Today’s article about “Non-Resident RRSPs” is an anonymous guest post. I don’t normally accept anonymous submissions. But it’s a great article. It’s not back-link SPAM, nor a sponsored post, nor a lazy article I outsourced from India. It’s also about a topic that I consider extremely important: how Canadians can escape their insufferably arrogant, socialist, overpriced homeland.
After university, I was offered a job in the United States. It was pretty much impossible to turn down. I had no significant ties in Canada (i.e. no serious boyfriend), my family wasn’t too far away (Editor Joe’s note: 99% of Canadians live in a single apartment building at the Detroit-Windsor border crossing), and the job offered a pretty good amount of money — far more than I would have started at in Canada with the exact same job description. I am now considered a non-resident in Canada for tax purposes, which makes my financial situation a bit interesting. Non-resident RRSPs (Registered Retirement Savings Plans) are probably the weirdest part of it.
I’ve always loved organizing my money, but this was a new twist. Most people I knew had moved to the States right after university with a job offer, like me. But, unlike me, they had no savings. I had never taken out student loans, so I didn’t have to worry about sending money back to Canada to cover those. I didn’t know anyone else with money in RRSPs, TFSAs, or much in the way of savings accounts. My employer had a nice international relocation package but, unfortunately, it didn’t include any tax advice. So where to turn for advice? Tax treaties and the CRA website, of course!
I earned quite a bit of money throughout my university years (thanks co-op program!). I slowly realized that I had no immediate need for that money, so I started to max out my RRSPs — including going back to past years. I am proud to say that I maxed out my RRSPs for most of the years of university, except for the last one. I put some money into a TFSA (Tax-Free Savings Account) instead that year but, based on 20/20 hindsight, I really should have put it into an RRSP.
In university, my friends (the few who knew anything about investing) made fun of me because I had zero interest in the stock market. I put all of my savings in GICs. They told me that GICs weren’t really investing, that they wouldn’t keep up with inflation, etc. Well, I lucked out. Throughout the “Great Financial Collapse”, my RRSPs earned 4%+ consistently. My allocation strategy has changed since then, but being super conservative during university worked out well.
Since TFSAs are so new, the IRS still doesn’t recognize them. Translation: you have to declare all income within your TFSA on your US tax return just like normal income. Things may have changed now but, honestly, it’s just been way easier for me to keep the money consolidated. I didn’t have much in my TFSA when I left Canada, so I just transferred it all out into my taxable savings account, which made life way easier.
RRSPs, on the other hand, aren’t so bad. Some days it seems easier to just cash them in (particularly during tax season) but I won’t. They will grow tax-deferred until I need them. I’ll just keep filling out some specific forms on my US tax return each year.
There is one catch for non-resident RRSPs that most people would be concerned aboot (I mean, “about”): after you move to the US, you can’t make any trades in your RRSP. Opening and closing GICs is completely fine, but trading is not. So if you have stocks or mutual funds, you’re in a bit of a situation because you can’t touch them while you’re living in America. I think there are ways around this, but it’s not really worth it for the amount of money that I have in Canada. So, in retrospect, I am really glad that I “only” bought GICs in my RRSPs. They’ve been providing me with nice returns, which has helped to offset the stock market’s ups and downs. GICs offer far better rates in Canada than in the US, while stock index funds are much cheaper down here. My non-resident RRSPs still make up a pretty good portion of my portfolio’s overall fixed income allocation, so I think I’m using my non-resident RRSPs in a way that wisely supports my allocation strategy.
Stay tuned for more! If Joe lets me, I’ll turn this into a regular series on how being a Canadian citizen living in America affects my finances. (Editor Joe’s note: I’d love to have more posts on this topic!)
I’d love to relocate to Hawaii!
You should consider checking out 6400 Personal Finance. It’s a personal finance blog written by an Army officer who lives in Hawaii.
Hah! I have no interest in relocating to Hawaii.
I worked in Cross Border Tax Services at Deloitte & Touche for a few years during my co-op terms. I can spot a few grievous issues on this post related to Part XII tax and would like to warn non-resident readers that you should hire an expert when dealing with cross border issues and make sure you’re on the level.
Part XIII tax on non-residents is not an area for novices; instead of a 10% penalty you could be looking at a 25% non-refundable withholding tax. Although yes this could possibly be used to offset taxes due on the withdrawal n the US to the extent the US tax exceeds it, which it likely wouldn’t.
Removed the misinformation about withdrawals. Thanks for the heads-up!
It’s not necessarily misinformation; I don’t want to draw the ire of your contributor. I’m just saying that there are cases where an expert on cross border personal tax should be consulted (at a reasonable rate–ever frugal), and I feel this is one of those cases. Part XIII tax is not very well explained in my opinion on the CRA website, especially relating to RRSP withdrawals on non-retired persons.
Oh most definitely. As a general rule of thumb, people should seek professional advice (the advice of a good professional can be invaluable). When dealing with a topic as complex as international taxation, it’s an even better idea to seek help.
No worries. The problem I’m having is that I have so little money in my RRSPs (< $10k) that it's not *worth* hiring someone, but it's expensive to cash them out in addition to being complicated and I haven't yet decided if I never want to move back to Canada. Leaving them alone seems to be fine for now though…
canada only withholds 25% from Non-residents if they cash out their entire RRSPs or take thier canadian work related pension money as a lumpsum. If you setup monthly installments like RRIFs then canada only withholds 15% which is stipulated by the canada-US tax agreement. For 2012 the fed taxed the 1st $43561 at 15%. If you make more than that in pensions then stay with the 15% withholding as the tax rate then goes from 22-29% for income over 43561 otherwise consider filing a canadian tax return. Do the math first. You have to declare world income as well so consider that. you first file form NR5 to see if CRA will accept you position. if they do then the 15% withholding requirement is removed but agin you’ll need to file a canadian income tax yearly.
I think I would have to be offered a really great salary and benefit package to consider moving to the US. All the hassle with Visas, a lack of US credit and the tax stuff make it unappealing to me.
Yeah, moving in general sucks. I can only imagine compounding the frustration and workload with the bureaucratic hoops, forms, and duties/tariffs/etc of relocating to another country.
I would never, ever consider relocating to another country without a generous international relocation package from the employer.
Well, my employer (as do most) took care of everything to do with the visa. It really wasn’t that complicated for me. I have great health insurance and by now, I have sufficient credit to have a mortgage. I use a Canadian bank’s USD visa sometimes still, but this has taught me that I don’t really need credit.
I should get pretty close to grossing $200,000 next year, within 3 years of graduating from college. There is no way I would be there in Canada at that point, nor would I have been making anywhere near my starting salary in Canada yet either.
Is it a similar scenario for Americans living in Canada regarding their retirement savings and tax returns? I’m afraid to ask since I know how ginormous the US Tax Code is. :S
AMERICA NEEDS A RON PAUL RV-OLUTION. THROW THE TAX CODE IN THE GARBAGE AND RE-WRITE IT ON A NAPKIN: NO TAXES. THEY TOOKR JERBS.
It’s somewhat easier moving south from what I know. Then again, I’m not a US citizen and know very little about Canadian immigration.
I was never confident that I could qualify for work in the USA. I worked as a geologist, but assumed that Americans could fill that occupation… unless I was willing to work in Alaska, perhaps.
As soon as you said ‘geologist’, this is the first person who came to mind:
That is really cool though, always amazed by the blog’s readers. I’d be interested to hear your opinions on silver. If your opinion is that it’s extremely overvalued or undervalued and you’re interested in writing a guest post let me know! lol
I don’t really follow commodities. I took a mineral economics class in university, and the prof showed a graph indicating that over time, the inflation-adjusted value of commodities decreases on account of better exploration and cheaper development.
I’ve noticed that mining towns and cities tend to decrease in population over time as machines get more efficient at extracting ore. However, part of the decrease in population is due to the ore being depleted over time.
Also, commodities do not have any pricing power. People may be willing to pay a little extra for Coca Cola over Jim’s Awesome Cola, but no one will pay extra for Joe Wood’s premium silver over Loblaw’s No-Name Silver. A little something I learned from reading some Warren Buffett.
If you are a Canadian citizen, you could be eligible for a TN, which is super cheap: http://en.wikipedia.org/wiki/TN_status
(That is not legal advice, just some googling. Use at your own will.)
Cool. I did not know that. Oh well, I’ve moved on from geology now. I just sit at home investing now. That said, I never made anywhere close to $200,000 during my geology career!
I didn’t realize you retired so early! (If you mentioned it earlier and I forgot, sorry). That’s amazing. Now I double want you to do a guest post sometime.
I always say that one of my criteria for allocating investments it that I would be comfortable with both the returns and the security if I didn’t have access to them for 10-20 years, but I didn’t think there was a realistic scenario where this could happen!
At least it’s easier if you still want to hold those assets and you’re building a new portfolio, since you can just invest in other things as needed to balance them.
lol TBH I don’t understand why it kind of operates like an untouchable trust as soon as you move across the border. Then again, taxation laws are typically illogical.
A logical and simple taxation law would create a black hole and destroy the earth. They’re just protecting us.
That’s why it’s not so bad for keeping GICs there. The balances are so small that it’s not so bad to have low returns on that portion of my portfolio, but at least it didn’t lose any money over the course of the stock market crash! Plus, stock index funds are super cheap in the US! I would be so depressed to try to buy index funds back in Canada after this experience…
Funny story: my 401(k) has mostly Vanguard index funds, so I had no idea there were expensive mutual funds and then opened a Roth IRA and a taxable account with Vanguard since *shrug* that’s where my 401(k) was. Ignorance can be good!
Cool topic. I’d for sure be interested in learning more about it. Doesn’t pretty much every Canadian want to move somewhere a bit hotter?
I didn’t move here for any weather reasons
I did! I moved from Vancouver to Florida. Got a job via TN visa – US citizen now.
No regrets.
According to the SEC you CAN manage your RRSP (or RRIF) from the US. http://www.sec.gov/rules/other/34-42906.htm
The problem is that I’m not sure if this order has been changed since it was first granted by the SEC. There is also a question regarding mutuals funds as being treated as a PFIC which is a “passive foreign investment corporation”
from: http://www.scotiabank.com/ca/common/pdf/about_scotia/PFIC_FAQ_-_English_Version_(Final_12_28_11).pdf
Q. What is a PFIC?
A. A PFIC is a “passive foreign investment corporation”, which is basically a non-U.S. corporation that derives most of its gross income in the tax year as passive income (i.e., rental income or royalty income as well as interest, dividends, and capital gains) or at least half of its assets produce passive income (e.g. cash, bonds, stocks). All Canadian mutual funds, including Canadian Exchange Traded Funds, are now considered by the IRS to be PFICs for U.S. tax purposes. If you are a U.S. Person, you should seek advice from a U.S. tax specialist who can advise you on those investments that fall within the definition of “passive foreign investment corporation” under U.S. tax laws and those Canadian or non-U.S. securities that can be held (such as individual stocks and bonds) without triggering the PFIC rules.
Q. Can I avoid the PFIC tax rules if I hold my Canadian Mutual Funds inside a Registered
Account like my RRSP?
A. At the present time, there is no clear guidance on this matter from the IRS. However, because
of recent enforcement practices of the IRS, there is a possibility that investment income earned
from Canadian Mutual Funds held within an RRSP will not be eligible for a tax deferral under
U.S. tax laws. Instead, the IRS may treat the Canadian Mutual Fund in the Canadian registered
account as a PFIC in the current tax year, and distributions and increases in value in respect of a
PFIC held in the Canadian registered account will be reportable as income in the U.S. Person’s
U.S. tax return. This may be the tax treatment applied by the IRS despite the fact that, in Canada,
the RRSP is designed to allow a tax deferral on any and all income earned within the registered
account as long as the investment is held in the RRSP
You would think that the SEC order outlined here: http://www.sec.gov/rules/other/34-42906.htm would cover all assets (stocks, bonds, mutual funds) but some think that it might not. The magic of the RRSP (and the tax treaties between Canada the US in regards to RRSPs) would be null and void all due to mutual funds being perceived as PFICs.
One of the grounds for the exemption was the RRSP foreign content limit (“The Canadian SROs advance several grounds for the relief sought. First, because Canadian law requires that RRSP and RRIF accounts maintain 80% of their assets in Canadian securities and comply with various tax regulations, account holders will be disadvantaged if they cannot continue to deal with Canadian broker-dealers familiar with both Canadian securities and the requirements of Canadian tax law”), which was scrapped years ago. Thus while I have no idea, and I’d have to defer to somebody who clearly has done more research than me (e.g. you), it still seems very possible there’s been changes. If I were a major publication, I’d definitely spend some money to hire a cross-border tax specialist accountant or lawyer to lay out the law in clear phrases. Unfortunately, TF doesn’t have those resources so we’ll need to keep inviting input from astute Readers like yourself. Thanks for stopping by, Wayne, and great comment.