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Updated on November 20, 2023
It is possible to transfer funds accrued in a foreign pension plan to Canada with zero tax impact, provided the transfer is well planned.
If you have lived and worked abroad, you may have contributed to a retirement plan. For example, in the U.S., there is the Individual Retirement Account (IRA) and 401(k) and 403(b) plans. However, before you decide to move these retirement savings to Canada, there are several factors to consider. It is therefore important to consult an international tax expert in order to define the strategy best suited to your situation and properly plan the transfer.
Why transfer the funds?
While transferring the funds to Canada is not mandatory, there may be several benefits to this process, such as:
- Simplifying wealth management by consolidating all retirement savings in Canada;
- Avoiding complications at the time of death (transferring the funds could be complicated);
- Avoiding U.S. estate tax and high legal fees at the time of death;
- Minimizing the risk of exchange rate fluctuations.
Transferring funds to your RRSP
When you become a Canadian resident again, you can transfer a lump sum to your RRSP in Canada. Under certain conditions, you then have an equivalent deduction that does not take into account your RRSP deduction limit.
- The amount transferred to your RRSP must be included in your taxable income in Canada, but the equivalent amount can be deducted, as is the case with a standard RRSP contribution.
- To be entitled to the deduction in the year of transferring a foreign plan, you have to make the RRSP contribution no later than 60 days after the end of the year of transfer and the transfer must occur before December 31st of the year you turn 71 years of age (transfers to a registered retirement income fund (RRIF) do not qualify).• Transfers to a spouse’s RRSP are not permitted.
- In Canada, with proper tax planning, you may be able to recover up to all of the foreign tax by claiming a foreign tax credit. This will avoid double taxation, i.e., not having to pay both the foreign tax and the Canadian tax that will be due when you start withdrawing funds from your RRSP.
Transferring with zero tax impact: Example of a U.S. plan
Let’s say that you have a U.S. pension plan valued at US$100,000. If you withdraw the full amount to transfer it to an RRSP in Canada, you will pay US$30,000 in U.S. tax (30% of US$100,000). You will then have a US$70,000 balance to transfer. Nevertheless, you will be able to contribute up to US$100,000 to your RRSP by designating this contribution as a qualifying transfer (the allowable tax deduction is equal to the total amount withdrawn from your U.S. plan).
Ideally, in order to contribute the full amount allowed, you will also need to have income from other sources, since the U.S. tax authorities will have withheld 30% of the amount from your retirement plan. Note that if you are under age 59 1/2 at the time of withdrawal, you may be subject to an early withdrawal penalty of 10% of the amount withdrawn.
To achieve zero tax impact, you have to be able to claim the highest possible foreign tax credit to recover U.S. tax paid and avoid double taxation. This requires having sufficient other income to report in Canada.
Periodic payments on retirement
Another option is to leave the funds in the foreign plan until retirement and then make periodic withdrawals as permitted under tax rules.
- Under this option, you cannot transfer the amounts to your RRSP in Canada, unless you have contribution room.
- The withdrawn amounts are added to your taxable income in Canada.
- In Canada, you could recover any foreign tax paid by claiming a foreign tax credit on your tax return.
Regardless of the solution you choose, there are several other important considerations to ensure that there is zero tax impact and to avoid double taxation. That’s why solid planning with a tax expert is essential before you start transferring funds from your foreign pension plan.
Do you have questions? Our team of international taxation experts can support you in making the choice and implementing the most beneficial tax strategy. Contact us to talk to one of our specialists.
This article was drafted in collaboration with Julie Barma, Senior Consultant, Tax.
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