Collapsing RRSPs and consuming carry forward credits?

[poutine]

At the advice of our relocation accountants, we each moved <$20k cash from our TFSAs into RRSPs before we moved to the USA. It's still in cash (that's a whole other story) and has had zero growth since we moved. Since we moved at the beginning of the year, we didn't have much income, and had large carry forward RRSP credits, which was declared on our final non-resident returns. At that point we expected this to be a 3 year stay, but now it's looking more long-term.

I'd like to look into collapsing these RRSPs and moving the cash to the USA. I understand that there would be a 25% withholding. What is the best approach to do this so that we can apply the carry forward credits to the withdrawal? Do I need to file a non-resident return in Canada?

We are in the 32% bracket here in the USA, so I'm also wondering if it's just best to leave the RRSPs alone. We expect to be in the 35% or even the 37% bracket in 2019.

[nelsona]

Only a portion of the RRSP is taxable in US, so the 25% tax will be carriedforward is used as a credit. However, it is unliklery that you would use that credit anytime soon, if at all, as you would need non-connected income (ie Cdn wages) in the next 10 years.
Probably better to use the tax asa deduction (if you can match it with other deduction for the year to meet the statndard deduction threshold).

Otherwise it is lost.

[nelsona]

Btw, it only makes sense to make a large RRSP contribution in the year you move, if (a) you had a good income in Canada that year, or (b) it is early in the year, and you are making a contribution for the PREVIOUS year, in which you had a good income.

It was pointless to contribute without getting an immediate HEFTY deduction (ie. when you are in at least the second tax bracket.

And your TFGSAs need to closed now, otherwise you face tax and reporting issues in US.

[poutine]

We were given bad advice by our relocation accountants (both the one hired by our employer and a second opinion I hired on the side). We made the move over two years ago. The TFSAs were closed and the cash moved to the RRSPs (along with some proceeds from our house sale) the week before we moved to the USA.

I'm confused by the "so the 25% tax will be carriedforward is used as a credit". If I withdraw all the money from our RRSPs (we are both under 40), I assume that our bank will withhold 25% on the entire amount. I'd like the use the carry forwards to counter that amount, reducing our tax burden in Canada. What I'm worried about is that the USA will tax that money again, at a much higher rate since we are in a high tax bracket this year. What portion is taxable in the USA? The accounts have zero capital gains since inception.

[nelsona]

You don't have a tax burden in Canada. And the 25% is the final tax on your RRSP. There is nothing to carryforwad on that. so you face the prospect of paying 25% tax to Canada on monies that you didn't even get a tax deduction for.

What you may be able to do, Before withdrawing, is to look at removing the funds that you put in that were not used as a deduction tax-free, or applying for a waiver on the tax. There is a form for that , but it might be too late.
See form T3012A

https://www.canada.ca/content/dam/cra-a ... 2a-17e.pdf

I have written many posts on the amount that is non-taxable in US when you withdraw funds from your RRSP. It is essentially the value of your account when you arrived in US. Since, as I said, you will have little gains in US, your 25% tax is of little use as a credit in US, but you can use it as a deduction.

[poutine]

I'm having trouble wrapping my head around this. Checking my CRA account, I have 10k in unused RRSP deductions. If I withdraw 10k, why can't I just apply the 10k in unused deductions to this withdrawal? An RRSP withdrawal is Canadian income, right? Can't I submit a non-resident return with 10k in income minus 10k in deductions?

Looking on the conditions on that form, it's too late to use it.

[nelsona]

Because, even if you were in Canada, that would be considered income, and would have tax withheld. Once you are non-resident, you don't have regular income tax return, and RRSP income is not reported on a non-resident return, you pay flat tax, withheld at source, and that is that. Same goes for many other types of Cdn income , once you are non-resident.

So, as I said, you would have needed to apply to CRA BEFORE the withdrawal, to have your 10K of non-deducted contribution, returned to you without being taxed. Then withdraw the taxable portion with 25% final tax.

I would contact them direcyly to see if they can give you a repreive given you are non-resident. Otherwise, you will keep that 10K for when you return to Canada, if ever.

Poor advice sucks, expecially when you could have found better right here.

[nelsona]

There may be a way to file as a special elective 217 non-resident return, however it would require that the over contribution be made by a spouse that is now earning very little other income worldwide for the year other than the RRSP withdrawal. Otherwise, that return would determine that your RRSP contribution should be taxed far more than 25%.

Does that apply in your case? for example, if you had the over contribution, and were not working, you could look at this elective return.

[poutine]

No, we are both currently working, and have almost exactly the same compensation.

I'm starting to come to the conclusion that leaving these RRSPs intact might make the most sense for now. My brokerage (RBC Direct Investing), will only let me either put them in GICs or convert the entire accounts to USD and then invest on US stock exchanges (non-PFIC). Maybe I'll just toss them in a GIC and forget about 'em for a few years beyond listing them on our FBARs.

Thanks for helping me sort this out. I'm very annoyed at the bad advice I got during our relocation. Even RBC gave me the wrong information pre-move, saying that mutual fund purchases weren't allowed, but Canadian-based ETFs were fine.

[nelsona]

Their bad advice continues. RBC is being far too restrictive. PFIC considerations don't apply in RRSPs, so that is wrong advice, right there.

You might consider moving to TD Direct, which allows US residents a whole range of investments in their self-directed RRSPs.