Are Your 401(K) Contributions Deductible in Canada?

You might recognize this situation. You are a Canadian resident working in the USA on a TN visa. Your employer offers a 401(K) plan that includes a matching contribution. You know contributing to the 401(K) plan lowers your taxable income in the US. Does the same hold true for your taxable income in Canada?

Provided certain conditions are met, you may deduct, for Canadian tax purposes, the contributions you make to a 401(k) plan in the US.

For example, let’s assume you are a resident of Canada who is employed in the USA and you contribute to your employer-sponsored 401(K). Under the US-Canada tax treaty, your contribution to the plan (up to your remaining RRSP deduction room) will be deductible for Canadian tax purposes. But you need to be careful because your 401(K) deduction on your Canadian return is limited to your RRSP contribution room minus any other RRSP contributions. So if you’ve made RRSP contributions as well as 401(K) contributions, then you may have to defer some of the RRSP contributions you made and deduct them in a future year.

In addition, keep in mind that IRA contributions are NOT treated the same way as 401(K) contributions and are not deductible in Canada.

Are Your RRSP Contributions Deductible in the US?

In the above scenario, we discussed deducting 401(K) contributions for purposes of Canadian taxation. Now we turn our attention to whether or not contributions to an RRSP are deductible for purposes of US taxation.

John is a dual US-Canadian citizen who has been living and working in Canada for over 5 years. As a result, John files a Canadian tax return because he is a tax resident of Canada and he also files a 1040 return because he is a US citizen residing abroad.

If John makes a deductible contribution to a RRSP on his Canadian tax return, then will this contribution also be deductible on his US tax return? Generally, an RRSP contribution is not deductible on a US tax return.

There is, however, an exception under the Canada-US tax treaty that allows a RRSP deduction in certain situations. In particular, if the RRSP contribution is made via employee contributions to an employer sponsored group RRSP plan, then the contribution is deductible on the US tax return.

But there is a limit on how much you can contribute. Specifically, the RRSP contribution is limited to the lower of your RRSP deduction limit in Canada or your 401(K) limit (currently at $18,000 for those under the age of 50).

In addition, you will need to notify the IRS that you are lowering your taxable wages by the RRSP contribution. You do this by filing a Form 8833 with your US return and claiming an exemption under the tax treaty.

At Cardinal Point, we are here to assist residents on both sides of the border with their cross-border tax filing requirements and retirement planning scenarios.