Many Canadians are pursuing career opportunities across the globe. While they learn new languages and discover new cultures and experiences, they may also be accumulating new retirement assets. When they return home, they may want to consolidate these savings on Canadian soil. Thanks to the Canadian Income Tax Act (ITA), this may be possible.
Section 60(j) of the ITA outlines the criteria for putting foreign retirement savings toward an RRSP without affecting contribution room. Here, foreign retirement savings are divided into two types: superannuation (or pension benefits) and foreign retirement arrangements.
Section 60(j)(i) outlines the requirements needed to contribute a foreign superannuation or pension benefit to an RRSP without using any contribution room:
- contributions must be made by an employer, for an employee, for their services rendered. Further, the contributions are used to provide an annuity or periodic payment on or after the employee’s retirement;
- the benefit paid must be a lump sum and cannot be periodic payments (including a payment of periodic payments in arrears or retroactive adjustments to periodic payments);
- the pension benefit must be attributable to employment service while the employee was a non-resident of Canada; and
- the pension benefit must be included in income for the year and cannot be exempt from tax in Canada due to an income tax treaty.
If a person was a non-resident of Canada and a member of an employer-sponsored pension plan, the pension can be rolled over to an RRSP, provided it is paid to the person as a lump sum. The lump sum is included as taxable income in the year it’s withdrawn from the foreign pension but, by depositing it to an RRSP, the person receives a deduction against the income inclusion without affecting their RRSP contribution room. If the foreign pension benefit is tax exempt, and not included in taxable income, it cannot be rolled over to an RRSP under Section 60(j)(i).
Foreign retirement accounts
The definition for a foreign retirement arrangement is, unfortunately, not as broad as a foreign superannuation or pension benefit. In fact, this was a special provision intended to apply specifically to U.S. Individual Retirement Accounts (IRAs). Personal retirement accounts from other countries that are not pensions cannot be transferred to Canada on a tax-deferred basis. Therefore, the criterion for Section 60(j)(ii) is simple: IRA is OK, but every other individual and personal retirement account? No way.
The general mechanics for transferring a foreign superannuation or pension to Canada are:
- Receive a lump sum withdrawal from the foreign pension plan and pay any withholding tax and/or penalty tax if applicable.
- Deposit the proceeds, in Canadian dollars, to an RRSP, either in the year of the withdrawal or within 60 days of the end of the calendar year of the withdrawal.
- Include the lump sum withdrawal as income on Line 115 in Canadian dollars on the T1 General.
- Include the RRSP deposit amount in Canadian dollars on Line 208 on the T1 General along with a completed Schedule 7.
- Report the value of any withholding tax paid at source, if applicable, in Canadian dollars on Line 405 of the T1 General.
The most common foreign pension transfers come from the U.S. (e.g., 401(k), 403(b)) but Section 60(j)(i) rollovers are not limited to the United States. Theoretically, any foreign pension plan from any country that meets the criteria from 60(j)(i) can be transferred into an RRSP. A review of Section 60(j)(i) interpretations from CRA over the last decade has provided examples of pensions from several different countries that would be eligible. This list includes, but is not limited to:
- private superannuation pensions from Australia,
- Pillar 2 pensions from Switzerland,
- pension plans from Hong Kong,
- pension plans from the Philippines.
Before transferring any funds to an RRSP, your client must be eligible, under the rules in the foreign country, to receive payment of a lump sum from the foreign pension plan. The rules regarding the commutation of foreign pension plans will vary by country. As such, anyone interested in bringing such benefits onshore should start the process by confirming their eligibility to receive a lump sum commuted value payment directly with the foreign pension plan.
Simultaneously, the client should confirm any costs related to the commutation of the pension. These can include a non-resident withholding tax, withdrawal fees, early withdrawal penalties or taxes and wire transfer fees.
An individual transferring a foreign pension to an RRSP can deposit up to the gross withdrawal amount in Canadian dollars. The example (see “Case study: Foreign pension transfer,” this page) shows it may be desirable to make a deposit less than the gross withdrawal in order to increase taxes owing by just enough to fully recoup the foreign withholding taxes at source. Crunch the numbers before initiating a foreign pension transfer.
Individuals coming to Canada may be able to bring their foreign pension plans with them under Section 60(j) of the ITA. If the foreign pension plan meets the criteria and allows for a lump sum payment, the groundwork is laid to transfer those funds home. After determining the costs of the transfer, including any foreign taxes applicable, proper tax reporting can finalize the move of the foreign pension funds to Canada.
Case study: Foreign pension transfer
Jennifer is a 47-year-old Canadian citizen who just returned to Canada after 10 years of living and working in Switzerland. She was a member of a Swiss Pillar 2 Fund where her Swiss employer made contributions. The commuted value of the pension plan is $100,000 (all funds in Canadian dollars). She would like to transfer this lump sum to her RRSP and currently earns $65,000 a year as a resident of Nova Scotia.
First, Jennifer contacts the Swiss pension plan administrator and confirms she is eligible to take the $100,000 commuted value, and that no fees apply. She confirms there will be 25% non-resident withholding tax ($25,000) at source.
Next, Jennifer must confirm whether her Swiss pension plan meets the requirements under the ITA as a foreign superannuation or pension benefit. In her case, contributions were made by the employer in consideration for her services while she was a non-resident. Finally, the contributions were intended to provide an annuity or periodic payment in retirement.
When Jennifer receives her funds net of withholding ($75,000), she deposits it to her RRSP in the same calendar year. She receives a contribution receipt indicating the $75,000 contribution, referencing Section 60(j)(i). When she files her Canadian tax return, she includes the gross withdrawal of $100,000 as income on Line 115 of her T1 General, and the RRSP deposit of $75,000 on Schedule 7, Part C, as a transfer. This transfer value is subsequently reported on Line 208 of her T1 General. The withholding tax of $25,000 is reported on Line 405 of the T1 General.
Here is how the numbers break down:
|Gross withdrawal from Pillar 2||$100,000|
|RRSP deposit from Pillar 2||($75,000)|
|Income before tax||$90,000|
|Foreign tax credit||$25,000|
The difference between the gross and net withdrawal amounts from the Swiss pension increased Jennifer’s income for the year by $25,000 (from $65,000 to $90,000). This also increased her taxes owing from $16,363 to $25,655. The tax increase resulting from the deposit of only the net amount of the Swiss pension withdrawal allowed Jennifer to fully benefit from the $25,000 tax credit created by the non-resident withholding tax.