A11

David Konning

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* Editor's note: This is part two of a two-part series on transferring US-based retirement plans to Canada.

The first step in transferring your U.S.- based retirement plan to an RSP in Canada is to confirm, with the assistance of a qualified tax professional, that this strategy and the expected benefits make good financial sense for you.

Once you have determined that the strategy would be beneficial, the following is a general description of the steps that would typically be followed if you are a Canadian resident who is not a U.S. citizen or green card holder at the time that the strategy is implemented:

Instruct your U.S. plan administrator to collapse your qualifying U.S. retirement plan, and to mail you a cheque for the proceeds. Along with your written request, submit IRS form W8 BEN (available online from www.irs.gov) to the U.S. plan administrator confirming that you are a resident of Canada and that you are eligible for a reduced rate of non-resident withholding tax.

The U.S. plan administrator should apply a reduced withholding tax rate (15% rather than the non-Treaty rate of 30%) as provided for under the terms of the Canada-U.S. tax treaty.

When filing your Canadian income tax return for the year of withdrawal, you will be required to report the Canadian-dollar equivalent of the gross amount withdrawn (the full amount before withholding tax) as taxable income.

To offset the income inclusion resulting from the withdrawal, contribute an amount equal to the full value of the gross withdrawal from the U.S. plan to an RSP by the end of the regular RSP contribution deadline (during the year of the withdrawal, or 60 days after the end of that year, at the latest).

To recover part or all of the U.S. withholding tax, claim a foreign tax credit on your Canadian income tax return to reduce or eliminate your Canadian tax payable on your other sources of income.

Before proceeding, you should be aware that your ability to recover the U.S. non-resident tax withheld will depend on the value of the U.S. plan being collapsed and the amount of your taxable income in Canada.

Excess foreign tax credits cannot be refunded or carried forward for use in a future year. In certain cases, it may be advisable to execute this strategy over a period of two or more years in order to make full use of the foreign tax credits.

Ensuring that you have a strategy in place to allow you to make use of most or all of your foreign tax credits is a key issue that should be discussed with a professional tax advisor. To make a full offsetting contribution as outlined above, you will need to have access to funds equal to the amount of U.S. withholding tax.

Should you be able to recover the full amount of your withholding tax by claiming a foreign tax credit, these funds will be needed only temporarily, until your Canadian tax return has been filed and assessed.

While there are many compelling reasons to transfer a U.S.-based retirement plan to an RSP in Canada, there are many issues to consider and tax implications to be aware of before proceeding. Clearly, there is no one strategy that is right for everyone. Advice from a professional who is experienced in these matters is highly recommended.

In some cases, it may be best to simply leave the U.S. plan in place and receive an income stream from it when you retire.

Please notethat the above information is based on the current and proposed tax law in effect as of the date of this article. Individuals should consult with a qualified tax and legal advisor before taking any action based upon the information contained in this column.

* David Konning is an investment and retirement planner at Royal Bank. If you would like to reach him, please e-mail him at David.Konning@rbc.com or phone 856-0406.