Tax questions from Canadian citizen in the US

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iristopher
Posts: 18
Joined: Fri Oct 30, 2015 12:02 am

Tax questions from Canadian citizen in the US

Post by iristopher »

Situation:
- Canadian who moved to the US and currently a US resident for tax purpose.
- In 2017-2018, I will have income in both US and Canada and therefore will file income tax in both countries. Canadian tax will be filed as non-resident.
- In 2019, there will be no more income from Canada, so I will stop filing income tax with CRA.

I'm considering withdrawing from my RRSP as non-resident. I understand that withholding tax in Canada is 25% for lump sum and 15% for periodic withdrawals. I also understand that I can use this withholding tax amount as foreign tax credit in the US to reduce my US income tax. What I'd like to know is whether this foreign tax credit can be used to lower my US income tax for foreign income only OR US income as well.

For example, while ignoring currency exchange rate for simplicity, let's say my RRSP grew from $5k to $20k and $15k growth is taxable in the US at marginal rate. If I withdraw the entire $20k, withholding tax in Canada will be $5k. If my marginal tax rate in the US is 40%, I'll owe IRS $15k * 0.4 =$6k. In this case, I guess I can use $5k foreign tax credit to reduce this tax to $1k. However, if my marginal tax rate in the US is 20%, I will owe IRS $15k * 0.2 = $3k. In this case, I can wipe out this tax and will be left with additional $2k foreign tax credit in the US. Can I use it to reduce my income tax for other US generated income? If so, I'll probably go ahead with a lump sum withdrawal, otherwise, I'll covert to RRIF for periodic withdrawals as I don't expect to have any more foreign income after 2018 to use up my foreign tax credit against.


Some additional questions I have are:
- When calculating the gain in RRSP for US income tax filing, which currency do I use for US stocks held in RRSP account? For example, if I bought a US stock for $100USD while CAD:USD was 1:1, and sold for $100USD while CAD:USD was 1:0.8, is this considered break even OR is it 25% gain since in CAD the net sale value is $125 CAD?
- if I co-signed a mortgage (as a guarantor) without being on title for my parents' property in Canada, will this affect my non-residency status in any way?


Thanks!
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

First off, for Cdn tax filing in 2017 you will be considered EMIGRANT. Non-resident filing is only the following years. the parents house has no affect on this. The RRSP will have 25% withheld (if you make sure you tell your RRSP truistee that you are living in US) and that will be all for Canada (not reported on a return).


For RRSP withdrawal , you will have little or no tax in US, since only the Book value growth after arrival is taxable, so the foreign tax credit won't be much use to you, since their will be no US tax to write against it (for the RRSP). You mention other Cdn income. What would that be? This will be taxable in US as well as Canada.

So, your only tax on RRSP will be the 25% NR tax withheld by Canada, plus maybe a little in US (if your investmenbt grew betwe ntime you bought it and sold it (In USD).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
iristopher
Posts: 18
Joined: Fri Oct 30, 2015 12:02 am

Post by iristopher »

Actually, I moved to the US in 2016 and 2016 tax return was filed as Emigrant. 2017 return should be filed as non-resident. Does that change your answer about me co-signing my parents' mortgage in Canada? I want to make sure CRA doesn't use it revoke my non-residency in Canada.

Other Canadian income during 2017-2018 will be from RSU vesting from my employment. As these were granted while I was in Canada, they will continue to vest in Canada. My understanding is that the tax on this income will be higher in Canada, so I won't owe any US tax. As it sounds like I won't have much use for the foreign tax credit, I guess it's better to go with RRIF conversion and periodic withdrawals to minimize the withholding tax to 15%. Please correct me if I'm wrong.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Again, their house has no impact on this.

Since the vesting, I believe is considered wage income, if the annual total is less than C$10K, you can exempt this from Cdn tax on your NR return. Since this would still be considered Cdn-source income, it may be to your advantage to cash the RRSP and use that tax against the RSU tax in US. That is whay I was asking what income you had. These would both be considered general limitation income for FTC purposes.

Unless you have a very large RRSP, and are, say 110-15 yrs from rerirement, I would not bother with RRIF, since you can only take 10% of the funds per year, which will likely mean a smaller and smaller amount each year for the next 20 yrs until you finally collapse it. Best to just get rid of it, and put the remainder to work in US (on your house or Roth, for example).
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
monily

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Post by monily »

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iristopher
Posts: 18
Joined: Fri Oct 30, 2015 12:02 am

Post by iristopher »

RSU income in Canada for 2017 is about 100k and RRSP is worth about 100k and I'm pretty far from retiring. RSU vesting in Canada already deducts hefty withholding tax for CRA. Because my US marginal income tax rate is lower than Canadian rate, I don't believe I need to pay any tax in the US for that income. Because RSU is Cdn-source income, wouldn't this generate foreign tax credit too? I'm not sure how I can use foreign tax credit from RRSP withdrawal against this tax. I would really appreciate if you could clarify.

My wife has zero income in both Cananda and US and has about 100k RRSP. As she has no plan of generating foreign income in near future, does it make sense to go with RRIF coversion in her case?
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Your RSU income and RRSP income would be Cdn-sourced. The RRSP income would be flat taxed in Canada (25%) and not included on any Cdn return, and the RSU would be taxed at marginal rates. the withholding on the RSU is only an estimate of your Cdn tax, which will only be on the RSU.

The RSU would be fully taxable in US as well, while only a small portion of any RRSP withdrawal would be taxable in US.

You may not know this but foreign income credits do not usually produce a dollar for dollar credit, because of the math. The foreign income is taxed at your marginal rate, while the credit is given at your effective (average rate). You will end up with carry forwards which you will be unlikely to use, unless you can generate non-taxable income in Canada (which is why I suggested RSU income of less than 10K as a strategy).

Given your income levels, it is likely that you will be paying some tax in US on RRSP growth if you wait very long. I would just collapse it, maybe in the first year you no longer have RSU. . You could convert to RRIF, and take 10K a year at the 15% tax while you wait. Or, if you can, skip taking RSU for a year, and collapse your RRSP sooner.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
iristopher
Posts: 18
Joined: Fri Oct 30, 2015 12:02 am

Post by iristopher »

Can you please clarify why collapsing RRSP in the year where I have no RSUs is better?

Also, I'd really appreciate if you could shed some light on this question as well:
- When calculating the gain in RRSP for US income tax filing, which currency do I use for US stocks held in RRSP account? For example, if I bought a US stock for $100USD while CAD:USD was 1:1, and sold for $100USD while CAD:USD was 1:0.8, is this considered break even OR is it 25% gain since in CAD the net sale value is $125 CAD?
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Because you will already have large taxable foreign income. I'm simply suggesting that you not collapse your RRSP while you already have large foreign income. When you do your 2017 taxes, you will see how much of your Cdn tax is not used. It will be staggering.

Realize that the US tax on your RRSP is not a major issue, it is the Cdn tax. But at least by having some possibility of using some of the RRSP tax against future RSUs is possible.

For IRS purposes, all investment calculations, both cost and proceeds, are based on USD values at the time the cost/proceed occurred. The gain or loss in CAD is meaningless.

So for your RRSP, you need to determine the cost basis (in USD) on the day you became a US taxpayer, sometime in 2016. This will be your basis for determining any future US tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
iristopher
Posts: 18
Joined: Fri Oct 30, 2015 12:02 am

Post by iristopher »

Thanks for the detailed responses! One more question, can I convert my RRSP to RRIF now and start my annual 10% withdrawals starting on Jan 1, 2018?
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

Yes, if you can get it done fast enough. To start taking 10% in 2018, it MUST be converted before the end of the 2017. It may be too late administratively, since they are now focused on thise who MUST convert due to age.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
monily

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Post by monily »

Monily started as a simple bookkeeping processing organization. However, in time, it acquired professional expertise and expanded business operations bringing more effective talents onboard.
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monily

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Post by monily »

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iristopher
Posts: 18
Joined: Fri Oct 30, 2015 12:02 am

Post by iristopher »

One last question regarding this topic. If I want to withdraw the entire amount, is it still better to convert to RRIF and collapse as opposed to collapsing RRSP? More specifically, do I get 15% withholding for the amount up to 10% of previous years balance and 25% withholding for the rest if I were to collapse after RRSP is rolled in to RRIF ?
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