Elect to defer Cdn taxes on IRA?

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patti
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Elect to defer Cdn taxes on IRA?

Post by patti » Thu Jul 19, 2018 6:19 pm

I always understood that a Canadian (non-USC) could keep their American rollover/traditional IRA once they move back to Canada and defer any Canadian tax until they took distributions. My understanding was that this deferral was automatic; however, I recently read an article that says that an election needs to be filed each year to defer the taxation:

"Under the Canada-U.S. Income Tax Convention, Canadian residents may enjoy continued tax deferral of their IRA, 401(k) plans and Roth IRA balances once they return to Canada, just as they would if they were still U.S. residents. However, that deferral doesn’t continue automatically, as Canadian plan owners must file an election each year with their Canadian tax returns to defer tax on their IRA and 401(k) plan balances. CRA provides no form or published guidance for plan owners wanting to make this election, except in the case of Roth IRAs"
Source: http://www.advisor.ca/tax/tax-news/tax- ... ras-189370

This is news to me! Is it accurate? After several google attempts, I could not find anything to substantiate the need to elect annual deferral. If it is true, I'm surprised the CRA would not have provided any kind of guidance, similar to what they provided in 2011 for Roth IRAs (a one time election with no annual election requirement).

nelsona
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Re: Elect to defer Cdn taxes on IRA?

Post by nelsona » Fri Jul 20, 2018 10:17 am

The information is incorrect, other than the fact that Roth IRAs holders need to file an election.

There is no need to file any election or statement regarding the existence of a US pension or retirement plan. Even the treaty states that if such an election were required, it would have to be "established". Saying that since CRA hasn't given any guidance, shows that no such rules have been established. US has in the past had such requirements, and they were established, by a series Rev. Procs, and Notices, culminating in Form 8891, which is now abolished.
Some plans MAY need to be included in the foreign asset report, however, but that is by no means an election to defer.

The article in question is dealing with those who are being forced to withdraw money from their retirement plans, which of course is taxable if it occurs while resident of Canada.
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patti
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Re: Elect to defer Cdn taxes on IRA?

Post by patti » Fri Jul 20, 2018 10:41 am

Thanks, that confirms what I always understood to be the case.

I'm curious that you said, "Some plans MAY need to be included in the foreign asset report". Under what circumstances might an IRA need to reported on the T1135? I recall looking into this several years ago and determined that IRAs met the CRA definition of "Exempt Trusts" and, therefore, they are not "specified foreign property" for T1135 requirements.

nelsona
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Re: Elect to defer Cdn taxes on IRA?

Post by nelsona » Fri Jul 20, 2018 2:34 pm

Well, for example, if you violate your Roth exemption by making a Cdn deposit, it no longer qualifies for exemption from T1135. There may be others, like HSAa, 509 plans etc.
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patti
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Re: Elect to defer Cdn taxes on IRA?

Post by patti » Fri Jul 20, 2018 4:11 pm

That makes good sense. Thanks.

brianbbc
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Re: Elect to defer Cdn taxes on IRA?

Post by brianbbc » Sat Oct 13, 2018 12:04 pm

Is my understanding correct (Cdn citizen and resident, former US resident on TN)

1. A ONE time filing first tax year after you re-enter Canada for Roth to avoid filing of T1135, which form please?

2. Do I have to report my HSA account for form T1135 (value over 100K cdn), or treat like IRA under tax treaty (no need to report).

3. You previously posted (aug 16, 2018) that the CRA views HSA just like the IRS does (which is great, I will probably have medical expenses in Canada that are not covered by the government), but when you take distributions from the HSA , form 1099-sa is generated and sent out, thus forming a paper trail of a potentially taxable event. Apparently, the CRA does not require a filing as long as I have proof its for a qualified expense in case they ask. How do I let the IRS know that it is qualified and not subject to taxes. In years past as US resident, I just confirmed the amount on the 1099-sa on my 1040, and was not taxed. Do I have to complete a 1040NR to dot the i's?

Once again ,thanks for the help.

nelsona
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Re: Elect to defer Cdn taxes on IRA?

Post by nelsona » Sat Oct 13, 2018 12:52 pm

1. the one-time filing is NOT primarily to avoid having to include Roth account on T1135 although it does accomplish this. More importantly, it is to establish that the account is indeed a Roth. there is no from, but you submit a statement:
From CRA Technical New #43
http://www.cra-arc.gc.ca/E/pub/tp/itnew ... s-43-e.pdf
------
1. Your name and address;
2. Your social insurance number and social security number;
3. Name and address of Roth IRA trustee or plan administrator;
4. Roth IRA account number;
5. Date that the plan was established;
6. Date that you became resident in Canada;
7. Balance of the Roth IRA as of December 31, 2008 or as of the date on which you became resident in Canada, whichever is later;
8. Amount and date of the first Canadian Contribution made to the Roth IRA, if any (see the definition of "Canadian Contribution" in section 2 above); and
9. A statement signed by you indicating that you elect to defer Canadian taxation under paragraph 7 of Article XVIII of the Canada-U.S. Income Tax Convention with respect to any income accrued in the Roth IRA for all taxation years ending before or after the date of the Election, until such time as a Canadian Contribution is made.
------
A byproduct of doing this makes the Roth non-reportable on T1135, as long as you do not make a Cdn contribution, which essentially invalidates the Roth, making it taxable and reportable.


2. First off, let's be clear that the reason IRA's and 401(K) are not reported on T1135 has nothing to treaty. It is by the CRA definition of what is or is not a specified foreign asset. IRAs and 401(s) are foreign pensions, thus not subject to T1135 reporting.

Since HSA is not a pension, I would conclude, absent of any direction from CRA, that the foreign asset should be reported on T1135.

Note that this does not make it taxable in Canada (which IS a treaty issue), as explained below

3. One is supposed to file IRS form 8889 anytime one withdraws funds from their HSA, determining if the distribution is taxable or non-taxable, and any penalties. You should continue to do this, attaching it to your 1040NR form.
You would then only report taxable income and possible penalty on your 1040NR, and report this income on your Cdn return, using the tax and penalty as a foreign tax credit.
This treatment is because although not a pension, it is a "benefit" plan and is thus considered income in Canada only to the extent that is in US.
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nelsona
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Re: Elect to defer Cdn taxes on IRA?

Post by nelsona » Sat Oct 13, 2018 12:55 pm

Just to correct your third question, it is the IRS the requires proof (or not) about qualified spending, since it is a plan under their rules, not CRA. CRA will then accept what you put on your 1040NR. They let IRS determine if you have reported correctly, and if IRS "corrects" your return , you will need to do the same on your T1.
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brianbbc
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Re: Elect to defer Cdn taxes on IRA?

Post by brianbbc » Sat Oct 13, 2018 6:32 pm

I have thought of another complication: The IRS does allow me to use my HSA (tax free) for qualified medical expenses spent in Canada even as a NR of the USA (ie it is meant to be used anywhere). So say in Canada I spend $1000 total for medical expenses, and want to be reimbursed from my American USA. I have EFT with my HSA custodian, so I can transfer the $1000 from that account to a US based bank account checking account I have, then just wrist a check from that bank and deposit into my US funds account in my Canadian based bank. The HSA custodian would issue me a 1099-sa, I would attach form 8889 to my 1040NR and would be free of tax implications on the $1000.

But, the expense is in cdn dollars and the reimbursement will be usa currency. Do I us the exchange rate the date the medical expense occurred or the date I transfer the money out of the HSA account?

nelsona
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Re: Elect to defer Cdn taxes on IRA?

Post by nelsona » Sat Oct 13, 2018 10:43 pm

It is when the expense occurred. Typically you will incur the expense, convert to US, and ask HSA to transfer that amount. You need to keep a spreadsheet of your expenses in any event, what's one more column with the exchange rate?

Have you not been using your HSA all these years? How have you been tracking eligible expenses in the past?
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brianbbc
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Re: Elect to defer Cdn taxes on IRA?

Post by brianbbc » Sun Oct 14, 2018 11:29 am

Well as a US resident I first reimbursed myself immediately using their debit card (>13 years ago).Since then I employed the strategy of keeping accurate records of all transactions letting the total amount increase until I am ready to withdraw it from the HSA. So far with my surgeries, child birth, expensive tests etc, its almost 20k I owe myself. the idea is let your has account grow tax free (I have it invested in total stock market fund) until you want to take the reimbursement, the longer the better to maximize the use of the HSA. The HSA custodian informed me of this idea and the IRS does not care if you postpone the withdraw year to year, as long as its a qualified expense with proof.

nelsona
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Re: Elect to defer Cdn taxes on IRA?

Post by nelsona » Sun Oct 14, 2018 3:50 pm

Of course you do not need to take the reimbursements immediately. So you have kept track of these expenses, and it should be easy to convert these into USD.
By the way, remember not to claim these medical expenses on your Cdn tax return, since you are being reimbursed for them.
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brianbbc
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Re: Elect to defer Cdn taxes on IRA?

Post by brianbbc » Tue Oct 16, 2018 5:30 pm

I know you probable been asked these questions a thousand times, but if you could oblige, the answers will clarify any doubts and I can be done with it. Applies to cdn citizens only, working TN visa, living in USA. Moved back to Canada July 2018. Sold my house and all mutual funds with a capitol loss. Will leave US based checking account open, and will likely receive interest and dividends from my taxable accounts dec 2018 after I have become a cdn resident again.

1. I believe we passed the SPT and will file 1040 as usual. Do we include the US based interest/dividends AND any Canadian income after we leave the US on it? I'm wondering if the IRS gets to tax you for the entire year even though we left in July.

2. Will file T1 with the CRA, get any government benefits and credits . I understand they tax you on world income AFTER you enter Canada. I will have modest Cdn income from employment and bank interest/dividends which will be reported, but do not have to report ANY income from the US prior to the date I entered Canada

3. We already discussed the need to declare the CRA about the Roth accounts. What about years later if I want to perform a rollover from my Roth 401k to my roth account or 401k to traditional IRA. I understand the CRA will allow it without any tax consequences, but do I need to report the transaction to them?


4. For any subsequent years, I will file a 1040 NR for all taxable events in the USA. for me it would be bank interest, dividends, sale of stock, ira rollovers, and distributions from the HSA, roth and IRA. these will all be reported to the CRA except qualified expenses from the HSA, they get to tax non qualified.

5. After all these years, it seems fairly straight forward tax wise leaving the US. I'm am surprised. Am I needing to file some kind of declaration or form with the IRS telling them I'm gone, or will my finger do?

Once again , thanks for your help

nelsona
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Re: Elect to defer Cdn taxes on IRA?

Post by nelsona » Tue Oct 16, 2018 5:45 pm

1. SPT doesn't apply when you are leaving US. You will have the choice to file a plit-year (dual-status) return, in the last year or a full year 1040.
If you file a full year 1040, you must include all world income, and take credit for Cdn taxes paid on the Cdn income.

2. No

3. It doesn't appear that you need to do any further reporting. A transfer between Roth plans (including Roth401(k)) is NOT a reportable transaction, and is not considered a Cdn contribution, but should be kept in your records.
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brianbbc
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Re: Elect to defer Cdn taxes on IRA?

Post by brianbbc » Tue Oct 16, 2018 6:27 pm

I am not sure about your answer to "2" when you responded "no". I assume you mean we do not report any income on our t1 was acquired prior to entering Canada? that is, from the US based source.

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