Foreign tax credit for 60(j) IRS to RRSP transfer

[mackayr]

Individual is Canadian resident, Canadian citizen, former US green card holder (properly expatriated in 2012).

A person takes a distribution from US IRS to transfer to his RRSP.
US payer holding the IRA withholds 15% treaty rate (or 30% and he receives a refund of the rest).
The person pulls the equivalent of the 15% tax withheld from personal funds, and includes that in the RRSP contribution. Therefore, the RRSP contribution is equivalent to the full IRA withdrawal before tax withholding.

On his Canadian return, the IRA distribution would be reported as income, and the full amount transferred to his RRSP would be reported on line 208. Therefore, the taxable income effectively does not include any of the IRA income.

Effectively, his US IRA distribution is not taxed at all, but it seems that he's still entitled to claim the full FTC against tax paid on other income. The outcome is desirable (ie. US tax paid now is fully offset by FTCs claimed on Canadian return and RRSP withdrawal is taxed only in Canada when withdrawn in the future), but leads to a couple of questions:

Does the "net foreign non-business income" on form T2209 have to be reduced by the RRSP deduction? This does not appear to be included in the list of amounts that should be deducted.

I believe the answer is "no", but would like to confirm this.

Thanks!

[nelsona]

The RRSP deduction must be deducted from his income. However, the US tax can be used against his remaining CDn income.
So, if one has $60K CDn source income, and a $40K IRA withdrawal, he can use the US tax against the $40K US income, even though he has "transferred" it to his RRSP (it must be considered a transfer). The RRSP transfer does not reduce what is considered US source income.

[nelsona]

So to answer your question is does not reduce the US source income for fTC purpsoses.

[nelsona]

Just one thing to note is that CRA accepts this process only for "lump sum" withdrawals from IRA/401(k), not periodic withdrawals. So the distribution cannot be small portion oif the 401(K0; it should be most if not all of it.

[mackayr]

Thanks for the responses nelsona!

Yes, it's a "lump sum" transfer, so he should be fine. My understanding is that he's transferring his entire IRA to his RRSP over the course of a few years (he did a couple of transfers back in 2016 and 2017), and he's doing more this year (or early 2020).

[nelsona]

If CRA accepted the first times they will accept this time.