Managing Your Money

Transferring a foreign pension to Canada?  It pays to look before you leap

Have you got a pension payable from another country where you lived and worked for some time?  Are you thinking about bringing those investments into Canada to add to your retirement nest-egg here?  Before you make the leap – or in this case, the transfer – and move those funds into Canada, there are some important tax implications you should look at.

Canada has tax treaties with many countries, including the United States.  The purpose of a tax treaty is twofold:  to prevent double taxation, and to reduce tax evasion by allowing for the exchange of taxpayer information between the countries.  On the surface, that sounds pretty simple – you shouldn’t be double-taxed on a transfer of pension funds into Canada -- but the reality is a lot more complex.

Even if Canada has a treaty with the source country, it is very possible that a straight transfer of your pension plan assets from that country could cause taxes to be paid in both Canada and the country of source.  That’s because some types of pensions can be rolled over and some cannot.  To find out what’s what requires knowledge of the taxation rules in the foreign country and a careful reading of the pertinent tax treaty along with any additional rulings or bulletins by the Canada Revenue Agency (CRA) – and even then, the complexities are such that you should always seek advice from a tax expert and financial planning professional to be sure you won’t be hit by unexpected taxes.

Let’s take a closer look at how the Canada/U.S. tax treaty can affect the rollover of two common U.S. pensions – a traditional Individual Retirement Account (IRA) and a 401(k) for someone who is not a U.S. citizen or greencard holder:

IRAs are similar to our Registered Savings Plans (RSPs) in that they provide tax-assisted savings for retirement.  Like RSPs, annual IRA contributions are limited and the income earned within the plan is tax-deferred until withdrawn.

If you have a traditional IRA and become a resident of Canada, there are no immediate tax consequences.  Investment income earned in the plan continues to be tax deferred for both U.S. and Canadian tax purposes.

Under Canadian rules, you are allowed to transfer a lump sum IRA withdrawal to an RSP on a tax-deferred basis, but the transfer is not exempt from U.S. tax and the general 30 percent U.S withholding tax will apply on the total withdrawal.  Depending on the amount of your Canadian taxable income, some or all of the U.S. withholding tax can be offset by the foreign tax credit on your Canadian tax return.  Any U.S. penalties (usually 10 percent) for early withdrawal before age 59 ½ from your IRA are not eligible for the Canadian foreign tax credit.

401(k)s are an employer-sponsored deferred income arrangement through which employees elect to have a portion of their salary transferred to the plan (within annual contribution limits) reducing the employee’s salary for tax purposes.  Matching employer contributions may also be made and these contributions are not taxable in the U.S. Income earned within the plan is tax-deferred until withdrawn, but early withdrawal (before age 59 ½) is generally subject to a U.S. penalty of 10% in addition to the tax.  However, you can transfer funds from a 401(k) plan to an IRA on a tax-deferred basis.

When you move to Canada, there are no immediate tax consequences associated with a 401(k); moneys in the plan continue to be tax-deferred until benefits are actually received from the plan.  If no additional contributions are made, benefits received from the plan will be taxable in both Canada and the U.S., but Canada will allow a foreign tax credit for the U.S. tax paid.

With so many complexities that can so powerfully affect your retirement income, it makes good sense to look to the advice of a professional financial advisor before you make the leap of transferring foreign pension funds to Canada.

This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.