I've helped a couple clients with cross investment issues, but have never heard of this scenario before.
A U.S. citizen is in Canada working for a U.S. corporation on a multi-year assignment. They would like to stay in Canada, but have been told that if they stay more than 5 years, CRA will begin to tax the incremental growth in their 401(k) plans.
I believe this is incorrect. As I understand it, CRA will not tax 401(k) plans owned by Canadian residents until distributions are taken and a 1099 issued.
Can anyone confirm whether a 5 year rule exists?
Thanks,
Arteeh
401(k) Taxation
Moderator: Mark T Serbinski CA CPA
Someone has been trying to interpret (incorrectly) the new treaty protocol...
Currently, a Cdn resident cannot deduct 401(K) contributions on their Cdn tax return. Period. However, once the money is in there, iy is not taxed until taken out, as you say.
Once the new treaty is ratified, 401(k) contributions will be come tax deductible in your clients situation. There may be a five year rule, but it is not as you described. the five-year rule would apply to the deductibility, not the taxation of growth.
Currently, a Cdn resident cannot deduct 401(K) contributions on their Cdn tax return. Period. However, once the money is in there, iy is not taxed until taken out, as you say.
Once the new treaty is ratified, 401(k) contributions will be come tax deductible in your clients situation. There may be a five year rule, but it is not as you described. the five-year rule would apply to the deductibility, not the taxation of growth.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Yes, there is. It is in clause XVIII.8 and applies strictly to maintaining paension arrangements already in place for short-term transferees. the 5 year limit applies to residents of one country continuing to participate in the a plan in the other country, as a result of a transfer.
Example: as above, a US citizen gets assigned to canada, but as an employee of the US company, and maintains his benefirt package, including 401(K). he would be allowed to deduct his 401(k) contributions from both his US and Cdn tax returns.
The solution, of course, sometime before the 5 years end, is to simply stop funding the 401(k) and participate in the firms 'Cdn' pension plan or RRSP. This would not be subject to any 5-yr limit.
But, unlike what as suggested to arteeh's clients, regardlkess of how a 401(K) is funded, and whether or not its contributions are deductible or not, once the money is in the 401(k) or pension, or RRSP, or IRA, it cannot be taxed until the money is removed from such a plan, by treaty.
Example: as above, a US citizen gets assigned to canada, but as an employee of the US company, and maintains his benefirt package, including 401(K). he would be allowed to deduct his 401(k) contributions from both his US and Cdn tax returns.
The solution, of course, sometime before the 5 years end, is to simply stop funding the 401(k) and participate in the firms 'Cdn' pension plan or RRSP. This would not be subject to any 5-yr limit.
But, unlike what as suggested to arteeh's clients, regardlkess of how a 401(K) is funded, and whether or not its contributions are deductible or not, once the money is in the 401(k) or pension, or RRSP, or IRA, it cannot be taxed until the money is removed from such a plan, by treaty.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Something that I would like to point out is that all these new cross-border pension provisions strictly apply only to employer-sponsored palns. That would be 401(K) gruop RRSP etc or pensions that part of an employer/employee ralationship.
It dopes not apply to self-funded RRSPs and IRAs.
So, a Cdn resident working in US would benefit from a 401(K) or a Roth 401(k), but not necessarily an IRA or Roth IRA that he funds outside of work.
Same in canada. A US citizen living in Canada would not get a tax deduction on his 1040 for RRSP contributions made on his own. Only those made thru his comapny's plan would be deductible, under the terms of the treaty:
"XVIII.15. For purposes of paragraphs 8 to 14, a qualifying retirement plan in a Contracting State means a trust, company, organization or other arrangement:
(a) That is a resident of that State, generally exempt from income taxation in that State and operated primarily to provide pension or retirement benefits;
(b) That is NOT an individual arrangement in respect of which the individual’s employer has no involvement;"
(b) is the key
It dopes not apply to self-funded RRSPs and IRAs.
So, a Cdn resident working in US would benefit from a 401(K) or a Roth 401(k), but not necessarily an IRA or Roth IRA that he funds outside of work.
Same in canada. A US citizen living in Canada would not get a tax deduction on his 1040 for RRSP contributions made on his own. Only those made thru his comapny's plan would be deductible, under the terms of the treaty:
"XVIII.15. For purposes of paragraphs 8 to 14, a qualifying retirement plan in a Contracting State means a trust, company, organization or other arrangement:
(a) That is a resident of that State, generally exempt from income taxation in that State and operated primarily to provide pension or retirement benefits;
(b) That is NOT an individual arrangement in respect of which the individual’s employer has no involvement;"
(b) is the key
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best