Gifting Canadian RRSP to Children

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Question

Phil,

I was born in Canada and was a citizen until 2019 when I became a US citizen. I have been outside Canada since 2000. I have an RRSP in Victoria BC. I have not contributed since I left although have consolidated some other retirement RRSPs into the one larger one.  I would actually like to disburse the funds to my children who live in Canada and are still Canadian citizens. They are grown and live in Vancouver.

Can you advise on how to do this while minimizing taxes.

Thank you.

XXXXX

Answer

Hi XXXX

Thanks for the email and question about your RRSP.

There isn’t a way for you to distribute the amounts in your RRSP tax-free to your Canadian children, however you do have some options:

  • You can withdraw the funds and pay a 25% Canadian tax withholdings. If your current US tax rate is less than 25% the 25% tax rate will be the final tax then you can gift the cash to your children. If they are only Canadian tax residents they should not have any extra tax on the gifted amounts. That being said, they will be taxable on any income or capital gains earned on the money once in their hands.
  • You will also tax the amount on the US tax return (in US dollars) and take a foreign tax credit (form 1116) to offset any US tax on this income.
  • You can wait until you pass away, however if you wanted to gift the money now that won’t be an option. Also, you would likely have lots more tax owing upon death as the full amount would come into income depending on how much is currently in the RRSP.
  • You’ll also want to ensure that you have been filing FBARs for your RRSP accounts in Canada.

In most cases the most tax efficient method would be to take the money out slowly to ensure it’s taxed at relatively low rates. However in your case the minimum amount of tax will likely be 25% (the amount of the Canadian non-resident withholding).

If you have very little other income it’s possible to file a s.217 Canadian income tax return to have the RRSP income taxed at lower rates than 25% if tax on your worldwide income would be less than 25%. If you have very little other worldwide income as this may be an option. However the cost to file the s.217 returns should be also taken into consideration.

Hope that helps.

Cheers

Phil

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