Transferring foreign pensions to Canada

Many Canadians are pursuing career opportunities across the globe. While they learn new languages and discover new cultures and experiences, they may also be accumulating new retirement assets. When they return home, they may want to consolidate these savings on Canadian soil. Thanks to the Canadian Income Tax Act (ITA), this may be possible. Determining eligibility for foreign pension transfers to a registered retirement savings plan (RRSP) can be difficult, with tax treaties, pension definitions, and other countries’ transfer rules all contributing to the complexity. To help make the transfer as smooth as possible, follow these three steps.

Step one: check that the benefit qualifies as a pension

Paragraph 60(j) of the ITA outlines the criteria for putting foreign retirement savings toward an RRSP without affecting contribution room. Here, foreign retirement savings are divided into two types: pension benefits and foreign retirement arrangements.

The requirements to contribute a foreign pension benefit to an RRSP without using any contribution room are:

• The payment from the plan must be a lump-sum amount.
• The payment must relate to services rendered by you, your spouse,¹ or your former spouse during the period in which you were a non-resident of Canada.
• The payment must be fully taxable in Canada and included in your income in the year of transfer.
• The amount transferred must be designated as a transfer on Schedule 7 of your Canadian income tax return in the year of transfer to obtain an offsetting deduction from the income inclusion.

As this is considered a transfer, the RRSP contribution doesn’t impact your RRSP room and is in addition to your regular RRSP room. The transfer payment can be contributed to your RRSP or RRIF* and not to a spousal plan where you’re the contributor. In addition, on the transfer of the funds, the contribution and corresponding deduction can only be made in the year or within 60 days after the end of the year that the payment is reported in your income (i.e., there’s no carryforward deduction available).

*On August 4, 2023, the federal government released draft legislation proposing to allow transfers to your RRIF as well. Although the draft legislation is not yet law, it is deemed in force as of August 4, 2023. Note that financial institutions may not be in a position to administer these changes until the proposed legislation becomes law.

Foreign retirement arrangements

The definition for a foreign retirement arrangement is, unfortunately, not as broad as a foreign pension benefit. In fact, this is a special provision intended to apply specifically to U.S. individual retirement accounts (IRAs). Personal retirement accounts that aren’t pensions can’t be transferred to Canada from other countries on a tax-deferred basis.

What if the foreign account in question isn’t a U.S. IRA but is like an RRSP—can it be transferred? The short answer is maybe. As Canadian residents we’re taxed on worldwide income, so withdrawals from foreign retirement accounts—whether lump sum or periodic—are still taxable income. Foreign tax credits may be available to offset foreign tax withheld on such withdrawals. If adequate RRSP room exists, withdrawals from the foreign accounts can be contributed to an RRSP. The contribution creates the necessary deduction against the income inclusion of the original withdrawal. To minimize tax, this strategy could be used over several years, as it wouldn’t be restricted by the ITA’s foreign transfer provisions.

Step two: check foreign rules regarding pension transfers

Some countries have their own rules for pension transfers that can prevent a transfer even if that pension would meet the ITA requirements above. Failure to comply with the home country’s rules may also result in punitive tax penalties.

Other countries may require government approvals to transfer pensions to foreign jurisdictions or require that foreign accounts meet local pension laws or provisions. The U.K., for example, has a list of recognized overseas pension schemes to which U.K.-based pensions can be transferred. You can consult a foreign government’s customs and revenue agency website for pension transfer information or contact a foreign pension plan administrator to ask about transfer options for non-residents.

Finally, there could be other fees associated with the withdrawal of the foreign pension benefit or transfer-related costs that should be confirmed with the foreign pension plan before proceeding.

Step three: review tax treaties

The last requirement for foreign pension transfers under the ITA is that the foreign pension benefit be included as income for Canadian tax purposes. If a provision of a tax treaty allows for the foreign benefit to be exempt from Canadian tax, you may claim a deduction on your Canadian tax return to offset the income inclusion from the pension withdrawal. But there’s a catch: if you claim this deduction, you can’t claim the deduction for the foreign pension transfer to your RRSP and it would require contribution room.

Where a foreign pension is exempt from tax in the foreign country but taxable to Canadian residents under the prevailing tax treaty with that country, the pension could still be transferred to an RRSP, assuming the pension meets the requirements for the foreign pension transfer deduction. The fact that no foreign tax would apply may make such a transfer attractive from a Canadian tax perspective.

Case study: foreign pension transfer

Cassandra is a Canadian citizen who just returned to Canada after 10 years of living and working in Switzerland. She was a member of a pension plan where her Swiss employer made contributions. The commuted value of the pension plan is $100,000 (all funds in Canadian dollars). She would like to transfer this lump sum to her RRSP and currently earns $70,000 a year as a resident of Nova Scotia.

First, Cassandra confirms there will be 25% non-resident withholding tax ($25,000) at source with no other fees applying.

Next, she confirms with her advisor that her Swiss pension plan meets the requirements as a foreign pension benefit under the ITA. She wants to know how much to transfer to her RRSP (up to the full gross withdrawal) to fully utilize the foreign tax credit. She can top up the net withdrawal with her own funds or a loan if necessary.

To fully utilize the foreign tax credit, Cassandra only needs to transfer the net amount of her withdrawal to her RRSP. She would receive a contribution receipt for the $75,000 RRSP deposit. When she files her Canadian tax return, she includes the gross withdrawal of $100,000 as income on Line 11500 of her T1 General, and the RRSP deposit of $75,000 on Schedule 7 as a transfer in Part C. This transfer value is subsequently reported on line 20800 of her T1 General. The withholding tax of $25,000 is reported on line 40500 of the T1 General, representing the foreign tax credit.

Determine your best pension transfer option

With almost 200 countries in the world and nearly 100 Canadian tax treaties, it’s challenging to know which foreign pensions are eligible for transfer to an RRSP. The process above can be used to help evaluate transfer options. Partner with a tax advisor familiar with these areas to confirm the fine points and navigate the complexities.

1 Spouse includes common-law partner, as these terms are defined in the Income Tax Act (Canada).