A few years ago, cross-border financial planning experts Brian Wruk and Terry Ritchie got a call from an estate lawyer in California seeking advice. The lawyer wanted to know how to handle the affairs of a Canadian client who had collapsed and died while at work in the U.S.

The client had been in the U.S. on a work visa and had kept many of his accounts, including those for banking, investments and bills, in his name only. Now, his widow was facing a large U.S. estate-tax liability without access to any of the couple’s assets, much of them back in Canada.

“The lawyer needed to get a copy of the Canadian will, get that validated in a court of law and have that probated and processed,” Wruk says. “The only planning the deceased had done was to prepare a will.”

The Canadian couple could have taken a number of pre-emptive steps to minimize these problems, including having a lawyer in the U.S. review the Canadian will, perhaps amending it so that it better conformed to U.S. estate law. However, like millions of Canadians and Americans who vacation, invest, work or make a permanent move across the border, the couple had neglected to plan — let alone seek out expert help — for cross-border issues that might affect them.

“Ignorance is bliss,” says Wruk, summing up the attitude of many who venture across the border. “People don’t know what they don’t know until something happens. But by then, the opportunity for planning is over.”

Wruk and Ritchie are certified financial planners and partners in Transition Financial Advisors Group Inc., based in Phoenix and Calgary. Their business is built around helping clients deal with cross-border financial issues.

And there are certainly a wealth of issues affecting cross-border clients. When making a cross-border transition, you and your clients need to consider immigration, health care, insurance, banking, investments, pensions, and estate and tax planning.

Admittedly, very few advisors can stay on top of all the considerations related to cross-border planning. But being aware of the major issues will allow you to identify potential problems or opportunities for your clients and refer them to appropriate professionals — before it is too late.

“Advisors should take some time to get educated as to what the major cross-border issues are that can affect a client,” says Prashant Patel, vice president with Toronto-based Royal Bank of Canada’s wealth management services division. “They should know which resources to tap into, either in-house or externally.”

Additionally, an advisor who can counsel a client on cross-border issues has an opportunity to deepen the relationship with that client.

“It builds on your credibility as an advi-sor,” says Tannis Dawson, a senior specialist in the tax and estate planning department of Winnipeg-based Investors Group Inc. “You always want to be the first person your client goes to for advice.”

So, it’s important to ask your clients, particularly at the beginning of the relationship, whether they are citizens of another country and whether they have financial interests or family members abroad or foreign beneficiaries. Of course, the diligence doesn’t end there.

“You may have a domestic-only client now, but circumstances change,” Wruk says. “The client might want to buy property in the U.S., or one of the children might decide to move there.”

Clients who may be affected by cross-border issues fall into three categories. First, there are snowbird clients — Canadians who spend part of the year in the U.S. and who might have property, investments or bank accounts there, as well as a possible U.S. tax-filing requirement. Then there are those among your clients who are U.S. citizens but who live and work year-round in Canada; they still must file U.S. taxes annually. Finally, there are those Canadian clients who are planning to move to the U.S., either because their employers have asked them to relocate or because they have married an American.

Here’s a look at how cross-border issues can affect these clients.



> Canadian Snowbirds

The most important thing for your snowbird clients to understand is that when they enter the U.S., they are crossing the border into another country and must abide by the conditions of their visas.

That may sound obvious but, as Wruk says: “Many people think they can go from Alberta to Montana in the same way as they go from Alberta to Saskatchewan. That’s not the case.”

@page_break@You need to remind clients that running afoul of immigration laws is a serious matter. “If a border officer catches you in a lie, or even thinks you’re lying,” Ritchie says, “under U.S. immigration rules, the officer can deny you entry into the U.S. without any judicial recourse whatsoever.”

Most snowbirds visit the U.S. under a B-2 visitor’s visa. Although no document is actually issued, the B-2 visa allows the snowbird to be in the U.S. for a total of six months (183 days) in a calendar year. The terms of the visa state that the visit must be temporary in nature and that the client maintains primary residency in another country.

The B-2 prohibits snowbirds from working in the U.S. “You cannot even work as a handyman in your trailer park,” Wruk says.

Although U.S. immigration rules allow snowbirds to stay in the U.S. for up to six months a year, U.S. tax rules kick in earlier. The U.S. Internal Revenue Service uses the “substantial presence test” to determine whether a snowbird is a U.S. resident for tax purposes. If the snowbird meets the test, he or she must file a U.S. return.

The SPT formula adds together the number of days the snowbird is present in the U.S. in the current calendar year, one-third of the number of days in the previous year and one-sixth of the days in the year before that. If the total is 183 days or more, and the snowbird has spent 31 days in the current year, he or she must file a U.S. tax return. As a rule of thumb, spending four months or fewer in the U.S. each year will prevent a snowbird from meeting the SPT.

Snowbirds who do meet the SPT can still avoid being considered a U.S. resident for tax purposes by annually filing IRS Form 8840, a “closer connection exemption statement for aliens.” This form allows your client to declare that he or she maintains a tax home and a “closer connection” — indicated by things such as a principal home, personal belongings, primary bank accounts — in Canada.

Two other scenarios exist in which a snowbird would have to file a tax return: if the snowbird rents out a U.S. property, or if the snowbird sells a U.S. property for a gain or loss.

Although the IRS is not supposed to share information with other agencies of the U.S. government, the trend everywhere is toward more co-operation among government departments. Failure to file U.S. taxes when they’re due could cause clients trouble when crossing the border or in their future financial dealings in the U.S.

“The likelihood of getting caught ‘out of compliance’ has gone up significantly,” Wruk says. “And it will continue to go up. Don’t play that game.”

In addition, the U.S. and Canadian governments are becoming increasingly diligent about communicating with each other regarding immigration and taxation, raising the chance of Canadians in the U.S. — or Americans in Canada — getting caught out of compliance.

“There are a ton of Canadians who don’t realize they have a U.S. tax-filing liability,” says Dawson. “We run into it all the time.”

It’s also important to note that Canadians who hold a “green card,” indicating they are lawful permanent residents of the U.S., are also considered U.S. residents for tax purposes, even after they move back to Canada. That means your clients who hold green cards must file U.S. tax returns every year. Green-card holders can use an exemption, available under the treaty governing Canada/U.S. cross-border tax relations, to get out of filing a U.S. tax return. But they still must declare U.S. sources of income. However, using this exemption will probably result in the U.S. immigration service ruling that the client has abandoned his or her green-card status.

If your client owns property in the U.S. — such as a vacation home or U.S. securities — worth more than US$60,000, his or her estate could be subject to U.S. estate taxes. This is true even if the Canadian is not a U.S. resident or has never been in the U.S. The IRS charges estate taxes based on the fair market value of a deceased’s worldwide assets at the time of death, if the total value of the estate is in excess of US$3.5 million. For Canadians, the U.S. estate tax, which tops out at 45%, is charged on the portion of the estate that consists of U.S. property.

Advisors also suggest that Canadian snowbirds who own property in the U.S. have their wills reviewed by a U.S. lawyer and arrange a power of attorney in the state in which the snowbird owns property.

Clients should also be informed that the U.S., unlike Canada, has a gift tax. For snowbirds, the tax kicks in for gifts of tangible personal property — such as real estate but not U.S. equities — valued at more than US$13,000. However, a different gift tax exemption allows one spouse to gift a non-citizen spouse US$133,000 a year without taxation.



> Americans In Canada

There are hundreds of thousands of U.S. citizens living in Canada, either as dual citizens or as permanent residents. As with Canadians migrating to the U.S., Americans need to be in compliance with Canadian immigration rules to reside in Canada and to work here legally.

Americans living in Canada are required to file a U.S. tax return annually. That’s because the U.S. government determines its tax liability based on both citizenship and residency — unlike Canada, which determines tax liability based solely on residency. U.S. citizens living anywhere in the world must file a U.S. tax return based on their worldwide income, even if they do not reside, earn income or invest in the U.S.

U.S. citizens living in Canada must also file a Canadian tax return. However, in general, filing two tax returns does not result in double taxation. U.S. citizens can claim a credit in the amount of their Canadian tax liability against their U.S. taxes. In addition, if certain rules are met, U.S. citizens may be exempt up to US$91,400 of Canadian-source employment income, but not investment income, under the foreign earned-income exclusion rules.

“At the end of the day,” Ritchie says, “in most cases, the U.S. return will ultimately be a ‘nil liability’ return.”

A U.S. citizen who holds a Canadian RRSP or a RRIF must include income generated in those accounts in their declared U.S. taxable income. However, by attaching IRS Form 8891 to the U.S. tax return, the client can make an election to defer registered-plan income until the funds are withdrawn. A separate Form 8891 must be filed for each registered plan held. However, there is no election available to defer the taxation of income earned in a tax-free savings account or a registered education savings account.

Many Americans in Canada are surprised to learn of their filing requirements, and find the prospect of getting back into compliance with the IRS daunting. In practice, those who have done it say the process is often not that painful. “In many cases, the IRS will ask the client to go back and file the past six years of U.S. taxes that haven’t been filed,” says Patel. “Most likely, those will be nil returns. And the IRS will generally be OK with that and just move on.”

U.S. citizens who live in Canada are liable for U.S. estate taxes, even if all their assets are in Canada. There are certain measures, including the proper structuring of a will, that can be taken to alleviate this tax burden.

An American living in Canada is also subject at death to Canadian taxes on the capital gains of the deemed disposition of all assets. However, with proper tax planning, an American living in Canada can get credit in one country for the estate taxes he or she pays in the other.



> Canadians Moving To The U.S.

Whether it’s a temporary move for work or to live there permanently, a Canadian moving to the U.S. has much to consider.

To satisfy immigration requirements, a Canadian will need the correct visa in order to remain and work in the U.S. There are two ways of getting legal status to be in the U.S.: through a business or professional relationship, or through sponsorship by a family member.

One issue that may lead to problems when moving to the U.S. is the immigration status of two spouses, Wruk and Ritchie say. If one spouse is in the U.S. on a work visa and the other is there on a visitor’s visa and cannot work, it can create an awkward and frustrating situation, especially if the spouse who cannot work wishes to pursue a career.

Also, if a Canadian couple has a child while in the U.S., the couple must file to retain the child’s Canadian citizenship before the child reaches the age of 21, or the child will lose his or her Canadian citizenship.

Clients who are leaving Canada permanently and are ceasing to be Canadian residents will have to a pay Canadian departure taxes. The Canada Revenue Agency considers the permanent departure of Canadians to be a deemed disposition of that person’s worldwide taxable property, including stocks, bonds, mutual funds, income trusts and other investments in non-registered accounts. There would also be a deemed disposition of any U.S. real estate. Exceptions are those properties to which the CRA can “attach” itself, or continue to tax after the Canadian has departed, such as RRSPs, RRIFs and other registered plans, Canadian real estate and life insurance policies.

“Whenever you leave or enter Canada, your Canadian tax return is reviewed and assessed by members of the international taxation department in Ottawa,” Ritchie says. “And they’re sharp. This is the last chance they have to get any taxes owing to them, and they’re going to spend their time on it.”

Clients moving to the U.S. are advised to make use of a lawyer in the U.S. — preferably one who is familiar with Canadian tax law as well as U.S. tax law — to review wills and estate plans. IE



COMING IN THE JUNE ISSUE:

PART 2: ISSUES RELATING TO SNOWBIRDS