Hidden risks of cross-border transfer of mutual funds
Mutual funds are established to play a role within the regulatory framework of their country of origin until changes in your country of residence are completely OK. Once this happens, those same mutual funds can quickly turn into financial liabilities.
When you update your account address to reflect your new country, many financial institutions and online brokers will freeze their accounts or be limited to “sell-only” transactions. This means no rebalancing, no professional management, and no ability to adapt to the evolving market conditions.
In the worst case, the institution may require you to transfer your account to a financial institution in the new country within 30, 60 or 90 days, or you can immediately clear your holdings and send you a check. This can cause significant problems if it triggers the realization of previously unrealized capital gains, resulting in unexpected (usually huge tax bills).
This is a breakdown of how mutual funds handle based on the type of account you hold, especially when you cross the boundaries.
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RRSP and co-funding
If you move from Canada to another country, your RRSP will remain in Canada. This means that mutual funds within RRSP can also be retained. However, if you try to purchase a new mutual fund within the RRSP while backing up the U.S. address with the financial institution holding the account, you may be restricted or refused to do so due to regulatory restrictions related to non-Canadian residency.
TFSA and Cross-border Issues
Moving to the United States using TFSA is a completely different problem. U.S. citizens should generally avoid holding TFSAs because Canada-U.S. tax treaties do not recognize them for U.S. tax purposes. In short: While TFSA can technically stay in Canada, the U.S. tax reporting and compliance burden often outweighs the gains.
Unregistered accounts and mutual funds
Unregistered (taxable) accounts present the biggest challenge. These accounts often cannot live with you for a variety of reasons: tax reports, rebalancing restrictions and residence-based restrictions. For example, as a Canadian resident, I cannot open or maintain a non-registered brokerage account in the United States. Similarly, if you move to the U.S., your Canadian unregistered account (and the mutual funds therein) may need to be reorganized because mutual funds are investment vehicles for a specific country.
The opposite rule is the opposite: U.S. retirement accounts (such as IRAs and 401(k)) stay in the U.S., but if you are no longer a resident, you usually need to close or adjust the U.S. unregistered (taxable) account.
