The
requirement to add 401(k) contribution to the wages shown on a W-2 has been
explicitly mentionned in the tax guide for years.
The
earliest version I have seen is on the 1996(!) General Guide (line 104) and
every year since.
And as to
using the tax treaty, the only requirement CCRA has is to not consider proceeds
from a 401(k) as income to a greater extent than IRS. Since IRS considers ALL
proceeds from a 401(K) as income, CCRA is quite free to do the same. This says
nothing about contributions, as you brought out.
It quite
simply, does not make sense (other than to get company matching) for a Cdn
resident to contribute to a 401(k), as any tax saving garnered from IRS, will
be happily snapped up by CCRA.
Andrew G.
Nelson
-----Original
Message-----
From: centapede-admin@lists.belcarra.com [mailto:centapede-admin@lists.belcarra.com]
Sent: Thursday, February 20, 2003 17:30
To: Centapede
Subject: [CEN-TAPEDE] CANADA taxing 401K deductions
I am a U.S. citizen (and
recent Canadian citizen as well) residing in Canada and employed by
a major company in the US. My job takes me all over the United States
and I choose to live in Canada with my Canadian spouse as a base of
operations. I do NOT work in Canada. As an employee in a U.S.
corporation, I participate in a company retirement /savings plan known as a
401K. As you are aware, in the U.S., 401K contributions, as well as any
interest accrued are not taxed until withdrawal and are then treated as
ordinary income. Well, by the U.S. anyway! I have recently
been advised by Revenue Canada, that such contributions to a US pension plan
under 401K are not deductible and thereby increasing my taxable income
considerably.
What gives? I was
under the impression that the U.S./Canadian Tax Treaty was to prevent double
taxation. If the Canadian government gets the tax going in and the U.S.
government as the money is withdrawn, isn't this double taxation.
What am I missing here?
LXXXXXXXXX XXXXXX
----------------------------------------------------------------------------------------------------------------------------------
david ingram replies
For all intents and
purposes, a US 401K plan is virtually identical to a Canadian Registered
Pension Plan.
However, the US does NOT
recognize a Canadian RRSP or RPP as a tax deduction and Canada does NOT
recognize a US 401K or an IRA as a tax deduction.
However, the practice of
almost every US /CANADIAN tax consultant has been to take the pure W2 slip
figure for taxable wages and use that figure when filing a Canadian Income Tax
return.
This figure is "after" a
401K deduction.
Until October 2002, I had
never seen this changed by the CCRA.
Since then, I have seen or
heard of a dozen.
And surprizingly, the first
one was a US CUSTOMS officer who was married to a Canadian and lived in
Canada. He had been religiously paying tax to Canada since 1995 on his
US earnings from the US government.
When the Canadian Government
decided to go back and tax him on all his 401K income, he came to me for help.
The net result was we have
got over $30,000 Canadian back because under Article XIX of the treaty, He
should never of being taxed on his US Government income while living in
Canada.
And until today, none of the
changed returns had been prepared by our office.
However, just to keep us
honest, I guess, one of my own was brought to my attention (to really be
honest, it was sent to the office several days ago, but I only dealt with it
for the first time today).
I have filed a form T400
which is a standard notice of objection.
The taxation of these
amounts by Canada would be totally unfair and there should/must be a treaty
item that we can use.
You cannot assume by the way
that the Canadian Tax officer is familiar with the treaty. We have more
INS and IRS officers changing their returns now after years of dealing with
CCRA officers who have told them that they had to pay tax to Canada when the
US government employees were clearly exempt under the treaty.
The US IRS officer's return
did not require me to look into it because I merely excluded
ALL the income and there was
no tax.
At this point, we are merely
filing Notices of Objection to give us time to research the matter and form a
"bulk" appeal.
It is obviously a massive
problem for everyone such as yourself. It will likely have to be dealt with at
the diplomatic level because it "will" result in double taxation as you have
suggested.
I will be sending a further
missive.
In the meantime, "YOU" MUST
file an official Notice of Objection within 90 days of the date on your notice
of assessment or reassessment.
If you want to fax us a copy of your assessment to (604)
913-9123, we can put you into the works here.
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
Cell is (604) 657-8451 (10 AM to 10 PM seven
days a week)
US / CANADA / MEXICO
Working Visa and
Income Tax Specialists
