What happens to an RRSP when a client relocates to the U.S.?


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Cross-border planning is necessary when relocating to the U.S.ehrlif/iStockPhoto / Getty Images

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If an individual leaves Canada and relocates to the U.S., retaining their registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) requires a clear understanding of tax rules in both countries.

First, the good news: the RRSP and RRIF should continue as tax-deferred accounts when the person relocates. But from a U.S. state tax perspective, this only applies to U.S. states that adhere to the tax treaty between Canada and the U.S. as well as those that don’t have state income tax.

For those states that don’t recognize the tax treaty or impose state taxes, RRSPs and RRIFs are potentially subject to state taxes on dividends, interest, and capital gains earned within those accounts. This could result in double taxation as Canada would tax this same income but in the year of withdrawal.

California is an example of a U.S. state where any RRSP or RRIF investment growth is taxable. Those affected California residents must report their earned income from these accounts and pay state taxes on gains each year.

There may be a workaround when dealing with U.S. states such as California that don’t follow the tax treaty. A crystallization strategy recognizes the gains within the RRSP before the person establishes residency in the new state. It essentially resets the cost basis for U.S. state tax purposes. This proactive approach can prove beneficial especially if the RRSP assets show unrealized appreciation before the person becomes a resident of the given state.

Planning such scenarios before the move is a prudent opportunity, so working with a cross-border tax professional is key.

Most will advise U.S. residents who hold non-U.S. mutual funds or exchange-traded funds within an RRSP or RRIF that those investments are exempt from passive foreign investment company (PFIC) regulations. The PFIC rules consider RRSPs and RRIFs pension plans under the Canada-U.S. tax treaty.

On the other hand, PFICs held in other types of accounts, such as non-registered accounts, may attract complex and costly tax filings and adverse federal tax implications. That said, Canadian mutual funds might place limitations on non-residents purchasing such investments. Some mutual funds may allow the holder to retain ownership of their funds if they held them before ceasing Canadian tax residency.

When it’s time to withdraw

It’s well known that when a person withdraws from their RRSPs or RRIFs in Canada, the entire amount, including the original contribution and subsequent growth, is taxable. For non-residents of Canada, lump-sum withdrawals from an RRSP also incur a withholding tax of 25 per cent. Opting to keep investments within the RRSP, converting it to an RRIF, and making periodic distributions can reduce the withholding tax to 15 per cent under the Canada-U.S. tax treaty. To qualify for the reduced withholding tax, annual withdrawals must adhere to certain criteria to qualify them as periodic payments.

South of the border, RRSPs and RRIFs are also taxable in the year of withdrawal, and the taxable amount will depend on certain factors such as U.S. tax status at the time of the contributions. To alleviate double taxation, federal foreign tax credits should be available on the U.S. tax return. However, keep in mind some states, such as California, don’t allow foreign tax credits.

Cross-border taxes and remote work

The rise of remote work prompts the question of whether one can or should contribute to an RRSP if they’re working for a Canadian company while living and working in the U.S. The answer hinges on various factors, including available contribution room and the feasibility of utilizing the RRSP contribution against Canadian income. If that proves impractical, contributing to U.S. retirement plans, such as a 401(k) or an individual retirement account (IRA), might be more advantageous.

Contributing to an RRSP after moving to the U.S. may still make sense in certain situations. For example, an individual may continue to have Canadian-sourced income to report on a Canadian tax return as a non-resident and need to offset Canadian taxable income in the same tax year of ceasing residency. The decision rests on individual circumstances as there’s no tax-free mechanism to transfer an RRSP or RRIF to an IRA.

Carson Hamill is associate portfolio manager and assistant branch manager with Snowbirds Wealth Management at Raymond James Canada Ltd. in Vancouver. Sonya Dolguina is manager, tax consulting, at Raymond James in North Vancouver.

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