Treatment of DB pension plan and 401K on 1040NR for Covered

[nelsona]

Indeed
Hope you will be able to use the tax fully on your cdn returns

[nelsona]

But frankly, since you were relinquishing for financial reasons, the taxes have to be the basis for your decision

[nelsona]

Btw, there is one treaty provision that will eventually help you, which deals specifically with expats:

XXIX.2(b) limits this regime of taxation to ten years.

[expat61]

thanks nelsona

FWIW, I'm not relinquishing for financial reasons, other than the huge cost of my being divorced if I don't get my wife "home" soon. :) The US will revoke my LPR status the next time we cross the border when they figure out we don't live in the USA anymore. And that triggers the whole 8854 process.

In my case, I'm not too sure I'll be able to recover the full 30% from foreign tax credits on my Canadian tax return each year but it will be close. I should really do a CDN return using my expected numbers and see what happens. The taxable income threshold for a 30% rate in Canada seems to be around $75K per https://www.taxtips.ca/taxrates/on.htm .

And at this point, doing some gymnastics via gifting and other legal financial maneuver, I may be able to qualify as "not covered". The reason for my original question was to try and assess the cost of being "covered" vs the cost of the moves necessary to be "not covered". I think my biggest hit will be the IRS taxing my full RRSP value as income when I expatriate (I have no IRA's). To use those tax credits and not be doubly taxed on the RRSP value, I'll have to fold up all my RRSP's and pay tax in Canada in the same year too - 50% of my pretax savings gone in an instant.

I'm off to study XXIX.2(b) now.

[nelsona]

Ouch. Forced into expatriate tax when you were never a citizen.
I presume you trigger this on net worth, which has a pretty low threshold.
Hopefully you are young enough to avoid needing most of this deferred income until past the 10 year mark.

[expat61]

nelsona wrote:
> I presume you trigger this on net worth, which has a pretty low threshold.

I live in a "community property" state - so my net worth is split 50:50 with my wife. Effectively giving us 2x the threshold a single person would be entitled to. And that's still a low threshold.

> Hopefully you are young enough to avoid needing most of this deferred income until past the 10 year mark.

Like I said, I'm making some expensive financial moves to avoid being a covered expatriate. The 10 year mark info is interesting but it does not help the one time tax hit on expatriation (at the top marginal rate) to our RRSP's.

Think about it - the IRS will tax money that I had put in an RRSP prior to moving to the USA. Totally unconnected income to the USA.

[nelsona]

Even though the RRSP is mostly non-taxable?

[expat61]

nelsona wrote:
> Even though the RRSP is mostly non-taxable?

From what I've been told by my international tax attorney that an RRSP balance is treated just like an IRA if you are a covered expatriate. You have to include the total amount on your final tax return as income, which will of course be at your highest marginal rate.

I inquired about whether it should be just on the value gained since we received LPR status and was told no, it's on the entire amount.

I'd love to find a reference that refutes that interpretation but so far, no luck on that.

[nelsona]

It is not the value when you became LPR, it is the value when you became US taxpayer, which is probably not the same for you.

There is Rev Proc 89-45 that outlines how RRSPs are taxed in US. Many on this site have been withdrawing RRSPs over the last 20 years and have never been denied the reduced taxable amount, myself included. US tax atty's do not seem to understand this.


The consistent adbice here is to collapse RRSP t some point before returning to Canada, which is now even more important given your experience.

[expat61]

Interesting! Doesn't the CRA take a bite too?

[expat61]

Never mind. If that's your only CDN income and you take it in small bites each year, little or no CDN tax.

Doh.

[nelsona]

The Cdn tax is 25% flat for US residents on the entire withdrawal, regardless of amount.