I moved to the US from Canada in 1989. My husband at the time had a pension fund from his Canadian employer. No contributions were made to that fund after we moved to the US it basically just sat there.
We were divorced in 2003 and in 2006 the pension fund was partitioned and we each got half, about $100,000 (Canadian). My portion was moved to a RRSP with RBC where I earned a very low rate of interest but the fund is now around $120,000.
This year I withdrew $48,000. My US accountant added the full amount to my world wide income and used form 1116 to calculate my foreign tax credit. I paid 25% to Canada or $12,000. This was around $9000 US. My tax credit is only about half that or around $4500 due to the way the 1116 is calculated.
My question is simply should my accountant have figured a cost basis on the RRSP and then I would only report a percentage of my withdrawal as taxable income? I'm assuming that percentage would be calculated as 100/120. Obviously, the addition of $48000 to my income has resulted in a crushing tax owed to the US.
Cost Basis for RRIF Received in Divorce
Moderator: Mark T Serbinski CA CPA
RRSP and RRIFs funded by pensions are 100% includable in income in US. Only *some* self-funded RRSP/RRIFs enjoy any partial tax exclusion in US upon withdrawal.
Unfortunately you have learned the hard way about how foreign tax credits work, which would have been explained to you had you read here first. Foreign income is taxed at your MARGINAL rate, but foreign tax is only credited at your EFFECTIVE rate. In the end you probably paid about 40% tax on this income, plus any state tax.
may I ask why you decided to take some of your RRSP now? What you did was essentially the same as drawing off your 401(k) while still working.
I would suggest that if you need the funds going forward, you should convert the RRSP to a RRIF, which will allow you to take 10% of it each year at only 15%, which would meld better with your US tax situation, bringing your overall tax down to about 25-30%.
Unfortunately you have learned the hard way about how foreign tax credits work, which would have been explained to you had you read here first. Foreign income is taxed at your MARGINAL rate, but foreign tax is only credited at your EFFECTIVE rate. In the end you probably paid about 40% tax on this income, plus any state tax.
may I ask why you decided to take some of your RRSP now? What you did was essentially the same as drawing off your 401(k) while still working.
I would suggest that if you need the funds going forward, you should convert the RRSP to a RRIF, which will allow you to take 10% of it each year at only 15%, which would meld better with your US tax situation, bringing your overall tax down to about 25-30%.
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