RPP turning into LIRA in 2014, for Cdn resident and USC

CdnAmerican · Post by **CdnAmerican** » Fri May 02, 2014 8:37 pm

This question goes along with the "RPP turned LIRA in 2013" , but the scenario is different so I'm starting a new thread.

I am a USC in Canada, working in a position with an RPP. If I leave this position, I can get my pension paid out to me, with about 80% going into a LIRA and 20% in a cheque (which could then be put back in an RRSP).

If I get this pension payout, I assume I claim the 20% cheque as income in Canada as well as the US (noting if I put it back in an RRSP, I would offset the Cdn taxes).

My main question is, Do I claim the LIRA piece as income for my US tax?

nelsona · Post by **nelsona** » Sat May 03, 2014 8:36 am

You need to be careful when taking the 20% portion, whether you want to make a DIRECT or an INDIRECT transfer to an RRSP.

The LIRA is a non-event. Since it is being transferred directly into the LIRA, no reporting is required. You would have to begin filing 8891 every year in US, just like you are doing for any other RRSP that you have.

If you take the other money from the RRP yourself, it will be subject to tax, and should have tax withheld at source. You also need to determine is this is a "retiring allowance" or simply a lump-sum from your pension. the treatment in both Canada and US would be different. If it is NOT a retiring allowance (severance) then to put it back into an RRSP would require that you have contribution room, and you would also want to make up what was withheld.

For US purposes, this would be a taxable withdrawal, but the contribution might not be deductible, so I would not be doing this.

Best to have your firm DIRECTLY transfer this 20% to an RRSP. Or, if you need the money, simply take it and report on both returns.

CdnAmerican · Post by **CdnAmerican** » Sat May 03, 2014 1:04 pm

Nelsona - That's really helpful. Thanks very much. I feared that the 80% LIRA piece would be reportable/taxable in the US, and that was my main concern. What you've described sounds fair, since I'm still not accessing the money. I did wonder if the IRS would think it odd that a large 8891 was introduced, but I guess they wouldn't really care.

I will look into how the 20% lump-sum piece is treated, though it's not unreasonable for that to be taxable in the US. That's fair.

Thanks again!

nelsona · Post by **nelsona** » Sat May 03, 2014 5:40 pm

Its fair if you keep the money, but if you take the money and then put it in an RRSP why pay tax in US now? Best to move everything directly, keeping the LIRA and RRSP separate.

CdnAmerican · Post by **CdnAmerican** » Sat May 03, 2014 11:25 pm

Thanks - that's wise counsel. No point in paying tax on it to US now if it can be avoided.

CdnAmerican · Post by **CdnAmerican** » Wed Dec 10, 2014 1:52 am

Hi - this is a follow-up on this thread. The info at the top from a few months ago is still accurate, but with one change. If I leave the pension plan, about 80% goes into a LIRA (no change there), but the 20% is now called Maximum Transfer Value Excess. They no longer give the option of transferring this directly into an RRSP; instead, this all now appears to be taxable income, which is sent to me in a cheque (the plan withholds a certain amount, but regardless of this amount it's all taxable income).

I presume I could offset the Cdn tax by then putting it into an RRSP, so my question involves the US tax. The guidance from nelsona before indicates that this income is all US taxable once it is sent to me .. but now the opportunity to shelter it by having it sent to an RRSP is no longer available.

My questions are:
1) Does the change in terminology (MTV Excess) have any implication for US tax, or is this still the same (i.e., all passive taxable income)?
2) Is it still the case that the RRSP transfer is a non-event for US tax purposes (that is, not taxable until withdrawn)?

Thanks!

nelsona · Post by **nelsona** » Wed Dec 10, 2014 8:44 am

The income was never passive, it is general limit income. I will get into the handling later.

nelsona · Post by **nelsona** » Wed Dec 10, 2014 10:40 am

So what has changed is that the 20% is NOT being considered severance.

Let's be clear about the US taxability. The money that comes directly to you is taxable in US at that time. So, any funds that are not put directly into another pension vehicle are taxable in canada and US.

Hopefully the Cdn tax will be 15% rather than 25% (make sure they know you are inUS).

I'm wondering if you were a Cdn resident if the options laid out from the company would be the same. It seems strange that a pension would FORCE a Cdn resident to take taxable income.

Are you familiar with how any former collegues handled this "MTV Excess"? If they were allowed to put this into an RRSP "indirectly", I suppose you could to, provided you find a willing Cdn broker.

CdnAmerican · Post by **CdnAmerican** » Thu Dec 11, 2014 12:45 am

Thanks nelsona! Sorry - I should have clarified. I am a USC but living in Canada, with no plans to move. The divestiture would only happen if I quit my job, and then I would have the option to divest the pension, but could just leave it alone if I chose to.

I don't know how anyone else at my employer has handled this situation. My colleagues seem to see this pension as a very positive and low-risk vehicle. I lived in the US long enough to see plenty of pensions that were thought of as low-risk go bankrupt, so I would prefer to manage the $$ myself.

I did not realize the income would be general limit. That might result in a tax hit in both the US and Canada, which would be unfortunate.

nelsona · Post by **nelsona** » Thu Dec 11, 2014 10:16 am

Why would the category change your taxability in US?

In either category, you have suffcient Cdn tax to cover any US liability.

CdnAmerican · Post by **CdnAmerican** » Thu Dec 11, 2014 7:55 pm

Oh, of course. I was thinking I couldn't claim against my US tax if it's general income, but of course my Cdn income would also be general so I'd just use 1116 to offset it. That said, I'd be paying a pretty high marginal tax in Canada (36%, I think) and that plays into any decision.

Thanks for your help. I think this makes sense now!