- February 26, 2023
- Posted by: Simon Huften
- Categories: Investing, QROPS, QROPS RRIF, QROPS RRSP
Tax is not payable when a pension scheme is transferred from the UK to Canada
Investment growth is not taxable when the pension funds are invested in Canada
Any withdrawals from a QROPS RRSP or QROPS RRIF are 100% taxable as income
QROPS RRSP / QROPS RRIFs are transferred tax free to a spouse upon death
QROPS RRSP / QROPS RRIFs are 100% taxable at death if there is no spouse
QROPS, or Qualifying Recognized Overseas Pension Schemes, are pension plans based outside the UK that meet specific requirements set by HM Revenue and Customs (HMRC). QROPS are designed for individuals who have accrued UK pension benefits and wish to transfer them to an overseas pension scheme.
In regards to taxation on QROPS in Canada, it depends exactly on what you are referring to. We have broken down the different areas of taxation for QROPS in Canada depending on what stage you are currently at.
Tax on Transferring Pension
When you transfer your UK pension scheme to Canada, you will need to have your accountant complete your tax return correctly so that your pension funds are received in Canada on a tax free basis. You will be issued a 60(j) tax receipt from the financial institution who you invest your pension scheme with in Canada the year after the transfer has been completed. This will need to be included on your tax return to ensure that your funds are received in Canada tax free.
If this is done properly, there is no tax incurred on transferring your UK pensions scheme to a QROPS RRSP / QROPS RRIF in Canada.
Tax on Investment Growth
Once the funds have arrived in Canada, you will have to choose how to invest the money from your pension. With the current rules for QROPS in Canada, you will have to invest your pension funds in either mutual funds or segregated funds. The pension funds will also have to be invested in a “Registered Account” in Canada which means that they have to be invested in an RRSP or RRIF (depends on your age). The growth of your investment inside of an RRSP or RRIF is non-taxable to you on an annual basis (unlike a non-registered account).
You might be wondering this means…
For example, when your pension funds arrive in Canada from the UK, they are converted from pounds to dollars on the day that they are received by the investment provider in Canada. If your pension funds end up equalling $200,000 in Canadian dollars and you get a 5% rate of return in the first year that they are invested in a QROPS RRSP, your account value would increase to $210,000 from $200,000. The $10,000 of growth is non-taxable to you because it is inside of a RRSP.
As the years go by, not paying any tax on the growth of your investment account allows for your investments to grow quicker when compared to a regular, non-registered investment which is taxable by the CRA.
Tax on Withdrawals
On the other hand, when you are ready to start drawing income or make a withdrawal from your QROPS RRSP or QROPS RRIF account, the amounts withdrawn will be 100% taxable to you as income in the calendar year that you make the withdrawal.
For example. If you withdrawal $12,000 in a calendar year (e.g. $1,000 per month), the full amount of $12,000 will be added to your total income for the year. You will be taxed on your total income for that calendar year. If you have other pension income, employment income, Canada Pension Plan (CPP) or Old Age Security (OAS), the withdrawals from your QROPS RRSP or QROPS RRIF will be added to this and you will be taxed as such.
If you have any specific questions regarding how much income tax you will be required to pay or any other tax questions, we highly recommend speaking with a tax professional (accountant) in Canada to answer all of your questions.
Tax at Death
Upon passing, if you have a spouse, you can roll over your QROP RRSP or QROPS RRIF account to your spouse on a tax-free basis. Your spouse can take over your pension account without having to incur any income tax until they start making withdrawals from the account.
If you do not have a spouse upon death, 100% of the funds are taxable to your beneficiaries. The value of your pension account will be added to your final tax return as income, and you will pay tax accordingly. In most cases, this means that close to 50% of your account will have to go to tax.
In conclusion, there are different stages of taxation with a QROPS in Canada. You can avoid paying tax on the transfer of your pension from the UK to Canada by completing the appropriate tax documents. You will also avoid paying tax on the growth of your pension scheme once it is in Canada as long as the funds are inside of a RRSP or RRIF account. You will always have to pay income tax on any withdrawals from a QROPS RRSP or QROPS RRIF account. At death, your pension scheme can rollover to your spouse on a tax-free basis, but it will be 100% taxable upon the death of your spouse to your beneficiaries (e.g. children) or estate.
It is essential to seek professional advice to ensure that you comply with Canadian tax laws and optimize your tax position.
If you are interested in learning more about transferring a pension scheme from the UK to Canada, please contact us today for a free, no obligation consultation.