How do I handle pension benfits earned somewhere, other than Canada?

1. Foreign Pension Transfers
Comprehensive
Personal Article
Issues for consideration
Prepared by The Investors Group Advanced Financial Planning Team
Definition and Rules
Canadian residents who have previ- income is non-taxable. A “superannu- pension benefit. To utilize this
ously worked in a foreign country ation or pension benefit” is generally rollover the benefit can either by
and have “superannuation or pension considered to be a payment from a transferred directly to their RRSP or
benefits” from this employment plan in which contributions have a contribution can be made within
often find the concept of transferring been made by an employer on behalf 60 days of the end of the year in
the pension to Canada an attractive of an employee in consideration for which the payment was made. The
alternative. Benefits of these transfers services rendered by the employee or rollover is also available when pay-
include a deferral of Canadian taxa- by a government and these contribu- ments are made as a death benefit to
tion, greater control over invest- tions are used to provide a periodic a surviving spouse or as part of a
ments, and increased ease of admin- payment on or after the employee’s divorce or separation agreement.
istration from the owner’s perspec- retirement in consideration for A pension transfer by an individual
tive. However, there are some poten- employment service. who has turned 71 in a prior year
tial pitfalls including taxation in the will not be eligible for the rollover.
A traditional US Individual Retire-
country of origin and restricted trans-
ment Account (IRA) is the lone
ferability from the foreign country.
exception to this in that even though
Although the rollover provided for in
This article outlines the major it does not meet the definition of a
the Canadian Income Tax Act appears
issues involved with the transfer of “superannuation or pension benefit”,
to make the transfer of a foreign pen-
a foreign pension to Canada, but section 56(1)(a) of the Income Tax Act
sion plan a relatively simple matter,
because of the potentially significant makes a specific provision in which
there are many issues which make
tax consequences individuals should the benefits from a traditional IRA
this decision quite complex.
always seek independent accounting are taxable income in Canada.
advice and contact the pension plan Payments from a Roth IRA are not To begin with it needs to be deter-
administrator. considered to be taxable income in mined if the pension plan is transfer-
Canada according to Article XVIII of able. Some countries prohibit the
the Canada-US tax treaty. transfer of pension plans and trans-
Section 56(1)(a)(i) of the Income fers in other countries are often
Canadian taxpayers are allowed to
Tax Act states that foreign pension restricted at the pension plan level.
transfer a foreign pension benefit to
income will be taxable income in It should also be determined if the
their RRSP without affecting their
Canada if it is considered to be a entire plan can be transferred or only
contribution room. Under section
“superannuation or pension benefit”, a portion of it. If a transfer is allowed,
60(j)(i) of the Income Tax Act individ-
unless a tax treaty with a foreign are there any restrictions in terms of
uals can claim a deduction to offset
country specifically states that the the type of plan or benefits that must
the income inclusion of the foreign
continued on next page

2. Comprehensive Personal Article
UK pension transfers
continued from previous page
be provided from the plan it is trans- recognized for US tax purposes. utilize the foreign tax credits the
ferred to. In most cases these ques- US citizens, US residents, and green individual must have Canadian tax
US pension transfers
tions can be answered by the pension card holder are required to file a US payable in the year of transfer equiva-
plan administrator. tax return based on their worldwide lent to the amount of the US with-
income and the entire pension trans- holding tax. For this calculation the
The next item of consideration
fer amount must be included in Canadian tax payable does not in-
should be the tax consequences in
income in the year of transfer and will clude any income from the pension
the country of origin of the pension
be subject to US tax at their marginal applied to the RRSP.
plan. Individuals should work with a
tax rate. Since the US tax system does
tax advisor with expertise in the tax An age penalty of 10% will be applied
not recognize an RRSP contribution
laws of the originating country to by the US to any individual who is
as a deduction, double taxation would
determine the amount of foreign under the age of 59½ on the date of
result from this transfer. Therefore, in
withholding taxes if the plan is trans- the transfer. This age penalty may be
most cases a pension transfer is usu-
ferred. Any penalties for the transfer recoverable by the individual because
ally not in the best interests from a
of the plan should also be taken into of the foreign tax credit.
financial perspective for these indi-
account. If the plan is left in the for-
viduals due to the fact that if the plan
eign country, the tax implications of
is left in the US it will continue to
this decision should be considered. UK pensions can be transferred
grow in a tax sheltered environment
in both Canada and the US. to financial institutions that are
Finally, the Canadian tax implications
recognized by the UK pension
should be considered. Will there be
There may be some cases in which authorities as “Qualified Recognised
any foreign tax credits available to the
an individual may wish to pursue a Overseas Pension Schemes”
individual on their Canadian tax
transfer even if they are a US citizen, (QROPS). Investors Group has an
return? If there are, will they be able
US resident or green card holder. For RSP plan, approved as a QROPS.
to completely offset the foreign taxa-
example, if their account was small Other conditions required for a
tion or only partially offset it? If the
or they felt they were receiving poor transfer are that at least 75% of the
plan is left in the country of origin,
service from the plan administrator. transferred funds will be used to
what will the Canadian tax conse-
If this is the case the plan should not provide income for life, the benefits
quences be?
be transferred to an RRSP as double cannot commence prior to age 55,
taxation would result, but rather to a and the UK taxation authorities are
non-registered investment. advised when the individual starts
Due to the close proximity of Canada
to receive benefits.
and the US there are many Cana- If the individual is not a US citizen,
dians who may be interested in trans- US resident, or green card holder The taxation issues of a UK pension
ferring amounts from a US pension than there will be non-resident with- transfer are not always clear due to
arrangement such as an IRA, 401(k), holding taxes of up to 30% on the the fact that the Canada – UK tax
or 403(b) to Canada. transfer to an RRSP. There may be treaty does not comment on the
foreign tax credits available on the non-resident withholding tax rate on
The most important consideration is Canadian tax return to offset the US lump sum transfers, although with-
that a transfer will be a taxable event withholding tax, but in order to fully holding taxes on lump sum transfers
in the US, as there is no rollover
to QROPS are not currently imposed.
continued on next page

3. Personal Article Comprehensive
Summary
continued from previous page
Pension payments from the UK that
are considered periodic are not sub-
ject to non-resident withholding Foreign pension transfers are legiti-
taxes. Therefore, the individual mate options in the right circum-
should seek advice from the UK stances, but individuals should
pension administrator regarding consider all factors involved in the
the withholding tax that would be transfer before taking any action.
charged before a transfer is initiated. It is extremely important to attain
independent accounting advice and
As long as the pension funds are to contact the pension plan adminis-
transferred to a QROPS there are trator before initiating a transfer.
usually no penalties associated with Contact your Investors Group
a UK pension transfer. Consultant for further information.
ED MADRO B.A. Econ., CPCA
Consultant
edward.madro@investorsgroup.com
(403) 220-9654
This report is intended as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor
is it intended to provide tax, legal or investment advice. Clients should discuss their situation with their Investors Group Consultant for advice
based on their specific circumstances.
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“Foreign Pension Transfers” ©2011 Investors Group Inc. (10/2011) MP1568
Investors Group Financial Services Inc.