QUESTION: I'm a citizen of the US and Canada. I was born in the US to an American and Canadian parent and have been in Canada as PR for around five years since my mid 20s. I have been contributing to RRSPs as a tax shelter for a portion of those years. Currently, I have around $50k CDN in RSPs. There is a strong potential as I may end up returning to the US to work and live in the upcoming years.
Is leaving the money I invested in RRSPs the only real way not to take too big of a hit for withdrawal of the money. Ideally, if I could wave a magic wand, I would slide the money into a 401K and not have a hit at all. I know that isn't a real posibility. Is there a way to minimize the impact. I'm trying to find a way not to feel like the beginnings of the retirement savings I've started may not have been a wasteful one.
Thanks,
Shane
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david ingram replies:
I hope and trust that you have been filing your US returns every year while living in Canada. You have a bigger responsibility to file te US returns than you do a Canadian return.
As an example -
If you were earning $100,000 Canadian per year as an employee, your employer would or should have deducted about $28,500 and depending upon the province you live in, your Canadian tax (no RRSP, no union and no other dedcutions) would be about $28,000 and you would get back $500 or so as a refund.
The fact is that there is no legal requirement for you to file a Canadian Tax Return becasue you do not owe tax. Canda can request and / or demand a return from you but unless they do, you do NOT HAVE TO FILE in Canada.
HOWEVER, you are a US citizen and must file a US return no matter where you live and no matter what currency you are paid in. The $100,000 Canadian is about $88,000 US in 2006 and the tax (single - no mortgage interest, etc) owing to the US at this point is $16,613. US or $18,840 Cdn. And, you do owe the tax UNLESS you file a return and claim a foreign tax credit on form 1116 or an up to $82,400 earned income exemption on form 2555.
In addition, you must file Form TDF 90.22.1 to report the RRSPS and any other financial accouints in Canada (or France or Germany) or face a possible fine of up to $500,000 plus 5 years in jail and form(s) 8891 to report the internal earnings of the $50,000 of RRSPs or face fines of 35% of the $50,000 in the RRSP PLUS 5% per year for every year you fail to report it (them).
Goto www.centa.com and read the Oct 1995 Newsletter (top left hand box) for details of what you have to report to the US as a US citizen living in Canada and then go to www.centa.com and read the US/Canada Taxation section in the second box down on the right hand side. This particular section is downloaded some 300 trimes a day from our web site.
If you had moved back to the US six years ago, you would have (on average) 70 percent MORE money in your Canadian RRSP than you would have if you had managed to move it to an IRA or 401(K). This is because the Canadian dollar has gained some 35% in value relative to the US diollar and the Canadian stock market also outperformed the US market for most of that time as well.
There is no guarantee that the same thing will happen in the future but if you "do" return to or move to the US, I suggest you leave the RRSP in Canada and start new savings in the US.
If you "do" decide you want the money in the US, you can withdraw the RRSP from Canada and pay 25% tax to Canada as a non-resident. Becasue you only have $50,000 in teh RRSP, you copul dlikely roll it into some sort of tax sheltered plan in the US by taking out $10,000 a year, paying the tax to Canada and then depositing the same amount o your US plan (because you have it available). It would take six or seven years but if you could set up some sort of private pension plan or even participate in a larger way in a company 401(K) because the money is available.
If you have not being filing your US returns (bet you have not) and you want help with them, that is what we do by fax, email (pdf files only), snailmail or courier.
I personally have 44 years experience in US Canada tax and have three associates with significant experience as well.
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