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More families are dealing with mid-life career changes and cross-border moves.

That’s why the 2013 IAFP symposium case study, presented last month in Ottawa, examined the potential cross-border tax, retirement and estate planning issues of a hypothetical family from Ottawa.

The father’s job is in jeopardy and the mother is being asked to accept a work transfer to the U.S. Meanwhile, the couple has to amp up retirement saving, while also providing for their kids’ educations.

The case was based on real client examples, says Peggy Cameron, an IAFP symposium committee member and founder of Cameron Leadership Development in Ottawa. It shows advisors how to balance short-term, retirement and family goals simultaneously.

Read: Clients buying U.S. real estate? Consider trusts

Case study details

Jim, 42, and Sarah, 40, live in Ottawa (in a $400,000 jointly owned home) and have three children, with ages ranging from 10 to 17. One was born with a heart condition, and has regular checkups at an Ottawa hospital.

The couple makes more than $295,000: Jim works with the Federal Public Service and makes $95,000 a year, while Sarah is a computer engineer at Cisco who brings in $200,000 a year, plus a 35% annual bonus. The children go to private school for a total cost of $30,000 per year—that cost is expected to rise by 10% in 2014.

As for savings, Jim and Sarah each have an RRSP and TFSA invested in mutual funds, and they have a family RESP and a joint non-registered investment account that are also invested in mutual funds.

They also have life and disability insurance. Additionally, Jim has a pension and Sarah has $600,000 in Cisco stock options.

The issues

Jim may lose his job due to downsizing. Meanwhile, Sarah’s company is consolidating in Austin, Tex. and she’ll likely lose her job if she doesn’t move.

The couple’s considering these three options:

  1. They can stay in Ottawa and invest in a medical technology startup run by doctors at the Ottawa Heart Institute, with Jim staying in his current position (as long as it exists).
  2. They can move to Alberta, where Sarah can join another friend’s 7-year-old company and Jim can request a lateral move.
  3. They can relocate to Texas, where the company will take care of the family’s green cards. Jim’s employment would be uncertain.

Sarah’s salary makes up more than half the household income. In comparison, her starting salary at the Ottawa company would be $80,000 (with staged increases). Her Alberta pay and benefits haven’t yet been determined.

At first blush, moving to Texas makes the most sense, especially because there are no personal income taxes in that state. There are federal taxes, however, says Shawn Brayman, CEO of PlanPlus in Lindsay, Ont.

Read: Don’t delay planning

Based on their current finances and employment, he finds they’d save nearly $50,000 on taxes by moving to the U.S., since they wouldn’t have to pay personal income taxes. Their marginal household tax rate would fall from 43.97%, or $126,191, to 33.22%, or US$80,501 (about CDN$83,000).

This analysis assumes Sarah’s salary remains the same and that Jim finds a new job that offers a salary of US$95,000. If he lost that salary or had to accept reduced pay, however, the family would have to reevaluate their tax situation.

Income Tax Summary – Canada

Jim’s Tax $24,745
Sarah’s Tax $101,446
Total Taxes $126,191
Jim’s Marginal Tax Rate 43.40%
Jim’s Average Tax Rate 26.04%
Sarah’s Marginal Tax Rate 44.17%
Sarah’s Average Tax Rate 36.28%

 

Income Tax Summary – Texas (all figures in $US)

Jim’s Tax $14,959
Sarah’s Tax $65,542
Total Taxes $80,501
Jim’s Marginal Tax Rate 28.00%
Jim’s Average Tax Rate 15.74%
Sarah’s Marginal Tax Rate 35.00%
Sarah’s Average Tax Rate 23.44%

On the upside, sales taxes are lower in Texas (8.25% compared to 13% in Ontario), and land taxes (between 1.9% and 3.1% in Austin) are tax deductible, says Terry Ritchie, director of cross-border wealth services at Cardinal Point Wealth in Calgary. The family could also buy a home for half the price of their $400,000 Ottawa home (the median price in Austin is US$227,400). If they move, Sarah must ensure she negotiates a favourable compensation package, as well as find out how her stock options might be affected. In particular, she should ask for benefits that would help cover their daughter’s medical needs, says Brayman.

Read: One Canadian retirement advantage

Trouble with registered accounts

The family must deal with their RRSPs if they move to Texas. Such plans aren’t sheltered in the U.S., but Brayman and Ritchie suggest the couple keep their accounts if they move. They’d face high taxes if they withdrew their RRSP funds prior to moving. Jim would have to pay withholding tax of 10% on his $11,000, while Sarah would have to hand over 30% of her $200,000. Plus, the couple would have to pay extra taxes at filing time, since their marginal tax rates exceed those withholding rates.

Also, they’ll need their registered accounts if they ever move back to Canada. Their RRSPs make up a significant portion of their planned retirement income.

If they chose to keep their RRSPs, they’d need to file Form 8891 to the IRS to defer any U.S. taxes payable, says Ritchie. They’d also have to file Form 8938, which must be completed by families or people if the value of their assets surpasses reporting thresholds. Thresholds differ for Canadian residents living in the U.S. and U.S. residents living in Canada, he adds. Jim and Sarah, who are filing jointly, would have to file the form since their collective foreign assets are worth more than $100,000.

Read: Faceoff: TFSA vs RRSP

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