Non resident contributing to RRSP

sitonatree · Post by **sitonatree** » Sat Jun 14, 2014 12:50 am

I still have unused contribution room to RRSP prior to moving to US. Can I still contribute to RRSP when my income from Canada is just bank interest income??

Thanks in advance.

nelsona · Post by **nelsona** » Sat Jun 14, 2014 9:31 am

you can, if your broker allows it (most don't), but unless you have Cdn taxable income, why bother? You are making an undeductable contribution at that point.

It might makes sense in year of departure (didn't you already ask this?) to reduce tax in Canada, but not other wise. save it for when you ever return.

sitonatree · Post by **sitonatree** » Sat Jun 14, 2014 10:40 am

Thanks Nelsona. No, I havent asked this question before:)

I deducted all the contribution I had at the year of departure. I know if I make extra contribution it will be non deductable, but I have no use of this money and don't plan to use it till retirement. So at least I can get the interest tax sheltered.

My RRSP is just a high interest savings account. So I guess it's allowed?

exPenn · Post by **exPenn** » Sat Jun 14, 2014 12:59 pm

Yes any interest you earn will be tax sheltered within your RRSP, but remember that all the money in your RRSP (including contributions) will be taxed when you withdraw it. Without any offsetting deduction on your Canadian taxes, you are, in essence, taking money that you have already paid tax on, and turning it back into taxable money, so eventually you will be paying tax on this money twice.

sitonatree · Post by **sitonatree** » Sat Jun 14, 2014 2:01 pm

Hi exPenn, I believe if I have never deducted this contribution before, when I take it out at retirement, only the interest generated from this particular contribution is taxable (as long as I fill out RRSP form correctly to track the contribution and deduction), not the principal contribution, since the contribution has already been taxed and never deducted on any tax return. Am I misunderstanding it?

exPenn · Post by **exPenn** » Sat Jun 14, 2014 7:04 pm

That is true for your US taxes. But, if you move back to Canada when retired, all of your RRSP withdrawals would be taxed at the same rate as all other income, regardless of whether your had any Canadian tax deduction when it was contributed. The same thing holds true for Canadians who find themselves in a higher Tax Bracket in retirement than when employed. They pay more tax on withdrawal than they saved when contributing.
If you stay in the US upon retierment, Canada will withhold 25% of all withdrawals from your RRSP (both contributions and interest), but you can claim it as a foreign tax credit on your US taxes.
P.S. I'm no expert. This is just what I have learned from this forum.

nelsona · Post by **nelsona** » Sun Jun 15, 2014 7:45 am

While it may be true that the non-deducted contribtions might be withdrawn later (there is probably a time limit on this), you are still going to pay a high rate of tax on the interest it does generate.

Surely, now that you are living in US, you can find a more useful investment vehicle for your "extra" cash that will benefit you more than a highly taxed low interest bank account (when did 2-3% start to be considered high interest?).

There are tax-free investments that you can contribute to like your home.

Most people in your position are wanting to REDUCE their RRSP before going back to Canada, not contributing to it.

Again, your broker/bank will have rules on whether they accept your contribution. Most will not.

exPenn · Post by **exPenn** » Sun Jun 15, 2014 7:55 am

FYI: If you make a contribution to your RRSP and don't claim a deduction for it on your Canadian taxes, you can apply to CRA (there are some restrictions) to have that contribution refunded to you, but only in the tax year you made the contribution, or the following year.

nelsona · Post by **nelsona** » Sun Jun 15, 2014 8:10 am

exPenn, that is for a refund of unused contribtions. It is possible, when one withdraws from their RRSP, to reduce the taxable portion by the amount that was "unused" ie contributed in any pervious year but never deducted.

There is even a form: T746.

The process you mention is more for those who have excess contributions, rather than unused. although one can use that process for unused as well.

sitonatree · Post by **sitonatree** » Sun Jun 15, 2014 11:49 am

Thank you Nelsona and exPenn. I'm glad I asked this question before doing anything.

I read form T746 and T4040. The unused contribution can only be refunded the year it was contributed, or the following year, or you withdraw it in the year a notice of assessment or notice of reassessment for the year you contributed it, or in the following year.

So if I contribute now and retire in Canada without ever deducting it before withdrawing it, this unused contribution would be taxed twice,

I guess the above rule is only for Canadian tax resident. If you happen to have unused contribution as a non resident, whenever you withdraw it there will be 25% withholding tax. The unused contribution will still be taxed twice (when the contribution was made because it never has been deducted, and when its withdrawn even if the withholding tax can be used as credit for US tax return).

nelsona · Post by **nelsona** » Sun Jun 15, 2014 4:45 pm

No, your unused contribution would not be taxed when taken out. That is the whole point of T746.

But, regardless, it is not wise to contribute when not owing Cdb tax

nelsona · Post by **nelsona** » Sun Jun 15, 2014 4:46 pm

When I say it would not be taxed, I mean tax would be withheld, but refunded by CRA at year end.

sitonatree · Post by **sitonatree** » Sun Jun 15, 2014 8:05 pm

Hi Nelsona, when you say "tax would be withheld but refunded by CRA at year end", you mean if I withdraw the unused contribution as a Canadian tax resident, right?

Could you let me know where on T746 it shows I will not be taxed (or tax withheld but refunded to me at year end)? I read T4040 "unused contribution" section. The unused contribution can be "refunded" by taxpayer including the amount in income and deducting it also on the return. Therefore the withdrawing unused contribution will not be taxed. But the unused contribution has to be withdraw the year it was made, the following year, or in the year a notice of assessment or notice of reassessment for the year you contributed it, or in the following year.

Did I miss anything on T746?

nelsona · Post by **nelsona** » Mon Jun 16, 2014 10:19 am

Reread the sction on unused contributions, it describes TWO methods of handling.

One is the return of the money, with no tax withheld, which was described by exPenn.
The other is with T746, which asks CRA to reduce the taxable portion of an RRSP withdrawal, after the fact. The non-taxed portion would be reported as a deduction on line 232, as indicated on the form. So you take out 10K, 1K of which was considered unsued. You report the 10K as income, and the 1K as a deduction on line 232.

Now, this would most easily be done by a Cdn resident, but I'm quite sure that one could apply, using NR7-R for a return of some of the money withheld using T746.

But, why are we discussing this. DON'T BOTHER MAKING A NON-RESIDENT CONTRIBUTION THAT YOU CANNOT IMMEDIATELY USE ON A CDN TAX RETURN.