Cross-Border Retirement for Business Owners: The Individual Pension Plan, the RRSP, the Cash Balance Plan, and the Owner Who Moves

Retirement plans are where business owners shelter the most income, and a move across the border tests whether the shelter holds. The Canadian owner's plans. The RRSP: recognized by the United States under the treaty — growth deferred automatically, withdrawals taxable in the United States with a credit for the Canadian withholding (the RSP guide and the RRIF guide); contributions after the move generally aren't deductible in the United States and complicate the deferral — stop contributing. The individual pension plan (IPP — a defined benefit plan for an owner-employee of their own corporation, funded by the corporation on an actuary's recommendation, allowing contributions above RRSP limits for older high earners, and required to pay at least a RRIF-style minimum each year from the year the member turns 72): it's a registered pension plan; the United States recognizes Canadian registered pension plans under the treaty's pension article (Article XVIII) — the growth deferred, the benefits taxable when paid (with Canadian Part XIII withholding on periodic pensions at 15 percent — the NR301 guide), but the IPP's continued operation after the owner moves raises problems: the IPP is sponsored by the Canadian corporation, which must continue to exist and fund it (the owner who winds up the corporation must wind up or transfer the IPP — the commuted value transferred to a locked-in plan up to the Regulation 8517 transfer limit, with any excess paid out as taxable income, or an annuity purchased), the owner's continued accrual requires continued employment by the sponsoring corporation (the kept-Canadian-corporation guide's structure), and U.S. tax treatment of contributions made on behalf of a U.S.-resident employee to a Canadian plan is not deductible in the United States unless the treaty's cross-border contribution rules apply (Article XVIII paragraph 8 — the owner was a member of the plan immediately before starting work in the United States, wasn't a U.S. resident then, and hasn't worked there for the same or a related employer for more than 60 of the preceding 120 months — or paragraph 10 for a commuter); so an owner moving permanently often stops accruing in the IPP, keeps the accrued benefit deferred until retirement, and takes the pension as a non-resident (15 percent Canadian withholding, U.S. tax with a credit). The TFSA: not recognized — close it before the move (the TFSA vs Roth guide). The pension's locked-in funds: a locked-in RRSP or LIRA from a former employer's pension is recognized as a Canadian retirement plan (deferral), and non-residents can unlock it after two years of non-residency federally and in many provinces (Ontario, for example, requires at least 24 months since leaving and a written CRA determination of non-residency; the rule follows the jurisdiction governing the plan) — a withdrawal with Part XIII withholding (25 percent as a lump sum) and U.S. tax with a credit. The U.S. owner's plans. The 401(k) and the IRA: recognized by Canada under the treaty (Canada taxes the distributions when paid, not the growth — an IRA is a "foreign retirement arrangement" taxed only on distribution, and the treaty's Article XVIII(7) deferral covers employer plans), withdrawals taxable in Canada as pension income with a credit for the U.S. withholding (30 percent default, 15 percent treaty for periodic payments — the W-8BEN guide); a lump-sum IRA withdrawal by a Canadian resident can be rolled into an RRSP under the Canadian rules (section 60(j) — a contribution of the lump sum to an RRSP in the year or within 60 days after, with a deduction offsetting the inclusion; for an IRA only the portion derived from the taxpayer's or spouse's own contributions qualifies under section 60.01, while a lump sum paid directly from a U.S. employer plan for services rendered while non-resident qualifies under subparagraph 60(j)(i); the U.S. withholding is largely uncreditable because the deduction leaves no Canadian tax on the amount — a move to model, not assume, for an IRA-holding mover). The Roth IRA: recognized by Canada only with the one-time election and no Canadian contributions (the TFSA vs Roth guide). The cash balance plan (the dental entity guide's instrument): a U.S. defined benefit plan sponsored by the owner's U.S. business — recognized by Canada under the treaty as a foreign pension (deferral) — but a U.S. owner moving to Canada typically stops accruing (the U.S. business may continue, but contributions for an owner who is now a Canadian resident working in Canada fall outside the treaty's contribution relief unless the paragraph 8 or commuter conditions are met, and benefits can accrue only on compensation the U.S. business still pays the owner), and the plan is often terminated and rolled to an IRA before the move (a rollover in the United States — no tax — then an IRA held as a Canadian resident). Contributions across the border — the treaty's narrow window: the treaty lets an individual working in the other country continue contributing to their home-country plan with a deduction in the host country (paragraph 8 — plan membership immediately before the work began, not resident in the host country then, no more than 60 of the preceding 120 months working there for the same or a related employer, and relief capped at what the host country allows its own plans), lets a cross-border commuter deduct contributions to their work-country plan (paragraph 10), and lets a U.S. citizen living and working in Canada deduct contributions to a Canadian employer's plan for U.S. purposes (paragraph 13); outside these, contributions to the other country's plans after a move aren't deductible in the new country of residence. The withdrawal phase — the treaty rates: periodic pension payments across the border carry 15 percent withholding in the source country; lump sums carry the domestic rate (25 percent in Canada, 30 percent in the United States) with no treaty reduction; Social Security and CPP/OAS benefits are taxable only in the country of residence (Article XVIII paragraph 5 — the U.S. resident receiving CPP/QPP and OAS is taxed in the United States as if they were U.S. Social Security, so up to 85 percent is included, with no Canadian withholding; the Canadian resident receiving U.S. Social Security is taxed in Canada on 85 percent of it — 15 percent is exempt). The owner's planning sequence before a move: max out the home country's plans in the last resident year (the deduction is valuable at the home rates); decide the employer-sponsored plan's future (keep accruing, freeze, terminate and roll); close the TFSA (moving to the United States) or file the Roth election (moving to Canada); for an IRA holder moving to Canada, consider the section 60(j) rollover; and record each plan's balances and contributions at the move date (for the new country's basis and deferral reporting). The bookkeeping: each plan's balance, basis, and contribution history at the move; the treaty elections and forms; the employer plan's status; withdrawals with withholding and credits; FBAR and Form 8938 reporting of the Canadian plans by a U.S. person (RRSPs and RRIFs remain reportable on the FBAR and Form 8938, but Rev. Proc. 2020-17 exempts them from Forms 3520 and 3520-A, and Rev. Proc. 2014-55 made the U.S. deferral automatic without Form 8891). The errors: an IPP left accruing after a permanent move with no U.S. deduction; the TFSA kept after moving south; RRSP contributions continued from Florida; an IRA withdrawn in Canada without considering the 60(j) rollover; the cash balance plan's termination left until after the move; and the Canadian plans missing from the FBAR.

Key takeaways

• RRSPs, RRIFs, IPPs, and locked-in plans are recognized by the United States under the treaty — growth deferred, withdrawals taxable with a credit for Canadian withholding; stop contributing after the move.
• An IPP needs its sponsoring Canadian corporation and continued employment to keep accruing — most permanent movers freeze it and take the pension later as non-residents.
• 401(k)s, IRAs, and cash balance plans are recognized by Canada — withdrawals taxed as pension income with a credit; a Canadian resident may roll a lump-sum IRA withdrawal derived from their own contributions into an RRSP under section 60(j).
• TFSAs aren't recognized by the United States; Roth IRAs are recognized by Canada only with the election and no Canadian contributions.
• The treaty allows cross-border contributions only for assignments within the 60-of-120-months limit, commuters, and U.S. citizens working in Canada.
• Social security benefits are taxed only in the country of residence; periodic pensions carry 15 percent source-country withholding, lump sums the full domestic rate.

The business owner's cross-border retirement file

Each plan: type, balance, basis, contribution history at the move. Last-resident-year contributions maximized. Employer plans: accrue, freeze, or terminate and roll (before the move). TFSA closed or Roth election filed. Section 60(j) IRA rollover analysis. Withdrawals: withholding and credits. FBAR and Form 8938 for Canadian plans held by a U.S. person. The employer-sponsored plan decision is the one that has to happen before the move.

Worked example

A Vancouver engineer, 58, owner of a consulting corporation with an IPP (C$1.1 million) and an RRSP (C$600,000), moves to Sarasota. Before the move: the corporation's final IPP contribution for the year is made; the TFSA (C$95,000) is withdrawn tax-free; the corporation's future is planned (the moving a business guide — he keeps the corporation for two more years winding down Canadian contracts, then winds it up). The IPP: frozen — no further accruals after his U.S. residency begins (contributions for a U.S. resident wouldn't be deductible in the United States and his Canadian employment ends); when the corporation winds up, the IPP's commuted value is transferred to a locked-in plan (up to the Regulation 8517 transfer limit — any excess is paid out as taxable cash, with 25 percent Part XIII withholding) and later converted to a life income fund paying periodic pension income — 15 percent Canadian withholding under the treaty, U.S. tax with a credit. The RRSP: no further contributions; deferred under the treaty; converted to a RRIF at 71 (the RRIF guide). His Florida LLC's consulting income funds a new Solo 401(k) going forward. The reverse: a Seattle dentist, 52, moving to Victoria terminates her cash balance plan and rolls it to an IRA before the move (no tax in the United States, and no foreign pension termination in Canada to compute later), then, as a Canadian resident, withdraws US$150,000 from a separate IRA built from her own contributions and contributes the full US$150,000 to her RRSP in the year or within 60 days after under section 60(j) — the RRSP deduction offsetting the Canadian inclusion, though the U.S. withholding and, at 52, the 10 percent additional tax on early distributions are a largely uncreditable cost; the rollover IRA holding her employer-funded cash balance money wouldn't qualify.

Official sources

The CRA states: “An RRSP is a retirement savings plan that you establish, that the CRA registers, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax. Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan.” — Canada Revenue Agency, Registered Retirement Savings Plan (RRSP), https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/registered-retirement-savings-plan-rrsp.html

The IRS explains: “Defined benefit plans provide a fixed, pre-established benefit for employees at retirement. Employees often value the fixed benefit provided by this type of plan. On the employer side, businesses can generally contribute (and therefore deduct) more each year than in defined contribution plans.” — Internal Revenue Service, Defined benefit plan, https://www.irs.gov/retirement-plans/defined-benefit-plan

Practitioner note

A business owner's retirement plans are the largest shelter they have, and a move across the border tests each one differently: the RRSP and the IPP are recognized by the United States but the IPP needs its Canadian corporation to keep accruing, the TFSA isn't recognized at all, and the U.S. cash balance plan is cleanest terminated and rolled to an IRA before a move north — where section 60(j) may let part of the IRA move into an RRSP. Our desks decide each employer-sponsored plan's future before the move, maximize the last resident year's contributions, and keep the plans on the FBAR where a U.S. person now holds them.

See also: For related guidance, see moving a 401(k) or IRA into an RRSP under section 60(j) and Canadian employer pensions, RPPs, and LIRAs across the border; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle cross-border retirement planning for business owners — individual pension plan accrual and wind-up options, RRSP and RRIF treaty deferral, cash balance plan termination and rollover timing, section 60(j) IRA-to-RRSP transfers, TFSA and Roth elections, treaty contribution windows, withdrawal withholding and credits, and FBAR reporting. See pricing or book a call.