Yup. In my opinion IRS treats RRSPs (and thus LIRAs) as trusts. That is why even on the 2004 3520 and 3520-A form, RRSPs are specifically mentionned while pensions are not.
You have quite simply set up a trust before moving to US and are thus subject to tax only on its income. Thousands of foreigners do this all the time. they pay yearly tax on that income subjet to the trust rules.
The twist is that IRS by treaty <b>must </b> grant deferral because it is a trust that is set up primarily for retirement purposes, if the taxpayer so chooses.
The other side of this is however is that the IRS <b>could</b> decide to treat RRSPs a pensions, as the treaty allows them to -- not forces them to.
Up til now, IRS have not chosen to do this, but they could.
<i>nelsona non grata</i>
RRSP Taxability
Moderator: Mark T Serbinski CA CPA
I've been reading the info on this great board concerning disclosing my RRSP.
My situation is:
1. Canadian citizen
2. US resident for a long time
3. Never disclosed the RRSP before
4. Due to my skillful investing (Nokia, etc.) I've turned my $22K CDN RRSP into something like $1,200! - so I've lost a bit!
5. So ... should I disclose now, in the past, in the future? ... or is it only when you take RRSP distributions or actually make some money in the RRSP?
6. I won't become a stock broker.
Thx.
Russ
My situation is:
1. Canadian citizen
2. US resident for a long time
3. Never disclosed the RRSP before
4. Due to my skillful investing (Nokia, etc.) I've turned my $22K CDN RRSP into something like $1,200! - so I've lost a bit!
5. So ... should I disclose now, in the past, in the future? ... or is it only when you take RRSP distributions or actually make some money in the RRSP?
6. I won't become a stock broker.
Thx.
Russ
Technically, you only need to avail yourself of the treaty (to defer taxation) when you actually have income.
Be careful though that even in losing portfoilio you *could* have a dividend, which would be reportable.
HOWEVER, as per the newer rules, even the existence of an RRSP (since it is a foreign trust and not a pension in the eyes of IRS) requires the filing of 3520 and/or 3520-A, UNLESS you file statements which comply with RP 02-23. There are serious penalties for not disclosing the mere fact you have an RRSP.
Given that you will never hope to recover the losses in your RRSP, you should probably NOT avail yourself of the treaty, and simply treat the RRSP as a normal investmant account, and take the cap losses just like any other investment. This would require filing the new form 8891, but not choosing to defer tax.
In addition, You might also just want to collapse the RRSP, and pay the Cdn tax, and claim it as a deductible foreign tax, rather than a credit.
<i>nelsona non grata</i>
Be careful though that even in losing portfoilio you *could* have a dividend, which would be reportable.
HOWEVER, as per the newer rules, even the existence of an RRSP (since it is a foreign trust and not a pension in the eyes of IRS) requires the filing of 3520 and/or 3520-A, UNLESS you file statements which comply with RP 02-23. There are serious penalties for not disclosing the mere fact you have an RRSP.
Given that you will never hope to recover the losses in your RRSP, you should probably NOT avail yourself of the treaty, and simply treat the RRSP as a normal investmant account, and take the cap losses just like any other investment. This would require filing the new form 8891, but not choosing to defer tax.
In addition, You might also just want to collapse the RRSP, and pay the Cdn tax, and claim it as a deductible foreign tax, rather than a credit.
<i>nelsona non grata</i>
Thanks for the excellent info as usual.
However, I have some more questions about this. I've read through the other posts on this board - and ... the old board - and am I right in thinking the following:
1. the RRSP IRS form / direction / clarification went from: RP89-45 to RP02-23 to Notice03-75 and is now trying to be replaced with: Form 8891?
2. Form 8891 is in draft but still not official so we can't use it yet?
3. All these forms are for deferring income / earnings in the RRSP?
4. In my case, since I lost $20K CDN, if I didn't defer income but filed form 3520 or 3520-A, I would saying it's a foreign trust and as such, the loss could be recaptured on my personal US tax?
5. If 4. is true, then since I started working in the U.S. in 1996 or so, do I have to amend the actual year(s) I lost the money, start with the first year when the RRSP had the $20+K in it (a couple of years ago) or can I just start with 2004 and say I lost $20K?
Thx. again.
However, I have some more questions about this. I've read through the other posts on this board - and ... the old board - and am I right in thinking the following:
1. the RRSP IRS form / direction / clarification went from: RP89-45 to RP02-23 to Notice03-75 and is now trying to be replaced with: Form 8891?
2. Form 8891 is in draft but still not official so we can't use it yet?
3. All these forms are for deferring income / earnings in the RRSP?
4. In my case, since I lost $20K CDN, if I didn't defer income but filed form 3520 or 3520-A, I would saying it's a foreign trust and as such, the loss could be recaptured on my personal US tax?
5. If 4. is true, then since I started working in the U.S. in 1996 or so, do I have to amend the actual year(s) I lost the money, start with the first year when the RRSP had the $20+K in it (a couple of years ago) or can I just start with 2004 and say I lost $20K?
Thx. again.
Capital losses MUST be reported and claimed in the years that they occur, not simply when you remember to claim them. And remeber that cap gains/losses only occur whaen you actaully sell, not simply when the stock plummets.
Then, a rh sez, you can write off the losses bit by bit against non-capital income, and/or wagainst cap gains without limit as these arise.
Back to the fact that these are RRSPs.
I have a thread about 8891 going, you'll get all you need on this form there.
You should go back ad ammend any returns in which your RRSP genberated any income: interest, dividend or triggered cap gain or loss. You would want to do this BEFORE you decide to collapse RRSP, and you would need to comply with 3520 filing requirements for 2002, 2003 and (unless 8891 is approved soon) 2004 tax year.
The 3520 requirement is specifically because you are choosing not to avail yourself of deferal.
If 8891 is approved, you would want to indicate that you are NOT availing yourself of your treaty right.
<i>nelsona non grata</i>
Then, a rh sez, you can write off the losses bit by bit against non-capital income, and/or wagainst cap gains without limit as these arise.
Back to the fact that these are RRSPs.
I have a thread about 8891 going, you'll get all you need on this form there.
You should go back ad ammend any returns in which your RRSP genberated any income: interest, dividend or triggered cap gain or loss. You would want to do this BEFORE you decide to collapse RRSP, and you would need to comply with 3520 filing requirements for 2002, 2003 and (unless 8891 is approved soon) 2004 tax year.
The 3520 requirement is specifically because you are choosing not to avail yourself of deferal.
If 8891 is approved, you would want to indicate that you are NOT availing yourself of your treaty right.
<i>nelsona non grata</i>
Sounds good.
However, for further clarification, I think I bought these couple of losing stocks in the year 2000 when the RRSP was worth about $21K CDN and I was working in the US.
The value has now plummtted to be worth < $1K CDN and I haven't yet sold them inside the RRSP (glutton for punishment I guess), so I suppose I haven't created any loss as such.
Therefore, if I sold them this year and collapsed the RRSP this year - while still a US resident / non-Canadian resident - and as they have been going down since yr. 2000, not up - would I be able to only filing the $3K loss per year starting in yr. 2005. ie: I hopefully don't have to amend past returns as the stocks only went down, not up and I haven't triggered the sale yet.
Also I believe you mentioned that the 25% that would be held by the Canadian brokerage (about $200) could be used as a foreign tax on my yr. 2005 US return?
Thx. once again.
However, for further clarification, I think I bought these couple of losing stocks in the year 2000 when the RRSP was worth about $21K CDN and I was working in the US.
The value has now plummtted to be worth < $1K CDN and I haven't yet sold them inside the RRSP (glutton for punishment I guess), so I suppose I haven't created any loss as such.
Therefore, if I sold them this year and collapsed the RRSP this year - while still a US resident / non-Canadian resident - and as they have been going down since yr. 2000, not up - would I be able to only filing the $3K loss per year starting in yr. 2005. ie: I hopefully don't have to amend past returns as the stocks only went down, not up and I haven't triggered the sale yet.
Also I believe you mentioned that the 25% that would be held by the Canadian brokerage (about $200) could be used as a foreign tax on my yr. 2005 US return?
Thx. once again.
So you bought the stocks in 2000, when you were a US tax resident.
But with what funds did you buy these stocks? Did you sell something else to buy them? Did you have term deposits (generating interest) that you used?
In other word, you have to go back to the day you moved to US, and determine, year by year what events or distributions caused a taxable event - every single one of them -and report them in the year they happened.
Then, when you do sell and collapse your RRSP, you will trigger this final cap loss, which you will be able to use up year by year as you outlined.
The tax can be used on your schedule A as a foreign tax deduction.
<i>nelsona non grata</i>
But with what funds did you buy these stocks? Did you sell something else to buy them? Did you have term deposits (generating interest) that you used?
In other word, you have to go back to the day you moved to US, and determine, year by year what events or distributions caused a taxable event - every single one of them -and report them in the year they happened.
Then, when you do sell and collapse your RRSP, you will trigger this final cap loss, which you will be able to use up year by year as you outlined.
The tax can be used on your schedule A as a foreign tax deduction.
<i>nelsona non grata</i>
I read through many of the posts on RRSPs on the old Grasmick forum and here, and although things are clearer, I still have some questions.
I am a Canadian citizen, moving to the US in a few days on an E2 visa, so I will be a US resident but not a US citizen (though the latter could change in the future).
Since I don't intend on returning to Canada in the forseeable future, I would like to withdraw my RRSPs (value $130k). The RRSPs are all in cash (no mutual funds or stocks).
If I withdraw the RRSPs after I move to the US, a 25% withholding tax is payable to CCRA, which in my case would be $32,500, which is the total of my Canadian tax liability on the RRSP withdrawal. I realize there is disgreement as to whether or not I have to declare the $130k as income on my US return. There would be virtually no gain on the RRSPs from when I entered the US to when I cashed them in.
As I understand it, the $32,500 tax paid to CCRA (call it US$26k) could be declared on my US tax return either as a tax credit or a deduction. Since my foreign income after arriving in the US would be negligible (unless the RRSP withdrawals count as such), I'm assuming the deduction would be the best option for me, and per an earlier post I would declare the US$26k as a foreign tax deduction on schedule A. How exactly does the tax deduction work? Does it reduce the amount of US income that I have to pay taxes on? So if I have (for example) US$40,000 in income for 2005, would the deduction reduce my taxable income to US$14,000?
Would there be any advantage to withdrawing part of my RRSP before I leave Canada? I will pay only 10% withholding if I withdraw in $5k increments (according to Royal Bank). Would there be any benefit to doing this (eg. to use the money for an entire year before I would have to file my Cdn tax return for 2005 at which time I would have to pay CCRA the difference between the 10% withholding and the actual amount owing).
In this second scenario, what would the implication be for US taxes? When I did my US taxes for 2005, could I claim all the tax paid on my RRSP withdrawal (both the 10% withholding and the extra amount owing at tax time) on my US taxes, either as a tax credit or a deduction, or is that only allowable if I withdraw my RRSPs after I am already in the US?
Another question: in the year of immigrating to the US, does a person pay US taxes on Canadian-source income earned BEFORE immigrating, or only on any income earned AFTER immigrating?
WRT making an RRSP contribution... is it treated any differently if I make the contribution as a US resident? Since RRSP room is based on the previous year's income, I won't know what my 2005 RRSP room will be until I do my 2004 taxes. By that time I'll be in the US.
One more question... I will have quite a large pension adjustment reversal (PAR). Can this be used in any way to reduce taxes (my Canadian-based income for 2005 will be only what I earned before I move to the US... roughly $5200). Can it be used to reduce my US taxes paid on US earnings at all?
Thank you for your help!
I am a Canadian citizen, moving to the US in a few days on an E2 visa, so I will be a US resident but not a US citizen (though the latter could change in the future).
Since I don't intend on returning to Canada in the forseeable future, I would like to withdraw my RRSPs (value $130k). The RRSPs are all in cash (no mutual funds or stocks).
If I withdraw the RRSPs after I move to the US, a 25% withholding tax is payable to CCRA, which in my case would be $32,500, which is the total of my Canadian tax liability on the RRSP withdrawal. I realize there is disgreement as to whether or not I have to declare the $130k as income on my US return. There would be virtually no gain on the RRSPs from when I entered the US to when I cashed them in.
As I understand it, the $32,500 tax paid to CCRA (call it US$26k) could be declared on my US tax return either as a tax credit or a deduction. Since my foreign income after arriving in the US would be negligible (unless the RRSP withdrawals count as such), I'm assuming the deduction would be the best option for me, and per an earlier post I would declare the US$26k as a foreign tax deduction on schedule A. How exactly does the tax deduction work? Does it reduce the amount of US income that I have to pay taxes on? So if I have (for example) US$40,000 in income for 2005, would the deduction reduce my taxable income to US$14,000?
Would there be any advantage to withdrawing part of my RRSP before I leave Canada? I will pay only 10% withholding if I withdraw in $5k increments (according to Royal Bank). Would there be any benefit to doing this (eg. to use the money for an entire year before I would have to file my Cdn tax return for 2005 at which time I would have to pay CCRA the difference between the 10% withholding and the actual amount owing).
In this second scenario, what would the implication be for US taxes? When I did my US taxes for 2005, could I claim all the tax paid on my RRSP withdrawal (both the 10% withholding and the extra amount owing at tax time) on my US taxes, either as a tax credit or a deduction, or is that only allowable if I withdraw my RRSPs after I am already in the US?
Another question: in the year of immigrating to the US, does a person pay US taxes on Canadian-source income earned BEFORE immigrating, or only on any income earned AFTER immigrating?
WRT making an RRSP contribution... is it treated any differently if I make the contribution as a US resident? Since RRSP room is based on the previous year's income, I won't know what my 2005 RRSP room will be until I do my 2004 taxes. By that time I'll be in the US.
One more question... I will have quite a large pension adjustment reversal (PAR). Can this be used in any way to reduce taxes (my Canadian-based income for 2005 will be only what I earned before I move to the US... roughly $5200). Can it be used to reduce my US taxes paid on US earnings at all?
Thank you for your help!
Geez, that should tell you something.
I have no idea what your long list of definitions was all about, but putting that aside...
Kelli,
Your only issue is whther to take the money before leaving, as a Cdn resident, or after as a non-resident.
I would think that if you took the money now, you will pay about 40-45% tax on the money. To figure exactly, just fill out a 2004 return, but only give yourself 1/6 of the personal ammount as a credit.
Don't be fooled by bank rhetoric about how little they withhold from you when you take out small amounts. The withholding is meaningless: it is the final tax that matters.
So, your best bet is taking it out after leaving and paying flat 25%.
Your US tax liability will only be on any interst that your RRSP earns this year. This will include the interest earned before leaving Canada, as no doubt you will be electing to be taxed as a US resident for full year in 2005, which means reporting world income for 2005.
You will NOT have to report the RRSP withdrawl, since -- even by Mark's conservative view of RRSP -- if you don't elect to defer (and you will not) then the acount is merely treated like any other investment account.
Using the Cdn tax you pay as a credit would be useless, since it will be severely limited by the little Cdn income you would be reporting, and would eventually be lost in the next few years.
<b>Use it as a deduction</b>, since a deduction does not required there to be matching included income.
<i>nelsona non grata</i>
I have no idea what your long list of definitions was all about, but putting that aside...
Kelli,
Your only issue is whther to take the money before leaving, as a Cdn resident, or after as a non-resident.
I would think that if you took the money now, you will pay about 40-45% tax on the money. To figure exactly, just fill out a 2004 return, but only give yourself 1/6 of the personal ammount as a credit.
Don't be fooled by bank rhetoric about how little they withhold from you when you take out small amounts. The withholding is meaningless: it is the final tax that matters.
So, your best bet is taking it out after leaving and paying flat 25%.
Your US tax liability will only be on any interst that your RRSP earns this year. This will include the interest earned before leaving Canada, as no doubt you will be electing to be taxed as a US resident for full year in 2005, which means reporting world income for 2005.
You will NOT have to report the RRSP withdrawl, since -- even by Mark's conservative view of RRSP -- if you don't elect to defer (and you will not) then the acount is merely treated like any other investment account.
Using the Cdn tax you pay as a credit would be useless, since it will be severely limited by the little Cdn income you would be reporting, and would eventually be lost in the next few years.
<b>Use it as a deduction</b>, since a deduction does not required there to be matching included income.
<i>nelsona non grata</i>
Actually, because she will get very little personal ammount tax credit she will be paying her marginal rate on every penny of her RRSP withdrawal.
Starting at 16% federal, only if she lives in BC or (maybe) Ontario will her tax rate be less than 25%, and that would only be 1-2% on the first 25K of RRSP withdrawal. This 'saving' would be eaten up by the fees for making multiple RRSP withdrawals no doubt. And saving would be non-existent in all other provinces.
Unless she will have <u>tax-exempt wages </u> earned in Canada over the next five years, there is absolutely no scenario in which opting to carry over the tax credit would be better than taking the deduction this year.
And, since she is going to US on investor statsus, she obviously is going to have world income, which would preclude her using a 217 election.
No, the simplest, and best soultion, is to move to US next week and then in a couple of months, collapse the RRSP in one swoop, pay the 25% tax, and use that tax as a deduction in US.
Don't forget she is moving to US this week, so probably doesn't have all friggin week to calculate to the last penny what her tax rate will be on the 24,965th dollar of RRSP withdrawl.
If she lives in BC, think (only think) about taking out 20K before, as long as your RRSP manager doesn't charge you $250 for a withdrawal (some do).
If she feels that the deduction may be more than she can use this year, or that it may force AMT (rhollan will calculate this for you, kel), then best split the withdrawl into 2 years, although AMT shouldn't even be a concern as it can be recouped.
<i>nelsona non grata</i>
Starting at 16% federal, only if she lives in BC or (maybe) Ontario will her tax rate be less than 25%, and that would only be 1-2% on the first 25K of RRSP withdrawal. This 'saving' would be eaten up by the fees for making multiple RRSP withdrawals no doubt. And saving would be non-existent in all other provinces.
Unless she will have <u>tax-exempt wages </u> earned in Canada over the next five years, there is absolutely no scenario in which opting to carry over the tax credit would be better than taking the deduction this year.
And, since she is going to US on investor statsus, she obviously is going to have world income, which would preclude her using a 217 election.
No, the simplest, and best soultion, is to move to US next week and then in a couple of months, collapse the RRSP in one swoop, pay the 25% tax, and use that tax as a deduction in US.
Don't forget she is moving to US this week, so probably doesn't have all friggin week to calculate to the last penny what her tax rate will be on the 24,965th dollar of RRSP withdrawl.
If she lives in BC, think (only think) about taking out 20K before, as long as your RRSP manager doesn't charge you $250 for a withdrawal (some do).
If she feels that the deduction may be more than she can use this year, or that it may force AMT (rhollan will calculate this for you, kel), then best split the withdrawl into 2 years, although AMT shouldn't even be a concern as it can be recouped.
<i>nelsona non grata</i>