T&T: RRSP Edition

P wrote: Gail, my husband was transferred to the U.S. and I’m just about to follow him. Since we will be U.S. residents, how’s that going to affect the money we have in RRSPs in Canada?

Gail says: The amount you’ve accumulated in the RRSP up to the date of your move is not subject to tax. But anything earned in the plan after the move would normally be subject to tax. You can elect to defer paying tax on current earnings of the plan until you withdraw them so you can take advantage of the foreign-tax-credit system. You’d have to figure out what portion of the plan represents earnings since leaving Canada, because these would be subject to tax. The U.S. Internal Revenue Service has a bulletin that explains how this calculation is made.

To elect to defer U.S. taxes, each year you have to attach a note with your U.S. return providing:

•     the name and address of your RRSP trust/trustee

•     the plan number

•     the value of the plan on the day you became a U.S. resident

•     the accumulated income for the year.

If you withdraw money from your RRSPs after changing your tax status from Canadian to U.S., you will have to pay a 25% withholding tax on lump-sum withdrawals and a 15% withholding tax on periodic withdrawals, say if you bought an annuity or registered retirement income fund (RRIF) and took out no more than twice the yearly minimum-withdrawal amount.

Since the tax on withdrawals after a change in residence is only 25%, if you anticipate needing the money you should change your residency status BEFORE you make a withdrawal.

Cross-border tax planning can be very complicated, so you’re best off seeking professional help before making a move.

Deena wrote: My daughter has been working part-time since she was 16. I know she has some RRSP contribution room. Would it make sense to make a contribution for her so that money can start growing from now? Suppose she wants to cash it in, can I stop her?

Gail says: Anyone with earned income in Canada can contribute to an RRSP, regardless of age. Whether a child is modeling, shoveling snow or babysitting, as long as the child files a tax return and has qualifying earned income, she can begin to contribute to an RRSP.

Go ahead and make the contribution but don’t claim the deduction since Baby Girl won’t get the biggest bang. Tell her to wait until she’s in a higher tax bracket. A lot of people don’t realize that the RRSP tax deduction that most people take in the year of contribution can be carried forward indefinitely, so that when she is working full-time, she will have deductions she can use to offset the tax on her higher income.

As for cashing in the plan? Hey, once you give it to her it’s her money, so that’s her prerogative. The best you can do is demonstrate the long-term cost of making the withdrawal, in terms of both the lost growth and the tax that will have to be paid. Even if the deduction hasn’t been claimed, the withdrawal is still considered income and, therefore, taxable.

Jack wrote: Could you please provide some information on self administered RRSP’s being used for our personal mortgage. We have enough money in our RRSP’s to cover our existing mortgage.  Is this relatively easy to set up?   What are the disadvantages/advantages?

Gail says: A self-directed mortgage is a mortgage, just like any other mortgage, except your RRSP holds the paper, and you make the payments back to the plan instead of lining the pockets of some third-party lender. In effect, you are borrowing cash from your RRSP which takes title to any Canadian real estate you own, or that’s owned by your immediate family, as security.

Not everyone benefits from a self-directed mortgage. You should have at least $150,000 left on your mortgage to make this work in the context of the fees involved. And just because you’re writing the mortgage from your own RRSP doesn’t mean you can make up the rules. CCRA has stringent rules you must follow: the interest you pay has to be comparable with current rates, the mortgage must be insured, and you must qualify for the mortgage just as you would if you had gone to a financial institution. Payments must be made on time or your RRSP will be forced to foreclose.

If you decide to go ahead with this, you’ll have to think about what you’re going to do with the mortgage payments trickling into the RRSP every month. If that money sits idle, your RRSP’s return will suffer. There’s also the issue of diversification. A large portion of your portfolio in an SDM would weight you too heavily on the fixed-income side. I’d recommend that you dollar cost averaging your monthly mortgage payments into an equity mutual fund.

Arranging for a mortgage from your RRSP is no small feat. You may very well have to meet with mortgage officers, your financial advisor, and your lawyer to get it all accomplished. While this isn’t a horrendously complex investment strategy, there is a dearth of information out there and most advisors don’t have a clue how to do it. You’ll have to hunt for a body who can lead you through the process smoothly.

One of the biggest drawbacks to the self-directed mortgage strategy is the associated fees. While some are on-going, others are one-time charges. Many people are put off by all the fees associated (mortgage set-up fee, legal fees, appraisal fees, and CMHC insurance premiums, along with the SD RRSP admin fee and the mortgage admin fee). You have to shop around for the financial institution that doesn’t do in your strategy with ridiculously high fees.

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Gail Vaz-Oxlade

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15 Responses to “T&T: RRSP Edition”

  1. Re Deena – RRSP’s are *before tax* money. Why would you put in your *after tax* dollars to your daughter’s RRSP? She made money, she can contribute – or she can start saving up so she can contribute. If she uses her own money she will think a lot harder about taking it out again early.

  2. RSP season everyone!!!

    I actually made my contributions early in 2013 – more time for growth!

    The biggest thing I made a mistake on when was I younger and in a lower tax bracket and didn’t realize I could delay the claim on my contributions. Oh well, what’s done is done.

    I’m maxed out on my contributions, mainly because I am enrolled in a company pension plan with the pension adjustment eating up a lot of my RSP room. I guess this can be a “good” problem.

  3. I also put my maximum contribution allowed in early last year so it could work for me. I’ve never understood why someone would wait until the beginning of the following year to put in their RRSP money for the previous year.

  4. Can anyone recommend a tax guy in Toronto area who has CDN/US expertise?

  5. @grace. Why dont you try H&R Block. I used to work at one, and the tax experts (the full time guys with all the experience and knowledge) are usually at the Head office.

  6. avatar Christine Says:
    January 16, 2014 at 1:38 pm

    @Grace there is also in Canada KPMG. Those people are expensive but they are worth the while.

  7. TFSA is much better way to grow money than RRSP. If you are a saver, you likely have money invested elsewhere, at least for me and it’s all going to be taxed. I only contribute the minimum I need so my professional association will match. Everything else is invested in my corporation or TFSA.

  8. @Grace – We have a great accountant in Windsor, ON. We have always sent everything to him and provided clarification via email/phone. http://gordonbleeca.com/home.html

  9. I am with Kratos on this one! Contribute the minimum to my pension, and then plunk the rest in my TFSA.

    Does anybody know if you can borrow against a registered pension vs. borrowing against an RRSP?

  10. @Kratos – How does the TFSA grow better than a RRSP? They both grow untaxed. Yes the RRSP is taxed upon withdrawal, but you get the initial tax deduction. No doubt you can’t go wrong with a TFSA. The higher one’s income, the more beneficial the RRSP. BTW, I max out the TFSA then the RRSP.

  11. @ Grace, I second the recommendation of Gordon Lee in Windsor. I used him a few years ago after I moved to the U.S. He’s well versed in Cdn/US tax laws. He was able to walk me through the process of “breaking” my RRSP along with explaining the tax implications and how to deal with them come tax time. A bonus is his fee was nominal (compared to other accountants/firms)

  12. TFSAs are not better than RSPs, they are just a different tool.

    If your taxable income is higher when contributing vs when you are withdrawing, you benefit from tax savings – simply put.

  13. Folks, not sure if many have done this or have the restraint to be able to pull it off, but using the T1213 form to reduce tax at source, will give you more money on your paycheque to use towards RRSPs, rather than waiting until tax time. I used this for the first time in 2013, and it’s worked beautifully.

  14. Grace…. Hire the right professionals. It may cost more but you’ll get better advice (full estate planning and financial planning). We use Paul Watson – pewatson@kpmg.ca

  15. I am CDN immigrating to USA to be with my husband. Given that CDN dollar is so low, financial planner/accountant said to keep funds in Canada until exchange rate changes. Any advice on what to invest the money in Canada in the meanwhile. I am maxed out on RRSPs, Pension, TFSAs – got it all covered – got any advice on Index Funds?

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