US Citizen In Canada–US Pension?

Question

I’m a retired school teacher living in Canada, but am also a US citizen. I’m 59 this year, and am looking at taking my pension payments soon. Because I’m living in Canada, I’m not sure about withholding tax from the US. And I’m also being paid in US dollars, so I think I have to convert to Canadian dollars? I read about this foreign tax credit thing, but am confused.

Answer

Good question reader. Because you are a US citizen, you will likely get hit with the standard 30% US withholding rates. US-side, you’ll be taxed at the pension rates on the US 1040 return that you’ll file.

Canada-side, you’ll convert the pension income to CDN$, and report that on your Canadian T1 return. You’ll also pay tax on this money, but, you’ll be able to claim the US tax that you paid (the 30% withholding) as a Foreign Tax Credit on your Canadian return, and offset the Canadian tax bill.

One thing to watch: CRA will likely review the FTC claim, so make sure you have a processed copy of the 1040 return available for submission to them.