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California Residents: Does Your Financial Advisor Tax-Manage Your RRSPs?

May 27, 2015 By Cardinal Point Wealth

California residents who hold RRSPs, LIRAs, RRIFs or other Canadian tax-deferred accounts are subject to a unique set of tax planning and reporting requirements.

california-flagUnlike most states, California does not allow Canadian retirement accounts to grow on a tax-deferred basis. And that can present a serious income-tax problem for residents of California, given the fact that the state taxes the annual income distributions (interest and dividends) and realized capital gains inside Canadian registered plans.

What are California’s Tax Rules?
California rules require its tax residents to include annual investment earnings on their Form 540. Unlike the taxpayer’s U.S. federal return, the State of California (Franchise Tax Board) requires that you pay tax annually on your RRSP earnings.

You would be responsible for including your interest (line 8), dividends (line 9) and capital gains (line 12) of Schedule CA. They will ultimately appear in Column C for additions to income. If you have a capital loss, the loss would be reported in Column B of line 12.

The State of California’s tax position on this matter is reported in Franchise Tax Board Legal Branch. Click here to view the documentation.

It can be difficult to avoid including this income for California State tax purposes, given that the state requires that the taxpayer’s complete tax return, including Form 8938, be included. This gives the Franchise Tax Board the ability to determine whether a taxpayer has an RRSP and has included the accrued income within their Form 540 return. To make matters worse, if a California resident were taking distributions from their RRSP/RRIF where Canadian withholding tax was being remitted to the Canada Revenue Agency (under the Treaty), this tax would not be eligible as a foreign tax credit for California State tax purposes. The state does not recognize, nor is it party to, the Canada—U.S. Income Tax Treaty.

What can be done to minimize tax?
Unfortunately and all too often, Canadian advisors overseeing Canadian retirement accounts are unfamiliar with California’s treatment of these accounts. What’s more, they do not offer investment strategies to ensure the management style and philosophy employed is uniquely mapped to California’s tax rules. And why would they? Their core clientele are Canadian residents with RRSPs, and not U.S. residents living in California. That is one of the reasons we suggest clients living in the United States, and especially California, work with a Canada-U.S. cross-border financial advisor.

At Cardinal Point, we strive to reduce taxable transactions inside clients’ Canadian retirement accounts through a tax-managed style of investing. First, we treat the account as if it were taxable (non-registered) rather than a traditional, tax-deferred retirement account. In doing so, we always consider the future tax consequences of each security selected. For example, an RRSP account being managed on behalf of a Canadian resident might typically include higher-yielding, income-producing securities. This makes sense under Canadian tax rules for residents of Canada because investment income inside an RRSP plan is tax-sheltered. In California, however, the exact opposite is true. Therefore, we select investment securities that attempt to limit large taxable transactions or distributions inside the account.

Another key aspect of tax managing a Canadian retirement account is employing tax-loss selling when possible. When a security with a capital gain is sold, we proactively sell a security in the account with an unrealized capital loss to offset the gain where possible. If a security in the account has a large unrealized capital gain, we may attempt to reduce the holding over a number of years to minimize taxes, versus selling out the entire position at once and incurring a hefty tax bill.

The ultimate goal is to tax manage the account to the greatest degree possible without compromising the integrity of the client’s overall investment strategy or performance.

Other Considerations for RRSPs
Aside from tax managing Canadian retirement accounts on behalf of California residents, we also provide the following strategies:

  • U.S. dollar-Denominated RRSPs: We have the ability to manage your RRSPs in U.S. dollars, eliminating the need to monitor the Canada-U.S. exchange rate.
  • Cross-Border Account Integration: We offer integration with your U.S. investment accounts so that the investment strategies of your Canadian and U.S. accounts complement each other.
  • Proper Tax Reporting: Our firm provides Canada-U.S. tax reporting and preparation services to ensure all IRS and state foreign account reporting and disclosures are done correctly.
  • Discharging Your RRSP: We advise on the best process, timing and tax strategy to distribute your RRSP.

California residents who hold Canadian tax-deferred accounts face a number of tax-planning and reporting challenges. In order to comply with the state’s reporting requirements, and preserve as much of your capital as possible, we strongly advise that you work with a qualified cross-border financial advisor. Please don’t hesitate to contact the team at Cardinal Point if you are interested in learning more.

Jeff Sheldon is a co-founder and principal at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada.

Filed Under: Articles, Cross-border Tax Planning, Investment Management Articles Tagged With: California's Tax Rules, Canadian tax-deferred accounts, Investment Management, rrsp tax management, U.S. Resident with RRSP

Do You Have to Pay U.S. Taxes for Canadian Registered Retirement Savings Plan Withdrawals?

February 22, 2014 By Cardinal Point Wealth

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

Filed Under: Articles, Canada-U.S. Financial Planning Articles, Cross-border Tax Planning, Featured, Investment Management Articles Tagged With: Canada-U.S. financial planning, Cross-border tax planning, Investment Management, U.S. Resident with RRSP

Cardinal Point Wealth Management featured in the Wall Street Journal, “A Cross-Border Retirement Without Tax Woes”

January 11, 2013 By Cardinal Point Wealth

Our own Jeff Sheldon was recently featured in a Wall Street Journal article, “A Cross-Border Retirement Without Tax Woes.” He shared the story of a couple who retired to the U.S. from Canada. While they sought sunny weather and a simpler life, when it came time to sort out their taxes and streamline their retirement investments, they were confronted with a cloudy, complicated situation. Adding to the challenge, “the wife was a Canadian citizen, the husband held dual citizenship in Canada and the U.S., and the couple owned retirement plans, property and other assets on both sides of the border.”

What to do? After other advisors told the couple to liquidate their Canadian retirement accounts and transfer those assets to U.S. accounts, the couple turned to the cross-border expertise of Cardinal Point. Jeff was concerned that such a move would subject those assets to double taxation, first as a withholding tax in Canada and then again as taxed income in the U.S. Fortunately, he came up with a solution that enabled the couple to avoid being taxed twice while still receiving funds from their tax-deferred Canadian retirement accounts.

Then Jeff identified a significant issue with their estate plan. “[T]he husband’s estate was considerably larger than his wife’s. That ordinarily wouldn’t be an issue, but the wife isn’t a U.S. citizen and isn’t eligible for the unlimited marital exemption.” As a result, the wife would owe estate taxes on what she inherited from her husband. To prevent this, Jeff employed two strategies to help ensure she wouldn’t owe estate taxes on that money.

As with many cross-border moves, there were no “one size fits all” solutions to fit the couple’s complex financial, tax and estate planning needs. It wasn’t a quick fix, but our tailored advice helped the couple worry less about their retirement and enjoy more Florida sunsets.

Filed Under: Articles, Canada-U.S. Financial Planning Articles, Cross-Border Estate Planning Articles, Cross-border Tax Planning, interviews, press release Tagged With: Canada-U.S. financial planning, Cross-Border Estate Planning, Cross-border tax planning, Dual Citizen Couples, U.S. Resident with RRSP

Why Is It Important For Canadian Expats To Disclose Foreign Based Accounts to the IRS?

March 22, 2012 By Cardinal Point Wealth

John McCord’s article focuses on the IRS (US Internal Revenue Service) policy that taxes the worldwide income of US residents. Many US residents are unaware of this policy and the law that requires the disclosure of the majority of foreign accounts, as they are subject to US taxation. Disclosure rules also apply to Registered Retirement Savings Plans, pensions and bank accounts. In order to enforce these policies the IRS is aggressively pursuing civil and criminal penalties for noncompliance and maintains close communication with the CRA (Canadian Revenue Agency), references the FBAR (Report of Foreign Bank and Financial Accounts) and, beginning in 2013, will enforce the FATCA (Foreign Account Tax Compliance Act) in order to do so. FATCA will focus on the compliance of foreign-based accounts and increase communication with foreign financial institutions in order to identify US residents who do not report their foreign-based accounts. For both Canadian Expats and US residents with foreign accounts, McCord stresses it is critical to consult with a cross-border financial advisor in order to ensure compliance and identify the right solution that may include tax, legal and investment professionals depending on your personal situation.

Filed Under: Articles, Canada-U.S. Financial Planning Articles, FATCA Tagged With: Canada-U.S. financial planning, Canadians living in U.S., FATCA, FBAR, U.S. Resident with RRSP

Preparing to Exit Canada for the United States? (Part III)

August 12, 2011 By Cardinal Point Wealth

The third and final installment of the series addresses what to do with your Registered Retirement Savings Plan (RRSP). This article discusses some of the fundamental decisions that must be made concerning any tax-deferred accounts that are being left in Canada. It also looks at some of the common strategies suggested by cross-border financial planning advisors.

Filed Under: Articles, Canada-U.S. Financial Planning Articles, Cross-border Transition Planning Tagged With: Canada-U.S. financial planning, Moving to U.S. from Canada, Transition Planning, U.S. Resident with RRSP

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“Cardinal Point” is the brand under which dedicated professionals within Cardinal Point Capital Management, ULC provide financial, tax and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point Capital Management, ULC is a US registered investment advisor and a registered portfolio manager in Canada (ON, QC, MB, SK, NS, NB, AB, BC). Advisory services are only offered to clients or prospective clients where Cardinal Point and its representatives are properly registered or exempt from registration. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.