How Canadians can avoid costly U.S. tax surprises

For many Canadians, the United States is more than a destination for vacations. It’s a place where they own property and other investments, do business and spend extended time.

“Any time you bring these scenarios into your financial picture, you’re potentially dealing with U.S. tax implications,” says John Waters, a chartered professional accountant, certified financial planner and vice president of tax consulting services for RBC Wealth Management Canada.

A key risk is double taxation, where both the Canada Revenue Agency (CRA) and the U.S. Internal Revenue Service (IRS) tax income from the same source. It’s not just ownership of a U.S. property or U.S. investments held in a portfolio that present challenges. Depending on the duration of their time spent down south, a Canadian could be considered a U.S. resident for tax purposes.

Individuals often purchase U.S. real estate first and ask tax questions later, says Anneke Keenleyside, managing director, RBC Private Banking in Toronto. “I tell my clients that before they make a major decision, like buying a vacation property, consulting with their Private Banking team can help make sure they have the proper plan in place to avoid unintended consequences.”

Private bankers can integrate cross-border wealth solutions into their services to ensure clients are able to bank confidently and efficiently in the U.S. when necessary. They can also help clients make informed decisions about how their U.S. assets fit into their broader financial pictures.

Cross-border issues can be complex, and one common example involves the substantial presence test. Many Canadians don’t fully understand the nuances, Ms. Keenleyside says.

Individuals who spend more than 183 days a year risk being considered U.S. residents, but the test is more involved, consisting of two parts. The first looks at whether a visitor spends more than 30 days in the United States for the current year. If that’s the case, the second part requires a rolling three-year calculation that can’t exceed 183 days.

The calculation involves counting all the days that you were physically present in the U.S. for the current year, one-third of the days spent there the previous year, and one-sixth of the days for the year before that. “The rule of thumb really is to not be in the U.S. more than 120 days every year,” Ms. Keenleyside says.

Given the implications and potential for confusion, RBC’s Private Banking team regularly asks clients about U.S. visits and financial connections beyond investment portfolios. “We have the team and resources to help mitigate tax and other risks associated with U.S. exposure,” Ms. Keenleyside says.

RBC Private Banking can connect clients with RBC’s deep bench of tax specialists, such as Mr. Waters and his team. “We can provide an awareness of the issues, outline the relevant tax rules and discuss various potential strategies to consider, with the direction of their external advisors, depending on what makes sense in their situation,” he says.

RBC Private Banking can also offer guidance on other complexities regarding U.S. assets, including U.S. estate tax considerations, and if necessary, can provide contacts for trusted third-party cross-border tax professionals.

“Owning a rental property in the U.S. or selling a U.S. property introduces further complexities,” Mr. Waters says, noting the possibility of high withholding taxes if individuals fail to file the right IRS forms on time.

U.S. taxes paid on U.S.-source income may be allowed as a foreign tax credit to reduce the Canadian tax owing, but there still may be some tax leakage. Plan upfront to help reduce these additional costs and headaches often involved with the purchase, rental or sale of U.S. real estate. Proper planning can ensure an appropriate ownership structure, with tax implications coordinated on both sides of the border.

For Canadians, U.S. exposure can vary. But whether it’s income from renting out a part-time vacation property, buying or selling U.S. real estate and other investments, or wintering in the Sun Belt, Mr. Waters says timely guidance is paramount.

“Always consult with your private banker about your circumstances, so that they can work with you and your external tax and legal advisors to put a plan in place ahead of time to avoid costly pitfalls.”

This article was originally published in The Globe and Mail .