Retirement planning can be a complicated process in itself, but when you also have to consider cross-jurisdictional issues – things can become messy! This is especially true in Canada, where you have to understand the treatment of the US – Canada Tax Treaty and American expat taxes toward specific Registered Investment Plans like the RRSP, TFSA or some types of pensions. If you find yourself searching for this information, you won’t want to miss this article – get the facts you need below, starting with the most ideal option and ending with the least ideal option.
1) Registered Retirement Savings Plan – RRSP
This retirement savings plan is registered with the Canada Revenue Agency (CRA), and contributions can be made by yourself or your spouse/common-law partner. You can contribute to an RRSP up until December 31st of the year when you turn 71 years of age, or until the end of the year your spouse or common-law partner is 71, if he or she is the annuitant. Contributions to an RRSP can be used to reduce your tax payable in the year that contributions are claimed. Income you earn in the RRSP is typically exempt from tax, so long as the funds remain in the plan. Once you receive payments from the plan, they are taxed at your current tax rate (You’ll learn more about the effect on your American expat taxes at the end of this section). Also, at the time of withdrawal, the bank or investment company withholds the following in taxes for Canadian residents:
- 10% (5% in Quebec) on amounts up to $5,000;
- 20% (10% in Quebec) on amounts over $5,000 up to including $15,000; and
- 30% (15% in Quebec) on amounts over $15,000.
For non-residents of Canada, withholding is 25% unless modified by a treaty. The treaty between the United States and Canada allows for 25% withholding for lump sum payments, but a lower 15% withholding for periodic payments.
When it comes to US treatment, distributions from this type of account must be reported on your American expat taxes the same as they would be on your Canadian Tax Return. You also may be required to file an annual Foreign Bank Acccount Report (FBAR) form and FATCA Form 8938 if the value of your assets meets the relevant thresholds.
2) Registered Retirement Income Fund – RRIF
If you have an RRSP, it must be converted to a retirement income option like an RRIF by December 31st of the year in which you turn 71 – however, you can also convert it to an RRIF any time before then. While similar to an RRSP, once you’ve converted your funds over to an RRIF, you can’t make further contributions and must make a mandatory minimum withdrawal each year. The amount you’re required to withdraw is calculated by your age and the market value of the assets in the accounts as of December 31st of the previous year.
Your RRIF payments are considered taxable income in the year they’re withdrawn and will be taxed at your current rate. You have the ability to withdraw as often as you’d like and may withdraw over your minimum annual amount.
The withholding rates for withdrawals are the same as those for an RRSP. For non-residents, withholding rates are 25% for a lump sum and 15% for periodic pension payments under the treaty with the US. Also, the US tax treatment is the same as for RRSPs, so you must report distributions on your American expat taxes.
3) Canada Pension Plan – CPP
This particular option is similar to Social Security benefits in the US, as all employed Canadians over 18 must contribute a portion of their earnings to CPP. This is current 4.95% of an employee’s gross employment income between $3,500 and $54,900 – up to a maximum contribution of $2,479.95. Employers must match this contribution. If you’re self-employed, you’ll be responsible for paying both the employee and employer portion of CPP. You can apply for and begin receiving CPP benefits as early as 60, up to the age of 70.
If you’ve contributed to both the CPP and US Social Security, it’s possible you’ll qualify for a Canadian or American benefit (or both), under the US – Canada Social Security Agreement. In some circumstances, this gives you the ability to transfer amounts paid into either program into the jurisdiction you choose.
CPP payments are considered taxable income in Canada, so the tax rate paid will be dependent on your other income for the year. If you have income from other sources, you may elect to have federal income tax deducted each month from your CPP payment. However, any US Social Security benefits received by Canadian residents are only subject to tax in Canada. Canadian residents who receive US Social Security benefits must include 85% of those in computing their Canadian income. Full benefits are to be reported on the Canadian tax return, and the non-taxable amount of 15% will be claimed as a deduction from net income when calculating taxable income.
Some Canadian retirement plans receive special tax treatment because of the US – Canada Tax Treaty, and CPP is included in this list – along with Quebec Pension Plan (QPP) and Old Age Security (OAS). The way this income is taxed depends on the recipient’s residency states (i.e., Canada, the US or both). If the recipient is an American resident, the benefits will only be taxable in the US and are treated as US Social Security benefits for tax purposes. Your payments will be reported on Form 1040 or Form 1040A of your American expat taxes on the line where you’d report Social Security benefits. If the recipient is Canadian, these benefits would only be taxable in Canada.
4) Old Age Security – OAS
This pension is a monthly payment available to most who are 65 or older and who meet Canadian legal status and residency requirements. You can receive this even if you’ve never worked (unlike the CPP).
There is a ‘clawback’ that kicks in if your net income is over $73,756 (2016 income level), which means you must pay back a portion of OAS at a rate of 15% of net income. On income levels of $119,512 or higher, the full benefit of OAS is eliminated.
OAS is taxable income, and no American expat taxes are deducted unless it is requested – much like CPP. Because of the US – Canada Tax Treaty, OAS falls under the same treatment as CPP.
5) Tax-Free Savings Account – TFSA
This is a flexible, registered savings account which allows Canadians to earn tax-free investment income by contributing after-tax dollars. As of January 1, 2016, Canadian residents 18 and older can contribute up to $5,500 annually to TFSA, which can hold cash, mutual funds, GICs and certain stocks and bonds.
Gains earned in the TFSA are tax-free (unlike RRSP contributions), but they are not tax-deductible for income tax purposes. If you failed to maximize contributions in the current year, you can carry forward any unused contribution room. The full amount of withdrawals can be replaced in the TFSA in future years, but note that re-contributing in the same year might result in an over-contribution amount that is subject to penalty. As of 2016, the total cumulative contribution room for a TFSA is $46,500.
TFSAs differ when it comes to US treatment, as Canadian mutual funds held in these types of accounts are generally considered by the IRS to be investments in a passive foreign investment company (PFIC). This means US citizens would need to report this on Form 8621.
It’s also possible that the IRS could view a TFSA as a grantor foreign trust. This would mean US citizens should file Form 3520 and Forms 3520A.
Also, if certain thresholds are met, you may be required to report the TFSA on the Foreign Bank Account Report (FBAR) or FATCA Form 8938. Generally speaking, it’s advised that US citizens not hold a TFSA, as the reporting costs typically outweigh the benefits.
As you can see, there are quite a few considerations to make when it comes to Canadian retirement plans. You will want to factor in cross-border tax issues, especially if you’re a US citizen who intends to work until retirement in Canada. While the RRSP is currently the best option for US expats because of clear guidelines and reporting requirements laid out in the tax treaty, treatment of Registered Investment Accounts continue to be ever-changing on both sides of the border – so it’s important to stay up-to-date with the latest information and tax laws in order to make smart investment decisions. When it comes to your American expat taxes, we’ve got the information you need to understand your filing obligations – check out our tax guide for Americans working overseas.
Have More Questions About Retirement Planning and Its Effects on American Expat Taxes?
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