Crossborder Implications of Canadian Accounts

Taxable Account

US citizens can hold taxable accounts in Canada with Canadian brokerages. For more on choosing a brokerage see this page.

A Canadian brokerage will let you hold funds in both US dollars and Canadian dollars. This is very helpful, since your US brokerage will likely not allow you to continue holding a taxable account once you move. Thus, you can transfer your US holdings to the US dollar account at your Canadian brokerage. In the US dollar account, I simply hold the same US ETFs that I did before (VTI and VXUS).

In the Canadian dollar account, you need to be more careful. Canadian-domiciled mutual funds and ETFs are considered Passive Foreign Investment Companies (PFICs) and, as such, are punitively taxed by the IRS and have onerous filing requirements. Thus, I avoid them.

Instead, my plan is to invest in individual Canadian stocks in my Canadian taxable account. This violates my general investing approach, but I’m OK with it for a couple of reasons. For one thing, this will not likely be a large portion of our portfolio — it is currently less than 1%, and I’d be very surprised if it was ever over 5%. I don’t anticipate working full-time for very long in Canada, so we won’t have much Canadian earnings to invest. In addition, Canadian dividends are taxed favorably in Canada, so my plan is to invest in a few of the “dividend aristocrats” to take advantage of this.

If I were early in my accumulation phase, I would consider converting money to USD and investing them in US-domiciled ETFs. And if this was my plan, and I was going to be doing a lot of currency conversion, I would probably try to optimize it.

RRSP

RRSPs are tax-deferred retirement accounts where you put pre-tax dollars and gains are not taxed until withdrawal, at which time withdrawals are taxed as income. Generally speaking, the amount you can contribute each year (aka your RRSP room) is 18% of your taxable income from the previous year. Thus, your first year in Canada, you won’t have any RRSP room and can’t contribute to it. Another wrinkle with RRSP room — if your RRSP has an employer match, the employer’s portion also counts against your room. So, assuming your salary remains static, if you had a 6% employer match, you could contribute 12% (which the employer contribution of 6% would bring up to the 18% match).

RRSPs are an available account for US citizens, as they are recognized as a retirement account by the IRS. To avoid double taxation, you need to do an election on form 8891 to defer the US income tax on the RRSP investment until withdrawal. I haven’t done this yet (as this will be my first year contributing to an RRSP) but I’ll say more about it once I have.

Unlike an IRA, there isn’t a minimum age for RRSP withdrawals. RRSPs mature the last day of the calendar year that you turn 71. At that time, you can 1) take a lump sum withdrawal 2) roll it into an RRIF, from which you would make annual minimum withdrawals or 3) purchase an annuity.

It is possible to roll an IRA into an RRSP, but the US withdrawal will be taxed. This means that at least 15% (and possibly more, depending on your tax rate) will be withheld, plus an additional 10% if you are under the age of 59.5. All of this would be available as a foreign tax credit (if you had enough taxes to offset it) but you’d have to make up the difference at the time of rollover or else only contribute the portion of your IRA left over after taxes. You wouldn’t be able to top it up later as it has to be done all at once to avoid counting against your RRSP room.

Personally, I haven’t really gone into the weeds on a rollover, but I may look more into it as I have a 403(b) and it might be a way to access it without the age restriction. At the same time, we also have a taxable account and 457(b)s so the plan is to save the 403(b) until later anyways. Here is some more info on rolling a 401(k) or an IRA into an RRSP.


The next several account types are more complicated for US citizens and you may want to avoid them.


TFSA

A TFSA is a retirement account where you invest post-tax dollars and withdrawals are tax free. There is no minimum age for making a withdrawal. Unlike RRSPs, the room available is not connected to your income — every Canadian simply gets a certain amount of room per year ($6000 in 2020) and this room is cumulative (unlike, for example, an IRA where if you don’t use your annual space you lose it). In short, TFSAs sound like a great option for folks who are earning at a level where it makes sense to pay their taxes now (rather than deferring them to retirement).

Unfortunately, the IRS doesn’t recognize them. This means that the US will tax the gains on this account. This isn’t necessarily a deal breaker, as the taxes may be offset elsewhere, but so far I haven’t availed myself of a TFSA. I plan to discuss it with my tax advisor once I start earning Canadian dollars later this year.

RESP

An RESP is an account aimed at saving for a child’s education (like a 529 in the US). However, similar to a TFSA, it is taxable for US income tax purposes. Thus, this isn’t something we’re using.

US Account Types | Table of Contents | Moving Money Across the Border