Insurance Grey Areas | E124

Insurance Grey Areas | E123

Understanding US-Canada Cross-Border Taxation with Terry Ritchie In this episode of Financial Planning for Canadian Business Owners, Terry Ritchie, an expert in US-Canada cross-border planning, joins us to discuss the impact of recent US political changes on cross-border taxation. We delve into key aspects like the implications of US citizenship-based taxation, the Canada-US tax treaty, the potential changes in estate tax exemptions, and the recent elimination of the Windfall Elimination Provision related to social security. We also explore the complexities US citizens face with tax compliance when residing in Canada, along with beneficial tax provisions and ongoing legislative proposals. Ideal for Americans in Canada and cross-border financial planners, this episode is full of crucial insights and practical guidance.

00:00 Introduction and Guest Introduction 00:48 Understanding US Taxation for Canadians

01:45 Eritrea and Cross-Border Taxation Anecdotes

02:41 US Tax Obligations and Compliance 06:26 Social Security and Windfall Elimination Provision

10:19 Potential Tax Changes and Their Implications

15:44 Estate Tax and Gift Tax Rules

21:05 Real Estate and Relocation Considerations

23:21 Conclusion and Contact Information

Resources Mentioned:

Full Transcript

Audio

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Jason Pereira: [00:00:00] Hello and welcome to Financial Planning for Canadian Business Owners. This week we have a repeat guest, my friend Terry Ritchie, one of the foremost authorities on Canada US cross border planning.

And I brought him on the show to talk about what the new presidency means in terms of potential tax changes. And with that, here's Terry. ~Terry, thanks for joining us.~

Terry Ritchie: ~You said something that was interesting. ~You said a new president.

Jason Pereira: Sorry, old new old president.

Terry Ritchie: Yeah, something happened, huh?

Jason Pereira: ~Lots of things have happened. ~Lots of things have happened.

Terry Ritchie: Yeah. No, it's an interesting time here and there. Here I'm in Calgary today. I'm out in Arizona at our office next week. But yeah, Interesting, interesting times here. We could talk about, you the capital gain stuff from last week in Canada and things like that.

~But,~

Jason Pereira: Oh, I've got an entire other episode on that ~Don't worry about that.~

Terry Ritchie: so today we're going to talk about some of the U S taxation

Jason Pereira: Yes. So before we get started though, let's just recap Okay ~So ~for anyone who hasn't watched this before doesn't know the reason why this is important to anyone living in Canada is the u. s Unlike every other country in the world except for Eritrea hilariously taxes based on citizenship Not residency what that means is that if you're an American citizen [00:01:00] Doesn't matter where you go.

You were always filing with the IRS every single year. That does not necessarily mean you're going to have taxes owing in the U. S. ~As always, the answer with financial planning is it depends, but for the most part, no, ~but it does mean you are subject to two separate sets of tax code. And guess what?

There's no real rule book on how those two things come together. The cross border treaty does a very small bit of that, but there's still a lot that's not covered. And this is why need people like Terry and myself to wade through the complexity of this. So Terry, with that, let's turn back to the topic.

~Now that these people know that they've got a file,~

Terry Ritchie: Since you mentioned Eritrea, ~interesting enough, ~when

Jason Pereira: go for it.

Terry Ritchie: in 1995, part of my responsibility at another firm I was at was to go to Edmonton once a week. This is pre Uber and all that kind of stuff. And so I'd land at the Edmonton airport and every single cab driver I had always was from ~Eritrea. this large community that developed in Edmonton, and I knew what you just shared with our listeners about the U. S. and ~Eritrea. And I would often ask these guys, hey, are you filing your Eritrean returns? They had no freaking clue what I was talking about. But, it is interesting

Jason Pereira: And then I think it's like a 2 to 5 percent tax and good luck enforcing it.

Terry Ritchie: So if you go to Edmonton, ~if you're, ~if you don't do the Uber route and you take a cab, it's very likely that [00:02:00] your cab driver will be from Eritrea. So yeah, there's lots of, Americans, in Canada. And so we have to be cognizant of these rules. You'd mentioned

Jason Pereira: Okay.

Terry Ritchie: that, U. S. citizens, have an obligation to comply with.

these rules. And in some cases there may be some additional tax that has to be paid beyond what the treaty provides and beyond foreign tax credit elimination. There's a couple of things that work for the benefit of ~Canadians in I'm sorry, ~Americans in Canada is that they get to exempt. foreign tax credit. For the 25 year, 130, 000 of their employment income, can be exempt from us

Jason Pereira: The net.

Terry Ritchie: that's not a U. S. person for tax purposes, they have to file married separately. And [00:03:00] so in those cases, sometimes there may be, a level of tax that would have to be paid. Beyond the foreign taxes, because in the U. S. under the Obama, administration, there was to subsidize Medicare taxes. We had what many people would call the Obamacare surtax, the net tax, And that

Jason Pereira: Yes. ~Okay. You~

Terry Ritchie: ~of our listeners who might be, citizens resident Canada, the treaty works to their benefit, income, exclusion, maybe work to their benefit and foreign tax credit can solve that mess.~

That being said. There is the administrative burden of having to still comply with these rules. The following of the, many people still use the term FBARs, the Foreign Bank Account Reports, actually called FinCENs, Financial and Enforcement Network, the FinCEN 114. And then also there's another form that goes with the return, in many cases called the IRS Form 8938, that's the Statement of Foreign, Statement of, Foreign Accounts as well. That has to be

Jason Pereira: [00:04:00] Okay.

Terry Ritchie: representative from, Illinois, that passed legislation to create a citizenship versus residency based taxation.

If you're an American who's working in Canada or working in the UK or something like that, we'll see if that ever comes to the light of day. What's been proposed there, his name is Darren LaHood, I think is his name, from Illinois, is that, if you are working in Canada, you would be able to exempt any of your Canadian source or any Canadian source income from the U.

S. tax reporting. But if you have ~any ~Any U. S. source of income dividends, things like that, that would have to be picked up. If you recall, Trump, on the campaign trail made a number of promises, some he's trying to deliver on right now. And one of the promises was to make, ~a bit, bigger, or ~a better system for expats that live or work abroad. So we'll see whatever comes of that. This what the hood is proposing might be part of that. So that's something that we might see. a couple of the changes that came about [00:05:00] in December and you would be aware of this is ~the ~the issues that related to social security and the windfall elimination provision. So what happened there is ~so ~a new acronym for our listeners, for our viewers, WEP, the Windfall Elimination Provision, WEP. ~The U.~

S. loves to use, acronyms for lots of different things.

Jason Pereira: Usually they spell funny things though, like guilty ~or ~

Terry Ritchie: TGA TCJA.

Jason Pereira: A good one, but there was another one where it was just like ~you, ~you purposely had to find an acronym for this, but guilty was the funniest of them all.

Terry Ritchie: In, in, in that case, so there are situations where, you have a, an individual that lived in Canada, moved to the United States, worked for a U S based employer, was self employed in playing and paying self employment tax, and they were contributing to the social security system, They're fica, they're paying FICA taxes and FICA contributions and things like that. Under the Windfall Elimination Provision, if they had worked in Canada and they also contributed to Social Security, if their contributions to the Social Security Administration, either through being self employed or through their [00:06:00] employer contributions, through payroll contributions, not exceed 30 years, then they were subject to this, I use the term clawback, which is a term we most of our listeners know from an OAS perspective, these individuals, when they applied for social security and they were also entitled to Canada pension plan benefits would have a clawback somewhere between zero and maybe 600, depending on the level of benefit contribution earnings and things like that.

And a lot of. Canadians, When they'd be aware of that, were pretty upset about that. And it was, something we had to have a discussion about. We wrote a lot of articles on our blog set about that. And there were many. Court cases that challenged this over the years because there's really two camps that the WEP really impacted.

The first camp, which I saw early in my career when I was working in Phoenix is I had a lot of Phoenix police officers that would work there 20 years for the municipality, contribute to the municipality pension plan, not social security. They'd have 20 years, they'd get their full pension after 20, ~20 years, ~and then they'd go into the private sector and then they'd contribute in the private sector and they maybe pay [00:07:00] 10 years and then retire. Those people were also impacted. by WEP a larger contingent they didn't have 30 years in there. Okay. And then you had ~the ~the Canadian who worked in the U. S. worked in Canada and then the U. S. That also didn't have 30 years. So this was a big deal for a lot of people. And in December, Biden on a Sunday or one of his surrogates, that's a joke, signed this legislation, ~to ~to go ahead and basically eliminate that. So now what's supposed to happen is that those in 2024 that were subject to weapon, I have a number of clients that were several clients that they're supposed to get a lump sum check this year and then any future payments would be grossed up before the, for the web that was taken out. So that's been removed. Interestingly enough, I've written an article, it's yet to be on our blog site that speaks to this. We worry about the long term viability of Social Security because, now that we've gone ahead and eliminated WEP and we're paying more benefits to more people. What's the long term viability of that as well? one [00:08:00] of our professional colleagues, Andrea Thompson, had written an article about this. I think I saw it on LinkedIn. That was the first one I saw. And I took that and wrote an article as well that will be in our blog site. So as we're having discussions with clients and doing some long term retirement forecasting, Social security viability, is something that we have to maybe think about because of these changes. So that's a big change that happened. The residency versus citizenship based taxation is another big change. Another couple of big changes that, may come about, and he's on a tear right now, is the,

Jason Pereira: You don't say.

Terry Ritchie: Whether tips, will be tax free, and whether social security benefits will be tax free, right?

~So

~

Jason Pereira: ~To be fair, ~Social Security is already partially tax free.

Terry Ritchie: that's correct. so he's looking to eliminate full social security benefits from taxation, which is very interesting because if you are domiciled in the U. S., not physically anywhere else other than the U. S. and you are receiving social security benefits, those benefits are partially tax free. 85 percent of that benefit, depending on thresholds, it's [00:09:00] either 50 percent Or 85 percent of that benefit would be subject to taxation report of taxation on the U. S. side. And then many states, basically reduce that. It's not taxed again on the state side, depending on what state you're resident

Jason Pereira: Okay.

Terry Ritchie: for S. citizen client in Canada, filing a T1, receiving a social security benefit, it comes in, You're then entitled to take a 15 percent deduction so that you're taxed as 85%. And then what CRA in their infinite wisdom does every year, along with other stuff that they do every year, is they'll send out that review letter. And the review letter will ask, hey dude, why are you deducting this, taking this additional deductions online? I think it's 249, I have to look it up. [00:10:00] And then that's the social security deduction that you're entitled to. So every year you got to send in The copy of the SSA. 1099 And support that and every year and they don't get it.

So it's every year, it's just a consistent thing. ~And don't get me going. But~

Jason Pereira: It's been funnier when they ask for proof of payment to the IRS ~and the IRS does not issue notice of assessments like Canada does. ~So they're asking for something that they know is not issued, which is always comical

Terry Ritchie: Yeah, we could have a whole another podcast on like CRA and IRS war stories and things like that. So, but what would be interesting here is if Trump is successful and Congress is will go along with this ride here. To eliminate the taxation of social security benefits. You think Canada is going to do it too? They did give us the 85 percent treatment. Would they give us the a hundred percent tax free treatment? Highly unlikely, but that would be another compelling benefit. Why a Canadian might choose to who's entitled to this benefit or a U. S. person moving back

Jason Pereira: to choose to retire in the U S. Yeah. It's hard to argue with that, ~but~

Terry Ritchie: ~that kicks in when you basically give it all back. ~if you move to the U. S. and you're entitled to old age [00:11:00] security benefits, you're and you would be in many cases, depending on your physical presence in the US. I'm sorry, in Canada. So at 65, you apply for that.

And it's only security and Canada pension plan benefits under the treaty are taxed the same way as social security benefits would be. So you lump it in there and get that 85 percent treatment. There's no OAS callback. I've had clients who are

Jason Pereira: ~let's we'll stop. ~It could be OAS clawback if you basically have Canadian sourced income in excess of the threshold, correct?

Terry Ritchie: I've never seen that Jason. ~So I don't, I~

Jason Pereira: ~Let's be, ~let's also be honest. You'd have to have Canadian sourced income exceeding for a couple now, 180, 000 roughly to do that. So ~it's, yeah, it's, ~it would be rare if it ever happened.

Terry Ritchie: ~I I've never seen it. I've so ~I have wealthy individuals that live in the U S they don't need the money, but they get the OAS, you get it paid in us, you can get paid in CAD, but that's one way to subsidize Medicare premium payments ~that. ~That they may have to pay because they don't have enough credits to qualify for full, ~part be ~premiums that they'd have to make payments on.

So anyways, that's another benefit. And then, so we have social security, we [00:12:00] have tax on tips, and then these maybe citizenship ~or ~or residency taxation. And then the next thing that likely will happen. This year, ~is ~before the end of this year is again, the whole elimination of the. cuts and jobs acts provisions that were supposed to sunset at the end of this year and

Jason Pereira: be clear, like the way it works in the US, unless you have a certain majority in Congress to pass a financial budget act, ~like the tax cuts and jobs act, then ~it is subject to a 10 year provision for sunsetting, meaning that ~it has to be, ~those things disappear. ~And we were just so happens when this was passed, the new old president was in office and that was his bill.~

And now he has an opportunity to potentially kick it down another 10 years.

Terry Ritchie: that's right. And we saw this under the Bush administration. So legislation that was passed, basically if, it doesn't get permanently, put forward, then at the end of the 10 years, it reverts back to the way it was on an inflation adjusted basis. So there was some concern that the state tax exemption, gifting rules, tax rates, things of that nature would be going back to the way they were.

which would be higher rates, higher thresholds, those kinds of things. But the biggest thing for our [00:13:00] viewers and listeners and our clients is like the, around the estate tax exemption. So the estate tax exemption for the 2025 tax year is 13. 99 million. So effectively, I don't know why they 14, but it's. 14. 14 million

Jason Pereira: You

Terry Ritchie: significant thing about, that threshold is that threshold also applies to

lifetime gifts as well.

Jason Pereira: Okay. Okay. Okay. Okay. Okay. Okay.

Terry Ritchie: the problem is that the annual exclusion for US purposes this year is 19, 000. So if Terry gave Jason 20, 000, I've created a taxable gift of 1, 000. So I'd have to report that on a gift tax return when I file my 1040. [00:14:00] It's IRS form 709, and then what happens is I would basically report the 1, 000 gift, but the IRS gives me an exemption of 13. 9, a lifetime exclusion of 13. 99 million. So no tax to pay out of my pocket. It just grinds that thing down.

Jason Pereira: Is that check arriving, by the way,

Terry Ritchie: Pardon me.

Jason Pereira: when is that check arriving, ~by the way?~

Terry Ritchie: Yeah, by the way, ~I interact. I, get, ~I think I interacted it in,

Jason Pereira: ~Okay. I got a 3, 000 limit every day, but sure. Okay, fine. ~Okay. Continue.

~Yep.~

Terry Ritchie: and then, so that applies for US persons to anyone other than their spouse. ~If you are, ~if your spouse is a US person as well, gift all you want back and forth. Obviously, if they're in Canada doing it, there's ~obviously ~implications related to attribution, other kinds of things, but if you're in the US and you're gifting money back and forth between spouses, difference, back and forth all you go.

In terms of if you're married to a non citizen spouse,

Jason Pereira: ~Okay. Okay. And I think that's it. for me. ~Okay. [00:15:00] You

Terry Ritchie: Circumstances there for reporting and things. the limit for her to give to me is a hundred ninety thousand dollars. So if you give to your non citizen spouse, it's not 19 It's a hundred ninety thousand dollars and that's adjusted typically for inflation every year Okay, so anything over and above that would then be reported gift on the 709 return.

Jason Pereira: Excellent.

Big ones, right? ~What else we have? Anything else? As of,~

Terry Ritchie: Since we've been talking about this Terra Force, I think interestingly enough, got a 30 day reprieve. ~Okay. ~

Jason Pereira: As of where we are right now, we're recording in February. ~I'm not sure when this is airing, but~

Terry Ritchie: okay.

Jason Pereira: have a 30 day reprieve for now. ~Yes.~

Terry Ritchie: Okay. And lots of things happened. Good or bad, we don't want to get political here. ~You can ~some people would ask why is he doing this? We know why he's doing this, but ~the ~another reason why he may be doing this, ~is it. ~I don't know. If we're going to have an elimination of social security benefits, if we're not going to have tax rates going up and maybe going down, of course, that's another thing that could happen this [00:16:00] year. Not only will the, we won't have any sun sitting. We'll have those extended out. ~Is that ~rates can all come down as well? There's even the discussion of ~even ~eliminating a state tax having some type of system ~and ~like we have in canada disposition tax with fairly healthy exemption

Jason Pereira: So let's just be clear about this. One of the reasons why the estate tax exists is ~because. ~Because in the U S on death, you are able to have a bump up in basis, meaning that if you have a deferred capital gain, that gain is not triggered on death. Unlike in Canada, where unless it's being left to a spouse, if you have a capital gain of half a million dollars on your stock portfolio or your rental property, that is taxable in the year of death in the U S ~that is not a thing, ~the cost base, ~it ~gets passed on at the cost base, then gets increased the market value.

So no gain passes on everybody, no tax, but. The estate tax does kick in if you are subject to it. ~So they're talking about moving away from their current system, potentially where it is the estate tax threshold to one of elimination, potentially of at least partially, if not entirely the bump up in basis,~

Terry Ritchie: correct? Yeah, so it's a moving target. ~And ~and so now that we have these tariffs ~that may be a way ~that may be some level that revenue,

Jason Pereira: revenue generation.

Terry Ritchie: level of mechanism to cover off the tax savings. that [00:17:00] might be promoted through and whatever. ~But ~what's interesting though, we're in an environment where the dollar sucks.

We're at 69 cents today. Let's see where we are a month from now. But, there's lots of Stuff in the press related to, and we've got clients who said, you know what, Terry, think it's time for us to sell this place that we have in Arizona and go back or this place in Florida, I can't afford to fricking pay, property, insurance, costs any longer.

~My~

~Through foreign tax credits, but I just got to get out of Dodge.~

And so we're starting to see more inquiries from clients about does it make sense to sell my house? And what would that look like from a tax perspective? And there's a whole. withholding tax implications, that's a whole another show. But we're starting to see that because of the dollar and because of the level of appreciation.

~And then there's some people that just don't want to be down there for a variety of different reasons. And so on and so forth. ~

Jason Pereira: ~It's yeah, ~actually, interestingly enough, normally about a week after the election, I start fielding the move to Canada calls, no matter who wins, no matter who wins and didn't happen this time. So I don't know, maybe they're thinking, maybe they're looking at what's going on up here and say, maybe it's not as attractive as it used to be.

~I don't know. ~

Terry Ritchie: ~I've ~been doing this a long time, 40 years now. And I've been through lots of different cycles. And ~there, ~there was a lot of saber rattling [00:18:00] during the first go round. And a lot of people didn't follow through with it. ~I~

Jason Pereira: oh, they never fall through. ~That's my history.~

Terry Ritchie: ~We have seen, ~we've seen certainly families that have come up because of it.

They just want to raise their kids in a different environment. My logic is, it's messy everywhere. It's not perfect up here as well, but, to each his own and we respect that. And our job is to make them aware of what they're leaving and what they're getting themselves into.

Again, if you're a U. S. citizen moving to Canada. You're not going to escape all that stuff. You still have that administrative burden. Your planner needs to understand whatever you're doing from that perspective and from this perspective. And that's sometimes not very easy to find.

Jason Pereira: No, it's not. So thanks for the update, Terry. Very much appreciated. It is a complex subject and it's something that any American living in Canada or anywhere else for that matter really needs to take seriously. So I thank you for your time. And before we go, where can people find you?

Terry Ritchie: So our website is, ~so Cardinal Point Wealth, so it's ~www. cardinalpointwealth. com. We got tons of content on our blog site. ~So ~if you just go ahead and type in Cardinal Point Wealth, Google [00:19:00] Cardinal Point blog. There's lots and lots of stuff. Many of the things I've been talking about today are there.

You mentioned business owners. We've got lots of content related to if you're a business owner, looking to move from here to there. We've got apps numbers, lots of really good stuff on there ~that ~that I think people will find of interest.

Jason Pereira: ~Excellent. ~Thank you all for listening. If you enjoy this podcast, ~of course, ~leave a review on your normal podcast subscription service. And if you're watching on YouTube, please and subscribe. Thanks until next time.

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