RRSP withdrawal, sell and purchase step-up necessity

[Anna2024]

Hello,

While figuring out my possible tax obligations towards the US in connection with RRSP withdrawals, I found a rule full of sense:

"For U.S. tax purposes, RRSP withdrawals are taxable only to the extent that income (and not contributed principal) was withdrawn from the plan [...] Further, income earned within the plan while not a U.S. resident or citizen will also not be taxable for U.S. purposes."

And also the other rule which seems more unclear:

The necessity to "sell and purchase" stock held within RRSP for a possible step-up before US residency.

I explain: according to the first rule, a step-up is natural, you don't owe any taxes to the US on the income earned while you have no connection to the US. The second rule tells you that you have to "sell and purchase" to be be able to avoid paying taxes on the income earned from the beginning of your contribution while being a Canadian resident and before your US residency.

Are we talking about different types of RRSP?

And a more specific question: All the withdrawals happened before entering the US but after looking at all the filing possibilities, one may prefer to submit a full-year regular return. I presume that even if the withdrawals happened before the US entry, I still have to declare the income earned in RRSP from the beginning of the year since my filing choice is a full-year declaration. Am I wrong on this point?

And finally and this is confusing, while trying to find information on possible step-up options in RRSP on this forum, I came across these terms - Book value versus Market value and I'm absolutely not sure why these terms were used in the context. Was an initially contributed amount referred to as a Book value? And thus, this initial amount was necessary for calculation in the absence of any step-up within RRSP, to be taxed on the income earned from the beginning of your contribution to the RRSP to the withdrawal, no matter when your residency starts.

A "Sell and purchase" requirement is a real sell and purchase and is not some kind of deemed disposition, isn't it?

I hope I don't mix several different concepts in one and If someone is able to clarify all this, it would be really helpful,

[nelsona]

"Income earned". RRSP internal income is only earned when (a) interest and dividends are deposited into tha account. and (b) when sales of capital assets trigger a capital gain in the account.

So, why it is advisable to sell "winners" before moving (or before your become taxable in US), is that unrealized gains would be eventually taxable in US when you with draw funds as a US taxpayer,

You do realize that you do not pay US taxes on internal RRSP income on a year-by-year basis? Only at withdrawal time do you pay some US tax on your withdrawal.

So, anyone with an RRSP becoming a US taxpayer needs to determine the BOOK value of the account on their first US tax day.

Ex: A stock bought in RRSP at $1000, valued at $2000 when you move has a BOOK value of $1000. If it was sold and rebought jsut before moving, it would have a BOOK value of $2000, making $2000 of your c=account non-taxable in US in future, as opposed to $1000.

Since RRSPs are not subject to CRA deemed disposition rules, there is no automatic resetting of BOOK value to current FMV when you move.

[nelsona]

And before you do more research on this... All you need to do is calculate the BOOK value of your entire RRSP an the day you became a US tax resident (which, if filing full year, is Jan 1, or some other date if you fill dual status). All future taxation in US will be based on that number, which you determine once. You do not have to calculate gains and losses for each asset individually.

In my opinion, even though you may have to report some RRSP income if you choose full year 1040, since the Cdn tax on that income would far outstrip any US tax, and you would get the benefit of full year 1040.

Top anyone following this thread a piece of advice: do not withdraw your RRSP before leaving Canada, since after departure the Cdn tax rate is 25% (no more, no less). Doing so before departure subject one to including it in income and paying the marginal rate, BOTH Fed and provincial, which is almost surely going to be more than 25%.

[Anna2024]

Thank you Nelson for the reply.

A mechanical question: I have two values in my RRSP - Book Value and Market value for the beginning of 2023. Do I have to do any further calculations to determine the originally contributed amount or the Book value for 2023 is the Book value I must use?

I don't have any financial or investment knowledge and I don't know if the type of RRSP is relevant in this situation but we speak about RRSP where from every pay the employer co-finances/buys and deposits shares of the company.

[nelsona]

Only Book value counts.

[Anna2024]

Thank you very much,

I presume the RRSP management company has done all the calculations for me if they put these two values - BV an FMV - on their slip and I don't have to return to day one and to check the value of the first half share dropped in this account.

I must say I don't find the rule of the Book Value reasonable. Why would the treaty country want to profit of the growth of your money during the years and in some cases, many years, when you don't have any connection to the country? The Fair Market Value of RRSP is clear for every year and doesn't need any special deemed disposition to crystalize it. Anyway, Canadian taxes will wash out all possible US profit in many cases.

And what about a regular RRSP which gives you 0.8% of growth every year? Do you still have to go back to your first deposit and to take it as a Book value or you can just take the Value as shown on your slip for the beginning of the year? I don't mind to take either number as we talk about minimum amounts but I just want to avoid mistakes and penalties for these mistakes which seem more considerable than potential "profit".

Thank you,

[nelsona]

The reason that US doesn't have the notion of "pre-arrival" gains etc is that deaprture and arrival are not US tax concepts, since US citizens are taxed wherever that live. Canada has departure/arrival dispositions.

In any event, the tax you owe in canada will far outstrip your US tax (remember, your withdrawals are 100% taxed in Canada)