Blog post

Key Points

• California residents with Canadian RRSPs must navigate complex U.S. and state tax rules.
• The U.S. requires annual reporting of RRSPs on IRS forms to avoid penalties.
• California does not recognize RRSP tax deferral, leading to potential double taxation.
• Proper planning is essential to minimize tax liabilities for California residents with RRSPs.
• Engaging with a cross-border tax specialist is crucial for compliance and tax optimization.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

Question

Hi Phil,

My wife and I (61 and 62, respectively) are California residents and we each have an RRSP in Quebec.

I’d like to access this Canadian money in a tax efficient manner.

My RRSP has about 100k CAD and my wife’s has about 55k CAD. We file jointly in the US and do not file in Canada. My effective federal tax rate for 2024 will be below 10%.

Happy to pay for the service but I’d prefer to do it by giving you our business for 2024 US tax prep.

Would you please advise?

Regards,

XXXXX

Answer

Hi XXXXXX

I’ve moved over to the wealth management side of the industry; however, I should be able to give you some general guidance on your situation.

Just a note that my response is for informational purposes only and you’ll want to get a proper legal tax opinion before making any changes.

This will be dependent on your tax situation and current US tax rates, however in most cases it will be much more efficient to convert the RRSP to a RRIF to gain access to the 15% Canadian withholding rate under the Canada US tax treaty.

If you withdraw funds from the RRSP before converted to a RRIF the withholding rate under the treaty will be 25%. In both cases you’ll get credit in the US for Canadian taxes paid, however if your US rate is lower than 25%, you’ll end up paying the full 25% on the RRSP withdrawal regardless.

In some cases, it makes sense to try and calculate the cost basis in the RRSP for US purposes to reduce the taxable amount of the RRSP/RRIF withdrawal for US purposes, but that is certainly lots of work.

For example if you assumed your US tax rate is around 10% it does seem like converting the RRSP to a RRIF is the most efficient way of withdrawing the funds from the registered account. You may be able to file a s.217 Canadian income tax return, however that can get expensive, and it will be unlikely to get below 15%.

Hope that helps and please feel free to take advantage of our complementary cross-border investment consultation to review your investments and tax positions and to see if we can add value to the process.

Cheers

Phil