Updated: Oct 5, 2022
Living in the US and receiving Canadian retirement income? Tips on reporting this income to the IRS and related issues.
Many former Canadian residents prefer spending their retirement years in the US, especially in the Southern states with better climate and more affordable property values. But this triggers many complexities, especially in reporting Canadian retirement income to the IRS. This article will give some quick tips on reporting of such income to the IRS.
First of all, it is important to determine what type of retirement income you are receiving. Should a person be a resident of Canada, the income would be reported on various T-slips which include but are not limited to:
T4RSP slips – to report distributions from RRSP accounts which could be treated as annuity payments or regular account withdrawals;
T4A slips – various pension, retirement, annuity or other similar income;
T4A(P) slips – Canada Pension Plan benefits;
T4A(OAS) slips – Canadian old age security payments.
If you, as a resident of the US and non-resident of Canada, have properly notified the payers of these benefits of your Canadian tax non-resident status, the income would be typically reported to you on forms NR4 instead of the above slips, and Canada would also withhold the non-resident tax based on the rates agreed between Canada and US (see comments about Canada-US Double tax treaty below).
As the above list shows, there is a great variety of types of social security and pension benefits that a former resident of Canada retired in the US may be receiving. You would refer to the type of the T-slip issued to you or to the code shown in the box 14 or 25 of form NR4 to determine the type of income paid.
It is important to understand the difference between these benefits to determine how they affect your US taxation and on which line of the US tax return they should be reported. Generally, this income would need to be separated into two categories: one is pension and annuity income, and another is social security benefits. These two categories have different treatment accordingly to internal countries’ rules and to the Canada-US Double tax treaty:
Payments from various non-government registered pension plans in a form of annuities, retirement benefits etc. is considered pension and annuity income and should be reported on line 16 of the US federal tax return, form 1040.
Payments from Canadian Pension Plan and Canadian old age security program have a different treatment: they are generally reportable on line 20 of the US return, as social security benefits.
Taxation of pension and annuity income from Canada received by a resident of the US is regulated by Article XVIII, section 2 of the Treaty which says that both Canada and US have a right to tax such income but Canada has the first right to tax and should limit its taxation to 15% of the income. This is the withholding rate you should expect to see on the form NR4. As a result of the Treaty provisions, you would normally pay the difference in the US by claiming a credit for Canadian taxes on the US return.
Taxation of social security benefits is regulated by section 5 of Article XVIII which provides for a different treatment: such benefits under the Canadian Social Security act paid to a resident of the US are generally taxable in the US only.
These rules can make filing requirement for the US residents receiving retirement benefits from Canada more complex – it is important to ensure that income is reported accordingly to its type, that Canadian issuer reported the income correctly and withheld proper taxes, and that a foreign tax credit is correctly claimed on the US return to eliminate any double taxation.
This is not all. To make it even more complex, the United States has consistently been increasing the requirements relating to disclosure of assets held in Canada which may include pension and RRSP accounts, and regular cash accounts you may have in Canada.
It is important to report such accounts on the US forms:
Form 8938 which is a part of the US federal return. The form is applicable only if the aggregate value of the accounts and other financial assets in Canada and other countries is over relatively high thresholds which depend on the US filing status.
Another form is form FinCEN 114 (formerly known as FBAR) which is filed to the Department of the Treasury. The threshold for the form is only USD 10,000 of aggregate value of non-US accounts, which is quite low.
Assets and accounts reportable on the forms may differ depending on the type and location. Also, there are stiff penalties that may be potentially imposed on non-compliers, so it is really important to have these forms filed and to seek professional help if necessary.
Unfortunately, the complexity of the reporting has been increasing over the years. The only concession given by the IRS recently was abolishment of requirement to report RRSP, RRIF and similar Canadian accounts on form 8891. Though such accounts are remain reportable on 8938 and FinCEN 114, so this hardly made things easier for Canadian retirees in the US.
The above tips are only the tip of the iceberg. So, the rule of thumb is quite simple – ask your tax advisor if you need help with compliance related to Canadian retirement benefits.
Provided by and for more information please contact:
Kirill Chistyakov, IRS Enrolled Agent
Manager, Expatriate Tax
T: 416-214-7833 x160
Arun (Ernie) Nagratha, CPA CA, CPA (Illinois)
Partner, Expatriate Tax
T: 416-214-7833 x102