Hi, I moved to the US from Canada a few years ago (I have a Green Card) and I am planning to have my first RRSP distribution this year. I selected to differ the income tax on the undistributed earnings of the plan on form 8891 in 2006. I have read the messages posted on this forum related to my situation and still have a couple of questions:
1. Form 1116 (to apply for a foreign tax credit) requires to specify the category of the income. There are a few choices but the two choices that are possible candidates here are "General category income" and "Lump-sum distribution". One message posted on this forum mentioned that "It is general limitation income, not passive, nit lump-sum". However, the instructions on form 1116 describe the lump-sum distribution as following: "You can take a foreign tax credit for taxes you paid or accrued on a foreign source lump-sum distribution from a pension plan". So this would suggest that the RRSP distribution is a lump-sum distribution since RRSP is a kind of "pension plan" - am I wrong?
The problem is that if one selects the "lump-sum distribution" category then one has to use "Lump-sum distributions smart worksheet" (which is part of 1116) and one ends up with tax credit of $0.0. This is because one has to take the smaller of the foreign tax paid and the tax calculated using form 4972 (and this form is only to be used by people who were born before 1936). I don't quite understand why only people born before 1936 can get a tax credit for taxes paid in Canada and others are to be taxed twice on the same income.
If the RRSP distribution is to be considered "General category income" then there is no problem - filling in form 1116 will result in a tax credit.
2. Many IRS publications talk about different rules depending whether a plan is a "qualified employee plan" or not. Is RRSP considered a qualified employee plan? (it is similar to the 401k plan but nevertheless it is a foreign plan).
More RRSP related questions - Canadian living in the US
Moderator: Mark T Serbinski CA CPA
Thank you very much for the clarification.
I am still struggling with two more issues.
1. From what I understand the US taxable income from a complete RRSP distribution is the difference between the value of the distribution and one's own contributions to the RRSP. But I saw messages posted on some bulletin board where people believed that the taxable income was the difference between the value of the distribution and the value of the RRSP at the time of moving to the US. Could you please clarify this? Is it that one calculation is for federal tax and another for a state tax? Or perhaps the difference is in whether one has deferred the undistributed earnings of the RRSP on form 8891 (?).
2. I live in Pennsylvania and I would like to find out how my RRSP distribution will impact my state taxes. I read that California residents must calculate the RRSP income based on how much the RRSP has grown during the year. What about other states (i.e. Pennsylvania):
a) Is the RRSP distribution income supposed to be reported on the PA state return the same way as the RRSP income reported on the federal return i.e. the difference between the value of the distribution and the cost basis (the original RRSP contributions)?
b) Is there any tax to be paid to PA on the undistributed value of the RRSP or its growth?
c) Is my Federal foreign tax credit (as per form 1116) going to reduce my state tax as well?
d) Where can one find more information on how to report the RRSP distributions in their state returns? I looked at the Pennsylvania Department of Revenue web site and could not find any related documentation.
Thank you for your help!
I am still struggling with two more issues.
1. From what I understand the US taxable income from a complete RRSP distribution is the difference between the value of the distribution and one's own contributions to the RRSP. But I saw messages posted on some bulletin board where people believed that the taxable income was the difference between the value of the distribution and the value of the RRSP at the time of moving to the US. Could you please clarify this? Is it that one calculation is for federal tax and another for a state tax? Or perhaps the difference is in whether one has deferred the undistributed earnings of the RRSP on form 8891 (?).
2. I live in Pennsylvania and I would like to find out how my RRSP distribution will impact my state taxes. I read that California residents must calculate the RRSP income based on how much the RRSP has grown during the year. What about other states (i.e. Pennsylvania):
a) Is the RRSP distribution income supposed to be reported on the PA state return the same way as the RRSP income reported on the federal return i.e. the difference between the value of the distribution and the cost basis (the original RRSP contributions)?
b) Is there any tax to be paid to PA on the undistributed value of the RRSP or its growth?
c) Is my Federal foreign tax credit (as per form 1116) going to reduce my state tax as well?
d) Where can one find more information on how to report the RRSP distributions in their state returns? I looked at the Pennsylvania Department of Revenue web site and could not find any related documentation.
Thank you for your help!
1, There is noi difference on what the "investment" in your RRSP is whether or not you make a full collapse of an RRSP or you take it out periodically. The differnce is only in the fact that one "uses up" all the tax-free portion when taking a full collpase, and when apportions the tax-free amount over the years one takes periodic distributions. The fial result is te same. If you arrived in US with X as your 'investment' (which is the book value on your arrival in US for non-citizens; contributions only for US-citizens) and you ultimately took out (X+Y), you would get X tax-free and pay US tax on Y.
I've explained how you candivvy up X when taking periodic payments several times here, so I'll let you find that.
2. I know of no other state that taxes non-withdrawn RRSP income that Cali. I would not suggest contacting your state, as this will only alert them to a possible tax stream (this is what happwened in Califormia).
a) yae, whatever value you put on 16b of 1040 will be considered taxable income in PA.
b)No
c) Actually, if PA give a deduction for fed tax, your question should be will a 1116 credit INCREASE my state tax or not (since you fed tax will be lower). Most states do not reduce your fed tax deduction by the 1116 credit, but some do. But very few states actually give any foreign tax credit (especailly for Cdn federal tax; a couple do for Prov tax, none of which is paid on your RRSP withdrawal).
d) If you find nothing, I would leave it alone.
I've explained how you candivvy up X when taking periodic payments several times here, so I'll let you find that.
2. I know of no other state that taxes non-withdrawn RRSP income that Cali. I would not suggest contacting your state, as this will only alert them to a possible tax stream (this is what happwened in Califormia).
a) yae, whatever value you put on 16b of 1040 will be considered taxable income in PA.
b)No
c) Actually, if PA give a deduction for fed tax, your question should be will a 1116 credit INCREASE my state tax or not (since you fed tax will be lower). Most states do not reduce your fed tax deduction by the 1116 credit, but some do. But very few states actually give any foreign tax credit (especailly for Cdn federal tax; a couple do for Prov tax, none of which is paid on your RRSP withdrawal).
d) If you find nothing, I would leave it alone.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thank you. With respect to your answer #1, I am not a US citizen so I will have to use the date of my arrival in the US to determine my RRSP cost basis. I wonder however, whether it is the same for regular immigrants and those who arrive only as temporary residents on a TN visa. When I arrived (8 months into the year) I was only on a TN visa and when I filed the tax for that year I used 1040-NR (as I was still a "Non-resident alien" for income tax purposes). Starting the following year (while still on a TN) I filed a regular 1040 (because I was now considered a resident alien for tax purposes). So my question is whether I need to use the date of my actual arrival to the US to determine my RRSP cost basis, or whether I may use Dec. 31 of that first year (i.e. the last day before I became a resident alien for tax purposes).
The "date or arrival" is in fact the date you filed as tax resident, which for you was Jan 01 following your arrival. had you file dual-status in the year of your arrival, it would have been the a mid-year date, or Jan 01 of that year if you had chosen a full-year 1040.
Good thing to clarify.
Its not dependent on reason you became resident, just that you are.
Anothr thing to clarify is that it is BOOK value on that date (which is basically cost basis) and not market value (which is current price) ondate of arrival.
Good thing to clarify.
Its not dependent on reason you became resident, just that you are.
Anothr thing to clarify is that it is BOOK value on that date (which is basically cost basis) and not market value (which is current price) ondate of arrival.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing