An RRSP is a Canadian-tax-sheltered retirement account. Once the owner becomes a US tax resident, two questions arise: is the RRSP still tax-sheltered on the US side, and what happens when withdrawals start?
Accumulation — Article XVIII deferral
Article XVIII of the Canada-US Income Tax Convention provides that the earnings of certain pension-style accounts — including RRSPs and RRIFs — are not taxed in the country of residence until distribution. For a US-resident with a Canadian RRSP, this means the income earned inside the RRSP (interest, dividends, capital gains, etc.) is not currently US-taxable.
Before 2014, the deferral required a specific annual election (Form 8891). That requirement was eliminated under Rev. Proc. 2014-55; the deferral is now automatic for any RRSP or RRIF owned by a US person. The pre-2014 election history matters only for taxpayers who failed to make an election in earlier years and may have a clean-up to perform.
Distributions — taxable in the year received
When the RRSP-owner takes a distribution, the distribution is US-taxable in the year received. Article XVIII allocates primary taxing rights on RRSP distributions to the source country (Canada), but provides that the resident country (US) can also tax with a foreign tax credit for the Canadian tax.
Canada applies non-resident withholding on RRSP distributions under Part XIII of the Income Tax Act. The default rate is 25%, reduced to 15% under Article XVIII for periodic pension payments and to 25% for lump-sum withdrawals. The withholding is the Canadian tax; no Canadian return is filed unless the taxpayer elects under Section 217 to file (which can produce a lower effective rate for low-income retirees).
The cost-base question
One quirk of the treaty deferral: it does NOT eliminate US tax on the entire RRSP withdrawal. Only the portion of the distribution attributable to post-immigration RRSP earnings is US-taxable. The portion attributable to the original RRSP balance at the time US residency began is treated as a non-taxable return of basis on the US side.
Determining the post-immigration earnings portion requires knowing the RRSP's value on the day US residency began. For taxpayers who didn't track this number contemporaneously, the IRS will accept a reasonable reconstruction — but having the number locked in at the time of move is much cleaner than reconstructing it years later.
Coordinating the Canadian and US returns
For a US-resident-Canadian-citizen taking an RRSP withdrawal:
- Canada withholds 25% (or 15% on periodic payments) at source.
- US Form 1040 reports the withdrawal as taxable, then claims a foreign tax credit for the Canadian withholding.
- If the Canadian withholding is less than the US tax on the same income (which is usually the case), no further Canadian filing is needed.
- If the Canadian withholding exceeds the US tax (rare, but possible at lower US marginal rates), the excess is non-refundable on the US return; a Section 217 election in Canada may recover some of the Canadian tax.
RRIFs and annuitization
When an RRSP is converted to a RRIF at age 71, the same Article XVIII analysis carries over. RRIF minimum payments qualify as "periodic" for the 15% Canadian withholding rate, which is normally more favourable than the 25% lump-sum rate.
The bottom line
For US-residents with Canadian RRSPs, the treaty does most of the work — accumulation is sheltered, distributions are taxed in both countries with the foreign tax credit relieving double taxation. The mechanical points to get right are: knowing the RRSP balance at the date of US residency, choosing periodic vs. lump-sum withdrawal patterns to match the 15% / 25% Canadian withholding tiers, and coordinating with any Section 217 election where it produces a better result.