IRA to Roth IRA and canadian tax credit

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pl0910001
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Joined: Fri Jun 21, 2019 6:33 pm

IRA to Roth IRA and canadian tax credit

Post by pl0910001 »

Working in USA on TN visa and will cease to be a canadian resident on august 1st of 2020. will owe canadian taxes on the portion of my salary made prior to august 1, 2020, correct? If that's the case, as i will become a resident in a state with no state tax, is it a good idea to do a IRA to Roth IRA conversion on a sum which will essentially bump up my US taxes owed in order to fully take advantage of the additional canadian taxes paid, and therefore, the foreign tax credit for 2020 on my 1040? Any other things to be aware of when departing from canada in the middle of a tax year? Thanks
nelsona
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Re: IRA to Roth IRA and canadian tax credit

Post by nelsona »

So I assume you have an existing IRA?
It is good to make any IRA withdrawal (be it to cash or to a Roth) while not a Cdn resident. NEVER do a IRA to Roth conversion while in Canada.

As to the idea of increasing your overall tax rate just to increase the portion of US tax that you can use towards the Cdn taxes you will owe US wages you will report on your Cdn departure return (i'm out of breath)? I guess, if your intention all along was to do the conversion, but I wouldn't do it "just" for that reason.

But looking at your post, you are wondering if that will help on your 1040. It won't, since you can only get tax credit for the Cdn taxes you pay on Cdn-source income, not US-source.
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pl0910001
Posts: 23
Joined: Fri Jun 21, 2019 6:33 pm

Re: IRA to Roth IRA and canadian tax credit

Post by pl0910001 »

Hey Nelsona
Yes, the IRA exists already. I do plan to do small IRA to Roth IRA in order to get some money moved over at the lower USA tax rate prior to returning to canada in XX years.
to clarify, any canadian taxes i pay on my US income is not deductible as a foreign tax paid on my 1040? i can only claim US taxes paid on my US income on my canadian tax return?
in terms of departing Canada and filing my final tax return. I would have to use a paystub as my proof of salary paid up to the date i leave Canada, correct? As my W2 will have a full year of salary on it.
I appreciate the helpful advice.
pl0910001
Posts: 23
Joined: Fri Jun 21, 2019 6:33 pm

Re: IRA to Roth IRA and canadian tax credit

Post by pl0910001 »

"As to the idea of increasing your overall tax rate just to increase the portion of US tax that you can use towards the Cdn taxes you will owe US wages you will report on your Cdn departure return (i'm out of breath)? I guess, if your intention all along was to do the conversion, but I wouldn't do it "just" for that reason."

i guess this brings up another question. As I asked, do i include a payslip to show what my wages are on the date i become a non-resident? Am I able to use all US taxes paid the the entire year when calculating foreign tax credit on canadian tax return? or can i just use taxes which would be owed based on my wages up to the day i left canada?
Same goes for 401k contributions. I can use them and get credit for RRSP contribution on my canadian tax return, but any made after i become a non resident, can those be used toward RRSP contributions too?

thanks
nelsona
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Re: IRA to Roth IRA and canadian tax credit

Post by nelsona »

The taxes you pay in canada are NOT eligible for foreign tax credit on 1040 (form 1116).
You won;t need to include the paystub. HJUst track it yourself.
The US taxes you include on your CDn return will be the PRORATED portion of your US taxes calculated on your 1040, if you report 30% of your US income on your CDn departure return, then you can only clim 30% of the overall US tax you calculate (plus FICA of course).

Eligible 401(K) contributions are determoned on a special CRA form, and have nothing to do with RRSP contributions, other than perhaps reducing the contribution room in future years.
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
pl0910001
Posts: 23
Joined: Fri Jun 21, 2019 6:33 pm

Re: IRA to Roth IRA and canadian tax credit

Post by pl0910001 »

The US taxes you include on your CDn return will be the PRORATED portion of your US taxes calculated on your 1040, if you report 30% of your US income on your CDn departure return, then you can only claim 30% of the overall US tax you calculate (plus FICA of course).

Hey Nelsona
a follow up on that. can i claim my full 401k contribution for 2020 (up to my rrsp limit for 2020) or only claim a pro rated 401k contribution based on the above math? In this case , i would just contribute the top up directly into my rrsp if required in order to fully contribute to my rrsp in my departure year.
thanks
nelsona
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Joined: Wed Oct 27, 2004 2:33 pm
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Re: IRA to Roth IRA and canadian tax credit

Post by nelsona »

I believe you would only be able to clim the 401(k) contributions that were made WHILE resident in canada. So contribute as much as you want BEFORE leaving, if you wnt it to be included on your CDn return.
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
pl0910001
Posts: 23
Joined: Fri Jun 21, 2019 6:33 pm

Re: IRA to Roth IRA and canadian tax credit

Post by pl0910001 »

Hey Nelsona, a follow up question regarding claiming a foreign tax credit. I am currently filling out taxes for 2020. I will pay canadian taxes on a proportion of my salary based on the number of days i was present in the USA vs a resident of Canada. And also prorate the taxes paid to USA as a foreign tax credit. The issue is that i am married filing jointly for 2020 in USA. Do i simply divide the taxes paid in half, or is there some other formula that looks at actual salary ratios and uses that as a multiplier against taxes paid? Thanks
nelsona
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Re: IRA to Roth IRA and canadian tax credit

Post by nelsona »

The proportion of wages you report in canada is based on the days you WORKED in canada, and you cannot claim any tax credit in canada on that portion of your salary, since it is Cdn-sourced. If there are days you worked IN US, that you must include, only that portion is eligible for Tax credit, and you would then prorate that portion over your entire US gross income to determine the US tax available for credit, Doesn;t matter if you file jointly, there is still only one value for gross joint income. and one value for total tax.
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
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