Since coming to Canada, I have been exploring ways to transfer my pension plan from my home country. Canada’s Registered Retirement Savings Plan (RRSP) offers greater flexibility compared to pension plans in my country of origin.
An RRSP is a retirement savings account for both employees and the self-employed. Pre-tax funds placed into an RRSP grow tax-free until withdrawal, at which point they are taxed at the marginal rate.
While there are various discussions online about whether RRSP is suitable for one’s financial situation or if other saving accounts like Tax-Free Savings Account (TFSA) or Unregistered accounts are better, this article will not delve into that topic.
Advantages of RRSP
- Contributions to RRSPs are made with pre-tax money and are deducted from income.
- The growth of RRSP investments is tax-free.
- The grows of RRSP investment on the bigger amount than in after-tax money investment accounts.
Disadvantages of RRSP
- Taxes are paid upon withdrawal at the marginal rate, including gains (in comparison to unregistered accounts where taxes on gains are only half of the marginal rate).
There are several types of RRSPs, but for this transfer, the Individual RRSP type should be used.
In addition to choosing the RRSP type, selecting an investment type for your RRSP account is crucial before initiating the transfer. Permitted RRSP investments include:
- Mutual funds
- Exchange-traded funds
- Equities
- Bonds
- Savings accounts
- Mortgage loans
- Income trusts
- Guaranteed investment certificates
- Foreign currency
- Labor-sponsored funds
The details of each investment type are beyond the scope of this article. Personally, I use Exchange-traded funds for my RRSP.
For the year 2019, the RRSP contribution limit is 18% of the earned income as reported on the previous year’s tax return, up to a maximum of $26,500. Contributions exceeding $2,000 are subject to penalties, with a 1% tax per month on excess contributions.
Tip: The pension transfer is not affected by the contribution limit and does not impact the available contribution room.
Pre-requirements for the pension transfer:
- Your country of origin must have a tax treaty with Canada. For example, in the case of Israel, the details are explained under section 3 ARTICLE 17 Pensions and Annuities of Canada–Israel Tax Convention Act, 2016
- The pension transfer should occur within one tax year, involving the withdrawal of pension funds from the origin country and their deposit into RRSP within the same tax year or within 60 days after the tax year-end.
- The foreign pension should be contributed before you become a resident of Canada for tax purposes.
- Sufficient federal payable taxes in Canada are necessary to claim the origin country taxes back. You must have federal payable taxes in Canada equal to or greater than the taxes paid in the origin country. The Canada Revenue Agency (CRA) does not refund money not paid to them.
- You need to file a tax return in the origin country for the year of pension withdrawal.
- Adequate funds must be available to cover the origin country’s taxes. When depositing pension money into RRSP, the amount of taxes paid in the origin country should be added.
- The pension transfer must occur before you turn 71 years old.
Tip: If you lack sufficient federal payable taxes, consider spreading the transfer over several years.
After completing all preparations, follow these steps:
- Withdraw the pension from the origin country and pay the taxes.
- Transfer the pension funds to Canada, which can be deposited into any of your Canadian accounts, including a checking account. Note the exchange rate used for converting the origin country’s currency to Canadian dollars, as this rate will be used for all conversions.
Tip: You can use the actual exchange rate when you did the exchange or the average rate for this year.
- Deposit the pension funds into the RRSP account, along with an additional amount equal to the taxes paid in the origin country. The RRSP account should ultimately hold the same amount as the pension account in the origin country.
- File a tax return in the origin country.
- Have the tax return translated into English by a certified translator.
File Canadian taxes.
I did not try the following steps as my accountant Maya Schwartz (MyTaxAdviser) file my tax return for me.
- Include the whole pension amount include foreign taxes that you deposited to your RRSP as income for the year. Line 115 of Federal Tax return form - Other pensions and superannuation.
- Deduct the RRSP amount from income: line 208 - RRSP deduction. And on line 11, Schedule 7, mark that the RRSP is a transfer. This will say that the RRSP amount should not affect your contribution limits.
- Receiving Foreign Tax Credit.
While the foreign tax return form is not required when filing Canadian tax returns, the CRA may request supporting documents for the transfer during the summer. When contacted, send the form to the CRA.
