Hello again,
I have now moved down to the US, and I just received from the company I worked for in Canada a letter asking me to decide how I want my pension benefits paid out. I have two options:
1. Receive the benefit in cash, subject to a 20% withholding tax.
2. Transfer the benefit to a non locked-in RRSP on a tax-free basis.
If I choose option 1, do I have to report the benefit as income on my 1040, since I will have received it AFTER I moved to the US? Or will it be considered Canadian 'income' because it is a benefit that has strictly to do with my Canadian employment when NOT a resident of the US? Can I claim the 20% withholding tax as a foreign tax deduction?
If I chose option 2 and transferred it to my RRSP, I would only turn around and take it out again when I withdraw ALL of my RRSP monies, and that means a 25% withholding tax because I am now a non-resident.
I would think option 1 would be preferable IF I don't have to claim it as 'US income'.
What to do about pension payout?
Moderator: Mark T Serbinski CA CPA
Kelli,
1. the 20% withholding tax would be the initial tax for someone who is a Cdn resident, after which the entire amount and the tax would be included with everything else on your 'normal' Cdn return, and your final tax would be determined then.
Since you are a non-resident, you actuall will have to pay 25% flat NR tax, and that is it.
It is also reportable in US (all of it) with the 25% tax a as a credit.
2. If you successfully roll it into an RRSP, it will not be reportable in either Canada or US. However, it is unlikely that you will find a broker that will accept this money (unless you have an existing relationship somewhere).
Under new rules, because this was a pension, your 'basis' for any of this money, if put in an RRSP, would be '0', thus a future withdrawal of these funds, while a US citizen would be fully taxable in US (and Canada at 25%)
<i>nelsona non grata</i>
1. the 20% withholding tax would be the initial tax for someone who is a Cdn resident, after which the entire amount and the tax would be included with everything else on your 'normal' Cdn return, and your final tax would be determined then.
Since you are a non-resident, you actuall will have to pay 25% flat NR tax, and that is it.
It is also reportable in US (all of it) with the 25% tax a as a credit.
2. If you successfully roll it into an RRSP, it will not be reportable in either Canada or US. However, it is unlikely that you will find a broker that will accept this money (unless you have an existing relationship somewhere).
Under new rules, because this was a pension, your 'basis' for any of this money, if put in an RRSP, would be '0', thus a future withdrawal of these funds, while a US citizen would be fully taxable in US (and Canada at 25%)
<i>nelsona non grata</i>
Hmmm, does not seem right that I have to pay US tax on something that has nothing to do with US employment... if my company had given me this info a couple of weeks ago, while I was still a Canadian resident, then I wouldn't have to pay US tax... but now I do? That seems kooky. US income *should* be based on when the money was earned (in my case, over the last 10 years while a Canadian resident), not when it was received. (Not that anything in government ever makes sense.)
At what point is one considered a US resident? Although I am here in the US, my 'move' is not complete in the sense that my possessions have not yet been delivered by the movers. I still have not given change of address to my bank, I still have my Canadian credit cards, etc. Do I *have* to declare myself a US resident as of the date my I-94 is stamped or is there some flexibility?
At what point is one considered a US resident? Although I am here in the US, my 'move' is not complete in the sense that my possessions have not yet been delivered by the movers. I still have not given change of address to my bank, I still have my Canadian credit cards, etc. Do I *have* to declare myself a US resident as of the date my I-94 is stamped or is there some flexibility?
Kelli, even if the company would be giving youback salary after you left, it would still be taxable in US, since you now live in US.
All countries tax their residents, so this should come as a big shock. The same would happen in reverse when/if you return to Canada: all money you receive the day sfter you return (wages, severance, pension, etc) is taxable in canada. source doesn't matter.
But, until October 2004, your thinking was correct, and IRS used to give a pass to the portion of pensions that were earned before arrival. But they have tightened up this rule, at leat for non-treaty countries. I would argue taht it doesn't apply to Cdns, but thats another debate.
But, had you been a US citizen all this time you would have had a tax deduction for any of your contributions, so would be taxable now, so I don't think a non-discrimination claim is justified.
As to 'delaying your move', this would not work, since PRESENCE is the important thing for IRS, and you are now PRESENT in US, regardless of your ties in Canada, your US meter is already running.
Like i said, you are quite free to roll this over into your RRSP and pay no tax for now.
But a pension payout in the eyes of IRS is fully taxable.
It is also fully taxable in Canada, regardless of your residency there too.
<i>nelsona non grata</i>
All countries tax their residents, so this should come as a big shock. The same would happen in reverse when/if you return to Canada: all money you receive the day sfter you return (wages, severance, pension, etc) is taxable in canada. source doesn't matter.
But, until October 2004, your thinking was correct, and IRS used to give a pass to the portion of pensions that were earned before arrival. But they have tightened up this rule, at leat for non-treaty countries. I would argue taht it doesn't apply to Cdns, but thats another debate.
But, had you been a US citizen all this time you would have had a tax deduction for any of your contributions, so would be taxable now, so I don't think a non-discrimination claim is justified.
As to 'delaying your move', this would not work, since PRESENCE is the important thing for IRS, and you are now PRESENT in US, regardless of your ties in Canada, your US meter is already running.
Like i said, you are quite free to roll this over into your RRSP and pay no tax for now.
But a pension payout in the eyes of IRS is fully taxable.
It is also fully taxable in Canada, regardless of your residency there too.
<i>nelsona non grata</i>
In looking briefly through the IRS guides available online, I came across the following:
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Dual-Status Aliens
You can be both a nonresident alien and a resident alien during the same tax year. This usually occurs in the year you arrive in or depart from the United States. Aliens who have dual status should see chapter 6 for information on filing a return for a dual-status tax year.
First Year of Residency
If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.
Residency starting date under substantial presence test. If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year. However, you do not have to count up to 10 days of actual presence in the United States if on those days you establish that:
1. You had a closer connection to a foreign country than to the United States, and
2. Your tax home was in that foreign country.
-------------
Assuming I could establish a 'closer connection' (and I think I could, in reading what this entails), it would appear I could discount the first 10 days since arriving here as having been a US resident for tax purposes and therefore, if I can get my old employer to pay out the pension in the next two days, it would not be subject to US tax.
-----------
Dual-Status Aliens
You can be both a nonresident alien and a resident alien during the same tax year. This usually occurs in the year you arrive in or depart from the United States. Aliens who have dual status should see chapter 6 for information on filing a return for a dual-status tax year.
First Year of Residency
If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.
Residency starting date under substantial presence test. If you meet the substantial presence test for a calendar year, your residency starting date is generally the first day you are present in the United States during that calendar year. However, you do not have to count up to 10 days of actual presence in the United States if on those days you establish that:
1. You had a closer connection to a foreign country than to the United States, and
2. Your tax home was in that foreign country.
-------------
Assuming I could establish a 'closer connection' (and I think I could, in reading what this entails), it would appear I could discount the first 10 days since arriving here as having been a US resident for tax purposes and therefore, if I can get my old employer to pay out the pension in the next two days, it would not be subject to US tax.
You can only exclude the first ten days if (a) you were here and then left, and (b) had that closer connection elsewhere. So at a minimum, you'd have to leave US today or tommorrow, and that assumes yyou weren't in US at all in Jan or Feb 2005. Were you?
THis applies to people who, at the beginning of the year come here on vacation, or a conference, and then later in the year move to US. It probably doesn't apply in your case, but as I will explain, even if it did, it probably wouldn't help you.
As you will become aware, if you choose not to be US resident for the WHOLE YEAR, you will be taxed at a much higher rate than if you elect to file full-year 1040, reporting all your income for 2005.
So it will not matter whether you got this income before or after you left canada, the fact that you get it in 2005 will be enough to make it reportable in US.
How much are we talking about? If its less than $5K and you don't have an existing RRSP. you should just take it and pay the tax.
If its more than that, shouldn't the company have to kept you on their books?
<i>nelsona non grata</i>
THis applies to people who, at the beginning of the year come here on vacation, or a conference, and then later in the year move to US. It probably doesn't apply in your case, but as I will explain, even if it did, it probably wouldn't help you.
As you will become aware, if you choose not to be US resident for the WHOLE YEAR, you will be taxed at a much higher rate than if you elect to file full-year 1040, reporting all your income for 2005.
So it will not matter whether you got this income before or after you left canada, the fact that you get it in 2005 will be enough to make it reportable in US.
How much are we talking about? If its less than $5K and you don't have an existing RRSP. you should just take it and pay the tax.
If its more than that, shouldn't the company have to kept you on their books?
<i>nelsona non grata</i>
I was in the US over Christmas and left on January 3rd (vacation). Then I arrived here on Feb 28th (as a resident). So using the 10 day extension is probably not an option for me.
WRT being considered a US resident for <b>all</b> of 2005 for tax purposes, I thought I only had that option if I married a US resident this year:
--------------
First Year of Residency
If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.
...
Choosing Resident Alien Status
If you are a dual-status alien, you can choose to be treated as a U.S. resident for the entire year if <b>all</b> of the following apply.
1. You were a nonresident alien at the beginning of the year.
2. You are a resident alien or U.S. citizen at the end of the year.
3. You are married to a U.S. citizen or resident alien at the end of the year.
4. Your spouse joins you in making the choice.
...
Note.
If you are single at the end of the year, you cannot make this choice.
WRT being considered a US resident for <b>all</b> of 2005 for tax purposes, I thought I only had that option if I married a US resident this year:
--------------
First Year of Residency
If you are a U.S. resident for the calendar year, but you were not a U.S. resident at any time during the preceding calendar year, you are a U.S. resident only for the part of the calendar year that begins on the residency starting date. You are a nonresident alien for the part of the year before that date.
...
Choosing Resident Alien Status
If you are a dual-status alien, you can choose to be treated as a U.S. resident for the entire year if <b>all</b> of the following apply.
1. You were a nonresident alien at the beginning of the year.
2. You are a resident alien or U.S. citizen at the end of the year.
3. You are married to a U.S. citizen or resident alien at the end of the year.
4. Your spouse joins you in making the choice.
...
Note.
If you are single at the end of the year, you cannot make this choice.