RRSP’s & Moving To The U.S.

by Tax Guy - Burlington Accountant on December 2, 2010 Print This Post Print This Post

So you’re tired of living with short summers and are thinking of moving to the U.S. Or perhaps you are U.S. citizen who worked in Canada for a number of years and are returning. In either case, you may be wondering if you should leave your RRSP in Canada or take it with you.

Before you make a decision, it’s important to plan appropriately before you leave Canada.

How The U.S. Looks At RRSP’s & RRIF’s

The IRS considers an RRSP or RRIF (hereafter I simply refer to both accounts as RRSP’s) as a regular non-registered investment account. As a result, all of the investment income in the RRSP is fully taxable for U.S. purposes. However, when a person takes up residency in the U.S., they should file form 8891 with their 1040 tax return to claim a tax-treaty exemption on the investment income.

When a US resident withdraws from an RRSP, only the income portion is taxable and the individual is permitted to withdraw their original contributions (the total of all RRSP contributions made to the RRSP) free from U.S. income tax.

Can I Roll My RRSP Over To A U.S. IRA?

There are no provisions in the U.S. that allow a rollover of RRSP to an equivalent Individual Retirement Account (IRA).

If you want to take the RRSP with you to the U.S. you would have to collapse your RRSP and the full value would be included in your income in the year of the withdrawal. This could result in a substantial tax hit. 

What Should I Do With My RRSPs When I Move?

1. Avoid withdrawing the funds from your RRSP before you leave Canada.

Instead, leave the RRSP in Canada where the investments can grow free of Canadian tax. When you become a resident of the U.S. for tax purposes, any withdrawals from the RRSP will be taxed under non-resident rules and will be subject to the 25% withholding tax. If you decide take periodic payments, either by converting to a RRIF or purchasing a registered annuity, the withholding tax would be reduced to 15%.

Once you are a resident of the U.S. any withdrawals from your RRSP will be subject to U.S. taxes. However, in the U.S., you are permitted to withdraw the cost base of your RRSPs tax-free. The cost base is determined to be the original cost base on the date you became a resident of the U.S.

It is important to note that you engage the services of a cross-border tax professional to help you give up your Canadian residency properly to ensure you are not subject to full Canadian taxes on your withdrawals.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 41 comments }

robert shortly October 5, 2010 at 4:10 pm

In your article you state that once you leave Canada and become a resident of the US , you are permitted to withdraw the cost base of your RRSP’S tax free

It is my understanding that the IRS (72(w) ) changed this in Oct 2004 so that generally payments from RRSP’S are fully included in US income except to the extent the contributions ,or earnings inside the plan, as the case may be’ were subject to tax in Canada ,US or another country

Your comments

Thank you
Robert Shortly

Tax Guy October 6, 2010 at 3:39 pm

The IRS considers the RRSP a simple grantor trust and the IRS taxes the grantor or contributor on all income as it is earned or realized. The application of form 8891 provides treaty relief for the accumulated income and tax deferral.

In my opinion IRC s. 72(w) applies to employer-sponsored pensions and not RRSP’s.

David A November 24, 2010 at 2:20 pm

I have a number of RRSP’s in Canada and am currently residing in the US with no intention of returning. Just to be clear, if I decide to withdraw the cost base of my RRSP to move to a US IRA, I can do this without any additional US taxes but would still be subject to the 25% withholding tax in Canada. Is this correct?

Tax Guy November 25, 2010 at 10:57 am

David,

The withdrawals from the RRSP would be subject to a 25% non-resident withholding tax on the amount withdrawn.

The withdrawals will also have US consequences. The US will look at the sum of all contributions made to the RRSP an that would be the “cost” and the excess would be taxable.

You should engage a cross-border planning form to assist you as these strategies can be complex.

robert shortly November 24, 2010 at 3:36 pm

In October 2004 IRS section 72(w) would negater the stepping up of the cost base strategy

Tax Guy November 25, 2010 at 11:01 am

Robert,

I came across some information recently that suggests that the IRS looks at the contributions to the plan since its inception as the cost basis of the plan. It suggested that the sum of contributions would be used as the cost basis but that opening a new RRSP account and transferring the existing assets to the new account before leaving Canada would affect a bump.

Your thoughts?

robert shortly November 25, 2010 at 5:43 pm

can you tell me the source of the information

In conversation with several US CPA’s -they were of two opinions

The one I mentioned previously re section 72(w) rules
and the one you mention -that being the original contributions would be non taxable (This is the way California taxes RRSP’S)

However none accepted that the step up strategy was viable

Casey December 7, 2010 at 9:49 am

I am a Canadian citizen and a US Permanent Resident. I have several RRSP accounts that I left in Canada when I moved. I wish to consolidate my RRSPs into a single account and I probably need to adjust my investment mix as well. Naturally, I want to avoid triggering any tax liability at this time. Are US residents free to adjust investment options within an RRSP? Are there restrictions on the transfer of funds between RRSP accounts that would not apply if I were still a Canadian resident?

Tax Guy December 7, 2010 at 5:14 pm

You should call a few Canadian financial institutions to ask if they can help. You may not be able to consolidate or readjust your investment mix due to securities laws.

You should sill be able to defer federal US tax as long as you file form 8891. Also be carefulynof state tax if our state has an income tax.

Jim January 29, 2011 at 2:41 pm

I am a US resident with RRSPs remaining in Canada. I have statements shwoing the “book value” of my RRSPs on my ‘departure date’ to the US. My understanding is that book value = cost basis. Market value is different. Will this be acceptable for US reporting assuming a conversion to US dollars?

Tax Guy January 31, 2011 at 10:59 am

Jim,
It would appear that the IRS considers the contributions to the RRSP as opposed to the securities bought. It might be best to work with a CPS on this as you might have to go back to each and contribution and convert it since the IRS does not permit yearly average FX.

As for suitable investments, Canadian or US stocks or bonds. Any other foreign investments may complicate matters.

Jim January 29, 2011 at 2:43 pm

What investments are best for earning foreign passive income to enable getting credits for foreign taxes paid on RRSP distributions?

Paul March 20, 2012 at 8:35 pm

This is an excellent question. Because of the different categories of foreign income defined by the IRS, the foreign tax credit can only be used as a credit against tax that would be incurred on foreign income of the same category.

So if you make an RRIF or RRSP withdrawal, Canada will withhold 15 or 25%, respectively. It is considered foreign passive income. To make use of the foreign tax credit, you need to have generated some foreign passive income to write it off against. CPP and OAS, I believe, would qualify. But if there are other ways to augment that foreign passive income, I would LOVE to hear about it!

Dominic February 8, 2011 at 7:20 pm

Hi Tax Guy:

I’m a bit confused.

Here’s my situation:

On Jan. 5, 2009, I have an RRSP in Canada with a current value of $100,000 (i.e. this includes $90,000 contributions and $10,000 interest income).

On Jan. 6, 2009, I move to the U.S.

On Jan. 7, 2010 I’m still in the U.S.. I am now a permanent U.S. resident. My RRSP is still in Canada. Say, It is now worth $101,000.

If I withdraw all of the $101,000 on Jan. 8, 2010 (re: I’m still in the U.S. and I’m still a U.S. resident)..

How much do I have to include in income for U.S. purposes?

Does the Canadian Bank withhold 25% tax when I withdraw it and how do I get this tax amount back?

Thanks,

Dominic

Tax Guy February 9, 2011 at 8:34 am

My understanding is that the US allows you to withdraw the contributions from the RRSP without tax consequences and any in excess of that amount would be added to gross income.

The 25% withheld at source would be claimed as a foreign tax credit or itemized deduction on your US tax return.

Keith February 17, 2011 at 11:26 pm

Hi Tax Guy,
I am currently a Canadian permanent resident that may move back to the US. I am thinking of contributing to my RRSP for the tax break on that income and leaving it there until I retire. Is this a good move? Or am I better off not contributing anymore so I can take it to the US if I move?

Thanks

Tax Guy February 18, 2011 at 1:43 pm

Keith,

I can be a little complicated from a US tax perspective. The IRS looks at the RRSP as a simple grantor trust and unless you file the appropriate exemptions (form 8891) you will have to pay the tax on the RRP income.

If you are in a state that has state tax, you will be required to pay the state tax on accumulated income on the RRSP and there is no treaty protection or exemptions.

If you are going to move to a state with no income tax, then you should be fine in terms of leaving it in Canada. Be aware that once you draw as a US resident that you will be allowed to draw out the accumulated contributions to the RRSP tax-free under US law. The withdrawals will still be subject to Canadian withholding tax and you can claim that as a tax credit or itemized deduction on the 1040.

After you leave you may not be able to make investment changes due to securities laws so it is advisable to ensure that you have the proper investment mix.

Finally, you should not hold mutual funds since these may cause additional reporting requirements in the US and can be rather cumbersome.

Keith February 23, 2011 at 9:24 pm

Thanks Tax Guy!
Just a follow up… if I do move and lose my Canadian residency, I suppose I will have no status anymore (I won’t be a citizen or anything of Canada). But is my RRSP savings still valid – you don’t need to have some status in Canada to maintain that RRSP, correct?

Keith

Tax Guy February 24, 2011 at 11:13 am

Hello Keith,
When you cease to be a resident you are considered to have sold your worldwide assets at fair market value. This triggers a tax event. However, registered accounts are excluded from this deemed disposition.

A bit of round about way to say yes you can leave the RRSP here. You might be restricted from placing trades in RRSPs while you are not resident in Canada due to securities laws. Check with your brokerage firm.

Leslie January 24, 2012 at 1:37 pm

I have been a US resident since 2004 but left my RRSP account in Canada. No additional contributions were made since 2004. I have filed my 8891’s annually. Is the entire amount of my RRSP taxable in the US upoon withdrawal or only the gain within the account since 2004? I realize that Revenue Canada will withhold 25% & I can claim a foreign tax credit for that amount on my 1040. Are foreign tax credits refundable?

Tax Guy January 24, 2012 at 2:19 pm

The amount above the contributions is taxable in the US. You can claim the foreign tax credit in the US, up to the amount of US tax otherwise payable.

Barb March 7, 2012 at 2:12 pm

I have over $40K of unused RRSP contribution room. If I move to US and become a US resident, can I still contribute to my RRSP without having any current earned Canadian income, up to my RRSP limit?

Tax Guy March 7, 2012 at 8:43 pm

If you move the the US and still have RRSP room, you can contribute to your RRSP. Hoever, the contribution may not be available on your US return.

Harald G April 2, 2012 at 11:16 am

I am totally impressed with your understanding of what seems to be simple, but is really so complex.
I moved to the US 18 years ago. In spite of the fact that I consulted Canadian and US tax professionals, no one told me about having to submit form 8819 re. my RRSP in Canada.
This past year I took a lump sum distribution of the RRSP. I am finding it a real challenge to know how to report the income and how I can take the 25% non-resident tax credit already taken by the Canadian government.
I think that the taxable portion of the distribution is what has accrued in the RRSP since my moving to the US.
Beyond that…?
Thanks
Harald

Tax Guy April 2, 2012 at 3:31 pm

Harald,
The rules around these accounts has changed a lot over the last 18 years. Basically, the taxable amount in the US is the value of the RRSP less your contributions to it over the time you had the plan. The 25% can be claimed either as an itemized deduction or tax credit. Be aware that the tax credit is limited to the US tax on the proportional amount of income from the RRSP added to your US taxes.

Erik June 18, 2012 at 5:23 pm

The methodology you outline seems to me like I am getting double taxed. I have a similar situation as Harold. My contributions to the RRSP were taxed on my U.S. taxes during the years I made the contributions living in Canada. I will get taxed by the U.S. on the earnings income above the contribution amount upon distribution. When I take the distribution I am getting hit with a withholding tax from Canada on both my contributions and the earnings above the contribution. If the U.S. credit I can take only covers the earnings above the contribution amount, then I am getting taxed by the U.S. on the contributions as they are occuring AND taxed by Canada on the contributions upon distribution. Shouldn’t I be able to take a credit on the U.S. for the entire amount so I am not getting double taxed on those contributions?

Tax Guy June 18, 2012 at 6:06 pm

Erik,

I’m not sure I understand your situation. There is no withholding tax on contributions.

It’s helpful to know your age, where you currently live, your citizenships(s), and what exactly you are trying to do.

Erik June 18, 2012 at 6:29 pm

I’m 33, live in the U.S. with U.S. citizenship. I had moved to Canada on a work permit between 2007-2010. I am liquidating my RRSP account. My Canadian financial institution is witholding a tax of 25% of my entire RRSP distribution as I am a non-resident. My initial contributions along with investment earnings along the way make up my RRSP. What i meant above is when I withdraw my initial contributions, I get taxed on them.

On my U.S. return in the years 2007-2010 my RRSP contributions counted as part of my gross worldwide income for U.S. tax purposes. Therefore I had income tax liability to the IRS on contributions I made for four years while I lived in Canada and now will have withholding tax for the CRA on the distribution I am taking (which includes all contribtions initially put in). Taxed by IRS as part of gross income at the time of earning and taxed by the CRA at time of distribution on the same money. This seems unfair. Am I explaining this properly?

Paul June 18, 2012 at 8:43 pm

I’m following this thread because for years I’ve tried to figure the best way to withdraw RRSP funds after having returned to US.

The question I have for Eric is: Are you sure you paid US taxes on the RRSP contributions at the time you were making them? I returned to US 1n 1999 and at that time, the foreign income exclusion was quite substantial. In effect, I was having to report foreign income to IRS, but was not getting taxed on it.

So now the issue is how to minimize Canada withholding on the withdrawals (As Tax Guy mentions, 25% if withdrawn through RRSP; or by converting to RRIF where withholding drops to 15%.) I think if periodic withdrawals are set up within the RRSP, that also will drop the withholding rate within RRSP structure.

The much more difficult problem (to me) is how to make use of ANY tax credit you get from paying the Canadian withholding on your US tax return. It is NOT a simple deduction from your US tax owed. It must be used ONLY to offset income of the same TYPE, i.e., foreign earned income of a certain type (general or passive, I forget which). Correct me if I’m wrong on this, but this is the area where I have been looking for help for a long time.

Jon July 17, 2012 at 3:13 am

This is a very great article. Thank you so much for it.
I have a similar situation as those above. I’m in my 20s, and have $25000 in my RRSP account that I originally intended to use for the HBP. (The whole amount is principle) However, I recently got a job in the US that would start in September. I was contemplating on either becoming a non-resident in September or January 2013.

My question is, when I withdraw the $25000, I know that 25% would be withheld, and I know that I could either claim a foreign tax credit or an itemized deduction. But my question is: What’s the difference between the 2? From my current understanding, the foreign tax credit could only be applied against the taxes generated by the investment in the US (in my case, does that mean it isn’t applicable, as the $25000 principle would not generate any US taxes anyway?) How does the itemized deduction work with the withholding tax specifically?

On another note, would it be beneficial for me to use my HBP in 2013’s january just before I become a non-resident? (I just bought a place in Canada.) From my interpretation, when I become a non-resident, I would have to pay back the HBP amount or have it count as income. But since that’s all the Canadian income I would have for the year, the tax would be less than the 25% withholding, right? (I live in Ontario, and the provincial tax is 5.05%)

Tax Guy July 17, 2012 at 5:00 pm

A tax credit is a dollar-for-dollar reduction in tax. The credit is limited, very generally, to the proportion of local tax otherwise payable. The deduction reduces income by which tax is calculated.

If you use the HBP and cease to be a resident of Canada, the whole amount will be added to your income.

George Weisz December 23, 2012 at 3:35 pm

The answers on the US tax credit are not clear at all. Leave Canada for the US with $30,000 RRSP balance in a mutual fund. Today the appreciated balance in the account is $130,000. Pay the 25% withholding tax in Canada when withdraw this year.

1. What is taxable in the US ($100,000 as capital gain taxed at 15% in 2012 or $100,000 as pension/ordinary income taxed at the US marginal tax rate).

2. What is the tax credit (a)tax paid on the reported RRSP US income (b) since there is no other foreign source income to apply credit against, zero (c) the total capital gain tax paid times the proportion of capital gain attributed to the RRSP gain or (d) the total tax paid for the year times the proportion of RRSP tax to total tax.

Tax Guy - Burlington Accountant December 24, 2012 at 9:10 am

The amount taxable in the US is the amount appreciated that is in excess of the original contributions.

George Weisz January 4, 2013 at 11:13 am

Tax Guy, still in the dark.

1. Is the amount over initial contributions taxable as capital or income gain in the US?
2. I think the tax credit is the proportion of RRSP income to total passive income times the US tax on all passive income. Is this correct?

Tax Guy - Burlington Accountant January 5, 2013 at 5:28 pm

George,
The income is income and not capital gains in the US. Unfortunately, I do not know the answer to the second question.

John February 6, 2013 at 4:57 pm

I am moving to the Philippines and wonder if there is much different from what you have told the folks moving to, or already in, the US? I intend to close bank accts., sell property, vehicles etc and the only remaining item would be my RRSP. How should I handle this prior to and post rolling it into a RRIF? After 6 months plus a day I believe I am out of the taxman’s grip if I have done all these things prior to my departure; is this correct? I would appreciate your thoughts and suggestion on how to be totally out of Canada in every way however I do receive a pension from a US Parent but is/was (?) registered in Canada. Would this last point keep me from being an expat for tax purposes? I would arrange for it to go direct to a Philippine Bank so all I would have tying me to Canada, as a resident, would be non dependent children and my passport (which I could change as dual citizen, not the US). Thank you, John

Tax Guy - Burlington Accountant February 6, 2013 at 10:36 pm

John,
The rules for ceasing to be a resident woud be the same. Hoever, your comment about 6 months has to do with being in Canada. It nothing to do with leaving Canada.

Dave April 5, 2013 at 1:21 am

Hello,

I’m a Canadian in my 30’s not retiring anytime soon, have been in the states for over a decade and no current plan to move back to Canada, but perhaps eventually. I’ve been filing US taxes for all this time, and just now realized that my small RRSP account in Canada should have been mentioned all along. I don’t know the exact value off the top of my head, but it’s somewhere in the range of $8 to $12,000 — either just above or just below the FBAR threshold. I have not made any contributions after leaving Canada.

From reading these pages it sounds like I need to:
1) File IRS form 8891 to declare my RRSP and elect to defer taxation federally.
2) File an IRS FBAR if the amount is > $10,000
3) Inform California about my foreign investment income if the account made interest in 2012… and it sounds like I get taxed on the interest income. I don’t really understand why this makes sense if 30 years from now I’ve already moved back to Canada and retired and paying tax on 100% of my withdrawals from the RRSP. I guess that would be clear double taxation in action?

My main questions are:

A) if I do all three of these things, what do I do about the fact that I hadn’t done any of this in the past 10 years of filing with the IRS?

B) Would it make financial sense instead to just to withdraw it all and only receive 75% of it? Is that 75% still “income” in the US? Do I need to file a return with the CRA if I do this to reconcile the 25%?

Thanks,
Dave

Erik April 15, 2013 at 1:01 pm

Hello,

As a US citizen now living in the U.S. I had my CPP converted to a LIRA. I then met the 2 year non-resident test and was able to access and take a lump sum distribution from the LIRA. Are the U.S. reporting guidelines for a distribution for a LIRA the same as for an RRSP? Is a LIRA just a locked in RRSP? Form 8891 only gives options or RRSP or RRIF to check. Can the LIRA distribution be considered an RRSP and reported in the same fashion?

Tax Guy June 18, 2012 at 6:41 pm

Erik,
The contributions were not deductible on your US return but you should have a deferral if you filed 8891. The withdrawal on the US side is complicated as the withdrawal itself is not taxable. Rather, the amount above your contributions are taxable.

If you contributed $10,000 and withdrew $12,000, then only $2,000 is deductible. Now the tax credit becomes an issue because it should be limited to the US tax otherwise paid. So there is likely going to be double tax.

You can leave the plan in Canada and turn it into a RRIF and ave 15% taken from the payments. This reduced the double tax.

Erik June 26, 2012 at 3:30 pm

The 8891 deferred my income made on the contributions but not the contributions themselves – the contributions themselves are only on the 8891 for reporting purposes. So the contributions themselves counted on my U.S. return as my adjusted gross income back in 2008-2010, just like the rest of my salary that wasn’t contributed to an RRSP. Now Paul makes the arguement that the foreign earned income exclusion wipes out any taxes you owe to the U.S. but this exclusion excludes somewhere around high $80K’s to low $90K’s. Everything above that is going to flow through to line my AGI on the 1040 and I’ll get taxed on it. So my initial contributions made to the RRSP are getting taxed by the IRS. Now upon withdrawl the entire amount (contributions + income accrued) is withheld by the CRA at 25%. Per your example if I contibuted $10K in 2008, that amount would be included in my gross income on my 1040 and if my earnings were above $100K the foreign earned income exclusion would not cover it all and I would get taxed on it. I would defer the $2K in accrued earnings on the 8891. Now at time of distribution the CRA witholds 25% of the whole $12K. I just don’t see how there is no recourse for getting taxed by the U.S. on the initial $10K and then getting taxed by Canada on that same $!0K upon withdrawl.

To Paul’s 2nd point about maximizing the credit (which is what I am trying to do as well), would the best option be not trying to take it as a credit but as a deduction on the Schedule A line 8? This won’t give you dollar for dollar savings but if you do the math it may actually save you more than the credit would. Is that a possibility?

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