Roth IRAs held by Canadian Residents

US citizens living in Canada or those who worked in the US in the past and later moved to Canada often have Roth IRAs. They may wonder what the impact is of contributing to their Roth IRA as a Canadian resident. After all, it is quite possible for a Canadian resident contribution to be made inadvertently, for example, right after a move to Canada or as part of a US citizen’s desire to contribute to tax-advantaged accounts beyond the TFSA and RRSP available to Canadian residents.

Roth IRAs, like TFSAs, are funded with after-tax dollars and feature tax-free growth and tax-free withdrawals as long as the IRS’s holding requirements are met. CRA allows Roth IRAs owned by Canadian residents to continue their tax-free status as long as all contributions were made prior to the Canadian residency start date, and as long as a one-time election to defer tax was filed with CRA for the tax year corresponding to the first year of Canadian residency. This one-time election must be filed for each Roth IRA / Roth 401(k) account owned in the first year of residency or resumed residency and does not need to be filed in future years. Required information on the election includes (non-exhaustive):

• The balance of the Roth IRA on the date of the move to Canada;
• Roth IRA account number;
• Name and address of financial institution holding Roth IRA;
• Date that the Roth IRA was established; and
• A signed statement that the individual wishes to defer Canadian taxation on the Roth IRA under Article XVIII(7) of the Canada-US Treaty.

Any subsequent Roth IRA contributions or Roth IRA conversions made as a Canadian resident will cause the account to lose its tax-free status in Canada, which will become taxed like a regular non-registered investment, with all growth becoming taxable.

Not only would this be an extremely undesirable result, it would also become challenging to calculate the taxable investment income since Roth IRAs don’t come with tax slips given their tax-free status in the US. For this reason, it is crucial that a Canadian resident not make any Roth IRA contributions and to seek professional cross-border tax advice. For a US resident contemplating a move to Canada, it is equally important to seek proper cross-border advice before the move as significant pre-exit tax savings opportunities may be available.