RRSP Contribution Room Calculations for US Commuter

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lipeter1
Posts: 2
Joined: Thu Aug 01, 2019 4:21 pm

RRSP Contribution Room Calculations for US Commuter

Post by lipeter1 » Thu Aug 01, 2019 4:36 pm

I am a Canadian resident who commutes to the US to work for a US employer. I have contributed to their 401(k) plans. It is a money purchase plan, and my employer also matches 50% of my contributions up to a maximum of 3% of my salary.

I just spent a whole lot of time talking with CRA agents, and was a bit shocked by their instructions on how to calculate my RRSP contribution room.

Assuming I contributed $5000 to my 401(k) plan, and my employer matches $2500. The CRA told me to enter the following:

- Form RC268, Box 5125: $5000
- Form RC268, Box 5123: $2500
- T1, Line 206: $2500
- T1, Line 207: $5000

The CRA agent me that my RRSP Contribution Room is reduced by the amount on line 206 ($2500) and is unaffected by the amount on line 207. I am shocked because I have $5000 pre-tax dollars sitting in a tax shelter, but only $2500 of my contribution room is reduced. Does this make any sense? Can I purchase another $2500 in RRSPs?? I am worried about over-contributing.

Steve15
Posts: 75
Joined: Mon Jun 10, 2013 11:26 pm

Re: RRSP Contribution Room Calculations for US Commuter

Post by Steve15 » Tue Oct 29, 2019 9:34 pm

I file about ten 1040NR returns for cross border commuters every year.

Every single return I have ever filed with a 401K deduction has had their RRSP contribution room calculated incorrectly because of the Pension Adjustment (PA) on form RC268. This includes all the ones that subsequently get selected for a Processing Review by CRA in the summer and must provide proof to substantiate their deduction on line 207 via a completed RC268 form, W2 slip, year-end pay stub, etc.

For whatever reason, CRA only considers EMPLOYER contributions to your 401K when calculating your PA, not your own contributions. Just as they did for you with the $2500.

I have brought this to CRA’s attention on several occasions and they keep telling me I’m completing the RC268 form correctly and the employee contributions are not used to calculate the PA.

The interesting part is that my tax software actually includes the employee contributions and calculates the RRSP room for the subsequent year correctly.

This is as mysterious as a black hole. It makes absolutely no sense at all.

Cross border commuters with 401k’s are essentially receiving an advantage over every other Canadian taxpayer with a pension plan.

How is it fair that other Canadian taxpayers get an amount in box 52 of their T4 slip for their PA, which includes their own contributions AND employer contributions?

In other words, CRA is reducing RRSP contribution room for EMPLOYER and EMPLOYEE contributions to Canadian defined contribution plans but only EMPLOYER contributions to 401K’s (which are the equivalent to defined contribution plans).

I have made my clients aware of this potential oversight by CRA. Some have decided to play it safe and not use the additional “phantom” RRSP room and others (where advantageous) have decided to drive a dump truck through this potential loophole.

I have three theories as to what’s happening here.

1) I’m completing the RC268 form incorrectly. Perhaps the wording “amount of employer contributions made on your behalf” on line 2 of the Prescribed Amount section implies the EMPLOYER and EMPLOYEE contributions and both amounts should be included here. Even know CRA tells me I’m doing it correctly and they never change the amount for the returns selected for a review.

2) My software is not handling this correctly. I noticed that only the employer contributions from line 2 of the Prescribed Amount section show up on line 206 of the actual tax return (PA line) and not the employee contributions from the section above.

3) CRA is unaware of this oversight. Which I find hard to believe seeing that 401K contributions have now been deductible for about ten years.
Perhaps there is something else I’m overlooking, but this seems completely discriminatory to me.

Anyone else have any insight on this?

Steve

Steve15
Posts: 75
Joined: Mon Jun 10, 2013 11:26 pm

Re: RRSP Contribution Room Calculations for US Commuter

Post by Steve15 » Wed Oct 30, 2019 2:16 pm

Hey guys, I called one of my contacts at CRA today and they pointed me to an income tax ruling on this matter. It seems to confirm my previous comments that employee contributions are not included in the PA, only employer contributions. My contact was as shocked as I was after she read this.

Nelsona, I would be interested in your opinion on this matter if you don't mind. I'm confused about the part where it states that employee contributions are generally not deductible??? This ruling came out in Dec 2008, but it said these rules were made in anticipation of the ratification of the Fifth Protocol.

https://www.fin.gc.ca/drleg-apl/arit2008_1-eng.asp

Check out clause 99

Here are the relevant excerpts.

"Subsection 8308.2(1) of the Regulations prescribes a reduction in the RRSP limit of certain individuals who are resident in Canada and participate in foreign pension plans. The most common application of this subsection is with respect to Canadian residents who are employed in the U.S. by corporations that do not carry on business in Canada."

"If the individual is accruing benefits only under a money purchase provision, paragraph 8308.2(2)(a) provides that the amount determined under this subsection is the amount that would be the individual’s pension credit for the service year under the provision if the plan were a registered pension plan. The pension credit would be determined in accordance with subsection 8301(4) of the Regulations but, as provided for in new subparagraph 8308.2(2)(a)(ii), without taking into account employee contributions. This means that the amount determined under this subsection will generally be the amount of the employer’s contributions made in the service year in respect of the individual."

"These amendments recognize that, in the case of money purchase provisions, determining the value of the accrual for the individual, and thus the appropriate reduction in RRSP room, is relatively straightforward. The fact that employee contributions are not included in the determination of the prescribed amount recognizes that employee contributions are generally not deductible. Although the Protocol does allow for the deduction of certain Canadian-resident employee contributions to foreign plans, the employee’s RRSP room in reduced by the amount of the deducted contributions."

Steve15
Posts: 75
Joined: Mon Jun 10, 2013 11:26 pm

Re: RRSP Contribution Room Calculations for US Commuter

Post by Steve15 » Wed Oct 30, 2019 3:17 pm

I think I figured out where CRA is dropping the ball. The last paragraph clearly indicates that CRA is in fact recognizing the treaty and allowing the employee deductions.

"Although the Protocol does allow for the deduction of certain Canadian-resident employee contributions to foreign plans, the employee’s RRSP room in reduced by the amount of the deducted contributions."

However, what I think they are saying is, for the purpose of calculating RRSP room, employee 401K contributions are NOT part of the PA calculation. Rather, they should be treated exactly like RRSP contributions instead of RPP contributions and their RRSP room will be reduced accordingly by the contributions just like an RRSP contribution would be! This is exactly how my software handles it.

My software added a new line to the standard RRSP contribution calculation: “Less 2019 contributions to a foreign plan (RC267/RC268/RC269)”.

However, I then checked several CRA Notice of Assessments and the RRSP limit calculation they use on their online system and this line is NOT included!

In other words, the employee contributions are CORRECTLY not being picked up in the PA as per the legislation cited above, BUT they are also NOT being treated like RRSP contributions and being deducted from their RRSP limit as this legislation states that they should be.

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