Nondeductible IRAs and returning to Canada

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tyronen
Posts: 11
Joined: Fri Feb 11, 2005 8:22 pm

Nondeductible IRAs and returning to Canada

Post by tyronen »

I understand that in the US, the contribution portion of nondeductible IRAs is not taxed on withdrawal.

If I were to return to Canada, would CCRA give it the same treatment? Or would I be in effect subject to double taxation on the contributions, paying Cdn taxes on money already taxed in the US?

As an alternative to IRAs, I have seen a few references to something called a 'Cdn Roth' taking advantage of a loophole in the tax laws for Cdn citizens returning to Canada. How exactly does this work?
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The treaty protects you by limiting the Cdn taxable portion of your IRA to what was taxable on your US return.

So, when you go to withdraw from your IRA, the first $X,XXX will be non-taxable in US and Canada.

A Cdn Roth (my term) arises from the possibility of any <u>non-US Citizen</u> of being able to exclude from tax (both IRS and CRA) the accrued (but not triggered) capital gains on investements when leaving US.

This applies also to Green Card holders, even if they keep their GC.

The treaty allows Cdn residents to report cap gains (except, basically on US real estate) only in Canada.

Canada, by its own rules, deems anyone arriving in Canada to have sold their assets and repurchase them on arrival. Deemed acquisition.

So, if you hold-off cashing in investements that have grown until after leaving US, you will not have to report these in US (by treaty), and -- when you do cash in -- Canada will only tax you on growth after you arrived.

Small example: You bought ABC at $5, you leave US when it is $12 and sell (the next day, or 2 years later) at $13.

You report nothing to IRS, since you are a CDn resident.

On your Cdn return you report the gain as $1, (13-12).

Of course there are ways to get bit by this:

If you have an untriggered cap loss when you leave you lose that too.

Example: But at $12, leave at $5, sell at $6. You report nothing in US and end up paying cap gains tax on $1 (6-5) in Canada, even though overall you lost $6.


So the mantra is, for Cdns going back to Canada from US:

<b>Sell your losers BEFORE leaving, and sell your winners AFTER.</b>

There are technicalities to go thru, but I frankly won't give them here.

<i>nelsona non grata... and non pro</i>
aggarwal
Posts: 1
Joined: Wed Mar 23, 2005 12:51 am

Post by aggarwal »

Does this apply to real estate? Here are the details:

1. In 1997 I purchased a condo in Vancouver while living/working in Canada. (Lets say I paid 100K CDN)
2. In 1998 I moved out of Canada to US and rented out the condo.
3. In 2005 (this year) I plan to move back to Vancouver. (Lets say its worth 150K CDN).

If I sell after I move back to Vancouver the capital gain on my CDN return is the difference between 150K and the sell price? And I don't report it on my US return, even though I am a dual citizen?

Also, I am renting out the condo. How do I handle the depreciation I was forced to claim on my US return? What is the best timing to stop renting it out? Is it best to wait until after I have returned to Canada?

Thanks in advance for your advice!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

It doesn't apply because you are a US citizen.

Had you not been a US citizen, you still would have been on the hook for all the growth between 1998 and 2005, since Cdn real estate ALWAYS remains taxable in Canada, regardless of where you live.

I trust you are reporting the rent correctly in Canada as well?


It doesn't matter when you stop renting, because for at least the entire period of your non-residence it is considered <b>not</b> to be your principal residence.


<i>nelsona non grata... and non pro</i>
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