Understanding RRSP Non Resident Withholding Tax in the U.S.

If you're a non-resident Canadian with a Registered Retirement Savings Plan (RRSP), you need to be aware of the U.S. withholding tax implications.

The U.S. imposes a 30% withholding tax on certain types of income, including RRSP withdrawals, unless a lower tax treaty rate applies.

If you're a Canadian citizen living in the U.S., you may be exempt from this tax, but you'll still need to file a tax return with the U.S. Internal Revenue Service (IRS) to claim an exemption.

You'll need to provide the IRS with a valid Social Insurance Number (SIN) to claim the exemption.

In Canada, Registered Retirement Savings Plans (RRSPs) are a popular way to save for retirement.

Contributions to RRSPs are tax-deductible, which means you can reduce your taxable income by the amount you contribute.

You can contribute up to 18% of your earned income in a year, but not more than $27,830 for the 2022 tax year.

The contribution deadline is March 1st of the following year.

RRSPs allow you to invest in a variety of assets, including stocks, bonds, and mutual funds.

Your RRSP contributions are typically made with after-tax dollars, which means you've already paid income tax on the money.

The RRSP contribution limit is based on your previous year's earned income.

If you're a Canadian non-resident with an RRSP, you're subject to U.S. tax implications on your withdrawals. Without any tax treaty benefits, the U.S. would classify RRSPs and RRIFs as foreign grantor trusts, which means any income earned within them could be taxable in the U.S. each year.

As a foreign grantor trust, you'll need to file additional forms, such as Form 3520 and Form 3520-A, to report the trust's activities. Failure to file these forms can result in substantial penalties.

Withdrawing from your RRSP can have significant tax implications, both in Canada and the U.S. In the U.S., RRSP withdrawals are subject to federal income tax and may be subject to state income tax.

A 25% withholding tax is automatically applied to RRSP distributions made to non-resident individuals. This means that if you withdraw $20,000 from your RRSP, $5,000 will be withheld for taxes, and you'll receive $15,000.

Here's a rough idea of the 2022 tax tables for U.S. federal taxes:

Keep in mind that this is a simplified example, and your actual tax liability may vary depending on your individual circumstances.

Withdrawing from your RRSP can have significant tax implications, both in Canada and the US. In Canada, RRSP withdrawals are taxed as ordinary income, and the tax rate will depend on your residency status and the amount you are withdrawing.

For Canadian residents, the tax on RRSP withdrawals varies depending on the province of residence, with Quebec having a lower tax rate. In all other provinces, the RRSP redemption withholding tax is 10% for amounts withdrawn up to $5,000, 20% for amounts between $5,001 and $15,000, and 30% for amounts over $15,000.

Non-residents of Canada, on the other hand, face a flat tax rate of 25% on RRSP withdrawals. However, if you convert your RRSP into a RRIF, you can withdraw your funds as periodic pension payments, which will lower the non-resident withdrawal tax to 15% per the US-Canada tax treaty.

In the US, RRSP withdrawals are subject to federal income tax and may be subject to state income tax, with Michigan residents paying a state tax rate of 4.25%. The US-Canada tax treaty allows US citizens to defer taxation on their RRSP account, but when you withdraw from your RRSP account, you will have to report the income on your US tax return.

Here's a breakdown of the withholding tax rates on RRSP withdrawals in all provinces (excluding Quebec):

It's worth noting that the withholding tax on RRSP withdrawals in Quebec is a little trickier to work out, as you'll also pay an additional 16% in provincial sales tax (PST).

If you're living in the U.S. and take a distribution from your RRSP, you'll have to consider both state and federal taxes. You'll have 25% automatically withheld to pay Canadian taxes, but this may or may not be enough to cover your U.S. federal taxes.

For example, a $20,000 withdrawal would require $5,000 to be withheld for taxes, leaving you with $15,000. But if you're in a higher tax bracket, you might actually owe additional taxes on the withdrawal.

You'll need to include all your worldwide income in your U.S. tax return, which will be added to your adjusted gross income (AGI) and taxed at the same rate as if you earned it in the U.S. The foreign tax credit can help offset this extra income, but if your marginal tax bracket is over 25%, you'll owe more taxes than what was withheld.

If you're in the 32% tax bracket, but you only get a credit for 25% of your withdrawal, you'll need to pay another 7% to the government in taxes.

If you live in a province other than Quebec, you'll pay 10% withholding tax on RRSP withdrawals up to $5,000.

For withdrawals between $5,001 and $15,000, the tax rate jumps to 20%.

And if you withdraw more than $15,000, you'll be hit with a 30% withholding tax.

In Quebec, things get a bit more complicated - you'll pay the federal rates, but then add an extra 16% in provincial sales tax (PST).

Automatic tax deferral is a relief for RRSP holders, as it's automatic under the U.S.-Canada Income Tax Treaty and Revenue Procedure 2014-55, so you don't need to file a special election.

You'll need to report your RRSP on the FBAR, and potentially on Form 8938, depending on the total value of your foreign financial assets.

Distributions from your RRSP are taxable in the U.S., but you can often offset this with foreign tax credits for Canadian taxes paid.

Forms 3520 and 8621 are generally not required for RRSPs, so you can avoid unnecessary paperwork.

Withholding tax on withdrawals from RRSPs can range from 5% to 30%, depending on your age and residency status.