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The CFO of a major American pharmaceutical company recently took a five-year posting in Canada. Shortly after the move, he received a letter from his U.S. investment advisor, saying he had 90 days to move his Individual Retirement Account (IRA) to Canada or he’d have to cash it out and pay the tax. That came as a big surprise. SEC rules say an advisor must be registered in the same jurisdiction his or her clients reside in; as a result, the CFO’s U.S. financial institution could no longer advise him. For more than two months, he looked unsuccessfully for help from Canadian financial institutions and wealth managers.

The issue

According to the Securities Exchange Act of 1934, Canadian salespersons are not allowed to deal with clients in the U.S. unless they are registered with a dealer that’s registered in both Canada and the U.S.

On June 7, 2000, the SEC granted firms and salespersons dealing with U.S. residents who have Canadian self-directed, tax-advantaged retirement plans (e.g., RRSPs and RRIFs), an exemption from broker-dealer registration. The exemption has conditions, but the net result is that, in most states, a Canadian can retain RRSP accounts in Canada and continue to benefit from the tax deferral. Americans in Canada, or Canadians returning home with IRAs in tow, don’t have the same benefit.

The issue isn’t that the IRA becomes immediately taxable. Under the Canada-U.S. Income Tax Convention, Canadian residents may enjoy continued tax deferral of their IRA, 401(k) plans and Roth IRA balances once they return to Canada, just as they would if they were still U.S. residents. However, that deferral doesn’t continue automatically, as Canadian plan owners must file an election each year with their Canadian tax returns to defer tax on their IRA and 401(k) plan balances. CRA provides no form or published guidance for plan owners wanting to make this election, except in the case of Roth IRAs (see “What’s a Roth IRA?”, below).

This does not initially seem to be a tax issue. And, tragically, that’s why it goes unnoticed by many tax professionals. I’ve seen a CPA inform a client there would be no adverse tax consequences in returning to Canada. The client was shocked to receive notice from her U.S. brokerage that her IRA had to be transferred or moved within 90 days or it would be cashed out, resulting in a tax liability of more than $250,000.

Some U.S. brokers won’t maintain IRA accounts for clients who move back to Canada. These brokers have been challenged by recent changes by the Canadian Securities Administrators regarding registration requirements for all broker-dealer and advisor firms doing business in Canada. After reviewing exemption requirements for individual investors and registration requirements for dealers, many have concluded that the cost and complexity of complying outweighs the benefit of retaining the clients’ accounts. So, they are terminating those relationships and asking for the accounts to be transferred to another firm.

It’s left to the taxpayer to find an institution that will take on a new account for a Canadian resident. This search can be both time-consuming and frustrating. We have also seen situations where a U.S. institution agreed to take on the account, but then changed course during the transfer and refused to accept the account.

Canadian investment firms can’t open IRAs because they’re U.S. plans. And while it’s possible for IRA proceeds to be moved to an RRSP, that’s an exception rather than the rule. For example, only lump-sum amounts (not periodic payments) contributed to an IRA by the plan owner or spouse may be transferred to the plan owner’s RRSP.

Employer contributions to the plan owner’s IRA may not be transferred to an RRSP unless the plan owner has enough existing RRSP room to accept the employer contributions. In most cases, this restriction won’t cause problems for IRAs, to which only the plan owner or spouse has contributed. However, it can cause trouble for SEP IRAs (a type of pension plan available for small employers) and IRAs where the plan owner has transferred money from a 401(k) plan to which her employer contributed.

Since the process of moving an IRA into an RRSP is complicated and ill-suited to those who wish to remain in Canada permanently, it’s not a workable remedy. So, what’s an investor to do?

The solution

The remedy is to find a way to leave the IRA in the U.S by working with an advisor who’s fully licensed in Canada and the U.S., and can offer an IRA to Canadian residents.

This is the best and easiest option, as the IRA won’t have to be liquidated. Further, it may continue to be managed by the client and her advisor while the client’s in Canada.

Finally, it can remain intact should the planholder return to the United States. An institution that would offer such a service would have to be a broker-dealer, registered with FINRA, that allows suitably qualified Canadian financial advisors to be licensed in the U.S.

by Darren Coleman , PFP, CFP, CIM, FMA, FCSI, senior vice-president and associate branch manager at Raymond James.

Originally published in Advisor's Edge Report

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