When making a move from the US to Canada, individuals often think about the tax impacts of their US pensions or retirement savings after leaving the US. The Canadian tax impacts will vary depending on the type of account held, with traditional IRAs and 401(k)s generally maintaining a tax-deferred status.
It may also be possible to transfer funds in a US IRA to a Canadian RRSP. But, with almost all things taxes, the “devil is often in the details.” Careful analysis should be done before making any tax or other moves.
Tax Treatment of US Traditional IRA Withdrawal in Canada
The decision to withdraw funds from a US IRA will lead to an income inclusion in the US. Individuals who are also taxed in Canada as a resident, will also report this income on a Canadian tax return. If the US funds withdrawn are transferred to a Canadian RRSP, a special deduction may be available. The deduction is generally equivalent to the amount of the IRA transferred to the RRSP. In addition, foreign tax credits may also be claimed in Canada for taxes paid in the US.
Now, while utilizing a special election to transfer these funds to a Canadian RRSP may be helpful for some, without careful planning this tax move could prove costly.
Tax Treatment of Roth IRAs in Canada
While it is possible to transfer a traditional IRA to a Canadian RRSP using special provisions under Canadian tax law, this option is not available for Roth IRAs.There are some unique considerations on the Canadian end for a US Roth IRA.
Because Roth IRAs are not considered a registered plan under the Canadian Income Tax Act, the income earned in a Roth IRA is generally taxable for Canadian purposes. Fortunately, it is possible to make a one-time election under the Canada-US income tax treaty to defer taxation of the Roth IRAs.
Canada/US Tax Treaty Benefit for Roth IRAs
This treaty benefit generally means that where a Canadian resident makes an election to defer taxation of the US Roth, under paragraph 1 of Article XVIII of the Canada-US income tax treaty, distributions from the Roth to a resident of Canada may be generally exempt from Canadian tax to the extent they would be excluded from taxable income in the US. The election has the benefit of deferring accrued income that would otherwise be taxable on a current basis. This presumes that further contributions will not be made to the Roth as a resident of Canada.
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Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.