When a Canadian resident decides to move to the United States, there are numerous cross border tax and financial planning considerations that need to be addressed. One area of concern for many is how their Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs), Locked-In Retirement Accounts (LIRAs), and Life Income Funds (LIFs) will be impacted by this move. In this blog, we’ll explore what happens to RRSPs/RRIFs/LIRAs/LIFs when an owner moves to the U.S. and we’ll reveal various available options for effective cross border tax and wealth management planning.
Understanding the Transition
Leaving Canada doesn’t necessarily mean leaving behind your Canadian investment accounts. RRSPs/RRIFs/LIRAs/LIFs can still be maintained, as long as you follow crucial steps to ensure full compliance with Canadian and U.S. tax regulations.
Reporting Requirements
One important note for Canadian emigrants moving to the U.S. is that they do not need to report on Form T1161 (List of Properties by an Emigrant of Canada) or Form T1243 (Deemed Disposition of Property by an Emigrant of Canada). However, it is essential that they file a Form 8833 with their U.S. tax return to disclose any tax treaty elections or positions under the Canada-U.S. Tax Treaty. If the maximum value thresholds are met on your Canadian registered accounts, it is also critically important that you report that on an FBAR/FinCEN 114 and on Form 8938 of your U.S. tax return.
Tax Planning Strategies
For Canadians relocating to the U.S., several tax planning strategies can help optimize the treatment of RRSPs and RRIFs.
Article XVIII(7) Election
Under Article XVIII(7) of the Canada-U.S. Tax Treaty, emigrants can elect to defer U.S. taxation on income accruing within their RRSPs/RRIFs/LIRAs/LIFs until distributions are received from the accounts. This election offers a unique advantage, particularly if the individual plans to take periodic distributions over time.
Withholding Tax Considerations
The tax treatment of distributions from RRSPs/RRIFs/LIRAs/LIFs depends on the individual’s tax residency status. Canadian withholding tax rates for Canadian residents range from 10% to 30%, but if someone becomes a U.S. tax resident or non-resident of Canada, the Canadian withholding tax rate is automatically 25%. However, the Canada-U.S. Tax Treaty allows for reduced withholding rates of 15% for periodic distributions from RRIFs under specific guidelines. The Canadian non-resident withholding tax (Part XIII) on lump sum distributions from RRSPs/RRIFs/LIRAs/LIFs remains at 25%. Canadian Part XIII taxes are a final tax liability to Canada. Taking a distribution from RRSPs/RRIFs/LIRAs/LIFs with Part XIII tax withheld does not necessitate a Canadian tax return filing. The taxes paid to Canada will be available as foreign tax credits to reduce taxes payable to the U.S.
Non-Resident Canadian Income Tax Return
In certain cases, former Canadian residents might benefit from filing a Canadian income tax return as a non-resident under Section 217 of the Canadian Income Tax Act. Doing so enables non-residents of Canada to claim deductions and credits similar to those available to Canadian residents, thereby optimizing tax efficiency.
State Tax Implications
It’s essential to consider that some U.S. states, such as California, may tax annual income and realized capital gains within RRSPs/RRIFs/LIRAs/LIFs, irrespective of distributions. This is because some states do not adhere to the Canada-U.S. Tax Treaty, so the Article XVIII(7) Election does not apply at the state level. These potential implications should factor into your overall tax planning strategy.
Conclusion
Navigating the complexities of cross-border financial and tax matters requires a deep understanding of both Canadian and U.S. tax laws. If you’re a Canadian moving to the U.S. and wish to maintain your RRSPs/RRIFs/LIRAs/LIFs, it’s crucial that you work with experienced professionals who can help you develop a comprehensive tax plan tailored to your individual circumstances. Keep in mind that tax laws can change, so it is vital that you stay informed and seek consistent professional advice to ensure your financial health in both countries. Please see our blog titled Income Tax Implications of RRSP Withdrawals as a Non-Resident of Canada for more information, and contact Cardinal Point should you have any questions.