Tax Alerts
Special Canadian election due April 30 if you have a ROTH IRA
Do you have a ROTH IRA? This is a US savings plan, somewhat similar to the Canadian Tax Free Savings Account, in that earnings in this plan are tax free for US tax purposes. You may have one of these accounts if you lived in the US in previous years, and contributed to such a plan, or converted a regular US Individual Retirement Account (IRA) account to a ROTH IRA.
Because the earnings in these plans are not taxable for US tax purposes, you may not be aware that such tax free status is not generally available while living in Canada. However, if you have such an account, and have not contributed to it since becoming a Canadian resident, or after December 31, 2008, (whichever is later), you have until April 30, 2011 to file an election with the Canadian government to ensure that Canadian tax on earnings within such an account will be deferred until such time as the funds are withdrawn from the IRA. This is a one-time irrevocable election that will cover all future years. Changes were made to the Canada - US income tax treaty to clarify the tax status of ROTH IRA’s in Canada, and it is as a result of these changes that an election is now available to protect you from current year taxes on earnings in the plan. If you are a Canadian resident at the time of withdrawal of funds from the ROTH IRA, another exemption under the Canada - US Treaty may apply such that the accumulated earnings can be withdrawn tax-free.
In addition to current year Canadian tax on the investment earnings of your ROTH IRA if you do not file an election, such plans, because they are held outside of Canada, may be subject to special Canadian reporting on forms such as T1135, Foreign Information Verification Statement, T1141, Information Return re Transfers or Loans to a Non-Resident Trust, and/or Form T1134B, Information Return re Controlled Foreign Affiliates. Failure to file such reporting forms, if required, carries a penalty of $25 per day, to a maximum of $2,500 per form. The requirement to file any of these forms depends on your individual circumstances, such as how the plan is constituted – i.e. as a custodial plan or as a plan governed by a trust, the size of your holdings in the plan, and when contributions were made.
In the CRA announcement about Roth IRAs, the CRA stated that taxpayers who make the election will not be required to file the above mentioned information returns or statements, if such filings would otherwise be required.
If you were resident in Canada before January 1, 2010, and had a ROTH IRA in any year that you were resident, the election must be filed by April 30, 2011. If you moved to Canada in 2010, the election must also be filed by April 30, 2011.
Anyone moving to Canada owning a ROTH IRA after December 31, 2010, must file this election by April 30 of the following year.
The CRA has also announced that taxpayers who previously reported and paid tax on earnings within a ROTH IRA on their Canadian tax return, will be eligible to amend prior year tax returns, for up to ten years, and obtain a refund of Canadian taxes paid on ROTH IRA accumulated income.
If you have a ROTH IRA, ask your BDO Advisor what Canadian tax filings apply to you.
