How does the U.S. tax the Canadian retirement plans such as RRSP, TFSA, and LIRA?
The U.S. has a tax treaty with Canada, so as a Canadian non-resident living in the U.S., you can enjoy the same tax-deferred benefit on both sides of the border (for certain accounts).
Let’s take the example of the RRSP, LIRA, and TFSA.
Any RRSP contributions you make on any income or earnings are tax-deferred and has the same tax status on both sides of the border. This is also true with LIRA which is locked in. The only exception is the TFSA, which does not have the same benefits. The IRS does not have any regulation or policies regarding the TFSA, and it is not part of the tax treaty.
If you have Canadian mutual funds, the PFIC forms will be applicable on the U.S. side.
If you have
- Interest Earned
- Capital Gains
- Dividends
… these are all reportable and taxable on the U.S. side. So, on the Canadian side, of course, this is considered a tax-free growth because all the contributions that you make in that account are after the tax. But, that’s not the same on the US side. There is some planning that needs to be done to ensure you retain your income.
What to Do if You are Planning a Cross-Border Move
If you are looking to move to the U.S., you should reach out to a talk to a cross-border tax professional who can help you to understand how you can manage your accounts and what needs to be done in order to minimize taxes or minimize any growth, taxes on the U.S. side. A professional CPA can also advise you as to how you can maintain the accounts.
How the Federal Government Treats Canadian Accounts
On the federal level in the U.S., the RRSP and LIRA are covered by the tax treaty so they do have the same tax benefits of deferral on both sides of the border. The exception is the TFSA account, where the U.S. doesn’t have any regulations and any investments that you have depending upon GIC.
How the State Governments Treats Canadian Accounts
There are some states that don’t go with the tax treaty policy-wise. One of the biggest examples is the state of California. They do tax you on the RRSP income that is being earned in that account. Not the value of the assets, but the income that is being earned in that account. So any interest dividend capital gains that you get in those accounts into your Investments is reportable and taxable by the state of California if you are living in California as a tax resident.
There are only few states that do have the exception. The majority of states do follow the federal law and give the same benefit. But, it’s important to make sure that you understand the state that you are in and how they will tax your accounts, whether they are retirement accounts or not.
Quick Breakdown
Federally, the RRSP is covered by the tax treaty.
Federally, LIRA is covered by the tax treaty.
Federally, TFSA is covered in only a few states.
State-wise, it depends on the state you are living in.
