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How Canadian RRSP’s are Taxed In The U.S.?

Taxation of Canadian RRSPs in the USA related to the topic Important Facts and Guidelines. Overview.

When Canadians relocate to the US and become US tax residents, what should be done with their RRSP’s? A lot of confusion exists on how the IRS and state revenue agencies treat these accounts. TN Visa holders are especially affected when they move to the U.S.

RRSP’s are not IRA’s (and vice versa)

The US tax code views RRSP’s as savings accounts and not retirement vehicles such as the US IRA’s. At first glance, this is perplexing to a new US resident from Canada as RRSP’s function almost the same as the various IRA investments available to US residents. The similarity is not the focus however. With most International Taxation, the fact that the account is foreign is the starting point for the different treatment, not the schematics of its function. Because the IRS does not view RRSP’s as the same as IRA’s, one cannot rollover RRSP’s into IRA’s and vice versa. To minimize the tax on any RRSP withdraws, careful planning is required.

RRSP Earnings are taxable

Since the IRS and US state revenue agencies do not view RRSP’s as IRA’s, all of the yearly earnings in the your RRSP accounts are taxable and are required to be reported annually. Additionally, when individuals holding RRSP’s work as a nonresident in certain states, the RRSP earnings must be included in the worldwide income used to determine the ratio of in-state earnings to worldwide earnings. This is especially true in California which is not the friendliest state for Canadian retirement account holders.

“Cost” of the RRSP

Another peculiar aspect of RRSP’s in the US is the fact that the “basis” an owner of an account has in the RRSP’s is the fair market value of all the accounts on the day that they enter the US. “Basis” is a term used to describe one’s investment in an asset. For example, if one buys stock for $200 and sells it for $400, they have “basis” of $200 and are taxed on the difference between the sales price and their basis. Withdraws from RRSP’s are generally taxable by Canada Revenue in full as there is zero “basis” in the accounts. This is due to the fact that the contributor received a tax deduction for the original contribution. When one enters the US and withdraws from an RRSP, they are fully taxable in Canada but only partially taxable in the US. For example, if one entered the US with RRSP’s totaling 10K and immediately withdrew the entire amount, they would be taxable in Canada on the 10K withdrawn and have no tax to pay to the US.

How the Tax Treaty Helps You

Fortunately, the US and Canada have a treaty that helps mitigate the potentially unfair treatment of RRSP’s in the US. The treaty allows owners of RRSP’s to do the following:

1) Defer earnings in the RRSP until actual distribution
This is not automatic. A taxpayer must state this desire on the appropriate form for each account that they own. Not all states will follow the treaty particularly California (have we said this before?). Since US state tax regimes function completely separate from the Federal IRS, it is their right to do otherwise despite the fact that the majority of states follow the treaty.

2) Deduct IRA contributions on the Canadian return
This works in a situation where a Canadian resident is working in the US as a nonresident or a US Resident working in Canada as a nonresident. The same deduction enjoyed in the nonresident nation is extended to the resident nation.

In the next article, we will explore the various forms involved in reporting RRSP’s in the US.

Don’t Navigate US Tax Law Alone: Speak with a Licensed Tax and Immigration Attorney Today!

US Tax Reporting for Non-Residents:

Those individuals who are US nonresidents for tax purposes have a different filing requirement from that of a US tax resident. Generally, a nonresident is only taxable on income earned within the US. Any earnings within RRSPs do not have to re-reported to the IRS if the individual is a nonresident. However, a number of states require a nonresident alien to report global income on the state tax return. In states like California, this includes any earnings within RRSPs. For example, if a Canadian tax resident on a TN Visa works a temporary assignment in California and earns $20,000, works in Canada and earns $20,000 and earns $2,000 of income within their RRSP’s, California will require the individual to report $42,000 of global income (assume exchange rate parity). California will calculate the tax on all $42,000 of earnings however; the actual tax will be 20/42 of the tax of $42,000. If California did not require the reporting of the income in the RRSPs, then the tax would be 20/40 of the tax on $40,000. This ratio is also applied to the standard deduction or itemized deductions that the tax payer claims.

US Tax Reporting for Residents:

US tax residents have more complicated filing requirements than nonresidents. It may be good to stop here and clarify what is meant by a US tax resident. A US citizen and a green card holder are automatically US tax residents. For TN Visa holders, the tax residence is determined by a number of factors including the number of days spent in the US and whether the United States-Canadian tax treaty modifies this determination in favor of one nation over the other. Tax treaties trump domestic law so while the Canadian TN Visa holder may live in the US for an entire year and satisfy the 183 days substantial presence test, if the tax treaty determines that the individual is a Canadian resident, then the treaty prevails. Determination of residence can fill an entire article, but this information is sufficient for our purposes. One important thing to keep in mind is that immigration status does not correlate with tax residency status.

If a US tax resident holds Canadian RRSPs, there are potentially three forms that are required to be filed:

1. 8891 – required of all RRSP/RRIF holders

Regardless of the value of the account, all earnings in RRSPs and RRIFs must be reported to the IRS on the annual tax return. This form also requires the reporting of the year in value as well as any distributions are taken from the account. Additionally, Form 8891 is where a holder of an RRSP can make an election to defer all tax on earnings until the day that the taxpayer receives distributions. This is an irrevocable election but it provides RRSPs the same tax treatment of an US IRA or similar deferred plan. As mentioned earlier, some states still tax earnings within the RRSPs so these elections have no force the state level. Form 8891 is filed with the annual US tax return.

2. TDF/FBAR – required for accounts greater than $10,000 in aggregate

While form 8891 is required of all RRSP and RRIF holders, an FBAR (Foreign Bank Account Report) is required for anyone holding more than $10,000 in foreign accounts on an aggregate basis. The value of each individual account does not determine the filing requirement. If the individual has more than $10,000 spread through different accounts (hence the term “aggregate”), a FBAR is required. Additionally, the $10,000 is not based on the year end amounts. It is based on the maximum value of accounts during the course of the calendar year. This form is not sent to the IRS – it is sent to the U.S. Treasury office in Detroit and is due on June 1 of every year.

3. 8938 – required for larger accounts

Form 8938, Statement of Foreign financial Assets, is the newest reporting requirement. The threshold for filing form 8938 depends upon the filing status of the individual, the value of their accounts at year, maximum value during the year and whether the taxpayer is living permanently in a foreign country. Individuals can hold other foreign assets besides RRSPs and trigger this requirement. For those who have already filed an 8891 to report their RRSPs and meet the threshold for filing form 8938, the form is still required, however, the taxpayers simply references the filing of form 8891.

Sound like a lot? The IRS has become very aggressive in pursuing US tax residents who hold funds in other countries. Since a US tax resident is taxable on worldwide earnings regardless of source, locating these funds is imperative to effective tax collection.

In the next article, we will explore the issue of tax residence in how the United States – Canadian tax treaty coordinates with domestic law.

Cross Border Taxes: Your Next Steps

Do you have questions about your RRSP’s? Find What You need to do to about your RRSPs.

Contact one of our trusted Cross Border Tax Professionals. It’s free to ask your questions.

Click here for a list of US Canada Tax Accountants


Eric Nghiem

Tax Specialist – U.S., Canada,

More about US Tax Forms