Tax "buckets" when retirement in Canada

DonMurphyCanada · Post by **DonMurphyCanada** » Sun May 25, 2014 1:11 pm

I am a Canadian Citizen who married US Citizen. I grew up in Canada moved to and worked I worked for exactly 40 quarters in US.
Moved back to Canada (I surrendered my green card at the border) where wife will have worked for 26 years when we plan to retire at age 60. I will have worked in Canada well over 40 years at that point.

For planning purposes (paying income tax) at retirement age, can I envision 3 buckets (one Canadian, one US and one US_Retirement) that is basically taxable income when in retirement (I realize some of these income sources won't kick in for several years after hitting 60.)

The Canadian bucket (SocialSecurity, PrivateCanadianRetirementPlan, 401K distributions, RRSP distributions) will be taxed at my nominal Canadian tax rate
The US bucket (* nothing) will be taxed at my nominal US tax rate
The US_Retirement bucket (PrivateCanadianRetirementPlan, 401K distributions, RRSP) will be taxes at 15%

* OAS, CPP and Social Security are exempt from US tax through tax treaty 8833

So really it looks to me like all my US tax will be payable at 15% and my Canadian tax rate will be derived from the bracket associated with adding up m Social Security, 401K and RRSP distributions.

Do I have this correct?

nelsona · Post by **nelsona** » Mon May 26, 2014 8:09 am

Yes. Your SS however will be subject to WEP and will be reduced.

Just as a reminder, even if you had not reached 40 quarters (in fact even with just 6 quarters) you would be eligible for some SS.

If you are non GC, you probably won't even file in US, if your accounts get withheld properly. Everything will be taxed in Canada, with the US tax withheld to be used as a credit. Your wife will have to report all her income in both countries, and exclude her SS.

Also, simply handing back GC does not absolve you of US taxation. You will need to file a form with IRS as well.

nelsona · Post by **nelsona** » Mon May 26, 2014 8:22 am

Ignore what I said about noy filing in US, you will simply file 1040NR to report your retirement income and the flat tax that was withheld.

DonMurphyCanada · Post by **DonMurphyCanada** » Mon May 26, 2014 9:21 am

So file 1040nr and fill in the flat tax portion. Ok thanks!

Would I include my private pension distributed from a company in Canada in that income? If so would that income also be included in the FlatTax bucket (renamed from RetirementBucket above?

Also there is potential for me to have stocks TSE at the time. Would those also go on the 1040nr in FlatTax bucket?

Thanks for the information.

Don

nelsona · Post by **nelsona** » Mon May 26, 2014 10:04 am

1040NR is for US-sourced income only. Nothing else.

Forget the bucket concept. You have one bucket: All income is taxable in Canada. Your US pension and nothing else is also taxable in US.

DonMurphyCanada · Post by **DonMurphyCanada** » Mon May 26, 2014 10:59 am

Awesome this is so helpful. Thanks Nelson. To summarize.

In retirement when living in Canada I will file

1) Canadian tax return with all my income. I will get a credit for the 15% flat tax I paid on my 401k distribution. WEP rules will apply to social security cpp and OAP.

2) US tax return 1040nr with my 401k distribution. No social security, OAP , cpp, or private retirement paid out in Canada will be listed.

In retirement when living in Canada my wife will file

1) Canadian tax return with all of her income . She will get a credit for the 15% flat tax she paid on her 401k distribution

2) US tax return with all her world income.
OAS, cpp and social security "disclosed" and excluded by treaty XVIII paragraph 5

rlb · Post by **rlb** » Mon May 26, 2014 12:39 pm

Corrections (to be verified by nelsona):
(1) OAS will not influence WEP, just CPP
(2) Your wife will file a 1040 on her world income, as you say, but this will determine the tax rate, not 15%. If the rate is less than 15%, Canada will give her a foreign tax credit for all of it (as applied to the US income), but if it is more than 15%, Canada will give her a tax credit for only 15% and she will have to file form 1116 "Re-sourced by treaty" to reduce the US tax on the 401(k) to 15%. She will also file another 1116 to get a US foreign tax credit on the Canada sourced income.

nelsona · Post by **nelsona** » Mon May 26, 2014 3:04 pm

rlb is correct.

DonMurphyCanada · Post by **DonMurphyCanada** » Mon May 26, 2014 4:59 pm

Well ok. This really is easy then.

As Nelson indicated everything is in one bucket. This really boils down to applying the tax bracket for all the income you are getting (All of it) and then using the Canadian tax rate. I tallied up all income sources individually and we are just shy of the ceiling of the first tax bracket (BC ... 20.6 % for 2014 < $37606)

I have no more questions on this - thanks!

nelsona · Post by **nelsona** » Mon May 26, 2014 9:15 pm

And what will your effective tax rate be. 20.6% is probably the marginal rate. Your average tax rate will be about 14 %, which means that the 15% US tax will be almost used totally, you will pay an extra 1% to Canada, so 15 + 5.6 + 1= 21.6%.

That's pretty good. If you were making less your US income would be hurting you

DonMurphyCanada · Post by **DonMurphyCanada** » Mon May 26, 2014 10:25 pm

Thanks for another ah-hah! Was not even paying attention to that but that made me go refresh my limited formal financial training.

https://www.mint.com/blog/planning/the- ... ates-1212/

Thanks again Nelson!

lufei · Post by **lufei** » Fri Jun 06, 2014 5:46 am

but if it is more than [url=http://www.teragoldeu.com/FIFA-14-2515/]FIFA 14 PC Coins [/url] 15%, Canada will give her a tax credit for only 15% and she will have to file form 1116 "Re-sourced by treaty" to reduce the US tax on the 401(k) to 15%. She will also file another 1116 to get a US foreign tax credit on the Canada sourced income.