U.S. citizens living in Canada|Canadian citizens living in U.S.

We have had several questions recently relating to citizenship and residency and the Registered Disability Savings Plan (“RDSP”). As you may have heard in the media recently, the U.S. Internal Revenue Service (“IRS”) is paying more attention to Americans living abroad.

While there are a plethora of residency questions relating to the RDSP, the two most important ones seem to be, “What if I am an RDSP Beneficiary who is contemplating a move to the United States?”  and “What are the implications if I am a U.S. Citizen but a resident of Canada and am the beneficiary of an RDSP?”

While we are very comfortable with Canadian tax law, these questions involve the U.S. Internal Revenue Code, the U.S. Treasury Department Regulations, the Canada-U.S. Income Tax Convention (the “Treaty”), and individual state laws.  Consequently, we are obliged to say that the following is for information purposes only.  If you are an RDSP plan holder or beneficiary and are a U.S. citizen or you are contemplating relocating to the U.S., we recommend that you seek professional tax advice from a cross-border tax specialist.

1.         What if an RDSP beneficiary moves to the United States and becomes a non-resident (of Canada) for tax purposes?

While “residency” is not defined in the Income Tax Act (Canada), courts have provided some direction.  Not surprisingly, residency is more than a person’s location on December 31^st of a given year.  Residency is a case-by-case determination made based on the facts of the particular situation.

The main consideration in determining whether a person living abroad remains a resident for Canadian tax purposes are his or her “residential ties” to Canada.  The three most significant “primary ties” are:

• Maintaining an available dwelling in Canada;
• A spouse or common-law partner living in Canada; and
• Dependents living in Canada.

A list of “secondary ties” may be evaluated if a person’s residency remains unclear.  These include factors such as:

• Personal property in Canada;
• Social ties with Canada (organizations and groups);
• Economic ties;
• Provincial medical insurance coverage; and
• Provincial driver’s license.

With respect to the RDSP, the regulations are clear: to open an RDSP and receive disability grants and bonds, the beneficiary must be a Canadian resident and must be eligible to claim the Disability Tax Credit (“DTC”).  If a beneficiary subsequently become a non-resident, the plan does not close (assuming the beneficiary remain eligible for the DTC), however, the beneficiary will not receive Canada Disability Savings Grants and Bonds.  If you become a non-resident for Canadian tax purposes and are deemed a resident of the U.S., you will be subject to U.S. tax laws as described below.

2.         Taxation and RDSP withdrawal for US. citizens and residents

As of today, the IRS will most likely consider RDSP’s a foreign trust requiring arduous reporting requirements (i.e. IRS form 3520/3520A and quite likely IRS form TD F 90-22.1 under the FBAR requirements) for U.S. citizens and residents that are RDSP plan holders.  Unlike RRSP’s/RRIF’s held by U.S. citizens that are afforded a tax deferral under Article XVIII(7) of the Treaty, RDSP’s are not yet eligible plans for such tax deferrals for U.S. citizens or residents.  As a result, RDSP plan holders and beneficiaries that are U.S. citizens or residents will not benefit from the tax deferral currently enjoyed by Canadian RDSP plan holders.

More importantly, the U.S. reporting requirement in itself may make it too difficult for U.S. citizens to be plan holders or beneficiaries of RDSP’s.  Adding the RDSP to the agenda for Canada-U.S. Income Tax Convention discussions is critical for RDSP beneficiaries who are American citizens.

Please note, the above is for information purposes only and is not a substitute for professional tax advice. The reader is cautioned not to rely on the above information with regards to their specific tax situation. To comply with the U.S. Treasury Department regulations, we inform you that the above tax information is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party the tax-related information discussed above.