Mike

On Friday, the Canada-US Income Tax Treaty was revised and will apparently enter into force on Jan. 1, 2008. Basically, employee contributions to a US pension plan (401k) will be deductible on Canadian tax returns.

Yay!

Here’s the description and link if anyone is interested:

http://www.fin.gc.ca/news07/data/07-070_1e.html

Pensions & other registered plans – mutual recognition

Who it affects: Cross-border commuters – individuals residing in one country and working in the other – who contribute to a pension plan (or any of certain other employment-related retirement arrangements) in the country where they work. Also individuals who move from one country to the other on short-term (up to five years) work assignments, and continue to contribute to a plan or arrangement in the first country. In certain cases, such persons’ employers may also benefit.

Current rule: No rule in respect of contributions, meaning no assurance that they may be deducted for tax purposes in the country of employment.

New rule: Provided certain conditions are met, cross-border commuters may deduct, for residence country tax purposes, the contributions they make to a plan or arrangement in the country where they work. Similarly, those who move for work and meet certain conditions can deduct, for source country tax purposes, their contributions to a plan or arrangement in the other country, for up to five years. In both cases, accruing benefits are not taxable.

Examples: (1) A resident of Canada is employed in the U.S., and contributes to an employer-sponsored pension plan there. The employee’s contributions to the plan (up to the employee’s remaining RRSP deduction room) will be deductible for Canadian tax purposes. (2) An employee of a Canadian company is assigned for three years to a related U.S. company. The employee keeps contributing to the employee pension plan of the Canadian company. For U.S. tax purposes, both the employee and the U.S. company will be able to deduct the contributions.

Significance: Facilitates movement of personnel between the two countries by removing a possible disincentive for commuters and temporary work assignments.

Application: Applies for taxation years that begin after calendar year in which the Protocol enters into force. However, if ratification is completed in 2007 the rule applies for taxation years that begin in 2008 (i.e. the same calendar year that the Protocol enters into force).

He’ll have to look into it and decide what to do.

Mike

I didn’t know about the transfer out. It sounds like that is dependant on the plan? Given how crappy his plan is, I’m guessing they don’t offer that alternative but it’s definitely worth asking. Thanks for the info! He hasn’t quite been in the plan a year yet but it’s worth inquiring ahead of time anyway.

It’s amazing that HR agreed to pay those types of fees. I’m guessing they are rather uninformed.

This is a T2033 transfer-out in cash.

As for his group rrsp – those rates are terrible – does he work for a small company? He should really talk to the administrator at his company (probably HR) and get them to either ask about reducing the MERs or switch to someone else. One of the big benefits of a group rrsp is the ability to negotiate lower fees which clearly has not happened in this case. A typical group rrsp would have average equity MERs of about half of retail so around 1.3%. Most of the saving comes from not going through an advisor who will often get 1% trailer which is a big part of the MER.

London Life is laughing all the way to the bank on that plan.

Mike

My husband’s RRSP group plan (in Canada) is through London Life and the choices are horrible! The MERs range from 1.9% (for a bond fund!) to a whopping 2.8%! We contribute enough to get the match there and the rest of his RRSP contributions are through TD efunds.

Even without the tax deferred advantage of the contribution (just tax deferred growth), I feel comfortable making contributions to my 401k (especially with the current exchange rate).

Even the most ‘expensive’ managed funds in our 401k group selections have MERs of 0.8% at most. Comparing that to my husband’s plans or even TDs index funds, I can definitely see why there are so many complaints about the obnoxious MERs being charged by Canadian fund companies.

It’s interesting to learn about 401(k)s – I didn’t realize they were set up by the employer. We have “group” rrsps at larger companies which are sort of the same thing in that there are limitations in what you can buy but you can easily set up a regular rrsp account(s) anywhere else you want.

Mike

By the way, Telly’s 401(k) is an atypically good one. Mine has a selection of 8 funds, no option to go to a trading account, and only 25% of the first 6% of my gross salary is matched. We have no Vanguard funds in our plan – so I’m stuck with managed funds with high fees. However, a 401(k) is probably the best tax-advantaged investing possible in the States, so I stick with it.

Mike