Canadian citizen moving to US - RRSP/RRIF withdrawals

[iristopher]

Our situation:
- Family of Canadian citizens moving to the US in July 2016 on L1 visa.
- Will be non-resident for the tax purposes and will start making US salary as soon as we move.
- I'll continue to have income in Canada for 2017 and 2018 (stock options), my wife will have very small interest income in 2017 only.
- Have some money in my RRSP and spousal RRSP (SRRSP)

We are considering taking out the money from these RRSP & SRRSP accounts to take advantage of low flat tax rate. I understand that IRA will tax for any capital gains, but we can minimize that by selling & re-buying everything that has made money in those accounts just before we move. Here is what I’m thinking, please let me know if it makes sense.

- In July 2016, we move to the US and become non-resident to Canada immediately. Then we convert both RRSP and SRRSP to RRIF and schedule periodic withdrawals so that total 2016 withdrawal amount = 10% of the account total at the beginning of 2016. Tax on all withdrawals = 15%.
- In Jan 2017, we change withdrawal schedule on both accounts so that total 2017 withdrawal amount = 10% of the account total as of Jan 1, 2017. Tax on all withdrawals = 15%.
- In 2018, we repeat the same. However, we may be able to withdraw from my SRRSP at a tax rate lower than 15% if we elected to pay Canadian tax instead of flat 15% withholding rate.
- In 2019, we repeat the same. However, we may be able to withdraw from my RRSP at a tax rate lower than 15% if we elected to pay Canadian tax instead of flat 15% withholding rate.

Does this make sense? Do you see any problem with the strategy or have anything else to recommend to minimize the income tax on these withdrawals?

I have some related questions:
- In 2016 when we become non-residents for the first time, what would be the maximum amount we can withdraw from RRIF at 15% tax rate? Is it 10% of the total value as of Jan 1, 2016 or the date we become non-residents?
- Can we convert RRSP and SRRSP to RRIF before we become non-residents or can we do it after in order to take advantage of the 15% flat tax rate?
- In order to qualify for 15% flat tax for RRIF withdrawals, do I need to have automated withdrawals set up with FI holding my RRIF accounts? Can I manually withdraw the exact amount once a year so that I don't need to update my withdrawal schedule every year?
- If we apply and get the green card, have some money in 401k/IRA Roth in the US, and move back to Canada, do I need to file income tax in the US every year even if I don't make any money over there?


Thanks!

[nelsona]

The periodic portion will not start until 2017. So, any withdrawal from the RRIFs you create in 2016 would be taxed at 25%.

Wait until 2017 to make your 10% withdrawals.

Since you are working in US, it is unlikely that you will ever get better than 15%, since section 217 (which what we are discussing here) doesn't work for those with anymore than minimal foreign income. It will work for your spouse however on the spousal that is converted to RRIF.

[iristopher]

Thanks nelsona for the quick reply.

It would be greatly appreciated if you could answer my other questions below:
- Can we convert RRSP and SRRSP to RRIF before we become non-residents or can we do it after in order to take advantage of the 15% flat tax rate?
- In order to qualify for 15% flat tax for RRIF withdrawals, do I need to have automated withdrawals set up with FI holding my RRIF accounts? Can I manually withdraw the exact amount once a year so that I don't need to update my withdrawal schedule every year?
- If we apply and get the green card, have some money in 401k/IRA Roth in the US, and move back to Canada, do I need to file income tax in the US every year even if I don't make any money over there?

[nelsona]

You can convert the RRSPs to RRIFs any time you want, but you need to be non-resident at the time of withdrawal to get the 15% flat rate instead of having to include it in your Cdn residential income tax return.

The withdrawals do not need to be automatic, they can be in one or more lump sum. You can probably ask the firm to make a one-time schedule 10% withdrawal instead of a hard figure, but it is safer my way in case they make a mistake, which would make the whole withdrawal subject to 25% tax. Personally, I take the minimum required automatically, which establishes what the 10% figure is based on, and then I take a second requested payment of the remainder.

If you get a green card or US citizenship you will ALWAYS have to file a US tax return, even if you make no money in US, until you give up your GC.

[iristopher]

Thank you!

[iristopher]

Hi nelsona,

I have a few more questions re: RRSP->RRIF conversion.

1) My understanding is that I need to pay income tax to IRS for any income generated from my RRSP account when I make withdrawals and the cost amount used for calculating the income is the cost amount of the investments as of the date I become a non-resident. How is the cost amount determined if I transferred stocks and ETF from RRSP to RRIF after I become a non-resident? Is it the same cost amount that would be used if I were to keep the investments in RRSP or does it get reset when I transfer from RRSP to RRIF?

2) If I were to make periodic withdrawals from RRIF (up to 10% of the balance), aside from the 15% withholding + income tax on the gain portion, are there any other tax I should be aware of?

3) When transferring RRSP to RRIF held at the same financial institution, do I need to transfer the entire balance and close RRSP or can I transfer part of my RRSP and keep RRSP open with remaining balance? I don't want to close RRSP account since I will continue to have some Canadian income and will contribute to RRSP to reduce Canadian income tax.

Thanks!

[nelsona]

1. It doesn't change. And, just for information, IRS views transfers between RRSPs and/or RRIFs as a non-event tax-wise, like Canada.

2. What other taxes did you have in mind other than income taxes??

3. Discuss this with your RRSP manager, the ymay not allow new contributions from US residents. Bedides, RRSP contributions made while in US to lower Cdn taxes will not rally help you since the income is taxable in US and the RRSP is not deductible in US.

What income will you have in Canada? Most is flat taxed and not reduceable by RRSP,

[iristopher]

Thanks for a quick response nelsona.

I didn't have any other tax in mind, and I just wanted to confirm if my understanding was 100% accurate before I decide to go with this RRSP->RRIF conversion.

To me, 15% withholding tax in Canada + ordinary income tax on only the gains in the US with the cost amount as of the date I become a non-resident seems like pretty tax efficient way to pull the money out of RRSP. I can also bump up the cost amount by selling and re-buying all investments that are making money just before I move in order to minimize the US income tax on the gains. The only better way I see is to withdraw in the years I have close to zero income, and I don't see that happening any time soon...even when I retire, I'll have CPP & OAS which will push me to ~20% tax bracket for any other income.

I'll continue to have Canadian income from my stock options vesting and I'm aware that this type of income is taxed at the marginal rate (not flat) and can be reduced by contributing to RRSP. Please correct me if I'm wrong.

[nelsona]

As I said, these options will be taxed in both countries, so since RRSP will only increase your taxes in US, there will be little benefit to the RRSP.

Besides, it will be negating your attempts to eliminate having any RRSP/RRIF before returning to Canada, which is the goal of this whole exercise. The endgame of this is collapsing any remaining RRSPs and RRIFs before returning to Canada.

And, it is unlikely that your broker will allow new contributions while you live in US.
Your contribution room growth will still only be a percentage of your option income, unless you have contribution room, in which case you should think rather of using it NOW, when you are still living in Canada, not afterwards.

Since stock options are considered wages (which would be the only portion taxable in Canada, keep in mind that if you earn less than $10K in Cdn wages (in your case, options), these are tax-free in Canada. and unless you are getting in the $40K+ range of options, your tax rate won't be that high. and If you are getting $40K+ in options, you shouldn't be asking questions on a forum instead of using a cross-border specialist.

I think once you leave Canada, you will mopre clearly see that RRSPs are not all that great.

[nelsona]

btw, in looking over this thread I just wanted to make one clarification on 217.
If your spouse is not working, it does not matter what the withholding rate on the spousal RRSP/RRIF is, since it will be overridden by 217 refund.
So it is not necessary to convert the spousal to get a 'better" final taxrate if one can avail themselves of 217.

And just FYI, while Cdn residents would have any spousal RRSP withdrawals taxed (attributed) in the hands of the contributing spouse (before the mandatory waiting period), this does not apply to non-residents. The spouse can take funds without waiting, taxed solely in their hands,

[nelsona]

and don't forget you get to use the Cdn tax that you pay on the RRSP/RRIF against the IRS tax that arises from the RRSP/RRIF, so the US tax can be quite small.

[iristopher]

Wouldn't we still benefit from SRSP->RRIF conversion since we will get 15% tax withheld for RRIF withdrawal (up to 10% of RRIF balance) as opposed to 25% tax withheld for RRSP withdrawal? We will also get all of that back in 217 refund if 10% withdrawal < basic personal amount AND my wife does have any other income that year.

Also, I thought non-residents filing Canadian tax return for their Canadian source income do not get the basic personal amount. My understanding was that even if my Canadian income from the options was $10k, I would still be taxed at 20.05% in ON. Please correct me if I'm wrong.

[nelsona]

217 always presumes person making little or no income outside of the pension income, as I said, so, OBVIOUSLY if this doesn't apply to your spouse, 217 won't work and converting to RRIF will be the better option. I'm giving you (and the 100's who read these posts) OPTIONS. I'm not YOUR advisor.

If the income is tax-free by treaty, then it will not be taxed in Ontario either.

And non-residents do not get personal amount unless they meet the criteria of 90% world income, which is the basis for 217 in the first part.

I think I will end this now.