If you’re a new or current resident of Canada, we can help manage your IRA accounts. You won’t have to collapse or liquidate them, which can result in significant penalties or tax consequences.
What Are The Tax Implications?
As a resident of Canada, when withdrawing from an IRA, the proceeds are categorized as income and subject to tax. If the funds are transferred to an RRSP, it could result in a “tax-neutral” outcome for the year of transfer under certain conditions.
The individual must pay U.S. tax on the IRA withdrawal, and as a resident of Canada, the individual must report the IRA withdrawal as income on their Canadian tax return. Additional care should be taken in light of the additional 10% early withdrawal penalty tax that the IRS will levy if the withdrawals are taken before retirement age, which is currently 59½.
The individual can claim the tax paid in the U.S. as a foreign tax credit. The foreign tax credit can be used to offset the Canadian tax on the IRA income.
Can I Contribute The IRA Proceeds into an RRSP?
If the individual withdraws the IRA funds and contributes the proceeds into an RRSP, they can get an RRSP tax deduction. This can be used on their Canadian tax return to reduce tax on their income as well as reduce the tax on the IRA income not fully covered by the foreign tax credit.
Under certain conditions, the gross amount of a lump sum IRA withdrawal can be contributed to an RRSP without the use of RRSP contribution room through what is referred to as a 60(j) transfer.
Absent of the conditions of the 60(j) transfer being met, it will be important to consider whether there is sufficient RRSP room to facilitate the contribution and deduction.
If both the foreign tax credit and RRSP tax deduction are fully used, the withdrawal of IRA funds into an RRSP may result in a “tax-neutral” scenario for the year of transfer.
But failure to fully utilize both could result in double taxation upon RRSP withdrawal. It is crucial to consider that the withdrawal of the IRA will have unavoidable US tax consequences that may be accelerated compared to leaving the funds in a traditional IRA.
Marnoa Private Wealth Counsel Ltd. (“Marnoa”) is a Portfolio Manager and Exempt Market Dealer registered in the provinces of Ontario, Quebec, British Columbia, Manitoba, Alberta, and Nova Scotia.
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