Canadian Pension Lump Sum on T4A

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
overthehill
Posts: 7
Joined: Thu Feb 18, 2021 2:09 pm

Canadian Pension Lump Sum on T4A

Post by overthehill »

Hello,

I'm a non-resident of Canada living in the USA. I received a lump sum payout of an old pension plan from Canada, part of which was transferred to an RRSP (still had RRSP space available) and part of which was received in cash. Around 18 percent of the cash part was withheld for federal income tax, as my employer did not seem to properly classify me as a non-resident. I received a T4A for the full lump sum amount and an RRSP contribution slip for the part that was transferred.

Should I now file a non-resident tax return to reconcile this? I assume that 25% should have been withheld. Will I pay the difference, or will a graduated rate apply on the Canadian side?

Trying to sort this out before the US declaration side.

Thanks.
nelsona
Posts: 16793
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canadian Pension Lump Sum on T4A

Post by nelsona »

To correct and PAY extra non-resident tax, one must send a letter along with documentation to CRA with the extra remittance, which would make the total in this case to 25% of the gross.

Your contribution is unfortunately not much use to you -- even though it was transferred -- , since you have no other Cdn income, and you cannot claim it on your 1040.

If you have little other world income, you could try to file a 217 return in which you report all income and thus may reduce your Cdn tax.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
overthehill
Posts: 7
Joined: Thu Feb 18, 2021 2:09 pm

Re: Canadian Pension Lump Sum on T4A

Post by overthehill »

Thanks a lot.

Indeed, the RRSP credit isn't too exciting. The portion of the payment transferred into the RRSP is reported on the T4A and offset by an RRSP contribution.

Unfortunately my worldwide income is too high to do a 217 election.

Reviewing the documentation again, I see that the withholding on the portion of the transfer not transferred into an RRSP is actually ~28 percent. I earlier calculated this on the full amount of the transfer and thought it was too low. I realize this should have been at 25 percent Part XIII withholding... but it wasn't.

In this case, it seems like I maybe should file a return -- the effective rate works out to something like 24 percent when I input it in ufile.
nelsona
Posts: 16793
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canadian Pension Lump Sum on T4A

Post by nelsona »

No. To get monies back, you would file an NR7, with documentation. And wait for a refund.

Non-residents never report RRSP income on a return unless they are making a 216 or 217 election.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
nelsona
Posts: 16793
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canadian Pension Lump Sum on T4A

Post by nelsona »

I'm not sure that a distinction can be made that the 25% withholding should only apply to the "non-transferred" money, unless it was a properly documented direct transfer.
https://www.canada.ca/en/revenue-agency ... rring.html
You may have had to have paperwork filed by the pension to do this correctly.

A transfer done properly should not affect or require contribution limits.

You may be stuck now having to pay the 25% NR tax on the entire amount (which looks like how the withholding was calculated at the CDn resident rate on about $18K of gross withdrawal?) and report the entire amount on your US return. You would get credit for the 25% tax.

With no immediate tax benefit for the contribution, in either country.

If you were a resident this could get fixed on your normal return, but not as a non-resident.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
nelsona
Posts: 16793
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canadian Pension Lump Sum on T4A

Post by nelsona »

Form T2151 should have been filed by the pension.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
overthehill
Posts: 7
Joined: Thu Feb 18, 2021 2:09 pm

Re: Canadian Pension Lump Sum on T4A

Post by overthehill »

Hmmm...

I agree that the employer should have 1) made a XIII withholding on the cash disbursement and 2) requested a waiver on withholding XIII for the amount directly transferred from a registered pension plan into an RRSP.

Instead they made a regular income tax withholding on the cash transfer value. They requested permission not to withhold income tax on the transfer portion. They reported the transfer value and income tax withheld to me on a T4A.

It seems too late to fix this mistake on withholding type. It would stink if I was left paying the 25 percent on the full amount, given the intent of the income tax law seems to be to permit this type of transfer.

Alas... now I need to figure out what kind of form to file, if any...
overthehill
Posts: 7
Joined: Thu Feb 18, 2021 2:09 pm

Re: Canadian Pension Lump Sum on T4A

Post by overthehill »

You have given me some hope, as they did file a T2151. This was used to avoid withhold regular income tax rather than XIII, but seems to be the same form and process.
overthehill
Posts: 7
Joined: Thu Feb 18, 2021 2:09 pm

Re: Canadian Pension Lump Sum on T4A

Post by overthehill »

I take that back — the T2151 was not for the portion contributed to the RRSP... oh boy.
nelsona
Posts: 16793
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canadian Pension Lump Sum on T4A

Post by nelsona »

Then why did they file T2151?? There is no other reason that to indicate what portion of a withdrawal is directly transferred (and then what was not). You should have a copy of this form from the pension fund. You were supposed to fill out the form to make this request.

So the question remains: Did the firm make a direct transfer to your RRSP or not? If it did, then you can go to CRA, claiming that the pension fund did not file the T2151 correctly, and ask for relief from the 25% withholding on the DIRECTLY transferred amount (an restoration of your contribution room at the same time). Your T4A would only indicate the NON-transferred money (section 2 line 4). CRA will tell you how to proceed to determine the correct tax and in getting the money back to you.

But if you touched any of the money that was ultimately put in your RRSP, then it was not a direct transfer, and your situation is as I described in an earlier post. Your T4A would indicate all the withdrawn funds (and there would be no need to have filed a T2151 in that case).


I think you have to plead that the firm screwed up the paperwork.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
overthehill
Posts: 7
Joined: Thu Feb 18, 2021 2:09 pm

Re: Canadian Pension Lump Sum on T4A

Post by overthehill »

First off - this forum is awesome and thanks for your advice.

Here are the specifics:

I had a defined benefit pension that was paid out in a lump sum in two parts:

1. Amount within limits under the income tax act
1.1 - an in-limit amount directly transferred into a LRRSP
1.2 - an in-limit amount directly transferred into an RRSP

2. Amount out-of-limits under the income tax act
2.1 - the cash transfer portion with income tax withheld

Nothing was withheld on 1.1 and 1.2 and I never “touched” these funds directly at all. There was a direct transfer to my LRRSP/RRSP administrator.

I received a T4A for 1.2 and 2.1 and an RRSP receipt for 1.2.

As I understand it, I needed RRSP credit available to use to extend the in-limit transfer for 1.2.

The firm in this case was the federal government. :-) It took years to get this paid out due to this Phoenix pay system debacle which is why this residency mix up happened. So happy to move on!
nelsona
Posts: 16793
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: Canadian Pension Lump Sum on T4A

Post by nelsona »

The transfer to the RRSP should have been treated exactly like the transfer to the LIRA on a second T2151. No T4A, and certainly no tax withheld. It should not have resulted in the need for you to use contribution room, because it was a transfer.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
overthehill
Posts: 7
Joined: Thu Feb 18, 2021 2:09 pm

Re: Canadian Pension Lump Sum on T4A

Post by overthehill »

Thanks a lot. Sounds like I’ll need to try to get it straightened out with the CRA.
Post Reply