3520 / 3520-A / PFIC and UK pensions

[Barack]

Can anyone out there please assist:

Let’s say “Barackâ€￾ is a US and Canadian dual citizen who is resident in the UK, works for a UK employer and has UK pensions whose contributions and growth are protected (excluded) from US tax as per article 18 of the US / UK income tax treaty.

Barack is interested in moving back to Canada. If Barack moves to Canada he will obviously not be a resident of the UK nor the US. Barack would keep his existing pensions in the UK but of course no longer would make further contributions to them. Despite this, the pensions would (hopefully) gain value between now and when Barack retires.

Would the growth in Barack’s pension plans be taxable in the US if and when he returns to Canada? In other words would the UK pension growth still be protected under the US / UK treaty even though Barack is not a resident?

If not, how would this growth reported year on year on a US tax return? Barack assumes he would need to keep records of the growth and tax paid year on year until he retires and hopefully can claim a credit once he makes distributions. Also, for example, if a $120k pension drops to $70k in year 1 and increases to $130k in year 2, would Barack pay tax on a $60k gain or on just a $10k gain in year 2?

Do forms 3520 and 3520-A need to be filed? Should Barack have been filing these all along? If not, will he need to start to file then once he leaves the UK?

If there are mutual funds in Barack’s UK pensions, would the US start to treat them as PFICs if Barack moved to Canada and they were no longer protected under the treaty?

Barack thanks you

[nelsona]

From my reading of Atricle 18, Your UK pension would only be exempt from US tax if you were living in UK. It would be exempt from UK tax only if living in US (or in another country which has a treaty provision preventing UJK tax).
So, for pension purposes, if you move to canada, your pension will NOT be taxed in UK (by Canada-UK treaty), but will be taxed in canada and US.

The problem will be to determine if the Cdn tax you pay will be allowed as a credit on your US tax return. The IRS typically publishes a technical expalnation of each treaty, which may shed some light on 33rd country taxation of pensions, and how IRS treats these.

Company Pensions are FULLY taxable (no non-taxable portion) in canada and US. Your contributions were not taxed in UK, thus are not considered part of the investment by IRS code section 72(w). I'm not aware of what types of self-funded pension plands the uK has. These may allow for growth to not be taxed (but only growth, not pre-

As to trust reporting, I'm sure a UK acct dealing with US citizens would be more knowledgable, but for a fact Cdn company pensions are not in the 3520 scope. If you have other retiremnet plans, they are likely reportable now, as only RRSPs are exempt. AUstralian personal retirement plans for example, require 3520 reporting.

[Barack]

Many Thanks nelsona for the quick reply. Just to clarify, I understand that pension distributions would be taxed in Canada and US if I leave UK, but what about year on year growth the UK pension would have? These gains would be unrealised but would I have to report it and pay tax on it each year once I leave the UK? My intention is to defer tax on my UK pension until I retire and pay Canadian / US tax on it at that point (similar to what you can do with RRSPs).

And in instances where 3520 reporting is required, would I also need to do a 3520-A even if I am just letting the pensions sit in the UK until I retire? Given the costs I have been quoted to do the 3520 related reporting I'll have no pension left by the time I retire...

[nelsona]

I don't know of any company pensions that are taxed in US on a year-by-year basis, so I doubt that your would be. This does not necessarily apply to non-company , personally funded pensions.

By treaty, if you are in neither UK nor US, you are considered US resident for the purpose of the treaty (becuase you are a US citizen and not a UK citizen), thus the US taxation of your UK pension while living in canada or anywhere else would be the same as if you were in US itself.

So, I'm sure there are many Brits of all ages living in US. Consult with a UK pro as to how their yet untapped pensions are being treated. Again, the technical expalnation of your treaty with UK might shed some light.

I would guess that they are neither required to report accrued income, nore report 3520 for these UK-company pensions.