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Relocating an Employee from Canada to the United States

By Richard Batch |

As a business owner, expansion into the US market often begins with the relocation of a single employee. As the employer, you will need to be aware of the tax implications associated with this person's move. However, the tax issues that will be faced by the employee are quite diverse, and may be difficult to ascertain.

The key issue will be the impact of the move on the employee's residency status. If the move will cause the employee to cease Canadian residency, there are several questions that should be considered:

  • Will the employee's house be sold, or rented with the intention of eventually returning to Canada? If the renting option is chosen, there are at least two elections to file: The first allows for the retention of the employee's "principal residence exemption". The principal residence exemption will be preserved, but the rental income cannot be offset by capital cost allowance (the tax system's equivalent of depreciation expense). The second election allows for the reduction of the required withholding taxes that must be paid on the rental payments. The renter is required to withhold a portion of the rent paid to the employee, since the employee is now a non-resident. Essentially, the election allows for the tax withholding to be a fraction of net rental income, rather than the rental revenue. Remember that if the family home is not rented to a third party (and not a relative), Revenue Canada may argue that the employee never ceased Canadian residency, and tax the employee's income in Canada. The result will be double-tax (and complex filings to claim foreign tax credits), because the employee will also be subject to US income tax.

  • RESP's and the employee's RRSP can be kept, but any withdrawals under the "home buyers plan" must be repaid, and accumulated income from the RESP cannot be paid out to non-residents. All other assets are deemed to be sold for their present fair market value, which may result in a tax liability without sale proceeds from which to pay it.

  • Special treatment is allowed for assets that are "taxable Canadian property", but a deemed disposition still occurs.

  • Revenue Canada will also still tax any income, such as dividends or interest, earned in Canada via withholding taxes.

There are also issues to consider from the US perspective:

  • An immigration attorney should be consulted to acquire proper status (i.e.: working visa, "green card").

  • Each state also imposes income tax, and the tax rates vary widely. US tax authorities will tax all income, including investment income from Canadian investments, rent from the Canadian house (if it is not sold), and earnings in an RRSP that is not collapsed, subject to some special elections.

  • The effective tax rate. While it is lower in the US, any Canadian-source income will still be subject to the higher Canadian tax. The result is both jurisdictions imposing tax on the same income. This is resolved by the relocated employee filing both Canadian and US tax returns, and claiming foreign tax credits.

Clearly, the issues faced by relocating employees are diverse and complex. A professional should be consulted well in advance of the relocation to discuss the Canadian and US tax planning opportunities.

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