Great, informative site - greatly appreciated!!
When I left Canada to live in the US my RRSP book value was 100k. Now it is 190k.
If I was to withdrawl the 100k that should be 'non-taxable' and claim it as line 16a (non-taxable) in the US, can I still claim a Schedule A deduction on line 8 'other taxes paid' for the 25k that Canada will withhold?
Schedule A deduction for Canadian withholding tax?
Moderator: Mark T Serbinski CA CPA
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Mark T Serbinski CA CPA
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Since your RRSP was never taxable either in the U.S. or Canada previously, the entire amount you withdraw will be subject to 25% withholding in Canada (assuming that you are a non resident of Canada), and it will also be taxable fully in the U.S.
As a general rule, you will be better off claiming a foreign tax credit for the withholding tax on form 1116.
BTW... in the event that you ever have any non taxable income from any source, the tax associated with it would NOT be creditable or deductible.
As a general rule, you will be better off claiming a foreign tax credit for the withholding tax on form 1116.
BTW... in the event that you ever have any non taxable income from any source, the tax associated with it would NOT be creditable or deductible.
Mark
Mark:
After looking at a previous thread last week, I see that nelsona has advised (regarding RRSP sistributions):
[i]I have seen a few methods:
1. Non-taxable first. If you have $100K non-taxable, the 1st $100K you take out is not taxable. This matches with how IRS treats the withdrawal of non-deductible IRA funds. The problem with this is that you get no credit for the Cdn tax you pay (only deduction). Works good for those able to withdraw RRSP tax-free in canada (ie. with a 217 return). I would suspect that the IRS would look more closely at one using this method.
2. Previously deferred income (taxable first). If you have been in US for some time, you will have deffered a certain amount of income by treaty every year. the same treaty states that that deferral only last until such time as the money is withdrawn, so you could report all growth as the taxable portion. This matches the treaty language best, and gets you some matching of foreign tax credits. It also allows you to keep a bigger non-taxable portion within your RRSP. So if you defferred $30,000 and withdrew $31,000, $30K is taxable, and your deffered balance is zero again. If you withdrew %28,000, its all taxable, and you still have $2,000 of deferred income left. This is the best method for californians, becuse of having to report income anyways. I have personally used this method for 5 years.
3. Proportional. Using your example, you would claim 8/18th of any withdrawl as taxable. Each year you would have to recalculate this percentage of course. This works best for those drawing of therir RRIFS for the next 30 years. yeilds good matching of credits. Mny accountants use this method for simplicity.
4. The General Rule method. Preferred by tax professionals (since they are the only ones that can figure it out) treats your RRSP like an annuity, and has certain charts and scales to determine what was taxable. Too complicated in my opinion. But is the one mentionned in Form 8891. Pub 939.
5. All taxable. The host of this believes that every penny of an RRSP withdrawl isd taxable. I know of no other cross-border type that subscribes to this belief. This makes anty RRSP withdrawl extremely expensive, as it adds bundles to your income, but only partially uses your tax credit, and kmakes your state tax bill bigger too. I only mention it for completeness.
The importnat thing is to keep good records of the book value when you became taxable, and to choose one method and stick with it.[/i]
Doesn't that suggest that (per option 1) I could withdraw only my 'non-taxable' portion from the RRSP (subject to 25% withholding tax in Can) to the US and plead the case that this should not be taxable in the US? Is there any way to 'get an opinion' from Uncle Sam before you do the deed?
Thanks Wil
After looking at a previous thread last week, I see that nelsona has advised (regarding RRSP sistributions):
[i]I have seen a few methods:
1. Non-taxable first. If you have $100K non-taxable, the 1st $100K you take out is not taxable. This matches with how IRS treats the withdrawal of non-deductible IRA funds. The problem with this is that you get no credit for the Cdn tax you pay (only deduction). Works good for those able to withdraw RRSP tax-free in canada (ie. with a 217 return). I would suspect that the IRS would look more closely at one using this method.
2. Previously deferred income (taxable first). If you have been in US for some time, you will have deffered a certain amount of income by treaty every year. the same treaty states that that deferral only last until such time as the money is withdrawn, so you could report all growth as the taxable portion. This matches the treaty language best, and gets you some matching of foreign tax credits. It also allows you to keep a bigger non-taxable portion within your RRSP. So if you defferred $30,000 and withdrew $31,000, $30K is taxable, and your deffered balance is zero again. If you withdrew %28,000, its all taxable, and you still have $2,000 of deferred income left. This is the best method for californians, becuse of having to report income anyways. I have personally used this method for 5 years.
3. Proportional. Using your example, you would claim 8/18th of any withdrawl as taxable. Each year you would have to recalculate this percentage of course. This works best for those drawing of therir RRIFS for the next 30 years. yeilds good matching of credits. Mny accountants use this method for simplicity.
4. The General Rule method. Preferred by tax professionals (since they are the only ones that can figure it out) treats your RRSP like an annuity, and has certain charts and scales to determine what was taxable. Too complicated in my opinion. But is the one mentionned in Form 8891. Pub 939.
5. All taxable. The host of this believes that every penny of an RRSP withdrawl isd taxable. I know of no other cross-border type that subscribes to this belief. This makes anty RRSP withdrawl extremely expensive, as it adds bundles to your income, but only partially uses your tax credit, and kmakes your state tax bill bigger too. I only mention it for completeness.
The importnat thing is to keep good records of the book value when you became taxable, and to choose one method and stick with it.[/i]
Doesn't that suggest that (per option 1) I could withdraw only my 'non-taxable' portion from the RRSP (subject to 25% withholding tax in Can) to the US and plead the case that this should not be taxable in the US? Is there any way to 'get an opinion' from Uncle Sam before you do the deed?
Thanks Wil
As I pointed out, Mark is the ONLY cross-border expert using this option. It results in TONS more US tax, and the other methods have been used without issue. RRSPs are NOT foreign employer-sponsored pensions, but that is a debate that you do not have to worry youself over.
The answer to your question is YES. You can report '0' net foreign income and stil claim the foreign tax as a deduction.
There is no requirement that ANY income be reported for there to be a legitimate foreign tax deduction (not so for credit). So long as the foreign tax is an income tax, and is legimately owed and paid, you can use it. The only stipulation is that you don't deduct tax for foreign income that you exclude by the FEIE rules (Form 2555). This does not apply to you. Beware that it most likely would result in AMT kicking in, so don't go overboard.
In my opinion, you would be better off using my Option (3), since you did not fully collapes your RRSp, and thus report about $45,000 as taxable on line 16b. This will leave you with non-taxable withdrawls in the future. You are entitled to $100,00 of tax-free withdrawls from your RRSP; I would spread it out over the lifetime of your withdrawals.
The answer to your question is YES. You can report '0' net foreign income and stil claim the foreign tax as a deduction.
There is no requirement that ANY income be reported for there to be a legitimate foreign tax deduction (not so for credit). So long as the foreign tax is an income tax, and is legimately owed and paid, you can use it. The only stipulation is that you don't deduct tax for foreign income that you exclude by the FEIE rules (Form 2555). This does not apply to you. Beware that it most likely would result in AMT kicking in, so don't go overboard.
In my opinion, you would be better off using my Option (3), since you did not fully collapes your RRSp, and thus report about $45,000 as taxable on line 16b. This will leave you with non-taxable withdrawls in the future. You are entitled to $100,00 of tax-free withdrawls from your RRSP; I would spread it out over the lifetime of your withdrawals.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Sorry, I re-read your post. Wasn't sure if you sais that you withdrew only $100,000 or if you withdrew all of it.
In any event, during your lifetime in US you will be able to exempt $100,000 from taxation, and there are the 4 aways I outlined above. Of course if you collapsed it all, its simple $190,000 on 16 a 100,000 on 16b, and then do your return either way (Schedule A deduction, or Form 1116).
for 1116 you will be limited to the $100,000 taxable portion, but can use all the tax. You will see though that only about 50% of the tax you paid will get credited, maximum.
So, so it both ways and see.
In any event, during your lifetime in US you will be able to exempt $100,000 from taxation, and there are the 4 aways I outlined above. Of course if you collapsed it all, its simple $190,000 on 16 a 100,000 on 16b, and then do your return either way (Schedule A deduction, or Form 1116).
for 1116 you will be limited to the $100,000 taxable portion, but can use all the tax. You will see though that only about 50% of the tax you paid will get credited, maximum.
So, so it both ways and see.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing