moving an IRA to a RSP -
QUESTION:
I lived in the US for a number of years and
contributed to a 401K. After I left my job there, the money was rolled
into an IRA. I have not contributed to this account since 2000. I
have lived in Canada since 2001 and want to move it to an RSP. I have been
trying to do this for about a year now. From what I understand, it cannot
be "rolled over" but withdrawn and then contributed to my RSP. I am
confused by the witholding percentage and the US taxation on this. I have
not filed US income taxes since I lived there in 2000 and I am a dual
US/Canadian citizen. I have no plans to move back to the US and really
would like to use this money as a downpayment on a house as a first time
buyer. Is it worth moving the money?
--------------------------------------------
david ingram replies:
First of all, get your US returns done.
As a US citizen living in Canada you are more liable to do a US return than a
Canadian return. If you are not careful, youwil have the IRS sending youa
tax bill for "ALL" of your earnings in Canda since you arrived here and not
allowing you an exemption or foreign tax credit because you are late and they
'caught' you. Read the November 1993 newsletter to avoid the late filing
penalty of no0t being able to c,laim a foreign tax credit.
You can bring
the IRA money to Canada largely tax free. However, as an example,
Today (really) I am doing a 2001 return for a lady who withdrew $185,000 from
her IRA in 2001 and bought a Vancouver House. Unfortunately, she did not
file her 2001 return and the US IRS has caught up to her and she now owes
$142,000 US for tax, penalties and interest.
The good news is that
she neded all the money to buy her Vancouver house and when she took it out in
2001, the exchange rate was 1.54 and she received $284,900 Canadian.
Today, the house has gone UP over $500,000 Caandian. When she goes to pay
the $142,000 US now, she is only paying back about $151,000 Canadian. She
is a way ahead of the game because she did not pay the $73,000 tax she would
have owed if she had paid the tax in 2002 (for 2001). By not paying the tax when
due, she got to buy a far more expensive house in 2001 because she had $110,000
(Cdn) more cash to spend at the time.
By not buying in 2001 when 'you'
came to Canada, you have lost 40% of the value of your IRA in exchange and the
home you will be buying has gone up anywhere from 30% to over 100% depending
upon where you intend to buy. Even Saskatoon went up 47% in 2006
alone.
To make your rollover tax free or effectively tax free, you have
to have significant Canadian income so that the foreign tax credit works for
you.
1. Cash in the IRA. I suggest that you take out $10,000
in one lump which will be 10% penalty free because you are using it to buy a
first time home. You will owe income tax on this amount in the US AND Canada but
not the 10% penalty. Take the rest out separately. On this
amount you will owe regular tax in teh US AND Canada. You wil also owe a
10% early withdrawal penalty which is calculated on form
5329.
2. Take $20,000 Canadian and get it into an RRSP
right away to use for your Home Buyer's plan. Be careful to make sure that
it is there for 90 days befroe you take it out to buy your house.
3. THEN, borrow the full amount of the IRA (less the
$20,000 already there) in Caandian Dollars and put it in an RRSP as an IRA
rollowver amount. This means that that amount will counter out the tax on
the IRA.
4. To get credit for the tax paid to
the IRS, you will take the amount of the IRA (in Canadian Dollars) and put
it on line 433 of schedule 1 of your T-1. Claim the tax paid to the US on
line 431 of schedule 1 and if there is any left over use schedule T2036 to
calculate a provincial foreign tax
credit.
----------------------------------------------------------------------------------
However,
get your US tax returns done befroe you end up with a $100,000 tax ill.
The following is a handout at a seminar i did for 91 people on Sunday, August
12th.
The following was a handout at the seminar and is pretty
self-explanatory. You can find an older and larger edition as the October 1995
newsletter in teh top left hand box at www.centa.com. You should also read the US
/Canada Taxation section in the second box down (Features) at www.centa.com.
US
CITIZENS OR GREEN CARD HOLDERS IN CANADA AND CANADIANS IN THE US - FOREIGN
ACCOUNT REPORTING REQUIREMENTS
I want to make it
clear that what you are about to read applies to Americans who have never lived
in the United States, as well as those who have emigrated from the U.S. to other
countries (including CANADA).
Even if they have no U.S. income now, and they have never had one cent
of U.S. income in their lives, United States citizens are required to file a
United States income tax return (reporting their world income) no
matter where they live in the world if they have income from any source
(including non-taxable internal earnings in an RRSP). There are severe penalties
for failing to file an annual U.S. return. In one case, $190,000 of tax and
penalties were levied against a U.S. citizen living in Vancouver, and shows that
the IRS can go back to 1986 (or even 1967) with impunity. In this case, the
gentleman has lived in Canada since 1986, and was told by professionals that he
did not have to file United States returns. The IRS found him after he lost his
U.S. passport in a robbery and had to get it renewed.
And, in case you are thinking this is a wealthy man who will just have to
"pay up"; the person involved averaged less than $15,000 Canadian per year of
earnings from employment for the years 1986 to 1995. This bill could have wiped
him out for life, and HE LOST MONEY. A Canadian professional accountant told him
explicitly that he did not have to file U.S. tax returns because he had lost
money and he was living in Canada. It is true that MOST Canadians do not have to
file Canadian returns if they move to the U.S., or Australia, or Germany, etc.
BUT! ALL AMERICANS do have to keep filing no matter where they live.
If you ARE a U.S. citizen, and have not been filing your U.S. returns, you
should get a copy of my November, 1993 CEN-TAPEDE and use the information in
that newsletter to file your returns retroactively. Find that newsletter at www.centa.com in the top left hand
box.
What else does an American in
Canada (or Paris for that matter) have to worry about?
1. Taxation of the Family
Residence
Americans come to Canada and are amazed that the family
home in Canada is income tax free. Unfortunately for the American, the sale of a
Canadian (or Australian, etc.) family house is still reportable by the American
on their annual 1040 income tax return ($250,000 US per person is exempt but
should be reported and exempted.
2. Gift Tax (if this applies to you, read my
February 1994 newsletter) After
selling the family house (which they think is tax free) it is not unusual for an
American living in Canada to give their children some of the proceeds and buy a
less expensive house or condo for themselves. A U.S. citizen can only give a
child up to $12,000 a year before incurring U.S. gift tax. The February, 94
newsletter has all the rates, but suffice it to say that if U.S. mom gives her
daughter $22,000 U.S. in one year, MOM OWES gift tax of $1,800 and has to file a
U.S. 709 gift tax return.
You might ask, "How will the IRS find out?" Easy! The daughter will
go across the U.S. border with her new car, and a customs/IRS agent will ask her
where she got the money to buy the car. Or daughter will buy a Hawaii condo with
the money and when she is audited on the sale and asked "where did the money
come from to buy the condo?" she will have to answer that "Mom gave it to
her."
This situation took place in my office the week I wrote this. I spent
21 hours over a 3 day period in a tax audit with a young couple, the tax
department auditor, and a 1 1/2 year old tyke. The auditor spent 4 hours asking
how much they spent for beer, diapers, clothing, rent, gas, travel, and Xmas
gifts, etc., IN DETAIL back as far as 1986 for some items. The auditor was doing
a "source and application of funds" audit and was particularly concerned
with how much money the husband's father had given them, and just as
importantly, when? After thirty-one years in the tax business, I still could not
figure out whether the auditor was after the 35 year old "kids," or whether the
auditor was after the father. I am inclined to think the auditor was after
"dad."
The auditor also mentioned the "close" cooperation which now exists
between customs, tax, and immigration. She can get whatever she wants from any
of the departments and we are seeing these ourselves almost daily. In addition,
the U.S. and Canadian tax authorities are now proactive in their
reporting. If a Canadian auditor is dealing with someone with an American
identity or income (rental, stock, director's fees, etc.) the Canadian auditor
MUST now automatically report it to the U.S. and vice versa because of the U.S.
/ CANADA Tax Treaty signed on November 8, 1995.
3. Ownership of Foreign Companies (Also
see September 94 newsletter)
If a U.S. citizen owns 10% or more of a foreign
corporation, he or she has to file some rather rigorous forms with their 1040
tax return. Basically, Form 5471 requires them to recalculate the company's
profits using a Dec 31 year end, and put their resulting share of profits (even
if not received) on their 1040 return. Penalties for failure to file this form
can add up at (are you ready for this?) $10,000 every 30 days late up to a
maximum of $50,000. This can be even more significant if you own 4 Canadian
companies. The hard part here is for the American to realize that his Canadian
Company is a foreign company to the U.S. This, of course, also
applies to A Canadian who moves to the USA and still owns shares in a family
corporation in Canada – Usually dad gave them the shares.
4. Taxation of "Tax Free"
Dividends This
is always a heart breaking moment. A Canadian accountant has spent hours
explaining to "hubby" why his wife should have "X" number of shares in his
company and how beneficial it is because she can take out $30,000 (varies)
of actual dividends and not have to pay any tax to Canada
because of Canada's dividend tax credit. They are totally dismayed and the
accountant mortified to find out that the dividends were 100% taxable on her
U.S. return, and that the U.S. does not recognize the Canadian dividend tax
credit. In addition, she is also liable to file the 5471 forms mentioned in "3"
above or suffer the penalties. And, she must file the TDF
90-22.1 mentioned in 5 below.
5. Reporting of Foreign (Canadian)
Accounts. U.S. citizens
with signing authority on foreign financial accounts which total more than
$10,000 U.S. at any one time in a year must report the details of ALL the
accounts to the U.S. Treasury in Detroit on a form TDF 90-22.1. Failure
to file this "simple little form" carries a penalty of up to $500,000 PLUS 5
years in jail. Note that this form is filed with TREASURY in Detroit, NOT
WITH the IRS. See the bottom of Schedule B of your 1040. And, of course, this
applies in spades to a Canadian in the US. As of about June
17, 2007, I am informed that the min penalty will be $10,000 for failure to file
this form which is mentioned in the last two questions on the bottom of schedule
B.
Notice that this TDF 90 form requires details of accounts on which you
have a signing authority. It does not need to be your account, or
contain your money or securities. If you are a nurse and sign on the
nurse's union account, you must report the details asked for on the form TDF 90.
If you are a cub leader or a signing officer for your Kinsmen account or a
deacon at your church and sign the church's account, you must give the details
to the Department of the Treasury in Detroit. This also applies to RRSP accounts
which are even more serious because they are also classified as "FOREIGN
TRUSTS". http://www.irs.gov/pub/irs-pdf/f90221.pdf
6. Annual Taxation of RRSP Accounts
NOTE that ANY U.S.
CITIZEN who owns a CANADIAN RRSP (which is a foreign trust
under U.S. law) is liable for a fine of up to $500,000 U.S. PLUS 5
years in jail if they do not report the existence of the account to the
Treasury Department as explained in item "5".
In addition, there are further penalties for failing to report the RRSP
earnings on an annual basis to the IRS. A new form 8891 was provided in 2004.
On an annual basis, you must report the following to the
IRS:
1. The name of the financial institution holding the RRSP;
2. The total contributions made up to Dec 31, 2006 including
rollovers;
3. The earnings (interest, dividends, capital gains) in 2006 (or any other
relevant year) and
4. The balance in the account as of (at) Dec 31, 2006 or other relevant
year.
5. Any Withdrawals made in 2006 (or any other
year)
Note that the internal earnings of the RRSP MUST be reported on the U.S. 1040
income tax return. The RRSP earnings can only be exempted AFTER reporting them
under the US/Canada Tax Treaty. Note that residents of every country other than
Canada must file form 3520 / 3520A.
http://www.irs.gov/pub/irs-pdf/f8891.pdf.
Failure to file the 8891 is 35% of the
principal plus 5% for each year not reported.
OUCH!!
7. Social Security Tax on Canadian Self
Employed Earnings If you
are earning money in Canada, you are liable to pay U.S. FICA taxes of 15.3% on
up to $94,200 of earnings (2.9% over 94,200) UNLESS you file
an exemption request under the US / CANADA Tax Treaty or Article V of the CANADA
8. All Canadian Wages or Self Employed Income
is Taxable in the U.S. There is an "up to $82,400" U.S.
exemption but to get the exemption, you HAVE to file the return and submit
a form 2555 to claim the exemption. If you do not fill in the exemption
form, your Canadian earnings are taxable on a U.S. return and you could end up
with double taxation if you do not come forward voluntarily. Note though,
that if the American in Canada has children, he or she can claim up to
$1,000 per child refundable tax credit by filling in form 8812 and 1116 instead
of form 2555.
Canadians performing services in the United States, and in 43 of the states
in particular, are required to file the respective state return(s) and a US
federal 1040NR or 1040 income tax return, even if their remuneration was paid
from Canada. This applies, but is not limited to:
* Executives attending
meetings in the US and, in particular, California,
* Service technicians
servicing Canadian products under warranty,
* Salespeople selling Canadian products in
the US,
* Journalists (e.g. covering Canucks
Hockey games, INDY races or O J Simpson trial),
* Horse trainers, race car
mechanics
The above are exempt from tax up to $10,000 of earned income but the
taxpayer must file returns to prove his or her exemption per Article XV. If you
earned over $10,000 in the US, US taxation depends on where the employer
gets its ultimate tax deduction for the wages paid out. If you are in the US
more than 183 days, you are usually taxable on your world income.
**
Entertainers, actors, musicians, performers,
**
Professional athletes, race car drivers, jockeys.
The above are exempt from tax up to $15,000
in gross earned income (which includes travel expenses) but still have to file
the return to prove their exemption under Article XVI.
*** Transport Employees, Truckers, Flight
Attendants, Pilots if over $15,000.
Transportation employees are exempt from tax
in most cases even if in the US for more than 183 days, if they are exercising
their regular employment. They must, however, file the tax return to
exempt the income.
Canadians with US rental properties must
file a 1040NR with schedules E and 4562 and the relevant state tax if in a
taxing state. The penalty for failure to file the 1040NR EVEN IF YOU ARE LOSING
MONEY is $1,000 to $10,000 per owner plus 30% of the Gross Rent with no expenses
allowed.
-------------------------------------------------
David
Ingram wrote:
---------------------------------------------------------------------------------------------------------------
It is very unlikely that blind or unexpected email to me will
be answered. I receive anywhere from 100 to 700 unsolicited emails a
day and usually answer anywhere from 2 to 20 if they are not from existing
clients. Existing clients are advised to put their 'name and PAYING
CUSTOMER' in the subject and get answered first. I also refuse to be a
slave to email and do not look at it every day and have never ever looked at it
when i am out of town.
However, I regularly search for the words"PAYING CUSTOMER" and
always answer them first if they did not get spammed out. As an example, as I
write this on June 28th, since June 16th (12 days), my 'spammed out' box has
7,118 unread messages, my deleted box has 2630 I have actually looked at and
deleted and I have answerd 63 email questions I have answered for clients and
strangers. I have also put aside 446 messages that I am maybe going to try
and answer because they look interesting.
Therefore, if an email is not answered in 24 to 36 hours, it
is lost in space. You can try and resend it but if important, you will
have to phone to make an appointment. Gillian Bryan generally accepts
appointment requests for me between 10:30 AM and 4:00 PM Monday to Friday
VANCOUVER (Seattle, Portland, Los Angeles) time at (604) 980-0321
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)
Disclaimer: This question has been answered without detailed
information or consultation and is to be regarded only as general
comment. Nothing in this message is or should be construed as advice
in any particular circumstances. No contract exists between the reader and the
author and any and all non-contractual duties are expressly denied. All
readers should obtain formal advice from a competent and
appropriately qualified legal practitioner or tax specialist
for expert help, assistance, preparation,
or consultation in connection with personal or
business affairs such as at www.centa.com. If you forward this message, this disclaimer must be
included."
David Ingram gives expert income
tax & 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 $400 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.
This is not intended to be definitive but in
general I am quoting $800 to $2,800 for a dual country tax return.
$800 would be one T4 slip one W2 slip one or two
interest slips and you lived in one country only - no self employment or rentals
or capital gains - you did not move into or out of the country in this
year.
$1,000 would be the same with one rental
$1,200 would be the same with one business no
rental
$1,200 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.
$1,500 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
$1,600 would be for two people with income from two
countries
$2,800 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 $150.00 up.
With a Rental for $350
A Business for $350 - Rental and business likely
$450
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 $800 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.
Just a guideline not etched in
stone.
This from "ask an income trusts tax and immigration expert"
from www.centa.com or www.jurock.com or www.featureweb.com. David Ingram deals on a daily
basis with expatriate tax returns with multi jurisdictional cross and
trans border expatriate problems for the United States, Canada, Mexico,
Great Britain, United Kingdom, Kuwait, Dubai, Saudi Arabia, Thailand,
Indonesia, Japan, China, New Zealand, France, Germany, Spain, Italy, Russia,
Georgia, Brazil, Peru, Ecuador, Bolivia, Scotland, Ireland, Hawaii, Florida,
Montana, Morocco, Israel, Iraq, Iran, India, Pakistan, Afghanistan, Mali,
Bangkok, Greenland, Iceland, Cuba, Bahamas, Bermuda, Barbados, St Vincent,
Grenada,, Virgin Islands, US, UK, GB, and any of the 43 states with state tax
returns, etc. Rockwall, Dallas, San Antonio Houston, Denmark, Finland,
Sweden Norway Bulgaria Croatia Income Tax and Immigration Tips, Income Tax
Immigration Wizard Antarctica
Rwanda Guru Consultant Specialist Section 216(4) 216(1) NR6
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FINTRAC E677 E667 105 106 TDF-90 Reporting $10,000 cross border
transactions Grand Cayman Aruba Zimbabwe South Africa Namibia help USA US Income
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David Ingram
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