Commuting Pension

[cyclelady012354]

I’m a US citizen with landed immigrant status living in Canada with my wife who is a Canadian citizen. I’ve been physically living and working in Canada for 35 years. Each year, I’ve filed my income tax to both the IRS and the CRA. My wife is not employed and will only receive a minimal amount from CPP and OAS.
I want to retire in the few months and my wife and I are in favour of the option to commute the pension and invest the funds ourselves. The non-registered funds will be subject to the highest income tax rate and the registered funds will be transferred to another RRSP account. In the past the foreign tax credit has covered any taxes I would have paid to the IRS. What will the tax obligation be to the IRS? Will the IRS treat the RRSP contributions similar to the CRA, defer tax until withdrawn, or will I have to pay the IRS on the full commuted value?

[nelsona]

Well, the RRSP transfer will not be a contribution, it will be a transfer, so it is a non-event in both countries. the RRSP will not be taxable in US until you begin withdrawals, like Canada.

The non-transferred amount will be considered pension income, "general limit" for foreign tax credit purposes. You should continue to have sufficient Cdn tax to wipe oy any US obligations.
Note that now that you will have control of these funds, you will need to comply with any FBAR, PFIC, and FATCA reporting obligations.

[cyclelady012354]

I understand the first year that the pension is commuted the high tax rate in Canada will exceed my tax obligation to the IRS. Is there a concern that in following years the amount I pay to the CRA will be less than what I owe to the IRS?

What about when I start to income split with my spouse who has very low income? I have been filing jointly with the IRS so I see this as a type of income splitting. Can I take credit for the tax she pays to the CRA on the joint return to the IRS?

[nelsona]

Didn't I answer the first question?: "You should continue to have sufficient Cdn tax to wipe out any US obligations."

Can you take credit for the tax she pays to the CRA on the joint return to the IRS? Yes, but ONLY if you file jointly (you did not say that you filed jointly in the past - is she american?)

Income splitting does not really work well for the one-US citizen couple (unless you decide to file jointly) since IRS disregrds the split, leaving you with less Cdn tax paid that you can use for your tax credit, and Cdn tax in your spouse's hands which is useless from a US point of view (again, unless you start filing jointly in US).

There usually is some "optimal" amount thgat can be split to your spouse, but you would need to calculate this amount on a year-by-year basis, such that you off-load just enough pension to lower your Cdn tax to zero out your US taxes, but not so much that you end up owing IRS.

The computation is doable, if you sit down with both programs open and play with split and the foreign tax credit, but it is a hassle, and defeats the full purpose of Cdn govt permitting pension splitting.

I do think though that it will be all teh other reporting requiremnts that I mentionned that will drive you batty in the long-run. You haven't said whether you have been correctly doing these reports in the past.

[cyclelady012354]

Is there a threshold or a minimum value before you are required to submit a FBAR?

What types of income are eligible for the Foreign Earned Income Exclusion (FEIE) such as pension, dividends, capital gains, and interest?

[nelsona]

Have you not been filing FBAR all these years. The total of all accounts under your control must be less than $10K to avoid doing so.
Sounds like you haven't been keeping up with filing requirements.

No FEIE. Only wages or self-employment income. foreign tax credit is the only thing you have once you stop working.