduction strategies using the U.S. as a tax haven and a good immigration strategy, Canadians can build what amounts to their own private swinging door on the Canada/U.S. border. This allows them to travel back and forth in either direction anytime they want, for any length of time they want, without harassment from either tax or immigration authorities for the rest of their lives, while covered by both the Canadian and U.S. medical systems.
In short, Canadians can ‘Take Their Money and Drive’ to a wonderful cross-border lifestyle, which makes their hard earned money, accumulated during their lifetimes, go substantially further under the palm trees of California, Arizona, Florida, or some other U.S. Sunbelt state.
is with KeatsConnelly, a cross-border wealth management firm. He is also the author of the book ‘A Canadian’s Best Tax Haven: the U.S., Take Your Money and Drive!,’ For more information on the book,