Bridging the Financial Planning Gap in Cross Border Mobility Matt C. Altro, MCA Cross Border Advisors Geoff Hartley, RBC Dominion Securities Alain Forget, RBC Bank USA Duncan MacCallum, RBC Royal Bank

A Challenge in Corporate Relocation • Why does the gap exist? • Corporate relocation is time sensitive • Benefit packages provided by the employer typically offer professional services that are reactive or narrow in scope: • No assistance at all with respect to financial planning • A lump sum payment to cover relocation expenses (but no direction) • Assistance with tax filing the following year (reactive) • Only a tax consultation in advance (narrow scope)

• This is problematic because: • There are many complex issues besides tax that overwhelmed employees will have to confront • The lack of proper planning can lead to missed opportunities and frustration

2 Cross Border Financial Planning: Proactive and Holistic

• Bridging The Gap

• Step 1: Creation of a cross border financial plan • A comprehensive road map to help employees who are relocating take advantage of opportunities and avoid costly mistakes

• Step 2: Team approach to implementation of the plan

3 Fact Pattern: Stage 1 – Outbound (relocating to the US)

Assets Value • Charles, Vice-President of Marketing at Global Pharma Inc. House in Toronto, ON $2,000,000 • 53 years old Cottage in Parry Sound, ON $750,000 • Kim is his wife Condo in Florida $500,000 • They have two children RRSP $750,000 • Global Pharma Inc. relocates him to their head Non-Registered Investments $3,000,000 office in Boston, MA on an L1 Visa TFSA $50,000 • He exits from Canada, cuts Canadian ties and RESP $70,000 brings his family with him Kim’s Non-Registered Portfolio $1,000,000 • It’s unknown how long he will stay TOTAL $8,120,000 in the U.S., he will re-assess in the future Life Insurance (UL) $3,000,000 Cash Value $350,000

4 Stage 1 – Outbound: Tax Considerations

• Canadian Departure Tax • Tax impact of becoming a non-resident of Canada • Deemed disposition of property at FMV – Realization of accrued gains prior to emigration – Capital Gains Tax • There are exceptions, not all assets are subject to departure tax • Final personal tax return (“exit return”) • Generally we like to defer, reduce or eliminate departure tax

5 Stage 1 – Outbound: Tax Considerations • Canadian Assets and Departure Tax • There are different cross border strategies for each asset subject to departure tax Assets Value Gain Subject to Departure Tax

House in Toronto, ON $2,000,000 $0 No Cottage in Parry Sound, ON $750,000 $0 No Condo in Florida $500,000 $250,000 Yes Example: RRSP $750,000 $100,000 No Designate Florida Non-Registered Investments $3,000,000 $500,000 Yes property as principal TFSA $50,000 $5,000 No residence to eliminate departure tax RESP $70,000 $10,000 No Kim’s Non-Registered Portfolio $1,000,000 $200,000 Yes TOTAL $8,120,000 Life Insurance (UL) $3,000,000 N/A No Cash Value $350,000 $0 No 6 Stage 1 – Outbound: Estate Planning

• U.S. Estate Tax • A Canadian who moves to the U.S. may be subject to U.S. estate tax on worldwide assets upon death – Exemption - $5,430,000 – Rate – Up to 40% • Beware of state estate tax – Massachusetts has a state estate tax on amounts above the exemption of $1M – Top tax rate for Massachusetts is 16% • Planning Points for Charles – Structure assets before moving so they do not form part of the estate for U.S. estate tax purposes – Estate planning should be done to avoid issues like probate and incapacity • Irrevocable Life Insurance Trust (ILIT) 7 Stage 1 – Outbound: Retirement Planning

• RRSP Planning for U.S. Residents • Maintain RRSPs • Special reporting with the IRS • File FBARs and FATCA • Withdraw RRSPs • Non-residents can withdraw RRSPs at lower rates • 25% or 15% • Ability to leverage Foreign Tax Credits • Pre-Departure Planning • Realize accrued capital gains before becoming a U.S. tax resident

8 Stage 1 – Outbound: Insurance Considerations

• Whole/Permanent/Universal Life Insurance can create issues when moving from Canada to the US • The policy will be scrutinized under US tax principles once the holder is a US person • Typical Canadian permanent policies do not meet the US rules to be deemed tax exempt for income tax purposes • Likely best to exchange Canadian Permanent policies for US ones, despite taxable event that results • Term insurance does not pose problems as there is no investment component

9 Stage 1 – Outbound: Education Planning • An RESP is considered to be a foreign trust by the IRS • Income earned within an RESP cannot be tax-deferred in the U.S. • The U.S. taxes the income and grants inside the plan annually • This can lead to double taxation as the beneficiary is taxed when they withdraw from the RESP • Options: • Leave it in • Holding an RESP as a Canadian non-resident can lead to complications and have negative tax consequences • Take money out • Collapse RESP: all grant money must be repaid to government and contributions are returned tax-free, but all accumulated income is taxable plus a 20% penalty

10 Timeline of Events

11 Fact Pattern: Stage 2 – Inbound (relocating back to Canada)

Assets Value • Ten years have gone by and Charles is now 63 years old and nearing retirement House in Boston, MA $2,000,000 • He is at a crossroads and must decide whether Cottage in Parry Sound, ON $1,300,000 to stay in the U.S. or return to Canada Condo in Florida $1,000,000 • He decides to return back home to Canada as he 401(K) $500,000 gets transferred back to his company’s head Non-Registered Investments $7,000,000 office Sally’s Investment Portfolio $1,000,000 • In addition, this will allow him when ready to TOTAL $12,000,000 retire to be close to his kids and grandchildren Life Insurance (UL) $3,000,000 Cash Value $700,000

12 Stage 2 – Inbound: Tax and Immigration Considerations

• Charles’ Green Card Options 1. Give up green card • Pro: if done within eight years no exit tax applies • Con: immigration process must be restarted from scratch if he wants to return to live in the US 2. Become a US citizen • Pro: can vote in US; unlimited travel, gifting between US citizen spouses & marital estate tax deduction (at death of first spouse) • Con: subject to the US tax system for the rest of his life (issues may arise on annual tax filing requirements in both Canada and the US) 3. Apply for a re-entry permit and go back to Canada • Pro: allows him to leave the US for an extended period without giving up intent of permanent residency • Con: only valid for a maximum of two years

13 Stage 2 – Inbound: Income Tax Traps

• Income tax traps for Americans in Canada occur when there is a mismatch on timing and income reporting between the IRS and CRA • Charles’s wife Sally has exposure to some income tax traps • Examples: • TFSAs • RESPs • Canadian mutual funds/ETFs • Life Insurance • Revocable Trusts • Etc. 14 TFSA/RESP

• Considered by the IRS to be foreign trusts • Income is taxable by the IRS • Government grants are taxable (TFSA) • Filing requirement each year • Form 3520 • Form 3520A • Penalties for non-compliance - $10,000

15 US Retirement Accounts

• Many Americans living in Canada have IRAs/401Ks

• Planning Options • Leave as is and begin taking Required Minimum Distributions as of age 70.5 • Convert to an RRSP once in Canada • Convert to a ROTH IRA (pre-departure option)

16 Passive Foreign Investment Company (PFIC)

• Canadian mutual funds and Canadian ETFs are considered to be PFICs • Non-controlling interests in Canadian holding companies can also trigger PFIC rules • Canadian mutual funds/ETFs in RRSPs and other registered accounts are shielded from PFIC rules • The IRS may levy punitive tax consequences on its taxpayers who hold shared of foreign companies that generate passive income

17 Implementation of Cross Border Financial Plan: Outbound Investment Strategy

• Considerations prior to Canadian Departure: • How do income tax considerations resulting from an impending departure impact investment and planning decisions? • Insurance Plan? • RRSP Room – can we maximize room to defer taxation on certain types of investment income? • TFSA – consider moving assets to non-registered account in US? • RESP – compliance and income tax cost vs benefit? • Working together with the Accountant, Financial Planner and HR • Administration and Regulation

18 Implementation of Cross Border Financial Plan: Outbound Investment Strategy

• Considerations while in the United States • Who is managing my assets and income tax planning, in tandem? • Is my Portfolio income tax-efficient? • Is my Strategy in Canada and the US comprehensive? • Foreign Exchange • Planning for Education costs • Working together with the Accountant, Financial Planner and HR • Administration and Regulation

19 Implementation of Cross Border Financial Plan: Inbound Investment Strategy

• Considerations upon returning to Canada • Will I return to the United States again? • Investment Strategy and Consolidation • Green Card decision will have implications on investment strategy • Foreign Exchange • Cost Basis and US Carryforward losses/foreign tax credits? • RRSP and TFSA in the year of return to Canada • Planning for Education Costs • Retirement implications • Working together with the Accountant, Financial Planner and HR • Administration & Regulation

20 Cross Border Financial and Banking Considerations Relocating to the U.S. (outbound) • My personal and professional relocation experience in the U.S. • Cross border financial and banking issues overview • Key part of the cross border financial planning process (holistic view: advice and solutions) • Understanding the differences (Canada/USA) to mitigate pain points (rules, regs, practices, terms & conditions, process) • Access to funds and credit before and during the transition process (SSN, credit history) • Mortgage, credit cards, utility providers • Currency exchange (CAD/USD) moving the money across the border • How to set a banking relationship in the U.S. before leaving Canada ? • How to stay financially connected with Canada ?

21 Relocating to the United States

22 Cross Border Financial and Banking Considerations Moving back to Canada (inbound) • Key financial and banking issues with reverse process: • Similar to outbound • Foreign exchange and fund transfers • Access to credit • Specific considerations about: • Mortgage in the U.S. • Mortgage in Canada (ex: MAP) • 401K • Key benefits of planning proper cross border financial and banking solutions for the Employer, Employee/family: • No bad surprise to reduce pain points and frustration • A more educated and seamless relocation employee experience to allow focus on other key personal and professional issues • Help secure a more cost-effective relocation process (tax, fees, currency exchange) • A win-win !

23 RBC Newcomers Program

For more than seven generations, RBC Royal Bank of Canada has been supporting Newcomers, making it easier for them to get settled, become established and succeed in Canada. During that time, we have developed a deep understanding of the needs and priorities of Newcomers. Our long history and experience around the globe means you can feel confident turning to us as a financial partner that understands your needs.

How is RBC helping newcomers settle in Canada? • Over the last year we’ve introduced significant changes to make it easier for newcomers to get settled and establish their banking in Canada. We launched a credit program and we can now more readily help newcomers get their first credit card, auto loan and mortgage, with no credit history required. Additionally, we have made further improvements to our credit policies and processes, development of new Investment tools and resources and the introduction of a Small Business offer. What does RBC do differently than other Canadian FI's for newcomers? • The key differentiator is our experienced and collaborative sales force that work together to offer our clients’ the solutions they truly need. Our focus and keen understanding of Newcomer client needs differentiates us from our competitors. We know that credit is a key need for Newcomers and our agility to help them meet all of their financial needs enables newcomers to get settled and established faster and easier.

I invite you to visit our website http://www.rbc.com/canada/ for further information on our Newcomer to Canada client service and solutions.

24 RBC Newcomers Program

Opening an account with RBC prior to client’s arrival • RBC provides banking opportunities to Newcomers prior to their arrival. • We can remotely open bank account for immigration purposes. • Having Canadian accounts allows our clients to transfer and send money safely and expediently by way of wires while they are still in their home country. • Some of these clients are required to have funds in Canada prior to their arrival as part of the immigration process. • In order to minimize fraud and reduce AML risk these accounts are streamlined, managed and opened by one of 3 specialized Account Mangers, located in each Centre (BC, QUE, ONT) (depending on the client’s final destination) **Once the completed documentation is mailed in and all the AML checks are in order the account will be opened as ‘deposit only’ until the client arrives in Canada and their identification is verified in person at any RBC branch. At that time clients must present their passport + any of the following Immigration documents: Work Permit Immigration Document IMM1442 or Permanent Resident Immigration document IMM 5292

25 Mortgage Relocation Program (Canada)

• Relocating can be a stressful time for any family. We can help ease the financial burden on your employees and your company through our simple, cost-effective relocation program. Offering one-on-one expert advice, our advisors will customize a program that will help meet your company’s needs, and we’ll work with your employees throughout the process of setting up their new mortgage, making their move easier and more convenient. • Mortgage Relocation Program – A tax-effective subsidy that you can offer prospective and existing employees that provides a financial incentive to relocate.

26 Mortgage Relocation Program (Canada)

How it works • When employees relocate within Canada, the CRA allows employers to subsidize 100% of the interest as a nontaxable benefit, to a maximum of $25,000. To qualify, the employee must have purchased a new principal residence at least 40 km closer to their work than their previous home. This can be especially beneficial for employees moving to a higher-cost community.

27 Mortgage Relocation Program (Canada)

28 Mortgage Relocation Program (Canada)

29 Mortgage Relocation Program (Canada)

30 Q & A and Panel Discussion

31