Per IRS, accrual of income in Canadian retirement plans like RRSP, RRIF and TFSA is taxable in the U.S. However, U.S. Citizens and residents of U.S. including Canadian Citizens can elect to defer tax U.S. tax on income accrued in RRSP and RRIF only until the income is distributed.
U.S. Tax for Canadian Retirement Plans can be extraordinarily complex. One of the main complications arises from cross-jurisdictional issues, such as the Canada-U.S. Tax Treaty. Therefore, understanding how the taxes on withdrawals on pensions and Registered Investment Plans like the RRSP, RRIF, TFSA or certain pensions, work in both countries will be helpful.
This article explains away the grey areas that surround retirement planning in Canada for U.S. expats.
Registered Retirement Savings Plan (RRSP)
The Canada Revenue Agency (CRA) registers RRSPs. You and your spouse may both contribute to them until the December 31st of the year when you turn 71. Likewise, your contributions stop for an RRSP of which your partner is the annuitant when they reach that age.
A major benefit aligned with an RRSP is that any income you earn through them is exempt from tax. However, that changes when the funds no longer remain in the plan.
Moreover, Canadian residents must also pay taxes of:
- 10% (Half that in Quebec) on amounts that reach $5,000
- 20% (Half that in Quebec) on amounts above $5,000 but reaching $15,000
- 30% (Half that in Quebec) on amounts above $15,000
Non-residents face 25% of lump-sum withdrawal and 15% for regular pension payments as withholding.
U.S. Treatment of RRSPs
Nowadays, a U.S. Tax for Canadian Retirement Plans like RRSP doesn’t involve filing Form 8891. However, distributions from your RRSP account must be a part of your U.S. income tax return. The other U.S. reporting requirements associated with How to Report RRSP Distribution on U.S. Tax Return, such as the filing of the annual FBAR and Form 8938 for plans meeting the relevant thresholds, remain the same.
Registered Retirement Income Fund (RRIF)
On turning 71, your RRSP becomes an RRIF – you may choose to do that earlier too. The RRIFs are akin to RRSPs in many ways, except for two things. Firstly, they don’t allow further contributions. Secondly, a minimum withdrawal is mandatory each year. The amount for the latter depends on your assets’ market value – the year before you turned 71 — and age.
RRIF payments are taxed at your current tax rate and have the same withholding as the RRSPs.
U.S. Treatment of RRIFs
The U.S. treats RRIFs like the RRSPs.
Tax-Free Savings Account (TFSA)
Flexible and registered, this savings vehicle exists as mutual funds, GICs, stocks, bonds, and cash. It provides Canadians with tax-free investment income. But that only happens after you keep contributing up to $6,000 to a TFSA annually. However, the TSFAs aren’t tax deductible like the RRSPs.
While under-contribution carries forward, over-contribution comes with a penalty. The TSFA cumulative contribution room is $63,500 right now.
U.S. Treatment of TFSAs
U.S. Tax for Canadian Retirement Plans like TFSA is different from RRSP and RRIF. The U.S. regards Canadian mutual funds in TFSAs as either investments in a passive foreign investment company (PFIC) or grantor foreign trust. For the first, you file form 8621 to report and for the latter, use forms 3520A and 3520.
On March 16, 2020 IRS published Internal Revenue Bulletin No. 2020-12 which contained Revenue Procedure 2020-17 to address the U.S. information reporting requirements with respect to the reporting of certain “foreign trusts”. To summarize, Registered Education Savings Plan (RESP) will no longer have to file Forms 3520 and 3520-A. Even though, TFSA is not explicitly covered by the bulletin, but we believe TFSA account holders also will no longer be required to file Forms 3520 and 3520-A.
Moreover, if it meets the threshold, report the TSFAs as part of your FBAR and file form 8938.
The RRSP and RRIF remains the best investment vehicle for retirement planning. You get clear guidelines, enjoy tax savings, and don’t suffer from the high reporting requirements of the TFSA. Therefore, we’d recommend sticking with the former for now. More importantly, keep an eye on the rules because they can change quickly!
Have questions about U.S. Tax for Canadian Retirement Plans? Then contact us before the IRS contacts you!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Akif CPA will not be held liable for any problems that arise from the usage of the information provided on this page.