How are US pensions taxed in Canada

19 May 22
Cross Border Tax

Question

I moved back to Canada a few years ago and will be starting to draw on my US pension in the coming months.

How will my US pension be taxed in Canada?

Answer

Hi, thanks for your question, however considering I don’t know much about your situation let me give you the basics:

  • US pension income will be taxable both in Canada and the US (assuming you’re also a Canadian resident)
  • The amount of US tax you pay will be different depending on whether or not you’re a US Citizen, Green card holder or a non-resident of the US
  • For US citizens and green card holders the US pensions will first be taxed (the taxable portion on the 1099-R) in the US on your 1040 return at regular rates. Note however that if your average US tax rate is more than 15% (maximum under the treaty) you’ll need to resource enough tax via form 1116 to ensure only 15% tax is paid to the US.
  • For non-residents of the US the pension income will attract a 15% US withholding tax that will be the final US tax for any distribution
  • For Canadian purposes the full amount of taxable pension per the 1099-R will be converted to Canadian dollars at the average USD/CAD rates and taxed at regular Canadian graduated rates.
  • Any US tax you paid on the pension income (either as a US citizen, green card holder or non-resident) will be available as a foreign tax credit on your Canadian income tax return. As mentioned above the maximum allowable to claim is 15% under the treaty.
  • In some cases lump sum pension payments will attract a 30% withholding rate, however administratively CRA and the IRS often only allow for the flat 15% rate.
  • Social security payments however are taxed completely differently. Under the treaty social security payments are only taxable in the country of residence. Therefore, for US citizens living in Canada that are currently receiving US social security payments these payments will be taxable only in Canada. Make sure to properly file your 8833 treaty election forms to properly disclose the fact that you’re not reporting the SS payments on your annual 1040 return.

Also note that most US pensions (excluding IRAs) will be available to pension split with a spouse. However, in cases where you income split with your spouse please ensure to also allocated the foreign taxes paid to the spouse so they can also claim their portion of foreign taxes.

Hope that helps and please let me know if you have any further questions.

Cheers

Phil

Phil Hogan, CPA, CA, CPA (Colorado)

Phil Hogan is a Canadian and US CPA working with clients throughout Canada and the US. Phil advises on cross border tax and financial planning matters. Phil can be reached at phil@beaconhillwm.ca or via telephone at 250-661-9417. You can also read more about Phil at www.Beaconhillwm.ca/team/about-phil/

This commentary reflects the personal opinions, viewpoints and analyses of the Beacon Hill Wealth Management Ltd. partner providing such comments, and should not be regarded as a description of advisory services provided by Beacon Hill Wealth Management Ltd. or performance returns of any Beacon Hill Wealth Management Ltd. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Beacon Hill Wealth Management Ltd. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Any discussion about taxation is for educational purposes only and should not be viewed as professional advice. Consult your tax professional for tax advice on your particular situation.

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