Test that the profit qualifies as a pension

If a consumer has gathered pension belongings as a non-resident of Canada and needs to switch that profit to their RRSP, step one is to find out if the profit qualifies as a pension below the Tax Act. on earnings (LIR) based mostly on the next: Standards:

• contributions have to be made by an employer to ensure that an worker to offer future pension earnings,
• the profit paid have to be a lump sum for the switch,
• the retirement profit have to be attributable to employment whereas the worker was a non-resident of Canada, and
• the retirement profit have to be included in earnings for the 12 months and can’t be exempt from tax in Canada as a result of a tax treaty.

What if the overseas account in query is like an RRSP – will it qualify? The brief reply isn’t any. The one eligible overseas particular person retirement account is a US Particular person Retirement Account (IRA), which is roofed by a distinct provision of the ITA. If the account shouldn’t be an employer pension or an IRA, it isn’t eligible for switch.

Nonetheless, prospects should be capable of convey these accounts to Canada. Canadian residents are taxed on worldwide earnings, so withdrawals from overseas retirement accounts – whether or not lump-sum or periodic – at all times represent taxable earnings. Overseas tax credit could also be obtainable to offset overseas tax withheld on these withdrawals. If the RRSP contribution room is ample, withdrawals from overseas accounts could be made to an RRSP. This could create the mandatory deduction in opposition to the preliminary withdrawal. This technique might be used over a number of years, as it might not be restricted by the provisions of the ITA on transfers overseas.

Test overseas guidelines concerning pension transfers

Some international locations have their very own guidelines for pension transfers which can stop a switch even when that pension met the ITA necessities above. Failure to comply with house nation guidelines also can end in punitive tax penalties.

Different international locations might require authorities approval to switch pensions to overseas jurisdictions or require overseas accounts to adjust to native pension legal guidelines or provisions. The UK, for instance, has a listing of acknowledged abroad pension schemes to which UK based mostly pensions could be transferred. Advisors can test the web site of the overseas authorities customs and income company for data on pension switch or contact the administrator of the overseas pension plan to inquire about switch choices for non- residents.

Study tax treaties

The ultimate requirement for overseas pension transfers below the ITA is that the overseas pension profit be included in earnings for Canadian tax functions. If there’s a provision in a tax treaty that permits the overseas profit to be exempt from Canadian tax, a deduction could also be claimed on a consumer’s Canadian earnings tax return to offset the inclusion of earnings from the pension withdrawal. . However there is a catch: In case your consumer claims this deduction, they can not declare the overseas pension switch deduction, and any RRSP contribution would require contribution room.

Lastly, an exemption from Canadian tax in a tax treaty doesn’t essentially imply that the pension earnings is exempt from tax in its nation of origin. In such circumstances, prospects have two choices:

1. Switch the overseas pension plan to their RRSP and waive the deduction below the tax treaty that may have exempted the overseas pension withdrawal from Canadian tax, with out affecting the restrict of their RRSP; or
2. Withdraw the overseas pension quantity and take the deduction obtainable below the tax treaty, exempting the quantity from Canadian tax. Any RRSP contribution could be restricted by the contribution restrict.

Within the various situation, the place a overseas pension is exempt from native tax however taxable for Canadian residents below the relevant tax treaty, the pension might be transferred to an RRSP, assuming the pension meets the necessities of the deduction for switch of overseas pension. The truth that no overseas tax would apply might make such a switch fascinating from a digital standpoint.

abstract

With almost 200 international locations all over the world and 93 Canadian tax treaties, it is laborious to know which overseas pensions could be transferred to an RRSP. The above course of can be utilized to assist prospects assess their choices. Advisors ought to accomplice with a tax advisor conversant in these areas to substantiate the intricacies and navigate the complexities.

Curtis Davis, FMA, CIM, RRC, CFP, is a senior advisor for tax, retirement and property planning, retail, at Manulife Funding Administration.