This is part II of an interview I did with frequent commenter Telly regarding her experiences with living in Canada and working in the United States. If you want to check out part I then click here.
You mentioned the Can/USA tax treaty – what is it and how does it help you with your taxes? Are the taxes more complicated? Do you have an accountant?
There is a little used tax article in the US/Canadian tax treaty (Article XXV, paragraph 4) that basically states that a married individual that is a resident in Canada and a non-resident in the US, with income taxable in the US, shall not be taxed greater than a US citizen would be taxed. So basically what this means is that I would file in the US as if I were a resident, which results in a lower tax rate and means I write off my mortgage interest, property taxes, etc. like a US resident would. This should (and did) reduce my taxes payable in the US but didn’t make a huge difference in my taxes payable in Canada (it just meant I was able to use more of the foreign tax credit, which CANNOT be carried forward to following years). Using the tax treaty definitely makes the taxes more complicated but I managed (with some help from a great message board http://forums.serbinski.com/index.php) to do our taxes myself. I’m not sure there are many accountants in my area that have used this treaty much and though I managed to save about $2000US by doing our taxes this way, much, if not all of that would have been eaten up by the accountant. For people with a much larger mortgage, and higher interest rate, this could make a bigger difference in taxes paid (both in the US and Canada) so it is definitely something worth looking into.
Are there rebates you can use? Ie the American equivalent of a GST rebate for example?
No. Sorry – I don’t have anything to add here except I wish!
Does working in the US change your investment style? Ie with asset allocation?
It does to some extent in that we’re more likely to have both registered and non-registered investments. With respect to asset allocation, we do have a bit of a different perspective here as well, mostly because both my husband and I have $US investments from work pensions and 401ks. Because these investments are denominated in $US, we tend to keep them in US-based assets (index funds) in our 401ks.
I know nothing about 401Ks – feel free to describe them and their differences with RRSPs.
401k’s are (usually) a company sponsored tax deferred retirement accounts. Unlike RRSPs, you can not make an early withdrawal without incurring a penalty (10%). You can start withdrawing without a penalty at age 59 ½. I have to admit though, I don’t know the details of whether you have to convert to a RRIF or similar after a certain age as you have to with RRSPs.
The current limit for 401k contributions in the US is $15,500. Companies can limit based on percentages as well but most are pretty high. My company limits to 30% so someone making over $51k would hit the $ limit before the % limit here. You can not carry forward contribution room, it is basically use it or lose it (though there is a catch up clause once you reach 50 I believe).
401k dollars are taken (pre-tax) from each pay cheque based on the percentage you choose. The issue, as a Canadian, is that 401k contributions are taxed as income (not deferred) by the Canada Revenue Agency (CRA) so there is no real incentive to contribute. My company does give a 50% match on the first 5% contributed by me so I always take the free money and contribute no more than the 5%. The match is NOT taxed by the CRA (i.e. it is tax deferred). 401k accounts are held by various institutions (Fidelity, JPMorgan, etc.). In our case, we have about 12-15 fund to choose from (which MUCH lower MER than almost any Canadian funds). Also, ½ of my 401k can be transferred to a trading account for a one time $100 fee. I now use all the low-cost index funds available in the US (mostly Vanguard). With MERs of 0.07%, I can’t complain.
We also have a pension plan (recently switched from defined benefit to defined contribution) that pays a % of salary based on years of service and age. This currently works out to 4% for me.
Thanks a lot Telly for doing this interesting and informative interview with me and I look forward to doing more interviews with you in the future!