UK Tax on a Canadian RRSP

OK thanks for the above - the comments are very helpful. So in summary, the treatment is as follows: The RRSP withdrawal is taxed in Canada where the taxable event is the withdrawal. This 25% tax charge is withheld by the Canadian tax authorities as part of the withdrawal. From a UK perspective, the taxable event is the liquidation of the assets within the RRSP. This liquidation is a chargeable event and is chargeable to Income Tax. As it's chargeable to income tax, top slicing relief is available if the policy is over 1 year old Because the two taxable events are different (Canada on the withdrawal, the UK on liquidation) there is no ability to claim a Foreign Tax Credit for the Canadian tax withheld Grateful if you could confirm finally that this is the correct approach. Thank you

Hi Simon.LSR
Yes that is correct.

Hello. I have come across this thread as a result of a search and found it very helpful, but I would like to clarify I have understood it correctly. I also have a couple of questions about reporting income. 1) I am a UK national residing in the UK who worked for 16 years in Canada. As a result I have approximately £50,000 in Canadian pension investments, divided roughly equally between a Registered Retirement Savings Plan (RRSP) and a Locked in Retirement Account (LIRA). Our Canadian advisers have suggested we may want to liquidate both and transfer the cash to invest in the UK; but if I understand this thread correctly, the money would then be subject to BOTH the Canadian 25% withholding tax, AND UK income tax on the whole amount. Is my understanding correct? 2) This would obviously push us into the higher tax band and generate a substantial UK bill, and it is therefore more tax efficient to convert our Canadian assets into income. This would still be subject to the Canadian withholding tax, and I presume the income would then need to be declared annually on my UK self-assessment and taxed accordingly. Is this correct? 3) From the UK point of view is the LIRA (which represents the money from my actual employers' pension plan) regarded any differently to the RRSP (which represents my personal savings). 4) Finally, if I take the lump sum (unlikely but I am asking for the sake of completeness), where do I declare it on my UK self-assessment, and where if anywhere do I enter the amount retained by Canada; and 5) If I take it as retirement income, where do I declare it, and where do I declare the Canadian tax taken off? There are obviously a lot of us in this sort of situation and I would welcome advice as we plan our retirement.

Hi Paul Farthing
1. Yes
2. Yes    
3. No.  
4. On the foreign section of your tax return and if RRSP no credit is given for the Canadian tax - Dt1467 - Where a UK resident makes a lump sum withdrawal from an RRSP or an RRIF, Canada imposes a 25 per cent withholding tax.
No tax credit relief is allowable in the United Kingdom in respect of the tax withheld, however, because the Canadian tax is imposed upon the lump sum withdrawal (which does not itself give rise to a tax charge in the United Kingdom), whereas any UK tax charge is on the disposal of assets held within the Plan or Fund to enable the lump sum to be withdrawn (and no tax is levied on the disposal of fund assets in Canada).
The Elimination of Double Taxation Article (Article 21) obliges the United Kingdom to give credit for Canadian tax paid only against UK tax computed by reference to the same profits, income or chargeable gains by reference to which the Canadian tax is computed.
Since no UK tax is computed by reference to the subject of Canadian tax (that is, the withdrawal), no tax credit relief is allowable.
Similarly, where the disposal of fund assets to facilitate a withdrawal gives rise to a UK tax charge, no tax credit relief is allowable since the disposal does not attract a tax charge in Canada.    
5. On the foreign page.

Hi HMRC admin, my spouse has Canadian rrsp but is unemployed in UK, say she withdraws £20k from rrsp and Canada deducts 5k as withholding tax. What is her tax liability in UK? I understand that she has to pay no tax in UK as it will be offset by the tax already paid in Canada given she is unemployed in UK. Pls advise.

Hi Skad,
DT1467 - Where a UK resident makes a lump sum withdrawal from an RRSP or an RRIF, Canada imposes a 25 per cent withholding tax.
No tax credit relief is allowable in the United Kingdom in respect of the tax withheld, however, because the Canadian tax is imposed upon the lump sum withdrawal (which does not itself give rise to a tax charge in the United Kingdom), whereas any UK tax charge is on the disposal of assets held within the Plan or Fund to enable the lump sum to be withdrawn (and no tax is levied on the disposal of fund assets in Canada). The Elimination of Double Taxation Article (Article 21) obliges the United Kingdom to give credit for Canadian tax paid only against UK tax computed by reference to the same profits, income or chargeable gains by reference to which the Canadian tax is computed. Since no UK tax is computed by reference to the subject of Canadian tax (that is, the withdrawal), no tax credit relief is allowable. Similarly, where the disposal of fund assets to facilitate a withdrawal gives rise to a UK tax charge, no tax credit relief is allowable since the disposal does not attract a tax charge in Canada. 
Thank you.

Hi HMRC Admin 20, Thanks for your reply, could you give an example with numbers so i understand it completely. So far what i have understood is based on my previous example: Withdrawal: £ 20k Tax paid in Canada: £5k Net amount in hand: £ 15k Taxable amount in UK = capital gain (disposal of assets) on RRSP withdrawal of £20k? Say if total income in the UK including capital gain from above is less than £12k, then no tax shall incur. Is this correct? Also what happens if total income in the UK including capital gain from RRSP is above £12k?

Hi ,
 

I regret that we cannot provide scenarios.  The double taxation agreement basically states that the lump sum is taxable both in Canada and the UK, with no tax relief allowable in the UK.  However, the double taxation agreement on lumpsums means the UK is required to give a credit against UK tax of up to 100% of the Canadial tax paid, to avoid double taxation.  The full £20000 is taxable in the UK in addition to any other income and a foreign tax credit of up to £5000 can be claimed, depending on how much UK tax is payable on the lumpsum. Thank you.

I am a UK resident, but worked in Canada some years ago. My RRSP was converted to an RRIP two years ago and I have withdrawn the minimum amount allowed each year since. Because I have only withdrawn the minimum, there is no Canadian witholding tax. I have included the full amount of the withdrawal in my self assessment return and have paid the UK income tax. Is this correct? If there was any Canadian witholding tax - can I deduct this as a foreign tax credit?

Hi annie491
Yes.

Many thanks

I do not understand why the UK is entitled to tax the full distribution from the RRIF/RRSP. The contents of these funds represent earnings of the Canadian resident in the years prior to departure. If the UK seeks to tax the distribution it is effectively taxing the earnings of the individual prior to establishing residence in the UK. I would have thought the proper treatment would be for the UK to treat the fair value of the RRIF/RRSP as a capital asset at the time of becoming a UK resident and any earnings on the RRIF/RRSP subsequent to establishing residence to be fair game for the Inland Revenue. Please explain why the UK believes it is entitled to tax an individual's earnings prior to establishing residence in the UK.

I have just noticed your comments to Skad above and your reference to the Canada UK double tax treaty. I have looked at the treaty and see that Articles 13 (on capital gains) and 17 (on pensions) would appear to apply. A lump sum settlement payment out of a RRIF/RRSP by definition under Article 17 is not a pension or annuity payment. As a consequence, it appears that such a lump sum is caught by Article 13(8). In order to compute the gain under Article (13) I would assume the cost base for determining the gain is the fair value of the RRIF/RRSP at the time of emigration to the UK. Do you agree and if not why not?

Hi 
andyken47
There is a tax treaty between the UK and Canada, that dictates which country has the taxing rights:

Canada: tax treaties

Where a UK resident makes a lump sum withdrawal from an RRSP or an RRIF, Canada imposes a 25 per cent withholding tax.

No Tax Credit Relief is allowable in the United Kingdom in respect of the tax withheld, however, because the Canadian tax is imposed upon the lump sum withdrawal (which does not itself give rise to a tax charge in the United Kingdom), whereas any UK tax charge is on the disposal of assets held within the Plan or Fund to enable the lump sum to be withdrawn (and no tax is levied on the disposal of fund assets in Canada).

The Elimination of Double Taxation Article (Article 21) obliges the United Kingdom to give credit for Canadian tax paid only against UK tax computed by reference to the same profits, income or chargeable gains by reference to which the Canadian tax is computed.

Since no UK tax is computed by reference to the subject of Canadian tax (that is, the withdrawal), no tax credit relief is allowable.
Similarly, where the disposal of fund assets to facilitate a withdrawal gives rise to a UK tax charge, no tax credit relief is allowable since the disposal does not attract a tax charge in Canada.
Please have a look at the double taxation relief manual at DT4605:
DT4605 - Double Taxation Relief Manual: Guidance by country: Canada: Notes
Thank you. 

Hi HMRC Admin25 Thank you for your response. Could you please clarify what the cost base would be for UK tax calculations in the following two examples of a lump sum distribution from a RRIF/RRSP: 1) the Canadian emigrant disposes of investments in the fund prior to emigration so that there is only cash in the fund; and 2) the fund owns the shares of one Canadian company which it acquired ten years prior to the Canadian's emigration. The fund disposes of the shares after emigration in order to make the lumps sum distribution. In situation 2) above the question would be whether any gain would be determined by reference to the original cost of the shares to the fund or their fair market value at the date of emigration.

Hi Andrew Kenyon

Payments from RRSP are a pension and as such are under Article 17 - DT4605- Where a UK resident makes a lump sum withdrawal from an RRSP or an RRIF, Canada imposes a 25 per cent withholding tax.
No tax credit relief is allowable in the United Kingdom in respect of the tax withheld, however, because the Canadian tax is imposed upon the lump sum withdrawal (which does not itself give rise to a tax charge in the United Kingdom),
whereas any UK tax charge is on the disposal of assets held within the Plan or Fund to enable the lump sum to be withdrawn (and no tax is levied on the disposal of fund assets in Canada).
The Elimination of Double Taxation Article (Article 21) obliges the United Kingdom to give credit for Canadian tax paid only against UK tax computed by reference to the same profits, income or chargeable gains by reference to which the Canadian tax is computed.
Since no UK tax is computed by reference to the subject of Canadian tax (that is, the withdrawal), no tax credit relief is allowable.
Similarly, where the disposal of fund assets to facilitate a withdrawal gives rise to a UK tax charge, no tax credit relief is allowable since the disposal does not attract a tax charge in Canada. 

Thank you

Hi Andrew Kenyon

If you are not resident in the UK, in the tax year, that the fund disposes of the shares, there is no UK tax liability.  
Where the disposal of fund assets to facilitate a withdrawal gives rise to a UK tax charge, no tax credit relief is allowable since the disposal does not attract a tax charge in Canada. 

Thank you

This is so very interesting, but very confusing to us. My Wife ex UK Police Officer transferred her pension to Canada in 2007 as we were residents there - it is now in a Locked RRSP - In 2015 we returned to UK for family reasons and are now UK Tax resident - But now planning for retirement we need to move the RRSP money back to UK - can anyone help in simple terms of what we can do to achieve this as we’ve approached many firms such as Hargreaves’s Landsdown etc who are unable to help us - Any help, advice. or pointers to any Companies that may be able to help would. be really helpful - Many thanks and hope some one can help as this is now becoming a stress we don’t need.

Hi Marg Jones,
If you qualify for split year then you only report any foreign income for the UK part of the year:
RDRM12000 - Residence: The SRT: Split year treatment: Contents.
If you do not qualify then you will need to report all your foreign income to the UK:
Tax on foreign income
The guidance at RDRM12150 at www.gov.uk will help you work out if split year treatment applies. 
Thank you. 

 

  

Can I use a relatively simple case to make sure I understand the previous comments regarding the Foreign Tax Credit Relief in the case of a UK resident, paying tax at the Basic Rate who has made a withdrawal from their RRSP. Assuming that £20,000 is the Sterling equivalent of the lump sum withdrawn and that £5,000 (25%) is the non-resident tax withheld by the Canada Revenue Agency. In the Foreign pages of the Tax Return (F 2 in the 2023 Return), in the “Overseas pensions, social security benefits and royalties” section the following would be entered in columns A-C: “A Country or territory code”: CAN “B Amount of income arising or received before any tax taken off”: 20000 “C Foreign tax taken off or paid”: 5000 In the “Overseas pensions, social security benefits and royalties continued” section (page F 3 of the 2023 Return), enter in columns D-F: “D Special Withholding Tax and any UK tax taken off”: 5000 “E To claim Foreign Tax Credit Relief, put ‘X’ in the box”: X “F Taxable amount – if you’re claiming Foreign Tax Credit Relief, copy column B here. If not, enter column B minus column C”: 20000 If the tax payer had £2,500 of their £12,570 Personal Allowance available for the tax year, then £17,500 of the £20,000 lump sum withdrawal would fall within the Basic Rate band and £3,500 of UK tax would be due. In our case, as the CRA tax withheld (£5,000) is more than the UK tax due of £3,500, only £3,500 of Foreign Tax Credit Relief is claimable. So for our example, on page F 1 in the Foreign section in Box 2 “If you’re calculating your tax, enter the total Foreign Tax Credit Relief on your income” the tax payer would put 3500. If the tax payer had none of their Personal Allowance available, then £4,000 of tax would be due at the Basic Rate and so they would enter in Box 2: 4000. I would greatly appreciate your review of this and for any corrections or additional notes.