I am a U.S. business owner (S-corp) and U.S. citizen. Got Canadian PR card and am thinking of moving to Canada but have come across a big potential issue/question.
My U.S. business contributes to a Defined Contribution Plan (DCP) on my behalf. This contribution is fully deductible on the business tax return. If I live in Canada and continue my U.S. business:
Will I have to pay Canadian income tax on the DCP contribution? Or does it not show up as taxable income for Canadian purposes because it was tax deductible to the US business and thus not on my W-2?
Any help will be appreciated. Thanks.
Moving to Canada - huge potential obstacle Help!
Moderator: Mark T Serbinski CA CPA
In general, one is able to continue to deduct contributions made by or on behalf of the employee to a US pension arrangement, for 5 years after they move to Canada, while still working for that US employer.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
[quote="nelsona"]In general, one is able to continue to deduct contributions made by or on behalf of the employee to a US pension arrangement, for 5 years after they move to Canada, while still working for that US employer.[/quote]
Thanks nelsona for your help! I was told by a CPA that the deduction on the Canadian tax return for US retirement contributions is allowed only up to the Canadian RRSP annual contribution limit. My Cash Balance contribution is higher than the RRSP limits. I was looking at Form RC268 and that seems to suggest that the deduction for US Pension contribution is only allowed upto the RRSP limit because you have to take the LESSER of line 3 and line 6.
So for example if my US Cash Balance Contribution was $50,000 but the RRSP limit is 25,000 then even though I contributed 50,000 to the US Cash Balance Plan, I would have to pay Canadian taxes for 25,000 on that.
Are you saying this is not the case for first 5 years after moving to Canada and it only applies after 5 years? If so, is there any CRA document/instruction you could refer me. Thanks again!
Thanks nelsona for your help! I was told by a CPA that the deduction on the Canadian tax return for US retirement contributions is allowed only up to the Canadian RRSP annual contribution limit. My Cash Balance contribution is higher than the RRSP limits. I was looking at Form RC268 and that seems to suggest that the deduction for US Pension contribution is only allowed upto the RRSP limit because you have to take the LESSER of line 3 and line 6.
So for example if my US Cash Balance Contribution was $50,000 but the RRSP limit is 25,000 then even though I contributed 50,000 to the US Cash Balance Plan, I would have to pay Canadian taxes for 25,000 on that.
Are you saying this is not the case for first 5 years after moving to Canada and it only applies after 5 years? If so, is there any CRA document/instruction you could refer me. Thanks again!
There is a difference between an employer-sponsored 401(k) plan and a defined benefit pension plan.
The CPA is correct that a 401(k) contribution would not be deductible in the first year since you would have no RRSP contribution room for that year, and then limited to RRSP room in later years. That can go one forever. But that is not what we are talking about. Besides RC268 is for those commuting to US to work. The situation is more likely covered by RCA267, which has no such RRSP contribution room limits. So wrong info from your CPA.
The other question is whether YOU are making this contribution or your COMPANY is making it. You may have to change how the pension is funded.
The information is in the US/Canada treaty -- or your CPA will try and doo better this time.
You should also nbe looking to re-arrange your affairs to have a Cdn corporation rather that a US one.
The CPA is correct that a 401(k) contribution would not be deductible in the first year since you would have no RRSP contribution room for that year, and then limited to RRSP room in later years. That can go one forever. But that is not what we are talking about. Besides RC268 is for those commuting to US to work. The situation is more likely covered by RCA267, which has no such RRSP contribution room limits. So wrong info from your CPA.
The other question is whether YOU are making this contribution or your COMPANY is making it. You may have to change how the pension is funded.
The information is in the US/Canada treaty -- or your CPA will try and doo better this time.
You should also nbe looking to re-arrange your affairs to have a Cdn corporation rather that a US one.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Wow, there may be hope yet. I will try to find the Tax treaty info. Thanks! Please see me responses/questions below
[quote="nelsona"]Besides RC268 is for those commuting to US to work. The situation is more likely covered by RCA267, which has no such RRSP contribution room limits. So wrong info from your CPA.[/quote]
I won't be commuting for work but may need to travel to U.S. for some meetings once in a way. I assume that doesn't force me to fill out the RC268? Also, the RC267 says "Employee Contributions to a United States Retirement Plan for 2016 – Temporary Assignments". In my case, I would be moving to Canada, so would that qualify as a temporary assignment? Also, I will still be an employee/owner of the US company, W-2 income, so no Canadian salary, would RC267 work?
[quote="nelsona"]The other question is whether YOU are making this contribution or your COMPANY is making it. You may have to change how the pension is funded.[/quote]
My U.S. company makes the contribution and it is fully deducted on the US company return.
[quote="nelsona"]You should also nbe looking to re-arrange your affairs to have a Cdn corporation rather that a US one.[/quote] do you mean from reducing tax liability perspective?
[quote="nelsona"]Besides RC268 is for those commuting to US to work. The situation is more likely covered by RCA267, which has no such RRSP contribution room limits. So wrong info from your CPA.[/quote]
I won't be commuting for work but may need to travel to U.S. for some meetings once in a way. I assume that doesn't force me to fill out the RC268? Also, the RC267 says "Employee Contributions to a United States Retirement Plan for 2016 – Temporary Assignments". In my case, I would be moving to Canada, so would that qualify as a temporary assignment? Also, I will still be an employee/owner of the US company, W-2 income, so no Canadian salary, would RC267 work?
[quote="nelsona"]The other question is whether YOU are making this contribution or your COMPANY is making it. You may have to change how the pension is funded.[/quote]
My U.S. company makes the contribution and it is fully deducted on the US company return.
[quote="nelsona"]You should also nbe looking to re-arrange your affairs to have a Cdn corporation rather that a US one.[/quote] do you mean from reducing tax liability perspective?
The work is temporary in that it can only last 5 years (to benefit from the deduction). Right now, the appearance is that your USco has sent you to work in Canada. So just make sure you change your structure by that time. since the company is making this contribution, you may not even have to worry about it. If you do hit up on a hard limt, just reduce you contribution and leave it in the corporation.
There are probably some major tax benefits to becoming ga Cdn corp since you live and work in Canada (occasional meetings don't impact this).
As to the "source" of your salary: you are working in Canada, so it will be Cdn sourced (another reason to eventually switch to cdn employer/corp.)
And I'd rather you not use the 'quote" system. it clutters up your posts and I already know what I wrote.
There are probably some major tax benefits to becoming ga Cdn corp since you live and work in Canada (occasional meetings don't impact this).
As to the "source" of your salary: you are working in Canada, so it will be Cdn sourced (another reason to eventually switch to cdn employer/corp.)
And I'd rather you not use the 'quote" system. it clutters up your posts and I already know what I wrote.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Sorry about the quotes.
Just make sure I change the structure by that time means by when? Before moving or within 5 years after moving? I have to have a US firm and be its employee with a US W2 salary for my business.
I will definitely exceed that limit and leaving in the US corporation does nothing because being an S corp it show up on the personal taxable income via K-1.
I don't understand how the salary will be sourced in Canada. Although I will be a Canadian resident after I move, my income source is in the U.S. because the clents that pay for my work are in the U.S. So my S-corp will give me a U.S. W-2 and I won't have a Canadian Corporation. Please clarify.
Just make sure I change the structure by that time means by when? Before moving or within 5 years after moving? I have to have a US firm and be its employee with a US W2 salary for my business.
I will definitely exceed that limit and leaving in the US corporation does nothing because being an S corp it show up on the personal taxable income via K-1.
I don't understand how the salary will be sourced in Canada. Although I will be a Canadian resident after I move, my income source is in the U.S. because the clents that pay for my work are in the U.S. So my S-corp will give me a U.S. W-2 and I won't have a Canadian Corporation. Please clarify.
within 5 years, but sooner would be better.
Why would you say you "need" such a US corportation structure?
Employment income is sourced by where you DO the work, not where the client or even the employer is.
A US business shouldn't be paying a Cdn resident employee by W2 in any event. they must be paying Cdn payroll taxes and withholding, so you will need some form of Cdn structure, even if it is just for payroll purposes.
You shouldn't be worrying about US tax once you live in Canada, since the Cdn tax rate will take care of any US obligation.
You need to sit down with a Cdn corporate tax expert.
Why would you say you "need" such a US corportation structure?
Employment income is sourced by where you DO the work, not where the client or even the employer is.
A US business shouldn't be paying a Cdn resident employee by W2 in any event. they must be paying Cdn payroll taxes and withholding, so you will need some form of Cdn structure, even if it is just for payroll purposes.
You shouldn't be worrying about US tax once you live in Canada, since the Cdn tax rate will take care of any US obligation.
You need to sit down with a Cdn corporate tax expert.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
I need the US Corp because client contracts already exist with that Corp and the clients will not be willing to redo those contracts with a different/foreign entity.
Since I am a US citizen and am owner/employee of this US firm, living in Canada to maintain my Canadian PR, why can the US firm not pay me based on a W2? In fact how will the firm pay Canadian payroll tax/withholding since there is no Canadian firm/corp, only US.
I have already spent a bunch of money talking with a well known Canadian cpa firm and they told me the RRSP limit is the limit for any US retirement contribution and if that's wrong then :shock: I am concerned getting any more advice from them.
Since I am a US citizen and am owner/employee of this US firm, living in Canada to maintain my Canadian PR, why can the US firm not pay me based on a W2? In fact how will the firm pay Canadian payroll tax/withholding since there is no Canadian firm/corp, only US.
I have already spent a bunch of money talking with a well known Canadian cpa firm and they told me the RRSP limit is the limit for any US retirement contribution and if that's wrong then :shock: I am concerned getting any more advice from them.
"since there is no Canadian firm/corp, only US. " Exactly. That is the problem for you.
Most Cdn working for a US firm end up being contractors, not employees, because their US employer refuses to set up a Cdn payroll for them --- because the firm is based in the states. I hope your US corp won't screw over its employee like that.
You can probably keep he US one for contractual purposes, but the work is going to be dome by a Cdn employee -- probably of a Cdn company, which should be transparent to them.
The RRSP thingy is a completely different matter -- and quite frankly there may be limits on how much your company can load into your pension -- but it isn't based on RRSP contribution limits -- and they clearly showed you the wrong form.
What you have to address is doing business and working in Canada.
You need to talk to a cross-border corporate tax expert.
Most Cdn working for a US firm end up being contractors, not employees, because their US employer refuses to set up a Cdn payroll for them --- because the firm is based in the states. I hope your US corp won't screw over its employee like that.
You can probably keep he US one for contractual purposes, but the work is going to be dome by a Cdn employee -- probably of a Cdn company, which should be transparent to them.
The RRSP thingy is a completely different matter -- and quite frankly there may be limits on how much your company can load into your pension -- but it isn't based on RRSP contribution limits -- and they clearly showed you the wrong form.
What you have to address is doing business and working in Canada.
You need to talk to a cross-border corporate tax expert.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
"I hope your US corp won't screw over its employee like that. " I will not have any Canadian employees. The only employees of my US business will be my spouse and myself.
I thought the US business can pay us W2, and we pay US payroll tax and federal income tax and then with the Canadian return we pay the balance/additional tax on that US W2 income that would be due in Canada. And the Cash Balance Plan contribution is made and deducted by the US company so not Canadian taxes due for that. Is that not how it could work?
And BTW, the firm I talked to is one of the Cross Border Tax expert firms :cry:
I thought the US business can pay us W2, and we pay US payroll tax and federal income tax and then with the Canadian return we pay the balance/additional tax on that US W2 income that would be due in Canada. And the Cash Balance Plan contribution is made and deducted by the US company so not Canadian taxes due for that. Is that not how it could work?
And BTW, the firm I talked to is one of the Cross Border Tax expert firms :cry:
YOU are the Cdn employees! You need to get paid like a Cdn employee, because you live and work in Canada.
maybe you didn't ask the right questions, after all, the concern you had on this thread was your pension, not payroll, not corporate stuff.
I'm going to leave it at that, there are others who might want to chime in.
But, just to illustrate the complexity:
http://www.claconnect.com/resources/art ... -in-canada
ands that is for those SENDING workers to Canada, never mind HAVING Cdn employees, like you have.
maybe you didn't ask the right questions, after all, the concern you had on this thread was your pension, not payroll, not corporate stuff.
I'm going to leave it at that, there are others who might want to chime in.
But, just to illustrate the complexity:
http://www.claconnect.com/resources/art ... -in-canada
ands that is for those SENDING workers to Canada, never mind HAVING Cdn employees, like you have.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
First thing I see is that you have an S Corp and for US tax purposes its NET income is simply added to your 1040 at year end so in essence its treated as as registered business for US purposes not in any way as a corporation. I Canada CRA will not allow you to simply enter this as business income it will not be a flow through entity CRA will treat it as a Corp you need to file a T2. CRA has recently spoken on this saying LLP's will be grandfathered going back to April 2017 and treated as Flow Throughs but they did not mention S Corps. Also even if you treated it as a flow though in Canada a business income CRA does not allow an unicoprporated business to deduct salary paid to its owner. Your salary will be sources as CND you will need to incorporated a CND company to be able to deduct salary to you and if that income is coming form the US it will not be eligibke for the small business tax rate of 18% since it has to be Revenue form CND sources the tax reate would be 28%.
JG