US Gates are at Pearson Airport in Toronto
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This article appears in the Mid-November 2022 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.

Canadians preparing to move south of the border can look forward to agonizing choices over which of their favourite pieces of furniture, clothes and other personal property to bring. But when it comes to the assets in their RRSPs or RRIFs, the decision tends to be a little more straightforward.

“Typically, our advice is to leave the account in place — not to close it,” said Jingchan Hu, a partner in the tax group with accountancy firm Crowe Soberman LLP in Toronto.

Hu explained that any withdrawal made prior to leaving Canada could be subject to tax at the client’s highest marginal rate in this country: “Depending on how much was in the RRSP account, that full amount can come into income, which could leave you with a very hefty tax bill.”

The options for closing or de-registering an account are not much better after a person has confirmed their non-residence in Canada, according to Rebecca Hett, high net worth planner with TD Wealth in Calgary.

Although there are possibilities for individuals moving north to achieve a tax-neutral transition of assets from certain U.S. retirement accounts into RRSPs, Hett said that perk is not reciprocal. For those moving in the opposite direction, outgoing transfers from RRSPs are treated as distributions under Canadian law, triggering non-resident withholding taxes payable to the Canada Revenue Agency.

“If you’re going down to the U.S., it generally makes sense to maintain the RRSP in Canada because it is still allowed to grow tax-deferred even after the owner moves,” Hett said.

Boosting the case for the status quo, RRSPs and RRIFs are among the exemptions under the federal Income Tax Act to the deemed disposition rule. That rule generally requires emigrants to pay capital gains tax based on the fair market value of all their property when they depart from Canada.

However, there are some steps Canadians can take to improve their future tax affairs before they cross the border for good. For example, when RRSP withdrawals are made by U.S. residents, U.S. tax authorities calculate the amount owing using a formula that accounts for both the fair market value of the plan at the time of the withdrawal and its underlying cost basis.

Although Hu’s practice deals exclusively with Canadian tax matters, she encourages clients to consult their cross-border tax and investment advisors to see if liquidating — and potentially repurchasing — certain assets in order to crystallize gains and step up the cost basis of their plan before departure makes sense.

“If you’re selling at the current value and repurchasing within the RRSP, there are no Canadian tax implications. But from a U.S. perspective, you’ll likely get that increase in cost basis,” Hu said. “Maybe not so much in today’s investment environment, but people have usually been invested in their RRSPs over a long enough term that they will have accrued gains.”

Kris Rossignoli, a private tax and wealth manager with Cardinal Point Wealth Management LLC in Toronto, said registered accountholders should also inform their financial advisors about relocation plans, as professionals with Canadian credentials are often restricted from making trades on behalf of non-residents unless they’re also licensed in the U.S. “It can create some issues on the investment side of things,” Rossignoli said.

Once Canadians have established themselves in the U.S., he said the threat of double taxation looms over any withdrawals they make from their registered accounts in Canada.

“A common issue there is over withholding on the Canadian side, which is then not creditable as a foreign tax credit on the U.S. side,” Rossignoli said, noting that lump-sum withdrawals from RRSPs made by non-residents are generally subject to a 25% Canadian withholding tax.

However, anyone who converts their RRSP to a RRIF can reduce the CRA’s cut thanks to Article XVIII(2) of the Canada-U.S. Tax Treaty, which provides for a 15% withholding tax rate on periodic withdrawals. To qualify for the lower rate, total annual withdrawals must be less than either twice the required minimum or 10% of the RRIF’s full value at the start of the year.

Withdrawing amounts on a periodic basis “can become quite tax-efficient,” Hett said. “If you were to stay a resident of Canada, you would generally experience higher tax than those thresholds if you have significant income.” (However, the income may be subject to taxation in the U.S. at the time of withdrawal.)

In addition, Article XVIII(7) of the treaty provides for American residents to defer the U.S. tax payable on income accrued inside their RRSP until any withdrawal is made.

To complicate matters, some U.S.states — notably California — do not honour the federal tax treaty, so residents of those states may still have to include RRSP income on their annual tax return.

“You would only have to pay tax on the income within the RRSP at the state level. In California, the top tax bracket is 12.3% for someone with very significant income, but people who earn less than $300,000 would be taxed at 9.3%,” Rossignoli said.

For younger Canadians who have moved south for work opportunities, contributions to retirement funds may be of more concern than withdrawals. Hett said there are plenty of options to structure contributions, depending on how long they intend to stay in the U.S. Canadian residency is not necessarily a requirement for contributing to an RRSP. Individuals can contribute to their RRSP after leaving Canada if they continue to earn Canadian source employment or business income, or if they have unused contribution room from prior years. “But it might not make sense to contribute from a Canadian tax perspective, assuming [the individual] no longer has a Canadian income-tax filing requirement,” Hett said.

“The individual may want to wait and make use of the deduction on their Canadian tax return when they live in Canada again.”

Generally, RRSP contributions are not deductible on a U.S. tax return. However, the Canada-U.S. Tax Treaty allows for U.S. citizens living and working in Canada who are contributing to an employer sponsored group RRSP to deduct those contributions for U.S. tax purposes. The contribution limit would be the lower of the individual’s RRSP contribution room and the contribution limits applicable in the U.S., Hett said.

U.S. residents with an eye on eventually returning to Canada may prefer to open an individual retirement account (IRA) — essentially the U.S. version of an RRSP — or participate in an employer-sponsored retirement plan such as a 401(k), understanding that a mechanism exists for their assets to be transferred to an RRSP on a tax-neutral basis at a later date without requiring contribution room.

Such a transfer could occur only under the Income Tax Act via a lump-sum payment once the holder of the U.S. account is a Canadian resident again for tax purposes, Hett said. The transaction is tax-neutral rather than a straightforward tax-deferred rollover because the multi-step process requires additional funds to top up the RRSP contribution in Canadian currency, making up for the 30% U.S. tax withheld at source as well as early withdrawal penalties applicable to most accountholders under the age of 60.

“To be tax-neutral in the year of the transfer, you need sufficient taxable income to be able to utilize the foreign tax credit generated on the U.S. side — including the withholding tax and any penalties,” Hett said. “It’s a relatively narrow set of circumstances, but it’s an option for people, especially if they’re concerned about estate taxes in the U.S. and they want to mitigate their exposure to U.S. situs assets to the greatest extent possible.”