I am a Canadian resident and have some funds in a U.S. 401K. What is the most tax efficient way of bringing these monies into Canada?

The most tax efficient method is to transfer these funds to your RRSP. Unfortunately, you cannot directly transfer your 401K to your RRSP.

This transfer can be completed as follows:

1. Open a Rollover Individual Retirement Account (IRA) account with an investment firm capable of cross border investment management.
2. Rollover the 401k to an IRA.
3. Withdraw all of the IRA as a Canadian resident (you will be assessed 15% withholding tax). If you are under 59.5 years, there will be an additional 10% penalty.
4. The net resulting lump sum payment is then transferred to your RRSP in Canadian dollars. The deposit into the RRSP must occur in the year of withdrawal or within 60 days of year-end.
5. The full gross withdrawal including the withholding tax is included as Canadian income with an offsetting RRSP deduction. This results in no additional tax liability to Canada.
6. The 15% withholding tax paid to the IRS may be claimed as a foreign tax credit (FTC) for Canadian tax purposes.

Please note that you will incur Canadian tax when you eventually withdraw funds from your RRSP.

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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