Optimizing Foreign Tax Credit

[EMR88]

I was born in Canada and worked there until 1997. I am now a naturalized US citizen living & paying taxes in the US. When I left Canada I left my RRSP account there. I have declared my RRSP on my US tax return every year, with the election to defer income.

Now I am retired and want to start distributions from my Canadian RRSP. I have an equal amount of money in my Canadian RRSP and in my US 401(k). I know that Canadian taxes of 25% will be withheld when I take a distribution from my RRSP. So my questions:
1. Do I have to file a Canadian tax return? Unless I can reduce the tax by filing under section 217, is a Canadian return required? I've not filed in Canada since I left in 1997
2. Is there a formula for taking distributions from my 401(k) and my RRSP so as to get the most benefit of the foreign tax credit? Such as 50/50, or all from the RRSP one year then all from the 401(k) the next year?

Thanks for your help!

[rlb]

This needs to be substantiated by someone more knowledgeable, but here is my understanding.

If you take a lump sum from your RRSP, 25% will be withheld, and it is also your final tax due, so no Canadian tax return is necessary. However, if you arrange that it be paid as regular periodic payments rather than a lump sum, it is considered a pension, and by treaty, only 15% should be withheld and that is also your final tax.

Since your foreign income from the RRSP will be taxed at 25% (lump sum) or 15% (periodic payments), you will only be able to get this much as a credit against your US tax due on the payments if your US effective (i.e., average) tax rate is 25% or 15% or more respectively. Therefore you would need to have other US income (401(k) perhaps, investments, social security, etc.) that put you in a high enough tax bracket. Otherwise not all of the Canadian tax will be recouped as a US credit (the US is not going to give you a credit for Canadian tax paid which is more than the US tax due on that income). Conclusion: don't take too little from the 401(k).

Look ahead to age 70 as well, because at that age there are required minimum distributions from both the 401(k) and the RRSP.

[nelsona]

First thing you need to do is convert your RRSP to a RRIF. Only RRIFs are entitled to the 15% withholding rate (on upto 10% or twice your required withdrawal).

So do this first. This will at least get your foreign tax to the 15% level, and you won't have to bother with 217 returns in canada.

Unless you can generate othr Cdn source genaral limit income that is not taxable in canada (so you don';t add to your foreign tax), you are almost always going to leave some NR tax 9even at the 15% level) on the table every year.

That how it goes in the world of foreign tax credits unfortunately.

What I've been doing is arranging a trip or 2 to Canada evry year for work, and that gives me (even thoughj I'm still paid by my US firm) some Cdn-source income that is not taxed in canada, and that chews up a lot of my ftc room.