tax considerations: moving back to Canada

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Veronica
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Joined: Wed Mar 30, 2005 1:39 am

tax considerations: moving back to Canada

Post by Veronica » Wed Mar 30, 2005 2:44 am

Finally here is the place to post the message, hope to get answers this time.

I'm a Canadian citizen. I'm planning to go back to Canada at the end of April this year (2005) after working here for two years on a H1B. There'll be no overlapping income from US and Canada for the year. Here are the questions I have for tax:

(1) For the tax, my current understanding is that, to States, I'll need to file IRS the income from States only; to Canada, I'll need to file income from both countries and use States' tax as tax credit. Is this understanding correct?

(2) For States, do I have to tell IRS by some kind of forms (similar to that when leaving Canada) to claim non-residency, Or just file 1040NR next year to let them know?

(3) On the other hand, for Canada, do I need to tell CCRA by some forms or just by filing T1 next year to let them know I'm back?

(4) Currently I have some mutual fund and 401K. For the mutual fund (with Fidelity), if I sell it after I go back Canada (can I still do that as non-resident of States?), say next year, my understanding is that I don't need to pay tax to States on the capital gain any more since I'm non-resident of States, and for Canadian tax, the captical gain is calculated from the day I enter Canada. Is this understanding correct? For States' tax, will the form 8833 still be required? (captical gain is not listed as one of the 3 catergories of treaty benefits?)

(5) For the 401K, this is where I'm a little confused after reading the posts, seems to me there are several options:

(a) Roll them into non-Roth IRA and then transfer it to RRSP.
(b) Keep it, but making sure the broker will allow a foreign address, or simply providing a US address of a friend or relative, etc.
(c) Collapse it and pay penalty and tax.

For me, I have $30K in my 401K account (with Manulife, now John Han****, I'll check with them to see if (b) is a viable option). My US income will be $25K for this year. In my situation, I'd like to know which option is the best choice.

(6) This is an extra question for my car, it's a 2000 Saturn SL2, manufactured in US. One option is to import it to Canada. After some research, I think I understand the lengthy process. My question is after it's imported and later when I want to sell it, are there any tax or other regualtions that will prevent me from the selling?

Thank you very much!

nelsona
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Post by nelsona » Wed Mar 30, 2005 9:53 am

Again, barebones, as this is covered elsewher:

1. No. In Canada you will be a 'necomer' and will write an arrival date on your return, and only report world income AFTER that date.

In the US you will have the same choices you had as the year you arrived. File 'dual-status' US-income only with no standard deduction, or full-year 1040, standard deduction, but reporting world income for the full year (possibly excluding Cdn wages earned in 2005). You do both next spring and choose the one that yields less income


2. Nothing special to report. You either will file a 1040NR for 2005, or if you choose 1040 for 2005 as outlined above, 1040NR for 2006.


3. Arrival date on T1 next spring.

4. You will sell your winners after leaving and your losers before. An 8833 should not be needed, since you can only make this claim when filing a 1040NR, and the 1040NR has space to outline any trear=ty position.

Note that if you elect to be treated as a US residnt for the whole year, you can't take advantage of the capital gains exclusion until after this year.

5 is upto you. You should be verifying if you canuse (b) BEFORE you leave. An IRA leaves you much more flexible than with your 401(K)

6. If you import your car, and use the duty exemption (personal use), you can't sell the car in Canada for a year.

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

Veronica
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Post by Veronica » Thu Mar 31, 2005 3:03 am

Thanks Nelson! That helps.

Just would like to make sure I understand what you said:

In (1), you mentioned "possibly excluding Cdn wages earned in 2005", how to verify this exclusion is valid?

Combining (1) and (5), if I intend to collapse 401k, there seem to be three ways (All in USD):

(a) to file 2005 US-tax using 1040 with collapsed 401k ($30K) plus salary $25K to get standard deduction (excluding Cdn-income) => 30K + 25K - 8K(standard deduction + 1 exemption) = 45 K taxable income => 8K US-tax + 3K penalty => 11K US-payment, no tax credit for Cdn-tax, but no extra world income for Cdn-tax either.

(b) to file 2005 US-tax using 1040NR with salary $25K, no standard deduction then => 25K - 3K (1 exemption) = 22 K taxable income => $3K US-tax;
then to collapse 401k in 2006, again 1040NR without standard deduction => 30K - 3K (1 exemption) = 27 K taxable income => 3.7K US-tax + 3K penalty => 6.7K;
Thus total paid to US is 9.7K, 6.7K can be used as tax credit against Cdn-tax, but an extra world income of 30K for Cdn-tax (given a 70K Cdn-income, it¡¯s about 11K extra Cdn-tax).

Are the above rough calculations conceptually correct?

Thanks!

Veronica
Posts: 11
Joined: Wed Mar 30, 2005 1:39 am

Post by Veronica » Thu Mar 31, 2005 3:09 am

Sorry, forgot the the 3rd way

(c) to file 2005 US-tax using 1040 with salary $25K, with standard deduction (excluding Cdn-income) => 25K - 8K(standard deduction + 1 exemption) = 17 K taxable income => 2.2K US-tax

then to collapse 401k in 2006, using 1040NR without standard deduction => 30K - 3K (1 exemption) = 27 K taxable income => 3.7K US-tax + 3K penalty => 6.7K;
Thus total paid to US is 9K, 6.7K can be used as tax credit against Cdn-tax, but an extra world income of 30K for Cdn-tax (given a 70K Cdn-income, it¡¯s about 11K extra Cdn-tax).


nelsona
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Post by nelsona » Thu Mar 31, 2005 10:14 am

You do know you can edit your own post, eh Ver?

Without going into detail about your scenarios, in determining whether to include the 401(k) money and the tax on your Cdn return, the important thing is when you take the money, not how you report it in US.

If you take the money after arriving in Canad, it is taxable in Canada, regardless of how you report it in US.

If you take the money before going to canada it is not repoirtable in Canada, again, regardless of how you report it in US.


so scenario (a) would still require that you take the money before establishing residence in Canada to avoid Cdn taxation.

Bottom line:

if you want to take the cash within the next 2 years (and you are going to be working in Canada), simply take it before returning to Canada. This will yeild the lowest tax, and be simplest.

If you don't want the cash soon, before you leave, find a US firm that will deal with you, and transfer your 401(k) to an IRA with them.

Then sometime in 2006 or later, think about transferring the money to a Cdn RRSP (in a year when you will make at least $50K Cdn-source income.). There will be no tax advantage to doing this (as you willpay US tax and claim it on Cdn, even though you will be adding no income to your Cdn return), merely a simplification.

That is for later. Leaving it in US until you need it, if you have a willing firm, is quite acceptable.


as to the exclusion of Cdn income on 1040 (with Form 2555), it is valid as long as you keep filing a 1040, and can establish the foreign exclusion criteria, which are described in IRS Pub. 54.

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

Veronica
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Post by Veronica » Fri Apr 01, 2005 1:15 am

Thanks a lot nelsona! From the advices you gave in this topic and other topics, most likely I'll transfer my 401K to an IRA rollover (from another post, it's mentioned Fidelity allows foreign addresses, I'll double check). In future, when the exchange rate is better and my Cdn income is more than 50K, I'll do a IRA-to-RRSP transfer.

I'll look more into "IRS Pub. 54", to better undersand the foreign exclusion criteria.

Thanks again! [:)]

nelsona
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Post by nelsona » Fri Apr 01, 2005 10:56 am

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">I'll do a IRA-to-RRSP transfer<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Just to be clear, this 'transfer' will not be like the 401(k) to IRA rollover that you will do.

1. You will be taxed by IRS on this manoeuver, since you will be withdrawing the IRA. You will be subject to tax/penaly withholding, and will file a 1040NR at year end to determine your exact tax rate.

2. In Canada, you will have to contribute the proceeds from your IRA, PLUS whatever was withheld (so you may have to come up with $20K to cover the withholding).
You would indicate to your RRSP firm that this is an IRA transfer, for theri records, so that this does not count against your normal RRSP contribution limit.
This is best done all within 60 days of the IRA withdrawal, but may not be absolutely necessary.

3. For Cdn taxes, you would include the entire IRA amount (tax included) as income, deduct whatever you contributed to RRSP as a deduction, and use the fianl IRS tax and penalty as a foreign tax credit, against the IRA income. This should result in a dollar for dollar credit on first the Fed and then the provincial return.

It would be at this point that you would get back the amount that you had to front for your RRSP contribution.

So, the big drawbacks of this method are (a) having to come up with upto 40% of the IRA in cash, to make up for the withholding/penalaty, and (b) having to wait for the refund of that money until the following spring and (c) hoping that the CRA agent that looks at your return is not confused by your actions, and is familiar with the tax code (not a given, sadly) and does hold up your refund for months.


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

Veronica
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Post by Veronica » Sat Apr 02, 2005 2:26 pm

A couple of things to clarify:

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">3. For Cdn taxes, you would include the entire IRA amount (tax included) as income, deduct whatever you contributed to RRSP as a deduction, and use the fianl IRS tax and penalty as a foreign tax credit, against the IRA income. This should result in a dollar for dollar credit on first the Fed and then the provincial return.
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
In this case, everything (entire IRA amount, final IRS tax and penalty, and dollar for dollar credit) is counted in Cdn (USD amount x US-Cdn exchange rate), isn't it?

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">the big drawbacks of this method are (a) having to come up with upto 40% of the IRA in cash, to make up for the withholding/penalaty <hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
For US-tax and penalty, they are directly deducted from the IRA. So the 40% of extra cash is for RRSP contribution in Canada, is my understanding correct?

BTW, I called Fidelity yesterday and set up a rollover IRA with them (since I already had a Fidelity MF account). For both accounts, they said there would be NO problem to change the address to a Canadian one. [:)]

Thanks!

nelsona
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Post by nelsona » Sat Apr 02, 2005 5:20 pm

Yes to both your questions.

And thanks for the tip about Fidelity!



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

Veronica
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Post by Veronica » Tue Apr 05, 2005 3:40 pm

Thanks nelsona!

Based on pub 54, as a H1B holder, I'll be qualified for foreign income exclusion as a resident alien in a Country with trade treaty.

To be regarded as resident alien, two tests in pub 519:
(1) greencard test
(2) general presence test:

I can pass the general presence test for 2005, but not 2006. Thus my first question is, does this means I cannot file 1040 for 2006 any more?

My 2nd question is, even though I'll be qualified for the exclusion for 2005, shouldn't I still calculate both situations (with foreign income/tax credit and without foreign income) in 1040? I may get a smaller tax even with foreign income (with tax credit).

Thanks!

nelsona
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Post by nelsona » Tue Apr 05, 2005 5:45 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">I can pass the general presence test for 2005, but not 2006. Thus my first question is, does this means I cannot file 1040 for 2006 any more? <hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

You can, by using the treaty, but the question would be why would you want to? There is little point going thru hoops to extract the lowest possible tax rate in US, since any slack will gladly be taken up bty CRA/provoncial tax.

In 2006, you will merely file a 1040NR if you have any US-source income. and nothing if you don't.

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">shouldn't I still calculate both situations (with foreign income/tax credit and without foreign income) in 1040? I may get a smaller tax even with foreign income (with tax credit). <hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

it is mathematically impossible for the foreign tax credit to be better than the exclusion.

Remember, you will quite likely use a combination of FTC and FEIE, since FEIE only applies to wages. But straight FTC is never as good as using FEIE


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CheapScotsman
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Post by CheapScotsman » Wed Apr 13, 2005 1:12 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by Veronica</i>

Thanks nelsona!

Based on pub 54, as a H1B holder, I'll be qualified for foreign income exclusion as a resident alien in a Country with trade treaty.

To be regarded as resident alien, two tests in pub 519:
(1) greencard test
(2) general presence test:

I can pass the general presence test for 2005 ... <cut>
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

But the flowchart on Pg 12 in Pub 54 indicates you have to be present in the foreign country for 330 days but you came back in April. I don't understand how you qualify for FEIE???

nelsona
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Post by nelsona » Wed Apr 13, 2005 10:06 pm

By counting the dys in the following year.

It's pretty well defined in Pub. 54.



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pitchoune
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Post by pitchoune » Wed Apr 27, 2005 12:39 am

- What is the 40% witholding?
- If I'm neither a citizen nor a green card holder, is it better to leave the IRA in US? Will I still have a penalty when I reach retiring age.

nelsona
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Post by nelsona » Wed Apr 27, 2005 7:55 am

The 49% withholding would apply to any IRA withdrawal you make while a US non-resident, and are less than 60 years old. (30% tax and 10% penalty)

But this is merelt withholding tax, not your final tax payment.

You would still be able to file 10 1040NR and recover some of that tax, but not the penalty.

If you are ovr 60, there is no penalty.


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

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