I am a US Citizen who may be permanently moving to Toronto in six months. I won't be obtaining Canadian citizen status, nor will I give up my US citizenship. I'll be a US citizen living and working in Canada. I'm a CPA and I understand the tax aspects of the move (filing in both countries, taking a credit in the US), but my question involves my Roth IRA's treatment.
I have a Roth IRA that I started last year and I'm debating whether or not to continue funding it this year if the earnings will be taxable if I were to move to Canada. It's my understanding that they would be taxable as though they are normal earnings for Canadian tax purposes.
Would it be beneficial for me to put additional money into the Roth IRA if I am planning to move to Canada in six months?
Also, it is my understanding that a Traditional IRA does NOT get taxed on the earnings in Canada, so would it be more beneficial for me to convert the money in my Roth IRA to a traditional IRA?
Finally, is there anything about this situation that I should be considering that I'm not?
Thanks.
US Citizen Moving to Toronto
Moderator: Mark T Serbinski CA CPA
Your Roth will not enjoy tax sheltering while in Canada, and thus you will be taxable in Canada on any income it makes after you arrive.
Contributing more to it will simply make it more of a hassle.
You mention something about converting a Roth to a Trad IRA.
I'd be intersted in how this is done, as I have seen nothing written about this and am not even sure it is possible.
Take the following example:
You have $40K in a Roth, based on $25K of contributions.
You decide you are now going to make this a Trad IRA.
Can you? I've never seen this mentioned in any IRS publication. I've seen many discussions about the reverse of course.
If you can, How is this IRA treated? Does it become an IRA with $25K of non-deducuted contributions? Is there an AGI limit at which this can or cannot be done?
If one can, then this would be an ideal situation for those Cdns who would fund Roths but are not sure if they will return to Canada, and would be the solution for you.
By the way, when you say "a Traditional IRA does NOT get taxed on the earnings in Canada", be careful! It only means that the income is not taxed year by year. In fact, every penny of your earnings would be taxable in Canada as you withdraw it. Only non-deductible contributions would come out tax-free (as they would in US).
<i>nelsona non grata</i>
Contributing more to it will simply make it more of a hassle.
You mention something about converting a Roth to a Trad IRA.
I'd be intersted in how this is done, as I have seen nothing written about this and am not even sure it is possible.
Take the following example:
You have $40K in a Roth, based on $25K of contributions.
You decide you are now going to make this a Trad IRA.
Can you? I've never seen this mentioned in any IRS publication. I've seen many discussions about the reverse of course.
If you can, How is this IRA treated? Does it become an IRA with $25K of non-deducuted contributions? Is there an AGI limit at which this can or cannot be done?
If one can, then this would be an ideal situation for those Cdns who would fund Roths but are not sure if they will return to Canada, and would be the solution for you.
By the way, when you say "a Traditional IRA does NOT get taxed on the earnings in Canada", be careful! It only means that the income is not taxed year by year. In fact, every penny of your earnings would be taxable in Canada as you withdraw it. Only non-deductible contributions would come out tax-free (as they would in US).
<i>nelsona non grata</i>
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stubacca22
- Posts: 10
- Joined: Tue Mar 01, 2005 6:36 pm
Thanks... not good news for me. IS the income on a Roth IRA still taxable to me if I'm living in Canada even though I'll maintain it in an American financial institution and remain an American citizen filing a US Tax Return?
Converting from a Roth IRA to a Traditional IRA can be done, and it is called recharacterization, but I'm not sure what the tax consequences are. I haven't had the time to fully research it yet, but I will.
I don't understand why a Traditional IRA is recognized by Canada and not taxed until the funds are distributed, but a Roth IRA is taxed as the income is earned. Seems backwards to me.
Converting from a Roth IRA to a Traditional IRA can be done, and it is called recharacterization, but I'm not sure what the tax consequences are. I haven't had the time to fully research it yet, but I will.
I don't understand why a Traditional IRA is recognized by Canada and not taxed until the funds are distributed, but a Roth IRA is taxed as the income is earned. Seems backwards to me.
"IS the income on a Roth IRA still taxable to me if I'm living in Canada even though I'll maintain it in an American financial institution and remain an American citizen filing a US Tax Return?"
Of course! Cdns resident report WORLD income, regardless of reporting elsewhere.
<i>Recharacterization</i>. I beleive you might be misinterpreting a recharacterization as simply the 'reverse' of a Roth Conversion. It isn't quite.
The conversion you are talking about can only be done for the current tax year (ie. A Roth contribution/conversion made for the 2004 tax year can only be recharacterized until April 2005. Nothing can be done for Roth contribs made for 2003 and before.
As to why Trad IRA is 'acceptable' as a pension and Roth is not?
Simple: Roth is NOT viewed as a pension scheme because (a) Roth contributions can be made at any age and <u>most importantly</u> (b) there is never any requirement to take out the money. This is the stated position of Finance Canada.
Also, no such scheme exists in canada. IF Canada does ever adopt such schemes, I'm sure at that point treay protocols will be amended to mesh the two.
<i>nelsona non grata</i>
Of course! Cdns resident report WORLD income, regardless of reporting elsewhere.
<i>Recharacterization</i>. I beleive you might be misinterpreting a recharacterization as simply the 'reverse' of a Roth Conversion. It isn't quite.
The conversion you are talking about can only be done for the current tax year (ie. A Roth contribution/conversion made for the 2004 tax year can only be recharacterized until April 2005. Nothing can be done for Roth contribs made for 2003 and before.
As to why Trad IRA is 'acceptable' as a pension and Roth is not?
Simple: Roth is NOT viewed as a pension scheme because (a) Roth contributions can be made at any age and <u>most importantly</u> (b) there is never any requirement to take out the money. This is the stated position of Finance Canada.
Also, no such scheme exists in canada. IF Canada does ever adopt such schemes, I'm sure at that point treay protocols will be amended to mesh the two.
<i>nelsona non grata</i>
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stubacca22
- Posts: 10
- Joined: Tue Mar 01, 2005 6:36 pm
I've now been told by a different Chartered Accountant in Toronto who deals with these types of issues that a Roth IRA is treated just as a Traditional IRA is in Canada, and that while they are not tax free forever like they are in the US, Roth IRAs are not taxed until the funds are distributed as though it's a traditional IRA.
I was told that they are both covered by article XVIII (7) of the US-Canada Tax Treaty. Now I'm officially confused.
It reads:
7. A natural person who is a citizen or resident of a Contracting State and a beneficiary of a trust, company, organization or other arrangement that is a resident of the other Contracting State, generally exempt from income taxation in that other State and operated exclusively to provide pension, retirement or employee benefits may elect to defer taxation in the first-mentioned State, under rules established by the competent authority of that State, with respect to any income accrued in the plan but not distributed by the plan, until such time as and to the extent that a distribution is made from the plan or any plan substituted therefor.
Technical Explanation [1995 Protocol]:
A new paragraph 7 is added to Article XVIII by Article 9 of the Protocol. This paragraph replaces paragraph 5 of Article XXIX (Miscellaneous Rules) of the present Convention. The new paragraph makes reciprocal the rule that it replaced and expands its scope, so that it no longer applies only to residents and citizens of the United States who are beneficiaries of Canadian RRSPs. As amended, paragraph 7 applies to an individual who is a citizen or resident of a Contracting State and a beneficiary of a trust, company, organization, or other arrangement that is a resident of the other Contracting State and that is both generally exempt from income taxation in its State of residence and operated exclusively to provide pension, retirement, or employee benefits. Under this rule, the beneficiary may elect to defer taxation in his State of residence on income accrued in the plan until it is distributed or rolled over into another plan. The new rule also broadens the types of arrangements covered by this paragraph in a manner consistent with other pension-related provisions of the Protocol.
I was told that they are both covered by article XVIII (7) of the US-Canada Tax Treaty. Now I'm officially confused.
It reads:
7. A natural person who is a citizen or resident of a Contracting State and a beneficiary of a trust, company, organization or other arrangement that is a resident of the other Contracting State, generally exempt from income taxation in that other State and operated exclusively to provide pension, retirement or employee benefits may elect to defer taxation in the first-mentioned State, under rules established by the competent authority of that State, with respect to any income accrued in the plan but not distributed by the plan, until such time as and to the extent that a distribution is made from the plan or any plan substituted therefor.
Technical Explanation [1995 Protocol]:
A new paragraph 7 is added to Article XVIII by Article 9 of the Protocol. This paragraph replaces paragraph 5 of Article XXIX (Miscellaneous Rules) of the present Convention. The new paragraph makes reciprocal the rule that it replaced and expands its scope, so that it no longer applies only to residents and citizens of the United States who are beneficiaries of Canadian RRSPs. As amended, paragraph 7 applies to an individual who is a citizen or resident of a Contracting State and a beneficiary of a trust, company, organization, or other arrangement that is a resident of the other Contracting State and that is both generally exempt from income taxation in its State of residence and operated exclusively to provide pension, retirement, or employee benefits. Under this rule, the beneficiary may elect to defer taxation in his State of residence on income accrued in the plan until it is distributed or rolled over into another plan. The new rule also broadens the types of arrangements covered by this paragraph in a manner consistent with other pension-related provisions of the Protocol.
I'm quite familiar with the treaty, but thanks.
Your accountant is incorrect in using the treaty becuase Finance Canada does not agree that the Roth is a <b>retirement </b> vehicle. (I thought I just explained that)
Show your friend the following:
http://www.fin.gc.ca/news98/98-129e.html
It clearly outlines the Cdn Govt position on Roths NOT being tax-deferred (and why), and such interpretation has not changed and has not been challenged. The treaty provisions for pensions DOES NOT apply to Roths.
Now, CRA will allow you to defer paying the tax on your yearly income until you take it out, but this is only done by permission, and on a case-by-case basis, and does not come out of any treaty basis, but rather CRA's unilateral decision (probably to simplify their lives).
But, if you stay in canada, you will eventually pay Cdn tax on the increase that your Roth has while in canada, as your buddy pointed out. But it will not benefit from the treaty wording that prevents Canada from including a US pension in income more than the US includes the same income.
If CRA were to accept it as a pesion, then NONE of it would be taxable in Canada, since none of it would be taxable in US, so how does your CPA on the one hand say its a recognized pension, but then say it doesn't get the benefit of no tax (as in US).
No, Finance canada's interpretation is correct, and CRA's decision to <i>allow deferral</i>, rather than being <i>required by treaty </i> to do so, is -- for once -- very reasonable.
Like I said earlier. The only hope for Roth to become tax-free is for (a) Canada to come up with their own 'Roth RRSP' and (b) the treaty be amended to include these 'Roths' under the pension Atricles.
<i>nelsona non grata</i>
Your accountant is incorrect in using the treaty becuase Finance Canada does not agree that the Roth is a <b>retirement </b> vehicle. (I thought I just explained that)
Show your friend the following:
http://www.fin.gc.ca/news98/98-129e.html
It clearly outlines the Cdn Govt position on Roths NOT being tax-deferred (and why), and such interpretation has not changed and has not been challenged. The treaty provisions for pensions DOES NOT apply to Roths.
Now, CRA will allow you to defer paying the tax on your yearly income until you take it out, but this is only done by permission, and on a case-by-case basis, and does not come out of any treaty basis, but rather CRA's unilateral decision (probably to simplify their lives).
But, if you stay in canada, you will eventually pay Cdn tax on the increase that your Roth has while in canada, as your buddy pointed out. But it will not benefit from the treaty wording that prevents Canada from including a US pension in income more than the US includes the same income.
If CRA were to accept it as a pesion, then NONE of it would be taxable in Canada, since none of it would be taxable in US, so how does your CPA on the one hand say its a recognized pension, but then say it doesn't get the benefit of no tax (as in US).
No, Finance canada's interpretation is correct, and CRA's decision to <i>allow deferral</i>, rather than being <i>required by treaty </i> to do so, is -- for once -- very reasonable.
Like I said earlier. The only hope for Roth to become tax-free is for (a) Canada to come up with their own 'Roth RRSP' and (b) the treaty be amended to include these 'Roths' under the pension Atricles.
<i>nelsona non grata</i>
By the way, the deferral permission that CRA grants, on a case by case basis, results in CRA;s treatment of Roths to be identical to IRS treatment of RRSPs:
You get deferral until you begin withdrawing, at which point you must begin reporting the income accrued after arrival in Canada: exactluy analogous to IRS treatment of RRSP income and deferral.
So the treatment, if you get permission, is not <i>that </i> bad.
The major differnce is that IRS <b>must</b> grant this deferral, by treaty; CRA does so of its own volition.
The other major difference of course is that RRSP withdrawls are entirely reported as income and taxed in Canada, while Roth income is neither reported nor taxed in US (when properly withdrawn of course), so much of the allure of the Roth is lost when coming into Canada.
<i>nelsona non grata</i>
You get deferral until you begin withdrawing, at which point you must begin reporting the income accrued after arrival in Canada: exactluy analogous to IRS treatment of RRSP income and deferral.
So the treatment, if you get permission, is not <i>that </i> bad.
The major differnce is that IRS <b>must</b> grant this deferral, by treaty; CRA does so of its own volition.
The other major difference of course is that RRSP withdrawls are entirely reported as income and taxed in Canada, while Roth income is neither reported nor taxed in US (when properly withdrawn of course), so much of the allure of the Roth is lost when coming into Canada.
<i>nelsona non grata</i>
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stubacca22
- Posts: 10
- Joined: Tue Mar 01, 2005 6:36 pm
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stubacca22
- Posts: 10
- Joined: Tue Mar 01, 2005 6:36 pm
Thanks for all the help here. One more question...
Say I move to Canada and maintain my Roth IRA in the US for the next 30 years (I'm 28 now). I make annual contributions to it, and I receive permission in the manner you described from the Canadian taxing authorities to have the tax on it deferred until I pull the money out upon retirement.
Now, what if I move back to the US when I'm 60 years old and begin to take the money out of the Roth IRA several years later? Is that money tax free to me as though I had been a resident of the US the entire time? By that time, I would no longer be filing a Canadian tax return at all, and the distributions from a Roth IRA are tax free in the United States.
So, I guess my question is that if I maintain my Roth IRA for the duration of my time in Canada and move back to the US before I begin to withdraw from the account, is that a way to take full advantage of the Roth IRA's tax-free earnings?
Thanks in advance.
Say I move to Canada and maintain my Roth IRA in the US for the next 30 years (I'm 28 now). I make annual contributions to it, and I receive permission in the manner you described from the Canadian taxing authorities to have the tax on it deferred until I pull the money out upon retirement.
Now, what if I move back to the US when I'm 60 years old and begin to take the money out of the Roth IRA several years later? Is that money tax free to me as though I had been a resident of the US the entire time? By that time, I would no longer be filing a Canadian tax return at all, and the distributions from a Roth IRA are tax free in the United States.
So, I guess my question is that if I maintain my Roth IRA for the duration of my time in Canada and move back to the US before I begin to withdraw from the account, is that a way to take full advantage of the Roth IRA's tax-free earnings?
Thanks in advance.
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stubacca22
- Posts: 10
- Joined: Tue Mar 01, 2005 6:36 pm
Yes, I'm a US citizen who most likely will be moving to Toronto in 6 months.
And yes, I'd think that if I live in Canada for 30 years while I contribute to the Roth IRA, as long as I move back to the US to retire, I'd be able to pull the money out tax free.
That's why it's so important to me that I'd be able to contribute to the Roth IRA and maintain it while I'm in Canada without getting taxed on the earnings. To be able to defer the tax until withdrawal would allow me to still take advantage of the benefits of the Roth IRA.
And yes, I'd think that if I live in Canada for 30 years while I contribute to the Roth IRA, as long as I move back to the US to retire, I'd be able to pull the money out tax free.
That's why it's so important to me that I'd be able to contribute to the Roth IRA and maintain it while I'm in Canada without getting taxed on the earnings. To be able to defer the tax until withdrawal would allow me to still take advantage of the benefits of the Roth IRA.
As I said earlier, current treatment of Roths by CRA is analogous to IRS treatment of RRSPs.
A person who defers taxation of RRSPs while in uS, and then leaves (non-US Citizen) has no tax obligation to IRS if he subsequently withdraws RRSP funds.
However, RRSPs are recognized by IRS as a retirement vehicle, and thus must abide by a certain set of rules.
Converesly, Roth treatment is entirely discretionary by CRA, and they are quite free to put any conditions on this arrangement that they wish, including not permitting continued deferral if one makes contributions to it while in Canada (it would then become an unlicensed tax shelter)
At a minimu, a Roth would be subject to deemed disposition tax upon departure.
You are entering into unprotected territoty.
<i>nelsona non grata</i>
A person who defers taxation of RRSPs while in uS, and then leaves (non-US Citizen) has no tax obligation to IRS if he subsequently withdraws RRSP funds.
However, RRSPs are recognized by IRS as a retirement vehicle, and thus must abide by a certain set of rules.
Converesly, Roth treatment is entirely discretionary by CRA, and they are quite free to put any conditions on this arrangement that they wish, including not permitting continued deferral if one makes contributions to it while in Canada (it would then become an unlicensed tax shelter)
At a minimu, a Roth would be subject to deemed disposition tax upon departure.
You are entering into unprotected territoty.
<i>nelsona non grata</i>
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stubacca22
- Posts: 10
- Joined: Tue Mar 01, 2005 6:36 pm
<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by nelsona</i>
As I said earlier, current treatment of Roths by CRA is analogous to IRS treatment of RRSPs.
A person who defers taxation of RRSPs while in uS, and then leaves (non-US Citizen) has no tax obligation to IRS if he subsequently withdraws RRSP funds.
However, RRSPs are recognized by IRS as a retirement vehicle, and thus must abide by a certain set of rules.
Converesly, Roth treatment is entirely discretionary by CRA, and they are quite free to put any conditions on this arrangement that they wish, including not permitting continued deferral if one makes contributions to it while in Canada (it would then become an unlicensed tax shelter)
At a minimu, a Roth would be subject to deemed disposition tax upon departure.
You are entering into unprotected territoty.
<i>nelsona non grata</i>
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
I was under the impression from what you said earlier that I may be able to gain permission from Canada to defer taxation of my Roth IRA income until withdrawal. If I'm no longer a Canadian resident when I begin to withdraw the money, how would they tax me? I would obviously not maintain the Roth IRA outside of the United States, so I don't know what this "disposition tax" would be related to.
Do the conditions they'd put on this arrangement have to be set up front, or can they change their conditions down the road?
As I said earlier, current treatment of Roths by CRA is analogous to IRS treatment of RRSPs.
A person who defers taxation of RRSPs while in uS, and then leaves (non-US Citizen) has no tax obligation to IRS if he subsequently withdraws RRSP funds.
However, RRSPs are recognized by IRS as a retirement vehicle, and thus must abide by a certain set of rules.
Converesly, Roth treatment is entirely discretionary by CRA, and they are quite free to put any conditions on this arrangement that they wish, including not permitting continued deferral if one makes contributions to it while in Canada (it would then become an unlicensed tax shelter)
At a minimu, a Roth would be subject to deemed disposition tax upon departure.
You are entering into unprotected territoty.
<i>nelsona non grata</i>
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
I was under the impression from what you said earlier that I may be able to gain permission from Canada to defer taxation of my Roth IRA income until withdrawal. If I'm no longer a Canadian resident when I begin to withdraw the money, how would they tax me? I would obviously not maintain the Roth IRA outside of the United States, so I don't know what this "disposition tax" would be related to.
Do the conditions they'd put on this arrangement have to be set up front, or can they change their conditions down the road?
I said that CRA on a case-by-case basis is granting permission to defer the tax that they legally owe every year.
That is not quite the same thing.
You are asking CRA for a favour. That favour may come with strings or it may not (like no contributions, like exit tax). You wil have to see. This could end, they could call you up and say pay tomorrow. Until the treatment is entrenched in the treaty you are at risk.
It is certainly not unheard of for CRA to permit deferral of the payement of tax until after one leaves canada and is no longer 'taxable' in Canada. One generally has to post securities until such time as the tax is paid. They don't simply foget about the tax.
As to deemed disposition tax, you have a lot to learn about Cdn taxation. All departing Cdn residents are taxed as if they disposed as if they sold up on the day they left. Only a very few certain things are exmpt from this (house, RRSP, Cdn private business). Foreign assets are not excluded from Cdn taxation, nor from deemed disposition tax.
When you move to Canada you will be deemed to have aquired everything on that day too (deemed acquisition).
<i>nelsona non grata</i>
That is not quite the same thing.
You are asking CRA for a favour. That favour may come with strings or it may not (like no contributions, like exit tax). You wil have to see. This could end, they could call you up and say pay tomorrow. Until the treatment is entrenched in the treaty you are at risk.
It is certainly not unheard of for CRA to permit deferral of the payement of tax until after one leaves canada and is no longer 'taxable' in Canada. One generally has to post securities until such time as the tax is paid. They don't simply foget about the tax.
As to deemed disposition tax, you have a lot to learn about Cdn taxation. All departing Cdn residents are taxed as if they disposed as if they sold up on the day they left. Only a very few certain things are exmpt from this (house, RRSP, Cdn private business). Foreign assets are not excluded from Cdn taxation, nor from deemed disposition tax.
When you move to Canada you will be deemed to have aquired everything on that day too (deemed acquisition).
<i>nelsona non grata</i>