Here is the scenario. I (Cdn citizen) moved to US in 1994 and am a green card holder. My basis in RRSP account consisted of C$100,000 original contributions + C$40,000 earnings till 1994, date of move to US. Current value of RRSP a/c is C$300,000. No contributions or withdrawals since 1994 after move to US. Elections or Form 8891 filed each year to defer tax on earnings in US. Total grwoth since move to US = C$160,000.
If I now make a withdrawal of say C$50,000 in 2007, there will be some tax consequences. My questions are as follows:
1. Gross distribution shown on 1040 = C$50,000. The taxable portion will be C$50,000 x C#160,000 (growth since move to US) /C$300,000 (current value) = C$26,667. Is this the correct assumption?
2. There will be a 25% tax withholding in Canada of C$12,500. I can claim only C$12,500 x C#160,000 (growth since move to US) /C$300,000 (current value) = C$6,667. Is this the correct assumption? This really translates to 25% of the taxable portion of the distribution.
3. What about the exchange rates? Do I need to use avaerage yearly rates to come yp with the US $ equivalents of the above amounts or can I use the rates at the time of the distribution?
4. So, if my marginal tax rate is 25% or less, the distribution will not cause any tax burden in US.
5. I want to withdraw the whole amount over the next 3-4 years. Any thoughts on this.
6. Would the above answers change if I were a US citizen. In other words, from US tax point of view, will it matter whether I am a US citizen or not?
Please provide comments if you agree with the above scenario and tax computations.
Thanks.
RRSP Distribution Planning
Moderator: Mark T Serbinski CA CPA
I have addressed this many times, so I won't even begin to discuss how you calculate what you should be reporting as 'taxable'. yours is one accepatble way
The key number to know is you 'investment' which is the book value when you arrived in US, in then-current US dollars. This is not the same as market value, but for example's sake, say it was C$140,000. And Lets say that converted to US $100,000 in 1994 (you can look up the true figures)
Regardless of how you take the money out, US $100,000 and only US $100,000 of it will be 'non-taxable', and the rest will be taxable.
You will find it easier to use US$ for all your calculations, as this is all that IRS cares about. Except for the non-taxable initial amount (which was evaluated in 1994) all other numbers are in current US dollars.
So, in your scenario, you take out C$50K this year. Call it US$45K.
Your RRSP is worth (before withdrawal): US$280,000.
So, your taxable portion, using your method is more like:
1. Gross distribution US$45K.
Non-Taxable amount: 45 * 100/280 = US$16K
taxable amount: US$29K.
This now leaves you with an US$86K non-taxable portion, for future use.
2. Your Cdn tax of US$11K is all eligible for use as foreign tax credit. It is not merely 25% of the taxable portion. The limits on form 1116 will take care of any excess. You'll be surprised to find how little of your Cdn tax actually gets creditted to you. Although the RRSP income will add about $10K in IRS tax You will be writing off the US tax on the US$29K that was taxable, which may be as little as $6-7K. The rest can be carried forward.
3. As i said, withdrawals are in current US dollars, but you initail investment is in the US dollar value at the time it was established.
4. You will see that the foreign tax credit system dose NOT truly give you credit dollar for dollar, since you are adding the RRSP income on TOP of your other income, but you are only getting credit for it at your effective taxrate, which is probably in the 10% range, maybe even less
5. You will face the same situation every year, and you will build up a huge, unusable foreign tax carryforward. Next year, your calculation will be based on having a US$86K 'bank' of non-taxable assets. Eventually, you will withdraw, say US$300K, have paid US$75K to canada, probably another $25K to US, plus $10K to your state. You will have a bank of about$50K in unused Cdn tax.
That is a pretty big taxrate for having left your money in canada all these years.
personally, my criteria for detrrmining whether one should withdraw RRSP is
(a) if you are going to do it, do it right away after leaving canada,
(b) if you are going to wait, then only do it if
(1) you Cdn taxrate is reduced, by 217 method (ie. when you are not working)
(2) if you live in a state that has no incoem tax
(3) your Us taxrate is in the first bracket (ie. you are not working).
6. No. The only difference would have been if you had been a US citizen all along, then NONE of the growth would have been considered tax-free. At least now, since you were not a US taxpayer before coming to US, the growth portion (that you crystallized before coming to US) was addied to your non-taxable portion.
The key number to know is you 'investment' which is the book value when you arrived in US, in then-current US dollars. This is not the same as market value, but for example's sake, say it was C$140,000. And Lets say that converted to US $100,000 in 1994 (you can look up the true figures)
Regardless of how you take the money out, US $100,000 and only US $100,000 of it will be 'non-taxable', and the rest will be taxable.
You will find it easier to use US$ for all your calculations, as this is all that IRS cares about. Except for the non-taxable initial amount (which was evaluated in 1994) all other numbers are in current US dollars.
So, in your scenario, you take out C$50K this year. Call it US$45K.
Your RRSP is worth (before withdrawal): US$280,000.
So, your taxable portion, using your method is more like:
1. Gross distribution US$45K.
Non-Taxable amount: 45 * 100/280 = US$16K
taxable amount: US$29K.
This now leaves you with an US$86K non-taxable portion, for future use.
2. Your Cdn tax of US$11K is all eligible for use as foreign tax credit. It is not merely 25% of the taxable portion. The limits on form 1116 will take care of any excess. You'll be surprised to find how little of your Cdn tax actually gets creditted to you. Although the RRSP income will add about $10K in IRS tax You will be writing off the US tax on the US$29K that was taxable, which may be as little as $6-7K. The rest can be carried forward.
3. As i said, withdrawals are in current US dollars, but you initail investment is in the US dollar value at the time it was established.
4. You will see that the foreign tax credit system dose NOT truly give you credit dollar for dollar, since you are adding the RRSP income on TOP of your other income, but you are only getting credit for it at your effective taxrate, which is probably in the 10% range, maybe even less
5. You will face the same situation every year, and you will build up a huge, unusable foreign tax carryforward. Next year, your calculation will be based on having a US$86K 'bank' of non-taxable assets. Eventually, you will withdraw, say US$300K, have paid US$75K to canada, probably another $25K to US, plus $10K to your state. You will have a bank of about$50K in unused Cdn tax.
That is a pretty big taxrate for having left your money in canada all these years.
personally, my criteria for detrrmining whether one should withdraw RRSP is
(a) if you are going to do it, do it right away after leaving canada,
(b) if you are going to wait, then only do it if
(1) you Cdn taxrate is reduced, by 217 method (ie. when you are not working)
(2) if you live in a state that has no incoem tax
(3) your Us taxrate is in the first bracket (ie. you are not working).
6. No. The only difference would have been if you had been a US citizen all along, then NONE of the growth would have been considered tax-free. At least now, since you were not a US taxpayer before coming to US, the growth portion (that you crystallized before coming to US) was addied to your non-taxable portion.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
1. Yes, and I've outlined them in other posts. But, It doesn't really matter to you, since you want to collapse the RRSP rather quickly, so the sceanrio I outlined in point 5 will be yours. You have US$200K in taxable assets in your RRSP that will become due at some point over the period you withdraw it, as well as ~US$300K that will be taxed at 25% by Canada when you withdraw it. the various methods would only shift how that $100K is plit (more up fromt, less up front, all now, all at the end). because you are wanting to collapse it quickly while you are working, there is no way to minimize the Cdn, nor effectively mesh the extra US tax you will pay.
See: http://forums.serbinski.com/viewtopic.php?t=2278
2. No. This tax-free portion was accrued years ago. It is currently US$100K (or whatever you finally determine your book value at tentry was). The only thing that will change this is (a) making RRSP contributions (which will increase your non-taxable ammount) , or (b)reporting non-taxable amounts on line 16 in years you withdraw (which will reduce your ammount, as I outlined above).
Changing to a US citizen doesn't really affect how you will be taxed while you live in US, or while you have green card. In reality, You have been taxed like a US citizen since 1994 and will continue to be whether or not you get US citizenship, so long as you live in US or keep your Green card.
See: http://forums.serbinski.com/viewtopic.php?t=2278
2. No. This tax-free portion was accrued years ago. It is currently US$100K (or whatever you finally determine your book value at tentry was). The only thing that will change this is (a) making RRSP contributions (which will increase your non-taxable ammount) , or (b)reporting non-taxable amounts on line 16 in years you withdraw (which will reduce your ammount, as I outlined above).
Changing to a US citizen doesn't really affect how you will be taxed while you live in US, or while you have green card. In reality, You have been taxed like a US citizen since 1994 and will continue to be whether or not you get US citizenship, so long as you live in US or keep your Green card.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
No, it would not. What would be different is that your Cdn tax *might* be reduced, as periodic distributions from a RRIF -- under a certain ammount based on your age -- would only be taxed 15% by canada.
but the limit would be rather small, and anything above that would be taxed at 25%. For example, the limit for a 55 yr old would be about 5%, so you would never be able to collapse the entire RRIF at the reduced tax rate, so you would be merely starting your pension early.
This would probably have reducing or eliminating your unused Cdn tax every year on your 1116 calcualtion.
So, you would save 10% Cdn tax on some of the withdrawal. But you will still pay US tax on everything you withdraw except the original $100K you brought down.
but the limit would be rather small, and anything above that would be taxed at 25%. For example, the limit for a 55 yr old would be about 5%, so you would never be able to collapse the entire RRIF at the reduced tax rate, so you would be merely starting your pension early.
This would probably have reducing or eliminating your unused Cdn tax every year on your 1116 calcualtion.
So, you would save 10% Cdn tax on some of the withdrawal. But you will still pay US tax on everything you withdraw except the original $100K you brought down.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best