NON REPORTING OF 401K Withdrawls

[workingintheus]

While working in the US between 1996-2001, 401K contributions made were not deductible in Canada (therefore the monies were essentially tax paid dollars in Canada). In 2003 after returning to Canada to work the 401K dollars were withdrawn well below the age the 65, the value of the withdrawl including employer match were below employee original contributions. These amounts were not reported in Canada when withdrawn as income in Canada as they were already tax paid dollars in CANADA. The CRA has subsequently sent a letter indicating that they are aware of the monies withdrawn from the US and why they had not been reported in Canada.

Your thoughts on whether taxes should be paid again in Canada?

When the funds were withdrawn from the US. The US withheld 20% which was unrecoverable as there was no longer foreign income to offset

[nelsona]

Ah... "essentially" does not mean "actually" in your case does it.?

If not. then the money is fully taxable in Canada. Unl;ess you actually reported the contributions as income, you cannot exempt any of the proceeds.

If, however, you lived in Canada all that while, You should have reported the income with a note indicating that it was not taxable, due to it being the return of your previously taxed contribution. You would have detailed records of YOUR contributins, your firms contributions, and the final proceeds. If you contributed more than you ultimately withdrew, you have no
Cdn liability,

It does highlight however why one should not participate in 401(k) while residing in Canada, as you end up being fully raxed going in (in Canada) and fully taxed coming out (in US).

For US, I assume that you were above 59.5, otherwise you failed to pay the early withdrawl penalty in US. Methinks the 20% withdrawal tax was based on them thinking you were a US resident.

You probably could have reduced the 20% tax by filing a 1040NR, and calculating the tax. It depends how large the You may still be able to do this. I

[nelsona]

Just to clarify:
If, however, you lived in Canada all that while you were working, You should have reported the income (in the year you withdrew it) with a note indicating that it was not taxable, due to it being the return of your previously taxed contribution. You would have detailed records of YOUR contributins, your firms contributions, and the final proceeds. If you contributed more than you ultimately withdrew, you have no
Cdn liability

[workingintheus]

Thanks Nelsona,

We spoke with the CRA Foreign Reporting today who have advised they will assess the 2003 full amount withdrawn from the US on the Canadian return and it will be our responsibilty to appeal to a different division to have the taxes refunded, based on the contributions to 401K already having been taxed in Canada as non eligible deductions.

Yes we have detailed records of contributions, and yes the amount withdrawn was less that personal contributions. I find it frustrating that although the person we spoke with at CRA understood and agreed no taxes were due we are still required to remit and appeal to collect

Thanks again

[nelsona]

This is good news.

To assist you in making your claim, remember 2 things;

Your 401(k) is recognized as an Employer Benefit Plan (EBP). Very important to use this term.

and that ITA (6)(1)(g)(ii) allows exclusion of income that is considered employee contribution.

Look at IT-502 para. 19, and, if you can find it, ruling CRA 2000-001819.

Now you just have the issue of the early withdrawl penalty in US.

[nelsona]

.. and just for my own peace of mind.

Did you or did you not report these contributions as earning on your Cdn tax return, during 1996-2001.

If you did, you might want to include copies of your W-2 and T1s to show that you did just that.

Reviewing your posts, you seem to have been very careful never to say whether or not you ACTUALLY declared the income. It is very important that you did.

I'm getting the sense that you weren't living in Canada during those years, which would make your entire 401(K) taxable.

[workingintheus]

During 1996-2001 these contributions to 401K were in fact reported as earnings in Canada (W2 and T1 to support).

Living in Canada the entire time

At the time the 401K was withdrawn. It was NOT reported on the 2003 Canadian tax return, with the understanding that it had already been tax. (ie. personal contributions during 1996-2001 > actual amount withdrawn) early withdraw penalty was in effect.

Now going to pay the tax and appeal to try and recover

Thanks

[nelsona]

So they want the tax first, and then you appeal?

I would want to appeal first, methinks.

Had you added a note back in 2003 you would have been fine... now they will 'investigate'

[workingintheus]

reverse onus at its best!!

Thanks for your input