RRSP transfer to LLP
Moderator: Mark T Serbinski CA CPA
RRSP transfer to LLP
How should a transfer from an RRSP to a Lifelong Learning Plan (LLP) be handled for a US citizen living in Canada. It's a tax free withdrawal from the RRSP in Canada but the US may not see it that way. Would it be reported as "other income" on the 1040, or on line 16a, or neither? Is it taxable? Would it be reported on line 7a of Form 8891?
This is similar to an RRSP withdrawal for HBP: the withdrawl/transfer, since it is not taxable in Canada, cannot be taxable in US.
However, it isa trigger to recapture any previously deferred income, thus there will be some taxable income to report. It is not quite the same as a transfer between two RRSPs or RRIFs, becuase the LLP doesn't have the same protection.
Example: since you are a US ccitizen, only your contributions that were not deducted on your 1040 are considered your "investment" in the RRSP that will eventaully come out tax-free.
So, say, you have a $100K RRSP, of which $60K was contribution, $20K is previously deferred income (from previous dividends, trades, etc), and $20 is current unrealized gains.
In transferring, say, $10K to LLP, you trigger some of the unrealized gain, say $2K. So, you have a $10K withdrawal from your RRSP, and $22K of deffered income. Since the $10K was 10% of your total RRSP, you should report $10% of your $22K deffered income, $1,200. $8,800 is remeoved without US tax.
Going forward, you now have an RRSP worth $90K, of which $51.2K remains as your contribution, $20.8K is your deferred income, and $18K is your current unrealized gains.
So, really, in terms of US taxation, this is exactly like an RRSP withdrawal, and just like the HBP, it does trigger some US tax if you have previously deferred income. For a Cdn residnt however, this should not result in any US tax, if one uses form 1116 for foreign tax credit, if needed.
However, it isa trigger to recapture any previously deferred income, thus there will be some taxable income to report. It is not quite the same as a transfer between two RRSPs or RRIFs, becuase the LLP doesn't have the same protection.
Example: since you are a US ccitizen, only your contributions that were not deducted on your 1040 are considered your "investment" in the RRSP that will eventaully come out tax-free.
So, say, you have a $100K RRSP, of which $60K was contribution, $20K is previously deferred income (from previous dividends, trades, etc), and $20 is current unrealized gains.
In transferring, say, $10K to LLP, you trigger some of the unrealized gain, say $2K. So, you have a $10K withdrawal from your RRSP, and $22K of deffered income. Since the $10K was 10% of your total RRSP, you should report $10% of your $22K deffered income, $1,200. $8,800 is remeoved without US tax.
Going forward, you now have an RRSP worth $90K, of which $51.2K remains as your contribution, $20.8K is your deferred income, and $18K is your current unrealized gains.
So, really, in terms of US taxation, this is exactly like an RRSP withdrawal, and just like the HBP, it does trigger some US tax if you have previously deferred income. For a Cdn residnt however, this should not result in any US tax, if one uses form 1116 for foreign tax credit, if needed.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
In our example, 7(a) would be $10000, 7(b) would be $1200, which would automatically transfer over to 16a/b of 1040.
Then, the $1200 would be eligible for use on a general limit form 1116, along with all other foreign general limit income, and you would use any Cdn tax on that type of income to figure your credit.
Then, the $1200 would be eligible for use on a general limit form 1116, along with all other foreign general limit income, and you would use any Cdn tax on that type of income to figure your credit.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best