This 29-year-old U.S. citizen living in Toronto makes $60,000 a year as a tech analyst. How should he invest his money?

Millennial Money is a weekly submission-based series that provides financial advice to millennials in the GTA. Read the full series here.

Just last year, Joe, a 29-year-old United States citizen, moved to Toronto for work and is now starting his career in Canada. Working as a tech analyst for a Canadian firm, he makes $ 60,000 (Canadian) a year.

Now, he wants tips on how he can smartly invest his money. “What investment products should I avoid to minimize tax headaches and risks? More generally, how should I invest as a U.S. citizen in Canada?” he asks.

Currently working from the office, Joe usually skips breakfast and buys takeout for lunch and dinner from a Subway sandwich shop underneath his workplace. “Both of my meals cost under $ 10,” he says, adding that even though he doesn’t cook at home, he’s being frugal.

Another thing that helps is that he was able to find a spot in the city near the downtown core that he shares with a roommate, and pays just $ 1,000 a month rent.

On the weekends, Joe spends time outdoors — even in the Canadian winter cold — to get some fresh air and exercise as the COVID-19 pandemic numbers continue to rise in Ontario. He also meets up with one or two friends on a patio.

Joe doesn’t have any debt and wrote to Millennial Money to learn optimal investing strategies he can take advantage of now. That includes whether he should invest in a property in Canada or in the U.S.

“I’m wondering is it preferable to buy a house in Canada rather than the U.S. as the CRA taxes Canadian residents on global income (i.e. U.S. capital gains)?” he said. Also, he wants to know how he can balance his retirement contributions between the two countries.

We asked Joe about his daily spending to get a better idea of his finances.

The expert: Jason Heath, managing director at Objective Financial Partners Inc., on Joe’s situation.

Joe is one of many U.S. citizens who have moved to Canada. Although the 2016 census found that only 377,000 Canadians reported their ethnic origin as American, estimates put the number of U.S. citizens in Canada at over one million. There are even accidental or unknowing U.S. citizens who acquired citizenship because their parents are Americans. U.S. citizenship impacts tax and investing for Canadian residents.

One important consideration for Joe and other U.S. citizens is that they need to continue to file U.S. tax returns while living in Canada. There can also be Canadian investments or accounts that make their U.S. tax filing more complicated or costly. One example is if Joe buys Canadian mutual funds or exchange traded funds (ETFs) in a taxable nonregistered account. These are considered Passive Foreign Investment Corporations (PFICs) and require filing the complex form 8621 with the IRS, driving up tax compliance costs. The tax treatment of PFICs can also be punitive for a U.S. citizen in Canada.

Traditional saving advice for a young person starting to build their investments may include contributing to a Tax Free Savings Account (TFSA). There can be problems for U.S. citizens who contribute to a TFSA because the IRS does not recognize the special status of the accounts. As such, a U.S. taxpayer with a TFSA must generally file form 3520 and 3520-A, leading to increased tax filing complexity and costs that may not be worth it, especially for a small TFSA. The IRS does not consider TFSAs to be tax free, so the income is taxable in the U.S.

TFSAs are a lot like Roth Individual Retirement Accounts in the U.S., but the IRS has yet to clarify their position on TFSAs. Joe should not contribute to a Roth IRA either as, once becoming a Canadian resident, the tax-free treatment for new contributions to a Roth IRA will not apply.

So, in Joe’s case, saving in a taxable account or contributing to a Registered Retirement Savings Plan (RRSP) are probably his best options unless he has a pension plan that he can contribute to at work.

The IRS recognizes the tax deferred status of RRSP accounts and company pensions. The thing with Joe is that he may not want to contribute too much money to a RRSP account for a few reasons. For one, his income is in a modest tax bracket at $ 60,000. If he expects his income to rise as his career progresses, or if he is hoping to buy a car or a home, he may not want to sock away too much money in his RRSP.

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When picking his investments, Joe should probably steer clear of Canadian mutual funds or ETFs, and possibly buy individual stocks or U.S.-listed ETFs.

If he hasn’t already, he should consider preparing Canadian estate documents like a will and powers of attorney. If he already has a U.S. will, it may still do the trick here in Canada but selfishly, given he has no dependants, his main priority should be his powers of attorney.

Ontario has powers of attorney for property (financial matters) and personal care (health-care matters) that appoint someone to make decisions for you if you are sick, have a disability or are otherwise unable to act on your own. If his family is back in the U.S. and he is new to Canada, it could be complicated if something happened to him and he didn’t have his estate planning up to date.

Joe buys food on the run a lot from the looks of it, but he is buying mostly grab and go meals that are reasonably priced. His rent is only 25 per cent of his take-home pay, which is a fraction of what many people pay for housing. His saving capacity is good and I would encourage him to make saving part of his budget. As people’s incomes rise, lifestyle creep often kicks in and discretionary spending rises with it. Save first, spend the rest.

So I’d talk to his accountant, get some validation on the interplay between his Canadian and U.S. taxes, and set up a savings plan for short and long-term financial goals.

The result: He spent more. Spending in week 1: $ 265 Spending in week 2: $ 330

How he thinks he did: “All of my expenses this week remain essential,” Joe said, adding that the positive comments from the money coach on his frugality were a “nice morale booster.”

“I had to get more winter clothing from Uniqlo. I’ve experienced Northeastern U.S. winters before, but Ontario winters are something else!” he adds, hoping that the layers can help him continue to spend time outside during the pandemic.

The other essential buy? Medicine for his father. “(It’s) cheaper in Canada. Americans can only look with envy at Canadian drug prices,” he said.

Take-aways: Clarity. “Upon reading the expert’s advice, there are more ‘do-nots’ than ‘dos’ for U.S. citizens, which may not be a bad thing as it means I can concentrate my funds in just a few investment vehicles,” Joe said.

One thing Joe was surprised about was the expert’s advice on retirement. “I found the expert’s advice regarding RRSPs and Roth IRAs to be unexpected. I was about to max out both accounts but will postpone doing so for now as instructed.”

Finally when it comes to estate planning and powers of attorney, he has a lot to consider.

“As the expert rightly noted: very complicated due to cross-border legal challenges, so I need to find a good time to discuss it with my family.”

Are you a millennial living in Toronto or the GTA and need help with saving your money? Be a part of #MillennialMoney and email ekwong@thestar.ca
Evelyn Kwong

TORONTO STAR