US tax for RRSP RIF distribution Taxable and Foreign tax Credit

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MFHEB2018
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US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by MFHEB2018 » Tue Sep 25, 2018 6:02 pm

Hello - I have a few questions:
I had an RRSP when I moved to USA. I am now taking distribution from my Canadian RRSP- RIF. I have setup a percentage per year so I am NOT taking tout the whole amount. BELOW I am using small numbers for the sake of the question.

For example let's say I had $200. CAD in my RRSP when I moved to USA. Now I have $300 in my RRSP - RIF
Starting in 2017 I am getting $50 a year from my RRSP/RIF.

So I am adding a revenue of $50 in my USA Tax 1040 for 2017. There is a field called "Taxable Part of distribution" How do I determine that amount ? Is it $200 that is the amount I had when I moved to USA or is it another amount?

If it is the amount when I moved to USA which is in the example is $200 and since I just received "$50 in 2017 Does that mean that the taxable is ZERO. and it will be Zero each year until I get to $200 Or???

And Do I need to report somewhere the AMOUNT of RRSP when I moved in USA in that Tax form somewhere? or??

ALSO which Conversion rate do I used for the Amount when I moved to US? so the$200 CAD is the rate on the date I moved in USA or?

ANOTHER question: For the Foreign Tax Credit -- This RRSP-RIF distribution is what ? A PASSIVE, General or LUMPSUM or?

I had applied for 2017 extension So I have until October 15 2018 to finish that 2017 Tax return.
MFHEB2018

nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Tue Sep 25, 2018 8:33 pm

Each year you take out money, you need to determine the taxable ratio based on (a) the non-taxable amount in your RRSP/RRIF and the total amount you have.

The non-taxable portion when you first begin withdrawing is the $200 you had when you arrived. The taxable portion is abouve that.

So, if at beginning of year you had $300, then the taxable ratio is (300-200)/300 = 1/3


Si, if you took $50, your taxable portion is $50 *1/3 = $16.67 and the non-taxable is $33.33.

Next year, your non-taxable portion is $200 - $33.33 = $166.67 and so on.
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nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Tue Sep 25, 2018 8:36 pm

For the amount you brought, the conversion rate is the day you arrived in US.
For the withdrawl and the tax, it is the day you took the money
For the value at beginning of your it is the Jan 1 exchange rate.

For foreign tax credit, the taxable income is General, and the Cdn income is $16 and the tax is 15 or 25% of the gross withdrawal that you paid to canada.
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MFHEB2018
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by MFHEB2018 » Wed Sep 26, 2018 7:45 pm

Thanks
A clarification of the Foreign Tax Credit
Since I now have reduced my "TAXABLE".

Can you confirm that I also have to reduce the amount of the tax I am entering for Foreign Credit?
That is instead of having a credit of the amount I paid to Canada - I will enter only the amount of 15% or 25% of the amount that I have calculated is the TAXABLE amount.

So In the example :

I will calculate for example 25% of the $16 that is I would enter $4.00 as Foreign Tax Credit as opposed to what I paid Canada which was 25% of $50 that is $12.5
Correct?
MFHEB2018

nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Thu Sep 27, 2018 8:43 am

No, you don't reduce the foreign tax, since the form will reduce the eligible amount for you. Any extra tax will simply be carried forward, unused.

That is why, in most cases, it WAS simply better to take the foreign tax as a deduction on schedule A. the new standard deductions makes this less likely. You could look at it for 2017 however.
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davidrbaker3971
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by davidrbaker3971 » Sat Feb 23, 2019 9:24 pm

Please clarify cost basis determination.
Is it the amount of your total contributions over the time the RRSP was active in Canada or is the value of the RRSP when you leave Canada and enter the USA?

nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Sat Feb 23, 2019 10:23 pm

It is the book value (the cost basis, not the market value) on the day you became a US tax resident. So a stock bought at $4 that appreciated to $8 the day you became taxable in US, has a book value of $4. That is why most are encouraged to sell/swap their RRSP internal investments just before leaving Canada, to increase their book value.

The day you became taxable in US is either January 1st of the first year you filed a 1040, or it is a mid-year date if you filed a dual-status return.
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davidrbaker3971
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by davidrbaker3971 » Sun Feb 24, 2019 12:08 am

So in that case it is on a contribution basis. I moved to the US in 1996 and have no records of my contributions, just what my rrsp was valued at then. I am now taking distributions from a converted RRIF.
Will I have to say that 100% of the RRIF is taxable? Seems like it should be based on actual value upon coming to usa.

nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Sun Feb 24, 2019 8:58 am

It should, but since you filed to maintain these records. how are you going to prove the value. As I said, it is NOT based on contribution value, it is based on book value at the time you became resident. There were statements you had to file on a yearly basis once you moved until 2014, so had you done this you would have those values from back then.

Reporting 100% is an option.
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davidrbaker3971
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by davidrbaker3971 » Sun Feb 24, 2019 2:21 pm

i did file the required forms with the balances and earnings for the tax dreferrrals under the USA canada income tax convention, so I have the reported value of the RRSP account from the year I moved and up till 2014 when that filing was no longer required,
Just not sure if the actual values as reported by the bank would be called "book value"

nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Mon Feb 25, 2019 6:51 pm

The 1996 value is probably accurate enough.
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borderguy
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by borderguy » Tue Feb 26, 2019 6:23 pm

Computing the taxable portion of initial and subsequent periodic RRIF withdrawals:

Contributions in plan as of US arrival: 10k
Mkt value on arrival day: 25k (Due to ignorance about wisdom of crystalizing value on entry day)
...
Fast forward 20 years.
Market value of RRSP converted to RRIF = 80k (RRSP to RRIF means CDN withholding drops from 25% to 15%)
Start periodic withdrawals at (2* RMD) = 10.56% ==> Initial withdrawal is 10.56% * 80k = 8448
NON-Taxable portion is (10/25)*8448 ==3379
TAXABLE portion is 8448-3379 = 5069

In subsequent years, it appears I have to keep a spreadsheet of how the remaining 6621 (10000-3379) of original cost basis will be applied to future withdrawals.
For sake of argument, say market value of RRIF on Jan 1 next year has grown, after initial withdrawal, to 75000.
Second periodic withdrawal at (2* RMD) = 10.8% ==> Year 2 withdrawal is 10.8% * 75000 = 8100
NON-taxable portion is 8100 * (6621/75000) = 715
TAXABLE portion is then 8100 -715 = 7385
After year 2, using this method, the unused cost basis for future withdrawals would then be 6621-715 = 5906

The aforementioned method is one that was suggested in a much earlier post.
I was wondering if there is an alternative method of pro-rating the cost basis:
what if the same 2*RMD percentage were applied to the unused balance of original book value cost when entry to US occurred. That would simplify the calculations somewhat and provides a reasonable basis. Would that be acceptable?

nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Tue Feb 26, 2019 10:38 pm

No it would not.

Your equation is completely incorrect. I don't know where you get the (10/25) term for example.

If you came with 10K book value (the 25K value at arrival has nothing to do in this calculation) and it is now worth 80k, in the first year 7/8ths are taxable (80-10)/80. Using your numbers a withdrawal of $8448 would be $7392 taxable and this $1056 non-taxable. You have now reduced your non-taxable portion by $1056, to $8944. The next year, you take the new Beginning of year value (BOY), say $72000, your new withdrawal, say $7260, and repeat the process. You will eventually whittle down your non-taxable portion, until, in the end, you will have excluded the $10K you came with.

So, each year, all you need to know is the BOY, your remaining non-taxable amount, and the amount you withdraw, all in USD.

It is a very simple spreadsheet.
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borderguy
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by borderguy » Tue Feb 26, 2019 11:33 pm

You're correct. I messed up the first year calculation.
I've spent a lot of wasted time looking around the internet for the method to determine taxable from non-taxable portions of periodic RRIF withdrawals. And spoken to 4 Turbotax product and "tax specialists" without getting a good answer.

So, NelsonA!! glad to see you're still around. And such a quick response! Thanks. During the years when I was really into the weeds with this RRSP and RRIF stuff, you were by far the most useful resource.

Now I know you're in the camp that considers these periodic RRSP/RRIF withdrawals to be general limitation basket for foreign tax credit. What about a defined benefit pension received monthly from Canada? Would you consider that passive category?

And finally, prior to this year, cross-border financial services advisor's fees and the cost of TurboTax could be expensed, even if not itemized. Is that no longer the case?

nelsona
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Re: US tax for RRSP RIF distribution Taxable and Foreign tax Credit

Post by nelsona » Wed Feb 27, 2019 7:45 am

Pensions are general limit. by definition. Not my definition.

I believe these always had to be itemized on sched A. In any event they are gone now.
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