Are Canadian Registered Retirement Savings Plans (RRSPs) reportable? The advice I have received is that they are only taxable when income is drawn down.
Mr JM, Cork
The Registered Retirement Savings Plan is akin to the Irish defined-contribution pension plan. And like Irish pensions, money invested in the plan comes from gross income but is free of tax – as are any investment gains within the pension fund. Income held in a RRSP is taxable only when it is drawn down, just like income from an Irish pension.
And while it is clearly an offshore asset, as it was funded with money subject to Canadian tax while you lived there, it is not a matter for Irish Revenue until the fund delivers you an income.
Where the Irish and Canadian systems differ is in the generosity of the tax relief. While both countries allow you to make contributions at your marginal – or higher – income tax rate, in Canada your contributions are limited to 18 per cent of your reported income the previous year.
That is much less generous than the Irish limits for most people – even if most Irish savers put nothing like 18 per cent of their income into their pension.
In Ireland, you can get relief on 15 per cent of your gross income going into pension fund up to the age of 30 – below the Canadian threshold. However, this rises to 20 per cent in your thirties, 25 per cent in your forties, 30 per cent in your early fifties, rising to 35 per cent from the age of 55 and 40 per cent of income once you hit 60.
Overall cap
The Canadians also have an overall cap on contribution levels regardless of income. In 2015, this figure was 24,930 Canadian dollars which, in today’s money, translates as €17,528.
In dollar terms, that means that no earnings above C$138,500 earn tax relief for pension purposes–– that’s just over €97,350. The figure is adjusted annually, upwards. In Ireland the earnings cap for pension tax relief purposes last year was €115,000, a figure that has been coming down substantially in recent years, but is still more generous than the Canadian RRSP scheme.
For you, obviously, the issue is when the money becomes taxable because that is when you will need to declare it to the Irish Revenue now that you are resident in Ireland.
Unlike in Ireland, you can actually withdraw funds from a RRSP at any age. However, you are obliged to act before the end of the year in which you turn 71.
Several choices
At this point you have several choices.
– withdraw all the funds and pay tax at your higher, or marginal rate on the full amount plus universal social charge;
– purchase an annuity, in which case the annual income delivered by the annuity is subject to tax in the usual way;
– transfer the fund to a registered retirement income fund (RRIF). This is likely to be the most popular option at a time when annuity rates are exorbitantly high.
The RRIF is like an Irish approved retirement fund (ARF) in that the funds in it continue to be invested and can grow (or fall) tax free.
As on the contribution side, there are some differences between the two when it comes to drawing down funds. With an Irish ARF, Revenue will assume that you are using a minimum portion of the fund each year. This is called an “imputed distribution” and means that, whether you draw down any money from the ARF or not, Revenue presumes that you have and taxes you accordingly.
Imputed distribution
Up to the age of 70, the “imputed distribution” is 4 per cent of the gross fund, rising to 5 per cent from the year in which you turn 71. If the fund exceeds €2 million, the imputed drawdown is 6 per cent. You can choose to leave the ARF intact, presuming you have the resources to pay the tax from other funds but that makes little financial sense for most people.
In Canada, the position is slightly different. Where we have an imputed distribution, Canada has effectively a forced withdrawal. Each year, a portion of the fund is cashed out and sent to your bank account and, naturally, becomes subject to tax (and tax credits or reliefs) at that stage.
There is a formula determining how much is cashed out each year but, without going into that, it is an escalating figure So, at 71, 5.28 per cent of the fund is cashed out. By 78, that figure has risen to 6.38 per cent.
From your point of view the enforced encashment makes the position clearer in Irish tax terms. Once the money is withdrawn through an RRIF or otherwise, you declare that figure to the Revenue and pay tax on it after claiming any tax credits due.
Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.
