Can I Transfer a US Pension to My RRSP? The ITA 60(j) Rollover

If you moved to Canada and you have a US pension, 401(k), or IRA, you may be able to roll the distribution into your RRSP using the deduction under ITA 60(j). The deduction matches the amount contributed to the RRSP, offsetting the income inclusion from the distribution. The result is a tax-neutral transfer from the US retirement account to the Canadian retirement account, with one important exception: the US withholding on the distribution is not refunded by the US (it is a final tax), but it generates a foreign tax credit on the Canadian return.

How the 60(j) deduction works

Step 1: receive a distribution from the US plan. The distribution is subject to US withholding. For a Canadian resident, the treaty-reduced rate is 15% on periodic payments (Article XVIII(2)). Lump-sum distributions may be subject to 30% withholding (the treaty reduction to 15% applies to “periodic” payments, and a lump sum may not qualify as periodic).

Step 2: include the distribution in Canadian income. The gross distribution (before US withholding) is included in income on line 11500 (other pensions and superannuation) of the T1 return, converted to CAD at the exchange rate on the date of receipt.

Step 3: contribute to your RRSP. Contribute an amount equal to the gross distribution (or as much as you can, up to the gross) to your RRSP. This contribution does not require RRSP contribution room; the 60(j) deduction is separate from the normal RRSP deduction and does not consume your room.

Step 4: claim the 60(j) deduction on line 25600. The deduction offsets the income inclusion from Step 2. If you contributed the full gross amount, the deduction equals the income inclusion, and the net Canadian tax on the transfer is zero (before considering the FTC for US withholding).

Step 5: claim the FTC for US withholding. The US withheld 15% (or more) on the distribution. That withholding generates a foreign tax credit on the Canadian return under ITA 126(1). If the 60(j) deduction zeroed out the income, the FTC may have no Canadian tax to offset, in which case it carries forward. If there is other Canadian tax liability, the FTC reduces it.

The five conditions

CRA’s interpretation of 60(j) imposes several conditions. The deduction is available when:

1. The amount was received from a “foreign retirement arrangement.” This includes US 401(k) plans, 403(b) plans, traditional IRAs, US government pensions (federal, state, military), and most other employer-sponsored retirement plans. Roth IRAs are more complex (see below).

2. The amount is included in your Canadian income for the year. The distribution must be reported on your T1.

3. You contribute the amount to your RRSP in the same year or within 60 days after year-end. The same timing rule as regular RRSP contributions applies.

4. The amount does not exceed the distribution received. You cannot deduct more than what was included in income.

5. The contribution is a “qualifying transfer.” CRA has interpreted this to require that the distribution be received as a consequence of the taxpayer ceasing membership in the foreign plan, or as periodic payments. The interpretation has varied, and CRA’s administrative position has not always been consistent. For lump-sum distributions, the 60(j) deduction is generally available. For partial distributions (taking some but not all of the US plan), the position is less clear. Consult with a cross-border CPA on partial distributions.

Does it use RRSP contribution room?

No. The 60(j) deduction is a separate deduction on line 25600, not the regular RRSP deduction on line 20800. The RRSP contribution is made (the money goes into the RRSP), but the deduction is claimed under 60(j), not as a regular RRSP contribution. Your RRSP contribution room is unaffected.

This is critical because many people who move to Canada from the US have little or no RRSP contribution room (room is based on prior-year Canadian earned income, and they may have just arrived). The 60(j) mechanism works regardless of contribution room.

However, the RRSP contribution still counts toward the RRSP’s total balance. When you withdraw from the RRSP in the future, the withdrawal is taxable in Canada (and in the US if you are still a US person), just like any other RRSP withdrawal.

What about Roth IRAs?

Roth IRA distributions are not straightforward under 60(j). A Roth IRA is a foreign retirement arrangement, but the distribution may be partly non-taxable in Canada (return of contributions, which were made with after-tax dollars). The portion that represents earnings may be taxable in Canada if the treaty election under Article XVIII(7) was not in effect during the accumulation period.

The 60(j) deduction applies only to the amount included in Canadian income. If the Roth distribution is not included in income (because it is a return of contributions or a qualified distribution that Canada recognizes as tax-free), there is no income to offset, and 60(j) does not apply.

For most people, the Roth IRA is better left in the US (if you can maintain it as a Canadian resident) or spent down rather than rolled into an RRSP. The Roth’s tax-free character in the US is its primary benefit, and converting it to an RRSP (which is tax-deferred, not tax-free) loses that benefit.

What about the US side?

The US treats the distribution as a distribution. If you are a Canadian resident (non-US-person), the US withholds at the treaty rate and has no further taxing right (the treaty gives Canada exclusive or primary taxing rights on pension distributions to Canadian residents). If you are a US citizen in Canada, the US taxes the distribution as ordinary income and allows an FTC for Canadian tax on the same income.

The rollover into a Canadian RRSP is not recognized by the US as a rollover. From the US perspective, the money left the US plan (taxable event) and went into a Canadian plan (not a qualified US plan). The treaty election under Article XVIII(7) then defers US taxation on the RRSP going forward, but the original distribution was a US taxable event.

For a US citizen, the 60(j) rollover produces a Canadian deduction (offsetting the Canadian income) and a US tax liability (offset by the FTC for Canadian tax, which is zero after the 60(j) deduction). The US withholding on the distribution is the US’s final tax on the distributed amount. The FTC for US withholding on the Canadian return offsets other Canadian tax or carries forward.

What should I do next?

If you have a US retirement account and you have moved (or are moving) to Canada, consider whether a 60(j) rollover makes sense. The decision depends on: the size of the account, the US withholding rate (treaty-reduced or not), whether you have cash to fund the gross contribution, and whether you want to consolidate into the Canadian system or maintain the US account with the treaty election.

• I’m Canadian and inheriting a US IRA or 401(k), the 60(j) rollover in an inheritance context
• 401(k) and Roth IRA when moving back to Canada, the broader account management question
• Can I keep my US brokerage and IRA after moving to Canada?, the alternative to rolling over

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.