Moving back to Canada

[dthidri1]

Hi:

My wife and I are Canadian citizens planning to leave the US permanently and become Canadian RESIDENTS January 1, 2008 (the day we will pass through customs). I will leave my employers in late December and I will not be working for any employer in the US in 2008. I will start my employment in Canada in late January 2008.

Brief history:
Entered the US on a TN visa May 2000 & renewed yearly until present.
Married to Canadian citizen Dec 2001 - she has maintained TD status and lived here the entire time.
No children / dependents.
Purchased home in Feb 2005 & sold it May 2007.
No ties to Canada and bank accounts in Canada are NR accounts.

My 1040 tax return shouldl be pretty straight forward for 2007, am I right? I'm hoping since I severed my residence at the change of tax years, accounting will be easier, without invoking too much of the US-Canada tax treaty.

My wife & I plan to purchase a home in 2008, and are going to take a 50K withdrawal from our 401K plan so we will have ~30K net for a down-payment (10% penalty + 20% witholding to apply to 2007 1040 NR + remaining balance). I would rather have the money to offset a mortgage since mortgage interest is NOT tax-deductible in Canada. I plan to roll the rest over into a pre-existing non-Roth IRA which I will not touch until retirement.

From reading this forum, I understand leaving the money in a 401K program is more difficult to make changes to when one is not a US resident versus an IRA. I did calculate with my income bracket this year ~150K by taking the 401K distribution while I am a US resident in the 2007 tax year it would save ~11% in taxes versus taking the distribution in Canada so this will be a source of income reportable for my 2007 1040 NR tax return.

Is there anything else that I should be doing to make sure I don't have any tax headaches for the US / Canada taxation that you are aware of? Does the above planning make sense?

I appreciate any comments / suggestions very much.

Doug

[nelsona]

You have a perfect opportunity to withdraw the 401(k) funds AFTER January 1, and return to canada AFTER you withdraw the funds, and avoid Cdn tax on that income altogether!! Delaying your retuurn by a week could sve you a bundle, and may mean you take out more of your 401(k) for the same tax.

There is no advantage at returning to canada on a specific date. My advice has ALWAYS, ALWAYS been to return to canada AFTER taking any US discretionary income. Each day you delay returning to Canada only adds about $12 to your Cdn tax for 2008.

You are absolutely correct in taking out the 401k in the new year, don't undo your strategy by unnecessarily moving back to canada early.

Doing it this way will still ultimately mean only paying US tax on the 401K money, at the lower 2008 rate (sincce you will have no other US income)/ You would still have the option of using 1040 if it will be lower tax than 1040NR.

[nelsona]

I think you are confusing your US tax returns. In 2007 you have no choice but to file 1040.

It is 2008 that will give you great tax planning, as you will have option of 104NR or 1040, and will have no US income other than 401(K).

Please do NOT take your 401(K) money before the end of the year.

[dthidri1]

I'm confused.

I thought any 401K withdrawal I took ON or AFTER January 1st would be subject to Canadian tax for the 2008 year, even if I withdrew the 401K money BEFORE becoming a Canadian resident.

I assume I would report this 401K withdrawal as INCOME on a 1040 NR for 2008 tax year BUT would need to report this income from the 1040 NR on my Canada tax forms for 2008, which would increase the amount of income tax owed to Canada.

You are right, I would report the 1040 for 2007, thanks for the correction.

Doug

[dthidri1]

Forgot to add:

The RC66SCH Status in Canada / Statement of Income form (Part D) requires reporting of income from "January 1 to the date you both became residents in that year".

Is this just a statement OR does this have any implications for reporting on our 2008 Canadian income tax return?

Thanks for your valuable input.

Doug

[nelsona]

You are NOT to report (and pay Cdn tax) on any non-Cdn income until you become resident. Period.

Income received from US before you 'land' back in canada is not subject to taxation in Canada.

The statement of world income is simply in order to determine if you should prorate your basic deduction or not (you will prorate, and his is what I meany by the $12 tax per day). You will not be taxed on any of this income.

[dthidri1]

Thanks for the valuable advice! You certainly helped my understanding of this tax situation considerably!