Your Tax Questions Answered
Question
"I am a US citizen permanently residing in Canada. I am retired and my major income is pensions from the US, and IRA withdrawals. My question is what part of this income is taxable in Canada, according the the tax treaty, and how do I handle it on my Canada tax return?"
Answer
U.S. Social Security and other foreign pensions are reported in Canadian dollars on Line 115 of the Canadian tax return. However, 15% of Social Security Benefits are exempt from tax in Canada by virtue of the Canada/U.S. Income Tax Treaty, so you can take an offsetting deduction of 15% of the Social Security benefits paid on Line 256.
Your foreign pension income can also qualify for the $1,000 "pension income amount," which is a non-refundable tax credit claimed on Line 314 of Schedule 1. The calculation of this credit must take into account the deduction taken on Line 256. Canada Revenue Agency provides instructions on how to calculate the pension income amount in the tax package.
The taxation of IRA's in Canada depends on the type of IRA. A general rule is that IRA withdrawals are not taxable in Canada--if they would not be taxable in the U.S. if you were a U.S. resident. This situation might arise if you:
Transfer funds between plans; or
Withdraw funds related to contributions that were not deductible from your income in the U.S. when the contributions were made in the first place.
If the above rule doesn't apply, then your IRA withdrawals are fully taxable in Canada on Line 115. They are treated just like Canadian RRSP's in that you don't have to pay tax on the interest, dividends, or gains earned inside the plans until withdrawals are made, with the exception of Roth IRA's.
Contributions to Roth IRA's are not deductible for U.S. taxpayers under U.S. rules and not taxable when withdrawn, therefore it would seem that CRA would not tax Roth IRA withdrawals as per the above rule. However, CRA does tax the ongoing income earned inside a Roth IRA, as it is earned. In other words, the interest, dividends, and capital gains accumulated inside a Roth IRA are not tax-deferred in Canada as they are in the U.S. These earnings should be reported to Canada as investment income, with tax paid on the income as it accrues.
The taxation of IRA's in Canada appears to evolve over time. A search of the CRA website yields the cryptic statement "If you had an individual retirement account (IRA) from the United States and either received amounts from it or converted it to a Roth IRA, contact us." I do recommend contacting them to get a ruling on your situation and double check that your IRA income is reported correctly. See the following webpage for contact information:
http://www.cra-arc.gc.ca/contact/menu-e.html
Of course, I would be happy to do this for you and take care of your income tax preparation needs!