In today’s labor market, talent mobility is becoming increasingly important. First, there’s a growing necessity for companies to function at a global level. Thanks to continuously improving communications technology, organizations are collaborating with partners and breaking into markets overseas. As a result, there are more relocation opportunities for employees to gain international experience.
Second, millennials – who’ve grown up in this hyperconnected world – expect to be given opportunities to work overseas. Whereas international assignments used to be reserved for highly experienced employees, nowadays, international transferees are often at the beginning of their careers. And though they’re likely to possess fewer assets than more seasoned employees, it’s nevertheless critical to be aware of the tax implications of relocating to a different country.
This is especially important for Canadian employees relocating to the United States. Both countries have a number of tax laws that can have a significant impact on the amount of taxes an employee has to pay on income and assets. In some cases, employees might even be subject to double taxation. That’s why it’s imperative that employers work with their employees to determine the best course of action ahead of time.
Keep the following considerations in mind:
- Tax residency. Canada levies income tax based on residency, so employees who retain their primary residency in Canada are likely to have to pay income taxes. The U.S., however, levies taxes on a citizen’s or resident’s worldwide income. The complication here is that the U.S. might consider someone a permanent resident based on the substantial presence test (SPT). This means it’s possible that an employee could be subject to double taxation, which can be extremely costly—even when you keep in mind that U.S. taxes are typically much lower than Canadian ones.
- Departure tax.When an employee leaves Canada and takes up permanent residency in the U.S., or when the SPT deems that employee to be a permanent resident of the U.S., he or she is no longer subject to income tax in Canada. However, assets the employee retains in Canada will still be taxed. These assets include: dividends, annuity payments, royalties and rental payments, amongst others. Real estate and registered retirement savings plans are exempt.
- U.S. estate tax. If an employee becomes a permanent resident of the U.S., he or she is subject to U.S. estate tax, which is levied on all of a resident’s worldwide assets if they amount to more than 5.43 million U.S. dollars and their assets in the U.S. if they’re valued at a minimum of $60,000 U.S. dollars. Again, if the employee retains assets in Canada, this could result in a double taxation situation.
It’s clear that when tax time rolls around, transferees could face complicated and expensive situations that could very well affect their engagement with their employer. To prevent this and ensure companies retain their people, employers are advised to provide proper assistance in terms of accounting and estate planning to all of their transferees.
Although this written communication may address tax issues, it is not a covered opinion as described in Circular 230. Therefore, to ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments), unless expressly stated otherwise, was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.