Hi Phil,
I would be interested in arranging a consultation to discuss Canada-U.S. tax issues. As a bit of background, my wife (Aileen) and I are U.S. citizens and currently live in Virginia, near Washington, DC. We were both employed as economics professors in Canada (University of Toronto for a couple years, followed by University for several more years) during the 1990s (we had landed immigrant status), and we have RPP accounts with the Carleton University Pension Plan as well as RRSP accounts with the Bank of Montreal. We are up to date with our U.S. filing requirements, including FBAR and Form 8938. We anticipate retiring in the next 2-3 years. I am interested in learning about the following sorts of issues:
(1) Tax treatment and reporting of RRSP distributions — I have roughly CDN$150,000 and Aileen has about CDN$100,000 in RRSP accounts.
(a) I understand that Canada will impose a 25% withholding tax on any RRSP withdrawals we decide to make, which we can then claim as a tax credit on our U.S. returns. I am wondering whether the full amount of an RRSP withdrawal is subject to U.S. tax. I had read somewhere that, since RRSP contributions are not deductible from U.S. tax, that only the earnings (not the principal) is subject to tax in the U.S., but I am unsure whether this is correct.
(b) I gather that RRSP distributions would be reported on Form 1040, lines 5a and 5b, and also documented on Form 8938, Part III, while the tax credit for Canadian withholding would be reported on Form 1116. Does that cover the reporting issues? (We may be interested in assistance with tax preparation when we begin withdrawing funds.)
(2) Tax treatment and reporting of distributions from our RPPs. We each have roughly CDN$375,000 in RPPs (University Retirement PLan).
(a) Should we arrange to have our RPPs unlocked under the Ontario provisions for non-residents? I gather that this would make it possible to make periodic withdrawals from our RPPs in the future directly, rather than having to setting up a LIF or annuity. If we took this approach, I gather that we would still have to roll over any undistributed funds to a LIF or annuity when we turn age 71. I am wondering whether such a rollover is considered a tax free event from the U.S. tax perspective (as it is in Canada).
(b) I gather that the reporting of RPP withdrawals would involve the same forms and line items as RRSP withdrawals. Is that right? I am wondering whether the full amount of the withdrawal is taxable in the U.S. or if only the portion attributable to employer contributions and earnings on employer contributions is taxable. (I read somewhere that employee contributions and earnings on employee contributions are not taxable in the U.S., because employee contributions to RPPs are not deductible in the U.S.)
(c) We are eligible for modest CPP benefits, which we are tentatively planning on deferring until we are 70 years old. We will likely be subject to the social security windfall elimination provision (WEP). I am wondering whether the Social Security Administration tends to apply the WEP provisions properly with regard to CPP. My understanding is that the WEP calculation is based on the benefits that would be available when one first becomes eligible for both programs (i.e., at age 62), so I am wondering if the Social Security Administration will be aware when we are 70 years old of what our CPP benefits would have been had we instead claimed them when we were first eligible at age 62.
Please let me know if you have availability for a phone/virtual consultation and, if so, your fee schedule and some possible days/times.
Best regards, Jammie
Sure, I can certainly help with Canada-U.S. tax issues! From your query, it's clear you've got a solid grasp of the basics, but these cross-border tax matters can get intricate. I've been advising on international tax matters for years, handling similar cases involving retirement accounts, foreign income reporting, and tax treaty implications.
Firstly, concerning RRSP distributions: You're correct that Canada withholds 25%, which is creditable against U.S. taxes. The taxation on RRSP withdrawals in the U.S. generally applies to the earnings rather than the principal. Contributions aren't deductible on U.S. taxes, so only the growth in the RRSP is subject to U.S. taxation upon withdrawal.
Reporting-wise, RRSP distributions go on Form 1040, lines 5a and 5b, and on Form 8938, Part III. You'll use Form 1116 for the tax credit from Canadian withholding.
Now, regarding RPPs: Unlocking RPPs under Ontario provisions for non-residents might facilitate periodic withdrawals without needing a LIF or annuity, but the rollover to a LIF or annuity at 71 may not be tax-free from a U.S. perspective.
Similar reporting processes apply for RPP withdrawals as for RRSPs. The taxable portion in the U.S. often involves the employer contributions and earnings, excluding employee contributions and their earnings, as employee contributions aren't deductible in the U.S.
As for CPP benefits and the Social Security Windfall Elimination Provision (WEP), WEP calculations might not properly account for CPP benefits at 70. The WEP typically considers benefits available at 62, so it's uncertain if the SSA would factor in CPP at age 70.
Regarding a consultation, I'd be glad to discuss these issues further. My fee schedule varies based on complexity and consultation duration, but I aim for a comprehensive yet reasonable approach. Let me know your availability, and we'll find a suitable time to delve into these specifics.
In summary, your concerns cover intricate tax nuances at the crossroads of Canadian and U.S. taxation, and navigating these intricacies will require a thorough understanding of both tax systems, their interplay, and relevant reporting procedures.
