Serbinski Accounting Firms

Thanks as always. >If there is no tax payable in US, the 25% is lost. Good point. >Besides, if there is taxable income, it is taxed at the US marginal rate and credited at the effective rate, which is much less. True but if, at the time of arrival, the entire value of the RRSP is entirely in cash an...

Hi Nelson,
Sorry if I was not as clear as I was in a bit of rush yesterday evening. I wholeheartedly agree with you – the RRSP should be not be used to simply park cash. I only brought up cash balances earning next to 0% to keep things very simple in order to illustrate what I believe to be a fairly sizable amount of tax savings which compounds over time. I also failed to use the proper tax terminology – credits provide a dollar of dollar reduction in tax owed, while deductions lower taxable income.

If an individual contributes $10K to their RRSP, they are essentially deferring a tax liability of say $3,200 (based on a 32% combined provincial and Federal marginal tax rate for a “high incomeâ€￾ earner). If this same individual decides to withdraw this amount prior to retirement, they would ordinarily pay that marginal rate to the CRA when everything is sorted out at tax time assuming all else is equal (ie. no change in taxable income)

Now compare this to the case when one moves to the US. For the sake of simplicity, let’s assume an individual has kept all contributions in cash and thus preserved the value of all his/her contributions over time. The accumulated cash balance would equal the FMV for IRS tax purposes on the day of arrival. Given that the IRS treats all past contributions as non-taxable capital and only taxes the difference between the cost basis and FMV, I would argue that the US tax rate to do withdraw the money is substantially zero.

This implies that the marginal tax rate to "gain full access" to that cash is essentially zero for the IRS (assume that the interest rate on cash balances is zero so no further interest is ever earned) vs. the 32% tax hit one would take in Canada for pulling out the same amount of money prior to retirement. The magnitude of tax savings will naturally compound itself year after year given multiple contributions -- all made before moving to the US.

Yes, the CRA will withhold their 25%, but the US taxpayer gets this back through Form 1116.

Am I making any sense? Thanks.

Hi Nelson, Thanks as always for your helpful response. Putting aside the mechanics of the tax reporting aside for now (I'll get to this later) and assuming one does not wait until retirement age to begin making withdrawals, it seems extremely advantageous to withdraw your RRSP in the US than in Cana...

Hi Nelson. I really appreciate your help. Sorry to belabor this, but I just wanted to run through the mechanics again to make sure I really understand everything. I used Excel to calculate the numbers so they ended being more precise but I tried to keep everything close to our original numbers. I al...

Nelson, that was quick and extremely helpful. Thank you. How is the cost basis affected in future years given fluctuations in the currency exchange rate? It should change every year right? If the US dollar depreciates, the $13,200 new cost basis in my example might be expressed as $14,000 using the ...

I am looking into the tax treatments of RRSPs for US residents looking to make withdrawals. As I understand it, the cost basis of contributions are tax free in the US (subject to Canadian withholding which can be claimed as a foreign tax credit). Any income earned after becoming a US resident is tax...

Nelsona, Thanks again. I appreciate your help. This is good info. Forgive me for asking, but the option for filing a full year return during the year of departure is indeed mentioned (albeit) buried somewhere in Pub 519 right? If not, where were you able to find out about this? Not challenging the e...

Thanks again. I came across Pub 519 after posting and what I saw seemed to point me in a slightly different direction with respect to filing the 1040 NR. I will give the publication another read through since I seem to have missed the reference that allows me to file a normal 1040.

Thanks so much nelsona.

From Publication 519:

Nonresident at end of year. You must file Form 1040NR or Form 1040NR-EZ if you are a dual-status taxpayer who gives up residence in the United States during the year and who is not a U.S. resident on the last day of the tax year. Write “Dual-Status Returnâ€￾ across the top of the return. Attach a statement to your return to show the income for the part of the year you are a resident. You can use Form 1040 as the statement, but be sure to mark “Dual-Status Statementâ€￾ across the top."

It appears I will need to file a Form 1040 NR. I assume your suggestion to file a Form 1040 for the whole year has to do with the ability to claim certain itemized deductions (yielding low tax) not allowable in the 1040 NR Is it still wise to do so in light of the above info?

Sorry, I forgot to mention I'm not a green card holder so would not be taxed on worldwide income. The 2555 is tailored to US citizens and residents. Needless to say, the US has no claim on my Canadian income I earned upon returning so I see no need to report it on the 1040 NR.

After over four years in the US, I chose to return to Canada in May. I will need to file both US and Canadian taxes for 2010 after having found a new job in this summer. I intend to file Form 1040 for the period from January to May and a NR-1040 covering the remainder of the year (I have rental prop...