Saving for retirement is a crucial aspect of financial planning, and in Canada, two primary vehicles facilitate this: Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). However, when individuals move between Canada and the United States or hold dual citizenship, the taxation of these accounts can become complex. The Internal Revenue Service (IRS) plays a significant role in the taxation of RRSPs for U.S. persons, adding another layer of complexity. This article aims to demystify RRSPs and RRIFs, explain how they are taxed in Canada and the U.S., and explore the tax implications for Canadian nationals moving to the U.S., U.S. expats, and dual citizens.

Key Takeaways

• Automatic Tax Deferral: Under the U.S.-Canada Income Tax Treaty and Revenue Procedure 2014-55, the deferral of U.S. taxation on income accruing in your RRSP is automatic. You do not need to file a special election.
• Reporting Obligations: You must report your RRSP on the FBAR and potentially on Form 8938, depending on your foreign financial assets’ total value.
• Withdrawals Are Taxable: Distributions from your RRSP are taxable in the U.S., but you can often offset this with foreign tax credits for Canadian taxes paid.
• Avoid Unnecessary Forms: Forms 3520 and 8621 are generally not required for RRSPs, contrary to what some may advise.
• Withholding Tax on Withdrawals: Withdrawals from RRSPs may be subject to withholding tax, ranging from 5% to 30%, if taken before the age of 71. Treaty benefits and residency status can affect the withholding tax rates for U.S. citizens receiving income from Canada.

What Are RRSPs and RRIFs? Registered Retirement Savings Plan (RRSP)

An RRSP is a tax-advantaged retirement savings account registered with the Canadian government. It allows individuals to save for retirement by providing tax benefits:

• Tax-Deductible Contributions: Contributions to an RRSP reduce your taxable income for the year, lowering the amount of income tax you owe.
• Tax-Deferred Growth: Investments within the RRSP grow tax-free until withdrawal, allowing for compound growth.
• Contribution Limits: The Canada Revenue Agency (CRA) sets annual contribution limits based on a percentage of earned income, up to a maximum amount.

Registered Retirement Income Fund (RRIF)

A RRIF is essentially an extension of an RRSP. When you retire or reach the age of 71, you must convert your RRSP into a RRIF or an annuity:

• Mandatory Withdrawals: RRIFs require minimum annual withdrawals based on your age and account balance.
• Continued Tax-Deferred Growth: Investments continue to grow tax-free until withdrawn.
• Flexibility: While there is a minimum withdrawal, there is no maximum limit, providing flexibility in managing retirement income.

Is Canadian RRSP taxable in the US?

Canadian Registered Retirement Savings Plans (RRSPs) are subject to taxation in the United States, but the specifics depend on several factors, including the U.S.-Canada tax treaty.

1. Growth and Withdrawals: Under Canadian law, contributions to an RRSP grow tax-free until withdrawal. However, for U.S. citizens or residents, any income earned within the RRSP is generally taxable in the U.S. when distributions are made. The U.S. tax system requires taxpayers to report their worldwide income, which includes any growth from RRSP investments.
2. Tax Deferral Option: The U.S.-Canada tax treaty allows U.S. citizens with RRSPs to defer U.S. taxation on income earned within the RRSP until actual withdrawals are made. This means that while the account is growing, U.S. taxpayers do not need to report that income annually, provided they elect to defer taxes under the treaty. Previously, individuals had to file IRS Form 8891 to make this election, but this requirement has been eliminated; now, all eligible individuals are automatically treated as having made the election retroactively.
3. Tax Reporting: When funds are withdrawn from an RRSP, they must be reported as income on the U.S. tax return. The entire amount withdrawn is subject to U.S. federal income tax, although taxpayers can claim a foreign tax credit for any Canadian taxes paid on that withdrawal to avoid double taxation. Additionally, RRSPs are considered specified foreign financial assets and must be reported on Form 8938 and FinCEN Form 114.
4. Compliance Requirements: While RRSPs are treated as foreign trusts for U.S. tax purposes, recent IRS guidance has simplified reporting requirements for most individuals holding these accounts, reducing the need for complex forms like Form 3520 for many taxpayers.

Is RRSP tax deductible in the USA?

No, contributions to a Canadian Registered Retirement Savings Plan (RRSP) are not tax-deductible in the U.S. for U.S. citizens or residents. However, there are provisions under the U.S.-Canada Income Tax Treaty that allow U.S. taxpayers to defer taxes on the income earned within the RRSP until it is withdrawn, similar to how RRSPs are treated in Canada. Tax treaties ease the reporting requirements for US expats with RRSPs.

Under Article XVIII(7) of the treaty, U.S. citizens or residents can elect to defer U.S. taxation on income accruing in the RRSP until they withdraw the funds. This means while the RRSP contributions are not deductible on the U.S. tax return, the income earned within the RRSP is tax-deferred until a distribution is made.

To benefit from this deferral, U.S. taxpayers had to typically file Form 8891 (now outdated) or make an election under Revenue Procedure 2014-55, which made the deferral automatic without the need for annual filings.

While RRSP contributions are not deductible in the U.S., it’s important to report any RRSPs or other foreign financial accounts on U.S. tax filings, such as the FBAR (FinCEN Form 114) and Form 8938, if certain thresholds are met.

How do I report my Canadian RRSP on my tax return?

As a U.S. citizen or resident with an RRSP, it’s essential to stay compliant with U.S. tax reporting obligations. The good news is that the election to defer U.S. taxes on income earned within your RRSP is now automatic under Revenue Procedure 2014-55. This allows the income to remain tax-deferred, in line with Canadian rules, without needing to file any additional forms specifically for the deferral—so long as you fulfill other U.S. tax reporting requirements.

Interestingly, this automatic treatment reflects the history of how RRSPs were previously handled. In the past, RRSPs were considered foreign trusts, requiring the filing of Form 3520 and Form 3520-A. The rationale behind this was rooted in the nature of the RRSP as a financial instrument. As with any trust, the account holds assets managed by a trustee, which historically aligned with U.S. tax principles concerning foreign trusts. However, over time, the need for such filings became redundant given the established tax treaty between the U.S. and Canada, prompting the procedural shift to streamline the process for taxpayers.

What You Still Need to Do:

1. 1. Foreign Bank Account Report (FBAR): Although the deferral election is automatic, you are still required to report your RRSP on the FBAR (FinCEN Form 114)if the total value of your foreign financial accounts exceeds $10,000 at any point during the year. The FBAR must be filed electronically and is separate from your tax return.
2. Form 8938 (FATCA Reporting): Depending on the value of your foreign assets, you may also need to file Form 8938as part of your annual U.S. tax return. The reporting thresholds vary depending on your residency and filing status, so you should confirm whether this form is necessary based on your circumstances.
3. Reporting Withdrawals: If you withdraw funds from your RRSP, you will need to report those withdrawals as taxable income on yourForm 1040. You may also be able to claim a foreign tax creditfor any Canadian taxes paid on the withdrawals, using Form 1116.

In summary, while the election to defer taxes on RRSP income is automatic, it’s important to remember the ongoing requirements for reporting foreign accounts and handling any withdrawals correctly. If you need further assistance or have concerns about your RRSP reporting, contact us for free tax advise!

U.S. Taxation of Canadian RRSP: Background

In the absence of any tax treaty benefits, the United States would classify RRSPs and RRIFs as foreign grantor trusts. Under U.S. tax law, a foreign grantor trust is a trust established abroad where the grantor retains certain powers or benefits. This classification has important implications:

• Annual Taxation of Income: Without treaty provisions, any income earned within RRSPs and RRIFs—such as interest, dividends, and capital gains—could be taxable in the U.S. each year, even if the income is not withdrawn. This is because the U.S. taxes its citizens and residents on worldwide income, and the grantor trust rules attribute the trust’s income directly to the grantor.
• Reporting Requirements: As foreign grantor trusts, RRSPs and RRIFs used to require the account holder to file additional forms, such as Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner), to report the trust’s activities. Failure to file these forms can result in substantial penalties.

This tax treatment can be burdensome, leading to potentially higher taxes and complex reporting obligations for U.S. taxpayers.

Deferral Election Under the U.S.-Canada Tax Treaty

To alleviate these issues, the United States and Canada have established provisions within the U.S.-Canada Income Tax Convention (the tax treaty) that offer relief to taxpayers holding RRSPs and RRIFs.

Article XVIII(7) of the U.S.-Canada Income Tax Convention specifically addresses the taxation of these retirement accounts. This provision allows U.S. taxpayers to defer U.S. taxation on income accruing in their RRSPs and RRIFs until the funds are actually withdrawn. In essence, it aligns the U.S. tax treatment with the Canadian tax deferral, preventing the annual taxation of undistributed income within these accounts.

Previously, taxpayers had to make an affirmative election to benefit from this deferral, typically by attaching a statement to their U.S. tax return. However, Revenue Procedure 2014-55 streamlined this process. According to this revenue procedure, eligible taxpayers are automatically considered to have made the election to defer U.S. income tax on undistributed income in their RRSPs and RRIFs. This automatic deferral simplifies compliance and reduces the administrative burden on taxpayers.

Eligibility Criteria for the automatic deferral under Revenue Procedure 2014-55 include:

1. S. Citizenship or Residency:The taxpayer must be a U.S. citizen or resident alien. This includes individuals who are considered U.S. residents for tax purposes due to meeting the substantial presence test.
2. Compliance with Reporting Requirements:The taxpayer must comply with all U.S. federal income tax and information reporting requirements related to the RRSP or RRIF. This means that all necessary forms must be filed accurately and on time, including any required disclosures of foreign accounts.

By meeting these criteria, taxpayers can benefit from the deferral of U.S. taxation on the income within their RRSPs and RRIFs until they withdraw the funds. This provision helps prevent double taxation and aligns the timing of U.S. tax liability with when the taxpayer actually receives the income.

Key Sections in Revenue Procedure 2014-55

1. Section 4: Application

• Section 4.02 Election under Article XVIII(7) of the Convention

“An eligible individual is not required to file a deferral election pursuant to Notice 2003-75 (or under any other procedure) to make an election under Article XVIII(7) of the Convention. Instead, an eligible individual will be treated as having made the election under Article XVIII(7) of the Convention to defer U.S. income tax on income accrued in the plan but not distributed.”

• • Explanation:
    • This section clearly states that eligible individuals are automatically considered to have made the election to defer U.S. taxation on income accruing in their RRSPs or RRIFs.
    • There is no need to file a formal election or attach any statements to your tax return.

2. Section 3: Background

• Section 3.02 Elimination of Form 8891 Filing Requirement

“In order to reduce taxpayer burden, the IRS and the Treasury Department have determined that taxpayers should no longer be required to file Form 8891. This revenue procedure eliminates the reporting requirements of Notice 2003-75 and the requirement to file Form 8891 for taxable years beginning on or after January 1, 2014.”

• • Explanation:
    • The IRS eliminated the need to file Form 8891, which was previously used to make the deferral election.
    • The removal of this requirement supports the automatic nature of the election.

3. Definition of Eligible Individual

• Section 4.01 Eligible Individual

“For purposes of this revenue procedure, an ‘eligible individual’ is an individual who: (1) is or was a beneficiary of a Canadian retirement plan and (2) has satisfied any requirement under Section 4 of this revenue procedure to file a U.S. federal income tax return for each taxable year during which the individual was a U.S. citizen or resident alien and a beneficiary of the plan.”

• • Explanation:
    • If you are a U.S. citizen or resident alien who has complied with U.S. tax reporting requirements, you are an eligible individual and qualify for the automatic election.

Impact on Forms 3520 and 8621

Previously, RRSPs could be considered foreign trusts, requiring Form 3520. Additionally, investments within RRSPs, such as Canadian mutual funds, might be classified as PFICs, necessitating Form 8621. However, under the current guidance, if you’re eligible for the automatic deferral, these forms are generally not required for RRSPs.

Beware of Unnecessary Forms

Some tax preparers may advise you to file forms that are no longer required, such as Form 3520 (for foreign trusts) or Form 8621 (for Passive Foreign Investment Companies or PFICs), in relation to your RRSP. This is often unnecessary and can lead to increased preparation fees. The IRS has clarified through Revenue Procedure 2014-55 that RRSPs do not require these forms under the automatic deferral provision.

It’s important to stay informed and ensure your tax preparer is up-to-date with current IRS guidance to avoid unnecessary filings and expenses.

Converting an RRSP to a Registered Retirement Income Fund (RRIF)

Converting an RRSP to a Registered Retirement Income Fund (RRIF) is a crucial step in managing your Canadian retirement savings. By the end of the year you turn 71, you must convert your RRSP into a RRIF. This conversion is mandatory, and it’s essential to understand the implications  of this change.

A RRIF is similar to an RRSP in several respects, but there are some key differences. Once your RRSP is converted to a RRIF, you cannot make any further contributions, and you must make a minimum mandatory withdrawal every year. The minimum mandatory withdrawal amount is calculated at the beginning of each year based on your age and the market value of the assets in the account.

RRIF payments are considered taxable income in the year they are withdrawn and are taxed at your current tax rate. The tax rate for RRIF withdrawals is the same as an RRSP. For Canadian non-residents, withholding rates are 25% for lump-sum payments and 15% for periodic pension payments.

Tax Implications of RRSP Withdrawals

Withdrawing from your RRSP can have significant tax implications, both in Canada and the US. In Canada, RRSP withdrawals are taxed as ordinary income, and the tax rate will depend on your residency status and the amount you are withdrawing.

For Canadian residents, the tax on RRSP withdrawals is shown in the table below. The rates vary depending on the province of residence, with Quebec having a lower tax rate.

For non-residents of Canada, the tax rate on RRSP withdrawals is 25%. However, if you convert your RRSP into a RRIF, you can withdraw your funds as periodic pension payments, which will lower the non-resident withdrawal tax to 15% per the US-Canada tax treaty.

In the US, RRSP withdrawals are subject to federal income tax and may be subject to state income tax. The US-Canada tax treaty allows US citizens to defer taxation on their RRSP account, but when you withdraw from your RRSP account, you will have to report the income on your US tax return. This income is technically subject to taxation, but you can use the Foreign Tax Credit to shield your pension from double taxation.

Contact us for Free Expert Tax Advice

Navigating the U.S. taxation of Canadian RRSPs can be complex, but understanding your obligations can simplify the process. Remember that the deferral of taxation on your RRSP is automatic, but you still have reporting requirements. Be cautious of advice suggesting unnecessary filings that could increase your costs without providing any benefit.

At 1040 Abroad, we specialize in cross-border taxation and offer free tax advice to help you navigate these complexities. Feel free to reach out if you need assistance with your RRSP reporting or any other U.S. tax matters.

Written by

Olivier Wagner

A tax preparer who is both an Enrolled Agent and a CPA (New Hampshire) and very well aware of the tax situation of US citizens living abroad. He runs the tax practice 1040Abroad.