Pre-Move Tax Planning Between Canada and the US: The Twelve-Month Timeline in Both Directions

Short version: Pre-Immigration Tax Planning for Canadians

Most of the tax cost of a cross-border move is decided before the move, and most of it is decided by default because nobody planned. The departure tax is fixed by the date and the values on that date; the TFSA and the Canadian mutual funds become US problems on the residency start date; the corporation becomes a CFC on the same date; the pension splitting ends at year-end; the FBAR starts with the calendar year. Each of these has a window before the move in which it can be handled cheaply, and the windows close in a sequence. Here is the timeline, for a Canadian moving to the US and for an American moving to Canada.

Key takeaways

• Start twelve months out, or as early as the move is likely. The corporate wind-up, the valuation of private shares, and the RRSP restructuring for a high-tax state each take months.
• The departure date is set last, after the asset inventory, the corporate decision, the RRSP and TFSA decisions, the loss harvesting, and the day count.
• Canada to US: close the TFSA, sell Canadian mutual funds, wind up or plan for the corporation, realize losses, decide the home, file NR301s, notify health coverage, and make the XIII(7) election on the first US return.
• US to Canada: file the Roth election, decide the 401(k) and IRA, spend or move the 529 and HSA, replace US mutual funds if desired, close state residency, and prepare for the T1135.
• Both directions: the first year's return is a project; the elections in it cannot be made later.

Canada to the US

Twelve months before. - Inventory every asset with its cost base and current value; identify what the departure tax will catch (non-registered investments, private shares, crypto, foreign property) and what it will not (Canadian real estate, RRSPs, TFSAs, pensions). - Decide on any private corporation: wind up before departure (pay the capital dividend account, distribute the surplus, file the final T2) or accept CFC status with Form 5471. A wind-up takes months. - If private shares will be deemed sold, get a valuation and plan the lifetime capital gains exemption and the T1244 security. - Check the destination state's rules: income tax, RRSP conformity (California taxes it annually), estate tax, property tax, homestead.

Six months before. - Restructure the RRSP if the destination state does not follow the treaty (shift to low-yield growth holdings), or plan withdrawals while still resident. - Sell Canadian mutual funds and Canadian-listed ETFs in taxable accounts; replace with individual securities or US-listed ETFs. - Realize capital losses to offset the coming deemed gains; apply loss carryforwards in the departure year. - If the destination taxes gains at ordinary rates, consider realizing gains in Canada at half inclusion. - Decide the home: sell in the departure year, or rent with NR6 and Section 216 and Section 116 later; avoid leaving a Toronto or Vancouver home empty. - Review deferred compensation, RSUs, and options for the working-day split and any SDA issues.

Three months before. - Count US days for the prior three years; confirm the substantial presence test has not already been met. - Withdraw and close the TFSA (tax-free in Canada); decide the RESP subscriber. - Confirm provincial health coverage end date and arrange US coverage to start the same month. - Tell payroll the departure date in writing. - Prepare NR301s for every Canadian payer; identify the brokerage's policy on US residents and plan the account transfer.

The date. - Set it after all of the above; it fixes the deemed disposition values and the residency split. - Notify Canadian financial institutions, Service Canada (for CPP and OAS), and the CRA (on the final return).

After. - Final T1 with departure date, T1243, T1161, T1244; TP-1 for Quebec. - First US return (dual-status or elected) with the Article XIII(7) election, FBAR, Form 8938, and any Form 5471; state part-year return. - Florida homestead by March 1; declaration of domicile.

US to Canada

Twelve months before. - Inventory US assets and basis; note that Canada steps up cost to fair market value on arrival, so pre-arrival gains are never Canadian-taxed, but US basis is unchanged. - Decide the 401(k) and IRA: leave them (taxable in both on withdrawal with a credit) or roll to an RRSP (usually worse). - If self-employed with an LLC or S corporation, restructure: an LLC is a foreign corporation in Canada with FAPI exposure; an S corporation election terminates when a non-resident alien becomes a shareholder.

Six months before. - Spend down or transfer the 529 (taxable in Canada) and HSA (growth taxable in Canada). - Decide whether to keep US mutual funds (fine in Canada, but Canadian mutual funds will be PFICs for a US citizen). - Review the Roth: no contributions after arrival; prepare the Article XVIII(7) election. - If moving from a high-tax state (California, New York), plan the state residency exit: sell or lease the home, move the family, close accounts, expect an audit.

Three months before. - Confirm provincial health coverage start (Ontario immediate; BC and Quebec after a waiting period) and bridge with private coverage. - If buying a home in Ontario or BC, review the foreign-buyer taxes (Ontario NRST 25%; BC 20%) and the exemptions for work-permit holders and permanent residents. - Prepare for Canadian filings: no TFSA, no Canadian mutual funds in taxable accounts (for US citizens), T1135 from the second year.

The date. - Canadian residency begins when residential ties are established (typically arrival with a home and job). - State residency ends on the move date; file part-year state returns.

After. - First T1 with the Roth election and the deemed acquisition at fair market value; no T1135 in the arrival year. - US 1040 continues with the foreign tax credit; FBAR and Form 8938 on new Canadian accounts. - 60(j) rollover election if a US plan is being rolled to an RRSP.

Worked example

A Toronto physician with a professional corporation ($800,000 of retained investments), $300,000 of unrealized gains in mutual funds, a $100,000 TFSA, a $900,000 RRSP, and a house decides in January to move to Miami in September.

• January to March. Valuation of the corporation's assets; decision to wind up; capital dividend account computed. Mutual funds sold (gain realized at Ontario rates; no PFICs later).
• April to June. CDA paid tax-free; remaining surplus distributed as a dividend; corporation wound up. Losses in the portfolio harvested. House listed.
• July to August. TFSA withdrawn and closed. RRSP left in place (Florida adds nothing). NR301s prepared. OHIP end date confirmed; US coverage arranged for September. Payroll notified.
• September. Departure. Final T1 with departure date; deemed disposition on the remaining portfolio.
• Following spring. First US return (dual-status) with the XIII(7) election, FBAR, Form 8938; no Form 5471 (corporation gone); no Form 3520 (TFSA gone); no Form 8621 (funds gone).

Skipping the January-to-June steps and moving in September anyway: Form 5471 every year for a corporation that is now a CFC; Forms 8621 for the funds; Forms 3520 and 3520-A for the TFSA; and a departure tax on the corporation's shares instead of a clean wind-up.

Official sources

"When you leave Canada, you are considered to have sold certain types of property (even if you have not sold them) at their fair market value (FMV) and to have immediately reacquired them for the same amount. This is called a deemed disposition and you may have to report a capital gain (also known as departure tax)." — Canada Revenue Agency, Leaving Canada (emigrants), https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html

"You are a dual-status individual when you have been both a U.S. resident and a nonresident in the same tax year." — Internal Revenue Service, Taxation of Dual-Status Aliens, https://www.irs.gov/individuals/international-taxpayers/taxation-of-dual-status-aliens

Practitioner note

The move date should be the last decision, and it is usually the first. Everything above the date on this timeline is cheaper before it than after, and several items (the corporate wind-up, the TFSA, the mutual funds) go from free to expensive on the day the residency starts. We start the file when the move is likely, not when it is booked.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the pre-move planning timeline in either direction, the account and corporate decisions before the date, and the first-year returns with the elections. See cross-border pricing or book a call.