Tax Treatment

Tax Treatment of RRSP Plans in California

Are you a Canadian citizen and resident moving to California?

You may be asking yourself:

  • What do I do with my RRSP when I move to California?
  • Who’s going to manage my IRA and other US investment accounts in California?

Commonly, people in your situation might have 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 is 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?

Yes. Our cross-border financial advisors are dually licensed to work with Canada and U.S. based clients and investment assets. We can hold your RRSP and IRA accounts and still provide ongoing investment and financial guidance.

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Managing the complexities of California’s tax treatment of RRSPs

RRSPs can create complex financial planning situations for taxpaying residents of the U.S.

The State of California does not acknowledge the tax-deferred status of Canadian retirement accounts, and therefore considers these accounts as fully taxable.

As a Californian resident, if you maintain a Canadian retirement account like an RRSP, you are obligated to declare your yearly investment income on your Form 540.

Form 540 is used by California residents 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.

Additional items to consider when moving to CaliforniA

If securities in a significant gain position are sold and re-purchased 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 such investments are sold. It is very important that the dispositions and re-purchases occur before becoming a California tax resident.

Because California State tax is paid on earnings within the RRSP, these earnings can be treated 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.

Careful tracking of the cost basis will be needed 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. As such, careful examination of each US state tax treaty rules should be considered.

Need answers?

Our cross-border financial advisors can help you navigate the investment and financial planning complexities of your move to California.

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Raymond James (USA) Ltd. advisors may only transact business with residents of the states and/or jurisdictions for which they are properly registered. The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. We are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related and legal matters.

Raymond James (USA) Ltd., member FINRA / SIPC.

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