Ottawa to Los Angeles: Aerospace, Defence, and California's Annual RRSP Inclusion

Southern California is the largest aerospace and defence region in the US, and its contractors recruit Ottawa's defence engineers and federal scientists. The move is a small rate cut: Ontario's combined top rate of about 53.5% becomes about 50.3% in California. What changes is the RRSP, which California taxes annually, and the Ontario surtax and OHIP, which end on departure.

Key takeaways

• Ontario's roughly 53.5% top rate, including the provincial surtax, sets the departure tax. On a $300,000 unrealized gain, about $80,000.
• California's combined top rate is about 50.3%; capital gains at ordinary rates.
• California does not follow the treaty on RRSPs: the account's annual earnings are taxable on the California return.
• A Canadian public service pension paid to a California resident is taxed federally with Canadian withholding capped at 15% under the treaty, and by California at ordinary rates.
• 13% HST becomes 9.5% sales tax. OHIP ends on permanent departure.

The Ontario departure

Departure tax applies to non-registered investments, private company shares, crypto, and foreign property at fair market value on the departure date. Ontario real estate, RRSPs, TFSAs, and registered pensions are excluded. Report on Form T1243, list holdings on Form T1161 if the total exceeds $25,000. Realizing gains before departure at Ontario's half inclusion is often cheaper than carrying them into California. The Ontario surtax ends on departure.

The federal pension in California

Under Article XVIII of the treaty, Canadian tax on periodic pension payments to a US resident is capped at 15%; file NR301 before the first post-departure payment. The US taxes the pension federally with a foreign tax credit; California taxes it at ordinary rates with no credit for the Canadian withholding.

Los Angeles's side

Graduated state rates to 12.3% plus a 1% surcharge above $1 million, for a combined federal and state top rate near 50.3%; capital gains taxed as ordinary income; 9.5% sales tax in most of Los Angeles County, up to 10.25% in some cities; Proposition 13 property tax at about 1.1% of purchase price with a 2% annual cap; no estate tax; aggressive residency audits; community property. The City of Los Angeles also levies a gross-receipts business tax that applies to freelancers and independent contractors from the first dollar of revenue earned in the city.

The RRSP in California

Federally deferred under Article XVIII of the treaty. California does not conform: the Franchise Tax Board taxes the interest, dividends, and realized gains inside the account each year. Before departure, restructure toward growth assets that produce little annual income, draw the account down while still a Canadian resident, or accept the annual inclusion and track California basis.

Who makes this move

DND and CSE engineers to Southern California's aerospace and defence contractors, CSA engineers to the region's space companies, Ottawa cybersecurity staff to Los Angeles's technology and entertainment security groups, and federal policy professionals to California's universities and think tanks.

Worked example

A former DND aerospace engineer moves to El Segundo on August 31 with $180,000 of unrealized gain in a non-registered account, $500,000 in an RRSP producing about $15,000 a year of income, and a Kanata home sold in the departure year.

• Departure tax. $180,000 gain, $90,000 taxable, at about 53.5%: roughly $48,000. Cheaper than California's ordinary-rate treatment later.
• RRSP. Federally deferred. California taxes the $15,000 annual income; restructuring reduces it.
• Home. Sold as a resident under the principal residence exemption.
• El Segundo. Combined top rate about 50.3%. HST 13% becomes sales tax 9.5%.

Official sources

"Pensions may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of a periodic pension payment, the tax so charged shall not exceed 15 per cent of the gross amount of such payment." — Canada-United States Tax Convention, Article XVIII(2)(a), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

"When you leave Canada, you are considered to have sold certain types of property (even if you have not sold them) at their fair market value (FMV) and to have immediately reacquired them for the same amount. This is called a deemed disposition and you may have to report a capital gain (also known as departure tax)." — Canada Revenue Agency, Leaving Canada (emigrants), https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/leaving-canada-emigrants.html

California does not conform to federal tax treaty provisions; income excluded from federal income under a treaty may be taxable by California. — California Franchise Tax Board, Publication 1031, Guidelines for Determining Resident Status, https://www.ftb.ca.gov/forms/2025/2025-1031-publication.pdf

Practitioner note

Ottawa retirees moving to California face a state that taxes the federal pension at ordinary rates and the RRSP annually, with no credit for Canadian withholding. The pre-departure decisions on the RRSP matter more here than in any no-tax state.

See also: Weighing Florida instead? See the Canada-to-Florida guide, or the same city's Ottawa to Miami guide.

Next step

Fairlight prepares the Ontario departure return, the pension withholding paperwork, the RRSP restructuring, and the first-year federal and California returns for Los Angeles clients. See cross-border pricing or book a call.