Before You Leave the US for Canada: The RRSP Question and Everything the Treaty Doesn't Cover

The US-Canada tax treaty is the most comprehensive the US has. It still doesn't cover the TFSA. Do not open one.

Michelle moved to Toronto when her company opened a Canadian office and asked her to run it. Her Canadian colleagues said a TFSA was like a Roth IRA — put money in, it grows tax-free, take it out tax-free. She opened one and started contributing. Her US CPA's email was short: the TFSA is not recognized by the IRS. The gains were fully taxable in the US. It might also require PFIC or foreign trust reporting. She closed it before year end. The compliance work cost more than the TFSA had earned.

The US-Canada tax treaty is, in fact, the best framework available for a US person living and working in Canada. RRSP deferral is recognized. 401Ks are recognized in Canada. Pension distributions flow cleanly under Article XVIII. The treaty doesn't help with everything — but the TFSA trap is the main one to avoid.

Before You Leave the US

401K: keep it, don't close it

Your US 401K is recognized in Canada under Article XVIII of the US-Canada tax treaty. Canada defers Canadian income tax on 401K earnings until actual withdrawal — you don't pay Canadian tax on 401K growth year by year while living in Canada. This makes the 401K one of the cleanest retirement vehicles to hold across the border.

Do not close or cash out your 401K before moving. Leave it in the US, continue to let it grow, and make distribution decisions later. The treaty makes it manageable.

US brokerage account: keep it in the US

Your US brokerage account holding US-listed ETFs and stocks is clean to maintain from Canada. Canadian capital gains tax and US capital gains tax (with treaty credits) both apply to the gains, but the FTC mechanism handles most of the double-taxation risk.

Do not open a Canadian brokerage account and start buying Canadian-domiciled mutual funds or ETFs. Canadian mutual funds and most Canadian-domiciled ETFs are PFICs for US persons — the same problem NRIs face with Indian mutual funds. The PFIC reporting burden is high and the punitive tax treatment on gains can be severe.

There is a workaround: US-listed ETFs that also trade on the Toronto Stock Exchange. These are dual-listed on both a US exchange and the TSX, which means they are US-registered securities — not PFICs. You can hold them in a Canadian account without triggering PFIC treatment. iShares and Vanguard both have products in this category. Ask your financial institution specifically whether a Canadian ETF is also listed on a US exchange before buying.

Sell vested shares before departure (non-citizens)

If you hold vested shares and you're not a US citizen, the same logic as other destinations applies: selling before you become a non-resident alien avoids 30% NRA withholding on proceeds. Capital gains rates apply while you're a US resident. US citizens: no withholding concern, sell based on your tax basis not departure timing.

First 90 Days in Canada

Do NOT open a TFSA

The Tax-Free Savings Account (TFSA) is a Canadian tax-advantaged savings vehicle. Canada treats contributions as after-tax and all growth as tax-free. The IRS does not recognize the TFSA. Gains inside a TFSA are fully US-taxable.

Worse, a TFSA may be characterized as a foreign trust under US tax rules, which triggers Form 3520 and Form 3520-A reporting — forms used for foreign trust reporting that carry significant penalties for non-compliance. The PFIC characterization is also possible depending on what the TFSA holds. Either way, the complexity and tax exposure are not worth the modest tax-free growth.

Tell your Canadian bank, your Canadian financial planner, and your employer (if they mention TFSA in benefits conversations) that you are a US person and cannot hold a TFSA without creating US tax complications.

RRSP: treaty election required

Canadian RRSPs (Registered Retirement Savings Plans) are recognized by the IRS under the US-Canada treaty Article XVIII. The treaty allows US persons to defer US tax on RRSP earnings — the US treats the RRSP like a traditional IRA for growth purposes.

But the deferral requires an annual election. Each year you file your US return, you must claim the treaty position to defer RRSP growth from US taxation. This is done by attaching a treaty disclosure (Form 8833) and listing the RRSP account and deferred income. Missing this election in any year means that year's RRSP growth is US-taxable as ordinary income.

This is a straightforward annual filing step, but it must not be skipped. Your US CPA needs to know you have an RRSP every year.

Canadian tax residency and provincial tax

Canada taxes residents on worldwide income. Provincial tax rates vary significantly — Ontario's combined federal/provincial top rate is approximately 53.5%, while Alberta's is approximately 48%. The province you reside in matters.

You'll file Canadian returns and US returns annually. The foreign tax credit mechanism handles most double-taxation — Canadian tax you paid on Canadian-source income is creditable against your US tax on the same income. The treaty prevents you from paying double the top rate, but it doesn't make the compliance simple.

Ongoing Obligations

Form 1040: You file every year. Americans in Canada get an automatic filing extension to June 15, but estimated quarterly payments are still due April 15 if you expect to owe.

RRSP treaty election: Annual Form 8833 attachment claiming the treaty deferral on RRSP growth.

Canadian tax return: Annual, filed by April 30 for most Canadians.

FBAR (FinCEN 114): Annual, for all Canadian financial accounts above the threshold.

401K distributions: When you eventually take 401K distributions from Canada, both countries tax them. The US withholds 30% on non-citizen distributions (or the reduced treaty rate if you claim it). Canada taxes the distribution as income. The treaty prevents double taxation, but you will owe something to both. Plan distributions when your Canadian income is low to minimize the marginal rate bite.