Persons emigrating from Canada are deemed to have sold all of their property, with some exceptions such as real estate in Canada and retirement plans, for fair market value proceeds and are subject to tax on any resulting gains. Once resident in another country, a person may be subject to tax in both Canada and the other country on income and gains earned on such property depending on the nature of the property and the relevant tax treaty, if any. Double taxation may also result on future withdrawals from Canadian retirement plans.
In order to minimize taxes, it is important to consult with a tax advisor prior to moving as certain planning strategies may only be available prior to becoming resident in another country. If assets will be retained in Canada, including retirement plans and insurance, an estate planning professional should also be consulted as it may be beneficial to have a Canadian will and power of attorney for property, and appropriate beneficiary designations for registered plans and insurance governed under the law of a Canadian jurisdiction, to deal with such assets on death and incapacity.
In this blog, we focus on the taxation of RRSPs, RRIFs, and TFSAs and we set out a few planning strategies in the context of emigrating to the U.S. In a future blog, we will focus on certain issues arising when immigrating to Canada.
While resident in Canada, a RRSP and RRIF plan-holder must include the full amount of all withdrawals in income, while a TFSA plan-holder does not have to include any withdrawals in income. Upon moving to the U.S., a RRSP and RRIF plan-holder will instead be subject to withholding tax on all withdrawals at a rate of 15% or 25%. The lower rate generally only applies to mandatory annual minimum withdrawals from a RRIF. A TFSA plan-holder, on the other hand, is not subject to withholding tax on withdrawals.
In addition to the above taxes, a plan-holder will also be subject to U.S. tax on any withdrawals from a RRSP and RRIF, but may be able to utilize foreign tax credits or deductions to reduce U.S. taxes.
Some possible options to minimize Canadian and U.S. taxes are set out below. The appropriateness of each strategy depends on a variety of factors.
- Filing a Canadian Tax Return – If the amount of withholding tax exceeds the amount of tax that would otherwise be payable if the plan-holder were resident in Canada (with some modifications to the normal rules), the plan-holder may file a Canadian tax return and pay tax based on the normal graduated rates.
- Crystallize Gains – For U.S. tax purposes, a plan-holder is entitled to withdraw, tax-free, the lesser of (i) the fair market value of the plan and the (ii) aggregate amount of all contributions to the plan plus any
realized earnings, both determined as of the time the plan-holder becomes a U.S. resident. To maximize the amount that can be withdrawn tax-free, the plan-holder could sell and repurchase the assets held in the retirement plan prior to becoming resident in the U.S.
- Convert RRSP to RRIF – To obtain access to the 15% withholding tax rate on annual mandatory minimum withdrawals, the plan-holder could convert his RRSP into a RRIF. This conversion can be done on a tax-free basis for both Canadian and U.S. tax purposes, but should be delayed until the plan-holder requires access to amounts held in the RRSP (such as on retirement).
- Collapse RRSP or RRIF – In some cases, it may be appropriate to collapse the RRSP or RRIF, such as where the plan-holder requires access to the amounts held in the RRSP or RRIF. Depending on the size of the plan and other sources of income, consideration should be given to whether it would be more beneficial to collapse the plan while resident in Canada or the U.S.
- Collapse TFSA – For U.S. tax purposes, income earned in a TFSA does not qualify for tax deferral (in contrast, income earned in a RRSP or RRIF is not taxed in the U.S. until it is withdrawn). Consequently, such income will be taxed in the U.S. in the year it is earned, which eliminates the main benefit of a TFSA (this also applies with respect to U.S. citizens living in Canada).
In each case, the appropriate strategy will depend on a variety of tax and non-tax considerations. As some strategies are only available prior to becoming a resident in the U.S., it is important to consult with a tax advisor prior to moving to the U.S.
In addition, in order to ensure that any future beneficiary designation changes comply with the relevant provincial laws and the estate plan generally, it is advisable to consult with an estate planning professional in the relevant jurisdiction prior to making any changes to beneficiaries.
The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. In particular, they are not intended to provide U.S. legal or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.