Planworth is excited to announce a new partnership with Flinks, a leader in financial data connectivity and account aggregation.
Always and only with a client’s consent, account aggregation gathers financial data from a broad range of financial accounts and institutions and increases transparency by helping financial advisors gain a deeper understanding and more comprehensive view of their clients’ finances and wealth, particularly for clients with assets and liabilities spread between different institutions and firms. Once fully integrated, Flinks will allow advisors on Planworth to have their clients link all their financial accounts (inside or outside the advisor’s firm) by securely logging into their online banking and investment accounts. Thereafter, the advisor will be able to view and pull accurate and up to date data about a client’s accounts, regardless of where they may be held.
By working with Flinks, Planworth is building on our platform by using aggregated financial data to help advisors guide the planning process and support clients through all stages of their wealth journey. With a consolidated view of a client’s current financial picture and access to data point typically not at their disposal, advisors can save time on discovery, deliver more tailored and insightful recommendations to clients and more readily identify planning opportunities and solutions for clients.
Planworth’s integration with Flinks advances our mission to modernise the wealth planning process by empowering advisors to deliver more value for clients and grow their business.
Canadian clients who also happen to be US citizens or green card holders (US Persons) present unique challenges and opportunities because rules on both sides of the border apply to them. Many planning strategies that seem like no-brainers from a Canadian perspective can lead to potentially negative US tax consequences for US Persons.
This post provides a summary guide to common pitfalls for US Persons living in Canada that every investment advisor should be aware of.
Disclaimer: The content of this guide is provided for educational and/or general information purposes only and does not constitute legal, tax, investment or other professional advice. You must instruct your client to seek specific legal, tax or other advice before exploring or making any changes to their situation.
Registered Education Saving Plans (RESP) are a great tool for Canadian parents to help their children with post-secondary education. However, if the parent who owns the RESP is a US Person, complex annual filings with the IRS may be required and the income and grants earned in the RESP may be subject to unexpected US income tax. Issues can be further complicated if the child beneficiary of the RESP is also a US Person. In either case, the client should consult with a US tax expert to ensure there are no issues.
If only one parent is a US Person, it may make sense to have the parent who is not a US Person as the RESP’s only owner.
If both parents are US Persons, it may be advisable for the RESP to be held by another trusted person who is not a US Person, like a grandparent.
A Tax Free Savings Account (TFSA) is a very attractive investment vehicle because growth and income inside the TFSA are generally exempt from Canadian tax. However, this tax-free treatment in Canada does not necessarily mean there will not be US tax issues for a US Person with a TFSA . A TFSA may require a US Person to complete complex annual filings with the IRS and income in the TFSA may be unexpectedly taxable in the US.
There is some disagreement in the tax planning world about whether US Persons with a TFSA are subject to US tax and compliance. Most tax experts err on the side of caution and will not recommend TFSAs for US Persons until the IRS comes out with clearer guidelines.
3. Canadian Mutual Funds
Special US tax rules apply to a Passive Foreign Investment Corporation (PFIC). A PFIC is a non-US corporation that produces most of its income from passive investment income such as dividends or interest.
The broad definition of a PFIC includes many Canadian mutual funds and may also include a private Canadian corporation such as a holding company that holds a stock portfolio. Owning a PFIC may cause complex annual filings and potential unexpected tax payable in the US tax return of a US Person.
A US Person that holds a Canadian mutual fund may be exposed to the PFIC rules without knowing it. This does not mean that a US Person can never hold a Canadian mutual fund, but the consequences of doing so should be considered. Therefore, an advisor should coordinate with the client’s US tax expert to ensure that the advisor’s purchase of Canadian mutual funds for the US Person does not inadvertently cause US compliance or tax issues.
4. Whole Life Insurance
A lot of investment and estate planning strategies use Whole Life Insurance because it offers many tax advantages. In particular, income earned inside the policy is exempt from Canadian tax. However, the income earned may be taxable in the US tax return of a policyholder who is a US Person.
If a client has a whole life policy and is a US Person, the advisor should encourage the client to consult with a US tax expert so that any potential issues can be addressed.
Likewise, if a US Person is considering the purchase of a whole life policy, the advisor should have the client run the recommendation by their US tax expert to ensure any potential issues are addressed.