Moving Your RRSP from Canada to California?
As a Canadian citizen moving to California, you likely wonder:
- How should I handle my RRSP when I move to California?
- Who will manage my IRA and other US investment accounts in California?
People in your situation typically work with two sets of advisors:
- A Canadian-based advisor in Canada managing your Canadian investments.
- A U.S.-based advisor in the U.S. managing your U.S. investments.
This happens because many Canadian and U.S. investment advisory firms are not registered to do business on both sides of the border.
Can Marnoa Private Wealth Manage Both My Canadian and U.S. Accounts Through a Single Relationship?
RRSP in California: California’s RRSP Tax Rules
RRSPs create complex financial planning situations for taxpaying residents of the U.S.
California does not acknowledge the tax-deferred status of Canadian retirement accounts. California treats Canadian retirement accounts as fully taxable.
As a Californian resident, if you maintain a Canadian retirement account like an RRSP, you must declare your yearly investment income on your Form 540.
California residents use Form 540 to file their state income tax. All earnings from interest, dividends, and capital gains must be reported annually, and taxes must be paid on these earnings from your RRSP.
RRSP in California: Key Considerations When Moving to California
If you sell and re-purchase securities in a significant gain position within the RRSP, this would result in a “step up” in cost basis for California State purposes, which would reduce the amount of California capital gains tax when you sell such investments. It is very important that the dispositions and re-purchases occur before becoming a California tax resident.
Because California taxes earnings within the RRSP, you can treat these earnings as after-tax capital invested in the RRSP. When the taxpayer then receives a distribution from their RRSP, the amount of the contributions and the previously taxed earnings is considered a non-taxable return of capital for California State purposes.
You will need to carefully track the cost basis to correctly calculate the capital gains for California state tax purposes. While RRSP withdrawals are considered as income for federal tax, they should not be included in the income for California state tax. To prevent double taxation for U.S. federal purposes, an adjustment will be necessary.
Although California is the most widely known State to have this unique rule, this tax treatment also applies to any other US state that does not follow the Canada-US tax treaty. You should carefully examine each US state tax treaty rules.
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