Does this situation sound familiar? You moved from Canada to the U.S and became a U.S tax resident. When you left Canada, you also left your RRSP account open.
If you are like many Canadian ex-pats who have left their RRSP’s behind to grow tax free in Canada, then you may now be dealing with a situation where you are making a withdrawal from your RRSP while you are a U.S tax resident.
While you’re probably aware of the tax implications of cashing out your RRSP from a Canadian tax perspective, you may not be familiar with the U.S. tax implications.
On the Canadian side, once you become a non-resident of Canada, any withdrawals from the RRSP will be taxed under non-resident rules and will be subject to the CRA 25% withholding tax. This withholding tax can be reduced to 15% if you elect to convert the RRSP to a RRIF and you take periodic payments from the RRIF or other similar annuity.
But the tax liability doesn’t stop with CRA. Once you are a resident of the U.S., withdrawals from your RRSP may also be subject to U.S. taxes.
Before you make a run to the Northern Border, consider that U.S. tax law does offer a couple of silver linings on how RRSP withdrawals are taxed.
First, if you take a taxable distribution from the RRSP, the U.S. will allow you to take a foreign tax credit or deduction for the Canadian tax withheld by CRA on the distribution.
Second, the U.S allows you to withdraw the cost base, subject to special rules and to foreign exchange adjustments, of your RRSPs tax-free. Therefore, only your actual profit in the RRSP will be subject to U.S. tax. In a future article, I will discuss how to minimize the U.S tax on your RRSP profits by stepping up the cost basis in your RRSP before moving to the U.S.
At Gedeon Law & CPA, when it comes to cashing your RRSP, we are here to help you navigate the tricky rules from everything on how to report the income from your withdrawal to how to establish your RRSP’s cost base under U.S. tax law to helping you decide whether to take a credit or deduction for the tax paid to CRA.