Three questions re.: IRAs

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worryfreeinvestor
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Three questions re.: IRAs

Post by worryfreeinvestor » Thu Oct 08, 2015 9:37 am

Colleagues, I am a citizen of both Canada and the U.S., currently living in the U.S. and planning to move to Canada for salaried employment. I have read the threads but I find them a little confusing. If anyone can help with the following questions, I'd appreciate it. One thing I do understand, is that if I shoud be changing my current financial arrangements, I should do it before I move to Canada not after. Also, I have no idea how long I'll live in Canada: One year, ten years, until retirement, or until death.

1. I have a cash (taxable) securities account at a U.S. discount broker (Schwab). They tell me as long as I maintain a U.S. address, I can trade in the account as per normal. I do not own a U.S. home. I have a friend's U.S. address I can use. Is that acceptable?

2. I have a Keogh Self-Employed Plan (SEP) IRA to which I have contributed consulting income while living in U.S. I plan to keep earning some U.S. source consulting income after moving to Canada. I plan to contribute it into the SEP IRA. So, the IRS will not tax it in the year I contribute. Will the CRA recognize the contribution as a deduction from taxable income in Canada, or will CRA want it included in taxable income?

3. I also have a Rollover IRA, from which I will not take distributions for a few years. How will CRA treat these? Background: I also have RRSP from previous career in Canada. IRS does not recognize RRSP as a trust, so income (dividends, coupons, capital gains) should be taxable in U.S. even though the RRSP does not pay them out yet. However, the IRA has a Form 8891 that I complete with my personal tax return 1040 that works around this. So, I pay no tax on RRSP income yet. Does CRA treat IRAs similarly or will I have to pay Canadian tax on dividends, coupons, and capital gains on an annual basis, even though the Rollover IRA is not distributing them?

These are all dealbreakers for my move to Canada if the answers go in the wrong direction. So, I greatly appreciate any feedback.

nelsona
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Post by nelsona » Thu Oct 08, 2015 9:47 am

1. When Schwab says mainatin a US address, they mean a real residence. it is a violation of Cdn serities rules for a US broker not licensed in Canad (schwab US is not) to deal in a non-retirement account of a Cdn resident.
A friend's address doesn't cut it, because you are ohysically in canada.

2. CRA will not recognize the contribution as deduction, but will not tax you on the interal growtth of the SEP/IRA/401(K), etc, until you take a withdrawal. You need to be focussing on deductions that will reduce your Cdn taxation, not US.

3. the IRA is sheltered while you are in canada and will not be taxable unless/until you take funds out, whereby the entire withdrawl is taxable in both US and Canada (if living in Canada).
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nelsona
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Post by nelsona » Thu Oct 08, 2015 9:48 am

by the way, your consulting work (as a contrator) will end up not being taxed in US, by treaty, so I wouldn't be making any US-type dedcutions as they will gain you nothing.
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nelsona
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Post by nelsona » Thu Oct 08, 2015 9:49 am

What you may want to look at is moving as much over to a Roth as possible, since this will groq tax free in both US and canada, or putting more funds in your home, which will also grow tax-free in both countries.
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worryfreeinvestor
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Post by worryfreeinvestor » Thu Oct 08, 2015 11:05 am

Thank you. Yes, I am planning to Rothify as much as possible, for the reason you cite.

WRT, to the U.S source consulting income, is there not another problem? RRSP contribution limits are based on previous year's tax return. But I will not have a 2015 tax return for Canada. I have not done one for a decade!

So, my first year working in Canada (2016), I will not be able to make any RRSP contribution. Is that right or is there a work around?

nelsona
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Post by nelsona » Thu Oct 08, 2015 11:23 am

Unless you had contribution room from before you left, that is correct; you will not be able to claim an RRSP deduction, until the year after you report earned income on a Cdn return.
You will be allowed to put $2000 in an RRSP (to be deducted in future) and $5000 in a TFSA(which I recommend against TFSA for US taxpayers).
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worryfreeinvestor
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Post by worryfreeinvestor » Thu Oct 08, 2015 12:08 pm

Thank you. I'll be able to contribute to RRSP in 2017, according to this scenario. Will that do me any good wrt to IRS? f I am a taxable resident of Canada and pay my Canadian taxes (after contributing to RRSP) will IRS want me to pay U.S. taxes on that contribution when I file my 1040 NR? If not, that would be a dealbreaker for my move.

nelsona
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Post by nelsona » Thu Oct 08, 2015 12:26 pm

First, you will be filing a 1040, not a 1040NR.

Contributions to personal RRSPs are not deductible in US anyways, but don't worry about US taxation once back in canada. you won't owe any US tax, as I said earlier.

US citizens in canada don't have tax problems with IRS, what they have is REPORTING issues (FATCA,PFIC,350,etc), but never owing tax issues.

Us citizens in Canada pay some US tax only on US employment (not self-employment) and IRA and US dividend income, all at rates which wold be lower than Cdn tax anyways.
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worryfreeinvestor
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Post by worryfreeinvestor » Thu Oct 08, 2015 1:31 pm

Thank you. What about filing Form 8833 with 1040 NR? Does that allow me to deduct contribution to employer-based RRSP to the same limit as if it was a 401(k)?

nelsona
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Post by nelsona » Thu Oct 08, 2015 1:49 pm

Employer based RRSP contribuitions are tax deductible in US on your 1040. You could indicate this on a form 8833.

But you will be self-employed, so this dpesn't apply to you.

Stop mentionning 1040NR.. You are not eligible to file 1040NR.
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nelsona
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Post by nelsona » Thu Oct 08, 2015 1:51 pm

Ignore the line aboput self-employed.

Again, stop focussing on reducing US taxation, you will have none.
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worryfreeinvestor
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Post by worryfreeinvestor » Thu Oct 08, 2015 8:39 pm

I have not been clear enough: I will have a salary in Canada, but also earn some income (gravy) as U.S. sourced consulting income.

Nevertheless: As a U.S. citzien living abroad, is the 1040 NR not the return I have to file with the IRA annually?

nelsona
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Post by nelsona » Thu Oct 08, 2015 9:33 pm

And I already explained that as a Cdn resident, you will be allowed to re-source the income to Canada and reduce the US tax to zero.

And US citizen world-wide file a 1040.

You haven't been reading clearly.

If there is nothing else, let's end this thread.
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worryfreeinvestor
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Post by worryfreeinvestor » Fri Oct 09, 2015 10:18 am

Thank you. I keep porjecting back to when I was living in Canada and not a U.S. citizien ubut earned U.S. income and filed a 1040NR.

I agree that's enough for this thread. But I may have to start abother one on how to deal with the wife's income taxex (i.e. differences in the way couples file in Canada vs. U.S).

nelsona
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Post by nelsona » Fri Oct 09, 2015 11:33 am

As I've said, income tax filing won't be an issue. Tax software will handle both, and no tax will be owed in US
Foreign account and holding reporting to IRS will your main headache.
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