Unexpected Consequences of IRA Transfer to RRSP on Expatriation

On October 29, 2018, through technical interpretation (TI 2018-0750411E5), the Canada Revenue Agency (CRA) confirmed a couple of things regarding US individual retirements accounts (IRAs) that are transferred to an RRSP upon expatriation (giving up US citizenship or surrendering/abandoning a green card). First they may be subject to both US and Canadian income tax, and second, later contributions to an RRSP comprising funds rolled over from an IRA are not deductible in Canada.

In other words…

Let’s say you are a Canadian citizen who once lived and worked in the US and held US lawful permanent resident (“green card”) status for at least 8 years (caution must be exercised with the definition of 8 years!). During that time, you were contributing to an IRA. You later decide to move back to Canada and, of course, you want to take your IRA investments with you. You decide to relinquish your green card, but your net worth on the day of relinquishment is more than $2 million USD (or your average tax payable in the US is above a certain threshold). For US tax purposes, you will be viewed as having expatriated for tax reasons and will be deemed to have received a distribution of your entire interest in the IRA. As a result, you will have to pay US income tax on the entire amount in the IRA that is deemed distributed. Canada would view the deemed distribution to be a payment received out of the IRA and simultaneously tax it.

As a bonus (tongue in cheek), the US taxes paid in respect of the “deemed distribution” on expatriation are not creditable against Canadian taxes!!! When the funds in the IRA are actually withdrawn, you transfer them to an RRSP and claim the deduction, right? Not in this case. You’ve already paid US and Canadian taxes, therefore, it will not be subject to further US and Canadian tax on withdrawal. However, even if the IRA amount is already taxed in Canada, any contributions you make to the RRSP that holds IRA funds cannot be claimed as a deduction for the tax year of the withdrawal from the IRA.

The above treatment equally applies to former US citizens who renounce or relinquish their citizenship as “covered expatriates”.

The CRA has noted that this matter will be brought to the attention of the Department of Finance for the consideration of a possible legislative change.

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