another question on moving rrsps

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eortlund
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Joined: Tue Aug 07, 2007 12:18 pm

another question on moving rrsps

Post by eortlund »

I was at the bank today discussing our options. Periodic pension payments as we would have with RRIF payments are actually not taxed at all for UK residents, unlike the 15% rate in the US. This seems like a good way to do it, especially as our UK income wont be high and so the tax shouldn't be too high there. So I am thinking of taking what we can in RRIF withdrawals yearly and then moving that money into Roths.

My financial advisor was telling me she thinks the bank would still withold 25% tax and then we would file CRA returns to recover it. This doesn't sound right to me. If we are non-resident, can't they take out zero tax because of the treaty with the UK and that be it? I really don't want to keep filing CRA returns over the years.
nelsona
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Post by nelsona »

It is best to have the firm handle the withholding correctly from the start. It should be zero for periodic withdrawals from RRIFs (it MUST be a RRIF - you can take 10% of the value out yearly) for UK residents, and remember that you don't get any periodic withdrawals the first year you create the RRIF, so make sure you create it in 2016 if you want to make a 0-taxed withdrawal in 2017.

If they do incorrectly withhold, you don't file a return. you have to file an NR-7-R, which can only be filed at year-end and takes about 4-6 months to issue refund.

I do not know what the UK rules are on Roths. Of course, if done while in UK, this does not violate any rules about making Roth contributions while in Canada.

You will have to report any RRIF/RRSP withdrawal on your US tax return. it is possible that you would not get any credit for the UK tax you pay, since the money would be Cdn-sourced and the tax be from UK. I'm not 100% sure how such asituation works, and is beyond the scope of this board.
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nelsona
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Post by nelsona »

By the way, I would disagree that UK does not recognize RRSP tax deferral. Since they recognize withdrawals from these plans as periodic "annuities" in the treaty, internal growth would not be taxed.

Where did you get such information?
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nelsona
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Post by nelsona »

Was it drom the same advisor who thinks your RRIF payments will be withheld 25%?
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eortlund
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Post by eortlund »

Thanks. I read that on the HMRC website but may be misunderstanding. http://webarchive.nationalarchives.gov. ... im1622.htm

If I couldn't get us credit for taxes paid to the UK, could I use excess foreign tax credits I've accumulated over the years?
eortlund
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Post by eortlund »

I did read that if the UK wanted to tax the rrsp gains, there is a capital gains exemption that comes into play. But the bigger it grows, perhaps the gains would exceed it?
nelsona
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Post by nelsona »

Thanks for the link.
Basically, UK treats RRSP the same as California does:

Your RRSP will be like any other investment account , and you will be responsible to pay tax year-over-year on the gains, dividends etc. the good news is that withdrawals won't be taxed in UK, other that any gains triggered by the sales.

So, like a person moving to US, you would want to crystalize any gains before you leave, so tha tyou know the book value of EACH item in your RRSP.

It will be very important for you to use the 0% withdrawal rate, as the link you sent clearly states that any Cdn tax levied on the RRSP withdrawl will NOT be creited in UK since the income in UK is considered investment income, while the Cdn tax is pension tax. so be careful on that.

Since RRSOs are not recognized in UK, You should be making sure of their policy on Roths and IRAs that you might have.
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nelsona
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Post by nelsona »

As to 1116, you are correct that, after the year in question, the tax loses its "nationality", so you could use the tax in the next year (or even carryback one year).

Problem: the income you would report in US would be PENSION (general limit) income. The tax you would be reporting from UK would be passive category.

While carryforward loses its nationality, it doesn't lose its category, so yoy would need to make sure of having sufficient other gene limit and passive foreign income to use it.
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eortlund
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Post by eortlund »

Thanks! I am writing all this down.

So you think that the periodic pension payments will not be taxed by Canada, and not by the UK either at withdrawal? I thought we would have to pay tax to the UK which is why Canada won't tax us? But then maybe that's because the UK taxes the gains as we go instead--I think the UK has a capital gains allowance that should cover that. I guess that leaves only the US for withdrawal taxes, and since there won't be any foreign tax to credit, can we use excess foreign tax credits from previous years?

The plan now is to go to the bank a couple weeks before we leave, do the paperwork to change the RRSPS into RRIFs, and in the process, change them into a different fund. Will that suffice for crystallizing the gains? Would the amount transferred be the book value? One RRSP has one mutual fund, the other has two. We will fill out the non-resident paperwork specifying when we will be non-resident. Then the first RRIF payment will come out January 2017. Not sure if they have to be monthly payments or if we can take the yearly allowance all at once? Taking 10% will be best. It will still take 15 years, but like you said, collapsing the whole thing will trigger double taxation. Does this plan seem good?

By the way, my advisor checked and realized she was wrong about them taking 25% out and me needing to file returns. They will take 0%.

I will check on how the UK treats the gains within a Roth, thanks.
eortlund
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Post by eortlund »

Sorry I didn't see you already answered that question about the carryover tax credits.

Yeah, our carryover credits are all general so far. I may just have to pay the US whatever it wants, while knowing it is still better than paying to Canada and the UK (if we don't have to pay the UK).
nelsona
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Post by nelsona »

Read the link you posted. It clearly states that you don't pay tax on withdrawals, BUT you pay tax EVERY YEAR even if you don't withdraw, on internal income.

As to the RRIF withdrawal, I would take 2 withdrawals. 1 would be the minimum required, the bank will figure this out and do it automatically on the date you tell them. This assures you about what figures they used for the beginning of year amount. Then I would take out the remainder of the 10%, minus $100 or so, just to be safe, with a phone call. it would be terrible to have to pay 25% tax instaed of zero, by 1 cent clerical error.
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eortlund
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Post by eortlund »

It is still a little unclear to me, when they say annuities is that the same as an RRIF?

The bank has told me I should call every December to make sure the proper amount is taken out and not more.
nelsona
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Post by nelsona »

I would not trust the bank to do the 10% right.
You can tell them to take the minimum. They know exactly what that is. Then you know exactly what you need to take out later.
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nelsona
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Post by nelsona »

UK atx on RRSP or RRIfs:
loot tha the tax letter:

"2) the Plan is treated as `fiscally transparent', that is income arising within the Plan is taxable in the UK as if the Plan did not exist, notwithstanding the tax-free accrual of income in Canada."

That means any dividends paid into the plan, cap gains from swaps, interst, is taxable every year.

"3) a lump sum withdrawal from the Plan is not taxable as such but the disposal of assets held within the Plan to effect the withdrawal may produce a UK tax charge. For example, a disposal of chargeable assets held within the Plan might produce a capital gains tax charge."

That means that since the account is treated like a normal account, withdrawals are not taxed, other than what is triggered by the withdrawal. Ex: you have a $100 stock tha tyou bought at $80 in your RRIF. When you ell the stock to take the money out of the rRIF, you won't ba taxed in UK on the $100 withdrawal, but you will be taxed on the $20 cap gain that you just triggered.

On point 4. a RRIF is not annuity. You would have to buy an annuity in Canada. If you did, UK would then figure out (when you submit the annuity paperwork for approval to UK) what your taxable portion would be year-by-year. the IRS has a similar arrangement. In Canada, the annuity provider is responsible for this.
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eortlund
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Post by eortlund »

I see what you're saying. I guess I had wondered if they had different rules for the RRIF than the lump sum withdrawal because of the treaty?

One more thing: Why does crystallizing the gains in the RRSP matter? Will it result in less tax to the US? The UK?
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