I have a few questions re planned withdrawals from RRSPs. Here is the scenario:
1. We are Canadian citizens with green cards in US since 1994. Have filed elections or 8891s all these years to defer US tax on income on RRSP accounts.
2. Plan to withdraw balance in RRSp accounts - some in 2007 and balance in 2008 to take advantage of attractive exchange rates. Assume I withdraw $100,000. The book value is around $25,000 so $75,000 will be taxed in US.
3. Canada will withhold 25% = C$25,000 and no more reporting required. Correct?
4. For book value calculation, the book value that I have calculated is based on the actual contributions made since 1986 x exchange rates for those years plus income earned in those years x exchange rates. In other words, I have used exchange rates on a year by year basis to compute US $ book value at the time of move to US. Is this OK or should I use the exchange rate of C$ at 1994 x exchange rate of 1994.
5. Some of the investment was in T. Bills. So, if I bought a T. Bill for $4,000 in 1990 which was to mature in 1998 for $10,000. For book value purposes, I have only included $4,000 as of 1994 and have ignored any accrued income on that investment. This obviously lowers my book value and increases the taxable income. Should i add the accrued income from 1990 to 1994, date of move to the book value at 1994.
6. Form 1116 - I used $100,000 as general limitation income with $25,000 foreign tax credit and it generated full credit of $25,000 on page 2 of 1040. Reading your posts, it sounded like the credit would be less than the actual amount withheld. Did I not do the 1116 correctly.
7. Am I correct to ignore 3520 filing since I will be filing 8891?
Your response will be greatly appreciated.
RRSPs
Moderator: Mark T Serbinski CA CPA
2. Taking advantage of the exchange rates can also be accomplished by exchaging your Cdn equities for US equities inside your RRSP. This would delay taxation til later (but taking them out now, for other reasons is fine).
3. Yup
4. Your book value when you entered US is the key, which is known on the day you became taxable in US. You should not have to go back to the begiining of time, since it is the book value on entry that matters.
5. I would accrue the income to 94.
6. You report 100K on 16a and 75K on 16b of 1040 (split over the 2 years you withdraw the money), Thus your eligible foreign income is only $75K for 1116 purposes. You use the 25K tax against that amount. The credit cannot be more than your overall EFFECTIVE taxrate, which, unless your make $500K, is unlikely to be 33% (be sure to use software to do this), Besides, you will be doing this over 2 years so the split will be different. If you get 15000 credit you are doing well.
6. Filing 8891 conforms to 3529 requirements for rrsps.
3. Yup
4. Your book value when you entered US is the key, which is known on the day you became taxable in US. You should not have to go back to the begiining of time, since it is the book value on entry that matters.
5. I would accrue the income to 94.
6. You report 100K on 16a and 75K on 16b of 1040 (split over the 2 years you withdraw the money), Thus your eligible foreign income is only $75K for 1116 purposes. You use the 25K tax against that amount. The credit cannot be more than your overall EFFECTIVE taxrate, which, unless your make $500K, is unlikely to be 33% (be sure to use software to do this), Besides, you will be doing this over 2 years so the split will be different. If you get 15000 credit you are doing well.
6. Filing 8891 conforms to 3529 requirements for rrsps.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thanks for the quick response. Re FTC, my marginal tax rate in US is 33% so that means I should be able to get the full credit of $25k withheld in Canada. For fun, i tried to see the change in US tax return for 2006, if I had this withdrawal of $100,000 and taxable income of $75,000, with $25,000 tax credit. The net result was an increase in US tax of only $1,250.
This makes sense as my US taxable income increased by $78,960 being the $75,000 RRSP taxable income and the difference due to reduction in personal exemptions due to higher AGA. So, addl tax in US = $78960 x 33% = $26,057 less full credit $25,000 = $1,057 increase which is close to what I got on the tax return.
Does this sound right to you?
I do have one more question. My son, a Canadian citizen, but have been living in US since 1994 has gone to school in canada this fall to do a masters program. He will be getting some funding for the education and has some investment income in US. Do I need to file any Canadian return for him? Will it impact his US return for 2007 in any ways.
Thanks once again.
This makes sense as my US taxable income increased by $78,960 being the $75,000 RRSP taxable income and the difference due to reduction in personal exemptions due to higher AGA. So, addl tax in US = $78960 x 33% = $26,057 less full credit $25,000 = $1,057 increase which is close to what I got on the tax return.
Does this sound right to you?
I do have one more question. My son, a Canadian citizen, but have been living in US since 1994 has gone to school in canada this fall to do a masters program. He will be getting some funding for the education and has some investment income in US. Do I need to file any Canadian return for him? Will it impact his US return for 2007 in any ways.
Thanks once again.
Notice i didn't say marginal taxrate. Your effective rate is the total tax you owe divided by the total income, so much less that 33%.
You should be using software, and this will corectly limit your FTC to about 15%.
this gives futher evidence that withdrawing your RRSP at this time may not be the wisest, as you will pay extremely high taxes on it (25% in Canada, anothe 10% in US, andwhayetever your state rate is.
For your son, if he is a green card holder, he must report income like any other US born student living abroad. If his funding comes from the Cdn school, he may have to report thid in canada as well, although it is unlikley to be taxable. it would be wise for him to remain non-resident of canada, which is usually the case for students.
You should be using software, and this will corectly limit your FTC to about 15%.
this gives futher evidence that withdrawing your RRSP at this time may not be the wisest, as you will pay extremely high taxes on it (25% in Canada, anothe 10% in US, andwhayetever your state rate is.
For your son, if he is a green card holder, he must report income like any other US born student living abroad. If his funding comes from the Cdn school, he may have to report thid in canada as well, although it is unlikley to be taxable. it would be wise for him to remain non-resident of canada, which is usually the case for students.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
For him (or you depending on his age) to qualify for LIFE and HOPE credits for example, he needs to get the paperwork from the school, most big schools in canada are capable of providing this.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
OK - my effective tax rate is 29.2%. With this rate being > 25%, will I not get the full credit of tax withheld in Canada. My software shows that. How did u get 15%??
I am basing my decision to withdraw on the assumption that I will pay 25% tax in Canada, include the taxable income in US and get the credit for the full 25% withheld in Canada. On the net cash that i will get, I will get better deal due to the current exchange rate of C$1 = US$1.01. vs US$ 0.78or so a few years ago. So, the exchange rate increase of about 29% in itself a big plus. I am hoping that I will get the full tax credit on 1116 of 25% and not 15%. Please let me know if I am wrong and if so, where. Thanks again.
I am basing my decision to withdraw on the assumption that I will pay 25% tax in Canada, include the taxable income in US and get the credit for the full 25% withheld in Canada. On the net cash that i will get, I will get better deal due to the current exchange rate of C$1 = US$1.01. vs US$ 0.78or so a few years ago. So, the exchange rate increase of about 29% in itself a big plus. I am hoping that I will get the full tax credit on 1116 of 25% and not 15%. Please let me know if I am wrong and if so, where. Thanks again.
True - I will pay high taxes but the exchange rate gain will offset quite a bit of that right now. Our AGI will be in the range of $280,000 to $300,000 for the next 8-10 years before we retire and who knows what the exchange rates will be at that time. And, I feel it is not a bad idea to get the money out and invest it here wisely rather than leave in Canada where I have very limited investment options. I can only buy stocks or invest in fixed income securities which yield 4% average. Can't buy mutual funds due to regulatory restrictions, per my broker.
I re-ran the numbers using foreign source income of $75,000 and tax withheld of $25m000 on Form 1116 and it gave me a credit of only $18,000 instead of $25,000. So, the difference was due to using $100,000 as foreign source income vs $75,000, i.e. the gross foreign income vs taxable foreign source income. I think now I understand when u said that i will loose part of the FTC. Thanks for enlightening me.
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dhirenasha
- Posts: 57
- Joined: Fri Nov 23, 2007 9:31 am
- Location: USA
Converting to US equities i.e chossing those funds with more US outlook/exposure would not make any sense becos when u invest in those funds you sell CAD to buy USD funds. But the returns are converted back from USD to CAD, which would be at the same rate say 1:1....
I m asuuming that the funds were kept in the RRSP itself and not been withdrawn.
I m asuuming that the funds were kept in the RRSP itself and not been withdrawn.
[quote="dhirenasha"]Converting to US equities i.e chossing those funds with more US outlook/exposure would not make any sense becos when u invest in those funds you sell CAD to buy USD funds. But the returns are converted back from USD to CAD, which would be at the same rate say 1:1....
I m asuuming that the funds were kept in the RRSP itself and not been withdrawn.[/quote]
Huh? Converting Cdn equities to US equities and maintaining these in your RRSp would indeed capture the recent rise in C$, and the subsequent growth in the US equities (which is hanna's stated reason for wanting to cash in now) would be reflected in the incresing NAV regardless if converted to C$ or not. Those subsequent gains would not be 'lost' when converted or sold later.
Remember, hanna is thinking that the C$ is at its top. he is expecting US to rise. I'm providing an alternate solution to taking these funds and bringing them to US at excessive tax cost, simply by moving his investments within the RRSP. the tax cost has obviously been important to him in the past, otherwise he would have csashed in his RRSP 10 years ago.
As for trading restrictions, if you go with TD waterhosue you can buy whatever you want. your broker has done you a disservice.
And as to timing, you yourself said that you will be retiring in 10 years. that is not long and you will be able to get this money out (the probably 300,000) at 15% as a pension.
This strategy BTW is the one being advised to any Cdn wth RRSP who thinks that the C$ has peaked: sell yor Cdn positions within your RRSP and buy foreign.
I m asuuming that the funds were kept in the RRSP itself and not been withdrawn.[/quote]
Huh? Converting Cdn equities to US equities and maintaining these in your RRSp would indeed capture the recent rise in C$, and the subsequent growth in the US equities (which is hanna's stated reason for wanting to cash in now) would be reflected in the incresing NAV regardless if converted to C$ or not. Those subsequent gains would not be 'lost' when converted or sold later.
Remember, hanna is thinking that the C$ is at its top. he is expecting US to rise. I'm providing an alternate solution to taking these funds and bringing them to US at excessive tax cost, simply by moving his investments within the RRSP. the tax cost has obviously been important to him in the past, otherwise he would have csashed in his RRSP 10 years ago.
As for trading restrictions, if you go with TD waterhosue you can buy whatever you want. your broker has done you a disservice.
And as to timing, you yourself said that you will be retiring in 10 years. that is not long and you will be able to get this money out (the probably 300,000) at 15% as a pension.
This strategy BTW is the one being advised to any Cdn wth RRSP who thinks that the C$ has peaked: sell yor Cdn positions within your RRSP and buy foreign.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
One final thought. hanna, ask your self if you would, today, collapse your 401(K) or IRA, pay the tax and penalty, or would you wait until you retire?
Apply the same logic to your RRSP.
Forget the C$. The rise in your RRSP has been due not to the rise in C$, but due to the fact that YOU HELD CDN posistions. If you think it is going down, get out of those CDN positions and into somthing else.
And it would appear that your broker has worn out his useflness at this point.
Apply the same logic to your RRSP.
Forget the C$. The rise in your RRSP has been due not to the rise in C$, but due to the fact that YOU HELD CDN posistions. If you think it is going down, get out of those CDN positions and into somthing else.
And it would appear that your broker has worn out his useflness at this point.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thanks for your very helpful comments. A few things on which I was basing my decision are as follows:
1. My tax rate will be 25+7. I live in a state where there is no state income tax.
2. I will check with TD Waterhouse. The firm I use in Canada is part of Royal Bank of Canada so I believed that wahtecver the broker told me was valid for other firms also.
3. Th 15%rate that u are talking about - is it when I convert it ro RRIF and draw over a number of years. I need to study RRIF rules etc. Can I convert RRSP into RRIFs now, start withdrawing and pay 15% tax. Is there any age limit? Any such conversion will not be a taxable event requiring disclosure on 8891 and reporting on 1040.
4. You are absolutely right - I would not withdraw my IRA funds and pay tax all at one time. But, with RRSP, the decision is due to the exchange rate situation right now. If I sell RRSP positions and bring all the cash in US, say C$300,000 , I get US$300,000 right now vs US$234,000 @ 0.78 rate when I left Canada.
5. I did an analysis and what that showed me was that the higher the RRSP withdrawal (and therefore the taxable income inclusion in US), the higher FTC I will get. On C$100,000, tax withheld was C25,000 and FTC was $18,140. On a C$500,000 withdrawal, the tax withheld was C$125,000 and FTC was $104,777. So, making one large withdrawal appeared to be better than a few smaller withdrawals.
6. I fully agree that converting C$ positions and buying US$ positions within RRSP would be better. I will do that if I can buy them. And, like I said, I will find out. My broker had told me that due to some SEC rules, he was unable to buy these securities.
I will certainly share what I find out. Thanks again and as always, I will welcome ur comments.
1. My tax rate will be 25+7. I live in a state where there is no state income tax.
2. I will check with TD Waterhouse. The firm I use in Canada is part of Royal Bank of Canada so I believed that wahtecver the broker told me was valid for other firms also.
3. Th 15%rate that u are talking about - is it when I convert it ro RRIF and draw over a number of years. I need to study RRIF rules etc. Can I convert RRSP into RRIFs now, start withdrawing and pay 15% tax. Is there any age limit? Any such conversion will not be a taxable event requiring disclosure on 8891 and reporting on 1040.
4. You are absolutely right - I would not withdraw my IRA funds and pay tax all at one time. But, with RRSP, the decision is due to the exchange rate situation right now. If I sell RRSP positions and bring all the cash in US, say C$300,000 , I get US$300,000 right now vs US$234,000 @ 0.78 rate when I left Canada.
5. I did an analysis and what that showed me was that the higher the RRSP withdrawal (and therefore the taxable income inclusion in US), the higher FTC I will get. On C$100,000, tax withheld was C25,000 and FTC was $18,140. On a C$500,000 withdrawal, the tax withheld was C$125,000 and FTC was $104,777. So, making one large withdrawal appeared to be better than a few smaller withdrawals.
6. I fully agree that converting C$ positions and buying US$ positions within RRSP would be better. I will do that if I can buy them. And, like I said, I will find out. My broker had told me that due to some SEC rules, he was unable to buy these securities.
I will certainly share what I find out. Thanks again and as always, I will welcome ur comments.
Certainly if you have $500K of RRSPs, you will be paying tax on them when you withdraw, regardless of how you take it.
You came to me with a $100K scenario, which I could easily see taking in 10 yearly chunks at retirement, with much lower tax.
Reemebr too, that getting more FTC does not mean paying less tax. Your taxable portion is taxed at 33%. Even if you got all of the fTC, you would still be paying 8% on that money in US.
You really should be waiting to take this discretionary incoem until you are in a lower tax bracket.
You came to me with a $100K scenario, which I could easily see taking in 10 yearly chunks at retirement, with much lower tax.
Reemebr too, that getting more FTC does not mean paying less tax. Your taxable portion is taxed at 33%. Even if you got all of the fTC, you would still be paying 8% on that money in US.
You really should be waiting to take this discretionary incoem until you are in a lower tax bracket.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
First, Nelson's advice is correct. Converting from Canadian denominated investments to U.S. denominated investsments will capture the recent increase in the value of the Canadian dollar. You can purchase funds that invest in the U.S. or even U.S. dollar denominated fixed income securities.
Second, your broker didn't try hard enough or ask the right question. Your broker should be able to deal with your registered funds while you're in the U.S., although there may be a couple states which won't allow this. Other than taking an order to liquidate an investment, they cannot deal with your non-registered funds.
If you want to verify this, call a couple Canadian mutual fund companies and ask if they will deal with your registered money while you live in the U.S.
Good Luck!
Second, your broker didn't try hard enough or ask the right question. Your broker should be able to deal with your registered funds while you're in the U.S., although there may be a couple states which won't allow this. Other than taking an order to liquidate an investment, they cannot deal with your non-registered funds.
If you want to verify this, call a couple Canadian mutual fund companies and ask if they will deal with your registered money while you live in the U.S.
Good Luck!
Arteeh