RRSP to RRIF as a non-resident: conversion and withholding tax

Can a non-resident convert an RRSP to a RRIF?

Yes. Section 146.3 of the Income Tax Act sets no residence condition for opening a RRIF, and section 146(16) lets an RRSP transfer its property to a RRIF of the same annuitant. An RRSP must mature by the end of the year its owner turns 71. Converting to a RRIF keeps the money in a registered plan after that; whether to cash out instead is covered in RRSP cash-out before or after leaving Canada.

Canada then withholds 25% on each RRIF payment to a non-resident, unless a tax treaty lowers it. Many treaties lower the rate only for periodic pension payments, and a RRIF payment is periodic only while the year's payments stay under a yearly limit.

A case is not simple when:

• the fund is large, or you plan withdrawals above the yearly limit;
• you open the RRIF partway through a year and want payments that same year;
• you moved countries during the year, or two countries could claim you as a resident;
• your spouse is your successor annuitant and lives in another country.

Gather: the RRIF's value on January 1 (in the first year, the date and amount of the RRSP transfer), your age (and your spouse's) at the start of the year, the treaty country you live in, last year's NR4 slip, and a signed Form NR301.

Some issuers limit what they offer to non-resident clients. Ask your issuer before you plan the transfer.

Is converting an RRSP to a RRIF taxed?

No. A direct transfer from an RRSP to a RRIF is not income, because section 146(16)(c) says the transfer is not included in income solely because it was made. Nothing is paid to you, so no Part XIII tax applies to the move itself. The CRA tells issuers not to deduct tax from funds properly transferred (IC78-18R7).

Tax starts when the RRIF pays you.

What is the withholding tax on RRIF withdrawals for non-residents?

The default is 25% of each gross RRIF payment, under section 212(1)(q). That includes the minimum amount: for a non-resident, every RRIF payment is subject to withholding, not only the part above the minimum. The CRA's T4058 lists RRIF payments among the income that payers withhold on.

A treaty may lower the rate. A RRIF payment is a pension for treaty purposes under section 5 of the Income Tax Conventions Interpretation Act, unless the treaty defines pension itself (IC76-12R8, paragraph 62). How far it drops depends on your country's treaty:

Read your rate in the treaty itself, from the list of treaties in force, or see non-resident tax rates in Canada. Country guides cover the treaty for common destinations, such as Hong Kong, Taiwan, China, the UK and Australia. For example, the Canada–US treaty caps tax on periodic pension payments at 15%; people living in the US should read RRSP and TFSA after leaving Canada.

Without a section 217 return, tax correctly withheld is your final Canadian tax on the payment. If the issuer withheld more than your treaty allows, for example with no NR301 on file, you can ask the CRA for the excess on Form NR7-R within 2 years after the end of the year the tax was remitted (section 227(6)).

Which RRIF payments count as periodic?

RRIF payments are periodic while the year's total stays at or below the greater of:

• twice the minimum amount for the year, and
• 10% of the fund's fair market value at the start of the year.

That is the definition of "periodic pension payment" in section 5 of the Income Tax Conventions Interpretation Act, paragraph (c). It applies whatever the treaty says, so it sets the line for every treaty country.

The test is a running total. Once the year's payments go over the limit, the payment that crosses it and the later ones that year are no longer periodic, so the issuer withholds 25% on them (section 215(1)). The limit resets each January.

Taking only the minimum amount always stays inside the limit. A large one-time withdrawal is the usual way to lose the treaty rate. To stay inside the limit:

1. Ask your issuer for this year's limit, or work it out from the January 1 value.
2. Set scheduled payments at or below it.
3. If you need more, take it late in the year, after the regular payments, or wait for January. The payment that crosses the limit loses the treaty rate in full, not only the excess.
4. Check the NR4 slip after year end.

How is the RRIF minimum amount worked out?

The minimum amount is the fund's fair market value at the start of the year multiplied by a prescribed factor (section 146.3(1), IC78-18R7).

You can elect to use your spouse's or common-law partner's age instead. The election must be made before the first payment from the fund, and once made it cannot be changed, even if the spouse dies. A younger spouse's age gives a smaller factor, so a lower minimum.

Why can first-year RRIF payments be withheld at the full rate?

The minimum amount is nil for the year the RRIF is set up (section 146.3(1)), and IC78-18R7 says any payment that year is above the minimum. For the periodic test, though, section 5 of the Income Tax Conventions Interpretation Act treats money transferred into the fund during the year as if it had been there on January 1. The twice-the-minimum leg is still nil, so the first-year limit is 10% of what you transferred in. Issuers may not all apply this the same way, so ask yours how it will treat a first-year payment before you take one.

Starting payments in the January after the transfer avoids the question: the fund then has a start-of-year value and a full minimum amount.

How do I get the treaty rate on my RRIF payments?

Give your RRIF issuer Form NR301, not the CRA. The form declares that you live in a treaty country and are entitled to its reduced rate on pension income. Without it, the issuer withholds 25%.

• The form expires three years after the end of the year you sign it, or sooner if your eligibility changes (NR301 instructions).
• You must tell the issuer right away if your country of residence changes.
• Each year the issuer reports payments and tax withheld on an NR4 slip. Check it against the treaty rate; if too much was withheld, use Form NR7-R as above.

If your treaty exempts pensions below a yearly amount, NR301 is not enough: the form's instructions say you need an approved Form NR5 for that. More on accounts and NR301: Canadian bank and brokerage accounts after leaving.

Does a section 217 return or Form NR5 help on RRIF income?

It can, when your world income is low. A section 217 return lets you report RRIF and other pension income on a Canadian return and pay at regular rates instead of the flat withholding (T4058). It is due by June 30 after the year. How the refund works: non-resident return for pension and RRSP income.

Form NR5 asks the CRA to lower the withholding up front. An approval covers five tax years, and you must file a section 217 return for each one (CRA). Details: lower withholding on Canadian pensions abroad.

What changes if I use my spouse's age, or my spouse is the successor annuitant?

Using a younger spouse's age lowers the minimum amount, and so the "twice the minimum" leg of the periodic limit. Before about age 70 the 10% leg is larger anyway, so the periodic room does not change. From 71 the twice-the-minimum leg is usually the larger one, so a younger spouse's age shrinks the room you can draw at the treaty rate every year. Decide before the first payment, because the election cannot be undone.

If your spouse becomes the successor annuitant after your death, RRIF payments to a spouse living outside Canada are also subject to Part XIII tax, at the rate of the spouse's own treaty country. The spouse needs to give the issuer a new NR301. What a surviving spouse or other heir must do: inheriting from a Canadian estate as a non-resident.

Example

Figures are in Canadian dollars and illustrative. "The treaty rate" means the periodic pension rate in the reader's treaty.

Age 65, fund worth C$300,000 on January 1

• Minimum amount: C$300,000 × 1 ÷ (90 − 65) = C$12,000.
• Twice the minimum: C$24,000. Ten percent of the start-of-year value: C$30,000.
• Periodic limit: the greater, C$30,000.

Payments up to C$30,000 in the year get the treaty rate. A C$10,000 extra withdrawal in December takes the total to C$40,000, so that payment is withheld at the full Part XIII rate.

RRSP of C$200,000 converted in June, age 60 (turns 61 in December)

• Year 1: the minimum amount is nil, so twice the minimum is nil. The transferred C$200,000 counts as held on January 1, so the periodic limit is 10%: C$20,000. Confirm with the issuer how it will withhold on a payment taken that year.
• Year 2: with no withdrawals in year 1, the fund is worth C$203,000 on January 1 and the owner is 61 on that date. Minimum: C$203,000 ÷ 29 = C$7,000. Twice that is C$14,000; 10% is C$20,300. Payments up to C$20,300 get the treaty rate.

Retired abroad with only a small RRIF income

A retiree draws C$20,000 a year from a RRIF and has little other income anywhere. Withholding takes a flat share of every payment. A section 217 return each year, or an NR5 approval, may bring the Canadian tax below what was withheld.

Different for you?

• Thinking about cashing out instead. See RRSP cash-out before or after leaving Canada.
• You live in the US. The US treaty and US tax on the RRIF: RRSP and TFSA after leaving Canada.
• The money is locked in. See unlocking a LIRA after leaving Canada.
• You moved countries during the year, both countries claim you, or your spouse lives in another country. The treaty rate and NR301 depend on residence, and the spouse's-age election cannot be undone. Book a call before the first payment.
• A large withdrawal, a first-year payment, or NR4 slips that show the full rate. Tax correctly withheld above the periodic limit is final unless a section 217 return is filed on time; tax withheld above the treaty rate may be refundable on Form NR7-R within 2 years. A review can show which applies. Book a call.
• Your new country taxes the RRIF too. Whether it credits the Canadian withholding depends on its own rules and the treaty. Book a call to line up both countries' returns.
• Retiring abroad generally. See retiring abroad from Canada.