So, you’re a Canadian who decides to move to the Sunshine State. At this point in the season – that season being “not winter, but also not spring” – it’s something I think about every day. However, if you’re a Canadian who: 1) Flew south for more than just the winter; 2) Is a resident of California; and 3) holds RRSPs, LIRAs, RRIFs or other Canadian tax-deferred accounts, you need to read this.
The Canada-US Income Tax Convention or “tax treaty”, provides a tax deferral for RRSP and similar retirement accounts until the time of withdrawal. Essentially, giving Canadian retirement plans the same tax treatment as US Individual Retirement Accounts (IRAs). But not every state follows federal tax treaties. California is a state that does not abide by federal tax treaties. According to the California State Franchise Tax Board (FTB), your RRSP is…well…more like a savings account. Translation – the income and capital gains are taxable in the year earned!
The IRS has issued Revenue Procedure 89-45 which provides guidance with respect to why, under US domestic tax law, RRSPs, LIRAs and RRIFs are not considered to be the same as US IRAs. This particular procedure goes on to explain that, in fact, the earnings from this type of plan should be reported as part of your gross income on your US tax return. Of course, this is before considering Income Tax Treaties.
In summary, a California resident must include any earnings from their RRSP in their taxable income and pay taxes in the year it is earned. There is an upside. (Finally!) But one would need to have good bookkeeping skills to take an advantage of it. After tax is paid on these earnings, the earnings will also be treated as capital invested in the RRSP, for California tax purposes. When a taxpayer receives a distribution from their RRSP, the amount of the contributions and the previously taxed earnings is considered a nontaxable return of capital for the California purposes. However, the withdrawal will be taxable federally, meaning an adjustment will be required state-side to avoid double-taxation
Enough freeloading, the CRA has said to the Canadian population at large; they will find you and they will take away your benefits regardless of who you are. The tracking system – be it a land border or by air – is in the works to catch Canadians whose insufficient presence in the country disqualifies them from certain benefits. Once the tracking system is in place, it should allow Canada to save between $194 million and $319 million over five years.
The CRA is instating a planned border tracking system which will alert them of Canadians who are residing outside of Canada and are therefore ineligible for social benefits. The benefits at issue include Old Age Security, Unemployment Insurance, Child Tax benefits and others.
In order to be cleared by the CRA to receive your child tax benefits, you must be present in the country for at least 183 in a calendar year. To be eligible for Old Age Security benefits, you need to be a resident of Canada for as little as 10 years and as long as 20 years depending on the country of residency at the time the benefits are collected.
The tracking system has already been instituted for foreign nationals and permanent residents of Canada and the U.S. but this next phase will be sharing information about both country’s citizens. Canada is also expanding its sources of gathering information to include travellers leaving by air and ground.
If you are one of the Canadians who make an annual pilgrimage to avoid Canadian winters you may be aware that starting June 30, 2013 both Canada and the US began the second phase of their Entry/Exit Initiative under the Beyond the Border Action Plan for Perimeter Security and Economic Competitiveness which is designed to share information on certain categories of people entering and exiting the respective countries. One of the primary objectives of the Initiative is to identify persons who potentially overstay their lawful period of admission. And even though the Government of Canada through its Canada Border Service Agency website assures that Phase II is restricted to non-Canadian and non-US citizens, it may be a matter of time when such restrictions are lifted.
Consider it as a warning and start paying closer attention to the rules which you may have ignored in the past. This includes potential US tax compliance if you spend at least 4 months or 121 days on a calendar-year basis in the US. The four months do not have to be consecutive, the days do not have to be full and it is irrelevant whether the US presence is business or personal.
US tax compliance will likely increase if your annual presence in the US exceeds 182 days. You may also be at risk losing a provincial health coverage, becoming liable for US taxes on a worldwide basis, facing Canadian departure tax and even being banned from entering the US for at least 3 years.