Fact - RRSPs/RRIFs/LIRAs are taxable in the US!
Few people realize (including most CAs/CPAs!) that the IRS does
not recognize the tax-deferred status of RRSPs/RRIFs/LIRAs like
the Canadian Revenue Agency does. In fact, the IRS considers them
nothing more than a regular brokerage account with all interest,
dividends and capital gains being taxable on your US return.
Many folks make the transition to the US , leave their registered
accounts in Canada and get themselves into a huge tax liability
as well as serious compliance trouble with the IRS. There
are various reporting requirements, the income inside these registered
accounts needs to be declared as income and taxed or, the Treaty
election to defer the income taken in a timely manner (when you
file your return). The fines for not being in compliance on
some of these issues can be up to U$10,000!
Determining the taxable amount of your RRSPs, etc. in the US is
a complex undertaking. IRS rules state that your original contributions
are returned to you tax-free along with any accrued earnings up
to your departure. Despite popular opinion, you do not get an automatic
"step-up in basis" when you take up tax residency in the US ! To
further complicate things, you must take into account the appropriate
exchange rates in establishing the "cost basis" of your RRSP because
there may be currency gains or losses that need to be accounted
for as well.
The next issue to contend with is taxation at the individual State
level. The IRS has one set of rules in dealing with RRSPs/RRIFs/LIRAs
but the States don't necessarily follow along. Some States don't
have an income tax, while others do. Some States don't recognize
the IRS election to defer the income inside the RRSP so the income
needs to be reported each year and state income taxes paid even
though the IRS allows the deferral!
In summary, you have only three options to consider regarding your
RRSPs/RRIFs/LIRAs:
| 1. |
Collapse the registered plan, withdraw everything out and
pay the withholding tax to Canada and the applicable income
tax to the IRS and your State of residence.
|
| 2. |
Declare the income on both the federal tax return and the
State return as applicable but leave them up there.
|
| 3. |
Take the Treaty election to defer the income
on the federal tax return and if allowed by the State, defer
the income on your State return as well. |
To determine the best course of action for your registered plan
depends on your individual circumstances and what you are trying
to achieve. Although we typically recommend you collapse and move
your RRSP to the US ( see Investment Planning ), it depends on your
individual circumstances. You may be focused on getting your registered
plans out of Canada but what are you going to do when they have
been withdrawn? Good RRSP planning considers how your plan is invested,
the best means of collapsing the plan (lump-sum or staged) and determines
the best use of the funds once collapsed. Some non-working spouses
may be able to get their RRSPs out of Canada tax-free while others
may not. As you can see, the complexities surrounding these decisions
require a thorough understanding of your unique financial situation
accompanied by much thought and analysis.  |
