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US CANADA Tax on cashing out LIRAUS / Canada Income Tax Help - CEN-TAPEDE centapede at lists.centa.comWed Jul 23 11:24:51 PDT 2008
I have ended employment with a company with which I've worked both in Canada and the US. I want to use my option to have my Canada pension transferred to a LIRA. I'd then like to unlock the LIRA which I understand means removing the money from any of the deferred tax vehicles. I am currently resident in the US and earning income from another company. Am I correct that 25% Canadian withholding applies, or is there a 15% treaty rate that applies? Do I have to cash out the LIRA immediately, or can I wait a few years when I may have no earned income - will this make any difference to the tax I pay? Do you have any advice or better courses of action for someone in my situation to reduce the tax owed? Regards, XXXXX ------------------------------------------------------------------------- david ingram replies: You can roll your pension into a LIRA and depending upon where you live may be able to unlock the whole thing as a non-resident and / or some of it under the new legislation. As a non-resident, the financial institution will have to withhold 25% tax on the amount you withdraw. If you roll it into an RRIF, the tax withheld by Canada is 15%. You must also report this as taxable income on your UR 1040. If you are in a higher tax bracket than 15% or 28%, you will have some more tax to pay on the taxable portion on your US 1040 and state return if you are in a taxable state. As a US resident, you must report the internal earnings of the LIRA on form 8891 (this also exempts the earnings) on your tax return and its existence to the Department of the Treasury on form TDF 90-22.1 - BIG fines for failure to file these forms. If you live in California, California taxes the internal earnings on an annual basis without honoring the exemption on Federal Form 8891. You therefore have to keep track of the value when you entered the US and its earnings to reduce future US tax when you actually cash the plan in. This older series will help a bit: QUESTION: ---------------------------------------------RRSP Redemption and taxes david ingram replies: I have no idea what the question is but this is likely the answer --------------------------------------------------- ----------------------------------------------------My wife (57) and I (61), now living in Michigan, both have small RRSPs from our years of working in Canada. Previously I was told that I could do nothing with the money, not move it to an RRIF or even move it within the family of the Investment Company. Now I'm told I may be able to withdraw it in increments of less than 5k for a 10% withholding. If this is possible what are benefits/drawbacks of withdrawing now vs. waiting till retirement? Also, I'm unsure about reporting requirements; I've only just heard about form 8891. david ingram replies; Dealing with a Canadian RRSP has become much easier over the years. You have been dealing with people who are inexperienced in dealing with non-residents of Canada who live in the USA. The minimum/maximum tax for you to pay on the withdrawal is 25%. If you roll it into a RRIF, the withholding is 15% under Article XVIII of the US Income Tax treaty. You should have been filling out form 8891 or its equivalent under 89-45 since 1989. Thankfully, the IRS and treasury have not been enforcing the onerous penalties associated with non-reporting (35% of the principal PLUS 5% per year of non-reporting for the 8891 or equivalent and up to $500,000 PLUS up to 5 years in jail for failure to file form T DF 90-22.1 . See this older answer --------------------- This is not the result of a question but is the result of an IRS Tele-conference on June 20, 2007. The subject was the reporting of foreign bank on form T D F 90-22.1. In particular, the tele-conference made the point that June 30th "IS" the deadline and that fines are being increased and in particular, there are / will be severe penalties for non-compliance. It would seem that there is NOW a $10,000 penalty for failure to file the form although that is in the regulations and not on the form. I know from other sources that some 1,000 clients of former advisor Jerome Schneider are in the process of being fined as I write this. I also admit that I have not worried much about the June 30th filing date in the past. However, the teleconference made the point that practitioners are subject to fine for not following up on these filings. As I write this Terry or Phyllis ?? is making it very clear that RRSP accounts must be reported but that the Company Pension does not have to be reported. So--- if you have not being reporting your foreign accounts - report now. AND, they also made the point that everyone with foreign accounts MUST file schedule B, even if there is no earnings form the accounts. AND, they also made the closing remark that if they have NOT been filed in the past, taxpayers should file back SIX years. ------------------ .And this other Q& A QUESTION: Can you please suggest a US source (expert)for assistance (direction) to transfer a Canadian LIRA tax free if possible into a US RIA. The owner is now a US resident with green card who will ultimately retire in the US. Many thanks david ingram replies: It cannot be done. You can transfer a US IRA (Independent Retirement Account) to an RRSP but can not transfer a Canadian LIRA (locked in retirement account) to an IRA. If the plan was registered in Alberta or BC, you can apply to withdraw it with the payment of 25% income tax to Canada. I also understand that Ontario is close to passing the same legislation. XXXXXXXXXx wrote Hi David, You may remember that we spoke a few weeks ago about trying to unlock a locked in RRSP as a foreign resident. Well, we finally unlocked it and got the funds and I wanted to thank you for helping. It took some perseverance but it paid off. Something you may want to warn people about is the amount of tax withheld. As a foreign resident I am not entitled to a "personal exemption" but I pay 25% flat tax rate. When the switch was made, MRS withheld more than that and I caught it. This is not the first time this has happened to me and it also happened when my husband closed his RRSP account. The extra 4% or so can make a huge difference! Thanks again for your help. All the best, xxxxxxxxx, Mexico xxxxxxxxx david ingram replies It is unusual for them to withhold too much. Usually, particularly with smaller amounts, they withhold too little and the taxpayer is hit with a bill at the end of the year. 25% is the fixed withholding for a non-resident of Canada. If they do withhold too much, one can file a tax return and get the difference back. It is also not unusual to be turned down at first. The following person was turned down as well but Dan Walkow of Seabank Capital managed to free it up for the person (who is not a client) and he sent me the following at the end of a long comment about green cards. ( Dan Walkow Seabank Financial White Rock Local (604) 541-9952 L D (866) 541-9952 www.seabankcapital.com) P.S. The two year out of Canada residency
with respect to LIRA's did apply to
me. ---------------------------------------------------------- ======================================== SUGGESTED PRICE GUIDELINES - May 17,
2008 david ingram's US / Canada Services US / Canada / Mexico tax, Immigration and working Visa Specialists US / Canada Real Estate Specialists My Home office is at: 4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7 Cell (604) 657-8451 - (604) 980-0321 Fax (604) 980-0325 Calls welcomed from 10 AM to 9 PM 7 days a week Vancouver (LA) time - (please do not fax or phone outside of those hours as this is a home office) expert US Canada Canadian American Mexican Income Tax service help. pert US Canada Canadian American
Mexican Income Tax service and
help.
David Ingram gives expert income
tax service & immigration help to non-resident Americans &
Canadians from New York to California to Mexico family,
estate, income trust trusts Cross border, dual citizen - out of
country investments are all handled with competence &
authority.
Phone
consultations are $450 for 15 minutes to 50 minutes (professional hour). Please
note that GST is added if product remains in Canada or is to be returned to
Canada or a phone consultation is in Canada. ($472.50 with GST for in person or
if you are on the telephone in Canada) expert US Canada Canadian American Mexican Income
Tax service and help.
This is not intended to be definitive but in
general I am quoting $900 to $3,000 for a dual country tax
return.
$900 would be one T4 slip one W2 slip one or two
interest slips and you lived in one country only (but were filing both
countries) - no self employment or rentals or capital gains - you did not move
into or out of the country in this year.
$1,200 would be the same with one rental
$1,300 would be the same with one business no
rental
$1,300 would be the minimum with a move in or out
of the country. These are complicated because of the back and forth foreign tax
credits. - The IRS says a foreign tax credit takes 1 hour and 53
minutes.
$1,600 would be the minimum with a rental or two in
the country you do not live in or a rental and a business and foreign tax
credits no move in or out
$1,700 would be for two people with income from two countries $3,000 would be all of the above and you moved in
and out of the country.
This is just a guideline for US / Canadian
returns
We will still prepare
Canadian only (lives in Canada, no US connection period) with two or
three slips and no capital gains, etc. for $200.00 up.
However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms,
expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or
T5008 or T101 --- Income trusts with amounts in box 42 are an even larger
problem and will be more expensive. - i.e. 20
information slips will be at least $350.00
With a Rental for $400, two or three rentals for
$550 to $700 (i.e. $150 per rental) First year Rental - plus
$250.
A Business for $400 - Rental and business likely
$550 to $700
And an American only (lives in the US with no
Canadian income or filing period) with about the same things in the same range
with a little bit more if there is a state return.
Moving in or out of the country or part year
earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for the first and $25.00
each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00
each.
18 RRSPs would be $900.00 - (maybe amalgamate a
couple)
Capital gains *sales) are likely $50.00 for
the first and $20.00 each after that.
Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable. In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years. We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files. As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files. It can take us a valuable hour or more to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. This is a guideline not etched
in stone. If you do your own TDF-90 forms, it
is to your advantage. However, if we put them in the first year, the computer
carries them forward beautifully.
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