We are often asked what is the most common mistake people make when moving from Canada to the U.S. Whether you’re relocating for retirement, work, or lifestyle, there’s one costly mistake we see over and over again, not planning ahead.
It may sound simple, but it’s true: if something is complex, and you haven’t studied it or done it before, and you don’t work with a professional, you’re likely to make mistakes. Those mistakes can cost you real money in the form of higher taxes, penalties, and missed planning opportunities. But, among all the issues we see, there’s one mistake that’s especially common, and easy to avoid.
Your Registered Retirement Savings Plan (RRSP) is likely one of your largest financial assets. If you move to the U.S. without proper planning, you might mishandle it and pay unnecessary taxes for years to come.
Understanding RRSP Taxation on Both Sides of the Border
While You’re a Canadian Tax Resident:
RRSP withdrawals are fully taxable as ordinary income. Period.
After You Become a Non-Resident:
Canada switches to a withholding tax regime for RRSP distributions:
- 15% withholding for periodic payments
- 25% withholding for lump-sum withdrawals
What’s a periodic payment?
Any RRSP withdrawal that’s less than 10% of the account’s value at the start of the year, or up to twice the minimum RRIF amount based on your age.
From the U.S. Perspective:
Here’s where things get interesting, and where opportunity can be lost if you’re not careful.
- RRSP contributions made while you were a Canadian tax resident are not taxable in the U.S. when withdrawn.
- Unrealized capital gains are taxable in the U.S. as foreign ordinary income.
- This doesn’t make sense as there are no “capital gains” in RRSPs. This is referring to securities that have grown in value and have not been sold.
- Selling investments inside your RRSP is not a taxable event in Canada — taxation is based on withdrawals, not activity within the account.
- Selling securities within your RRSP as a U.S. resident could have tax consequences at the state level. For example, California, Arkansas, Pennsylvania, and South Carolina (and maybe Delaware and Mississippi) do not honor the Canada-U.S. Tax Treaty or the deferral of investment income in Canadian registered accounts. In those states, interest, dividends, and capital gains are taxable as they are received like a taxable account. Distributions are not taxed.
Most Canadians who move to the U.S. do not know that they need to establish the U.S. tax cost basis of their RRSP. To establish the basis, you will need a complete transaction history so you can identify the dates and amounts of contributions, interest, dividends, and sales. Those transactions need to be converted to USD on the transaction date. Establishing the U.S. cost basis can be easier before you leave Canada because:
- If you are working with a cross-border expert, you account may be transferred to a new custodian and you may lose online access to the needed information.
- You will have a Canadian address and phone number for verification purposes.
- You may have statements and records that could be lost or buried during your move.
- Previous advisors and custodians are sometimes not as cooperative once you are no longer a client of theirs.
What Does “Crystallizing Your RRSP” Mean?
No, we didn’t invent the term, but we absolutely recommend the strategy. Before moving to the U.S., you can sell the investments inside your RRSP and convert everything to cash. This locks in (or “crystallizes”) the USD cost basis as the account value at the time of your move. This is much easier than trying to establish the USD cost basis from a transaction history report.
Then, once you’re living in the U.S., only the future growth is subject to U.S. tax when withdrawn. In other words, you minimize future U.S. tax by resetting the growth clock at the time of the move.
Why This Matters
If you fail to establish your RRSP cost basis, the IRS will treat your entire withdrawal as taxable income, including any contributions you made in Canada. If you can’t prove it, it didn’t happen. IRS rules state that if you cannot establish the cost basis then it is zero. This is particularly important if you are in a high tax bracket, will be returning to Canada, and would like to empty your Canadian registered accounts before returning to Canada.
The Bottom Line: Plan Before You Cross the Border
At 49th Parallel Wealth Management, we specialize in helping Canadians make the move to the U.S. with clarity, compliance, and confidence. Our cross-border planning services ensure your investments, taxes, and retirement income streams are aligned when your residency changes.
Moving to the U.S.? Let’s Get Your RRSP Strategy Right.
Avoid the most common mistake Canadians make and turn your RRSP into a tax-efficient retirement tool on both sides of the border. From the desert to the tundra, we are your cross-border retirement experts.
