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Handle your registered savings plans properly when leaving Canada

I travel quite a bit this time of year. This week I'll be in Winnipeg. My friend, Paul, was there this past week.

"How did you find the weather?" I asked him.

"Tim, you don't have to find the weather in Winnipeg this time of year," he said, "because it finds you -- no matter where you go."

Paul's comment reminded me of something Mark Twain once said: "Everybody talks about the weather, but nobody does anything about it." Mr. Twain obviously wasn't familiar with the thousands of Canadians who head south each winter. Some stay for good.

If you're contemplating taking up permanent residence in the United States, there are some things you should know about how to handle your registered retirement savings plan or registered retirement income fund. Let me explain.

Canadian tax

If you're planning to give up Canadian residency to live in the United States, be sure to leave your RRSP or RRIF intact. Collapsing these plans would be a big mistake. If you make a significant withdrawal from your plan while still a resident in Canada, you'll face tax on that withdrawal at a rate as high as 46 per cent (that's the Canada-wide average; it varies by province).

If you wait until you've become a resident of the United States to make those withdrawals, you'll pay a withholding tax of just 25 per cent to Canada Revenue, which can be reduced to just 15 per cent for periodic rather than lump-sum withdrawals. To take advantage of the lower 15-per-cent rate, simply convert your RRSP to a RRIF after you're gone and keep your withdrawals annually to no more than twice the minimum required withdrawal, or 10 per cent of the value of the RRIF at the start of the year, whichever is greater. (This last requirement is set out in the Income Tax Conventions Interpretation Act for those who really care.)

Rather than paying withholding tax to Canada Revenue, you can elect under section 217 of our tax law to file a Canadian tax return to report your RRSP or RRIF withdrawals after you're gone, just as though you're still resident in Canada. You'll even be eligible to claim full personal credits if the RRSP or RRIF withdrawals represent 90 per cent or more of your worldwide income. This election makes sense if your effective tax rate on the return will be less than the withholding tax of 15 per cent.

U.S. tax

You'll also face tax in the United States when you make withdrawals from your registered plans. The good news? You'll only face tax on the income and realized capital gains inside the plan from the date you become resident in the United States.

In other words, the cost amount of the assets inside your plan can be withdrawn tax free in the United States.

I've got two pieces of advice for you: First, since you can withdraw the cost amount of the assets tax free in the United States, you'll want to maximize that cost amount before arriving in that country. You can do this by selling any investments that have appreciated in value before taking up residence in the United States, and then reinvesting those dollars. This will step up the cost amount of those assets in the plan.

Second, you can and should defer the U.S. tax on the income and growth in the plan until you make withdrawals. Just file the proper information with the Internal Revenue Service annually (see Internal Revenue Notice 2003-75 at for more details).

Tim Cestnick, FCA, CPA, CFP, TEP, is author of Winning the Tax Game 2005, and The Tax Freedom Zone. He is managing director, tax and estate planning, at AIC Ltd.

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