Canadian RRSP's and a LIRA reporting in the U.S>

[Stuart Macdonnell]

My wife and I are Canadian citizens and GC residents of the U.S. We have an RRSP and a LIRA in Canada that we converted to a RRIF and LIF during 2012 and plan to make periodic payents from the RRIF and LIF beginning in Jan 2013. The periodic payments will have NR tax of 15% withheld by Canada. We have previously filed Form 8891 to defer this income in the U.S. until now.

Questions:
1. From previous posts I understand these RRIF and LIF payments are general limitation income for U.S. purposes on Form 1116. We also receive Canadian Canada pension and OAS payments - are these payments also general limitation income?
2. Do we need to make a US/Canada Treaty election to treat these payments as periodic for US purposes? I believe that these payments are defined as periodic in Canada under the Tax Convebtions Interpretation Act (ITCIA) and so am unsure of how to get that treatment for US purposes. If so, what would the US election on Form 8833 say?

[nelsona]

1. Yes, of course CPP and OAS are not taxable at all in canada, by treaty, but they are considered Cdn source income, which may prove useful in using up your Cdn RRIF tax.

2. For your LIF and RRIF, As long as you only withdraw LESS that 10% or twise your required withdrawal (whichever is less) then your payor should only withhold 15%. If you withdraw more than this, the payments are NOT considered periodic.

For US purposes, they are pension income, period. So you merely report the gross income, and the taxable portion, on 8891 ans these will flow to your 1040. There is no doistinction on how these monires are taxed by IRS, just like there would be none if you lived in canada. The only difference for your LIF and RRIF is that you must respect the limits outlined in ITCIA for Canada to only tax them at 15%.

Your LIRA is no doubt 100% taxable in US , since it was all company pension. Your RRSP may have some non-taxable dependoing on what its vale was when you moved to US -- which you must have been tracking since you moved.

So you will report 80% of your OAS, 80% of your CPP, 100% of your LIRA, and whatever the taxable portion of your RRIF, and then figure your tax credit, using all these amounts, and the 15% withheld from your LIF and RRIF.

[Stuart Macdonnell]

Thanks - a couple of follow-up questions

1. The LIRA was received from the company while I was still in Canada. Does it not have a cost basis just like the RRSP's?
2. The RRSP's do have a cost basis dating back to periods prior to our move to the U.S. so only a portion will be taxable in the US as you outlined in other posts. I assume that I will only be able to claim a tax credit for canadian taxes on that portion of the RIFF income that is taxable in the US - correct?

Thanks for your help

[nelsona]

1. No, LIRA's are in essence company pensions, which have no tax-free 'investment' on your part for US tax purposes. 100% taxable in US.
2. You will include only that xtaxable portion as your taxable in =come (duh!), so only that portion will be used for the tax credit eligible income, but ALL the Cdn tax is usabel, not just a portion.

So, on a $1000 RRIF withdrawl, that may only be $200 taxable in US, you will report $200 taxable income on line 16b, and on form 1116, but you will use all of the $150 in tax you paid. That is why your CPP and oAS will prove useful to you will report these as income, but have no Cdn tax against them. Thos means you are almost certain to use up all your cdn tax every year, which is your goal.

[Stuart Macdonnell]

Thanks Nelsona - your assistance has been very helpful.

I will do a pro-forma 2013 US tax return to see if I will be able to recover 100% of the Canadian tax witholdings through the US 1116 tax credit mechanism.

I will be very happy if I can! I will let you know the result.

Thanks again.

[nelsona]

Above I said:

2. For your LIF and RRIF, As long as you only withdraw LESS that 10% or twise your required withdrawal (whichever is less) then your payor should only withhold 15%. If you withdraw more than this, the payments are NOT considered periodic.

I meant to say " withdraw LESS than 10% or twise your required withdrawal (whichever is MORE)"

Ie: if your required withdrawl was 6%, then you could withdraw 12% in a year and still be considered periodic and eligible for 15%.

[Stuart Macdonnell]

Yes - I did know that it was the greater of the 10%*MV or 2x the MIN AMOUNT to qualify as a periodic payment subject to Canadaian 15% witholding tax.

Also in the above there is one other small mistatement I believe - the taxable amount of OAS and CPP in the US is 85% and not 80% - do you agree?

I am also still confused about the position that a Canadian LIF distribution does not have a US non-taxable component. My confusion is caused by the fact that a LIRA is a locked in RRSP and the LIRA must be converted to a LIF (a locked in RRIF) before a distribution can be completed. An option then exists to transfer 50% of the LIF to a RRIF (in Ontario) with the remainder paid out as periodic or non-periodic payments. So 50% of the LIF can end up in a RRIF where it can be paid out as part of the periodic payment stream. The IRS literature that I have seen doesn't really address the issue but generally it says that RRIF's have a non-taxable portion for amounts contributed or earned in Canada prior to the dtae that residence is taken up in the U.S.. So since the LIRA was established while I was still a Canadian resident it seems reasonable to take the position that the LIRA/RIF has a non-taxable component equal to the company contributions and investment earnings to the date of departure.

If you have any other thoughts on this issue please let me know.


Thanks again for all your help

[nelsona]

You are correct that the inclusion rate for OAS and CPP is 85%, exactly like SS benefits.

The 100% taxability of the LIF, is not because it is a LIF and not a RRIF, it is because of the SOURCE of that LIF or RRIF (and its pedecessor LIRA).

ALL retirement accounts that are funded from company pension plans (which is why they were locked in the first place) carry NO "investment" by the beneficiary, unless moneys put in by the contributor were taxed, either by US or Canada. This might happen if you were a US citizen living in Canada and not having your contributions made to your pension accpeted as a deduction on your US return, but not likely if you bacame US taxapayers after moving to US, which appears your case.

The RRIF that you create from a LIRA (with its source as above ) ALSO is 100% taxable.

Only RRSPs that you funded (and never got any US tax deduction for -- which by the way is no longer universally true) can have a portion of its assets considered "investment" in the RRSP which can be withdrawn US tax-free.

[Stuart Macdonnell]

Nelson - in the year that you convert an RRSP to a RRIF, so you have to file a FORM 8891 for the RRSP that has been converted to a RRIF before the end of the year and now has a nil balance as well as for the new RRIF that now contains the funds?

[nelsona]

Yes, unless their is merely a change in account number, but if merely the account number suffix changes, I would simply send one 8891 for the RRIF.

Remeber that in the year you change it you don't get any 15% rate withdrawal.