What is a 401k in Canada?

05 January 21
Uncategorized

Question

I’ll be relocating to Canada closer to the end of the year. I currently have a 401k that I contribute to through my employer. I will still be working for the same employer when I move to Canada (remotely). Should I continue contributing to my 401k? What is a 401k in Canada?

Answer

As with most cross-border tax questions…it depends.

First, you’ll want to ensure your employer truly understands their Canadian tax obligations for having employees in Canada. For example, if you’re doing the work in Canada you should be paid on a T4 with proper CPP and EI withholdings. This, compared to traditional W2 reporting for US companies and social security and FICA tax withholdings.

Second, whether you should contribute to your 401k depends on a few factors. You’ll need to have existing RRSP room available to be able to deduct your 401k contributions on your Canadian return (other criteria also apply). Only having the deduction available on your US return won’t help much with your overall tax liability. However, even if you have existing RRSP room available I would forgo the 401k contribution and simply open up an RRSP and contribute directly to the RRSP. Unless of course, your employer matches your contributions. In that case it would make sense to take advantage of the extra matching through your employer. Once again, you will need to have enough RRSP contribution room in order to fully utilize any 401k contributions as a deduction on your Canadian return.

Generally speaking, an RRSP is similar to US 401k and IRA accounts. You get a deduction on your tax return for any contribution and any withdrawals are taxed upon receipt. Income earned within the plans is compounded tax-free until its eventual withdrawal. Typically 401k are employer-sponsored plans while IRAs are individual retirement plans.

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 778.433.1314. 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.