U.S. Tax for Canadian RRSP and Canadian Retirement Plans

Share on facebook
Facebook
Share on google
Google+
Share on twitter
Twitter
Share on linkedin
LinkedIn
Reading Time: 3 minutes

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.

Residents

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

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.

Conclusion

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.

Leave a Reply

Your email address will not be published. Required fields are marked *

Client Reviews
AKIF CPA
5.0
Based on 95 reviews
powered by Google
Ammoria Daniels
Ammoria Daniels
02:11 16 Sep 21
We contacted Akif with an urgent matter regarding corporate taxes. Akif immediately understood what was needed and... within days had everything ready to sign. The level of service we received was amazing and unmatched. Waqar expertise in trucking industry made our situation seamless. His communication was outstanding; I heard from him daily and could have been completed sooner if I was as fast as he was 😃 Highly recommended!read more
Joe Paneitz
Joe Paneitz
18:30 18 Aug 21
What an absolute pleasure to work with this CPA firm. My business is already seeing such a positive impact and growth.... I cannot believe I didn't connect with them sooner. This firm is helping in so many ways! 5 stars is an understatement! Thank you so much for your help AKIF CPAread more
Helptest ARCpoint Labs
Helptest ARCpoint Labs
15:02 18 Aug 21
The firm is quick, responsive, and has the latest technological software. Thus far, I have been with them for 3+ years... and will continue to work with them even after relocating. They make it easy even when I'm miles away. Would highly recommend them.read more
Luz Tipaz
Luz Tipaz
16:06 13 Jul 21
Saim and his team are the best CPAs in town. I have been their client for years. All started when I needed help with... company structure with multiple companies and then accounting and Taxes. I have been very happy ever since. Thank you AKIF CPA.read more
Maria perez
Maria perez
18:31 08 Jun 21
Me and my husband have been getting all of our personal Taxes, business Taxes, monthly bookkeeping, accounting and... payroll done with AKIF CPA. Recently, we had more stuff come up and had detailed analysis done on capital gains, single family rentals (SFR) and business disposition. You will only know how great this CPA company is until you have worked with them and given them a chance. Words can’t describe our experience. AKIF CPA gets the job done every time - very reliable, professional and affordable.read more
Afnaan Amin
Afnaan Amin
22:14 02 Jun 21
Very good experience, we had unique situation in regards to cross border income as Canadians currently residing in the... US. Income on both sides of the border through completely different channels. Everything was very easy and completed timely, I also had lots of random questions and Mohammad provided top notch service along the way and even after we finished our taxes!! Highly recommended.read more
Ryan Paton
Ryan Paton
10:56 08 May 21
I moved to the USA from Canada late 2018 as part of a promotion/relocation for work. For my 2019 returns, I used an... accounting firm recommended by the local Canadian social club in my city, which was a terrible experience. They were slow to respond to inquiries and would follow up in piecemeal requests which dragged out my return process over several months, often asking for information I had already provided.For the price I paid, I vowed to find better service. I found Mohammad online and decided to reach out. Mohammad was extremely responsive, took care of my US and Canadian returns as well as my wife's business returns in a timely manner. Overall, it was a very positive experience and I would recommend him to another in my situation.read more
Tuan Vo
Tuan Vo
01:59 20 Apr 21
I relocated to Texas from Alberta, Canada and needed a CPA to help me with my cross-border taxes as I was not happy... with the CPA that I used previously. During my interviewing process to find another CPA, I had good feedback from Mohammad as he was able to answer my questions regarding my unique tax situation with expertise, and importantly to me, in a timely manner. I decided to use his services for the current tax year and I have nothing but compliments for the work Mohammad provided. If you are in need of a professional cross-border CPA, I highly recommend reaching out to Mohammad Akif.read more
See All Reviews