Author Topic: Option for lumpsum for a private Canadian pension, checking in about taxes  (Read 1830 times)

EnjoyTheJourney

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I'm a Canadian citizen living in the US. I have a green card and I'm not a resident of Canada for tax purposes.

I have the option to receive a lumpsum payment in lieu of receiving a monthly pension check. The letter explaining my choices clearly states that I'm not eligible to start the pension for many more years. That removes the windfall elimination provision (WEP) from consideration because lumpsum pension payouts received before being eligible to receive a pension are not covered by WEP, and instead fall under the usual guidelines for taxation. The lumpsum payout looks appealing, especially since WEP wouldn't apply to it^.

The letter sent along with the package explaining my options states that I have the option to convert almost all of the lumpsum into a Canadian tax-deferred account (ie: RRSP, TFSA) as long as I do so by early next year (the deadline for clearing this up was longer than expected, as well, which is helpful). There are three issues that I can see arising and with the help of somebody else I think I now now the answer to all of them. But, I wanted to check.

1. I believe that since I have no connection to Canada as a residence and no other assets in Canada that accepting a lumpsum payment won't change me to a resident of Canada for tax purposes. (I can't get this wrong because if I did then Canadian tax rates would apply to my US salary and that would be very expensive)

2. I can create an RRSP, as the letter I received suggests. But, the tax implications would make that a less-than-optimal choice given that I'll be in the US for a while longer (probably at least 2019 and 2020, perhaps a year or two beyond that).

3. I can choose to pay tax on the whole amount, keep the leftover money, and then create a Roth IRA. This is probably the best option. My sense is that I'd end up having some money withheld by the Canadian government (probably 15%), get a tax credit for US taxes, pay the difference between the taxes withheld by Canada to the federal government and any state taxes, and then be free to invest the remaining sum after that.

Is my understanding correct?

^ WEP would cut my pension in half if it applies, given my years of service counting toward social security.
« Last Edit: November 04, 2019, 08:42:51 PM by EnjoyTheJourney »

EnjoyTheJourney

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Re: Option for lumpsum for a private Canadian pension, checking in about taxes
« Reply #1 on: November 11, 2019, 10:39:09 AM »
I believe I found answers to my questions.

1. I would not become a resident of Canada for tax purposes because a pension distribution doesn't pass the kind of "significant tie" test that applies.

2. I can create an RRSP, but it wouldn't be helpful, in the end, because of tax complications.

3. A Roth IRA would probably be the best option if the WEP didn't apply. But, I found out that the WEP does apply because of employer contributions to the pension (ie: the pension isn't only my contributions).

In the end, it doesn't make sense to take the lumpsum distribution, weighing everything together.

I'm posting this in case it helps somebody else, down the road.