Money Smarts Blog

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!

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I asked frequent commenter Telly if she would consent to doing an interview about her experiences with living in Canada and working in the United States. Not only did she do the interview but she spent a lot of time writing great answers chock full of interesting information. I’ll be conducting a couple more interviews with Telly in the future on other topics. If you have an interesting story and would like to be interviewed then please send me an email.

 

Why do you live in Canada and work in the US – ie how did this happen?

I graduated with a degree in Engineering back in 1999. At the time, there were many job opportunities in Michigan and the exchange rate was a whopping $1.50 or so! A 50% raise for crossing the border each day? Sounded about right to me (and my then boyfriend, now husband). Actually, I would say a majority of my classmates also accepted positions in the US.

The NAFTA agreement allows for a certain list of professions to obtain work in other NAFTA countries pretty easily. Each year I have to renew my TN visa by showing my university degree, a letter from my employer, and pay $60US to the Customs office States-side (my company reimburses me). It’s a relatively easy process that takes about 5-10 minutes.

What is your commute like with respect to crossing the border? Do you get to know the border guards? Do you work from home at all?

My commute isn’t all that bad most days, usually about 30 minutes or so (I live very close to the border). Most of my co-workers in the US actually have substantially longer commutes than I do as I’m usually opposing traffic. The days surrounding Sept. 11 were obviously very chaotic. For a few weeks after 9-11 I did work from home but other than that I do not. On some random mornings the border is messy for no apparent reason. My hours are flexible though so it doesn’t wreak much havoc on my day thankfully. I think as the exchange rate got worse (for commuters like me) more and more people looked to find work back in Canada and the border seems to be much less busy than back in the days of up to $1.60 exchange.

I use a Nexus pass which helps speed things along. The border guards are actually quite friendly and a few of them refer to me by name. 🙂

Are you planning to continue with cross border working? Is it a lot of hassle or no big deal?

I’ve actually been on the lookout for jobs back home but haven’t found anything too exciting as of yet. There are definitely still more opportunities in the US, especially for more technical positions and less manufacturing type positions. Crossing the border isn’t too bad. I think the two biggest issues for me are: 1) taxation, 2) maternity leave (as we’re thinking of starting a family in the near future.

As many of you probably know, the difference between Canada and the US with respect to maternity (or paternity leave) is rather drastic. A new mother, whether through birth or adoption, is only entitled by law (FMLA), to 12 weeks unpaid leave (most employers pay a percentage of pay for the 1^st 6 weeks). And actually, it’s remarkable how few people actually take the “entire” 12 weeks. More commonly, women tend to take just 6 weeks. (I’m sure all the new parents are thinking that’s nuts!)

As far as taxation goes, tax rates are generally lower in the US than in Canada. I am required to file in both countries: as a non-resident in the US and as a resident in Canada. A US non-resident is taxed at a higher rate than a resident (go figure) but this is generally still lower than Canadian rates. Basically what happens is that I get a foreign tax credit for taxes that were paid in the US and that is applied to my Canadian taxes. The difference between the rates produces an amount owing in Canada. For example, if my average tax rate is 25% in the US and 30% in Canada then I would get a foreign tax credit for the 25% paid and then owe the CRA the other 5% (further deductions can only come from that extra 5% essentially). This is where I find I can actually lose out by working in the US.

Back in the great exchange days, I never really thought much about registered investing (RRSPs). Bad – I know. I was spending like a recent graduate 🙂, enjoying lots of great vacations, paying off my car, eventually our wedding and (my bit of redemption) aggressively paying off student loans. Now that I’m a little more financially savvy and my husband and I are at point where we can live significantly below our means, I realize the importance of RRSPs. Unfortunately they don’t work well for me. Currently, since I don’t earn any income in Canada (except for a relatively small amount of rental income which there is no withholding for) I can’t receive a tax return…I always owe (based on the difference between the countries tax rates) as CRA has never taxed any of my earnings throughout the year. So basically, I can only contribute enough to my RRSP such that I get to zero owing for the year. That basically amounts to the amount of rental earnings plus the dollar amount difference between the (I’m kind of guessing here) 25% that was paid in the US and the 30% owing in Canada. This usually works out to about $3-4k – not much. So each year I wait till February and make my RRSP contribution for the year – just enough to bring me to zero owing on my Canadian taxes (anything more would be ineffective). Last year this only amounted to about $2000 (the tax rate differentials between Canada & the US seem to be getting closer). So needless to say, my RRSPs are inadequate.

My husband now works in Canada so we’ve taken the approach of maxing out his RRSPs and then using our extra savings to make pre-payments on our mortgage. Very recently though, we’ve decided to start splitting the pre-payments up: 50% will still go to pre-payments and 50% to a non-registered portfolio. We don’t plan to live in our current home for much more than another 2-5 years so we don’t want to be too aggressive in paying off the mortgage lest we think we can afford a lot more home next time around. 😉 This is still being sorted out though as we have a lot of built up contribution room we can use up for my husband’s RRSP.

Check back tomorrow for the exciting conclusion of Telly’s interview!

When my wife and I bought a new house a couple of years ago we undertook an extensive renovation. One of the after effects of this reno and subsequent move into the house was that it took us a long time to get the house organized and cleaned up. During some of the cleanups of the basement it came to light that we had quite a bit of reno material from Home Depot that wasn’t used and could be returned. Last fall I collected quite a bit of this stuff and took it back with no receipts and they gave me a store credit for $230 which I found quite amazing since these were items that I more or less considered junk and had very little use for. A couple of months ago I did some more exploring in the basement and found more returnable items and got another credit for $137 at Home Depot.

Now I realize that most people don’t have that much extra reno material sitting in their basement but sometimes it doesn’t hurt to take a look in the basement or garage and see what is there. You might have bought some materials or tools with the intentions of a project but never used them. If it’s been a while and you aren’t likely to use the stuff then return it, clear some space and get a store credit.

Another possibility are tools that were bought for a specific project. In our case we own a tile saw and once we finish off the kitchen backsplash – scheduled for anytime in the next 10 years 🙂 then we might as well try to sell the saw since we are unlikely to have any further use for it.Another area to look for returnable items is the garden. Most of the larger stores that sell plants offer a one year guarantee so if they don’t last the summer or perish over the winter, then take them back and get a new one. It may seem silly to be digging up a rotten plant to take back to the store but the fact is that you probably paid at least $5 for that plant so you should get your money’s worth. This will require a bit of organization since you’ll have to keep the receipts for these.

PaidTwice of www.paidtwice.com has kindly written a guest post with her thoughts on having an emergency fund. PT started her excellent blog to document her family’s journey to get out of debt. If you want to read an upbeat debt reduction blog written by someone with a PhD who works at home with her two young children (I didn’t think it was possible) then I strongly recommend checking out her blog.

There are many schools of thought on if someone who is in debt and working to pay that debt down should have an emergency fund. The money that sits in the emergency fund could instead be applied to debt reduction and help the person get out of debt just that much faster. Well, I am here to say that I am firmly in the “have an emergency fund” camp. Not a fully funded, extensive, cover any possible contingency emergency fund, but something that you can fall back on if small things come up so you don’t need to resort to using credit and increasing your debt.

Debt is more than a financial predicament. It can become a state of mind, and also a recurring behavior. If the only thing you have to fall back on if something unexpected comes up (and, just assume that something will, at some point come up) is credit, you can feel like you are just sinking back into the hole of debt you are already in, and it can erode any feelings of progress you have made. Personal finance is about taking control of your money, but it is also about personal behavior. Once credit is again used, it can become all too easy to keep using it, and end up worse off than when you started debt reduction. It can also begin to feel hopeless and not worth it if the debt continues to rise even when you feel like you are trying to reduce it.

But what if you’re sure you won’t fall back into the pattern of accumulating debt if you have a setback? That is where I feel I am, and yet I still would rather a cash emergency fund rather than a credit safety net. Why? Because debt is an oppressive weight. Debt makes me anxious, on edge, and simply the idea of using a credit card I won’t be able to immediately pay off and putting myself further into debt just makes me edgy. I feel the interest I am paying adding up deep in the pit of my stomach. The feeling of peace I felt when we finished saving our $1000 emergency fund is really unexplainable. No, $1000 can not cover any conceivable emergency, but it can cover a whole lot of things that might come up. Knowing that I won’t need to immediately turn to credit if my car breaks down or I get sick is a very good feeling. I wish I could bottle that feeling and sell it. That’d help the debt reduction!

As for the emergency fund, ours is $1000 and it will increase over time… once we are out of debt. My spouse and I have not quite decided exactly how much we want in it, but at least 3 months of expenses if not up to 6. It is an ongoing process. That is really a personal decision based on what kind of emergencies you might be able to foresee and also your own life circumstances, but I am not recommending $1000 as the end all of emergency funds. But for someone who uses every spare penny to pay down their debt, that $1000 cushion is a lot to reserve. But completely worth it, in my opinion, is for nothing else, the peace of mind it provides.