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 And if it is article 18, am I responsible for tax on the full amount withdrawn or only a portion of the money?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.
