Canadian RRSP's Held by U.S. Residents & Citizens

 The United States - Canada Income Tax Convention, provides that a beneficiary of a Canadian Registered Retirement Savings Plan ( RRSP) may elect, under rules established by the competent authority of the United States, to defer U.S. income taxation with respect to income accrued in the plan but not distributed, until such time as a distribution is made from such plan, or any plan substituted therefor. Deferral is only available for income which is reasonably attributable to contributions made to the plan by the beneficiary while the beneficiary was a resident of Canada. The technical explanation to the Convention states that the purpose of this provision is to avoid a mismatch of U.S. taxable income and foreign tax credits attributable to the Canadian tax on such distributions.

CANADIAN LAW

 Canada generally does not tax contributions to or accumulations in an RRSP. Under the Convention, Canada generally will impose a withholding tax of 25 percent on distributions to non residents.  An election may be filed under Sec 217 if the tax calculated on the return is less than the withholding tax.

U.S. LAW

 Because an RRSP is not a "qualified" plan for U.S. tax purposes, there is no deduction allowed for contributions to such a plan in the U.S. and earnings of the plan are taxable annually to the beneficiary. By deferring U.S. tax on earnings in the plan attributable to Canadian contributions until there is a distribution, U.S. tax generally will be imposed in the same years that Canadian tax is imposed, so that U.S. citizens, green card holders, and residents may credit the Canadian tax against their U.S. tax liability.
 The Convention provides that deferral is available until there is a distribution from the RRSP "or any plan substituted therefor." Canadian law permits tax-free rollovers from an RRSP to either another RRSP or to a Registered Retirement Income Fund ( RRIF). For purposes of the Convention, a rollover of an amount from an RRSP into an RRIF that is treated as tax-free under Canadian law will be interpreted to be a rollover into a plan "substituted" for the RRSP. Amounts rolled over from the RRSP into the RRIF will qualify for continued deferral of U.S. tax until income is distributed from the RRIF. Accordingly, the amounts rolled over (and earnings on those amounts) will be eligible for deferral from U.S. tax until distributed, to the extent such amounts would have been eligible for deferral if they remained in the RRSP.

HOW TO DISCLOSE

 For U.S. tax purposes, an RRSP is treated as an investment account,  and an election to defer taxation of accrued income must be made annually, on form 8891.  This election, if properly made, defers taxation of income earned within an RRSP, as long as the contributions were made while a resident of Canada.   Department of the Treasury form 90.22.1 should also be filed to disclose foreign bank accounts, and the appropriate disclosure should be made on Schedule B of Form 1040.

CONSEQUENCES OF MOVING

 No rollovers of Canadian RRSP's to U.S. IRA's or similar plans are advisable, since such a transfer would be considered a distribution under Canadian law, and would trigger taxation in both countries under the Convention.
 Accordingly, persons moving to the U.S. after a work period in Canada should consider leaving the RRSP intact, and drawing funds from the plan only upon retirement or as required by Canadian law.

New Broker /SEC rules can prevent a U.S. resident from trading a Canadian R.R. S. P.  With the exception of Canadian self-directed tax advantaged retirement plans and temporary residents, Canadian salespersons are prohibited under the Securities Exchange Act of 1934 from dealing with clients in the U.S. unless they are registered with a dealer registered in the U.S.

Click on this link for a comprehensive report on the current situation related to Canadian RRSP holders resident in the U.S. - as prepared by the Investment Dealers Association of Canada.

Mark T. Serbinski Certified Public Accountants and Serbinski Partners PC, Chartered Accountants specialize in situations involving the taxation of U.S. citizens living abroad and Canadians living or working in the United States.   Please contact us for a complimentary initial review of your particular situation on a confidential basis.  ^{(Click here for details of our Complimentary services.)}

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