Late election to defer tax on ROTH

[bodgina]

I'm an American that lived in Canada for more than 10 years. In that time I did NOT file the election to defer tax on the ROTH IRA and have been paying taxes on it ever since. I also made a single Canadian contribution early on (big mistake, I know now). I read the information on the CRA site and it said though one should file by the first April following your first year, a late request could be made. So I have just sent off that letter.

1. What happens after you send the letter? Is there any confirmation from CRA about receipt or decision? With timely submission, is it automatically approved? With a late submission, is there a difference in processing? If there is communication, is it done through My Account on cra or via snail mail?
2. Do you just fill out the tax forms as if it has been received and approved?
3. When departing Canada, if you have successfully elected ROTH tax deferral, is the ROTH then also exempt from Departure Tax calculations?

My interpretation of the rules is that if my request is approved, everything I contributed in the US before I moved to Canada could be considered tax free going forward, and because I made a one time contribution in 2011, that portion of the ROTH will continue to have to be reported to CRA and taxed. And it seems that Departure Tax with regards to tax-deferred ROTH is a gray area (but I would hope with the election it could be excluded, like a 401k).

Further issue is that I have become Canadian, and left for a 3rd country temporarily (hence having to deal with Departure Tax), but plan to move back to Canada in a few years. So I would like to minimize the amount of Departure Tax as well as defer payment until such time as I do sell mutual funds/stocks/etfs and ROTH.

Depending on the answers to above, I will then have questions on how to deal with tax credit in US/Canada for when I do sell the mutual funds/stocks - as the gain period in Canada is only a portion of the actual real full period that it existed in the US (ie bought stuff in 2000, sell in 2040, but Canada is interested in my arrival date 2010 to departure 2021 values, and possibly when I move back again 2025-2040). However, as that is my future self, my current plan is to get an accountant in 2040 to deal with it (or are there further issues I should consider and talk to an accountant/financial advisor sooner?).

Thanks in advance for any insight.

[nelsona]

The letter is not much use to you, since you HAVE made a Cdn contribution, which essentially broke the Roth. It will not be an approval.

https://www.canada.ca/en/revenue-agency ... .html#toc6

The election os only available to those that have not made a Cdn contribution.

1. Yes, confirmation is sent, however it will likely include the fact that your Roth is broken, and that you must continue paying tax on the growth (until you leave canada).
2. AS I said, it makes no difference.
3. Good question. From other aspects of non-elected Roths (like inclusion in foreign assets), it would seem not to be excluded. The Roth is not considered a pension, due to the Cdn contribution.

Your error is not the absence of filing the election, it was the Cdn contribution.

Once you are in US, there is no tax on the Roth, so there will be no income on which to take a tax credit.

It is poissible, if you come back to canada, that you would get a "fresh start", erasing the Cdn contribution you made. That is FAR in the future.

[nelsona]

Really, your only other recourse is to claim ignorance back in the year that you made the contribution, that you were not aware of the Roth rules. I don;t know how lenient CRA woyuld be, particualrly since you knew enough to pay tax yearly.

[nelsona]

At a minimum, when returned to US, you should create a new Roth account at a new brokerage and move the funds there.
CRA views each Roth as a separate entity, so if the rukes then are as they are now, your election would be accurate in stating that no Cdn contribution had been made to THAT ACCOUNT.

[bodgina]

Thank you for your insight. I will have to consider moving the ROTH if I ever go back to the US before going back to Canada.

My hope in partial recognition of tax deferral came from reading 1.12 under Canadian Contribution:
https://www.canada.ca/en/revenue-agency ... .html#toc9

...which I thought would leave my pre-Canadian contribution as tax deferred,
and the Canadian contribution as taxed.

Section 1.13 also talks about the ROTH being split into 2 parts. I know it all depends on the election having being made in a timely manner but my hope was that even this late I could do something to avoid 25 more years of this mistake.

I will try to contact the CRA to see if there's any leniency in my case.

[nelsona]

This would have required that the election be made before the contribution.'
In any event., you have left canada. Pay your deemed disposition and forget about Canada/Roth.

[bodgina]

Just an update in case someone else is in my boat. I mailed the late election and then wrote to cra to find out about the process. They said on receipt of the election they would send me snail mail as acknowledgement. But due to pandemic/truck convoy/etc there is a backlog and so there is a delay in responding by about 6 months.

They also gave me hope that Folio section 1.12 and 1.13 might apply in my case even though I filed late, to be able to defer tax on the original US contributions (but of course continue to pay on the Canadian contributions).

It's just nice to know how this process works and the timeline of communication. I will file as I have in the past paying tax on it all, and then if I hear from them in a positive way file an amendment to get some money back. Hope this helps anyone in a similar situation!

[nelsona]

I thought you said you left canada. Why would you be reporting anything there once you leave?

[bodgina]

1. I left Canada so have to file for the year that I left when I was resident there (and would like to avoid paying on the ROTH gains at least partially if possible)
2. I will be coming back to Canada in a few years and would like to understand if I can make this one time election and have it apply when I return (or if I have to move the ROTH to a new account to have it treated separately as you suggested)...OR if I have to file again with the new residency start date.
3. Since I left I have to pay Departure Tax and would like to have the election apply to the ROTH so I don't have to pay the hefty tax on its deemed gains.

[nelsona]

I think we already discussed this. My opinion hasn;t cahnged.

I would be IMMEDIATELY after moving, be transferring my Roth to a new firm (to get your 5-year clock running). Then making the election when you next return to Canada. That would be unquestionably accepted by CRA, rather than an iffy opinion of one CRA telephlunkie.

As to deemed disposition, since you state that you have been paying each year, and that the pre-Cdn contribution amount is still protected, your CDn portion should not generate much tax.