Expatriate Tax Issues and Strategies: The IRS Eases Reporting Requirements for RRSPs

Canadians move to the U.S. for a variety of reasons. Some Canadians are drawn to states like California, Florida and Arizona, which offer the promise of year-round warmth and sunshine; others may want to be close to family members who live in the U.S.; and others might be permanently relocated south of the border by their employers, a move which can have significant tax consequences for employees, such as being subject to departure tax or U.S. estate tax.

While moving to the U.S. is appealing to many Canadians, Canadian expats must consider their cross-border tax obligations once they are on the other side of the border. Navigating the rough terrain of expatriation tax and other cross-border taxes can be a challenge, but there is some new relief for expats who maintain RRSPs in Canada.

The IRS recently announced that it will be eliminating the requirement for U.S. citizens and resident aliens (non-citizens) with RRSPs to file Form 8891 with their U.S. income tax returns; previously, reporting details on Form 8891 to the IRS was the only way for Canadian expats to defer tax on gains in their RRSPs until the distribution of income occurred. Although this tax deferral rule is contained in the Canada-U.S. Tax Treaty, in the past, the IRS didn’t apply the rule without Form 8891.

While the eradication of Form 8891 eases the burden of maintaining RRSPs by allowing Canadian expats to more readily benefit from the Canada-U.S. Tax Treaty, other attractive retirement planning options exist for Canadian expats with RRSPs. By withdrawing their RRSPs after exiting Canada, U.S. residents can take advantage of another, perhaps more important Canada-U.S. Tax Treaty benefit: withdrawing their RRSPs at a rate of 25% rather than the 40-48% rate levied on many high net-worth Canadian residents. With proper planning, the withdrawal rate for U.S. residents can be reduced from 25% to as low as 15%. The tax paid in Canada can be claimed as a credit on taxes payable to the U.S. in order to avoid double taxation.

For U.S. residents with RRSPs, withdrawal as a U.S. resident might make sound financial sense, particularly if a fulsome financial retirement plan is created with the help of a cross-border investment manager. By implementing a sound investment strategy, Canadian expats can offset tax on future income in the U.S with passive foreign income created from particular investments.

Cross-border investment managers with expertise assisting U.S. residents can help Canadian expats make the right investments at the right time, ensuring that their future in the sunny south remains financially bright.