Is Canadian RRSP Income Taxable in the US?

If you have the status of a U.S. resident or are a dual citizen holding a Canadian RRSP, it is very natural to wonder what happens at the taxation period. The short answer? Yes—Canadian RRSP income is generally taxable in the U.S. Yet there are specific provisions in accordance with the U.S.-Canada tax treaty that could provide benefits if the right steps are followed. 

Tax Deferral with the Right Reporting

The U.S. enables tax deferral on RRSP income—Most taxpayers now qualify for automatic deferral under IRS Rev. Proc. 2014-55; no annual election filing is required. In other words:

• Filing Form 8938 under FATCA, and/or FBAR (FinCEN Form 114) if thresholds are met
• Reporting the account value even if you haven’t made a withdrawal
• Treaty deferral is automatic under Rev. Proc. 2014-55, but you must still comply with FBAR and FATCA reporting if thresholds apply.

RRSPs and RRIFs are not treated as foreign trusts for IRS Form 3520/3520-A purposes.

When Is It Taxed?

Unlike in Canada, where RRSP withdrawals generate immediate withholding taxes, the U.S. waits to tax the income until the money is actually taken out. At that point, the entire withdrawal amount is treated as ordinary income and subject to your U.S. tax rate.

This generates the question: How much of RRSP is taxable? In the U.S., the full amount withdrawn is taxable unless excluded by a specific tax treaty clause. It should be noted that it is rare.

Major Considerations for U.S. Residents

• You will not face Canadian taxation in case you have moved out and are only taxed by the U.S.—Canada generally withholds 25% on RRSP withdrawals for nonresidents, though the U.S.–Canada treaty can reduce this to 15% for periodic pension-type payments.
• You may not get a U.S. tax credit for Canadian tax withheld unless you file correctly
• RRSP for non-residents comes with its own tax rules, so plan before withdrawing

If individuals plan a withdrawal, recognizing the RRSP withdrawal tax rate under both systems—and how they interact—presents assistance in preventing surprises.

Final Tip

It is true that the timing element and documentation practices make all the difference. If you need any assistance, contact Watter CPA today to make the most of your RRSP without generating penalty payments or double taxation. 

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