After two years as a TN in the US, I'm about to return to Canada. I'd like to ask for any advice on my plan below: hopefully it works and will be useful to anyone in a similar situation! My goal is to minimize the amount of paperwork come tax time!
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Situation: Departing mid-Dec for Canada. Last date of US employment will be Dec 31 (using some vacation days here). On Dec 31, I will receive my last paycheque and remaining vacation days. I have $2k in an HSA and ~$20k in my OPERS retirement plan (a defined contribution governmental 414(d) plan from the state of Ohio). The plan has a three-month wait between my employment end date and when I can cash out.
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Plan of actions:
1. Empty my HSA before Dec 31. Declare it on my 1040 and 8889, paying income tax and the 20% additional tax. I might save a few dollars if I hold off until 2016 and claim a foreign tax credit (FTC) but then I'd have more US paperwork to file.
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2. File a full year 1040 for 2015. According to Page 8 of IRS Pub 519, my residency termination date is Dec 31. Even if it is earlier, I can file full-year 1040 under XXV(1) of the Canada-US tax treaty. No need for a 1040C sailing permit (again, under XXV(1)).
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3. NOT file a Cdn return for 2015. I'll have no income, and the only unreimbursed moving expense will be my lease cancellation costs dated in 2016 and claimed on that year's Cdn return.
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4. Empty my OPERS retirement account in April, when I am eligible. File form W-8BEN so they withhold 15% tax (by treaty) and the 10% early withdrawal penalty.
Because I will already be in Canada I cannot rollover into an IRA, but I don't think I need to! CRA 2015-0572541r3 (http://taxinterpretations.com/?p=40234) says that direct 401(k) to RRSP transfers are permitted, and that both the 15% tax and the 10% penalty can be claimed as FTC.
So, I will ask my provider for a lump-sum $20k payment, get a cheque for $15k after withholding, and then contribute that and $5k from my savings to my RRSP.
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(I am taking the position that my OPERS account is the same as a 401(k) for these intents and purposes. Indeed, both the contributions from my salary and my employer were not taxed when deposited into the plan, and the plan falls under 401(a)).
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5. File a full year T1 in 2016. Declare the $20k income, and use the $5k withholding taxes (FTC) and my lease cancellation costs to reduce my tax payable. Include the $20k RRSP contribution as a Transfer on Schedule 7.Â
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6. NOT file a 1040NR for 2016. The only income I will have is from the retirement plan withdrawal. According to the instructions for 1040NR, it says "You must file a return if you owe any special taxes, including ... Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account." Since I won't owe anything beyond the withholding, I read this as saying I don't need to file. However, I don't know whether I should file one just as a way of saying I've left the US or if they'll see it as pointless.Â
I'd be grateful for anyone's thoughts on my situation!
After 2 year TN, about to return to Canada
Moderator: Mark T Serbinski CA CPA
1. Apparently CRA will treat HSA as a retirement account if you keep it if that helps. I would do what you are doing.
2. The right to a dec 31 residency end date is NOT a treaty matter. Everyone leaving US has this right.
3. You cannot claim any moving expenses when returning to Canada. You should file to establish your residency date in 2015.
4. Correct in every respect.
5. Correct except for no moving expenses allowed.
6. I would file a 1040NR in 2016, to be sure. Some argue that retirement account withdrawals are connected income, so are subject to graduak taxation, so there might be some advantage to soing this, perhaps lowering the 25% tax you will pay to a lower amount. you can decide this later. This might make me hold off on the HSA collapse until after new year, too, since that is definitely connected income (but also fully taxable in Canada).
2. The right to a dec 31 residency end date is NOT a treaty matter. Everyone leaving US has this right.
3. You cannot claim any moving expenses when returning to Canada. You should file to establish your residency date in 2015.
4. Correct in every respect.
5. Correct except for no moving expenses allowed.
6. I would file a 1040NR in 2016, to be sure. Some argue that retirement account withdrawals are connected income, so are subject to graduak taxation, so there might be some advantage to soing this, perhaps lowering the 25% tax you will pay to a lower amount. you can decide this later. This might make me hold off on the HSA collapse until after new year, too, since that is definitely connected income (but also fully taxable in Canada).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Nelsona - a much belated 'thank you' for the advice. I found the relevant rules saying I CANNOT claim moving expenses - thank you for saving me a headache! I kept the HSA intact for the time being.
The current problem is that my retirement plan withheld the full 30% when I requested a payout of my account, even though they have my W-8BEN on file. They said that the 15% treaty amount only applies to periodic payments. I have pointed them to [url=https://www.law.cornell.edu/cfr/text/26/1.1441-2]26 CFR 1.1441-2(b)(1)(ii)[/url] that states for this type of income "... it is immaterial whether payment of that item is made in a series of payments or in a single lump sum".
Does anyone know of another tack to try with them? I have the feeling they will take the 'safe' way out and leave me to deal with the IRS... via form 8833 with my 2016 1040NR to get back my money.
On a related note, I have read some suggestions that the 10% early withdrawal penalty (I'm under 59) doesn't apply to non-residents. Has anyone successfully done this? [/url]
The current problem is that my retirement plan withheld the full 30% when I requested a payout of my account, even though they have my W-8BEN on file. They said that the 15% treaty amount only applies to periodic payments. I have pointed them to [url=https://www.law.cornell.edu/cfr/text/26/1.1441-2]26 CFR 1.1441-2(b)(1)(ii)[/url] that states for this type of income "... it is immaterial whether payment of that item is made in a series of payments or in a single lump sum".
Does anyone know of another tack to try with them? I have the feeling they will take the 'safe' way out and leave me to deal with the IRS... via form 8833 with my 2016 1040NR to get back my money.
On a related note, I have read some suggestions that the 10% early withdrawal penalty (I'm under 59) doesn't apply to non-residents. Has anyone successfully done this? [/url]
Your reference doesn't really help you, as it merely states that how you take the money doesn't define periodicity.
A better reference is simply IRS Pub 901, under Table 1, which says Canadian residents get 15% regardless of periodic or not.
However, the prudent approach of your manager may help you in the end, since it will force you to file a 1040NR and get a definitive answer in your case.
There are several ambiguous factors that come into play her:
1. Withholding. The form for resident withholding and non-resident withholding differ. the NR form doesn't have a space to characterize the withdrawal as early or not. That leaves it in your hands. Company washes their hands. They have withheld the maximum. But why they would not simply look at Pub 901 is a mystery.
2. Is your withdrawal connected or non connected income. IRS says sometimes, treaty simply says it is all pension. Connected income would benefit from graduated rate, but be subject to 10% penalty. If it is not connected, then, IN MY OPINION, you are limited to the treaty rate of 15%, and no penalty. By filing a 1040NR and not including the penalty, you will get IRS opinion.
3. Finally, periodic, non-periodic. While the treaty limits tax to 15%, that is only supposed to cover periodic payments. However, as mentioned above, IRS doesn't seem to care about periodicity, in almost ALL countries have a flat rate (I found only one that cared). So, why your manager cares is questionable. You might want to ask him what definition they use for periodic (it could be SEPP?).
Bottom line is that, if they don't buy 901, just take the money and deal with it later. On your 1040NR, report the income as non-connected, at 15% tax, and see what IRS says.
Pretty vague, eh?
A better reference is simply IRS Pub 901, under Table 1, which says Canadian residents get 15% regardless of periodic or not.
However, the prudent approach of your manager may help you in the end, since it will force you to file a 1040NR and get a definitive answer in your case.
There are several ambiguous factors that come into play her:
1. Withholding. The form for resident withholding and non-resident withholding differ. the NR form doesn't have a space to characterize the withdrawal as early or not. That leaves it in your hands. Company washes their hands. They have withheld the maximum. But why they would not simply look at Pub 901 is a mystery.
2. Is your withdrawal connected or non connected income. IRS says sometimes, treaty simply says it is all pension. Connected income would benefit from graduated rate, but be subject to 10% penalty. If it is not connected, then, IN MY OPINION, you are limited to the treaty rate of 15%, and no penalty. By filing a 1040NR and not including the penalty, you will get IRS opinion.
3. Finally, periodic, non-periodic. While the treaty limits tax to 15%, that is only supposed to cover periodic payments. However, as mentioned above, IRS doesn't seem to care about periodicity, in almost ALL countries have a flat rate (I found only one that cared). So, why your manager cares is questionable. You might want to ask him what definition they use for periodic (it could be SEPP?).
Bottom line is that, if they don't buy 901, just take the money and deal with it later. On your 1040NR, report the income as non-connected, at 15% tax, and see what IRS says.
Pretty vague, eh?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Hi Nelsona,
Thanks for the details and the pointer to Pub 901. There is indeed too much ambiguity here from the IRS!
I'm befuddled whether this would be considered ECI. The money in the fund came from a mix of my wages (in lieu of social security, because I was a state employee) and employer contributions while I was resident in the US. This makes me think that it was connected to my employment, and should be ECI. OTOH, most experiences I have read on the internet suggest these are treated as non-ECI...
I like the idea of reporting the 15% rate on my 1040NR, and seeing what the IRS does. If the IRS accepts my return and gives me the refund, and then later decides to change it's mind (i.e. audit, whatever), am I going to be penalized/fined/taken out back and shot or will I just have to pay the difference? The amount of money involved is not worth any long-term headaches.
Thanks for the details and the pointer to Pub 901. There is indeed too much ambiguity here from the IRS!
I'm befuddled whether this would be considered ECI. The money in the fund came from a mix of my wages (in lieu of social security, because I was a state employee) and employer contributions while I was resident in the US. This makes me think that it was connected to my employment, and should be ECI. OTOH, most experiences I have read on the internet suggest these are treated as non-ECI...
I like the idea of reporting the 15% rate on my 1040NR, and seeing what the IRS does. If the IRS accepts my return and gives me the refund, and then later decides to change it's mind (i.e. audit, whatever), am I going to be penalized/fined/taken out back and shot or will I just have to pay the difference? The amount of money involved is not worth any long-term headaches.
I agree. that is why I said that your fund manager might be doing you a favour by withholding 30%.
If they withheld only 15%, in which case you would be rightly tempted to not bother filing anything for 2016, and the IRS later reassessed you based on the 1042-S that was submitted by the manager, that might cost you in interests AND a non-filing penalty.
Since it is quite likely that CRA tax will be higher than 15,25, or 30% on this income any, why aggressively pursue 15% and create that risk?
If they withheld only 15%, in which case you would be rightly tempted to not bother filing anything for 2016, and the IRS later reassessed you based on the 1042-S that was submitted by the manager, that might cost you in interests AND a non-filing penalty.
Since it is quite likely that CRA tax will be higher than 15,25, or 30% on this income any, why aggressively pursue 15% and create that risk?
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
I received a letter from the fund today with an explanation of their reasoning. The fund is relying on IRS Info Ltr 2004-0221(https://www.irs.gov/pub/irs-wd/04-0221.pdf), which says lump-sum payments are not covered by the treaty and therefore taxed at 30%.
I'll see what the IRS says in 2017, and if I don't forget, I'll post another followup then.
I'll see what the IRS says in 2017, and if I don't forget, I'll post another followup then.
I'd put this off for a number of months - just prepping my returns.
First problem was the my 1042-S stated income code 14 (Real Property Income) instead of 15 (Pensions, annuities...). Took three weeks to get that fixed :evil:
On the 1040NR, ECI will have the lowest tax burden. The pension was $15900, minus $8100 for two exemptions (wife) gives graduated tax of $783. Add on the 10% early withdrawal ($1590), and I end up with an effective rate of 14.9%!
I'll let everyone know in 6 months how this all worked out (p. 58 of 1040NR says the IRS will take their time with 1042-S refunds).
First problem was the my 1042-S stated income code 14 (Real Property Income) instead of 15 (Pensions, annuities...). Took three weeks to get that fixed :evil:
On the 1040NR, ECI will have the lowest tax burden. The pension was $15900, minus $8100 for two exemptions (wife) gives graduated tax of $783. Add on the 10% early withdrawal ($1590), and I end up with an effective rate of 14.9%!
I'll let everyone know in 6 months how this all worked out (p. 58 of 1040NR says the IRS will take their time with 1042-S refunds).
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MikeRitchie
- Posts: 21
- Joined: Wed Feb 22, 2012 7:01 pm
A few years ago, someone around here got an opinion from CRA That it would be treated like other employer-sponsored funds: taxable to the extent that it is taxable in US. Since you won't be able to use it in Canada, any withdrawals you make will be taxable in US and in Canada -- so just like a pension. The treaty also describes plans for employee benefits as treated like a pension.
Trouble trying to find any more info "in writing" is that CRA now has it's own HSA, so one cannot easily search their databases for info on the US version.
Trouble trying to find any more info "in writing" is that CRA now has it's own HSA, so one cannot easily search their databases for info on the US version.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
On the issue of HSAs,why would one not be able to use it in Canada to reimburse oneself for allowed medical expenses such as prescriptions, etc, in a tax-free manner? I didn't come across anything suggesting the IRS would only allow HSA withdrawals for medical expenses incurred in the USA, and nothing prohibiting one from using their HSA after leaving the country.
Read over the eligible medical expenses on the IRS website. Foreign prescription medicine is specifically excluded, for example. You will find it difficult (not impossible however) to substantially use up this amount.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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MikeRitchie
- Posts: 21
- Joined: Wed Feb 22, 2012 7:01 pm
Thanks!
I was thinking of using HSA as a supplemental retirement saving plan with the added benefit that if you use it for health costs in retirement, it remains tax free. After doing a bit more research, the fact that my wife has a health FSA probably precludes me from contributing to my HSA this year.
I was thinking of using HSA as a supplemental retirement saving plan with the added benefit that if you use it for health costs in retirement, it remains tax free. After doing a bit more research, the fact that my wife has a health FSA probably precludes me from contributing to my HSA this year.