What To Do With U.S. Mutual Funds in Canada
Written by John Woodfield Portfolio Manager, CFP®, CIM® and Tiffany Woodfield, TEP, Associate Portfolio Manager, CRPC®, CIM®
Dealing With Your U.S. Mutual Funds in Canada
If you are an U.S. Person living in Canada and you own mutual funds that you bought in the U.S., you’re going to encounter some complexities that are worth understanding.
Unfortunately, when you move to Canada and become a permanent resident, you cannot bring your U.S. mutual funds across the border. This regulatory rule comes from the Securities and Exchange Commission (SEC).
While some U.S. Persons living in Canada try to use a relative’s address in the U.S. and keep their mutual funds, doing so is a tax nightmare that will eventually catch up with them. Simply tracking two cost bases for U.S. and Canadian taxes is awful, and each country taxes capital gains differently.See this post for an explanation of “cost base” as it relates to cross-border individuals.
In addition, brokerage firms in the U.S. have become more stringent about not breaking the rules, so many U.S. Persons living abroad have received a letter from their financial institution informing them that they have just 90 days to liquidate their accounts.
Receiving this letter may send you into a panic because the tax implications of selling all your U.S. mutual funds at once can be quite substantial if you have a large capital gain.
However, there is hope.
What To Do With U.S. Mutual Funds in Canada
If you possess U.S. Mutual Funds and remain a U.S. resident, it's possible to strategically plan to prevent triggering a capital gains tax all at once.
Instead, you have the option to spread out the realization of these gains over several years. It's important to understand that this isn't an additional tax but an earlier recognition of the capital gains tax liability. Remind yourself that the existence of a capital gain is indicative of the success of your investment—it's a sign that you've made a profitable return.
At SWAN Wealth Management, one approach we have used with our clients is donating U.S. mutual funds to the client’s personal charitable donation fund. This means the client gets a tax deduction in Canada and does not incur tax in the U.S. This process is facilitated through our custodian partnership with Raymond James USA and by collaborating with the Raymond James Canada Foundation.
Canadian charities are not equipped to take on U.S.-issued mutual funds.
Moreover, if they donate these funds to a U.S. charity, they do not receive the Canadian tax break for the donation. However, using our method, our clients can donate the mutual funds to our U.S. arm, which immediately sells the funds and sends the cash to the charitable giving fund in Canada.
This mitigates the capital gains taxes and gives our clients a nice break for the donation while creating a pool of money within a charitable structure that they can distribute to the charities of their choice at their convenience.
If you're a Canadian resident working with the right cross-border advisory firm, you can donate U.S. mutual funds to charity.
We manage the holdings while they are in the charitable fund.
Dealing with U.S. mutual funds in Canada is an interesting problem because most U.S. persons who come to Canada think it is like moving to another state. They find it unbelievable that they have to sell their mutual funds and can no longer own mutual funds outside of those held inside their IRA if they bought these while they were U.S. residents.
In sum, it’s critical that you seek the guidance of a cross-border financial advisor who can create a solution so that you don’t take a big tax hit when selling your U.S. mutual funds.
Next Steps
If you’re a U.S. Person living in Canada or are planning on moving to Canada and need assistance with moving and optimizing your investments, estate planning, wealth management, and portfolio management, please get in touch. At SWAN Wealth, we specialize in cross-border wealth management, cross-border financial planning, and Canadian financial planning.
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If you’re planning a cross-border move, these articles and guides will help simplify your move and ensure you’ve covered everything.
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ABOUT THE AUTHORS
Tiffany Woodfield is an Associate Portfolio Manager licensed in Canada and the USA, a Chartered Investment Manager (CIM), a Chartered Retirement Planning Counselor (CRPC), a Trust and Estate Practitioner (TEP), and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border, and optimize their investments to minimize their tax burden. Together, Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams to keep their assets safe whether they live in Canada or the US.
John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP). In 2007, he was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals, and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.
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