Canadian snowbirds present opportunities — and pitfalls — for advisers

More affluent Canadians are flocking south for the warm winter sun and cheap real estate deals. Canadians are attracted to the Sun Belt, where real estate in places such as Arizona, Florida and parts of California is dirt cheap and the exchange rates with the weakened U.S. dollar are at near parity, favoring Canadians. Just a handful of advisory firms offer cross-border financial planning services, making it an underserved market full of potential. But financial advisers who venture into working with Canadians must do so carefully and realize that there are numerous financial planning issues — including taxes, trusts and estate planning, and retirement accounts — that if not handled correctly could result in their clients' getting doubly taxed and fined by Canada or the United States. “If you know what you're doing, you can save these people a phenomenal amount of money,” said Robert Keats, an adviser with Keats Connelly & Associates LLC of Phoenix, which manages about $280 million in assets and has an office in Boynton Beach, Fla. “But if advisers don't do it correctly, it can be a huge detriment to the financial health of the Canadians.” Mr. Keats has built up his practice working with Canadians, including those who live in the United States during the winter months. He has 105 clients with assets of $1 million or more and also has a division that works exclusively with the mass affluent on tax planning. The firm provided tax advice to 1,000 people this year, up 30% from last year. Mr. Keats envisions an even larger increase in business, starting in January, from clients who have bought property in the United States this year. A recent study completed by the National Association of Realtors showed that Canadians purchased 23% of all U.S. real estate sold to international buyers in the 12-month period ended March 31. This was the highest incidence among foreign nationals. Mexicans came in second with about 10%. Canadians' interest in real estate is linked to the slump in housing prices. According to the Realtors study, the average single-family home sold for $219,000 in the 12-month period ended March 31, down from $247,100 over the previous 12 months. Most of the Canadian purchases were in California, Arizona, Florida and Texas. Advisers predict that if the Canadian dollar continues to rise and the U.S. real estate market remains in the dumps in 2011, there will be even more Canadians looking to buy in the United States, and they will need financial advice while they are there. “A U.S.-based adviser can provide value to Canadian snowbirds,” said Gregory Smith, a Toronto-based managing director and partner with Novantas LLC, a consulting firm to advisers. “Advisers can make big mistakes if they don't know the right people to help the client or don't know the details of Canadian law.” In fact, advisory firms that cater to these Canadians say that they have to spend extra time training staff members so that they understand not just U.S. tax laws but any changes or nuances to Canadian tax rules as well that could affect their clients. “It's hard enough dealing with the normal everyday rules the IRS throws at us,” Mr. Keats said. “When it comes to the foreign stuff, it takes a lot of time to learn it and study it.” For example, Canada and the United States have completely different types of retirement vehicles and tax rules. Canada has the registered retirement savings plan, which is meant to help bolster retirement savings in the country. As is the case with America's individual retirement accounts, Canadian residents receive tax breaks for stashing money in RRSPs — but the breaks are structured differently. The Internal Revenue Service doesn't recognize the RRSP, and Canadian tax law doesn't recognize an IRA or a 401(k). It can get dicey if the Canadians decide to work in the United States and start to put money in a 401(k) plan, said Jim Sheldon, an adviser with Cardinal Point Wealth Management. If that happens, the IRS may try to tax the Canadians on their Canadian retirement accounts. Likewise, Canada may tax the residents on any earnings from a 401(k) plan. These problems can be solved by invoking the U.S.-Canada income tax treaty, which sets out rules for citizens of each country living on the other side of the border for periods of time. If an adviser doesn't invoke the treaty, clients could get taxed by each government, Mr. Sheldon said. The IRS considers the RRSP a foreign trust that is subject to steep taxes, and Canada would tax 401(k) growth at steep rates. Mr. Sheldon and his son Jeff have had a financial advisory office in Toronto and recently opened another location in San Jose, Calif., after they grew tired of losing clients who went to the United States.

ESTATE ISSUES

Another important planning area focuses on wills, estate documents and insurance policies, said Brian Wruk, a certified financial planner with Transition Financial Advisors Inc., which has offices in Gilbert, Ariz., and Calgary, Alberta. Too often, he said, advisers recommend that Canadians set up trusts here, but they don't understand all the rules, and that can lead to problems for the clients. For instance, a Canadian who decides to set up a trust here will be taxed by Canada as having a foreign trust. If the Canadian becomes a U.S. citizen, the person can set up the trust here, but if her or she dies within five years of setting up the trust and has Canadian residents as the beneficiaries, the trust will still be taxed under Canadian rules. “A lot of domestic advisers may not have a clue about this kind of stuff,” Mr. Wruk said. “But if they surround themselves with a team of people who understand this, they can show value to clients.”