With a growing number of U.S. residents choosing to move to Canada, Cardinal Point Wealth Management is highlighting an often-overlooked issue for those considering relocation: the complexities surrounding U.S. revocable living trusts (RLTs) in a Canadian tax environment. Aimed at educating clients and prospective clients, the firm provides guidance on navigating these unique cross-border estate planning challenges.
Terry Ritchie, Vice President and Private Wealth Manager at Cardinal Point, explains, “A U.S. revocable living trust is a well-established estate-planning tool for Americans. It allows individuals to maintain confidentiality, flexibility, and streamline asset transfer without the need for probate in the U.S. However, once a U.S. resident moves to Canada, the tax and administrative landscape surrounding an RLT becomes significantly more complicated.”
Understanding the U.S. Revocable Living Trust
In the United States, a revocable living trust (RLT) is commonly used by affluent individuals as an estate planning strategy. The RLT provides benefits such as maintaining confidentiality and avoiding the probate process. Unlike some trust structures, an RLT is a “grantor trust,” which means it is disregarded for U.S. income tax purposes. The income, losses, and expenses of the trust are simply reported on the individual’s U.S. tax return, eliminating the need for a separate tax filing.
“When used in the United States, an RLT operates efficiently within the U.S. tax system,” says Ritchie. “But for those moving to Canada, it’s critical to recognize that this simplicity does not extend across the border.”
Challenges of an RLT in Canada
When a U.S. Revocable Living Trust (RLT) trustee becomes a Canadian resident, Canadian law treats the trust as a separate taxable entity, creating new tax obligations. The trust must file a Canadian tax return, and the trustee must report income on both Canadian and U.S. tax returns. Foreign tax credits can help reduce double taxation, but managing the differing Canadian and U.S. cost bases for trust assets is challenging. Canadian cost basis is set at the asset value when the trustee moved, while the U.S. basis reflects original acquisition value. An exception allows for trust income to be included in personal income, potentially avoiding double taxation, though this option requires careful consideration and may not apply to all cases.
Risks of Double Taxation at Death
Double taxation concerns can intensify if the trustee of a U.S. RLT passes away as a Canadian resident after the trust has been in place for over 21 years. In this case, the trust would become part of the individual’s estate, potentially incurring U.S. estate tax. In Canada, a similar tax would apply once the trust assets are sold after 21 years, with no foreign tax credits available to mitigate the double taxation.
“Planning around potential double taxation scenarios is a key part of cross-border transition planning,” notes Ritchie. “At Cardinal Point, we aim to identify these risks early, helping clients determine whether maintaining the RLT is in their best interest or whether they should consider an alternative structure.”
Additional Complications: Departure Tax and Financial Institution Restrictions
For U.S. citizens temporarily residing in Canada, an additional concern is Canada’s departure tax, which applies if they return to the U.S. without carefully managing their trust. While U.S. citizens benefit from a five-year exemption from Canadian departure tax on personal assets, the RLT does not qualify for this exemption since it is considered a separate legal entity in Canada.
Furthermore, many U.S.-based financial institutions are not licensed to manage trust accounts for Canadian residents, even if the individual is a U.S. citizen. Attempting to circumvent these restrictions by registering the RLT to a U.S. address can lead to legal issues and additional tax complications.
Best Practices for Americans Moving to Canada
Ritchie notes, “While a revocable living trust (RLT) is an effective tool for U.S. residents, it brings about various administrative and tax challenges once the trustee resides in Canada. For individuals planning to relocate, it’s often advisable to consider unwinding the trust structure before or shortly after moving to avoid potential Canadian tax implications. That said, every situation is unique, and it’s essential to assess the specifics to determine the most appropriate course of action.”
About Cardinal Point Wealth Management
Cardinal Point Wealth Management specializes in assisting individuals and families with financial, tax, and estate planning for cross-border moves. With expertise in both Canadian and U.S. tax and estate laws, the firm offers customized guidance for affluent clients undergoing cross-border transitions. For U.S. citizens moving to Canada, Cardinal Point provides comprehensive cross-border financial planning to navigate the complexities of Canadian and U.S. tax obligations, helping clients achieve peace of mind and long-term financial security.
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