401K - Canadian Tax Question

[ams]

I have a question regarding my 401K account and Canadian Tax.

Some back ground info:

I was employed by a US company from 2000 to mid 2008. From 2000 to 2002 I was considered only a US resident for tax purposes. From 2003 to 2006 I was considered resident of both US and Canada for Tax purposes. And from 2007 onwards I am only a Canadian Resident.

I participated in the company's 401K plan from 2000 to 2008. For the period of 2003 to 2008, those contributions were reported as part of foreign income on my Canadian Tax returns.

I would now like to withdraw the money that I contributed from 2003 onwards.
I understand that the withdrawal will be subject to 10% penalty and 15% witholding tax in the US (Can i reclaim the 15% from the IRS).

On the Canadian side since I have already paid taxes on the base amount, logic would dictate that I should only have to pay Capital Gains Tax on increase in the value of the 401K funds. In essence I would like to treat the account as a non registered account.

Any advice in this matter would be greatly appreciated. I have tried to research this quite a bit but have not come up with a definitive answer.

[nelsona]

An ammount equal to YOUR contributions made while a Cdn resident, and reported on your Cdn return as income, can be withdrawn free of cdn tax. It is reported as pension income. Your employers contributions, your contributions made while a US resident, and ALL growth is taxable.

It cannot be 'treated" like an ordinary investment account, because it was sheltered. make sure you can document your contributions for that period of time. It should be simple, since your 401(k) contributions had to be added back to your W-2 wages on those tax returns.

So, if you put in $60K during those years, any amount in excess of that will be taxable in Canada.

If your US tax is correctly withheld at 15% plus 10% penalty, there is no need to file anything in US. Otherwise a 1040NR can be filed at year-end to correct this and get refund. The 15% tax can be used as a credit in canada, but not the 10% penalty.

Now, there is a question as to the "order" in which your funds come out. In US, your non-deducted contributions would come out first, but in Canada, I believe there is a blended approach taken (I'm looking into this, its been a while -- this would be the best way for you) , such that if 60K of a $100K pension is non-taxable, and you take $50K, $30K will be non-taxable and $20K will be taxable. You would then use your US tax as a credit against the Cdn tax arizsing from that $20K of taxable US income.

[nelsona]

... and then the next time you withdraw, you would still have a "bank" of $20K non-taxable.

[ams]

Thank you Nelson for your reply.

I would like to clarify one point. You stated "your contributions made while a US resident, and ALL growth is taxable."

For years 2003 to 2006 I was considered a resident of both the US and Canada for Tax purposes (present in US for more than the threshold, substantial ties in Canada) For these years can i treat my contributions as Non Taxable. Also can I report the income as Pension Income even though I am in my 30s?

Thank you again!

[nelsona]

When I said 'while resident in US, I meant while a non-resident of canada, that is, you did not report the contributions as income in canada, thus they are not eligible to be excluded from income later.

It is reported as pension income on line 115. Your age doesn't matter, except that the income will not qualify for any special treatment, like income splitting of pension deduction, reserved for older taxpayers.

I'd be curious to know how CRA allowed you to file as a resident when you were by treaty resident in US (unless you were a commuter). What changed in 2003 and 2007?

[ams]

"I'd be curious to know how CRA allowed you to file as a resident when you were by treaty resident in US (unless you were a commuter). What changed in 2003 and 2007?"

Yes, I was a commuter for those years spending most of the weekends in Canada while working in the US.

[nelsona]

That probably still made you a Cdn resident. True commuter means returning to canada most nights. It can also include if their is dependents who stay in canada.

Otherwise you are simply a US worker who goes to his cottage on teh week-ends in Canada.

[ams]

Right. Wife moved permanently back to Canada at the end of 2002.

[nelsona]

So it comes down to whjether or not your US wages your included on your Cdn return, and then whether your contributions 401(k) for that year were also added back into your wage amount.

So, form what you say, much of your 401(K) wcan be withdrawn free of Cdn tax. Doesn't help you much since your US tax and penalty will be substantial, but at least you won't pay MORE CDn tax.