QROPS 2023 – Taxation in Canada

Key Points

Withdrawals from a QROPS RRSP are 100% taxable as income

Withdrawals from a QROPS RRIF are 100% taxable as income

At age 71, you must convert your RRSP to a RRIF

You must be age 55 or older to transfer a UK pension to Canada

All withdrawals are reported to HMRC for 10 years after the transfer date

The taxation of your UK pension funds will change if you decide to transfer your eligible UK pension (QROPS – Qualifying Recognised Overseas Pension Scheme) to Canada. To initiate a transfer of a UK pension to Canada, you must be age 55 or older to qualify to be able to transfer your UK pension to Canada. If you are under age 55, please contact us so that we can be sure to follow up with you as you get closer to age 55.

When the funds from your UK pension arrive in Canada they will deposited into either a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF). Your age and income needs will determine which type of account that your funds will be deposited into.

QROPS RRSP

If you are between the ages of 55 (minimum age to qualify for a transfer) and 71, you will have the opportunity to deposit your UK pension into a RRSP. You will want to utilize a RRSP if you are still in the “savings” phase and are not ready to start drawing an income for retirement.

QROPS RRIF

At age 71, the CRA has made it mandatory that you “convert” or “switch” your RRSP account to a RRIF account and start drawing a regular income from your retirement savings. There is a minimum amount that has to be withdrawn every year from a RRIF which is dependent on your account value at the beginning of the calendar year and your age.

Prior to age 71, you would only want to deposit your pension funds into a RRIF if you are wanting to start drawing regular income (monthly, quarterly or annual income withdrawals).

Any withdrawals, whether they be from a QROPS RRSP or QROPS RRIF account are 100% taxable as income in the year that you make the withdrawal. The CRA also required that withholding tax is withheld at source when you make a withdrawal.

RRIF / RRSP Withdrawal Example

Gross Withdrawal in 2023 – $50,000
30% Withholding Tax – $15,000
Net Withdrawal in 2023 – $35,000

If you make a withdrawal of $50,000, the CRA requires that the financial institution that you are investing with hold back $15,000 and remit it to the CRA on your behalf to go towards your income tax for 2023.

Depending on your other income for 2023, you may end up having to pay more than 30% tax or less than 30% tax. The $50,000 gross withdrawal amount will be added to any other income that you have for 2023 and you will be taxed on your total income.

For example, if you were working part-time and had an income of $35,000, the $50,000 withdrawal will be added to your part-time employment so your total income will be $85,000 for 2023 and you will be taxed on that amount. Please discuss all of your personal tax matters with your accountant for confirmation as we are unable to provide specific tax advice.

QROPS Taxation

For the most part, QROPS RRSP and QROPS RRIF accounts in Canada function basically the same as a regular Canadian RRSP and RRIF.

Currently, Industrial Alliance (segregated fund accounts) and iA Clarington (mutual funds accounts) are the two main options for investments in Canada for UK pension transfers into Canada. This means that once your funds from the UK arrive in Canada, they basically have to be invested with one of those two companies. In the background, they are owned by the same company.

Industrial Alliance and iA Clarington are required by HMRC to report all transfer or withdrawals made from the QROPS RRSP / RRIF for a period of 10 UK tax years after the date of the original transfer.

If you are still a UK resident when you are making withdrawals from a QROPS RRSP / RRIF account in Canada, you may end up being subject to penalties and taxation in the UK. While non-UK residents may have access to 25% lump sum withdrawal tax free, the entire amount would be taxable in Canada (click for more information regarding Pension Commencement Lump Sum). Please consult with a tax professional if you are in one of these scenarios.

If you are a Canadian resident when you are making withdrawals from a QROPS RRSP / RRIF, you should have no issues and only be subject to the Canadian income tax rules.

If you are considering a SIPP instead of a QROPS, we highly recommend speaking with a tax professional to understand how your pension funds would be taxed when they arrive in Canada. Your entire pension amount could be considered as income when it arrives in Canada and you may not have enough RRSP contribution room to offset it.

Conclusion

You should first give a lot of thought into the reasons why you want to transfer your pension to Canada. If it is determined to be beneficial for you to transfer your funds to Canada, a QROPS RRSP / QROPS RRIF is a great opportunity for you to take advantage of right away. HMRC stopped allowing the transfer of UK pension funds for a few years and as a result it can be shut down at any moment. You should act fast if you are wanting to transfer your funds.

The taxation of your UK pension once it arrives in Canada will be very similar to how a regular RRSP / RRIF is taxed. There really is not much difference except for the fact that you are limited to the investment choices that you have available when compared to a regular RRSP / RRIF.

Please contact us today for a free consultation to see if it makes sense for you to transfer your pension funds to Canada.