expanding into the US

Compliance Lapse / What Went Wrong / Financial Risk Created

In the last post we described sanitized facts based on a real client situation.  This scenario is typical of what Canadian Expats face on a foreign work transfer.  There are unique Canadian and US tax and disclosure requirements upon relocation from Canada to the USA.  It is unlikely that even the most financially knowledgeable individuals would properly discharge these responsibilities without seeking professional help in advance.   Failure to satisfy disclosure requirements can and do result in substantial penalties, even if no tax is owing.  This post uses a Canada / USA relocation to illustrate but the same principles apply when departing Canada for any country.

In August 2016, S1 & S2 consulted a lawyer about the upcoming sale of the family home.  The lawyer advised that because they were non-residents, each would need a Certificate of Compliance [CofC] obtained from Canada Revenue Agency [CRA].  Otherwise the purchaser would have to deduct $225,000 [$900,000 x 25%] from the sale proceeds of the family home and remit these funds to CRA.  The lawyer advised that this is a standard process for real estate purchases from a non-resident.  S1 & S2 cannot avoid the CofC requirements by selling the property to another purchaser.

S1 & S2 consulted Hanson Cross Border Tax.   Based on a preliminary review of their fact situation, the potential tax, penalties and interest on reporting deficiencies exceeded $20,000.  S1 & S2 were shocked because they had always been told the sale of the family home is tax free.  They thought the sale would be straightforward.

 This discovery was only the beginning, if you want to know where S1 & S2 further went wrong, come back next week to see post # 3.


american citizens in canada

Our website and letterhead uses “HCBT” as an abbreviation for Hanson Crossborder Tax Inc.  After the next few posts HCBT could also mean Hanson Cross Border Tragedies.  These are real life sanitized client stories to illustrate the financial and emotional burden created if cross border tax situations receive inadequate care and attention. The first in the series involves a typical Canadian family in which the main breadwinner gets the chance of a lifetime to relocate to the USA at a substantially higher salary.   Canadian Expat Post #1 will summarize the facts, common to many Canadians that relocate to the US for career purposes.

Post #1 Background 

  • Family of two Canadian spouses plus 2 young children lives Ontario [S1; S2; C1; C2];
  • Family home is owned jointly by S1 & S2. Purchased in 2008 for $450,000; Estimated value in December 2013 $600,000;  Expected value increases $50,000 in each subsequent year;
  • S2 employed in previous years. Primary responsibility now is care of C1 & C2;
  • S2 owns 1,000 shares from a previous employer stock option program. Shares cost basis is $5,000.  Estimated value in December 2013 is $60,000;
  • S1 employed by Canadian employer for $150,000 CDN per year;
  • S1 has self-directed RRSP with $100,000 in mutual funds / ETF’s. Maximum contribution has already been made earlier in 2013;
  • S1 purchased a recreational vehicle for $75,000 in August 2013;
  • In early December 2013, S1 is offered a position with Texas company with an annual base compensation of $225,000 USD;
  • Family relocates to Texas in December 2013; rents apartment so S1 can start a new job on January 2nd, 2014;
  • S1 & S2 decide to rent the Ontario family home rather than sell it. S2-B, brother of S2, lives near the family home.  S2-B will obtain tenants, repair and maintain property, collect / deposit rents for fee of $200 per month.  S2-B has no previous experience in rental property management.
  • Tenants move in on January 2, 2014 and pay rent $1,800 per month. S1 & S2 expect that they will breakeven costs versus rent.  Tenant rent is deposited into joint bank account of S1 and S2 at an existing Canadian bank account.
  • S1 & S2 did not seek legal or financial advice about selling or renting the family home;
  • S1 prepared and filed a 2013 T1 return reporting employment income, RRSP deduction, spousal credit;
  • S2 had no income and therefore did not file a 2013 T1 return;
  • S1 & S2 prepared and filed joint US returns for each 2014 & 2015, reporting only US income, i.e. Texas employment earnings;
  • On August 30, 2016, S1 and S2 receive an offer to sell the Family home for $900,000 with closing date on September 30, 2016.

Unfortunately, tax planning was not considered by the family described above. Next week please come back to read post #2 of this series and let’s see what happened.



The Protecting Americans from Tax Hikes Act of 2015 (the 2015 Path Act), signed into law on December 18, 2015, increased the rate of withholding from 10% to 15% on disposition of US real property by non-US citizens, residents or Green Card holders under the Foreign Investment in Real Property Act of 1980 (FIRPTA).  The new regime does not apply (the 10% withholding requirement still remains) on sale of a principal residence with a purchase price of $1 million or less and to which the exemption for a residence bought for $300,000 or less does not apply.

The new provision becomes effective on transfers after February 16, 2016.

Under FIRPTA, gain or loss realized by a non-resident alien on sale of US real property interest is subject to income tax withholding.   A buyer of the US real property generally has a duty to withhold 10% (newly 15%) of the gross sales proceeds at the time of sale and remit it to the IRS within a narrow time window.

In contrast, if a US or foreign partnership with foreign partners sells US real property, the buyer is not required to withhold on sale.  Instead, it becomes a responsibility of the partnership to hold back tax on the amount realized by the foreign partner.  Partnerships are now too required to withhold at the rate of 15% instead of the former 10%.  The same an additional 5% increase also applies to US corporations, US or foreign estates or trusts.

The mechanisms to reduce or eliminate withholding requirements still exist if certain criteria are met.

Other significant FIRPTA amendment relates to an increase in the maximum stock ownership, held directly or indirectly, by a foreign shareholder in a publicly traded US real estate investment trust (REIT).  Under the new law, the ownership threshold in a REIT increases from 5% to 10% for purposes of being FIRPTA exempt.  As long as the percentage ownership threshold does not exceed 10%, any distributions attributable to gain from sales or exchanges of US real property in a REIT are treated as a dividend rather than as FIRPTA gain.

If the above changes apply to you and you need assistance, please feel free to contact us here.

Pensions Rentals

With globalization of the workforce it is not uncommon for Canadians to spend a portion of their working life abroad and return to Canada for retirement. Likewise Canada, being a hub for many multinational companies, hosts a large number of foreign employees who may contribute into a Canadian retirement plan and collect pension income once they leave Canada. Furthermore, considering the close proximity of the Canada-US border, Canadian and US commuter-employees may contribute to a pension plan of the country of their employment. The requirements for reporting, deductibility and income recognition of each type of a retirement arrangement may differ. The rules are typically driven by the tax laws of both the country where the plan is domiciled and where the participant resides. In addition, relieving provisions of a bi-lateral income tax treaty may also be relevant. With an accurate classification of the plan, timing of income recognition and an adequate disclosure, participants can achieve the most tax efficient results on both events at the time of contribution and distribution from a foreign pension plan.

There are lot to consider for non-residents when investing into US or Canadian real property. Both countries impose unfavorable income tax default rules in relations to rental income generated by non-residents. Such rules can be mitigated by an appropriate election and annual filing obligations. In addition, tax compliance requirements and tax cost may significantly differ depending on the structure of the ownership, i.e. whether the property is held individually or through an entity. Considering that rental income earned in another country is also subject to reporting and taxation in the investor’s home country, it is important that expenses are optimized (to avoid timing difference of income recognition) and a foreign tax credit is utilized. Finally, if a property is gifted or held by the investor at death, it may become subject to additional taxes, including gift, estate, generation-skipping, inheritance and capital gain on deemed disposition and probate/stamp tax.

The domestic tax rules and actual tax consequences related to various types of investment income (interest, dividends, capital gains, rentals, and royalties) are often misaligned which may even lead to double taxation. Tax relief available in one country can be construed as tax evasion in the other. It is therefore critical that a person who assists you with your cross-border tax compliance needs to understand your residency status, classification of income where it is domiciled, classification of income in your country of residency, and is able to apply any relevant tax treaty benefits. There is a large number of business strategies and vehicles available to maximize tax efficiency for individuals and business entities with foreign investments. We prefer to work with your investment advisor to ensure that all your objectives, whether tax ramifications or cash flow, are achieved