Have you recently moved to the United States from Canada and left your Registered Retirement Savings Plan (RRSP) open? After becoming a U.S. resident, you might be wondering if you have to pay U.S. taxes on withdrawals from your Canadian retirement plan.
There is a good chance that Canadians, who moved to the U.S., have a keen understanding about the Canadian tax implications regarding cashing out their RRSP. However, often Canadian expats lack proper perspective on the U.S. tax implications in their unique situation.
From the perspective of Canadian tax laws, once someone becomes a non-resident of Canada, further withdrawals from the RRSP are exposed to a 25 percent withholding tax by the Canadian Revenue Agency (CRA). If you are under the age of 71, you have the option to convert the RRSP into a Registered Retirement Income Fund (RRIF) that will allow the withholding tax to be reduced to 15 percent. Under the RRIF provisions, no further contributions can be made once conversion of the RRSP to an RRIF has occurred; however, the conversion enables the plan holder to make periodic withdrawals.
Canadians, who choose to become a resident of the U.S., may still be liable to pay U.S. taxes on their withdrawals from the RRSP or RRIF. However, there are a few workarounds to mitigate the U.S. taxes on Canadian RRSP withdrawals.
Knowing how to properly invoke the Canada-U.S. tax treaty is step one in reducing the likelihood of double taxation. The most common way to reduce your U.S. tax exposure would be to take a foreign tax credit for the tax withheld by the Canada Revenue Agency on the withdrawals from the RRSP. Moreover, you may be allowed to withdraw the cost base of your RRSP tax-free. Nonetheless, the amounts transferred from Canada to the U.S are subjected to some special rules, after considering the foreign exchange adjustments.
Since these RRSP transactions are often complicated and subjected to both countries’ tax regimes, seeking professional help to reduce tax burdens is always a good choice. At Cardinal Point, we are always here to help you navigate the complicated tax laws when it comes to withdrawing funds from your Canadian RRSP. Our experts can guide you in establishing your RRSP’s cost base under the U.S. tax law and help you make good decisions about whether to take a tax credit or deduction for the taxes already paid to the Canadian Revenue Agency. Contact us today.
Terry Ritchie is the Director of Cross-Border Wealth Services at the Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. Terry has been providing Canada-U.S. cross-border financial, investment, tax, transition, and estate planning services to affluent families for over 25 years. He is active as an author, speaker and educator on international tax and financial planning matters. www.cardinalpointwealth.com