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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 10104
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am retired & filed a W8Ben before leaving the US %

Customer Question

I am retired & filed a W8Ben before leaving the US for 15% withholding as I was advised. Is this income tax exempt in Canada & where do I document it?
Submitted: 7 months ago.
Category: Tax
Expert:  Christopher B, Esq. replied 7 months ago.

error. Somehow my response posted to your question on accident. I apologize and will opt out.

Expert:  Lane replied 7 months ago.

Hi,

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No, if I understand your question correctly, and you are returning to Canada, what filing the W-8Ben does is prevent the 401(k) administrator from withholding US taxes, (or allow for a lower rate of withholding) because you are a beneficiary of the US/Canada tax treaty

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A lump sum distribution from an IRA or 401(k) to a non-U.S. citizen, non-U.S. resident is generally subject to a U.S. 30 percent withholding tax.

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If the payments from the IRA or the 401(k) qualify as periodic pension payments under the Canada-U.S. Income Tax Convention, the withholding tax rate may be reduced to 15 percent.

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As a general rule, amounts invested in an IRA or a 401(k) while the individual was a non-resident of Canada and received once the individual has resumed his or her Canadian residency are taxable in Canada as pension benefits at the individual’s marginal tax rate.

Expert:  Lane replied 7 months ago.

The Canadian Income Tax Act allows the transfer of amounts from an IRA or a 401(k) to an RRSP on a tax-deferred basis, provided some conditions are met. Only lump sums can be transferred to an RRSP. Periodic pension payments do not qualify.

Expert:  Lane replied 7 months ago.

Essentially your options are as follows:

...

1. Leave your 401K or IRA in the US and have someone manage the investments for you;
2. Cash out the plan and pay a lot of unnecessary tax;
3. Start to take a retirement distribution (if you are of retirement age);
4. Transfer the plan to an RRSP in Canada.

Expert:  Lane replied 7 months ago.

Option 4 provides the most deferral ... You must first roll the dollars into an IRA

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Once you have rolled your 401(k) into an IRA, Canadian citizens can roll over their U.S. IRA plans to a Canadian RRSP However, as a Canadian resident, this will result in a 15% withholding tax (because you signed the W-8Ben rather than a flat 30%

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(in addition to the 10% early withdrawal penalty if you have not yet reached the age 59½ threshold).

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But then the dollars can be held tax free in the RRSP.

Expert:  Lane replied 7 months ago.

here are some good articles on the issue
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https://www.worldatwork.org/waw/canadanews/html/canv11n2-3.html

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http://www.canadianexpatnetwork.com/public/1237.cfm

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http://www.tewealth.com/blog/what-can-i-do-with-my-u-s-retirement-plan-401k-or-ira/

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And here's the CRA guidance:

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subparagraph 60(j)(i) or 60(j)(ii) of the Canadian Income Tax Act (ITA)

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Expert:  Lane replied 7 months ago.

Please let me know what questions you have

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Lane

..

I hold a law degree (JD, Juris Doctorate), with concentration in Tax Law, Estate law & Corporate law, an MBA, with specialization in finance & tax, as well as CFP® and CRPS designations. - I’ve been providing financial, Social Security/Medicare, estate, corporate, both for-profit and non-profit, and tax advice, to clients on three continents, since 1986.