I'm curious: suppose a US resident, dual citizen, with
accumulations in
both a Roth and a taxable IRA (established decades before, while
earning
income in the US, both IRAS having continued to grow since
then) -- suppose
that person then decides to retire to Canada. As he ages, how
will
distributions from the IRAs (both kinds) be taxed, and by whom?
is there
any way to make sure the IRAs are taxed at the most advantageous
rate?
thanks--
xx
Seattle, WA
----------------------------
david ingram replies:
Pensions, RRSP and IRA accounts are dealt with in Article XVIII
of the US / Canada Income Tax Convention which reads as follows:
Article XVIII
Pensions and Annuities
1. Pensions and annuities arising in a Contracting State and
paid to a resident of the other Contracting State may be taxed in
that other State, but the amount of any such pension that would
be excluded from taxable income in the first-mentioned State if
the recipient were a resident thereof shall be exempt from
taxation in that other State.
2. However:
(a) 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; and
(b) annuities 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 an annuity payment, the tax so charged shall not exceed 15 per
cent of the portion of such payment that would not be excluded
from taxable income in the first-mentioned State if the
beneficial owner were a resident thereof.
3. For the purposes of this Convention, the term "pensions"
includes any payment under a superannuation, pension or other
retirement arrangement, Armed Forces retirement pay, war veterans
pensions and allowances and amounts paid under a sickness,
accident or disability plan, but does not include payments under
an income-averaging annuity contract or, except for the purposes
of Article XIX (Government Service), any benefit referred to in
paragraph 5.
4. For the purposes of the Convention, the term "annuities"
means a stated sum paid periodically at stated times during life
or during a specified number of years, under an obligation to
make the payments in return for adequate and full consideration
(other than services rendered), but does not include a payment
that is not a periodic payment or any annuity the cost of which
was deductible for the purposes of taxation in the Contracting
State in which it was acquired.
5. Benefits under the social security legislation in a
Contracting State (including tier 1 railroad retirement benefits
but not including unemployment benefits) paid to a resident of
the other Contracting State shall be taxable only in that other
State, subject to the following conditions:
(a) a benefit under the social security legislation in the United
States paid to a resident of Canada shall be taxable in Canada as
though it were a benefit under the Canada Pension Plan, except
that 15 per cent of the amount of the benefit shall be exempt
from Canadian tax; and
(b) a benefit under the social security legislation in Canada
paid to a resident of the United States shall be taxable in the
United States as though it were a benefit under the Social
Security Act, except that a type of benefit that is not subject
to Canadian tax when paid to residents of Canada shall be exempt
from United States tax.
6. Alimony and other similar amounts (including child support
payments) arising in a Contracting State and paid to a resident
of the other Contracting State shall be taxable as follows:
(a) such amounts shall be taxable only in that other State;
(b) notwithstanding the provisions of subparagraph (a), the
amount that would be excluded from taxable income in the
first-mentioned State if the recipient were a resident thereof
shall be exempt from taxation in that other State.
7. A natural person who is a citizen or resident of a
Contracting State and a beneficiary of a trust, company,
organization or other arrangement that is a resident of the other
Contracting State, generally exempt from income taxation in that
other State and operated exclusively to provide pension,
retirement or employee benefits may elect to defer taxation in
the first-mentioned State, under rules established by the
competent authority of that State, with respect to any income
accrued in the plan but not distributed by the plan, until such
time as and to the extent that a distribution is made from the
plan or any plan substituted therefor.
Effectively, what this means is that you will pay 15% tax to the
USA on any monies coming from TIAA, CREF or your IRA pension,
zero to the US on the Roth IRA and Nothing to the US on your
Social Security.
Canada will tax you on 85% of your Social Security and 100% of
CREF, TIAA and your Conventional IRA annuity or pension and give
you credit for the 15% tax paid to the IRS by filling in lines
431 and 433 of your Canadian return.
According to a bulletin released by Paul Martin when he was still
finance minister and after Article XVIII of the Treaty was
signed, Canada will tax you on the earnings of the ROTH IRA
because Canada does not recognize the concept of the ROTH. I have
a problem with that because of Article I of the treaty above
which clearly states that an exempt amount in the US must be
exempt in Canada as well and have been treating them as tax free.
I have actually found (and bought) a couple of your books in my
travels.
------------------------------------------
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