How to avoid paying tax on RRSPs for non-residents is revealed in this article.
There are special tax implications for RRSPs for non-residents depending on where they reside. For the purpose of this article, the focus will be on those who left Canada and reside in the United States and those who plan on emigrating from Canada in the future.
Canadian tax implications of RRSPs for non residents
Relinquish ties to Canada – what happens to my RRSPs?
In order to be deemed a non-resident of Canada you must sever your ties to Canada, such as your permanent home, driver license, Canadian bank accounts, and so forth, when leaving Canada. If one fails to sever such ties, the CRA may still consider the person a resident of Canada and impose significant penalties for failing to file Canadian tax returns. However, you can rest assure that your RRSP account is one of the few Canadian accounts that you can keep without incurring any negative consequences from the CRA.
Departure tax when leaving Canada – does this apply to RRSPs?
Another piece of good news is that your RRSP account is exempt from Canadian departure tax. What is departure tax? On the departure date, the CRA deems that you sold all of your assets at its market value and any positive difference between the market value and the original cost of the asset will be taxed as capital gain. Some assets, such as your RRSP and TFSA accounts, and principal residence are exempted from the deemed sale.
Do non-residents pay Canadian withholding tax on RRSP withdrawals?
We don’t recommend taking out your lump-sum RRSP when you depart from Canada as you’ll be paying significant amount of Canadian tax on the amount. Instead, we advise that you withdraw your RRSP funds after you become a non-resident.
As a non-resident with a RRSP account, you will only be responsible for 25% withholding tax on all of your withdrawals. If you turn your RRSP into RRIF or other annuity payments, the withholding tax will be reduced to 15%. You may also be able to claim a Foreign Tax Credit in the US for the withholding taxes paid to the CRA.
Another option is filing a special section 217 return in Canada to reduce the withholding tax if your RRSP withdrawal constitutes more than 90% of all of your worldwide income.
Any funds remaining in the RRSP will continue to grow tax free in Canada.
US tax implications of Registered Retirement Savings Plans (RRSPs) in Canada
For US tax purposes, the IRS (equivalent of CRA) treats RRSPs as a regular, non-registered investment plans. As such, the US will impose tax on any growth of your RRSP fund when you file your US return.
However, to alleviate such inconvenience on RRSP for non-residents of Canada, the US-Canada tax treaty allows non-residents to maintain growth within the RRSP tax free in the United States. This is done by filing a Form 8891 -(US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans) and attaching it to your US tax return each year. This form will allow you to defer paying tax on your RRSP income until you begin your withdrawal.
How the IRS taxes an individual on their RRSP is interesting. On the date of entry to the United States, all of the RRSP contributions, interest, dividends, capital gains realized are considered principal and can be withdrawn tax free in the US. However, any unrealized capital gain inside the RRSP at the date of entry will be taxable. Therefore, on withdrawal, the US tax calculation will be as follows:
Value of the RRSP at withdrawal date – (Principal – unrealized capital gain in RRSP at entry date)*
*Calculation is different for US Citizens and green card holders
As the calculation shows, if the value of the RRSP decreases after entering the US, you will not be liable for tax on your RRSP.
Cross border tax implication of RRSP for non-residents is a complex area of international tax and as such, we recommend consulting your local US tax expert for professional advice.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.