Canadian Retirement Plans and Some Common US Tax Issues

Whether a desire for warmer weather or to visit grandchildren in the United States, Canadian citizens in their retirement years have flocked to the United States.  Recent business articles on Florida property say as many as 30% of all real estate transactions in Florida since the housing market crash were perpetrated by Canadians.  Regardless of the actual number of retirees, the fact remains that there is a noticeable population of Canadians retiring in the United States.  One of the more common issues that Canadian retirees living in the United States come across is receiving a pension or retirement income from funds in Canada.

Tax on Canadian retirement funds

With retirement into the US comes retirement income that ultimately may be subject to US tax as well as Canadian tax.  To understand this better, we need to understand the retirement plans commonly used by Canadian retirees.

There are two main retirement vehicles commonly seen in Canada, the Registered Retirement Savings Plan, or “RRSP” (and a similar plan called the Registered Retirement Income Fund, or “RRIF”) and the Canadian Pension Plan (CPP).  The RRSP is a voluntary retirement vehicle in which an individual can contribute a set amount (based on their income) to a retirement fund, and have the amount deducted from current year net income.  Upon retirement, the individual is then taxed.  The CPP (as well as other smaller similar plans, the OAS and QPP) is similar to the United States Social Security system in which an individual qualifies for guaranteed income upon reaching a certain age.

When Canadian citizens choose to retire in the United States, the income provided by the retirement funds becomes taxable to the Canadian citizen in potentially two ways:

  • The Canadian citizen becomes a resident of the United States through a long term visa (i.e. green card or “substantially present” residents)
  • The Canadian citizen is classified as a US non-resident through a temporary visa

Under both scenarios the individual will be subjected to withholding tax on any distribution from a Canadian source investment vehicle to a US resident or non-resident.  Under the US-Canada treaty, RRSP withholding rate would be 25%, and for an RRIF, 15%. For the Canadian Pension plan, the withholding rate is 25%.

Likewise, whether a resident or non-resident, any income a Canadian citizen receives from an RRSP/RRIF or CPP will be subject to US Tax.  Any withholding amount from Canada may be used as a tax credit against a US tax liability.

Keep in mind that Canadians classified as US residents potentially have favorable tax rates and deductions on their US tax return compared to a Canadian classified as a non-resident for US tax purposes.

Things to consider – Canadian citizens

  • If you have a domicile in the United States and you receive a CPP or RRSP, your withholding rate should be at 25%. To determine if the amount to withhold is correct, you should receive a Canadian Form NR4, and the amount withheld should be in box 17 or box 27 of the form.
  • If you own a home in Canada and receive a CPP or RRSP, your withholding rate should be 30%, while living in the US, and should be found in box 22 of Form T4A. Keep in mind that if you were not a resident of Canada in the year of the distribution, you should receive Form NR4 instead.
  • Any appreciation of pension fund value while domiciled in the United States is subject to tax deferral provided you apply the US-Canada tax treaty.
  • If you reside in the United States, any RRSP/RRIF balance in aggregate of $10,000 US, will need to be reported on FinCEN Report 114, the Report of Foreign Bank and Financial Accounts (“FBAR”) as well forms 8891 and 8938 on your US tax return.

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