If your family is dealing with mid-life career changes and cross-border moves, you’re not alone.
That’s why a symposium case study by the Institute of Advanced Financial Planners (IAFP) examined the potential cross-border tax, retirement and estate planning issues of a hypothetical family from Ottawa.
The father’s job is in jeopardy, and the mother is being asked to accept a work transfer to the U.S. Meanwhile, the couple has to amp up retirement saving, while also providing for their kids’ educations.
The case was based on a real family, says Peggy Cameron, an IAFP symposium committee member and founder of Cameron Leadership Development in Ottawa.
Case study details
Jim, 42, and Sarah, 40, live in Ottawa (in a $400,000 jointly owned home) and have three children, with ages ranging from 10 to 17. One was born with a heart condition, and has regular checkups at an Ottawa hospital.
The couple makes more than $295,000: Jim works with the federal public service and makes $95,000 a year, while Sarah is a computer engineer at Cisco who brings in $200,000 a year, plus a 35% annual bonus. The children go to private school for a total cost of $30,000 per year — that cost is expected to rise by 10% next year.
As for savings, Jim and Sarah each have an RRSP and TFSA invested in mutual funds, and they have a family RESP and a joint non-registered investment account, which are also invested in mutual funds.
They also have life and disability insurance. Additionally, Jim has a pension and Sarah has $600,000 in Cisco stock options.
The issues
Jim may lose his job due to downsizing. Meanwhile, Sarah’s company is consolidating in Austin, Tex., and she’ll likely lose her job if she doesn’t move.
The couple considers three options:
- They can stay in Ottawa and invest in a medical technology startup run by doctors from the Ottawa Heart Institute, with Jim staying in his current position (as long as it exists).
- They can move to Alberta, where Sarah can join another friend’s 7-year-old company, and Jim can request a lateral move.
- They can relocate to Texas, where the company will take care of the family’s green cards. Jim’s employment would be uncertain.
Sarah’s salary makes up more than half the household income. In comparison, her starting salary at the Ottawa company would be $80,000 (with staged increases). Her Alberta pay and benefits haven’t yet been determined.
At first blush, moving to Texas makes the most sense, especially because there are no personal income taxes in that state. There are federal taxes, however, says Shawn Brayman, CEO of PlanPlus in Lindsay, Ont.
Based on their current finances and employment, he finds they’d save nearly $50,000 on taxes by moving to the U.S., since they wouldn’t have to pay personal income taxes, and their marginal household tax rate would fall from 43.97%, or $126,191, to 33.22%, or US$80,501 (about CDN$83,000).
This analysis assumes Sarah’s salary remains the same and Jim finds a new job that offers a salary of US$95,000. If he lost that salary or had to accept reduced pay, the family would have to reevaluate their tax situation.
On the upside, sales taxes are lower in Texas (8.25% compared to 13% in Ontario), and land taxes (between 1.9% and 3.1% in Austin) are tax deductible, says Terry Ritchie, director of cross-border wealth services at Cardinal Point Wealth in Calgary. The family could also buy a home for significantly less than the price of their Ottawa home. If they move, Sarah must ensure she negotiates a favourable compensation package, as well as find out how her stock options might be affected. In particular, she should ask for benefits that would help cover their daughter’s medical needs, says Brayman.
Read more about Jim and Sarah’s decision in Part 2.