DCPP Taxation by IRS

jtserbinski · Post by **jtserbinski** » Fri Nov 25, 2016 3:02 pm

Hi!

This is a technical question in understanding why a (Canadian) DCPP which is later transferred into a LIRA (then a RRIF), one cannot make withdrawals where *some* of the withwdrawl is tax free (return of capital). I have read this in the forum but don't really understand the technical basis. I am a US resident.

Like many others here, I had a DCPP which was 50% employer/employee funded. For the employee contributions it is treated like a group RRSP, i.e. your/employee contributions are deducted from income and are added to your pension adjustment and limits your private RRSP contributions. I would have expected the employee contributions to be treated by the IRS like a private RRSP contribution. The employer contributons would be 100% taxable.

nelsona · Post by **nelsona** » Sat Nov 26, 2016 5:57 pm

DCPP's, since they are employer sponsored, and since none of the contributions were considered taxable (in either Canada or US), then none of the DCPP,LIRA, or RRIF will be tax-free upon withdrawal.
This is a considered section 72(w) type pension, not a self-funded RRSP.

nelsona · Post by **nelsona** » Sat Nov 26, 2016 5:58 pm

Rule of thumb is that any pension that can or must be rolled into a LIRA is 100% taxable in US when withdrawn.

jtserbinski · Post by **jtserbinski** » Thu Dec 01, 2016 10:27 pm

Thanks nelsona! I guess the key is employer-sponsored.

nelsona · Post by **nelsona** » Fri Dec 02, 2016 10:54 am

Indeed. many cross-border tax people mistakenly thought when 72(w) came out, that this removed the "tax-free" portion of regular RRSPs. It did not, unlerss these were employer-sponsored plans. They did not believe there was a distinction.

However with the release of the last protocol, it was made clear that IRS (and the treaty) make a CLEAR distinction between RRSP's that are employer-sponsored and those that are privately funded (by allowing a deduction for employer plans, and not for private ones).