| We have been driven to research a particular issue
that relates to persons who have monies on account in an U.S. Individual
Retirement Account (IRA) and who desire to have such funds transferred
to their Canadian RRSP. As a firm, we are now performing a lot of
cross-border services for U.S. expatriates and for Canadians returning
to Canada after an extended sojourn in the U.S.
On the surface, it would not make much sense for a country (in this
case, the U.S.) to allow a tax-free flow of retirement money, which was
tax deductible when it was contributed, to another country that would
enjoy taxing income that never did allow a deduction. As will be seen in
the following complicated analysis, it is possible to effect such a
transfer on an extremely tax-efficient basis.
The type of plan that will be discussed is a Simplified Employee
Pension IRA (SEP-IRA) that is a written arrangement under which an
employer sets up individual IRA's for its employees. They permit an
employer to make contributions toward an employee's retirement, although
such contributions are not mandatory. An employee who participates in a
SEP-IRA can make contributions, which may or may not be tax deductible.
Paragraph 60 (j) of the Income Tax Act allows a taxpayer to
deduct amounts contributed to an RRSP for certain amounts received in
the year from a non-registered pension plan that is included in the
taxpayer's income for the year. This deduction applies equally to direct
transfers of funds between financial institutions and to taxpayers who
receive the funds and, subsequently, transfer the said funds.
Sub-paragraph 60(j)(i) of the Income Tax Act provides that
certain payments received from non-registered pension plans are eligible
for contributions and deductions under 60(j) provided that they meet the
following criteria:
- The amount received must be in respect of a super-annuation or a
pension benefit. If, for whatever reason, the Canada/U.S. Tax
Treaty allows for a deduction pursuant to sub-paragraph
110(1)(f)(i), then it will not be eligible for contribution to an
RRSP;
- It must be a lump sum payment and not part of a series of payments
or periodic payments;
- It must be attributable to services rendered by the taxpayer or
spouse when that person was not a resident of Canada for tax purposes;
- It must be included in income first, pursuant to sub-paragraph
56(11)(a)(c) of the Income Tax Act. Also included in this
sub-paragraph is a Foreign Retirement Arrangement (FRA), which
includes the following types of IRA's, pursuant to regulation 6803 of
the Income Tax Act:
- Industry Retirement Trust Account pursuant to sub-section 408(b)
of the Internal Revenue Code;
- Individual Retirement Annuity Account pursuant to sub-section
408(b) of the Internal Revenue Code
- Individual Retirement Custodial Account pursuant to subsection
408(h) of the Internal Revenue Code.
It should be pointed out that notwithstanding the fact that a
transfer can be made to a Canadian RRSP, there still could be
withholding taxes claimed by the IRS. While sub-section 126(1) of the
Income Tax Act allows for a foreign tax credit that would otherwise
not be available as there is no net income being taxed (income under
section 56 and deducted because of 60(j)(1). Sub-section 4(3) of the
Income Tax Act, however, gives us the relief we seek by not
allocating the 60(j) amount specifically to the section 56-income
inclusion.
Yes it can be done, but it is complicated.
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