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Taxation of U.S. Pensions in Canada

Author: Brad Howland
First Posted: Jan. 23, 2006

Information for U.S. citizens residing in Canada and receiving U.S. pensions.

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 an offsetting deduction of 15% of the Social Security benefits paid can be taken on Line 256.

Foreign pension income can also qualify for the $1,000 "pension income amount," which is a non-refundable tax credit claimed on 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 the taxpayer was a U.S. resident. This situation might arise if the taxpayer:

  1. Transfered funds between plans; or
  2. Withdrew funds related to contributions that were not deductible from his/her income in the U.S. when the contributions were made in the first place.

If the above rule doesn't apply, then IRA withdrawals are fully taxable in Canada on Line 115. They are treated like Canadian RRSP's in that tax doesn't have to paid on 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Contributions to Roth IRA's are not deductible for U.S. taxpayers under U.S. rules and not taxable when withdrawn, therefore it would seem that CRA would not tax Roth IRA withdrawals as per the above general rule. However, CRA does tax ongoing income earned inside Roth IRAs, as the income is earned. 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.

CRA states on its website "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." We do generally recommend contacting CRA to make sure that IRA income is reported correctly.

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