Roth IRA Rules Change for 2010

Important changes are in the works for Canadian residents who own Roth IRAs.  Unless taxpayers want to start paying tax on accumulated earnings within their Roth IRAs, an election must be filed by April 20, 2011.

On August 27, 2010, the Department of Finance released draft legislation that amends the rules in the Income Tax Act governing the taxation of non-resident trusts and the related foreign reporting rules. These new rules will apply to a Roth IRA trust, subject to the application of the Canada-US Tax Convention. The new rules will apply to taxation years that end after March 4, 2010.

Note that for Canadian income tax purposes an IRA (but not a Roth IRA) is a "foreign retirement arrangement" and is treated like a pension plan.

Under recent changes to the Canada-US Tax Convention (known as the "Fifth Protocol"), a Roth IRA will be a "pension" for purposes of the Convention as long as no contribution is made to the Roth IRA after December 31, 2008, by or on behalf of the individual, while the individual is resident in Canada. Thus, if no contributions were made after 2008 while the taxpayer was resident in Canada, income accruing in the plan will continue to be deferred. Rollovers from one Roth IRA to another are not considered to be Canadian contributions, however, rollovers from plans other than another Roth IRA are considered to be Canadian contributions (if the taxpayer is resident in Canada at the time) and after such rollovers, the Roth IRA is no longer considered to be a "pension" and subsequent earnings on those contributions within the plan will be taxable to Canada.

Election to Defer Canadian Taxes on Accrued Income in Roth IRAs
Taxpayers who established Canadian residence prior to January 1, 2010 and had a Roth IRA, must file an election before April 30, 2011 if they wish to defer Canadian taxes on income earned within the Roth IRA. Taxpayers who establish residence after December 31, 2009 have until the filing due date for the return for that year to file the election. The election is irrevocable and applies to all tax years in which the taxpayer is a Canadian resident.

According to CRA's Income Tax Technical News No. 43, dated September 24, 2010, the election should be made in the form of a letter containing the following information for each Roth IRA plan or account:

• The taxpayer's name and address;
• The taxpayer's social insurance number and social security number;
• The name and address of Roth IRA trustee or plan administrator;
• The Roth IRA account number;
• The date that the plan was established;
• The date that the taxpayer became resident in Canada;
• The balance of the Roth IRA as of December 31, 2008 or as of the date on which the taxpayer became resident in Canada, whichever is later;
• The amount and date of the first Canadian Contribution made to the Roth IRA, if any; and
• A statement signed by the taxpayer indicating that they elect to defer Canadian taxation under paragraph 7 of Article XVIII of the Canada-U.S. Tax Convention with respect to any income accrued in the Roth IRA for all taxation years ending before or after the date of the Election, until such time as a Canadian Contribution is made.
  

The letter should be mailed to:

Income Tax Rulings Directorate

16th Floor, Tower A, Place de Ville

320 Queen Street
Ottawa ON K1A 0L5

If the taxpayer makes and election and had previously reported accrued income from the IRA, they may request and adjustment to the return for the year(s) in which the income was reported to remove the amount from income. The usual 10-year limitation on adjustments applies.

The election is valid only until a Canadian contribution is made. Once a Canadian contribution is made, the Roth IRA is no longer a "pension" according to the Convention and therefore any subsequent earnings within the Roth IRA will be taxable in Canada.

This information was extracted in EverGreen Explanatory Notes from The Knowledge Bureau.