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 From what I understand, it cannot be "rolled over" but withdrawn and then contributed to my RSP.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.
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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 / US Social Security Agreement
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.
