Non Resident Canadian Tax Rates on Pensions

For many people who lived and worked in Canada and then moved to the US or another country and are now receiving a pension from Canada, paying taxes is complicated. The software packages such as Turbotax help provide a lot of guidance but you still have to enter some data manually and make decisions on how to treat income from Canada. It probably means filling in form 1116 and the alternative minimum tax form as well. For those who are not willing to take the time to understand the process its best to use a CPA or a tax professional to complete your filing.

As we near the tax filing deadline in 2010 I plan to upload posts that give some details on my experiences with this task. In the mean time I have a few comments about Canadian tax rates that may be of value to people who are living outside Canada but obtain income from retirement or other funds or pensions.

Pensions are taxed at a 15% rate for non residents. This rate applies to plans and funds that provide disbursements on a regular basis.

If a lump sum is disbursed to you, the tax rate charged will be 25%

Both of these types of taxation can be claimed on the US tax filing as either a deduction or a tax credit. Deductions will have an impact on your taxable income and may not provide as much benefit as taking a credit. The credit however requires completion of form 1116 and is more complicated and not all the Canadian taxes may be credited based on various factors related to other deductions.

Withdrawing lump sums from RRSPs or other pre-tax retirement vehicles will have 25% non-resident tax removed at source by Canada. So consider taking monthly disbursements which may mean converting some of the RRSP to a RIF or other pension funding mechanism.

With the exchange rate at a 30 year high, a lot of people are taking advantage of moving Canadian funds into US dollars. Be sure you understand the tax implications and build a transfer plan so that you can maximize the value of your transactions.

Remember, the US tax code requires that all income from all sources is declared, so even if you take a disbursement into a Canadian bank account it is still income and needs to be properly handled.