What Fate Awaits Locked-In RRSPs on Emigration

The Joneses, an energetic retired couple, were looking forward to their move to Texas. Before playing in the sun, however, their tax affairs required some serious attention.

What would happen to their pensions upon departure? This was certainly front-and-centre on their minds, particularly as some of their RRSPs were Locked-In Plans.

Locked-in RRSPs are basically treated the same way as other RRSPs/RRIFs for tax purposes, here in Canada, although they serve the purpose of ensuring that planholder has a pension income on retirement. Lump sum withdrawals are therefore not allowed.

In practice these investments are subject to minimum and maximum withdrawal calculations. Such plans are provincially legislated, so you should check with your home province for up-to-the-minute changes in the rules. In Manitoba, for example, a new LRIF will be pegged to the investment income in the plan, to allow for a bigger withdrawal. In general, pensions from locked-in RRSPs can be accessed at age 55, although some provinces allow access at any time.

When a taxpayer leaves the country, the locking feature cannot be circumvented. Instead, the planholder may receive an income in the forof a pension either through an annuity or a life income fund. Those subsequent withdrawals are subject to Part XIII tax, which is basically a withholding tax of 25%, unless periodic payments are received by the non-resident, in which case that rate is reduced to 15%.

It would therefore be best to decide when to generate the pension income from the plan before leaving the country and then to determine the tax consequences in the US.

One should be aware that income earned within an RRSP is taxable in the US. However, a special election may be made to continue the tax-deferred treatment of earnings on pre-emigration investments. This is called Procedure 89-45 and the result of making the election is the continued tax deferred treatment on those investments until withdrawal. The election is not available on contributions to an RRSP after the beneficiary leaves the country.