Canadian HR Reporter

Canadian HR RepoRteR February 9, 2015 12 FeAtures April 22, 2015 Unthink Erik Wahl Internationally recognized graffiti artist, author and entrepreneur April 22, 2015 Host Misha Glouberman Communication expert, teacher, and author April 23, 2015 Give and Take Adam Grant Award-winning teacher, researcher, and professor at Wharton School pensions Dealing with cross-border obstacles Employees with individual retirement accounts may need a little help By Darren Coleman t oday, more than one mil- lion Americans live and work in canada, and an even larger number of canadi- ans live and work in the united states. ose with an individual retirement account (IrA) who are permanently or temporar- ily residents in canada may find their American financial insti- tution will no longer hold their IrA, and ask them to move it. Similarly, few investment firms will open new IRA accounts for Canadian residents, leaving them with significant taxes and penal- ties. (is situation does not af- fect Canadians with retirement savings plans when moving to the U.S.) Take, for example, the CFO of a U.S. pharmaceutical company who took a posting in Canada to manage the company's interests north of the border. His U.S. in- vestment advisor said he had 90 days to move his IRA to Canada, or cash it out and pay the tax. is was a surprise to him. According to Securities Ex- change Commission (SEC) leg- islation, an advisor must be reg- istered in the jurisdiction where the person resides. is means the CFO's U.S. financial institu- tion would no longer represent him because he was now non- resident there. Another American who was also moving to Canada — with US$3 million invested in an IRA- registered account — had the same problem. She had 90 days to move the account, or she would face taxes of US$230,000. In both cases, the executives worked with and obtained tax advice through their respective HR departments. As they partici- pated in workplace 401K pension plans and IRA plans, the transi- tion across the border was made with the co-operation and advice of their employers. Rules for salespeople e Securities Exchange Act of 1934 says Canadian salespersons cannot deal with clients in the U.S. unless registered with a dealer who, in turn, is registered in both countries. Otherwise, they may face charges. e initial intent of this act was to protect investors by having their advisors and financial institutions registered where they lived. In 2000, the SEC granted an ex- emption from broker-dealer reg- istration for firms and salesper- sons dealing with U.S. residents who have Canadian self-directed, tax-advantaged retirement plans such as registered retirement sav- ings plans (RRSPs) and registered retirement income funds (RRIFs). e exemption is subject to cer- tain conditions but the net result is that in most states, a Canadian can retain RSP accounts in Can- ada and continue to benefit from the tax deferral offered. Americans in Canada, or Cana- dians returning home with 401K pension plans and IRAs in tow, don't have the same benefit. e issue is not that the 401K pension plan or IRA becomes immedi- ately taxable — the Canada-U.S. Income Tax Convention says residents may enjoy continued tax deferral of their IRA, 401K plan and Roth IRA balances once they return to Canada, just as they would if they were still U.S. residents. However, continuing tax de- ferral is not automatic; many Ca- nadian plan owners must file an election each year with their Ca- nadian tax returns to defer tax on their IRA and 401K plan balances. Curiously, the Canada Revenue Agency (CRA) provides no guid- ance for plan owners wanting to make this election except for Roth IRAs. is doesn't seem like a tax is- sue, which is why most tax and HR professionals don't catch it when advising clients about moving across the border. One client was informed by her accountant there would be no tax consequences in returning to Canada, only to have her U.S. brokerage firm tell her the IRA had to be transferred or moved within 90 days, or it would be cashed out, resulting in more than US$250,000 in tax. is is not initially a tax prob- lem but a regulatory and com- pliance issue that becomes a tax problem. e challenge? Most U.S. bro- kers and financial institutions won't maintain IRA accounts for people who return to Canada because of recent changes from Canadian securities administra- tors regarding registration re- quirements for all broker, dealer and advisor firms doing business here. After reviewing exemption requirements for individual in- vestors and registration require- ments for dealers, many of them feel that the cost and complex- ity to comply outweigh retain- ing the client. So they terminate those relationships and ask for the accounts to be transferred to an- other firm and advisor. e taxpayer must then find an institution to take on a new account for a Canadian resident, which can be time-consuming and frustrating. ere have also peNsIoNs > pg. 13 The challenge? Most U.S. brokers and financial institutions won't maintain IRA accounts for people who return to Canada.

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