Canadian in USA - Tax Question - How to Record RRSP Sale

[dbchalmers]

Hello all,

I'm really hoping someone can help here - we've been to two accountants both have given us opposite information and we don't know which to believe. My wife and I have been living in the US for almost 2 years now, last year we sold our last RRSP and closed out the account (no more Canadian accounts). At the time of the sale we paid the 25% non-resident tax in Canada.

Now we are trying to do our US taxes and have been getting conflicting information about how to record that RRSP sale. Here are the two ways we've been told

1. At the time of the sale calculate the exchange rate value (so it's in US dollars per the IRS 2008 exchange rate) and than take that amount and record it (minus the 25%) as income in the US. That the Foreign tax credit will be used etc to knock off a bit of that income but we'll still end up with that amount essentially being lumped on top of our actual income and in turn we'll have to pay tax on that amount. This is obviously not real favorable because say the amount was $10 000 - we paid $ 2500 to Canadian gov't than add the say $6 500 (US) to our annual income and get taxed at our US income tax rate...and all of a sudden between the US and Canada we've paid like $5 000 tax on a $10 000 RRSP sale.

2. Concert the sale price to US dollars (same as above) than calculate and convert the amount the RRSP was on the day we left Canada. Subtract the amount from the day we left Canada from the total sale amount which will provide the GAINS of that investment between the day we left Canada and the day we sold it. Than record the GAINS only on our US return which of course lowers it substantially.
So in this example
Amount on day we left Canada $9 000 (US)
Amount on day we sold RRSP $10 000 (US)
---------------------------------------------------
GAINS $1 000 (US)
Taxes paid to Canadian gov't 25% (say $ 3 000 CAD)

and we get US taxed on the $1 000 worth of gains so only have to pay a few hundred dollars in tax. So on a $10 000 sale we end up paying less tax (Can + US) than the scenario above.

I'm really sorry for this lengthy post, but we're hoping someone out there has done this fairly uncomplicated task of selling an RRSP while living in the US and will know how they reported it.

ANY help is greatly appreciated!

Thanks in advance

[Steven]

This is a bit of a sticky issue because the tax treaty changed in several respects that affect this situation as of Jan. 1st, 2008. It's really important to know on what date the sale took place. Frankly there's no actual reason to close out your RRSP since last year because they're essentially treated as IRAs under the new treaty provisions.

In addition the departure tax provisions were altered under the new treaty, previously the IRS would calculate the capital gain from the date you acquired the capital item regardless of whether you had paid departure tax - now under the treaty they calculate it from the date you paid the departure tax.

I can't really follow the examples you've provided, but essentially to work it out you work out any capital gain (outside of a tax shelter, which an RRSP is) from the date you paid the departure tax, and as for calculating any income tax you do that as you would for withdrawing from an IRA which is explained in the 1040 instructions.

But basically withdrawals from IRAs are subject to income tax, not capital gains tax (because they're a tax shelter from income tax), so example 1 you provide sounds closer to what you need to do to me. If for example you had stayed in Canada and withdrawn from your RRSP, the withdrawal would be subject to income tax for the same reason.

You'll need to claim treaty provisions if you are working out capital gains for the above reasons.

Really talking to your average US accountant is pointless, you either need to talk to a good cross-border accountant based in Canada or alternatively talk directly to the IRS non-resident dept. in PA.

Bear in mind if you moved in 2007, distributions inside the RRSP are subject to US income tax for that tax year, if you moved your tax home to the US in 2007. When you moved your tax home obviously has a major bearing on this, if you got rid of the RRSP before you moved your tax home, it's subject to Canadian income tax, not US.

I know you're going to hate hearing this, but really what you should have done is left the money in the RRSP and declared the RRSP to the IRS on Form 8891 after you moved your tax home to the US.