http://www.serbinski.com

RRSP Withdrawals as US resident

 
Post new topic   Reply to topic    Serbinski Accounting Firms Forum Index -> Canada / United States Tax & Accounting
View previous topic :: View next topic  
Author Message
borderguy



Joined: 09 Jan 2007
Posts: 16

PostPosted: Tue Jan 09, 2007 2:05 am    Post subject: RRSP Withdrawals as US resident Reply with quote

Dual citizen with RRSPs in Canada. Want to get them out. Understand that lump sum withdrawals are subject to Canadian withholding tax at 25%. If thru a RIF, at 15%, but a maximum of only 10% of portfolio may be withdrawn in any one year.

In both withdrawal scenarios, it is my understanding that the amounts withheld can be used as a foreign tax credit that can be carried forward 10 years.

My question is whether,and how, careful financial planning can use ALL of the foreign tax credits to offset tax on other income that would ordinarily be subject to US tax. What types of income can the foreign tax credit be applied to? CPP? or Superannuation? or ANY US domestic earned or passive income or foreign passive investments? (I have been told that it is possible with careful planning to make the RRSP withdrawals in such a way that it is possible to offset most, if not all of the Canadian withholding tax.)
Back to top
View user's profile Send private message
nelsona



Joined: 27 Oct 2004
Posts: 14822
Location: Nowhere, man

PostPosted: Tue Jan 09, 2007 8:48 am    Post subject: Reply with quote

RRSP income is not 'passive' income for foreign tax credit purposes, as some cross-border types purport. It is 'general limitation' income.

Therefore, to use up any of the 15/25% tax you might generate from an RRSP/RRIF withdrawal, your only sources of 'gen limit' income from Canada are going to be: the taxable portion of your withdrawal, any other pensions, and wages. Since any pension income will have its own Cdn tax, this is an unlikely source of income that would use up your RRSP tax. CPP would be a better candidate, as this would only be taxed in US. Wages is another thing to look at, since earned income under $10,000 in canada would be exempt from Cdn tax. So earning $8-10K every year from working in Canada would generate Cn source gen limit income without Cdn tax.

To use the 'passive income' approach, one must NEVER have used the treaty deferral available to RRSPs (ie. Form 8891), and declre yearly income on one's 1040. Even so, capital gains would probably not be sourced as Cdn under this methos, since cap gains are not Cdn-sourced for US residents, regardless of where the account is held (except for certain resource and real estate gains -- which would fall under their own foreign tax credit category).
_________________
Nelsona Non grata. Non pro. Search previous posts.
Back to top
View user's profile Send private message
borderguy



Joined: 09 Jan 2007
Posts: 16

PostPosted: Tue Jan 09, 2007 1:15 pm    Post subject: Reply with quote

When you refer to RRSP withdrawals being "general limitation" income rather than "passive income" for foreign tax credit purposes, are you saying that the 25/15% withholding does NOT generate a foreign tax credit that can be used on US tax return? Or are you saying that the foreign tax credit that is generated by the RRSP withdrawals can ONLY be claimed against other "general limitation" type income?

You mentioned earned income of $8 to 10M in Canada, which would not be taxed in Canada. But as a permanent resident in US, that income would be subject to no Candadian tax, but would be subject to US tax. Are you saying the tax on that foreign (Canadian) income can be offset by the foreign tax credit accrued from RRSP withdrawals?

Now that you mention it, the CPP is not subject to withholding, but 85% of it is subject to US tax (I think). So any foreign tax credit could be used there. Unfortunately for me, the amount is so dinky, I must find another way! What about earned income in US, can a foreign tax credit be used on that?

And finally, a question about amounts subject to tax both in US and CDA. I left Canada before 2000. Is it correct that withholding tax in Canada subject to total current value (rather than some crystalized value at departure date)? And is US tax based on current value less contributions and/or any deemed dispositions at the time of entry into US?

Thanks.
Back to top
View user's profile Send private message
nelsona



Joined: 27 Oct 2004
Posts: 14822
Location: Nowhere, man

PostPosted: Tue Jan 09, 2007 1:54 pm    Post subject: Reply with quote

[quote]When you refer to RRSP withdrawals being "general limitation" income rather than "passive income" for foreign tax credit purposes, are you saying that the 25/15% withholding does NOT generate a foreign tax credit that can be used on US tax return? [/quote]

I'm saying it generates a foreign tax credit under the "general limitation" category, not the passive income category. Please refer to IRS Form 1116 for more info. One cannot current 'cross-credit' between incomes of different types. Your Cdn RRSP tax can be used to offset the US tax on Cdn income which falls into the 'gene limit' category.

[quote]Are you saying the tax on that foreign (Canadian) income can be offset by the foreign tax credit accrued from RRSP withdrawals? [/quote]
Yes. Both wages and pensions are considered 'gen limit' income.

[quote]What about earned income in US, can a foreign tax credit be used on that? [/quote]
No. But any Cdn tax can be used as a schedule A deduction (so long as the tax was not on income was not excluded by Form 2555, which wouldn't apply in your case). You don't need to have any taxable cdn income to make such a deduction.
[quote]Is it correct that withholding tax in Canada subject to total current value (rather than some crystalized value at departure date)? And is US tax based on current value less contributions and/or any deemed dispositions at the time of entry into US? [/quote] Cdn NR tax would be based on the withdrawal ammount. US tax would be based on the growth from book value when value when you arrived in US. deemed dispositions do not enter into it, since there was no deemed disposition on your RRSP. You would have had to actaully crystallize any internal gains by switching around your portfolio -- which is always the first piece of advice that any cross-border expert gives to one contemplating moving to US.

So, as you have no doubt read, the most effective use of the foreign tax generated by an RRSP withdrawl, is to use it as a Schedule A deduction in the year you paid the tax, unless you can foresee a steady stream of low or no taxed Cdn-source wages -- being careful not to run afoul of AMT.

Most do a simple calculation (using tax software, as the credit calculation is not straight forward) using the tax as a credit or a deduction, and choose the one that yields the lowest resulting US tax.

Before making any withdrawal of course, one would be sure that they have been ciorrectly reporting their RRSP income on their US return every year, or have been making the yearly RRSP declarion on Form 8891 or its previous incarnations.
_________________
Nelsona Non grata. Non pro. Search previous posts.
Back to top
View user's profile Send private message
borderguy



Joined: 09 Jan 2007
Posts: 16

PostPosted: Tue Jan 09, 2007 2:38 pm    Post subject: Reply with quote

Thank you very much for your comprehensive and detailed response! Most helpful.
Back to top
View user's profile Send private message
bruce



Joined: 02 Apr 2005
Posts: 94

PostPosted: Fri Jan 12, 2007 11:00 pm    Post subject: Reply with quote

[quote="nelsona"][quote]Is it correct that withholding tax in Canada subject to total current value (rather than some crystalized value at departure date)? And is US tax based on current value less contributions and/or any deemed dispositions at the time of entry into US? [/quote]
Cdn NR tax would be based on the withdrawal ammount. US tax would be based on the growth from book value when value when you arrived in US. deemed dispositions do not enter into it, since there was no deemed disposition on your RRSP. You would have had to actaully crystallize any internal gains by switching around your portfolio -- which is always the first piece of advice that any cross-border expert gives to one contemplating moving to US.[/quote]

Since borderguy is a US citizen, the above proposal can only be true if he has declared all the RRSP contributions and related earnings as taxable income on his US tax return (and paid any taxes due). Otherwise he would have had to file 8891. Then this plan all falls apart.

You said that cross border experts recommend crystalizing gains before moving to the US. That does not work for a US citizen does it? This would either generate taxable income in the US (without an offsetting tax credit) or compel him to file 8891.

Assuming he had filed 8891 at some point, would the IRS take a cut of the entire RRSP or just the growth from book value from the time the form was first filed?
Back to top
View user's profile Send private message
nelsona



Joined: 27 Oct 2004
Posts: 14822
Location: Nowhere, man

PostPosted: Sat Jan 13, 2007 3:09 am    Post subject: Reply with quote

Sorry, I had forgotten that he is a USC. My post above should only change however, that his US tax liability is the growth over his contributions, and not over some book value on re-entry ino US. Crystallization applies to non-US citizens.

Regardless of whether his RRSP [u]contributions [/u]were taxed in US or not (there is no deduction fo contributions), that portion is withdrawable tax-free. Even if he used 2555 to exclude the income. Had he additionally included the yearly internal income in his 1040, that portion too would become part of his 'cost in th investment', as you said.

The new 2555 rules, which stack any other income above the FEIE to determine tax, no longer makes reporting nternal RRSP income very palatable, as it will incur US tax.
_________________
Nelsona Non grata. Non pro. Search previous posts.
Back to top
View user's profile Send private message
bruce



Joined: 02 Apr 2005
Posts: 94

PostPosted: Sat Jan 13, 2007 4:16 am    Post subject: Reply with quote

[quote="nelsona"]...The new 2555 rules, which stack any other income above the FEIE to determine tax, no longer makes reporting nternal RRSP income very palatable, as it will incur US tax.[/quote]

Thanks for the clarification. FYI, I was just looking over the worksheets for the 2006 Form 2555 and the stacking rules do not appear to be quite as onerous as originally thought. If I'm interpreting it correctly, it looks like US expats can still apply their exemptions & standard deduction [u]after[/u] applying the FEIE. So for example a single taxpayer would not owe any tax on the first $8450 ($5150 strd ded + $3300 exemption) after taking the FEIE. This at least gives filers a little more wiggle room for things like unsheltered passive income or internal RRSP income.
Back to top
View user's profile Send private message
nelsona



Joined: 27 Oct 2004
Posts: 14822
Location: Nowhere, man

PostPosted: Sat Jan 13, 2007 12:26 pm    Post subject: Reply with quote

I have not looked over the FEIE this year, but that sounds correct.

For any expats in Canada with children of course, FEIE is no longer the preferred method, since this precludes getting any child tax credit.
_________________
Nelsona Non grata. Non pro. Search previous posts.
Back to top
View user's profile Send private message
tonyb99



Joined: 17 Mar 2005
Posts: 9

PostPosted: Mon Jan 29, 2007 12:49 pm    Post subject: Reply with quote

[quote]Dual citizen with RRSPs in Canada. Want to get them out. Understand that lump sum withdrawals are subject to Canadian withholding tax at 25%. If thru a RIF, at 15%, but a maximum of only 10% of portfolio may be withdrawn in any one year.
[/quote]

Minor correction:- There is no maximum withdrawal limit on an RRIF.
_________________
Back to top
View user's profile Send private message
nelsona



Joined: 27 Oct 2004
Posts: 14822
Location: Nowhere, man

PostPosted: Mon Jan 29, 2007 1:34 pm    Post subject: Reply with quote

You *might* be right. bUT, I'm pretty sure there is a formula applied as to what portion of the RRIF withdrawal is considered 'periodic' and what portion is considered 'lump-sum' and thus taxed at 25%. This is based on age.

Otherwise, everyone leaving US would convert to RRIF before collapsing to save 10% tax. This is not commonly done.
_________________
Nelsona Non grata. Non pro. Search previous posts.
Back to top
View user's profile Send private message
Norbert Schlenker



Joined: 21 Nov 2004
Posts: 68
Location: The Dry Side of the Wet Coast

PostPosted: Mon Jan 29, 2007 2:26 pm    Post subject: Reply with quote

IIRC (but you can't hold me to this because I haven't checked) anything up to twice the mandated withdrawal from the RRIF is considered periodic. Over and above, it's a lump sum and subject to the 25% rate.

For a young person, it will take forever on this sort of schedule. Even a 40 year old has a minimum of 2% a year from a RRIF. Double that and it's 4%. Better to find another way to get credit for the 25% withholding.

Let me go back to the original post though.

[quote]RRSPs in Canada. Want to get them out.[/quote]

Why? What's the big deal?

P.S. What's happened to the quote function?
Back to top
View user's profile Send private message Visit poster's website
nelsona



Joined: 27 Oct 2004
Posts: 14822
Location: Nowhere, man

PostPosted: Mon Jan 29, 2007 2:43 pm    Post subject: Reply with quote

They seem to have disabled all the html codes for this board, smileys, quotes, etc.

As to why get them out?: (I still have my RRSP, btw)

Here are a couple of reasons:

1. If you collapse them as a non-resident, you pay 25% tax at most. If you return to Canada, the least you would pay (unless you stop earning other income) is 23 to 47%.

2. Even at that 25% rate, that means that any further growth in your RRSP will be taxed at 25% (plus state taxrate), which quite a high taxrate for, say, capital gains.

3. Simplicity. having RRSPs while in US can be a nigtmenr reporting-wise, although that has been alleviated to a great extent by form 8891.

4. Freeing up the money to invest in US tax advantaged investments (most notably one's home)
_________________
Nelsona Non grata. Non pro. Search previous posts.
Back to top
View user's profile Send private message
rbrown06



Joined: 06 Feb 2018
Posts: 2

PostPosted: Tue Feb 13, 2018 7:45 am    Post subject: Reply with quote

[url=http://www.ralphlaurenoutletpoloonline.us.com/][b]Ralph Lauren Outlet Online[/b][/url]
[url=http://www.toryburchoutletinc.us.com/][b]Tory Burch[/b][/url]
[url=http://www.vansoutlet-store.us.com/][b]Vans Shoes[/b][/url]
[url=http://www.pandorajewelryofficialsite.us.com/][b]Pandora Jewelry[/b][/url]
[url=http://www.kd10.com.co/][b]Nike KD 10[/b][/url]
[url=http://www.jimmychoooutletshoes.us.com/][b]Jimmy Choo Shoes[/b][/url]
[url=http://www.michaelkorsoutletofficial.in.net/][b]Michael Kors Outlet[/b][/url]
[url=http://www.nmdadidas.com.co/][b]NMD Adidas[/b][/url]
[url=http://www.yeezysboost350v2.us.com/][b]Yeezy boost 350 v2[/b][/url]
[url=http://www.valentinos.us.com/][b]Valentinos[/b][/url]
[url=http://www.coachoutletonlinehandbags.us.com/][b]Coach Handbags[/b][/url]
[url=http://www.ralphlaurenpolo-outlet.org.uk/][b]Ralph Lauren Outlet[/b][/url]
[url=http://www.uggbootsoutletsale.org.uk/][b]Ugg Outlet[/b][/url]
[url=http://www.pandorarings.us.com/][b]Pandora Rings[/b][/url]
[url=http://www.northfacesjackets.us.com/][b]North Face Jackets For Women[/b][/url]
[url=http://www.pandoras.org.uk/][b]Pandora Jewelry[/b][/url]
[url=http://www.timberlandbootsofficial.us.com/][b]Timberland Boots For Men[/b][/url]
[url=http://www.pandoraringsofficial.us.com/][b]Pandora Rings Official Site[/b][/url]
[url=http://www.kyrie3shoes.us.com/][b]Kyrie 3 Shoes[/b][/url]
[url=http://www.adidasnmdofficial.us.com/][b]Adidas NMD Womens[/b][/url]
[url=http://www.kyrie3.com.co/][b]Nike Kyrie 3[/b][/url]
[url=http://www.ralphlauren-uk.me.uk/][b]Ralph Lauren UK[/b][/url]
[url=http://www.timberlandbootsformen.com.co/][b]Timberland Boots For Women[/b][/url]
[url=http://www.moncleroutletjackets.org.uk/][b]Moncler Jackets[/b][/url]
[url=http://www.jamesharden-shoes.us.com/][b]Harden shoes[/b][/url]
[url=http://www.officialpandorajewelry.us.com/][b]Pandora Jewelry Official Site[/b][/url]
[url=http://www.cgooseparkaoutlet.org.uk/][b]Canada Goose Outlet[/b][/url]
[url=http://www.northfaceoutletoff.us.com/][b]North Face Jackets Clearance[/b][/url]
[url=http://www.ralphlaurenpoloshirtsoutlet.org.uk/][b]Ralph Lauren Polo[/b][/url]
[url=http://www.kyrie4.com.co/][b]Kyrie 4 Shoes[/b][/url]
[url=http://www.kd10shoes.us.com/][b]KD 10[/b][/url]
[url=http://www.pandorabraceletuk.org.uk/][b]Pandora Bracelet UK[/b][/url]
_________________
Ruth Brown
Back to top
View user's profile Send private message
Display posts from previous:   
Post new topic   Reply to topic    Serbinski Accounting Firms Forum Index -> Canada / United States Tax & Accounting All times are GMT - 4 Hours
Page 1 of 1

 
Jump to:  
You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot edit your posts in this forum
You cannot delete your posts in this forum
You cannot vote in polls in this forum


Powered by phpBB © 2001, 2005 phpBB Group