Returning to Canada - Setting up annuities, receiving the funds, and taxes

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EnjoyTheJourney
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Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by EnjoyTheJourney »

I'm trying to better understand how to withdraw funds from my US-based retirement account in a way that minimizes taxes paid, while living in Canada as a Canadian citizen.

My understanding from talking with a taxation expert is that periodic payments (which must be annuities of a period of 10 years or more, it turns out) would have 15% tax withheld by the IRS, with no tax filing needed afterward (and no partial reimbursement possible, it seems). If non-periodic payments are received then the tax withholding would be 30%, with no tax filing needed afterward (and no partial reimbursement possible, it seems). So, it looks like periodic payments via annuities is the most appealing way forward for receiving all funds in my US-based retirement account.

Apparently I would not be able to set up annuities with US-based firms after returning to Canada. So, I apparently need to set up an annuity ladder with my funds held in a US-based retirement account before leaving the country.

From another source it seems that annuities received from US-based institutions must be deposited in a US bank account. But, since I will be a Canadian citizen living in Canada, I am apparently not allowed to have a US-based bank account. Is it possible to (legally!!) designate another person / entity to receive the funds on my behalf in the USA, and then send that money to Canada? Is there another (legal!) way to manage this?

Any insights offered would be helpful and most appreciated.
JDave
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by JDave »

I'm an American/Canadian dual citizen, and have lived and worked in both countries. My advice is to hire a Canadian accountant - you have serious taxation issues, and I think the money spent getting professional advice will prove worth it.
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EnjoyTheJourney
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by EnjoyTheJourney »

JDave wrote: Thu Jun 16, 2022 1:30 pm I'm an American/Canadian dual citizen, and have lived and worked in both countries. My advice is to hire a Canadian accountant - you have serious taxation issues, and I think the money spent getting professional advice will prove worth it.
Thank you for your response!

It would indeed be a major mistake to try to DIY this. To allay possible concerns, I am currently consulting with a Canadian accountant with extensive expertise in cross-border taxation issues.

However, it can also be risky to take whatever is said by any one individual as The Whole Truth, even in their own area of expertise, with a subject as complicated as this. In particular, all (legal!) options for navigating the requirement to have a US-based bank account may not even be fully understood by somebody who is in other ways an expert on cross-border taxation. There may be people who post here who have navigated this kind of issue and hopefully they can share what options they have used or considered.
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EnjoyTheJourney
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by EnjoyTheJourney »

We're looking at MassMutual as a vendor (through Fidelity as the seller's agent) for a 10 year period certain annuity. Has anybody here had good / bad / OK experiences with them? Do they use fees to extract a lot more money from clients than one might expect?

Thank you in advance for any experiences / insights offered!
JohnFiscal
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by JohnFiscal »

A number of the large Canadian banks offer accounts through a US subsidiary. We bank with Royal Bank of Canada and have checking account with "RBC (Georgia)" in the US. (yes, it's a funny name but that's the legal name. We banked with RBC in Florida when they had a retail presence in the US. No more, it's all online.) Funds can be transferred cross-border seamlessly (I have heard anecdotes that TD is not as integrated cross-border). You can get a US dollar denominated account in Canada for more convenience if need be (I don't). RBC does not give great currency exchange rates on the cross-border transfers (but then neither does Fidelity) so I am using an ofx company for exchange, quite easy and fast.

My situation with taxes is different as I am a US citizen (wife is dual). Some time ago I checked withholding on Canadian income (when we were still in the US) and it was same thing with the 30% and "no need to file". But if I remember correctly, you could file a return to claim any excess taxes paid; I'm sure the US must do the same thing, I would surely not want to pay flat rate tax withholding without having the opportunity to file a return to claim excess payments...that doesn't sound right.
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by JohnFiscal »

JDave wrote: Thu Jun 16, 2022 1:30 pm I'm an American/Canadian dual citizen, and have lived and worked in both countries. My advice is to hire a Canadian accountant - you have serious taxation issues, and I think the money spent getting professional advice will prove worth it.
definitely this. I consulted with some US professionals before moving last year from the US to Canada but it was very difficult because knowledgeable local people were limited or non-existent. Most of my info came from gleaning online. (note, I am a Canadian PR and my wife has dual citizenship)

My situation is a bit different as all our financial assets are in the US (except for two houses and some cash here in Canada) and we are retired, no more wage income. I did hire a Canadian accountant for 2021 income taxes; he is licensed in both countries and does primarily cross-border work.

Vanguard gave me grossly incorrect information, telling me that upon moving to Canada we would have to close our accounts at Vanguard and liquidate our retirement accounts...apparently wherever they were held ...but that we could roll into Canadian accounts. That first one would be a HUGE tax event and is not necessary. Rolling into Canadian accounts is "true" but extremely limited in dollar amounts. Fortunately further research showed this was not entirely true that Vanguard would shut down our accounts. With a Canadian address Vanguard will enforce closing taxable accounts but retirement accounts can be maintained...but no transactions can be made other than distributions...so, no rebalancing. Not really much of an issue for us as we are retired, no money going in. We also have accounts at Fidelity and it's pretty much the same thing.

A Roth 401K is tricky. Canada doesn't recognize these as tax exempt by default. You can send in an "election" letter to the CRA indicating that you want this treated as an annuity, which will exempt it from taxes on annual earnings and taxes on distributions. You have one year to submit this letter to the CRA from the time you enter (or return to) Canada. Fortunately I discovered this early on on my own and took care of that.
Topic Author
EnjoyTheJourney
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by EnjoyTheJourney »

Oops!

I forgot to mention that we confirmed there's no law against a non-US citizen having a US bank account. That's a very good thing since annuities from US insurance companies can only be directly deposited to US bank accounts. Also, we already have an account with TD Bank and they assured us that they won't close our account. Since we're moving soon we'll leave things that way until after we move and we have a bit more spare time to consider how we might (or might not) be able to organize something noticeably better.

It is also a Very Good Thing that filing a non-resident alien (1040NR) tax return is available if we overpay for US taxes, at some point.

These things are both very helpful.
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by LadyGeek »

This thread is now in the Non-US Investing forum (non-US investing). This forum attracts the attention of members who can help you the best.

EnjoyTheJourney - Please post this question in our sister Canadian forum
Financial Wisdom Forum
. You'll get expert advice.

They also have an excellent wiki: finiki, the Canadian financial wiki

- Cross-border and expatriate issues (from the Canadian perspective)
- Canadian-US investing differences

Disclaimer: I'm a member of both forums.
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by Hyperborea »

It's not clear that the IRA withdrawals need to be periodic to count as a pension. While the PLR is based on the Australian-US tax treaty it like the Canadian-US tax treaty is based on the OECD model and has a lot of similarities. It's probably worth investigating.


----------------------------------
https://www.irs.gov/pub/irs-wd/0416008.pdf
Paragraph 1 of Article 18 (Pensions, Annuities, Alimony and Child Support) of the
Treaty provides that, subject to the provisions of Article 19 (Governmental
Remuneration), “pensions and other similar remuneration paid to an individual who is a
resident of one of the Contracting States in consideration of past employment” are
taxable only in that Contracting State. Paragraph 4 of Article 18 defines “pensions and
other similar remuneration” to mean “periodic payments made by reason of retirement
or death, in consideration for services rendered, or by way of compensation paid after
retirement for injuries received in connection with past employment”. The word
“periodic” in Article 18(4) does not preclude the application of Article 18(1) to lump sum
distributions.


Based solely on the information submitted and the representations made by the
taxpayer, and provided that Participant is a resident of Australia within the meaning of
Article 4 (Residence) of the Treaty at the time of a distribution from the Plan, we
conclude that the distribution will be exempt from U.S. income tax under Article 18 of
the Treaty.
Also, if you read the OECD notes on the model treaties which the US treaties seem to follow, the discussion is that most individual retirement savings accounts (i.e. IRAs, 401ks, etc in the US) are "pensions" under the terms of the treaties. They also discuss lump sum versus periodic payments.

https://www.oecd.org/berlin/publikationen/43324465.pdf

pg. 276
5. While the word “pension”, under the ordinary meaning of the word, covers only
periodic payments, the words “other similar remuneration” are broad enough to cover
non-periodic payments. For instance, a lump-sum payment in lieu of periodic pension
payments that is made on or after cessation of employment may fall within the Article
pg. 277
6. Whether a particular payment is to be considered as other remuneration similar
to a pension or as final remuneration for work performed falling under Article 15 is a
question of fact. For example, if it is shown that the consideration for the payment is
the commutation of the pension or the compensation for a reduced pension then the
payment may be characterised as “other similar remuneration” falling under the
Article. This would be the case where a person was entitled to elect upon retirement
between the payment of a pension or a lump-sum computed either by reference to the
total amount of the contributions or to the amount of pension to which that person
would otherwise be entitled under the rules in force for the pension scheme. The
source of the payment is an important factor; payments made from a pension scheme
would normally be covered by the Article.
It’s not just that facts don’t seem to matter anymore. It’s that it doesn’t seem to matter that facts don’t matter.
Topic Author
EnjoyTheJourney
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by EnjoyTheJourney »

Thank you Hyperborea.

It's definitely food for thought and it has a reasoned basis. It raises questions about the dividing line between deferred compensation for employment (whatever that might be) and a pension, which seems like a challenging topic to navigate. It would seem, though, and sensibly, that if money is given to somebody in lieu of a pension that provides periodic payments then the sum of money that results and any associated disbursements could reasonably be treated as a pension.

I've passed that information along to the Canadian-based cross-border taxation specialist with whom I'm coordinating. I don't know how thoughtful he'll be in his response (perhaps it will be dismissed if it doesn't fit with his prior thinking, or perhaps not). Still, I'll report back on whatever I hear.
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by Hyperborea »

EnjoyTheJourney wrote: Tue Jun 21, 2022 8:01 am It raises questions about the dividing line between deferred compensation for employment (whatever that might be) and a pension, which seems like a challenging topic to navigate. It would seem, though, and sensibly, that if money is given to somebody in lieu of a pension that provides periodic payments then the sum of money that results and any associated disbursements could reasonably be treated as a pension.
That question seems to be answered in the second quote I included from the OECD model treaty discussion.

pg. 277
6. Whether a particular payment is to be considered as other remuneration similar
to a pension or as final remuneration for work performed falling under Article 15 is a
question of fact. For example, if it is shown that the consideration for the payment is
the commutation of the pension or the compensation for a reduced pension then the
payment may be characterised as “other similar remuneration” falling under the
Article. This would be the case where a person was entitled to elect upon retirement
between the payment of a pension or a lump-sum computed either by reference to the
total amount of the contributions or to the amount of pension to which that person
would otherwise be entitled under the rules in force for the pension scheme.
The
source of the payment is an important factor; payments made from a pension scheme
would normally be covered by the Article.

EnjoyTheJourney wrote: Tue Jun 21, 2022 8:01 am I've passed that information along to the Canadian-based cross-border taxation specialist with whom I'm coordinating. I don't know how thoughtful he'll be in his response (perhaps it will be dismissed if it doesn't fit with his prior thinking, or perhaps not). Still, I'll report back on whatever I hear.
Yes, please do pass along their insight into this. I'm nearing the point where I'm also planning to withdraw from the IRA as a US non-resident.



----------------

Edited: I did another search on this topic as I hadn't looked in a while and tried a few different search terms. I came across this interesting article from an international tax legal firm in San Francisco. They look at lump sum withdrawals from an IRA (as an example though other types of accounts are mentioned) under the tax treaties the US has with a wide variety of countries including Canada.

https://sftaxcounsel.com/tax-free-withd ... ent-funds/

An interesting note to an often raised question is that they also conclude that the 10% early withdrawal penalty wouldn't apply due to the tax treaties.
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by Peculiar_Investor »

LadyGeek wrote: Mon Jun 20, 2022 10:33 am EnjoyTheJourney - Please post this question in our sister Canadian forum
Financial Wisdom Forum
. You'll get expert advice.

They also have an excellent wiki: finiki, the Canadian financial wiki

- Cross-border and expatriate issues (from the Canadian perspective)
- Canadian-US investing differences

Disclaimer: I'm a member of both forums.
Another commonly reference discussion board on the Financial Wisdom Forum (FWF) is Serbinski Accounting Firms - Index page for cross-border tax information.

I'm also a member of both forums, as is EnjoyTheJourney (I checked).
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Topic Author
EnjoyTheJourney
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Re: Returning to Canada - Setting up annuities, receiving the funds, and taxes

Post by EnjoyTheJourney »

Below is the text of an email response from the cross-border tax professional we hired recently for advice. To make the context clear, I sent along the information resources pointed to by Hyperborea which discuss what is or is not considered a pension and what is or is not a periodic payment (for the purposes of determining whether the withholding rate should be 15% or 30%).

----------------------------------------------

"You have definitely tapped into a topic which has a lot of areas for debate – whether pension payments are ECI or non-ECI or are periodic or lump sum, etc. We could certainly delve into them for you, but I don’t think it would be worth the time, effort, and cost. We have dealt with these issues for many years and have taken the approach that is most practical – trying to ensure that clients don’t overpay tax overall and limiting the potential for disputes with the IRS and/or CRA that can be costly and time consuming. This has led us to generally try to have 15% withheld on US pension payments when appropriate and claiming the foreign tax credit in Canada. Arguments could be made in some cases that the income should be taxed differently in the US, but this would require additional work and returns to be filed in the US for a lower than 15% rate that may or may not be questioned and no tax savings since the difference in tax will be paid in Canada anyway. Further, if you file a return in the US and pay more than 15%, you will likely have to argue with the CRA on the merits of that amount of tax and may lose your credit over the 15% if they disagree. The cost benefit is simply not there. When 30% is withheld and claimed as a foreign tax credit (which is rare), the CRA will often question it and may deny the credit in which case a US return is needed to claim the 15%. In my experience, the IRS has never questioned a 15% withholding on US pension income when it is reasonable to do so.

It is a very complicated issue, but generally there is no benefit to try to do anything other than what is most practical."

------------------------------------------

In an earlier email this same person mentioned that there was a client of their firm that had funds taken from a rollover IRA being withheld at 15% without any questions being raised by the IRS. If those rollover funds came from a 401K, for example, then perhaps that makes sense.

I still don't get a sense of a definitive line between periodic and non-periodic payments. But, the scope for withholding at 15% (instead of 30%) seems noticeably wider than I thought it would be, which is helpful to know.

At this point we have a clear road map forward. After things settle down following our imminent move to Canada I'll try to figure out a way to summarize what I've learned and put it into the financial wisdom forum.
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