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Jun 1, 2020

Prince Harry And Meghan Markle Megxit: A Cross-Border Financial Planning Nightmare

by Robert Keats

Robert KeatsBesides creating a lot of recent headlines as well as numerous new episodes for the Crown Netflix series, Prince Harry and Meghan’s desire to move to North America, and/or the US, provides a great opportunity to review the complications and possible solutions for the numerous cross-border tax and estate issues this couple and their son Archie will be facing.

Now that they will be off of the British taxpayers direct support and earning a living off of their own skills, Prince Harry and Meghan will face many financial decisions, probably not knowing what effect each decision will have on becoming North American residents since the split away from their British Royalty duties.

There are Questions that will need to be addressed in a timely fashion or they may find themselves hopelessly mired in a financial nightmare with all three countries possibly battling to tax them on their world income. What immigration issues will they face? What are the tax/estate implications of the different status that Meghan and Archie have versus Prince Harry?

Let’s review the residency question first. The facts are that Meghan and Archie are both dual US and British citizens while Prince Harry is only a British citizen (it is believed Meghan was granted UK citizenship upon her marriage to Prince Harry, Archie is a US citizen because of his US citizen mother). None of them have any known immigration status with Canada and, at least in theory, will have to go through the same permanent resident applications for Canada that anyone else who wants to immigrate to Canada would have so that they can work and remain in Canada for as long as they desire. From a US perspective Meghan would have to sponsor Prince Harry for a green card or in other words, legal permanent residence for the US for him to be able to work and/or spend any significant time in the US. Currently Prince Harry can only visit the US on a 90-day visitor’s visa but could not engage in any employment of any form. For reasons not yet fully explained Meghan and Harry pulled up stakes from their Vancouver Island residence and flew by private jet to LA in March amid the COVID 19 pandemic. Fortunately for Prince Harry, the US has extended all those in the US on visitor’s visas by 60 days because of coronavirus’s issues. Consequently, he will have until sometime in August to make other arrangements to stay in the US although US immigration almost entirely shut down currently so he may be forced to leave the US until immigration opens up and his green card can be approved which could take several months.

By the sounds of this family’s plans as revealed by the Queen and family Prince Harry and Meghan will be spending time in all three countries while pursuing their new work desires to earn a living on their own. This means that they could be subject to paying tax in all three countries on their world income. Fortunately, the Canada/US and the Canada/British tax treaties have tiebreaker rules such that technically they will only pay tax on their world income in the country in which they are resident and then only pay taxes on the income directly earned in the other two countries as nonresidents. Meghan and Archie, as US citizens even though treaty may provide them with residency status in Canada or the UK always have to file US returns annually on their world income taking credits for taxes paid to any foreign jurisdiction covered by the treaties. The country in which the Treaty tiebreaker rules will determine their tax residency depends on facts and circumstances like where their designated primary residence is, how much time they are spending in the jurisdiction, where they are earning the majority of their income, their personal declarations like what they say in their wills and finally their immigration or citizenship status. What makes the answer to these questions even more complicated is that by the sounds of what Prince Harry and Meghan are going to do, a lot of these facts and circumstances could change from one year to the next until they really put a firm anchor where they live, work and call their permanent home.

Once the Sussex’s’ can determine in which of the three countries their world income will initially be taxed, then the real job of filing correctly will become paramount. I believe they will be shocked when they face the reality that the rest of us have to face, that taxes can take more than half of your hard-earned income and the taxes vary greatly based on your province, state and country of residence. Without proper planning on when and how the income flows, there are still many areas where they may face double or even triple levels of taxation that the Treaties may not provide relief for, particularly as residents of California as this state does not recognize any international treaties. To reduce this high level of tax requires in-depth multijurisdictional tax planning by experienced professionals because of the complex rules of how the US taxes foreign corporations for US citizens living abroad. In addition, the foreign tax credits provided by the treaty means that Meghan and Archie will always pay the highest level of tax between Canada, the UK and the US/CA virtually on every type and source of income. Prince Harry would be in no different position if he was in possession of a US green card while being a tax resident of Canada. With all of the foreign income and asset reporting that this family will have to do, with income and assets coming from multiple countries countries, on forms such as the CRA T1135 and the IRS form 8938 their annual tax returns will be several inches thick and require hundreds of man-hours to complete correctly with trying to coordinate tax experts from these multiple jurisdictions to assist them, a daunting task at the best of times.

Compared with the income tax planning for Prince Harry and family based on their desire to earn in all three countries, it might be considered relatively simple to the daunting task they will have planning their estate plan with wills and powers of attorney, inter vivos (living) or testamentary trusts.

Estate documents to cover multiple jurisdictions with potentially conflicting local, provincial, state and federal rules create a near impossible puzzle to solve. Each of the three countries involved introduce concept of domicile into estate planning however each country has a different variation of their definition of domicile and the treaty is of little assistance to settle as to which country each family member will be considered domiciled in at their respective deaths, and like tax rules domicile can change with residential and personal actions over long periods of time. The very important part of any estate plan when children are involved is who would be the custodian for Archie and any other children to be in the marriage if Prince Harry and/or Megan were to be killed in an accident or some other premature death event. Custody rules in these circumstances and situations such as divorce can vary greatly from jurisdiction to jurisdiction and make family plans become redundant unless the surviving family members from both sides of the pond can come to agreement as to who for example would raise Archie.

An important item of cross-border planning is to make the plans and put them in place before any action is taken such as moving across international borders to take up residency in a new country’s tax and estate jurisdiction. Most often things can be done in an arrangement made before one enters a new country that could not be done after arriving in that particular country that would provide substantial tax or estate benefits in the new country. An example of this might be for Prince Harry that before he moved to the US and gets a green card he could establish trusts for any valuable assets that would not be subject to US or Canadian estate/deemed disposition taxes as well as provide family asset protection which he could not do without substantial limitations once he became the US resident or green card holder. Since Prince Harry is already in the US and likely already working on an application for a green card through Megan’s sponsorship this door may be closed or at least closing rapidly.

However, this whole Megxit is very emotional and is steamed in hundreds of years of Royal traditions so it is likely that Prince Harry and Megan are charging out of the UK to North America with little or no planning. Regardless, my advice to them is that they engage professional cross-border tax and estate planners as soon as humanly possible, it could prevent a Royal disaster.

 

By Robert Keats author of The Border Guide, 12th edition and A Canadians Best Tax Haven: the US, 2nd edition