How are IRAs and Roth IRAs taxed in Canada?

This is a significant concern for U.S. citizens or green card holders who are also residents of Canada and therefore, must file tax returns in both countries.

IRA

An IRA has very similar characteristics to that of a Canadian RRSP – contributions are tax deductible, growth is tax free, and the withdrawals are taxed. However, for Canadian tax purposes, a taxpayer’s contribution to an IRA is not tax deductible. The growth in an IRA will still be tax free and withdrawals will be taxed similarly to how it is taxed in the U.S.

In Canada, individuals will have the option to transfer their lump sum IRA balance to a Canadian RRSP tax free, although U.S. tax will apply on the transfer. A Foreign Tax Credit will alleviate a portion of the resulting double taxation.

Roth IRA

Like an IRA is to a Canadian RRSP, similarly a Roth IRA is to a Canadian TFSA. Certain characteristics of a Roth IRA are that the contributions are not tax deductible, but the growth and the withdrawals are tax free. However, although the growth is tax free in the U.S., the Canadian tax authorities considers the account a normal investment account and therefore, will impose tax on the growth of the investments inside the Roth IRA.

ABOUT THE AUTHOR

ALLAN MADAN

CA.CPA.CGA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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