US resident with a Canadian RRSP
Moderator: Mark T Serbinski CA CPA
US resident with a Canadian RRSP
Hi - I'm new to this group. I am a Canadian. I married a US citizen and became a non-resident of Canada over 20 years ago, as of December, 1987. I have been living in the US since that time and I have a permanent US alien resident card. I kept an RRSP in Canada that was set up in 1974 when I worked for the Canadian Red Cross in Vancouver. This RRSP has been accumulating interest all this time, and now that I am 56 I am eligible to draw from this account. I have been quoted several different tax rates for withdrawing this money, from 20% to 30%. I was recently told that any amount over $20,000 would be taxed at a 30% rate. However, I have also been told that 25% is the correct rate. What is the true tax rate is for a non-resident living in the US to withdraw funds from a Canadian RSP? I have not reported this RSP on any tax return because I thought that I was only required to report if I was drawing funds from it. Is the first $20,000 taxed at 20% and the remaining withdrawal taxed at a higher 30% rate? Since the tax is taken out at the time of withdrawal, what tax returns (US or CAN?) will I be required to file? Thanks for any input.
For a simple RRSP withdrawl by a non-resident, the NR withholding tax is a flat 25%. Regardless of the amount.
The confusion probably came from the fact that, in canada, there is a sliding scale of withhoding rates based on the ammount of the withdrawl. This does not apply to non-residents.
I should point out that if you switch this account to a RRIF, and take no more than twice the required withdrawls every year, the NR tax will drop to 15% on that amount, 25% on the excess. So it may be worth your while to RRIF the account and take it out over several years, like a pension.
You will not have to file a Cdn tax return, the NR tax is your fianl obligation. If this income is your only souce of income, ytou may be able to file an elective 217 return, to reduce the amount of tax. I describe this elsewhere, and the CRA has info on this. If you currently work, you are likely unabel to reduce the tax. particularly if you chose the RRIF option of 15%.
When you say that now you can take it out, was it restricted somehow by Red Cross? You said you set it up, thus I would think that it was not a Locked-in account, and you could have taken it anytime. the taxation of the RRSP withdrawal does not change either in US or canada based on your age.
What will be more difficult to determine is how much of your RRSP is taxable in US. This will depend on how good your record keeping has been over the years. Do you know your RRSP value in 1987, in 2002, etc. basically, the taxable portion of your RRSP in US is the growth since you arrived. In other words, a significant portion of your RRSP may be non-taxable in US, based on its value when you came down here.
BEFORE you take any withdrawal, you need to address the 20 year oversight you have been making on your US returns. You have been required, since 1989 to report the existence of the RRSP to the IRS, and either pay yearly tax on the income, or elect to defer the tax until you withdraw.
I would advise you correct this oversight before you need to report any income. You do this by submitting Form 8891 for the past 6 years (2003-08) electing 2003 as the first year you defer taxation.
Failure to do this puts you in position to be penalized for failure to report past income, as well as fined for failure to report the existence of the RRSP.
You are not alone in this, so nothing to get overly excited about, but you need to get your RRSP filing up-to-date.
The confusion probably came from the fact that, in canada, there is a sliding scale of withhoding rates based on the ammount of the withdrawl. This does not apply to non-residents.
I should point out that if you switch this account to a RRIF, and take no more than twice the required withdrawls every year, the NR tax will drop to 15% on that amount, 25% on the excess. So it may be worth your while to RRIF the account and take it out over several years, like a pension.
You will not have to file a Cdn tax return, the NR tax is your fianl obligation. If this income is your only souce of income, ytou may be able to file an elective 217 return, to reduce the amount of tax. I describe this elsewhere, and the CRA has info on this. If you currently work, you are likely unabel to reduce the tax. particularly if you chose the RRIF option of 15%.
When you say that now you can take it out, was it restricted somehow by Red Cross? You said you set it up, thus I would think that it was not a Locked-in account, and you could have taken it anytime. the taxation of the RRSP withdrawal does not change either in US or canada based on your age.
What will be more difficult to determine is how much of your RRSP is taxable in US. This will depend on how good your record keeping has been over the years. Do you know your RRSP value in 1987, in 2002, etc. basically, the taxable portion of your RRSP in US is the growth since you arrived. In other words, a significant portion of your RRSP may be non-taxable in US, based on its value when you came down here.
BEFORE you take any withdrawal, you need to address the 20 year oversight you have been making on your US returns. You have been required, since 1989 to report the existence of the RRSP to the IRS, and either pay yearly tax on the income, or elect to defer the tax until you withdraw.
I would advise you correct this oversight before you need to report any income. You do this by submitting Form 8891 for the past 6 years (2003-08) electing 2003 as the first year you defer taxation.
Failure to do this puts you in position to be penalized for failure to report past income, as well as fined for failure to report the existence of the RRSP.
You are not alone in this, so nothing to get overly excited about, but you need to get your RRSP filing up-to-date.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
If you update your RRSP reporting requirements on your own, before IRS finds out about the RRSP, I have never heard of a case where the IRS imposes penalties, interst and fines.
I have heard of cases where one cashes in his RRSP without having made these reportings and then gets a surprise letter from IRS assessing back taxes and fines.
I have heard of cases where one cashes in his RRSP without having made these reportings and then gets a surprise letter from IRS assessing back taxes and fines.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Thank you for the info. The Red Cross set up the RRSP through TD Canada Trust in the 70's and it was a locked-in account until I reached the age of 55. My contact with TD Canada Trust is the one who is telling me that any amount over $20,000 will be taxed at a 30% rate AND I will need to complete a Canadian tax return when I start drawing from the RRSP. Your reply mentioned that I have been required here in the US to report the RRSP existence since 1989. Is that when a law was passed that this was required? Should I get our current tax preparer to include this Form 8891 for 2008 and ask him to correct the previous years back to 2003? You are talking about the US tax return right? Not a Canadian tax return. I guess you can tell that I have been totally in the dark on this....I knew the RRSP was there accumulating interest, but since I did not contribute to it and could not withdraw from it until the age of 55, I didn't think of it as income and neglected to do anything about it taxwise until now. One more question...after paying the Canadian taxes on the withdrawal, are you saying that I will be required to pay taxes on it here in the States as well? I'm just wondering how much will be left after all the taxes, penalties, etc., etc.!!
Your TD canada person is incorrect, for the reason I outlined above. is it possible they do noy know that you live in US? Generally, US residents must deal with the brokerage arm of TD (TD waterhouse), so I'm thinking they may not have you down as a US tax resident.
Since you want to make the election as far back as possible, you should be amending starting with 2003, adding the 8891 for this account. Then file 2008 return. If you have your statements for your RRSP for the last 6 years it will take 20 minutes to make the filing.
Yes, you will pay tax in US on this income (why would you not?). And in your state as well. Just like if you had pension income from canada or US. you will get credit for some of the taxes you paid in canada. But you will want to reduce the Cdn tax as much as possible (I mentionned RRIF, and also 217 election if you are not working right now or making little income in US).
Did you ever tell your current preparer that you had an RRSP. If you did and he did nothing about it, I would be finding anothr preparer.
Since you want to make the election as far back as possible, you should be amending starting with 2003, adding the 8891 for this account. Then file 2008 return. If you have your statements for your RRSP for the last 6 years it will take 20 minutes to make the filing.
Yes, you will pay tax in US on this income (why would you not?). And in your state as well. Just like if you had pension income from canada or US. you will get credit for some of the taxes you paid in canada. But you will want to reduce the Cdn tax as much as possible (I mentionned RRIF, and also 217 election if you are not working right now or making little income in US).
Did you ever tell your current preparer that you had an RRSP. If you did and he did nothing about it, I would be finding anothr preparer.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
No, it's totally my fault. I have not mentioned the RRSP to my current or previous tax preparers. The TD Canada person knows I am a US resident because she asked me for proof of my US residency and nonresidency status with Canada when I started enquiring about withdrawing the funds. Maybe I should direct her to this forum.
Just wanted to share this link with you.
http://www.morningstar.ca/globalhome/in ... 4200315311
In the article, there is mention of the withholding amounts for RRSP withdrawals by a nonresident. There is a scale from 10% to 30% depending on how much is withdrawn.
http://www.morningstar.ca/globalhome/in ... 4200315311
In the article, there is mention of the withholding amounts for RRSP withdrawals by a nonresident. There is a scale from 10% to 30% depending on how much is withdrawn.
[quote="harley"]Just wanted to share this link with you.
http://www.morningstar.ca/globalhome/in ... 4200315311
In the article, there is mention of the withholding amounts for RRSP withdrawals by a nonresident. There is a scale from 10% to 30% depending on how much is withdrawn.[/quote]
As Nelson has correctly pointed out, the rates of withholding you quote are ***wrong***. Those rates are for a resident of Canada. The article is a rare case of a published article that was not properly vetted.
Here is a link to CRA's page for non-residents. Take a look at the Part XIII withholding rate on RRSP/RRIF's. It is 25%.
http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... s-eng.html
http://www.morningstar.ca/globalhome/in ... 4200315311
In the article, there is mention of the withholding amounts for RRSP withdrawals by a nonresident. There is a scale from 10% to 30% depending on how much is withdrawn.[/quote]
As Nelson has correctly pointed out, the rates of withholding you quote are ***wrong***. Those rates are for a resident of Canada. The article is a rare case of a published article that was not properly vetted.
Here is a link to CRA's page for non-residents. Take a look at the Part XIII withholding rate on RRSP/RRIF's. It is 25%.
http://www.cra-arc.gc.ca/tx/nnrsdnts/nd ... s-eng.html
Thanks for all your help. I have one more question ... I am considered a deemed non-resident of Canada as of 1987. I have not filed a Canadian tax return since I left Canada to live in the US 20 years ago. I thought that since I had nothing in Canada except my RRSP, which I was not contributing to or drawing from all these years, I did not have to file a return. But As a deemed non-resident, I should have been filing a tax return each year, so I have been advised to file a Canadian tax return for the last 6 years (2003-2008) and all future years. I am receiving no Canadian income and have not received any Canadian income over the past 20 years. Just want to make sure that I file the right form. From my research on the CRA site, taxwise I file as a non-resident. So I think it's Form T1 General - Income Tax and Benefit Return for Non-residents and deemed residents of Canada. Is that right?
Let's use the correct term here: You are a non-resident of canada. Period. A deemed non-resident is something slightly different, and doesn't apply to you at all.
You have not had to file in canada at all during this period.
Even if you were deemed non-resident, they do NOT file in Canada after they get DNR status. It is treated exactly like a non-resident.
A DNR is someone who resides in 2 tax treaty countries simultaneously and which Canada, for tax purposes, 'pushes' out of the country. This is not your case. You have insufficient Cdn ties to be considered any kind of resident.
Now as a NON-resident you only file a non-resident return when you have Cdn-source income which is not subject to falt NR tax. Basically that would be Cdn wages and income from Cdn real estate and privately-held companies.
Nothing in your posts indicate this to be the case.
Cdn Pension income is not reportable on a non-resident tax return, since it is flat-taxed. Only if one makes a 217 election to reduce that tax would one file.
Don't be distracted by the current other thread that talks about DNR. That silliness doe not apply to you. I fear that pointless discussion has been a deteriment to you.
You have not had to file in canada at all during this period.
Even if you were deemed non-resident, they do NOT file in Canada after they get DNR status. It is treated exactly like a non-resident.
A DNR is someone who resides in 2 tax treaty countries simultaneously and which Canada, for tax purposes, 'pushes' out of the country. This is not your case. You have insufficient Cdn ties to be considered any kind of resident.
Now as a NON-resident you only file a non-resident return when you have Cdn-source income which is not subject to falt NR tax. Basically that would be Cdn wages and income from Cdn real estate and privately-held companies.
Nothing in your posts indicate this to be the case.
Cdn Pension income is not reportable on a non-resident tax return, since it is flat-taxed. Only if one makes a 217 election to reduce that tax would one file.
Don't be distracted by the current other thread that talks about DNR. That silliness doe not apply to you. I fear that pointless discussion has been a deteriment to you.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
RE:
<i>Just to clarify, by treaty, the rate for US residents of a periodic RRIF withdrawal would only be 15%. The definition of periodic being up to twice the required yearly withdrawal.</i>
I was researching this aspect recently and it appears that the definition of periodic withdrawal for RRIF purposes is the GREATER of
a. Twice the required yearly withdrawal; and
b. 10% of the value of the plan at the beginning of the year.
Here's the source of that interpretation:
Clause 286 of the Income Tax Conventions Interpretation Act
see pg. 73 of the 89 page pdf at
http://www.fin.gc.ca/drleg/97-117e4.pdf
<i>Just to clarify, by treaty, the rate for US residents of a periodic RRIF withdrawal would only be 15%. The definition of periodic being up to twice the required yearly withdrawal.</i>
I was researching this aspect recently and it appears that the definition of periodic withdrawal for RRIF purposes is the GREATER of
a. Twice the required yearly withdrawal; and
b. 10% of the value of the plan at the beginning of the year.
Here's the source of that interpretation:
Clause 286 of the Income Tax Conventions Interpretation Act
see pg. 73 of the 89 page pdf at
http://www.fin.gc.ca/drleg/97-117e4.pdf
that is correct. Up until about 70, the 10% would be the greater, after, twice the minimum would be greater.
Keep in mind though that if your start your RRIF very early, you will reach a point where the withdrawls will be quite small. 10% of the value does not mean you would collapse the RRSP in 10 years.
And keep in mind that the first year of the RRIF, you would not get this rate. You woiuld still get 25% tax.
Keep in mind though that if your start your RRIF very early, you will reach a point where the withdrawls will be quite small. 10% of the value does not mean you would collapse the RRSP in 10 years.
And keep in mind that the first year of the RRIF, you would not get this rate. You woiuld still get 25% tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
<i>And keep in mind that the first year of the RRIF, you would not get this rate. You would still get 25% tax.</i>
Your comment prompted me to re-read Clause 286, referred to earlier, looking for the 25% withholding on the first year of RRIF withdrawal and couldn't find a reference. Is there another section devoted to RRIFs that discusses that first year withdrawal rate is subject to the 25% withholding?
BTW, in trying to figure options for RRSP to RRIF withdrawals over an extended period, the question arises how to manage occasional trades. Are you stuck with the original allocations in the accounts, or do you have to hire a Canadian licensed broker to manage the accounts and trades? I don't think any of the discount brokers allow non-residents to manage their own RRSP/RRIF --trying to explore the options.
Your comment prompted me to re-read Clause 286, referred to earlier, looking for the 25% withholding on the first year of RRIF withdrawal and couldn't find a reference. Is there another section devoted to RRIFs that discusses that first year withdrawal rate is subject to the 25% withholding?
BTW, in trying to figure options for RRSP to RRIF withdrawals over an extended period, the question arises how to manage occasional trades. Are you stuck with the original allocations in the accounts, or do you have to hire a Canadian licensed broker to manage the accounts and trades? I don't think any of the discount brokers allow non-residents to manage their own RRSP/RRIF --trying to explore the options.