RRSP withdrawals @ 25% tax, and claiming credits

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
redrosepro
Posts: 10
Joined: Mon Feb 03, 2020 1:22 pm

RRSP withdrawals @ 25% tax, and claiming credits

Post by redrosepro »

Hi friendly folks

What are the ways, and types of incomes against which one can claim the 25% withholding tax that CRA takes when withdrawing RRSP as a US resident? The below link, dated 2007, says it can only be claimed again "general limit" incomes - is that still applicable, what does that mean?
Secondly, is there any suggestion on timing the withdrawal. I'm still a Canadian resident for this tax year (2020), and planning to move to US in Sept 2020.. should I wait to withdraw AFTER I exit, inform CRA of my change in status and then withdraw later in 2020? Or should I wait till 2021 to remove any ambiguity on my tax residency?

viewtopic.php?f=2&t=2029&sid=ad7a167f0b ... 707c01de7e
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by nelsona »

General limitation income is anything not covered by the other categories. Pensions, wages, etc are gen limit.

It is almost always the case that when one withdraws RRSPs that they are left with HUGE foreign tax credit carryovers, which are rarely usable in future, since that future income would likely carry new foreign tax.

One way is to generate wages in Canada which are not taxable in Canada. 2 ways that I know of is working for a Cdn company and earning less than $10K in a calendar year. This is foreign income (gen limit) with no CDn tax, and thus you can use the carried forward FTCs. Another is working for your current employer abroad. This would rarely be taxed in the other country, but the wages receieved are considered foreign source.

Other than that there is not much that will generate foreign income and no foreign atx.
So, what mots end up doing (or atleast used to when the standard deduction was small) is itemize the 25% tax as a deduction on schedule A. Doesn';t work so good now. Try both ways, and see which one lowers your US tax the most.

But don't count on ever using up those FTC carryforwards.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
redrosepro
Posts: 10
Joined: Mon Feb 03, 2020 1:22 pm

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by redrosepro »

Thanks Nelson. Of course it is not good news that I can't plan to use up the FTC credits future. Can those be used against ANY foreign income, or should it only be used against the same country that withheld it? I have income from a third country other than US and Canada.

Where do I go to read on against what items can I offset these FTC credits, please?

In the book Border Guide by Robert Keats, he claims that he can recommend clients many ways to use up these FTC credits, but he doesn't actually list those options. What would those possibly be? I can send you a screenshot of the page of the book if you want to take a look.Thanks again.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by nelsona »

I'm familiar with his book. He (mistakenly) treats RRSP income as passive income, which it is not bt IRS definition. As I said, the income you can use is any that is not part of the other categories (passive, etc). pensions, wages, royalties, etc. Even if it were passive income, one would be hard pressed to generate Cdn passive income sufficient to overcome the carryforward amounts you are probably talking about.

So look at using it as a deduction, and choose whichever gives you the larger reduction in US tax that year, and go wit that.

As to use later, once it is carried forward, it can be used against income from another country, just not in that year that is was paid/accrued. In that first year, the tax must be used against income from that country.

IRS publishes a guide to Foreign tax credits as well as form 1116.

But as I said, you are unlikely to be able to recoup past unused foreign tax, since most income you will get from foreign countries will be taxed higher in that country than it is in US, especially considering that it is taxed at marginal rate but only credited at effective rates.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
redrosepro
Posts: 10
Joined: Mon Feb 03, 2020 1:22 pm

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by redrosepro »

Thanks nelson. I got an epiphany which is that I'll continue to have rental income from both Canada and a third country in future years. CRA taxes it at 15% because it would be less than the limit for the next "slab". If foreign rentals can be put in the gen limitation category, then probably I can use up the future FTCs. Is this doable?

You are abs correct. Keats is not very clear in what category he slots the RRSP withdrawals. He probably wants to avoid getting into that, because maybe he thinks the interests and dividends earned in it are passive while 'principal' contributions are active.. I'm not an expert in categorizing myself. I guess I've to read the IRS guide that you mention. While at this, is there any book or guide other than IRS that analyzes the FTC credits and classifications in more detail?

once again, thanks for all the guidance. this is invaluable
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by nelsona »

Rental income is considered passive, otherwise I would have included it in the list I already gave you.

And, again, as I explained, even if you were able to use the rental income and the 15% CDn tax, you would still need to use the 15% tax first, which would probably result in a little MORE carryforward rather than a little less. You are looking for income the generates NO tax in Canada, and *some* in US.
The 2 items I listed (wages from Cdn firm less than $10K, OR US wages attributable to foreign assignments) are about the only ones I know, for Canada.

The other is small ($10-12K) RRSP withdrawals by a non-working spouse, which I have addressed here many times (Section 217 return).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
redrosepro
Posts: 10
Joined: Mon Feb 03, 2020 1:22 pm

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by redrosepro »

I was doing some math on this last few days. Can you please validate the below

(1) If I crystallize the entire RRSP while moving to US, then the gains every year when I’m in there US result in taxable income (is this passive or general?)

Can I withdraw only so much in that year, so that the CRA withholding of the taxes on withdrawal more or less matches with the taxes due to IRS from point 1 above, so the FTCs can be used against those taxes? (Ofc subject to my question in 1, assuming both are in same class in 1116)

And whatever FTC left over can be carried to subsequent years where hopefully one of those gives higher returns if RRSP was invested in stocks..

Does the above make sense?


Secondly, is there any way to design and invest the RRSP funds so as to return passive income at all??
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by nelsona »

You *can* do this, but remember the gains each year must be actual gains (not paper gains). It is an acceptable way of doing it, but you must do this way EACH time you withdraw.

You will still not use all the Cdn tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by nelsona »

Your goal should still be reducing the Cdn tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by nelsona »

RRSP income is general, one used to be able to elect to "break" the RRSP, but that is no longer the case, since RRSP were officially treaty-recognized in 2009. It is always pension income, general limitation for FTC purposes.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
redrosepro
Posts: 10
Joined: Mon Feb 03, 2020 1:22 pm

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by redrosepro »

Thanks nelsona, so I'm finally seeing some light.

When you say *actual gains* and not paper gains, are you referring to the gains inside the account regardless of whether I sell or not? Or are referring to the gains on sale of some portion of RRSP?

Yes, reducing Cdn tax is the overall goal, but when it comes to RRSP, afaik the lowest tax one can pay to CRA is 25% when wihdrawn as non-resident, and then to claim this as FTC for some reduction. Is there any other possibility further to this?

Thanks once again.
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RRSP withdrawals @ 25% tax, and claiming credits

Post by nelsona »

if you wish to pay on year-by-year income, ir must be REAL income, ie. cap gains from sales, and/or distributions/dividends made by the investments.
It can't be from "paper" gains, ie simply the increase in value of the stock.

I have addressed lower RRSP taxation in the past, by use of 217 for non-working spouse or by converting to RRIF - taking 10% per year. The other was by taking the tax as a deduction, but sine the doubling of the standard deduction, that option rarely works.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply