Collapsing RRSP

Oliver · Post by **Oliver** » Sun Nov 23, 2008 4:28 pm

Been contemplating collapsing RRSP for a number of years. Thinking of acting now while the value is low (close to book value in 2000 when moved to US) thus minimizing US tax impact. Any pitfalls I'm missing?

nelsona · Post by **nelsona** » Mon Nov 24, 2008 8:17 am

Your US tax is not usually the overriding issue, the Cdn tax is.

So, in that sense, since busting your RRSP now will lower Cdn tax, and this may be the time.

This will make all futue gains taxable as cap gains yearly in US rather than RRSP-taxable income later in both countries. In my opinion, cap gains tax is better.

If you are sure your income is not going down in the next 5 years (ie. retiring, quitting job for a while) then seems like a good idea.

I trust all your Rev Procs and 8891s have been in order?

Oliver · Post by **Oliver** » Mon Nov 24, 2008 11:54 am

Yes - 8891s are in good order.

We are not looking at retiring for 20 years and have a high marginal tax rate in the US.

We also have a LIRA but need to unlock it before collapsing. How long does that process typically take?

nelsona · Post by **nelsona** » Mon Nov 24, 2008 1:37 pm

Not sure how long. Ontario registered LIRAs still can't be broken, but others should not be a problem.

Oliver · Post by **Oliver** » Tue Mar 03, 2009 2:48 pm

Still haven't moved on this yet - with the market still going down. There's one aspect that I wanted to check. My wife (the Canadian) moved to the US in 2000 (on a TN1). We then both became permanent residents and then US citizens. I am assuming that collapsing my wife's RRSP would only trigger US tax on the gain from the book value in 2000 (which could be zero) despite now being citizens. Correct?

nelsona · Post by **nelsona** » Tue Mar 03, 2009 4:57 pm

The citizenship is no issue. The book value determination is made at the time when one fiorst becomes taxable in US (ie. Jan 01 of the year one first filed a 1040).

Oliver · Post by **Oliver** » Fri Mar 06, 2009 11:58 am

Pulled the trigger on the RRSP - just waiting for the funds to transfer.

Thinking ahead to my US tax return for 2009, in order to determine the taxable portion, I will need to convert the CAD book value in 2000 to USD (say using the interbank rate on the day in question). For the proceeds, I think that I should use the actual USD proceeds based on the actual exchange rate that I get (funds will be converted in Canada) grossed-up to account for the 25% Canadian withholding. Thus any difference between the current interbank rate and the actual rate that I get will be handled like a trading loss (which it effectively is). Do you think that this logic is defensible?

I think that the US taxable portion will be zero with the current market being so low but the USD was stronger against the loonie in 2000 compared to today so there might be a small currency gain.

nelsona · Post by **nelsona** » Fri Mar 06, 2009 12:17 pm

It won't be a trading loss. Technically it will be an annuity loss.

Getting back to your book value. Your book value is established when you bought the items you held when you bacame taxable (your cost basis). So, an item bought in 1998 held in 2002 when you moved, has a book value established in 1998, which would require 1998 eveluation in USD. Get my drift? Book value is not the market value when you moved. It is the cost basis on that date, which may or may not have been established years before.

But, generally, once you establish what the book value for each item in your RRSP (and then the overall book value). You will report the gross amount of the collapse (the value TODAY) on 1040 line 16a and that minus the 2000 book value on line 16b. I'm not sure you can enter a negative value there. I would not do as you propose, to wait until your exchange the money. The proceeds became income today. You will file one last 8891 for this RRSP.

The 25% tax (valued today) becomes your foreign tax deduction next year.

The loss if any also goes on your sched A, but I'm not sure where. I'll have an answer before April 2010, though.

Oliver · Post by **Oliver** » Fri Mar 06, 2009 9:25 pm

I do have the book value in CAD as of 2000 (not the market value) but I do not have enough history to map out the composition of the book value by year (1991- 2000). The loonie was at its lowest over that period in 2000 so at least using the 2000 exchange rate is conservative (although I may be leaving some tax loss on the table).

The proceeds will be converted to USD as soon as the funds are cashed out so ther isn't really a timing issue.

I hadn't thought about the foreign tax deduction. Is that available under AMT?

nelsona · Post by **nelsona** » Sat Mar 07, 2009 7:54 am

So, in 2000, you still had intstruments that you bought in 1991?!

I guess that is why all are advised to switch there RRSP just before entering US.

Your foreign tax deduction will not help AMT

Oliver · Post by **Oliver** » Sat Mar 07, 2009 10:00 am

Well I don't know for sure but that was the peroid over which the RRSP was built up. Remember that this is my wife's account (and we weren't married until late in 2000).

Damn the AMT!

nelsona · Post by **nelsona** » Sat Mar 07, 2009 10:53 am

If you can't claim it as a deduction, I would report it as a foreign tax on 1116 (even though it will be for no foreign incoem, and thereby have it available for carryforwrd, You can then use it if you ever get a Cdn contractor job (which would be tax exempt in Canada) and use the RRSP tax against your US liability.