U.S.-Canadian cross-border retirement planning.

The United States and Canada have a free trade agreement in place that allows the unrestricted movement of goods and services across their borders. This free mobility has created situations in which employees are transferred outside of their home country. Often while in the host country, the employees are earning pension benefits or making contributions into their own retirement accounts.

Once their foreign assignments end, some of these employees decide to retire in the host country. This decision raises certain questions about the treatment of retirement benefits that the employees may have earned throughout their careers.

Guidance may be found in:

* IRS Letter Ruling 8601047.

* IRS Letter Ruling 8633081.

* IRS Letter Ruling 8911001.

* Rev. Rul. 58-247.

* Rev. Rul. 56-446.

* Rev. Rul. 89-95.

* U.S.-Canada Treaty Article XVIII.

The following examples illustrate the application of these rules.

Example 1: T is a U.S. citizen who worked and resided in Canada. While there, T and his U.S. employer made contributions to his U.S. retirement account. T retires and remains in Canada. He begins to receive pension payments from his U.S. employer's pension plan.

Since T is a U.S. citizen, he is subject to tax on his worldwide taxable income and the U.S.-Canadian treaty provisions are not relevant for U.S. tax purposes. In Canada, under the treaty, to the extent such benefits are partially excluded from U.S. taxation, such benefits must also be partially excluded from Canadian taxation.

Example 2: A is a Canadian citizen who worked and resided in the United States. While in the United States, he earned U.S. pension benefits. He returns to Canada and retires. After his retirement, A began receiving annuity payments from the U.S. pension plan.

Since A is a Canadian citizen and resident, he will not be taxed in the United States on the annuity payments he receives. However, he will be subject to a 15% U.S. withholding tax on these payments.

Example 3: B is a U.S. citizen who worked and resided in Canada. B retires and returns to the United States. He receives Canadian social security benefits. Under the treaty, the United States must exempt one-half of his Canadian benefits.

Example 4: Assume the same facts as in Example 3, except that B is a Canadian citizen who retires in the United States. Again, based on the treaty, the United States would exempt one-half of B's Canadian benefit payments.

Example 5: C, a U.S. citizen, is a beneficiary of a Canadian registered retirement savings plan (RRSP), which was established while he worked and resided in Canada. Since Canadian law will not allow periodic payments to be made out of an RRSP, C rolled the proceeds over into a Canadian registered retirement income fund (RRIF). The rollover is not a taxable event in Canada.

The U.S.-Canadian treaty provides that a beneficiary of an RRSP account may elect to defer U.S. income tax on the plan proceeds until such time as a distribution is made from the plan or any plan substituted for the plan. Therefore, the rollover from the RRSP to the RRIF is not currently taxable in the United States.

Example 6: Assume the same facts as in Example 4, except that C is a Canadian citizen who is residing in the United States. The result would be the same as in Example 4.

Example 7: D is a Canadian citizen who worked in Canada for a U.S. employer. After his separation from service from his U.S. employer, he receives a lump-sum distribution from a qualified U.S. pension trust. This distribution relates to benefits earned for services performed in Canada.

D will not be subject to U.S. income tax on the distribution. Although the distribution is from a U.s. trust for services rendered in Canada, in accordance with the U.S.-Canadian income tax treaty, the distribution will be taxed only in Canada.

As the examples illustrate, there are many factors to be considered when planning for the cross-border payment of retirement benefits.