Canadian taxation on money withdrawn from an IRA for educational purposes
QUESTION:
Dear David,
My wife and I moved to Canada from the U.S. in Aug. 2002 for the purposes of continuing our education. She is a dual citizen and I am a US citizen with Canadian permanent residency. In April of 2003, before we found work in Canada, I withdrew $16,000 USD from an IRA (previously a 401K) to help pay for our living and school expenses in Canada. Our initial conversations with Canada Revenue Agency suggested that if the funds would not be taxable in the U.S., then they would not be taxed in Canada. Unfortunately, I should have pursued greater clarification on this subject. While I am exempt from US taxes because of low U.S. income and U.S. early withdrawal penalties because it was pulled out for educational purposes, Canada tells me that the money is taxable because it is an IRA. Whereas we should be getting back all of our Canadian tax paid, due to low income in Canada, now we may actually owe money because I have to report my IRA money.
1. Are there any exemptions that I can take advantage of other than the educational credits and the $1000 pension credit available on the T1?
2. Does my issue fall under article 18 of the tax treaty or can I qualify for article 20? And if it is article 18, am I responsible for tax on the full amount withdrawn or only a portion of the money? As this money was converted from a 401K to an IRA, I have paid no US tax on these funds.
3. The IRS has a $80,000 USD deduction on foreign earned income. Does Canada have an equivalent exemption?
Thank you for your time.
QUESTION:
Dear David,
My wife and I moved to Canada from the U.S. in Aug. 2002 for the purposes of continuing our education. She is a dual citizen and I am a US citizen with Canadian permanent residency. In April of 2003, before we found work in Canada, I withdrew $16,000 USD from an IRA (previously a 401K) to help pay for our living and school expenses in Canada. Our initial conversations with Canada Revenue Agency suggested that if the funds would not be taxable in the U.S., then they would not be taxed in Canada. Unfortunately, I should have pursued greater clarification on this subject. While I am exempt from US taxes because of low U.S. income and U.S. early withdrawal penalties because it was pulled out for educational purposes, Canada tells me that the money is taxable because it is an IRA. Whereas we should be getting back all of our Canadian tax paid, due to low income in Canada, now we may actually owe money because I have to report my IRA money.
1. Are there any exemptions that I can take advantage of other than the educational credits and the $1000 pension credit available on the T1?
2. Does my issue fall under article 18 of the tax treaty or can I qualify for article 20? And if it is article 18, am I responsible for tax on the full amount withdrawn or only a portion of the money? As this money was converted from a 401K to an IRA, I have paid no US tax on these funds.
3. The IRS has a $80,000 USD deduction on foreign earned income. Does Canada have an equivalent exemption?
Thank you for your time.
====================================================
david ingram replies:
Unfortunately, you should have pursued the matter further.
The statement that Canada would not tax the IRA if it was not taxed in the USA referred to a tax exemption by statute not because of low income exemptions.
1. The $1,000 Canadian Pension credit does not apply to your IRA withdrawal.
2. The IRA is taxable in Canada and there is no exemption under Articles XVIII or XX of the US / Canada Income Tax Convention (Treaty).
3. The US $80,000 exemption applies to earned income and does not apply to pension, RRSP, interest or dividends.
Canada also has an up to $80,000 foreign earned income exemption if the employee is working out of Canada for a "Canadian" company. Again, Canada's exemption does not apply to interest, dividends, rent or IRA's.
Wish I had a better answer for you but you are taxable on the withdrawal.
Dear David,
My wife and I moved to Canada from the U.S. in Aug. 2002 for the purposes of continuing our education. She is a dual citizen and I am a US citizen with Canadian permanent residency. In April of 2003, before we found work in Canada, I withdrew $16,000 USD from an IRA (previously a 401K) to help pay for our living and school expenses in Canada. Our initial conversations with Canada Revenue Agency suggested that if the funds would not be taxable in the U.S., then they would not be taxed in Canada. Unfortunately, I should have pursued greater clarification on this subject. While I am exempt from US taxes because of low U.S. income and U.S. early withdrawal penalties because it was pulled out for educational purposes, Canada tells me that the money is taxable because it is an IRA. Whereas we should be getting back all of our Canadian tax paid, due to low income in Canada, now we may actually owe money because I have to report my IRA money.
1. Are there any exemptions that I can take advantage of other than the educational credits and the $1000 pension credit available on the T1?
2. Does my issue fall under article 18 of the tax treaty or can I qualify for article 20? And if it is article 18, am I responsible for tax on the full amount withdrawn or only a portion of the money? As this money was converted from a 401K to an IRA, I have paid no US tax on these funds.
3. The IRS has a $80,000 USD deduction on foreign earned income. Does Canada have an equivalent exemption?
Thank you for your time.
QUESTION:
Dear David,
My wife and I moved to Canada from the U.S. in Aug. 2002 for the purposes of continuing our education. She is a dual citizen and I am a US citizen with Canadian permanent residency. In April of 2003, before we found work in Canada, I withdrew $16,000 USD from an IRA (previously a 401K) to help pay for our living and school expenses in Canada. Our initial conversations with Canada Revenue Agency suggested that if the funds would not be taxable in the U.S., then they would not be taxed in Canada. Unfortunately, I should have pursued greater clarification on this subject. While I am exempt from US taxes because of low U.S. income and U.S. early withdrawal penalties because it was pulled out for educational purposes, Canada tells me that the money is taxable because it is an IRA. Whereas we should be getting back all of our Canadian tax paid, due to low income in Canada, now we may actually owe money because I have to report my IRA money.
1. Are there any exemptions that I can take advantage of other than the educational credits and the $1000 pension credit available on the T1?
2. Does my issue fall under article 18 of the tax treaty or can I qualify for article 20? And if it is article 18, am I responsible for tax on the full amount withdrawn or only a portion of the money? As this money was converted from a 401K to an IRA, I have paid no US tax on these funds.
3. The IRS has a $80,000 USD deduction on foreign earned income. Does Canada have an equivalent exemption?
Thank you for your time.
====================================================
david ingram replies:
Unfortunately, you should have pursued the matter further.
The statement that Canada would not tax the IRA if it was not taxed in the USA referred to a tax exemption by statute not because of low income exemptions.
1. The $1,000 Canadian Pension credit does not apply to your IRA withdrawal.
2. The IRA is taxable in Canada and there is no exemption under Articles XVIII or XX of the US / Canada Income Tax Convention (Treaty).
3. The US $80,000 exemption applies to earned income and does not apply to pension, RRSP, interest or dividends.
Canada also has an up to $80,000 foreign earned income exemption if the employee is working out of Canada for a "Canadian" company. Again, Canada's exemption does not apply to interest, dividends, rent or IRA's.
Wish I had a better answer for you but you are taxable on the withdrawal.
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