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I have a client who received a Form NR4 -Lump-sum payment…

I have a client...

I have a client who received a Form NR4 -Lump-sum payment from a Canadian Registered Retirement Plan (RRSP)e some questions as to the tax ramifications. She is Resident of the United States.

Accountant's Assistant: The Accountant will know how to help. Please tell me more, so we can help you best.

She closed out the plan in late 2017the payer withheld 25% in Canadian taxes. She is single with no dependents.

Accountant's Assistant: Is there anything else important you think the Accountant should know?

That may be enough for now.

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Customer reply replied 4 months ago
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Customer reply replied 4 months ago
The Gross Income reported by the payer on the Form NR4 is 18,652.32 (Canadian dollars) and the Non-resident tax withheld is $4,663.08 (25). She is single with no dependents. Is a Canadian tax return required to be filed? Is the distribution taxable on her 2017 Form 1040? If so, can a foreign tax credit be claimed?
Answered in 56 minutes by:
3/9/2018
Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,394
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Welcome to Just Answer. My name is ***** ***** I will be happy to assist you.

Your client will report the distribution from the RRSP on her US tax return, and claim a foreign tax credit for the taxes paid to Canada.

Lump sum distributions from an RRSP to a non-resident are taxed at 25%. Your client would not be required to file a tax return in Canada, but can do so if it would be beneficial to her.

Please let me know if I can assist you further.

Thank you and best regards,

Barb

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Customer reply replied 4 months ago
That's great news Barb. She will be pleased on both scores (no Canadian tax return and a foreign tax credit on her US federal return). On the form 1116 - Foreign Tax Credit, there are five( 5) categories of income listed. Which one (1) should be checked?
Also, is the distribution taxable on the Massachusetts return?

For Form 1116 - Lump Sum Distributions

As to MA, yes.

My goal is to provide you with excellent service. Please take a moment to rate my answer with a 5-star rating to let me know that I have achieved my goal.

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Customer reply replied 4 months ago
I you check the Lump-Sum Distribution box, it takes you to Form 4972 - Tax on Lump-Sum Distributions, which states at the top (From Qualified Plans of Participants Born Before January 2, 1936). My client was born much after that date, so I didn't think it was required. Am missing something here?

Form 4972 is not required. The RRSP is not a qualified plan.

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Customer reply replied 4 months ago
Ok Barb. When I changed the category of income to Lump-sum distributions the Form 1116, show amounts on Lines 11, 14 and 15. Line 16 (Adjustments) is currently blank. Line 17 asks for the total of Lines 15 and 16, but is left blank by my tax software. Lines 18 through 29 are also blank and zero shows on Line 30 (foreign tax credit). A smart worksheet shows that an amount must be filled in on Line B - Enter the sum of the amounts from Form 4792, Lines 6 and 12 that are from foreign sources.
I hope this is clear, but, if not, please let me know.

Since I can't see what you're seeing, I'm at a disadvantage.

How did you enter the lump sum distribution as income in the return?

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Customer reply replied 4 months ago
It was entered on Line 16b of Form 1040. It transferred from a worksheet my tax software provides entitled Certain Canadian Registered Retirement Plans Worksheet.

Go through Form 4972 when it pulls it up. Once you answer the questions, your system should realize it is not needed and let you continue.

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Customer reply replied 4 months ago
Will do Barb.Also, on the RRSP worksheet, it has two (2) boxes - Beneficiary and Annuitant for taxpayer's status in the plan. Which one, if any, should be checked?

I would think it would be the annuitant, but like I said, I can't see what you're seeing.

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Customer reply replied 4 months ago
Should the Payer (bank) be able to provide that info?

Yes, or the taxpayer.

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Customer reply replied 4 months ago
I opened the Form 4972 - Tax on Lump-Sum Distributions and below that heading it says (from Qualified Plans of Participants Born Before January 2, 1936. Since my client was born well after that date I would assume that the form should not be filed.Anyway, I went to Part 1 - Line 1 and it asked Was this a distribution of a plan participant's entire balance from all of an employer's qualified plans of one kind ( for example, pension, profit-sharing, or stock bonus)? If "No," don't use this form. So I checked the NO box.
That allowed me to complete the Form 1116 (including the related worksheet) with no error messages.The result seems to be that there is no credit allowed in 2017 to reduce the federal income tax, but a carryover amount is shown on the worksheet.Does that make sense to you and if so when will the client actually be able to utilize the foreign tax credit carryover?
Customer reply replied 4 months ago
Let me correct that Barb.
Even after I checked the NO box on the Form 4972, I still get a requirement to fill in the following:
Enter the sum of the amounts from Form 4972, lines 6 and 12, that are from foreign sources. Also enter the amount on Form 1116, line 17.
Line 17 which is described as your net foreign source taxable income is now blank.

Something is not right.

I know you can't use Form 4972, but you have to put the foreign income somewhere so the credit is received for the taxes paid.

The amount of the foreign taxes paid should show up on Form 1116.

What software program are you using and does it have live support?

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Customer reply replied 4 months ago
I use ProSeries Basic Barb. It does not provide very good live support.
Customer reply replied 4 months ago
Barb, if I checked General category income instead of Lump-sum distributions the foreign tax credit gets calculated and no Form 4972 is prepared.
Do you think that would be the way to go?

Let me ask a colleague of mine who I believe is very familiar with ProSeries. He may post behind me in this Q&A thread.

Thank you.

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You are so right--no support from ProSeries!

BUT

A good workaround for this would be to enter it on Line 21 (list it as RRSP lump sum distribution). Then generate Form 1116 for the foreign taxes paid.

Let me know if that works.

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Just following up with you to see if you have any other questions. If so, please let me know so I can continue to assist you.

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Customer reply replied 4 months ago
Hi Barb. Hope you had a good weekend.
I was able to get some good support from ProSeries, after a few attempts and a long wait on hold.The rep did some extensive research and informed me that the General category income box is the right one to check on the Form 1116. When you do that there is no need to get involved with Form 4972.
Also, Form 1040, Line 16b is where the gross income gets reported from the Canadian Registered Retirement Plans Worksheet that the program software provides.A few other questions as we wrap this up:Are you familiar with preparing Canadian income tax returns?
Are returns required by the various provinces in Canada (similar to what we do for most states here)?
Do taxpayers in Canada get a deduction for the amounts they contribute to the plan (similar to IRA's here)?
Does the taxpayer have to pay US taxes on the gross income received even though some of that is from contributions made to the plan?
Thanks.

I guess that's ProSeries' workaround for that.

Unfortunately, I am not familiar with Canadian tax returns and would not want to provide you with incorrect information.

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Customer reply replied 4 months ago
I'm just wondering if my client has to report the full amount of the lump-sum payment as some of that is a return of her contributions to the plan.

Did she pay Canada tax on the full amount?

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Customer reply replied 4 months ago
They withheld 25% from the gross income reported on the Form NR4.

I wouldn't think that her own contributions would be taxable.

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Customer reply replied 4 months ago
Can you get a definitive answer on that Barb?

Does the NR4 contain any supporting information?

If not, if she gets questioned by the IRS, how would she prove that some of it contained her own contributions?

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Customer reply replied 4 months ago
The NR4 reports Gross income in Box 16 and Non-resident tax withheld (25%) in Box 17 (both in Canadian dollars).I would think she has a record of her contributions or perhaps the Canadian payer bank does. Again that would be in Canadian dollars.

You are converting to US dollars for the US return, right?

In any event, since foreign pensions aren’t qualified plans, employee contributions do not reduce the employee’s taxable US income, and employer contributions to a foreign pension fund increase the employee’s taxable income.

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Customer reply replied 4 months ago
I would report distribution in US dollars.
I'm not sure she was making contributions to the RRSP through her employer, but as an individual, similar to IRA contributions here.She does not appear to be filing a 2017 Canadian return so that the 25% withheld and reported on the NR4 would be the total Canadian tax paid for which the foreign tax credit would apply. I'm wondering if she can get any of that refunded?
I'm wondering if she could get any of that back if she filed a Canadian return.

As I mentioned, I'm not familiar with Canada returns.

The distribution is taxable because the RRSP is not a qualified plan and employee contributions do not reduce her US taxable income.

At this point, I would ask that you take a moment to rate my answers thus far so I receive credit for assisting you.

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Customer reply replied 4 months ago
I don't believe she is making the contributions as an employee through her employer, but directly to the Canadian bank.

It is still a non-qualified plan for US purposes.

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Customer reply replied 4 months ago
the entire distribution is taxable on Form 1040?

That's right.

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Customer reply replied 4 months ago
Is it possible that she could file a Canadian income tax return and get some of that 25% tax withheld? I believe the bank is required to withhold that amount from RRSP lump-sum payments.

I'm not familiar with Canada's rules regarding nonresidents.

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Customer reply replied 4 months ago
Hi Barb...snowing in Boston.I did some internet research regarding Canadian RRSP and related issues, especially for non-residents of Canada. I found something quite interesting which I'm sue you will like to know. I went to 'Non-residents of Canada - Canada.ca' which provides information about the income tax rules that apply to non-residents of Canada. Here is a section of that information:If you receive Canadian income that is subject to Part XIII tax:
•Canadian payers, including financial institutions, must deduct Part XIII tax when the income is paid or credited to you.
•The Part XIII tax deducted is your final tax obligation to Canada on this income (if the correct amount is deducted).
•The usual Part XIII tax rate is 25% (unless a tax treaty between Canada and your home country reduces the rate).
•Part XIII tax is not refundable. Therefore, do not file a Canadian tax return to report the income unless you elect to file a return because you receive either:◦Canadian rental income from real or immovable properties or timber royalties (see T4144, Income Tax Guide for Electing Under Section 216);
◦certain Canadian pension income (Electing under section 217).So it looks like the 25% withheld y the payer is the foreign tax that can be used to compute the credit on Form 1116.Here the link to that information so you can review and send me any comments you may have.https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/individuals-leaving-entering-canada-non-residents/non-residents-canada.html#txblgtnsThanks.

Thank you for the info.

I am familiar with the some of the information you found out, but I did not want to render an opinion because I'm not a Canadian tax expert.

I'm in Florida--so, no snow for me!

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Customer reply replied 4 months ago
Lucky you Barb. Your also lucky in that there is no income tax in the Sunshine State.The bot***** *****ne seems to be that Canada gets the 25% tax withheld by the payer and the IRS and Commonwealth of Massachusetts gets the taxes computed on the gross distribution. The taxpayer then recovers the Canadian tax by taking the Foreign Tax Credit on the Form 1116 which flows to the Form 1040.

Thank goodness for the FTC!

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Customer reply replied 4 months ago
It looks like some of it will be carried over to 2018.

Good luck in the snow! Stay safe and warm!

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Customer reply replied 4 months ago
It's still coming down.Thanks for your help.I'll submit my rating shortly.

My pleasure.

Please do not hesitate to specifically request me in the future if you have any other questions.

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Customer reply replied 4 months ago
My trial period ends tomorrow Barb.Any suggestions?

I guess see how it goes in the future.

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Customer reply replied 4 months ago
Can I contact on a case-by-case basis and get charged that way?

I don't know. Experts have nothing to do with billing, etc.

You can call Just Answer Customer Service at 1-***-***-**** and someone will be happy to explain it to you.

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Customer reply replied 4 months ago
Will do Barb.Have a good rest of the tax season.

You do the same.

I look forward to hearing from you in the future.

Barbara
Barbara, Enrolled Agent
Category: Tax
Satisfied Customers: 6,394
Experience: 20+ years of experience in tax preparation; 30+ years of experience as a real estate/corporate paralegal.
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Thank you for the positive rating of my answer. It is very much appreciated.

Have a great day!

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Customer reply replied 4 months ago
Your welcome Barb.I called the number you gave me and discussed the program with a representative in billing. I didn't want to sign up for the plan that charges $46.00 per month so I cancelled my account.
The rep said I could post a new tax question to you and get charged $5.00, but I'm still not clear how it works after that. The rep said a graph appears with amounts I want to spend on the issue, but I'm not sure exactly how it works from there. Perhaps you can let me know at your earliest convenience.
Thanks.

Unfortunately, experts are not permitted to discuss billing questions. Experts are users on the site just like you are.

If and when the times comes, I'm sure we can figure it out.

How much snow did you get?

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Customer reply replied 4 months ago
Sounds good Barb.We got about 2 feet of snow, but it's sunny out now and much of it has been cleared by the city or the sun. We have a contractor who services the needs of our condominium association.

Glad to hear it's business as usual!

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