Cross-border investment planning

There are significant investment tax-saving opportunities for Canadians who take up residence in
the United States. In order to benefit, it's important for individuals to properly structure their investment portfolios before they leave.

When an individual is leaving Canada, questions often arise about whether their investments can continue "as is", and what the tax implications are for their portfolio. This article offers some investment strategies for individuals planning to reside in the United States.

Registered investments
For U.S. tax purposes, only the income portion of withdrawals from an RRSP is taxable – the capital portion is tax exempt. The capital portion is deemed to be the "original contributions" to the plan and by increasing this amount an individual can reduce the taxable portion of their withdrawals and enjoy significant tax savings.

Individuals should transfer their RRSPs to a new plan before leaving Canada, as the capital portion will now equal the amount transferred into the new plan. A fund switch will not accomplish the "bump up" as it would not change the amount contributed to the plan – it would only increase the adjusted cost base (ACB). The Internal Revenue Service is only concerned with the amount contributed to a plan and not the ACB.

Tip
The different tax treatment of RRSP withdrawals from within Canada and the U.S. provides an opportunity to reduce taxes with proper planning.

Making it work
Sandra's RRSP has grown to a market value of $350,000. She transfers to a new RRSP just before leaving Canada to increase the capital portion for U.S. tax purposes to $350,000.

If Sandra cashes in her RRSP immediately after her move, the withdrawal would equal the capital portion and be exempt from U.S. tax*. The full value of her RRSP would be subject to a 25% withholding tax in Canada, but these taxes ($87,500) can be used as a foreign tax credit in the U.S. Compare this to cashing in the RRSP before leaving Canada – If Sandra is in a 45% tax bracket, $157,500 of her RRSP is lost to taxes.

GIC income
Unlike interest income from a traditional bank GIC, interest from guaranteed interest contracts issued by insurance companies (considered annuity income) is not reported to a non-resident. Because of the tax-deferred growth while outside Canada, it may be advantageous to transfer existing GICs to an insurance company issued Guaranteed Interest Contracts, before leaving Canada.

Trust income and capital gains
Taxable trust income (interest, dividends and foreign income) from mutual funds and segregated funds is reported to nonresidents each year as it occurs. Tax withholding on interest and dividend income in the amount of 15% is generally paid by surrendering units from the funds. Taxes are not withheld on capital gains. However, there is a deemed disposition on these types of investments upon leaving Canada, making any gains or losses subject to Canadian tax laws. Because of this, the decision to hold or sell before leaving Canada is not usually based on tax considerations.

Investment options with Manulife investments
Manulife and its subsidiaries provide a range of investments and services including:

Manulife Mutual Funds For those looking to build wealth, Manulife Mutual Funds can provide ideal solutions. Through our funds, we offer you access to a carefully selected group of highly disciplined asset managers from Canada and around the world.

The process used to select our asset managers is modeled on those used by top investment consulting firms, and stands behind every mutual fund that we provide.

Manulife GIF & GIF encore funds combine the growth potential offered by over 60 top-ranked investment funds, with the unique wealth protection features of an insurance contract. Through Manulife GIF & GIF encore, investors can limit their exposure to risk through death and maturity guarantees, potential creditor protection features, and the estate planning benefits – all from a single investment.

For conservative investors looking to grow their wealth but who are also concerned about minimizing risk, GIF & GIF encore provide an ideal solution.

The Manulife Investments GIC offers competitive rates plus investment options that include Basic, Escalating Rate and Laddered GIC Accounts. Tax on interest is deferred for up to one year, and for those 65 or older, the interest will qualify for an annual $1,000 pension income tax credit. In the event of death, the entire investment will pass directly and privately to named beneficiaries without surrender, probate, legal or estate fees.

Transaction restrictions from within the U.S
Due to securities regulations, U.S. residents are generally limited to redemptions and otherwise prohibited from managing their Canadian investments from U.S. soil. Certain states allow brokers or dealers to apply for exemptions on registered accounts but no exemptions exist on non-registered accounts. Therefore, it is important that individuals who are leaving Canada realign their portfolios for the long term unless they plan to return to Canada on a regular basis.

Ideal candidates
Individuals planning to take up residence in the U.S., and who hold the following investments:

• RRSPs or locked-in RRSPs,
• Non-registered GICs not issued from an insurance company,
• Non-registered mutual funds or segregated funds.

Take action
To maximize the tax-efficiency of their portfolio, investors should:

• Transfer their RRSP assets to a new plan before leaving,
• Ensure their non-registered GICs are held with an insurance company before leaving, and
• Ensure their portfolio has been structured for a long-term holding period, if they plan to keep their current mutual funds and segregated funds.

* An election (Revenue Procedure 2002-23) to defer U.S. tax on the undistributed income of a retirement plan until the funds are actually distributed must be attached to the individual's U.S. tax return annually.