Tax on US Pension/retirement funds in Ontario, Canada
Key Points
- U.S. pension and retirement funds are generally taxable in both the U.S. and Canada.
- The Canada-U.S. tax treaty helps avoid double taxation by allowing tax credits for taxes paid to the other country.
- It’s important to properly file and report U.S. pension income on Canadian tax returns to avoid penalties.
- Strategic planning can minimize tax liabilities on U.S. retirement income in Ontario, Canada.
- Consulting with a cross-border tax expert is crucial for optimizing U.S. pension and retirement fund taxation.
If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.
Question
Dear Phil,
I was surfing the net looking for answers to how taxes in Canada are applied to US citizens, and I came across your Blog Post.
I am hoping you can help me understand more about taxation in Canada.
I am US citizen, 62 years old, retired and living in Canada with my spouse (a Canadian citizen) since July 2021.
I hold both the US citizenship and the Canadian residency (acquired July 2023). I have a pension account in the US.
I aware that if I need to withdraw from this account, I have to pay 25% federal tax and up to 5.9% Arkansas state tax.
According to the above, would I also be taxed in Canada on the amount I withdraw from my pension plan and which is taxed in the US?
Also, is the maximum exclusion for US expats ($126,500 per person 2024) applicable if I withdraw more than the max exclusion from my pension plan?
Thank you in advance
XXXX
Answer
Hi XXXXX,
Thanks for the email.
You’ll want to get some official tax advice on this from a cross-border accountant; however, let me give you some general thoughts:
- In most cases, states will not tax your pension if you’re a non-resident of the state. If they withhold tax, you can file a non-resident state return to recover the tax withholdings. You’ll want to get advice on this.
- The exclusion you’re referencing below is the 2555 foreign earned income exemption. This does not apply to pensions and only applies to employment and self-employment income.
- Since you moved to Canada in 2021, I’m assuming you’ve been filing both Canadian and US tax returns since then. As you likely know, the tax filings can be quite complex. Here’s a good summary of what you can expect to file: https://newsglobal.ca/how-to-file-us-tax-returns-in-canada/
- With respect to the taxation of the pension:
- When paid, they may withhold Federal and/or State taxes.
- These amounts will not be final taxes and can be claimed as withholdings on your US and state returns (see note about the State return above).
- The pension amount will be taxed both in Canada and the US. For Canadian purposes, the amounts will be converted to Canadian dollars and taxed on your T1 Canadian return. You might be able to split this income with your Canadian spouse.
- The amounts will also be taxed for US purposes and any US/State taxes paid will be available as a foreign tax credit on your Canadian return.
- In most cases, this simply means that you’ll pay your marginal Canadian tax rate on the pension income.
As mentioned above, cross-border taxes are quite complex and you’ll likely want a competent cross-border accountant to help. Also note that information returns such as US FBARs could also be required.
If you need help with your cross-border investments please feel free to book a complementary cross-border consultation here: https://chat.newsglobal.ca/o/c0b2f5c6
Hope that helps, and let me know if you have any other questions.
Cheers,
Phil