Matt C. Altro is a contributor to Paul Delean’s business column in the Montreal Gazette. Scroll down to read Matt’s answer to the first question.

Tax strategy: Transferring U.S. pension to RRSP could trigger a tax hit

The Gazette
Tuesday, July 9, 2013

The consequences of transferring a U.S. pension and the taxation of withdrawals from life-insurance policies were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.

Q: My husband and I both spent three years working in the U.S. in the 1990s and have funds in a company pension plan and a 401K (a U.S. pension-plan account). We are residents and citizens of Canada now. Would it be better to transfer our U.S. savings into our Canadian RRSP and pension plans or would we be better off receiving payments from the U.S. plan when we retire? Is there a withholding tax in the U.S. if we transfer the funds to Canada?

A: Financial planner Matt Altro of MCA Cross Border Advisors Inc., said cross-border pension transfers often are complex issues where answers can vary depending on whether you’re contemplating a move or, like the couple in this case, already have done so. “Provided certain conditions are met, the Canada Revenue Agency will allow you to transfer your 401K to an RRSP,” he said. “If executed properly, the transfer will not trigger any tax on the Canadian side in the year of transfer. The U.S. imposes a withholding tax of 15 per cent on the transferred amount, and there’s an additional 10-per-cent early-withdrawal penalty if you are under 59.5 years of age.” While some may consider a tax of 15 per cent on the 401K acceptable, remember that you’ll also be taxed again on the same funds when they’re withdrawn from a Canadian RRSP, Altro noted. “You may be better off leaving it tax-deferred in the U.S. as long as possible. You will be forced to start taking required minimum distributions (the U.S. equivalent of RRIF payments) starting in the year you hit 70.5 years of age.”

Q: I have a life-insurance policy for which I have been paying annual premiums for 20 years. I was told that if I sell it now, about 75 per cent of the amount I would receive would be taxable. I found this surprising since the premiums are paid with after-tax dollars. Would this be taxable by both levels of government? And if I maintain this insurance, would the benefit payable to the beneficiary be taxable in their hands when paid out?

A: If you maintain the insurance until you die, there will be no taxes owed on the death benefit paid to your beneficiary. But if you decide to cash out first, taxes will be owed, since both Canada Revenue Agency and Revenue Quebec consider the sale or surrender of a life-insurance policy for its cash value a taxable event. As explained by John Archer, financial security adviser with RBC Wealth Management in Montreal, “depending on the type of insurance purchased, premiums paid go entirely toward the cost of the pure insurance coverage (as is the case for term insurance) or toward both insurance costs and insurance savings (as in the case of universal life and whole life policies). Since this particular policy has a cash value (available to the policy owner when he wishes to cash out), this value is subject to taxation if withdrawn, as a portion of the premiums have been going toward this side investment.” The taxable amount is the difference between the cash value of the policy and its adjusted cost basis (ACB), arrived at by subtracting the net cost of the insurance from total premiums paid.

The Gazette invites reader questions on tax, investment and personal finance. If you have a query you’d like addressed, send it to Paul Delean, Gazette Business Section, Suite 200, 1010 Ste. Catherine St. W., Montreal, Que., H3B 5L1 or to by email to

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