Tax, financial details that can make or break move to U.S.

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Canadian business owners who have moved to the United States or are considering doing so face myriad tax and financial issues, many of which are very complex.

Kris Rossignoli, a cross-border tax and financial planner with Cardinal Point Capital Management ULC in Toronto, helps business owner and high-net-worth clients work through the tax, estate planning, wealth management and other financial issues – both business and personal – that arise with a cross-border move.

Here he goes through a variety of cross-border scenarios, which all illustrate how much pre-planning needs to go into a business expansion, including a personal move, to the U.S., says Rossignoli.

It is not just a simple matter of the business owner deciding “‘there’s a big market down there. Let’s start tapping into it,’” he stresses.

Why did you decide on a career as a cross-border tax and financial planner?

I started my career at Deloitte, one of the big four accounting firms, working in Canadian private client tax planning. A lot of the people I was working with were ultra-high-net-worth clients. I recognized that a lot of those clients had ties to the U.S., whether it was a U.S. home, expanding their Canadian business to the U.S., or buying up U.S. rental properties.

From Deloitte, I went to work for an ultra-high-net-worth single family office, where I was very involved with all of their corporate structuring, as well as with mergers and acquisitions, among other activities.

Investments and portfolio structuring are a passion of mine and I wanted to continue learning, so I joined Cardinal Point in 2020. My mentors today are my colleagues here – people like co-founder Jeffrey Sheldon, and vice-president and private wealth manager Terry Ritchie, who has been practicing in cross-border financial planning for over 38 years.

Why do Canadian business owners often decide to have an American business presence in the U.S.?

The U.S. is certainly a much larger market than Canada, so it can be a natural progression for a Canadian company that has done very well in Canada to want to expand into the U.S.

While corporate tax rates in the U.S. are relatively similar to Canada, personal tax rates are much lower.

What are some of the main business tax issues you find with clients who move business operations across the U.S.-Canada border?

If a Canadian business owner is looking to start selling to the U.S., they need to be aware of U.S. tax rules.

For example, business income for U.S. tax purposes, and the tax forms that need to be filed, are based on whether that business has a permanent establishment in the U.S. Article V of the Canada-U.S. Tax Treaty lists various situations, such as having a place of management, a branch, an office, or a factory, among others, that can create a permanent establishment in the U.S.

A permanent establishment would effectively create the U.S. connected income required to file a U.S. tax return and determine the tax return that needs to be filed.

If a Canadian corporation has started selling to the U.S., then it needs to file a Form 1120-F – U.S. Income Tax Return of a Foreign Corporation. It is prudent for a business to start filing Form 1120-F even if there is uncertainty about whether it has a permanent establishment in the U.S.

The firm can also file a Form 8833 – Treaty-Based Return Position Disclosure on which they report their U.S. sales, but also explain that based on the international treaty they do not appear to have a permanent establishment, if they believe that is the case.

A more permanent way of expanding to the U.S. is to establish a separate entity, such as a U.S. C-corporation, which is similar to a Canadian corporation. In that situation, all of the firm’s U.S. earnings would be subject to a flat U.S. federal tax of 21 per cent.

A word of caution, however, is that the Tax Cuts and Jobs Act is currently scheduled to expire at the end of 2025, at which time the U.S. federal corporate tax rate would increase, effective January 1, 2026.

What happens if a business owner decides to maintain operations in both Canada and the U.S., rather than moving all of its operations to the U.S.?

If a business owner wants to continue operations in both Canada and the U.S., while remaining in the U.S, they might still be subject to a Canadian departure tax, resulting in a deemed disposition of assets immediately before leaving Canadian tax residency. A key factor in determining whether that applies is whether they decide to move their family to the U.S.

There is a $500,000 threshold that needs to be met on U.S. sales before U.S. tax is payable as a branch profit tax at a rate, which can be reduced to as low as 5 per cent. If a business meets that threshold, and has to pay the U.S. branch profit tax, that will be eligible for a credit on the annual T2 corporate tax return in Canada.

However, depending on the level of sales from the U.S. corporation, this could taint the qualified small business corporation status of the Canadian corporation, and the owner might not qualify for the lifetime capital gains tax exemption in Canada.

In that situation it is important for the owner to utilize the lifetime capital gains exemption on the Canadian operating corporation before leaving Canadian tax residency.

It is also important to make sure that any accrued capital dividend account balance gets paid out before leaving Canadian tax residency because while that capital dividend is tax free in Canada, it is subject to Canadian withholding tax if the business owner is a U.S. tax resident.

What are some of the personal tax and financial implications associated with a business owner’s move to the U.S.?

When a business owner moves to the U.S., he or she can keep their registered retirement savings plan and tax-free savings account in Canada. The RRSP will remain tax deferred even while they are in the U.S. The TFSA is not included in the Canada-U.S. Tax Treaty so technically it is treated as a taxable account in the U.S.

Another option with the RRSP is to crystallize the cost base for U.S. tax purposes by selling out of the investment and holding cash before starting U.S. tax residency. If the owner is then going to stay in the U.S. for a long period of time, when they start making distributions, only the future growth of the RRSP will be taxed in the U.S.

Stocks and exchange-traded funds can transfer in kind across the border. But mutual funds need to be sold off and transferred in cash.

It can be very difficult for a Canadian family to continue to hold a discretionary family trust once they become U.S. tax residents.

U.S. courts need to determine whether they can exercise supervision over the trust. There is also a control test to determine whether the U.S. person has the authority to control all decisions of the trust. If those conditions are met, then it would become a U.S. trust.

Typically we would not want a U.S. person to continue owning a Canadian resident trust. Canadian tax laws allow for a tax-free distribution from a Canadian resident trust to a Canadian resident beneficiary. So we would typically look to dissolve that Canadian resident trust before the trustees and beneficiaries move down to the U.S.

What are some of the key estate planning issues that will affect a Canadian business owner either moving to the U.S., or operating on both sides of the border?

An individual’s estate plan should follow where their tax residency is, as well as where their businesses and real property are located.

If, for example, they have a home and business in Ontario, they should maintain an Ontario estate plan. If they move to New York and have a home and business there as well, they would require a separate New York based estate plan for those assets.

If the estate planning involves an intergenerational estate freeze, where the value of assets are frozen for the first generation, and future growth for tax purposes is transferred to the next generation, there are rules that can allow a typical estate freeze and a share exchange to be essentially income tax neutral.

However, if an estate freeze was carried out in the traditional Canadian sense, that might not meet the U.S. definition of a tax deferred share exchange. The freezer would then be making a gift to the second generation, which would utilize the freezer’s lifetime gift and estate tax exemption. That exemption amount is set at US$13.6 million in 2024.

Responses have been lightly edited for clarity and length.

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