Implications of Canadian Contribution in Roth 401k

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johnnyappleseed
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Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed »

I recently began working in the United States on OPT as a Canadian expat. This being my fifth year on an F1 visa, I am still considered a Canadian resident for tax purposes, but will become a US tax resident starting January 2021. When I began my employment, I initially set up a Roth 401k contribution amount but changed it within a week upon seeing that Canada takes a pretty hardline stance on so-called "Canadian contributions", where the Roth 401k ceases to become a pension as soon as any contributions are made while a Canadian resident (see: https://www.canada.ca/en/revenue-agency ... no-43.html). This document makes it sound like all future contributions, accruals, and earnings on my Roth 401k plan will be taxed in Canada once I move back regardless of whether I make them as a US resident or not, since I cannot file the election to defer taxation once a Canadian contribution has been made. Unfortunately, I learned that my contribution rate change would only reflect after 1-2 pay periods, so it happened that 20% of my end of August pay check went into the Roth 401k (note: another 20% went into the traditional 401k, but it seems that this account will be exempt from taxation).

Per the document, it seems like there is nothing I can do to avoid being taxed on all future contributions and earnings except if I opt to become a US resident for this tax year (which I would rather not to do as it would be cost me a few thousand dollars). Are there any workarounds here aside from becoming a US tax resident? Is immediately withdrawing the contribution enough to say I did not make a contribution for all intents and purposes? Is there some sort of form I can file with the IRS to remove the contribution (though I didn't find any on the website)? Can I just avoid mentioning this one-off contribution when I file the election upon returning to Canada and say my first real contribution began in January 2021? Can I rollover the funds to a Roth IRA prior to becoming a resident of Canada and thus avoid having made a Canadian Contribution in my Roth IRA? Should I just avoid any contributions to the Roth 401k and only use the traditional 401k? Note that I hope to stay in the US for several years before returning to Canada.
nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

IRS doesn't get involved in funding or withdrawing these accounts. If you wish to redirect those deposits to your 401(k), you will need to do this through the plan admin, if it is even possible.

Just to review the tax situation for Canada for these accounts:
Your 401(k) contribution is deductible in Canada, you will need to file a form with your Cdn tax return.
Your 401(k) withdrawals, made when you are a Cdn resident, will be fully taxable in US and Canada, with canada giving you credit for US taxes paid.
Your Roth401(K) will be treated like an ordinary account in canada, gains, dividends etc being taxed each year, uless you can reverse this initail contribution.

I would be exploring the notion of declaring Cdn non-residency when you started working, assuming you have no residential ties in canada. Not sure what your situation would be that would cost you more now than if you declare for Jan 2021. If you remain Cdn tax resident, you will need to report and pay tax in Canada on your wages, so you might want to avoid this. This would not impact your tax status in US.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
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nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

btw, transferring the funds to another Roth later would not remove the stigma of a Cdn contribution.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
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johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed »

The reason it would cost me more to declare US residency is because I would have to pay FICA tax. In Canada, though, I have tax credits that can be used to offset the extra tax burden. If I intend to stay in the US a lot longer, I figured it would make sense to use those tax credits sooner rather than later to avoid depreciation from inflation. On top of that, I just liquidated my TFSA this year, but I imagine I would now be taxed on any capital gains in the US. And on the Canadian side, I would have to pay a 1% tax for each month a 2020 contribution remained in my account.

Unfortunately, it seems like the Roth 401k contribution is irreversible, even though I had never intended for it be made. If you have further guidance on this I would greatly appreciate it.
johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed »

Another issue is that I would not be able to claim my 2020 tuition amount on my Canadian tax return for future carryover if I am not a Canadian resident (though I am not entirely sure about this, perhaps CESB disbursements count as Canadian-sourced income); in the United States, I would not be eligible to claim this tuition amount regardless.
nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

As i said, becoming Cdn non-ressisnt would not immediately impact your US immigration status, so that is not a worry. Besides, you would get back more SS when you retire, so beginning to contribute in 2020 is beneficial to you. But, again, making your residncy end date in canda has no impact on US status or filing.

As to using tuition credits, since you are now earning wages in US, your US tax credit in Canada supersedes your tuition credits, so you can't use these anymore on any event.

Your best bet is to make your work-starting date your departure date, assuming again, that you don't have residential ties in Canada. Ypu don't have to srat non-residncy on Jan 1 or dec 31, your work date makes more sense, as you stopped being a student.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

What's the point of keeping Cdn residsncy just to use tuition tax credits, when you can avoid tax altogether by being non-resident.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed »

Reading more into it it seems that I would be forced to use all the tuition tax credit before being able to use foreign tax credit, the latter of which I would not be able to carryover. So it would definitely make sense to classify myself as a US tax-resident to avoid losing this amount in credit. However, I actually don't think I am able to qualify as a US tax resident as I cannot count exempt days from my F-1 visa to satisfy the requirements of the first-year choice election as noted in pub. 519.
nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

Again, if you do not have Cdn residential ties, you can declare yourself non-resident of canada. Period. It has nothing to do with US tax status, particularly since you are now working, not a student.

Your F1 (OPT) status prevents you from counting days, yes. Good! it means you can file 1040NR for one more year, and avoid FICA. Good!

But declaring CDn non-residency doesn't change any of this.

So, what are your ties in Canada, after five years abroad? There is a huge gray area on the foreign residential ties required for F1 status, and the ties required to maintain Cdn tax residency. Most in your situation declare Cdn non-residency after a couple of years on F1, unless they are in US as part of a Cdn study program.
If you were splitting your time between US and Canada, then, I would agree that the fact that you are not yet considered US rax resident would make a difference. But if you are 100% in US, and have no ties in canada, you are a CDn tax non-resident, by any definition, as long as you ACT that way, which means giving up any GST/CCTB etc, which you can easily do based on work starting date.

And just to add another wrinkle: ALL CDns, whether they set foot in US or not are allowed to file a 1040 instead of a 1040NR, if it is tyo their advantage, by treaty. As long as you fulfill all the filing requirements of 1040, reporting world income for the entire year.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

See
https://www.canada.ca/en/revenue-agency ... anada.html
which certainly allows for Cdn students abroad to become non-resident. Do not file NR73 unless asked by CRA.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed »

I see, that's great! For some I was under the impression that I was not allowed to be a non-resident of the two countries simultaneously. Thanks for your help.
nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

You are in transition.
A person leaving canada in, say, August, files as departing in August from canada, but still files a 1040NR for the same year, since he has not met SPT. He *can* file 1040 if it is beneficial, but, technically for the period Aug-Dec, he files as non-resident of both countries.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed »

Hi nelsona, sorry to revive such an old thread, but I was hoping you might assess whether or not I actually qualify for non-residency, as well as the tax implications that non-residency might have. It seems like the burden for declaring non-residency is quite high in ambiguous cases, but maybe you could shed some light given the context: I did not enter Canada at all during 2020, I didn't have my own Canadian residence (though I did maintain a mailing address through my parents' home), I still had Canadian bank accounts, I received CERB/CESB benefits, I was a 4th year student in a US university for the first-half of the year living on-campus, I started renting my own place after graduation, I gave up my Provincial Driver's License after I started renting, I started employment after graduation, I made TFSA contributions up until I started working. I think those details encompass the nature of my case fairly well.

The link you sent me says "If your stay abroad is temporary and you have kept significant residential ties in Canada, you will generally be considered a factual resident of Canad". I'm wondering if my intent to reside in the US longer actually matters, as the nature of the F-1 OPT visa is that it is temporary. Furthermore, maintaining a TFSA, receiving CERB/CESB, having a Canadian DL until half-way through the year, being a student living on-campus (therefore implying a "true residence" off campus, my Canadian one, even though I don't really live there) -- these can all point to my having residential ties, although I don't know if they qualify as significant.

Of course, if I do declare non-residency, I would have to pay penalties for my TFSA, and probably pay back CERB and CESB too (CERB because residing in Canada is one of the eligibility requirements and CESB because one of the conditions for being unable to find work would require me going back to Canada to work in the interim period between my graduation and OPT employment start date, which was prevented by COVID-19, though there is kind of a circular logic to this that might let me keep the CESB distributions as I did not end up in Canada).

Nevertheless, while I certainly don't think in 2020 Canada was "the place where in the settled routine of his life he regularly, normally or customarily lives" and "the degree to which a person in mind and fact settles into or maintains or centralizes his ordinary mode of living", I did find this excerpt: "When you leave Canada to settle in another country, you usually become a non-resident for income tax purposes on the latest of: the date you leave Canada, the date your spouse or common-law partner and/or dependants leave Canada, the date you become a resident of the country you settle in." (From the CRA website). That latest date is 01/01/2021, which implies I was a factual resident for 2020.

If I were a factual resident for 2020, and filed as such, I'm still not sure whether or not my Roth 401k contribution would be a so-called "Canadian contribution". While the sole condition for a Canadian contribution is that you are a "resident of Canada", I'm not sure whether or not I can actually break down the factual residency into the two parts of the year, the first before I started working and had stronger ties to Canada, and the second after I started working and had almost no ties to Canada other than the fact that my OPT is temporary. I haven't seen any guidance on this but I'm not particularly optimistic. If that is the case I should immediately stop making Roth 401k contributions (if I plan to or am forced to re-enter Canada at some point), and also report those contributions and income accrual on my 2020 tax return, right? Also, what if I made a Roth IRA contribution in 2021 backdated for the previous year 2020? When I made the contribution I was a non-resident, but I was making it for a year I was a resident. This seems like a technicality that would get counted as a "Canadian contribution" in the spirit of things, but I'm not 100% sure.
nelsona
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Re: Implications of Canadian Contribution in Roth 401k

Post by nelsona »

I thought we already determined that because you were F1, you fail to meet US tax residency (since you cannot count days toward SPT), so you remain Cdn resident throughout. Intent to remain abroad doesn't even come into play, until your days start to count. You never really left.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
johnnyappleseed
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Re: Implications of Canadian Contribution in Roth 401k

Post by johnnyappleseed »

I was going based off of "But if you are 100% in US, and have no ties in canada, you are a CDn tax non-resident, by any definition, as long as you ACT that way, which means giving up any GST/CCTB etc, which you can easily do based on work starting date." This seems independent of my US tax residency status.
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