Claiming a Foreign Tax Credit When Withdrawing RRSP Funds

[rgiustini]

Hi,

I'm a US resident and citizen, with RRSP/LIRA's in Canada. I have been deferring taxes on account appreciation each tax year using the required forms.

When I finally begin to withdraw assets from these plans at retirement, is all the gain over and above basis cost treated as taxable income (straight tax rate), or do I have to track and report short/long term capital gains, dividends and income separately? If the latter, that could really get complicated over several years of transactions.

Also, if I do have to track the types of gains and losses over the years, how would this affect my ability to claim a foreign withholding tax credit for each type of gain (assuming I withdraw funds periodically, incurring 15% withholding tax in Canada)?

Thanks in advance for your reply.

[nelsona]

Since you elected to defer income, all the taxable income is reported on line 16b. Only if you had not elected would you now be reporting the income in each income category.

[rgiustini]

OK, thanks! This leads me to ask some more questions:

I intend to convert the RRSPs to RRIFs and then draw out the maximum yearly amount allowed and still limit Canadian withholding tax to 15%.

1. Some of your earlier post replies state to always check the "beneficiary" box rather than "annuitant" box in Form 8891. Is this still true even when I begin to draw out funds from a RRIF, or should I then switch to "annuitant" election?

2. Re the taxable/non taxable computation, I like the "proportional" computation method you presented in an earlier post rather than the General Rule of Pub. 939 (mostly because I can't figure out how to compute the estimated future payments from a RRIF - have I missed something simple here?). Do I really have a choice to use proportional since it's not mentioned in Pub 939?

3. If I use proportional, the numerator of the fraction is easy - it's the account basis in US$ when I arrived in the US. Is the denominator I use each year the basis plus dividends and realized capital gains only, or do I use the current market value (including unrealized gains)? Also, is this the value on the day I make a withdrawal or the value at the end of the previous year?

I really appreciate the effort you put into this forum, it's a significant reference on cross-border taxation issues. Have you ever considered writing a book on this?

[nelsona]

1. Always beneficiary.
2. You can use prop. just be consistent. Your goal is to use up your non-taxable amount. As long as you do not exempt more than this amount obver the life of the RRIF, you are fine.
3. The key is being consistent.
If your withdrawals are yearly, I would use the market value on that day, if your withdrawals are more frequent, I would use the previous year-end value. I wouldn't use the generated income if using the prop method.

The goal in all this is to determine your taxable income, so the formula is

16b = 16a *[1-(NT/VAL)] where

16b is your taxable amount
16a is your gross withdrawal
NT is your non-taxabale investement in the account
VAL is your value (either that day or previous year-end)

So if you had $100 when you arrived and its value is now $200, and you withdraw $10

16b = 10 *[1-(100/200)] = $5 taxable

Your non-taxable portion was $5, so remember to reduce your NT for the next year by this amount, so $95.

Your NT will become smaller and smaller as time goes by (unless of course you make a non-deductible contribtion, which would add back to your NT).