1020 / What considerations apply to U.S. citizens who participate in Canadian retirement plans (such as RRSPs) while residing in Canada?

There are several types of tax-assisted private pension or retirement plans, and they function differently depending on the participants involved and the structure of the plan. There are registered pension plans (“RPPs”)¹ and deferred profit sharing plans (“DPSPs”),² which are employer-sponsored pension plans that benefit employees working in Canada, and involve contributions made by both the employer and the employee. These differ from registered retirement savings plans (“RRSP”)³ and registered retirement income funds (“RRIFs”)⁴ in that these are individual plans and only the individual or the spouse of the individual can contribute to his or her own plan. An RPP, DPSP and an RRSP matures in the year the individual turns 71, which means that the total value of an individual’s RRSP is included into income in that year, unless the individual “rolls” his or her RPP, DPSP or RRSP into a RRIF (essentially on a tax-free basis), or in the case of an RRSP alone, into an RRSP annuity (also on a tax-free basis).⁵ In this manner, RRIFs are simply extensions of RRSPs that can also be self-administered, with certain restrictions that are imposed on the individual such as annual mandatory withdrawals.

The tax benefit available with RPPs, DPSPs, RRSPs and RRIFs is in the form of a tax-deferral, which is a benefit to the individual because of the time value of money. The individual contributions to the plan(s) are deductible against income in the year the contributions are made, and are not taxable to the individual until the contributions are withdrawn (with two notable exceptions being withdrawals to participate in either the Home Buyer’s Plan⁶ and/or the Lifelong Learning Plan⁷). The tax on the contributions is thereby “deferred” to the year of withdrawals. There are limits on the amount of contributions an individual can make in a given year, which limits are defined by an individual’s “earned income,” participation in other plans, employer-dictated contribution limits and statutory maximum contributions. In addition, there may be other tax benefits, such as:

(1)     Any growth on the contributions within the plan are tax-exempt and are not taxed until withdrawn;

(2)     Typically, at the time the individual begins to withdraw from an RRSP or a RRIF, the individual is retired and is therefore in a lower tax bracket. The amount of tax owed on the contributions would likely be less than the amount of tax that would have been owed by the individual in the year the contribution was made;

(3)     Pensioners are entitled to split pension income with their spouses, which again may reduce the amount of tax owed in the year of withdrawal;⁸ and

(4)     There is a pension credit available on the first $2,000 of pension income, which means that the first $2,000 of pension income is essentially received tax-free.

For a U.S. citizen subject to taxation under the U.S. tax code, RRSPs do not qualify for the tax deferral granted by the ITA. However, Article XVIII(7) of the Canada- U.S. Tax Treaty provides some relief. U.S. citizens with RRSPs must file IRS form 8891 to obtain the deferral. This form must be filled out for each RRSP account.