I moved to the US from Canada in 1997. At the time I moved a took a leave of absence from my Candian company.
In 2003, I officially resigned from the Canadian Company (6 years on Leave of Absence). At the time I left the company I was offered the choice to either leave with 13 years of pensionable service or to pay 40K CDN and leave with 19 years of service. After looking at the ending balance of the plan, it made more sense to pay the extra 40K.
Also, at the time I quit, I elected to have the company pension rolled over to a Locked-In RRSP and during the rollover, the company withheld 40K CDN to pay for the extra 6 years of pensionable service. This whole operation was completed in mid-2004.
So, I now have a 40K NR4 form from Canada.
I am struggling with how to report this income on my 1040. How much of the 40K is taxable by the US? If I assume it all is, the Foreign Tax Credit option is causing me to get hit with an AMT penalty that is killing me. If I itemize the taxes, I still end up owing a lot of money.
I am hoping that there is a way to establish a cost basis for the Company pension so that I can at least reduce the amount of the 40K I need to pay tax on.
Any guidance on how to report this would be greatly appreciated.
David.
Company Pension -> LIRA: With a Twist
Moderator: Mark T Serbinski CA CPA
If I can recap just for my own clarity:
You were offerd the choce of the following (I'll make up numbers)
A. A transferable lump-sum pension of, say, $200K to be put in LIRA, or
B. A transferable lump-sum pension of, say, $300K to be put in a LIRA, but at a cost of $40K
and you chose (B), but instead of funding the $40K, you had them take it off the lump-sum, leaving you with $260K in the LIRA.
The $40K, since it was not transferred directly from the lump-sum to the LIRA becoming taxable, and you as a non-resident being assesses $10K (25%) in NR tax.
Is this a correct (but for the $200/$300K) recap?
<i>nelsona non grata... and non pro</i>
You were offerd the choce of the following (I'll make up numbers)
A. A transferable lump-sum pension of, say, $200K to be put in LIRA, or
B. A transferable lump-sum pension of, say, $300K to be put in a LIRA, but at a cost of $40K
and you chose (B), but instead of funding the $40K, you had them take it off the lump-sum, leaving you with $260K in the LIRA.
The $40K, since it was not transferred directly from the lump-sum to the LIRA becoming taxable, and you as a non-resident being assesses $10K (25%) in NR tax.
Is this a correct (but for the $200/$300K) recap?
<i>nelsona non grata... and non pro</i>
Exactly. Unfortunately, I am in a position where the AMT is kicking in and I am getting very little of the foreign tax credit. I was hoping that I might be able to use the value of the company pension at the time I entered the US as the cost basis, but from what I have been reading today, it would appear that I am basically stuck with paying the taxes on the full 40K and I am also now the proud owner of a LIRA with a $0 cost basis. 
Let me think about that, but you are probably correct.
I might make an argument that your origianl contributions made to this pension constitute 'investment in the account' and, since the $40K withdrawl was made BEFORE Oct 21, 2004, you could apply the foreign pension rules as they existed before that date, which allowed you to claim that your contribs (which would not have been deductible in US) can come out free of US tax.
You'd need to look more into IRS Pub 939.
<i>nelsona non grata... and non pro</i>
I might make an argument that your origianl contributions made to this pension constitute 'investment in the account' and, since the $40K withdrawl was made BEFORE Oct 21, 2004, you could apply the foreign pension rules as they existed before that date, which allowed you to claim that your contribs (which would not have been deductible in US) can come out free of US tax.
You'd need to look more into IRS Pub 939.
<i>nelsona non grata... and non pro</i>
Of course, had you actually forked over the $40K instead of having them take it off the top, this scenario would have played out otherwise.
There would have been no taxable event, in either US or Canada, and the $40K would now be investement in your LIRA.
By the way, your case illustrates the falacy of thinking that "one should report the entire amount of an RRSP withdrawal on both line 16a and 16b (making it all taxable)" using the excuse that "The foreign tax credit for the 25% tax will cover the IRS Fed tax"
AS you are finding, adding only $40k of income to your 1040, and using the $10K NR tax as credit, does not make this a wash transaction.
My guess is that this $40K is costing you about $12K in IRS taxes, and you are only getting to use about $5K of the Cdn tax as a credit.
So, using *someone's* unique advice to include all of an RRSP withdrawal as US income, results in an overall tax of, not 25% on that money, but closer to 40%.
<i>nelsona non grata... and non pro</i>
There would have been no taxable event, in either US or Canada, and the $40K would now be investement in your LIRA.
By the way, your case illustrates the falacy of thinking that "one should report the entire amount of an RRSP withdrawal on both line 16a and 16b (making it all taxable)" using the excuse that "The foreign tax credit for the 25% tax will cover the IRS Fed tax"
AS you are finding, adding only $40k of income to your 1040, and using the $10K NR tax as credit, does not make this a wash transaction.
My guess is that this $40K is costing you about $12K in IRS taxes, and you are only getting to use about $5K of the Cdn tax as a credit.
So, using *someone's* unique advice to include all of an RRSP withdrawal as US income, results in an overall tax of, not 25% on that money, but closer to 40%.
<i>nelsona non grata... and non pro</i>
You are correct that if I had put out the 40K, I would not be quite as messed up as I am now, but I would still owna $0 cost basis LIRA 
The great irony (to me) in all of this is that I have all this money in a LIRA that is earning 0.25% interest. I cannot do anything with the money because I am in Georgia. Georgia is the last hold out in the "allowing Canadians to trade in their RRSP" game! Once more the joke is on me
I would love to be able to have 2 different numbers on 16a and 16b, but hey, those are the cards I have been dealt this time around. At least it would appear I can use what's left of my foreign tax credit next year (and I may have some left for tax year 2006!)
"not 25% on that money, but closer to 40%": Pretty close but my hands are tied!
Btw, Nelson, thanks for posting all the information you do. While it has not changed my situation, it has made be better understand it. And it has helped me from making the mistake of trying to assign a cost basis to my new LIRA.
Cheers,
Dvaid.
The great irony (to me) in all of this is that I have all this money in a LIRA that is earning 0.25% interest. I cannot do anything with the money because I am in Georgia. Georgia is the last hold out in the "allowing Canadians to trade in their RRSP" game! Once more the joke is on me
I would love to be able to have 2 different numbers on 16a and 16b, but hey, those are the cards I have been dealt this time around. At least it would appear I can use what's left of my foreign tax credit next year (and I may have some left for tax year 2006!)
"not 25% on that money, but closer to 40%": Pretty close but my hands are tied!
Btw, Nelson, thanks for posting all the information you do. While it has not changed my situation, it has made be better understand it. And it has helped me from making the mistake of trying to assign a cost basis to my new LIRA.
Cheers,
Dvaid.
"..but I would still own a $0 cost basis LIRA".
No. you would have made a non-deductible contribution to your pension, and thus would have $40K of basis. This is pretty clear, even under the new foreign pension rules.
In fact, depending on your pension, it *might* even have been deductible on your 1040 (in which case the basis would have been '0'.)
In any event, making a $40K deposit would have eventually been tax deductible in US.
<i>nelsona non grata... and non pro</i>
No. you would have made a non-deductible contribution to your pension, and thus would have $40K of basis. This is pretty clear, even under the new foreign pension rules.
In fact, depending on your pension, it *might* even have been deductible on your 1040 (in which case the basis would have been '0'.)
In any event, making a $40K deposit would have eventually been tax deductible in US.
<i>nelsona non grata... and non pro</i>