RRSP contributions by a U.S. resident - advice please

[cmckellar]

I am a Canadian citizen but went to the States for university. I had RRSP contribution room in Canada based on employment when I was home for the summers during university, but I didn't open an RRSP at the time. I am now a permanent resident of the U.S., but recently opened an RRSP in Canada to fill up the room from those years.

It turns out that the Canadian government has no record that I've ever contributed to an RRSP, I guess because I haven't filed taxes in Canada since finishing university and settling in the U.S. permanently. So to make it into a real RRSP, I guess I'd begin filing taxes in Canada so they'll know about the contributions, plus file all the U.S. forms for holding Canadian retirement accounts.

Question 1) I know U.S. residents are only allowed to hold Canadian RRSPs if the contributions were made while a resident of Canada... what about if the contributions were made when I was no longer a resident, but they were intended to fill up the room that was created by employment several years ago, when I WAS a resident?

Question 2) I might still be able to claim Canadian residency from Canada's point of view. I am still a student (in graduate school) and still maintain a Canadian bank account, and an address at my parents' house. But I have had a U.S. green card for a few years now, so I think that the States would consider me a U.S. resident. In order for the U.S. to recognize my RRSP under the tax convention, is it more important to be considered a resident of Canada by Canada itself, or by the U.S.?

Finally, I could just give up, and move the money to my American accounts. If so:

Question 3) Would the RRSP holder (Royal Bank of Canada - Dominion Securities) charge the 25% penalty for withdrawing the money? From the Canadian government's perspective, they have no record that I ever contributed to an RRSP, so maybe I don't have to pay the penalty?

Any advice you could provide would be appreciated!

[nelsona]

There are several misconceptions in your post:

It turns out that the Canadian government has no record that I've ever contributed to an RRSP

Why would you say this? If you opened an RRSP with a financial institution (which is the only way to do this) then you have an RRSP. Period. The fact that you never claimed the contributions as a deduction on a tax return is immaterial. The trustee has been informing the Govt of its existence every year.

I know U.S. residents are only allowed to hold Canadian RRSPs if the contributions were made while a resident of Canada

This is not true. Contributions can be made at anytime, regardless of residence, and there is no distinction made between such contributions. IRS Rev Proc 2002-23 cleared that up. now, most trustees will not accept money from US persons, but that is a business decision base on security regualtions, not a taxation regulation.

I might still be able to claim Canadian residency from Canada's point of view. I am still a student (in graduate school) and still maintain a Canadian bank account, and an address at my parents' house.

If you were 'just' a student, then, yes you would be a Cdn resident. but your Green card tells me that you realkly are just a US resident ewho goes to school in US. Your Cdn residential ties are not sufficient to make you a Cdn resident, and their really is no advantage to trying to make yourself a Cdn resident in this case.

Would the RRSP holder (Royal Bank of Canada - Dominion Securities) charge the 25% penalty for withdrawing the money?

The 25% TAX is not a 'penalty' it is income tax. Money withdrawn from an RRSP is INCOME whenever it is withdrawn. There is no penaly on withdrawals.

From the Canadian government's perspective, they have no record that I ever contributed to an RRSP, so maybe I don't have to pay the penalty?

Indeed, what you have is "undeducted contributions" to your RRSP. But only such contributions made in the past 2 years would be eligible for tax-free withdrawal (and this would be determined AFTER the 25% tax was withheld, unless you and your trustee got special instructions from CRA). You would first need to establish with the CRA when you made these contributions, and then calculate which portion would be deductible. This would not be done on any specific form because (a) you didn't file in Canada for those years and (b) you are now non-resident.


Could I ask why you decided to make contributions to your RRSP, when you had no Cdn income, and certainly not enough to make your contributions tax deductible? And then to do so when you were a US resident, knowing that such contributions were not tax deductible in US at all?

This was unwise tax/investment planning.



What to do:

You have 2 chioces, based on what your intentions are with regards to living in Canada at some point in the near future.

1. If you plan to go bacK: Leave your RRSP as is. Do not make any more contributions (once you've used your room). When you return to LIVE in canada, start claiming the contributions you made as deductions on your return. I would send a note now to the Govt, outlining that you made xx contibutions in varios years, attaching the receipts. This will get your contributions on record for the years you made them. For IRS, begin to file the 8891 form yearly, to avoid yearly taxation on the RRSP.

2. If you do not foresee moving back to Canada: Collapse your RRSP, but only after contacting the CRA International office, getting their advice on how you can avoid taxation on your unused contributions. They likely would provide a letter to your trustee, instructing them exactly what to withhold on your withdrawal. Ideally you will only be taxed 25% on the 'gains'.

In the US, you treat this whole account as if it were an ordinary account, and report any interest/dividends/ cap gains/losses as if it hads been any normal brokerage account.

[Rickerbucks]

I must say, that given RBC Dominion Securities is a full service firm and assuming you provided them complete disclosure as to your situation (and I'm not saying you can 'blame' them, you are ultimately responsable) I'm surprised that RBC did not advise you that opening an RSP given your situation would be ........unwise (to put it politely).

[cmckellar]

Thank you so much for your informative reply.

The reason I thought U.S. residents can't contribute to a Canadian RRSP is the following statement in the Canadian Tax Chapter on the Serbinski website:

"U.S. residents who hold Canadian RRSP accounts are taxable in the U.S. on a current basis for any income earned within the RRSP plan unless an election as described in IRS Rev. Proc. 2002-23 is made in each year. This election is available only for principal that was contributed while the taxpayer was a resident of Canada."

I tried looking up the IRS Rev Proc 2002-23 that you mentioned, but couldn't find the text of it.

[Rickerbucks]

Truth be told, there is no upside to having opened an RSP and LOTS of downside.

Much as you are a CDN citizen, an RSP contribution is only deductable against CDN Income (My own advise is that it is questionable to make ANY RSP cont if your taxable CDN income is about $33k or less.) A

Thus as a US RESIDENT, and thus a US tax payer, there would be no benefit at all in contributing to an RSP. Just leave your available RSP room "available" - it carries forward indefinately - and then possibly make a contribution if and when you returned to Canada and had an income that exceeds $33k (or so).

In your case you have a "contribution" that you have not and cannot deduct BUT if you came back to Canada you would be able to use that deduction as it to carries forward when not "used".

I agree with nelsona, see if you can contact CRA, explain to them this was affectively a mistake and see if you can get some special dispensation to "unwind" the contribution. I have no idea if this is even possible or viable.

Good luck and let us know if you have any success.

[nelsona]

The last sentence in mark's explanation is a holdover from the previous rules, but is no longer the case.

Be that as it may, didn't you, as a US resident, contribute to an RRSP? That would put that belief to rest, no?

I'm having trouble believing that you couldn't find RP 2002-23. I put Rev Proc 2002-23 in google and the very first entry is:
www.unclefed.com/Tax-Bulls/2002/rp02-23.pdf

In it it states:
"This revenue procedure applies
regardless of whether the individual was a
resident of Canada at the time contributions
were made to the eligible plan."

In any event, the contribution is now made, and your course from this point was already outlined.

[nelsona]

Shaun, I suspect that RBC said nothing because our poster did not inform them that he was a US resident.

Even RBC would probably have refused his business if they had known of his residency, as it has been my experience that they WILL NOT take on new clients from the US, regardless of the state

[cmckellar]

It's likely that I'm remembering wrong, and that I opened the RRSP while I was still a resident of Canada. At any rate, it's good to know that the contributions I made recently are allowed by the U.S.

I think I'll take your advice about leaving the RRSP as it in, in case I ever move back to Canada. But if I were to decide to collapse it, you mentioned:

see if you can contact CRA, explain to them this was affectively a mistake and see if you can get some special dispensation to "unwind" the contribution.

I contacted CRA, and they say that they have no record that I have ever contributed to an RRSP. So I'm not sure how they could help me.

[nelsona]

They have no record of your contributions because you never told them.

They do know however that you have an RRSP (RBC has told them) and they will have a record of your withdrawal , and you would face the prospect of having to pay tax on an RRSP which you got no tax relief when you contributed.

I told you already what you must do to get your conributions on record. If you contributed as a resident, then you should have filed a Cdn tax return, at least for that year. I suspect that you haven't quite been meeting your Cdn filing requirements while you were resident, and when you left (did you file a departure return). Everyone who makes an undeducted RRSP contribution is supposed to file Schedule 7 with there return. CRA needs to keep accurate account of your contributions to ensure that you do not overcontribute. Even if you contribute as a non-resident, I would file a non-resident return (likely with zero income) but including a schedule 7, Since you say you only 'recently' made these contributions it should be easy to ammend the returns you eithe mis-filed or didn't file.

Lesson: Just because one has RRSP contribution room does not mean one should be tempted to use it, espaecially when one has little or no taxable income (ie. less than $30K). This applies doubly for non-residents, since they are genarally not taxable in Canada, and the contribution provides no tax relief at all. It applies trebly for US residents, since the tax reporting and securities compliance hurdles which must be jumped yearly are an unneccasary burden, given the many tax sheltering vehicles available to Americans.

[worryfreeinvestor]

I sympathize with cmkellar's inability to find Rev Proc 2002-23, because it is not possible to find it at www.irs.gov via its search function. I am grateful to Google and Uncle Fed for presenting to us.

In any case, actually possessing Rev Proc 2002-23 may be good for something: starting a fire, slapping your bad dog on the nose, lining your birdcage......, but it is useless for the purpose of filling out Form 8891, because it is illegible.

[nelsona]

Of course, the templates I produced at http://www.canadatotwincities.com/rrsp.html

is quite legible.

As you point out, RP 02-23 is passed for RRSPs. It still aplies to RRPs however.

[worryfreeinvestor]

There's no surfing there, is there?

When I state "illegible", I don't mean that literally. I just mean that the Rev Proc 2002-23, as written, is gobbledygook.

But back to cmkellar's last comment:

At any rate, it's good to know that the contributions I made recently are allowed by the U.S.

The IRS cannot allow or disallow a contribution to an RRSP. How could it? The IRS could not care less whether you put money, a pot of gold, or chicken feathers into your RRSP. The folks replying to your inquiry have been explaining that there is no point whatsoever to making an RRSP contribution if you are a resident of the US. You cannot deduct it from Canadian taxable income because that does not exist in your case and you cannot deduct it from US taxable income either.

[nelsona]

There's no surfing there, is there?

When I state "illegible", I don't mean that literally. I just mean that the Rev Proc 2002-23, as written, is gobbledygook.

I don't understand you comment. I know RP 02-23 is poorly written. however my 4 templates which cover all possible RRSP scenarios were drawn up to avoid having to read the rev proc.

They are clear as day.