If you have worked in the United States for several years and have contributed to a Roth IRA, it is important to understand the impacts of holding a Roth IRA as a non-resident of the United States for tax purposes. In practice, the Roth IRA works similar to the Tax Free Savings Account (TFSA): the contributions do not give the right to a deduction in your US tax return, but the income accumulated inside the Roth IRA are tax free in the United States. Likewise, withdrawals can be made without US tax consequences.
Unlike the 401 (k) plan and the Individual Retirement Account (IRA), the Roth IRA cannot be transferred to your RRSP. In addition, as a tax resident of Canada, although income generated inside the Roth IRA is exempt from US tax, it remains fully taxable annually in Canada if no election is made.
Choice available
The tax treaty between Canada and the United States allows you to make a one-time choice when you return to Canada to defer annually the taxation of income generated inside your Roth IRA. The choice – in the form of a letter – must be made no later than April 30 of the year following your return (therefore no later than April 30, 2021 for a return made in 2020). However, specific conditions must be met in order for this choice to be considered valid, including not having made a contribution to your Roth IRA as a resident of Canada. Otherwise, a portion of the selection could be disqualified.
If you returned to Canada in a previous year and did not make this election, a late election could potentially be made, but additional analysis would be required. Also, if the election was not made or is partially disqualified, your Roth IRA may need to be reported on Form T1135.
If you have moved to Canada and have a Roth IRA, make an appointment with one of our tax experts specializing in international tax. We have the expertise to ensure that the choice for your Roth IRA is optimal and that it is made properly, in the form prescribed by the tax authorities.