Many retirement accounts, different country pensions, exchange rates, and multiple tax rates. Working both in the U.S and Canada sure does make things complicated. However, if you are retiring here in the U.S., your tax situation is much more favorable than retiring in Canada. Here, I want to summarize the taxation of all of the different retirement accounts (RRSP, RRIF, and TFSA) as well as the retirement benefits (CPP and OAS).
First, we will lay out a quick summary, and below is a little more detail on these accounts/benefits here in the U.S. I’ll try to make this as clear as possible, but will use the caveat that you should always consult with your tax person if you have both U.S. and Canada accounts. Dealing with U.S. taxes alone is hard. Adding in additional Canadian benefits makes it that much more difficult.
| Canadian Asset | Minimum Federal Tax Rate |
| Retirement Savings Plan (RRSP) | 25% |
| Retirement Income Fund (RRIF) | 15% |
| Tax-Free Savings Account (TFSA) | N/A |
| Canadian Pension Plan (CPP) | Same as U.S. Social Security |
| Old Age Supplement (OAS) | Same as U.S. Social Security |
Registered Retirement Savings Plan (RRSP)
The RRSP is like the IRA or 401(k) here in the U.S. Initially when you contributed to the RRSP, you received a tax deduction. When you withdraw funds from the RRSP, you then have to pay the taxes. If you live outside of Canada, you will have 25% withheld from the distribution to pay the Canada tax. This should take care of your Canada tax liability, but may not satisfy U.S. taxes. Taxes are complicated but I’ll try to make this as easy as possible.
When you have the 25% withheld to pay the tax in Canada, you will then be able to use this money as a foreign tax credit on your U.S. income tax return. For example, if you take a $10,000 RRSP distribution, you will have $2,500 withheld for taxes. You will have to include the $10,000 on your U.S. taxes as income but can take credit for $2,500 on foreign taxes paid. If your U.S. marginal tax bracket is under 25%, the foreign tax credit will cover all of your U.S. taxes. The issue is if your U.S. tax bracket is over 25%. For example, let’s say that you are in the 32% tax bracket. On a $10,000 distribution, you are responsible for $3,200 of U.S. taxes, but you have only had $2,500 withheld for foreign taxes. In this situation, you would need to pay another $700 in taxes. Here is a chart of the examples that we just described.
| U.S. Marginal Tax Bracket | RRSP Distribution | Canada Withholding | U.S. Taxes | Total Taxes Paid |
| 12% | $10,000 | $2,500 | $1,200 | $2,500 |
| 32% | $10,000 | $2,500 | $3,200 | $3,200 |
In other words, when you take an RRSP distribution here in the U.S., you pay the higher of the 25% tax withholding or your U.S. tax bracket. If your U.S. tax bracket is higher than 25%, you pay the same amount of taxes on the RRSP distribution, as you do your U.S. retirement account distributions. If your U.S. tax bracket is under 25%, you are paying higher taxes on the RRSP withdrawal.
Registered Retirement Income Fund (RRIF)
If you are looking to lower the taxation of your RRSP, you can convert it to an RRIF. Instead of the 25% tax withholding on an RRSP, the RRIF only requires 15% withholding. For those here in the U.S. that are in lower tax brackets, this may make sense, as you will be paying less in taxes. So doesn’t it make sense to always convert your RRSP to an RRIF in retirement, if you live in the U.S.? Not necessarily, and here are a few reasons why:
Once you convert from an RRSP to an RRIF you need to start annual distributions
At age 71, you are required to convert your RRSP to an RRIF and begin minimum distributions. If you convert your RRSP to an RRIF before age 71, you will need to maintain yearly distributions forever.
Here is the minimum amount that needs to be withdrawn each year.
From RBC Wealth Management:
Remember, you don’t need to start taking withdrawals until age 71, but if you start early, you will need to maintain the minimum withdrawals above.
You are limited on your annual distributions from the RRIF, or additional taxes will be required
The easy question arises, “Why don’t I convert my whole RRSP to an RRIF and withdraw the total amount and only pay 15% in taxes?” Unfortunately, this is also not an option. You are only able to withdraw the larger of 2 times the minimum distribution, or 10% of the total account value as of January 1, to maintain the 15% taxation. For example, let’s say that you have a $100,000 RRIF at the start of the year, and you are 65 years old. The minimum distribution is 4%, or $4,000. 2 times the minimum distribution is $8,000 which is less than $10,000. Therefore, you can withdraw $10,000 and maintain the 15% tax withholding.
If your U.S. tax bracket is over 25%, you will end up paying the same amount of taxes
However, if your tax bracket is over 25% in the U.S., you are going to end up paying the same amount of taxes anyway on the RRSP and RRIF, just less will be withheld initially from the RRIF.
Let’s use the same example as we did before on the RRSP distribution:
| U.S. Marginal Tax Bracket | RRIF Distribution | Canada Withholding | U.S. Taxes | Total Taxes Paid |
| 12% | $10,000 | $1,500 | $1,200 | $1,500 |
| 32% | $10,000 | $1,500 | $3,200 | $3,200 |
As you can see, someone in the 32% tax bracket (or anyone over 25% tax bracket) ends up paying the same amount of taxes on both an RRSP and RRIF distribution. The difference is that less money is initially withheld from the RRIF for Canadian taxes. Anyone under the 25% tax bracket will pay less if they convert the RRSP to an RRIF.
Tax-Free Savings Account (TFSA)
The TFSA is very similar to the Roth IRA here in the U.S. You make after-tax contributions, the money grows tax-free and the withdrawal is completely tax-free. Seems simple enough. However, as you have probably realized, nothing is easy when it comes to cross-border taxation. The problem with the TFSA is that it was created after the U.S. – Canada Totalization Agreement, which laid out taxation and qualification for Canadian benefits here in the U.S. Therefore, there is a lot of confusion in regards to the taxation of the TFSA here in the U.S.
Most people believe that the TFSA is a foreign trust, and requires filing paperwork with the IRS on a yearly basis. Also, the U.S. taxpayer may have to pay taxes on withdrawals here in the U.S. as well. The typical recommendation is to withdraw the TFSA while living in Canada, before moving to the U.S. This way you can avoid all of the grey areas currently with the TFSA. If you live in the U.S. and have a TFSA, make sure that you are working with a competent tax planner.
Canadian Pension Plan (CPP) and Old Age Supplement (OAS)
I hear clients complain all of the time that they have to pay taxes on social security here in the U.S. “What do you mean I have to pay taxes on social security?! Social security is a tax, to begin with!” Unfortunately, there is no getting around paying taxes on social security. The good news, however, is that there are some tax advantages from social security income. The other good news, if you have a CPP and/or OAS, you receive these same tax benefits. This is because your CPP and OAS are taxed the same way as your social security benefit here in the U.S. This is a huge benefit compared to the taxes that you would pay if you collected the same benefit in Canada.
You are taxed on social security, as well as CPP and OAS, at the same federal rate as your normal taxes. However, the tax benefit is that at least 15% of your social security benefit is tax-free. In other words, only up to 85% of your social security benefit is included in your taxes.
Social Security Tax Formula
The amount that is included in your taxes depends on a somewhat complicated formula. First, we have to start by calculating your combined income. From the Social Security Administration:
Your adjusted gross income (AGI)
+ Nontaxable interest
+ ½ of your social security benefit
= Your Combined Income
For reference, your AGI is the bottom number on the front page of your tax form 1040. It is essentially all of the income that you earn, minus deductions such as IRA and HSA contributions. Nontaxable interest is interest that you earn from municipal bonds, which is not subject to federal income taxes.
Now that you know your combined income, you can determine the amount of your social security benefit that is taxable. Again, from the Social Security Administration:
If you:
File a federal tax return as an “individual” and your combined income is:
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
File a joint return, and you and your spouse have a combined income that is:
- between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
- more than $44,000, up to 85 percent of your benefits may be taxable.
In other words, if you are single you will pay no federal taxes on social security if your combined income is less than $25,000. If combined income is over $34,000, pretty good chance that 85% of your social security benefit will be added to taxable income and subject to federal taxes. If your combined income is between $25,000 and $34,000, between 50% and 85% of your benefit is subject to taxation.
If you are married and your combined income is less than $32,000, your social security benefit will be tax-free. If over $44,000, 85% of your benefit will be added to income and subject to federal state taxes. If combined income is between $32,000 and $44,000, between 50% and 85% of your benefit is subject to taxation.
As you can tell, nothing’s easy about social security taxes. The short version is this; the more you make, the more taxes that you pay on your social security benefit. Still, at most, only 85% of your social security, CPP, and OAS is subject to taxation.
Summary
After reading this post, you probably came to the same conclusion as before you started reading; taxes are complicated. Dealing with different taxes in multiple countries makes it just that much more difficult. I’d strongly consider working with a financial advisor that can help you navigate the complicated cross-border tax planning when you have lived in multiple countries. However, I do have some good news for you. Cross-border taxation in complicated. It is also much less in total taxes paid, than if you lived in Canada.
Have you lived and worked in both the U.S. and Canada? Cross-border tax and financial planning can be very difficult and a small mistake could cost you thousands. If you are interested in talking with a cross-border financial planning specialist, schedule a meeting below.
Very good information. I do have a question. Just received an NR4 showing amount of QPP received. I live in the U.S. but my question is do I apply the exchange rate as of the Dec 31 to convert the Canadian dollars to U.S. dollars for adding to my 1040, or should I simply declare exactly what I received from my American bank when they converted the deposits? I thought in Publication 54 (IRS) they seemed to indicate that the exchange rate should be at the time of receipt of the funds??
Hi Andre,
Thanks for the question. It is best practice to use the actual exchange rate when you receive each payment. It is easier to do when you receive the money in USD. You can also use the average exchange rate for the year published by the IRS. You can see the rates here: https://www.irs.gov/individuals/international-taxpayers/yearly-average-currency-exchange-rates
Best regards
Bryan
Thank you Mr. Haggard. Since the first time I can get my hands on the money it is already converted into US funds by my US bank, I will just use the amount in US funds deposited into my bank account and really will have no exchange rate conversion to do. Seems a much fairer way to do it as that is the actual amount in US funds that I received. Appreciate your help.
Hi Bryan, to confirm if an RRSP is converted to a RIFF the maximum amount that can be withdrawn per year is locked in at 10% of the RIFF value in January of the year in which the RIFF is created, or twice the minimum distribution whichever is greater?
For example Fund value at RIFF creation is $500,000, and minimum distribution at age 63 is 3.7%. So maximum RIFF withdrawal per year would be , $50,000 (10%) not $37,000 ( 7.4%) and still maintain a 15% withholding tax by Canada.
Hi Dave, Yes, you are correct. If you want to maintain a 15% Canada Tax Withholding, the maximum amount that you can withdraw is the greater of 2x the minimum or 10% of the account value.
Thanks for the question.
Best regards,
Bryan
Hi Bryan, living in USA with RRSP. If the tax paid for a RRSP withdrawl is greater than the US income rate, can i use the total foreign taxes paid amount to offset other types of US investment income tax?
Hi Max, No, the foreign tax credits only offset the income that you received from foreign sources. If the tax paid for a RRSP withdrawal is greater than the tax due here in the states, you will get a carry-forward into future years. This carry-forward is only helpful, if in later years, your tax paid on the RRSP is lower than your US taxes.
Thanks,
Bryan
Hi Bryan- My spouse closed out her RRSP of $150,872.16 and paid the non-resident tax of 25% ($37,718.04). We believed this would satisfy all taxes owed, as we are in the 22% bracket here in the U.S. Our accountant has indicated that, “due to rules approximately $2,500 of tax paid to Canada does not offset U.S. tax in 2022.” He is indicating we now owe an additional $2,500 in tax. We believe this is incorrect. Are you able to comment? Thank you.
Hi Pete,
Thanks for the question. The foreign tax credit is meant to only offset taxes you incur form the RIF withdrawal. Unfortunately, how Form 1116 (Foreign tax credit) is calculated, it is possible that you still owe money even though the FTC is higher than your US tax bracket if there was not enough withheld on your US tax obligation.
Thanks,
Bryan
I attended your cross-border webinar last week – thanks for that. I am left with one question. I am a US resident, Cdn citizen, now have SS and CPP benefits (OAS to come), don’t file a Cdn tax return, paid US taxes on CPP for first time on 2022 1040 (by placing CPP on Line 5b). I have a large amount in a Cdn checking account earning nothing and would like to invest most of it in a GIC or other such vehicle via the bank, but don’t know how those earnings would be taxed. Would I declare those earnings on the 1040 Line 2b using the bank’s Cdn T5 form?
Hi Clive, I’m not an expert in tax preparation but typically I see CPP and OAS listed as Social Security income (line 6b) and GIC interest listed as interest income.
Thanks,
Bryan
Hello, I’m a dual citizen (US-Canada) living in Canada since I was 14. I have just started receiving CPP/OAS, which I reported as taxable income on my Canadian tax return. Do I also need to report this as taxable income on my 1040? I have found plenty of conflicting advice online, but can’t find anything in the tax treaty that specifically addresses the US taxation of Canadian-source social security benefits that are paid to US citizens who live in Canada.
Hi Gail,
I’m not an expert in tax planning for Canadian residents. However, my U.S. residents do include CPP and OAS on their U.S. tax return. I’m guessing this would be the same for you given that you are a U.S. Citizen.
Thanks,
Bryan
I have just converted registered retirement funds (LIRA, RRSP) to an RRIF in September. The bank in Canada is telling the US investment firm (they use that bank – NBIN as the “custodian” for my retirement money) that I must pay 25 percent withholding regardless if I take periodic or lump sum payments this year (that only leaves November and December). I can’t get an answer as to why. After doing 4 days/12 hours per day solid research, the only thing I can speculate is that the RRIF was at $0 on January 1, 2023. So they cannot use the preferential 15 percent. Do you think that is a CRA rule that they have to follow? These guys have turned out to be terrible to deal with. For a litany of reasons. Mostly, apparently due to stupdity. This appears to be one more example; maybe. Please advise if you know or can direct me and also if this is something I can work with you on. Also, I am at this point wanting to move away from NBIN. In talking to TD Canada Trust (where I had and RRSP for 40 years – up till August) and CIBC, they seem to be totally confused as to how to work with a non-resident. Which I don’t understand from TD. It seems like it SHOULD BE no different – other than mail crosses a border and tax rates are different. I am guessing they are just too lazy and simple minded to bother. Do you have a recommendation on a financial institution? I am wide open to who. It is possible some other company could be worse; some how I doubt it. It would be the pain, of yet again, moving the money. But at this point, things are so bad, I need to find an alternative.
Hi,
Unfortunately, I see this often. It seems to vary between companies if you are able to convert to a RIF and have 15% withheld the same year. I’ve looked through the CRA guidelines and haven’t seen where they state this rule clearly unfortunately. I’ll usually suggest converting to a RIF the year before withdrawals start to avoid this problem.
Good luck and let us know if you do find anything concrete from the CRA.
Best regards,
Bryan
I use TD bank.
I think the reason is because, when you convert to a RRIF in 2023, you can only start taking the money out in periodic payments in 2024 and they tax them at 15% (if residence is USA).
If you take out before 2024, then it’s just a withdrawal and is at 25%.
That is how it was explained to me and so I left the money alone in 2023 and had the auto withdrawal set to start in Jan 2024 and it’s being taxed at 15%.
Hello, this is what I typically see as well.
I am having a hard time finding an answer to this. I recently moved from a state with no state income tax to Oregon which does have a state income tax. They do not tax U.S. Social Security but do tax pensions (including Federal pensions and retirement income). My thought is that the QPP I receive is considered as US Social Security that I should not have to pay Oregon tax on the QPP. But after calling OR Dept of Revenue, the only answer I got was to go seek tax help. The QPP amount is included in the SS amount on the same line on a 1040, so Oregon wouldn’t see a separate entry on the tax form.
Hi Andre, if Oregon doesn’t tax social security and you include QPP as social security income on your tax return, you probably won’t pay OR taxes on your QPP benefit. Most states just look at the federal return to determine taxes. They probably can’t classify the QPP differently and should be taxed the same as Social Security.
Thanks,
Bryan
I am a US resident who worked in Canada. I get a private pension from Canada, 15% goes to the Canadian government and I claim a foreign tax credit on my US taxes. It is always less than the Canadian tax paid. When I start my CPP, will I be able to claim that as foreign income for the purpose of calculating my tax credit? If so, that would increase the amount of the credit.
Hi Mike,
I typically don’t see that as CPP doesn’t have any foreign taxes withheld and therefore not included in the Foreign Tax Credit worksheet.
Thanks,
Bryan
Thanks Bryan. That sounds plausible, but I used to have investment income from Canada. There was no withholding but the income did count in computing my foreign tax credit. So it does not seem like “no Canadian withholding” is a general rule for using income in the tax credit calculation.
A user at the TurboTax community forum pointed out the following. The instructions for line 1a of form 1116 (Foreign Tax Credit calculation) say “Include income in the category checked above Part I that is taxable by the United States and is from sources within the country entered on line 1. You must include income even if it isn’t taxable by that foreign country.” That can be found here: https://www.irs.gov/instructions/i1116#en_US_2023_publink11441fd0e4093
The second sentence would seem to answer my question with a solid “yes”.
Hi,
I know there is a 15% tax withholding for RRIF, however, the CRA publication, https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic76-12.html
in paragraph 67, it says
67. No Part XIII tax has be withheld on certain pension amounts that payers transfer directly to a registered pension plan, registered retirement savings plan or registered
retirement income fund of a non resident (Form NRTA1,
Authorization for Non-Resident Tax Exemption). For more information about this provision, see the information provided on the current version of the form.
https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/nrta1.html
When can this form be used to get exemption from tax withholding? Or this is old news?
Thanks
Phuong
Hello Phuong,
Yes, the CRA publication is correct. If you just roll money from one qualified account to another, like RRSP to RIF, there is no tax due or withholding. If you withdraw the money out of a qualified account, you will have to pay taxes and taxes are withheld.
Thanks,
Bryan
Bryan,
As of 2023 I now receive US Social Security, CPP and OAS benefits while living in the US. I file a US 1040 tax return only. Is it correct to place my CPP and OAS benefits on Line 1 of the Social Security Benefits Worksheet along with my Social Security benefits? I have read that CPP and OAS are to be treated the same as Social Security for tax purposes and this is the only way I can see to interpret that. Am I right?
Clive
Hi Clive,
Yes, that is typically how I see most people report their CPP and OAS benefits.
Thanks,
Bryan
Hi Bryan,
I am a US resident, and collecting a Municipal Pension Income (MPP) from the Province of British Columbia. Do I report this pension income on line 5 or 6 of Form 1040?
Hi,
I typically see non CPP and OAS pension payments reported on line 5. You’ll want to make sure you are competing a FTC form to get credit for the Canada withholding.
Thanks,
Bryan