I am a citizen of both Canada and the U.S. My son Joel, 15, is also a joint Canada-U.S. citizen living with me and my Canadian husband (who is not a U.S. person) in Winnipeg, MB, Canada. My son recently qualified for Canada's Disability Tax Credit. My questions have to do with the taxation of the funds in a Registered Disability Savings Plan (RDSP), since my husband is considering investing in one on Joel's behalf.
I understand that the RDSP's earnings and gov't grants and bonds are taxable in Canada upon *withdrawal*, but that they are taxable by the IRS *every tax year* (i.e., in the tax year that Joel receives a gov't grant or bond he must declare it as income to the IRS, along with any internal earnings that year). If so, that poses a timing problem that will likely result in double taxation. Theoretically, I suppose my son could bury the gov't grants and bonds and earnings with the annual personal exemption except that the IRS rules seem to say that if Joel is claimed as a dependant by a parent (as he is), he has no personal exemption.
Given the prospect of double taxation, at this point I'm not sure whether it's even worth investing in an RDSP for him. However, it's hard to leave that much gov't help on the table.
My question: Is my understanding correct, as stated above?
Any advice is appreciated.
Ruth
Taxation of RDSPs
Moderator: Mark T Serbinski CA CPA
Re: Taxation of RDSPs
Since my OP has drawn a blank, I'll add some thoughts I've had since posting.
Perhaps one option is to wait until Joel is no longer a child dependant (18?), then start contributing such that his gov't bond, grant, and interest are under his personal exemption on his 1040.
The IRS's timing of taxing these funds is crazy. From CRA's standpoint, although the gov't funds go into an account with Joel's name on it, they are not truly his until many years later. If he withdraws early, Canada claws back those bonds and grants. If he's already paid tax to IRS, how does he get that back? I suspect IRS says, "too bad, so sad." Then it's not double taxation--it's taxation of income that never was. Another reason to try to bury any such income on the U.S. side.
Ruth
Perhaps one option is to wait until Joel is no longer a child dependant (18?), then start contributing such that his gov't bond, grant, and interest are under his personal exemption on his 1040.
The IRS's timing of taxing these funds is crazy. From CRA's standpoint, although the gov't funds go into an account with Joel's name on it, they are not truly his until many years later. If he withdraws early, Canada claws back those bonds and grants. If he's already paid tax to IRS, how does he get that back? I suspect IRS says, "too bad, so sad." Then it's not double taxation--it's taxation of income that never was. Another reason to try to bury any such income on the U.S. side.
Ruth