Help! How to avoid USA/Canada double tax on RRSP withdrawl

canadian-to-america · Post by **canadian-to-america** » Mon Apr 20, 2015 8:44 pm

Hi Everyone,

We are doing our US taxes a bit late this year (already filed for an extension) and we have a question that should be super simple, but I simply cannot find the answer anywhere on the internet.

My wife (Canadian) became a permanent resident last year in the USA and took about 13k withdrawl from her RRSP, paying the 25% tax to the Canadian Government. We know all about the Nr4 to hopefully bring that tax rate down to our joint-couple tax rate for 2014.

We are currently using Turbo tax to do our 2014 US Taxes. When I put the RRSP income in the "Canadian Registered Pension Income" section of Federal Income our taxes owed shoot through the roof. Where on a US tax return to we list this RRSP income to avoid paying tax to the US?

Any help would be enormously appreciated.
Thanks

nelsona · Post by **nelsona** » Mon Apr 20, 2015 9:07 pm

RRSP income IS taxble in the US. However only a portion of it is, based on the growth since 01/01/2014, when sdhe became a US taxpayer, which should be negligible. you are putting it in the right place but you need to determine gross and taxable portion.

The gross amount goes on 16a and the taxable portion goes on 16b. the Cdn tax is then either used as a credit on form 1116 or as a dediction on schedule A.

I'm not sure what you mean by NTR4 reduction, since hat is merely a slip. You may be refring to 217 election, whenre she reports the rrsp income on a special return, but that would require she have little US income, and is a little complicated in the year of her move.

canadian-to-america · Tue Apr 21, 2015 12:34 pm

Nelsona thanks so much for your explanation.

So my wife was living outside the USA and Canada up until 8/2013 when she came to the USA as a tourist. We ended up getting married in 11/2013 and she was finally granted her permanent residence in 8/2014.

Since she couldn't work most of 2014, we decided to take out her entire RRSP (in two withdrawls) in 2014. She had about 6k in work income for that year, so it seemed the perfect time to take out her RRSP because her income would be so low.

She paid the mandatory 25% tax to the Canadian Gov't and we got information that we would receive form NR4, allowing us to file 217 (as you said), reducing that 25% tax to some extent. And we were told we wouldn't pay tax to the USA because of the tax treaty between the two countries - preventing double taxation.

So I wasn't aware we would pay tax on the portion of the RRSP that grew since she became a US tax payer (which would be 2013 - the first year she filed a US tax return).

How do we determine the taxable portion of her RRSP withdrawl, which she cashed in entirely in 2014? Do I have to know how much her RRSP appreciated (stocks, mutual funds) since she entered the USA in 2013?

Thanks again!

nelsona · Post by **nelsona** » Tue Apr 21, 2015 2:41 pm

As you said, she would need to know what her RRSP was worth (book value, not Fair market value) when she entered. the difference is the taxable portion.

To use 217 in 2014, she has to have filed a departure return in 2013. otherwise she needs to file her departure return in 2014, and have CRA determine if she can use 217.

canadian-to-america · Post by **canadian-to-america** » Tue Apr 21, 2015 7:26 pm

Perfect, that makes sense. Great we'll go ahead and report that taxable portion.

My wife is actually preparing a 2011 Canadian tax return to establish that she severed residence in that year, so presumably would form 217 be an option for us this year? Or do we need to file for '13 or '14?

She has a somewhat complex residency picture:

She left Canada in 2011 on an R1 (religious) visa to live and work in the USA.
She left the USA in 2012 for Canada briefly, then back to the US as a tourist, then to Indonesia.
She left Indonesia in 2013 and came to the USA as a tourist.
We got married in 2013
She got permanent residency in 2014.

We were told that she could establish 2011 as the year she severed residence with Canada, thus we're preparing that 2011 return.

nelsona · Post by **nelsona** » Tue Apr 21, 2015 10:51 pm

I agree, but this should have been done back then.

In any event, she will be eligible for 217 this year.
Don't forget to include all YOUR expenses for things like medical premiums you paid, etc on her Cdn return. the only thing she can't have is the spousal amount since presumably you have a "normal" income.

canadian-to-america · Post by **canadian-to-america** » Mon Apr 27, 2015 1:33 pm

Hi Nelsona,

One last question. In the foreign taxes credit section of Turbotax, when I add the taxes we paid to the Canadian govt for the RRSP withdrawl (25% of 13,000) my tax burden this year doesn't budge. Am I doing something wrong?

Also, I don't understand why the US government would be giving me a credit paid to the Canadian government. Since I do owe that tax to one of the governments.

Thanks!

nelsona · Post by **nelsona** » Mon Apr 27, 2015 1:42 pm

On form 1116 (you have that filled out, correct?), you will only get credit for Cdn tax, if you owe US taxes on the income, so if you did not report any taxable income on line 16b, and did not specify this amount on 1116, you won't be credited with anyting.

If you are not getting any crdit (I would not expect that you would get more than a few dollars), it may be better, as I no doubt suggested earlier, to take the Cdn tax paid as a deduction.

Of course, you first need t oaccurately determine exactly wwhat the final Cdn tax on that money will be, since in all likelihood, you will be using a 217 election to reduce the Cdn tax. See why we don't wait til 4/27 to do this?

As to "Why?" a tax credit. because there are reciprocal agreements that allow it, so that large corportaions operating on both sides of the border don;t end up paying tax twise. Those advantages extend down to anyone who earned income on one side of the border but owes tax on the other.

Why does IRS give you a deduction for tax you paid to your state? You owe the tax to your state don't you?

canadian-to-america · Post by **canadian-to-america** » Mon Apr 27, 2015 4:45 pm

Yes when I attempt to take the tax (about $3000) paid to Canada as a deduction vs a credit, Turbotax doesn't give me anything in terms of lower taxes to the Fed.

Thanks again for all this help!

nelsona · Post by **nelsona** » Mon Apr 27, 2015 4:54 pm

Are you using the standard deduction, or are you itemizing?
Sounds like you are having trouble with the concept.

canadian-to-america · Post by **canadian-to-america** » Mon Apr 27, 2015 8:28 pm

I'm itemizing in Turbotax. I go through all the steps in the foreign tax credit section, put in the amount paid to the CDN govt and nothing happens to my tax burden.