Canadian RRSPs receive favourable tax treatment in Canada. However, for Canadians who immigrate to Australia, the Australian taxation of Canadian RRSPs can be a complex and confusing area. Furthermore, the Canadian Revenue Agency frequently informs the ATO of withdrawals from Canadian RRSPs which has resulted in the ATO treating 100% of the withdrawal from the Canadian RRSP as taxable income in Australia in some instances.
What are the issues?
A Canadian RRSP is typically funded using capital, however in some cases RRSP contributions are tax deductible under Canadian tax law. On withdrawal from a Canadian RRSP typically the Canada Revenue Agency deducts tax at 15% for non-Canadian tax residents.
People with a Canadian RRSP may find that the ATO incorrectly seeks tax on 100% of the withdrawal from their RRSP even though a large amount of the withdrawal is capital, because of the way in which these payments are reported to the ATO by the Canadian Revenue Agency.
What is the correct Australian tax treatment?
The ATO does not view all Canadian RRSPs as foreign superannuation funds. The exact tax treatment depends on the precise terms of the Canadian RRSP.
Most main stream Canadian RRSPs are not foreign superannuation funds. This is principally because withdrawals can be made from RRSPs at times that would not be permitted under Australian superannuation legislation. Therefore, whilst RRSPs are “foreign” from an Australian tax perspective, they are not “superannuation” and consequently are not taxed as foreign superannuation funds.
The ATO takes the view that most Canadian RRSPs are foreign trusts. This means that on a lump sum withdrawal from the RRSP, the payment is apportioned between:
- Income accumulated in the RRSP;
- Capital gains accumulated in the RRSP; and
- Corpus (or original capital) contributed to the RRSP.
The accumulated income and capital gains may include income and capital gains that have not been taxed in Australia in prior tax years. Therefore, effectively, the profit element in the RRSP is taxed in Australia, but the withdrawal of the original capital is not.
Temporary Residents of Australia
People who are in Australia on temporary visas should obtain Australian tax advice before obtaining permanent residency visa status in Australia. This is particularly the case for persons with Canadian RRSPs. Certain Australian tax advantages in relation to the taxation of foreign trusts are lost once a person changes their visa status from ‘temporary resident’ to ‘permanent resident’. Therefore, persons with Canadian RRSPs should seek Australian tax advice prior to applying for permanent residency with the Australian Department of Immigration and Border Protection.
The Australian taxation of Canadian RRSPs is a complex area. If you have a Canadian RRSP and plan to make a withdrawal, or have already made withdrawals, please contact Naomi Smith on 02 6279 5400 or firstname.lastname@example.org .
Similarly, if you are in Australia on a temporary visa and plan to apply for a permanent residency visa, please request tax advice from us prior to changing your visa status.
We can also assist you if you have Canadian tax issues via our Network of accounting firms in Canada.