Moving to the States? Know your RRSP rules!
When you become a U.S. resident, the value of your RRSPs is considered capital, and is therefore not taxable. Any income earned within the plan after you become a U.S. resident may continue to compound tax-free. However, you become liable for U.S. taxes once you start making withdrawals from the plan, but only on those amounts that relate to income earned in your RRSP after you become a U.S. resident, plus any unrealized capital gains. It therefore makes sense to take any capital gains in your RRSP before you leave Canada, thereby reducing the U.S. tax for which you’ll eventually be liable. If you’ve lost money in your RRSP to the extent that the plan’s value is less than it was at the time you became a U.S. resident, you’ll face no U.S. tax at all.
You will have to pay a 25 percent withholding tax in Canada when you make withdrawals from your RRSP after you become a non-resident by moving to the U.S. If you become a non-resident, the Canada Customs and Revenue Agency will regard the withholdings as your full payment. This means you’ll pay tax at a much lower rate than would have been the case had you stayed in Canada. Of course, some tax may be assessed in the S., but it will only be payable on a portion of your withdrawals, as we’ve seen. Plus, you should be able to claim a credit for your Canadian withholdings against your U.S. taxes payable.
^These rules make it advantageous to keep your RRSP if you decide to move to the States. Your investments will continue to grow, tax-sheltered, just as if you’d stayed in Canada. To be eligible for this tax break, you must make a declaration to the U.S. Internal Revenue Service (IRS) that you wish to use this provision of the U.S./Canada Tax Treaty. This requires a special election, which is made with the first U.S. tax return you file. You’ll be required to supply detailed financial information about your RRSP at that time.
Pension plans may also qualify for a tax break if you move to the U.S. Employee and employer contributions made to the plan on your behalf prior to taking up U.S. residency are considered capital, in the same way as your RRSP, and therefore won’t be taxed.
Until recently, RRSP investors faced a real problem when they moved to the United States. A couple of old rules, enforced by the U.S. Securities and Exchange Commission (SEC), meant that Canadians who were U.S. residents could
In addition to keeping abreast of the legislation, there is another side of RRSP investing that needs careful consideration if you decide to leave Canada for good. Should you run the risk of leaving your registered assets in Canadian dollars and perhaps seeing the loonie fall in relation to U.S. dollars?
The best way to avoid this is to switch a large proportion of your investments into U.S.-dominated securities. You can convert Canadian-dollar securities into U.S.-dominated assets quite easily, even in registered plans. The foreign-content limitations and the rule that says you cannot hold foreign currency in a registered plan are not the impediments they may seem to be at first glance.
U.S. dollar–denominated bonds from Canadian issuers such as the federal and provincial governments are considered to be 100
In the case of non-registered investments, there are no barriers of any kind in switching to a U.S. dollar–based portfolio. It’s simply a matter of selecting which securities you want to move. U.S. equities, as a group, tend to outperform Canadian stocks, so that could be a plus if you want to maintain a growth component in your portfolio.
Adapted from Gordon Pape’s 2001 Buyer’s Guide to RRSPs, published by Prentice Hall Canada.