Q: My sister is 57 years of age and a Canadian citizen who got married and moved to the United States over 20 years ago. She has an RRSP investment account left in Canada which has mutual funds in it. What are the best least-taxable options for her to consider? Can she wait until 71 years of age and create a RRIF and draw each year? How will CRA treat her situation? If she cashes out now, how much tax will she pay? Any advice would be most appreciated.
A: You sister should definitely enlist the help of a U.S.-Canada tax expert to assist with this planning and in calculating any taxes to be paid in either and/or both countries. This can be affected by her income level, what state she lives in and whether she is filing jointly with her husband.
Broadly speaking: You are not required to file a Canadian income tax return as a non-resident of Canada unless you have specific income that requires a return to be filed, owe taxes or elect to file a return. Therefore, if the income you receive has the proper amount of withholding tax taken on it, no return is required in Canada as Canada Revenue Agency has already received their tax allotted under the treaty.
Annuitized pension payments have a withholding tax rate of 15% when received by a U.S. resident and this tax is available as a foreign tax credit on the federal 1040 U.S. tax return. Note: most States do not abide by the Federal Income Tax Treaty; therefore, foreign tax credits are generally not allowed on the state return.
Canadian foreign pension plans are automatically treated as deferred pension plans in the U.S.; however, an 8833 treaty disclosure form is required to be included with the individual’s tax return to disclose the interest and exempt treatment.
FinCEN 114, the Foreign Bank Account Report (FBAR) will be required to be filed annually when an aggregate of $10,000 or more is held in financial accounts outside the U.S. This is a separate report from the individual tax return and in previous years, this was due every June 30th of the following year.
However, recently, the IRS changed the filing deadline for the FinCEN 114 to April 15th with the option to file a 6 month extension to October 15th. The 2016 tax year is the first year for this new deadline so the IRS is giving everyone an automatic 6-month extension if the return is not filed by April 15th.
Thanks to U.S. cross border tax expert Angela Preteau, CPA, CA and Partner, Frostiak & Leslie Chartered Professional Accountants Inc. for her assistance with this answer. She is the author of Canadians and the IRS, and the certificate course Cross Border Taxation, both published by Knowledge Bureau, and great resources for taxpayers who want to learn more about this complicated area of taxation for Canadians and U. S. citizens living in Canada.
Evelyn Jacks is president of Knowledge Bureau, which offers e-learning at knowledgebureau.com. Evelyn tweets @evelynjacks and blog at evelynjacks.com
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