Cautionary Words For US Citizens

As a US citizen living in this country, be aware not all Canadian investment options are good for you. Learn more about the potential tax consequences of investing in RRSPs, TFSAs, RESPs. Take advantage of foresight.

04.28.2021 - David Cieslowski, Vice President, CPA, CA, CFP, CIMA

Canadians and Americans may share a border, be generally good neighbours and have many similarities. There are also differences, one of which is lesser known, but of great significance.

That is the distinction between the US and Canadian tax systems, their respective views on citizenship, and who is eligible to be taxed. For instance, a Canadian citizen can move permanently to another country and cease residency for tax purposes without too much difficulty. The US tax system, however, is rooted in citizenship. This means, regardless of your permanent address in the world, the US Internal Revenue Service (IRS) sees you as a citizen of that country and requires you to file tax annually. (The only recognized way out is to surrender US citizenship, which can be very complex and costly.) While there are numerous ramifications stemming from the requirement to file tax while living abroad, in this article we focus on some of the investment effects.

There are more than half a million US citizens living in Canada. Many may be unaware of US tax filing requirements and likely do not appreciate that some investment options—of obvious benefit to Canadians—may not be optimal for them. We are raising a cautionary flag on three common investment vehicles: Registered Retirement Savings Plans (RRSPs), Tax Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs).

RRSPs: Focusing on retirement savings from a young age is always encouraged and, at first glance, RRSPs are considered a tax-friendly option. However, pre-retirement, the IRS views tax-deferred savings held in an RRSP as taxable, since the asset value presumably grows each year. The good news: There is an option. With the help of a cross-border tax specialist, you can file specific forms along with your US tax return that enable you to take advantage of US-Canadian tax treaty elections. This means US taxation can be delayed until you make withdrawals from your RRSP in retirement. This helps avoid double taxation, which may otherwise occur if you are taxed in different years and unable to utilize foreign tax credits for taxes paid to the other tax jurisdiction.

TFSAs: This is a no brainer for Canadians. However, the tax-free income earned within a TFSA is considered taxable for US tax purposes. Therefore, if you have any citizenship relationship with the United States, cross-border tax advisors will generally advise not to hold TFSA accounts.

RESPs: While an RESP can be a great way to save for your children or grandchildren’s post-secondary education, it is not so great if you are a US citizen. The IRS considers income earned within an RESP taxable income as it is earned annually. Be aware, these rules can apply if the children who are the plan beneficiaries are also US citizens, or if the subscriber contributing to the plan has US citizenship.

The Advantages of Foresight

Like most things in life, being aware you might have an issue and then seeking expert advice to help determine the right course of action is very important. In today’s world, with families on the move, we know this is particularly true when it comes to cross-border tax issues. Take the time to ensure you and/or your family members understand the US citizenship, taxation, investment relationship.


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