Government Employee Pension Transfer Value
Moderator: Mark T Serbinski CA CPA
Government Employee Pension Transfer Value
I'm a Canadian citizen working in the US and will hopefully soon get a green card. Clearly if all goes well I intend to remain in the US for the foreseeable future. My wife is about to retire from the Canadian Government (she has been on a leave of absence) When she retires she intends to have her pension converted to a transfer value and deposited to a LIRA. Since we are already in the US and reporting as US residents how does this transfer get documented with the IRS? Do we need to pay any taxes on any or all of this money or is it covered by the government worker article in the US/Canada tax treaty? What about her severance and or additional money beyond the $109K limit on what she can transfer (total transfer is about $150K and the limit is about $109K)?
Pension:
Any money she transfers to her LIRA will not be reported to IRS, but the LIRA will be fully taxable when withdrawls are taken, and the LIRA is subject to all the reporting/deferral requirements like any other RRSP.
Severance (Retirement allowance): Even though some of her severance can be put in an RRSP (based on years worked before 1996) this means nothing to IRS, thus the entire amount will be reported as wages on 1040.
So putting some of this money in an RRSP will not reduce your overall tax burden on that money, you will be reducing your Cdn tax, but this will merely reduce your foreign tax credit on 1040. The money that is put in the RRSP from this severance would be considered by IRS as 'investment' in the RRSP and that portion would eventually come out IRS tax free when you begin withdrawing from it.
By the way, since she is a non-resident of canada, the cdn tax on the taxable portion of her settlement (ie. the part that is not put in a LIRA or RRSP) should be a flat 25%. She could then also run a 217 election on her world income at year end to perhaps reduce the final Cdn tax below this 25%.
<i>nelsona non grata... and non pro</i>
Any money she transfers to her LIRA will not be reported to IRS, but the LIRA will be fully taxable when withdrawls are taken, and the LIRA is subject to all the reporting/deferral requirements like any other RRSP.
Severance (Retirement allowance): Even though some of her severance can be put in an RRSP (based on years worked before 1996) this means nothing to IRS, thus the entire amount will be reported as wages on 1040.
So putting some of this money in an RRSP will not reduce your overall tax burden on that money, you will be reducing your Cdn tax, but this will merely reduce your foreign tax credit on 1040. The money that is put in the RRSP from this severance would be considered by IRS as 'investment' in the RRSP and that portion would eventually come out IRS tax free when you begin withdrawing from it.
By the way, since she is a non-resident of canada, the cdn tax on the taxable portion of her settlement (ie. the part that is not put in a LIRA or RRSP) should be a flat 25%. She could then also run a 217 election on her world income at year end to perhaps reduce the final Cdn tax below this 25%.
<i>nelsona non grata... and non pro</i>
The Canada/US tax treaty article XIX says:
Article XIX
Government Service
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Remuneration, other than a pension, paid by a Contracting State or a political subdivision or local authority thereof to a citizen of that State in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in the State. However, the provisions of Article XIV (Independent Personal Services), XV (Dependent Personal Services) or XVI (Artistes and Athletes), as the case may be, shall apply, and the preceding sentence shall not apply, to remuneration paid in respect of services rendered in connection with a trade or business carried on by a Contracting State or a political subdivision or local authority thereof.
Wouldn't this article apply to the severance pay since it is being paid as a result of my wife having been employed by the Government ("in the discharge of functions of a governmental nature". I'm not as certain about how the lump sum tranfer value would be treated since it is effectively replacing a pension benefit, albeit in a deferred form, it may be treated as a pension in terms of the tax treaty. Appreciate any help you can provide with this.
Article XIX
Government Service
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Remuneration, other than a pension, paid by a Contracting State or a political subdivision or local authority thereof to a citizen of that State in respect of services rendered in the discharge of functions of a governmental nature shall be taxable only in the State. However, the provisions of Article XIV (Independent Personal Services), XV (Dependent Personal Services) or XVI (Artistes and Athletes), as the case may be, shall apply, and the preceding sentence shall not apply, to remuneration paid in respect of services rendered in connection with a trade or business carried on by a Contracting State or a political subdivision or local authority thereof.
Wouldn't this article apply to the severance pay since it is being paid as a result of my wife having been employed by the Government ("in the discharge of functions of a governmental nature". I'm not as certain about how the lump sum tranfer value would be treated since it is effectively replacing a pension benefit, albeit in a deferred form, it may be treated as a pension in terms of the tax treaty. Appreciate any help you can provide with this.
What I outlined previously would definitely be the case for a non-Gov't job.
The overlooked fact that this was Gov't job probably does make the severance portion non-taxable in US (you would use an 8833 to exclude it using the article you mentionned).
The pension roll-over, since that is exactly the rest of the incoem is, is already ignored by normal pension roll-over rules, so is not a concern.
Her lump-sum will have 2 components for Cdn purposes, pension, and severance (she will probably get 2 stubs), so it will be easy to know what portion is being 'ignored' by IRS, and what portion is being 'excluded' by treaty.
Even the Cdn treatment will be different for the 2 components, as the pension money will have to be directly rolled to LIRA, but the severance can either be paid out and tax, or partially roll-over without tax to an RRSP, depending on years of service.
Nothing would change from what I said above with respect to the RRSP treatment for either the pension or the severence contribution.
Since this would be excluded income from IRS point of view, no foreign tax deduction (or credit) would be available for any Cdn tax paid.
<i>nelsona non grata... and non pro</i>
The overlooked fact that this was Gov't job probably does make the severance portion non-taxable in US (you would use an 8833 to exclude it using the article you mentionned).
The pension roll-over, since that is exactly the rest of the incoem is, is already ignored by normal pension roll-over rules, so is not a concern.
Her lump-sum will have 2 components for Cdn purposes, pension, and severance (she will probably get 2 stubs), so it will be easy to know what portion is being 'ignored' by IRS, and what portion is being 'excluded' by treaty.
Even the Cdn treatment will be different for the 2 components, as the pension money will have to be directly rolled to LIRA, but the severance can either be paid out and tax, or partially roll-over without tax to an RRSP, depending on years of service.
Nothing would change from what I said above with respect to the RRSP treatment for either the pension or the severence contribution.
Since this would be excluded income from IRS point of view, no foreign tax deduction (or credit) would be available for any Cdn tax paid.
<i>nelsona non grata... and non pro</i>
Now that you have given me this information where can I actually open a locked in RRSP since my wife is resident in the US nobody seems to be able to open an account for her to transfer the funds into. TD Waterhouse says they can't open a new account and since her existing RRSP account is not locked in she can't roll the locked in transfer sum to that account.
Thans you've been very helpful. I did try back at TD Waterhouse and as you described you get different answers depending on how high up the food chain you work. Initially they told me I shouldn't even be trading funds on my existing account and I explained to the guy on the phone he was misinformed and should check with his supervisor. Sure enough after talking with him (maybe it was a her?) he confirmed (as you stated) that as long as you don't live in one of the 3 states you mentioned you are fine. I'm waiting for a call back on actually opening a NEW account but hopefully I'll track someone down that has the answer I want and stick with them through the entire process. Thanks again,