Canadian Retirement Accounts for U.S. Citizens
If you are a U.S. citizen living in Canada, understanding Canadian retirement accounts for U.S. citizens is important because Canadian and U.S. tax rules can treat the same account very differently. If you are a U.S. citizen living in Canada, Canadian registered accounts can create unexpected cross-border tax issues. Understanding the U.S. tax treatment of Canadian retirement accounts for U.S. citizens is especially important because an account that is tax-deferred or tax-free in Canada may receive very different treatment under U.S. tax law.
An RRSP may be tax-deferred in Canada. A TFSA may be completely tax-free in Canada. RESP may allow investment income to accumulate tax-deferred for a child's education.
But U.S. citizens generally remain subject to U.S. federal income tax on their worldwide income even while living in Canada. As a result, the Canadian tax treatment of an account does not necessarily determine its U.S. tax treatment. This distinction is particularly important for four common Canadian accounts:
Registered Retirement Savings Plans (RRSPs)
Registered Retirement Income Funds (RRIFs)
Tax-Free Savings Accounts (TFSAs)
Registered Education Savings Plans (RESPs)
Although these accounts are all registered under Canadian law, they are not treated the same way for U.S. tax purposes.
RRSP: Generally the Most U.S.-Friendly Canadian Registered Account
A Registered Retirement Savings Plan (RRSP) is one of Canada's primary retirement savings vehicles.
For Canadian tax purposes, deductible RRSP contributions can reduce taxable income, investment earnings generally accumulate tax-deferred inside the plan, and withdrawals are generally taxable when received.
For a U.S. citizen, however, there is another tax system to consider.
U.S. Tax Deferral for RRSPs
The Canada–U.S. Income Tax Treaty provides special treatment for qualifying Canadian retirement plans. Under IRS Revenue Procedure 2014-55, an eligible U.S. taxpayer generally receives automatic U.S. federal income tax deferral on income accruing inside certain Canadian retirement plans, including RRSPs.
This was an important simplification. Before Revenue Procedure 2014-55, taxpayers often had to make an affirmative treaty election to obtain U.S. tax deferral.
For an eligible individual today, income such as interest, dividends and investment gains accumulating inside an RRSP generally does not have to be included annually in U.S. taxable income merely because it was earned inside the plan. Instead, U.S. taxation is generally deferred until a distribution is received.
Are RRSP Contributions Deductible on a U.S. Tax Return?
This is a different question. An RRSP contribution that is deductible in Canada is not automatically deductible when calculating U.S. taxable income.
Special treaty provisions can apply to certain contributions involving cross-border employment and qualifying retirement arrangements, but a U.S. citizen should not assume that an ordinary Canadian RRSP deduction will produce an equivalent deduction on Form 1040. This can create different tax bases and different taxable amounts between the two countries.
RRIF: Similar Treaty Protection, but Distributions Matter
A Registered Retirement Income Fund (RRIF) is commonly established when an individual converts retirement savings accumulated in an RRSP into a retirement-income vehicle.
For Canadian purposes, investment earnings continue to accumulate tax-deferred inside the RRIF, while distributions are generally taxable to the recipient.
For U.S. purposes, qualifying RRIFs receive treatment similar to RRSPs under Revenue Procedure 2014-55.
Therefore, a U.S. citizen who qualifies for the treaty-based deferral generally does not report the RRIF's undistributed annual investment earnings as current U.S. taxable income. However, distributions from the RRIF generally must be considered on the U.S. tax return.
The amount taxable in the United States may not always equal the amount taxable in Canada because the taxpayer's U.S. tax basis in the plan can differ from the Canadian tax basis. That difference becomes particularly important when the taxpayer made RRSP contributions while subject to U.S. taxation but received no corresponding U.S. deduction.
TFSA: Tax-Free in Canada Does Not Mean Tax-Free in the United States
The Tax-Free Savings Account is where many U.S. citizens living in Canada encounter problems.
For Canadian purposes, a TFSA is extremely attractive. Contributions are not deductible, but interest, dividends and capital gains earned inside the account are generally tax-free, and withdrawals are generally tax-free as well.
The United States does not generally provide the same broad tax exemption simply because the account is registered as a TFSA in Canada.
There is no treaty provision comparable to the RRSP/RRIF treatment that generally makes TFSA investment earnings tax-deferred or tax-free for U.S. federal income tax purposes. Consequently, a U.S. citizen may have to report income earned inside a TFSA annually on the U.S. tax return. For example, depending on the investments held, this could include:
interest;
dividends;
capital gains; and
income associated with certain foreign investment funds.
The Investment Inside the TFSA Matters
A TFSA is an account — but the investments held inside it can create additional U.S. tax issues. This is particularly important when a TFSA holds Canadian mutual funds or exchange-traded funds.
Certain non-U.S. pooled investments may fall within the U.S. Passive Foreign Investment Company (PFIC) rules. When applicable, PFIC rules can create complicated U.S. tax calculations and potentially additional reporting, including Form 8621.
Therefore, analyzing a TFSA for a U.S. citizen requires looking not only at the account itself but also at what the account owns.
RESP: Canadian Education Savings With U.S. Tax Considerations
A Registered Education Savings Plan (RESP) is designed to help families save for a child's post-secondary education.
For Canadian purposes, contributions are not deductible. Investment earnings accumulate inside the plan, and the Canadian government may contribute education incentives such as the Canada Education Savings Grant. When funds are eventually used for education, the Canadian tax treatment depends on the type of amount distributed.
For a U.S. citizen who is an RESP subscriber, however, the U.S. treatment can be significantly different. The United States does not generally treat an RESP in the same manner as a U.S. Section 529 qualified tuition program merely because the account is used for education. As a result, income accumulating inside an RESP may have U.S. income-tax consequences for a U.S. subscriber even though Canadian tax is deferred.
What About Forms 3520 and 3520-A?
Historically, one of the biggest concerns surrounding RESPs was whether they had to be reported as foreign trusts on Forms 3520 and 3520-A. IRS Revenue Procedure 2020-17 provided important relief for certain tax-favored foreign trusts established and operated to provide retirement, medical, disability or educational benefits.
Where the requirements of Revenue Procedure 2020-17 are satisfied, an eligible U.S. individual can be exempt from the Section 6048 foreign-trust information-reporting requirements for qualifying arrangements.
However, this relief concerns foreign-trust information reporting. It does not automatically make the account's investment income exempt from U.S. income tax, nor does it eliminate other potentially applicable foreign-asset reporting requirements.
Foreign Account Reporting: FBAR and Form 8938
Even where income inside a Canadian registered account receives U.S. tax deferral, the account may still have to be disclosed as a foreign financial asset. Two major reporting regimes should be considered.
FBAR — FinCEN Form 114
A U.S. person generally must file an FBAR when the aggregate value of foreign financial accounts over which the person has a financial interest or signature authority exceeds US$10,000 at any time during the calendar year.
The threshold applies to the combined value of reportable foreign accounts, not separately to each account. Canadian registered accounts therefore need to be considered as part of the taxpayer's overall FBAR analysis.
Form 8938 — Statement of Specified Foreign Financial Assets
Form 8938 is a separate U.S. reporting requirement under FATCA. Whether it is required depends on factors including:
the taxpayer's filing status;
whether the taxpayer lives inside or outside the United States; and
the total value of specified foreign financial assets.
For taxpayers qualifying as living abroad, the thresholds are substantially higher than the thresholds for taxpayers living in the United States. For example, an unmarried qualifying taxpayer living abroad generally reaches the Form 8938 filing threshold when specified foreign financial assets exceed US$200,000 on the last day of the year or US$300,000 at any time during the year. For married taxpayers filing jointly and qualifying as living abroad, the corresponding thresholds are generally US$400,000 and US$600,000.
Form 8938 and the FBAR are separate requirements. Filing one does not necessarily eliminate the requirement to file the other.
Quick Comparison
A Common Cross-Border Mistake
One of the most common mistakes is assuming: “CRA considers this account tax-free, so I don't need to report anything to the IRS.” For a U.S. citizen, that conclusion can be incorrect. The better approach is to ask three separate questions:
Is the income taxable in Canada?
Is the income taxable in the United States?
Does the account trigger a U.S. information-reporting requirement?
The answers can be different. TFSA, for example, can produce no Canadian income tax while still creating U.S. taxable income and foreign-account reporting obligations. RRSP, on the other hand, may receive tax deferral in both countries because of the special rules available under the Canada–U.S. Income Tax Treaty and Revenue Procedure 2014-55.
Moving Between Canada and the United States
Canadian registered accounts deserve particular attention before a move across the border. A Canadian resident who is not a U.S. person may have used TFSAs, RESPs and other Canadian registered plans for years without U.S. tax consequences. That situation can change when the individual becomes subject to U.S. taxation.
Likewise, a U.S. citizen moving to Canada should consider U.S. tax treatment before opening or investing through a Canadian registered account.
Cross-border planning is often easier before a contribution, investment purchase or change of residency occurs than after the U.S. reporting consequences have already arisen.
The Bottom Line
Canadian registered accounts do not all receive the same treatment under U.S. tax law.
RRSPs and RRIFs receive particularly important cross-border protection under the Canada–U.S. Income Tax Treaty and IRS Revenue Procedure 2014-55.
TFSAs are tax-free in Canada, but their income is generally not automatically tax-free for U.S. federal income tax purposes.
RESPs can also create U.S. income-tax and information-reporting considerations, although Revenue Procedure 2020-17 provides significant foreign-trust reporting relief for qualifying tax-favored foreign arrangements.
For U.S. citizens living in Canada, the key is to analyze both the account and the investments held inside the account. That distinction can affect U.S. taxable income, foreign tax credits, FBAR reporting, Form 8938, Form 8621 and, in some circumstances, foreign-trust reporting.
Because cross-border treatment depends on the taxpayer's circumstances and the structure and investments of the particular account, Canadian registered plans should be reviewed as part of the taxpayer's overall U.S.–Canada tax position.
