IRS Simplifies RRSP Treaty Benefit Election For U.S. Citizens

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The IRS recently released a new Revenue Procedure regarding U.S. citizens and residents holding Canadian Registered Retirement Savings Plans (RRSP) and Registered Retirement Income Fund (RRIF). The IRS has simplified some of the reporting requirements for these taxpayers.

In the past, filing a 1040 tax return for a taxpayer who held RRSPs required the filing of form 8891 for each and every RRSP and RRIF account owned by the taxpayer. This form reported the December 31st balance of these accounts and claimed treaty benefit, Article XVIII(7), which is enshrined in the U.S.-Canada Income Tax Convention (herein referred to as treaty) whereby a taxpayer could defer taxation on the earnings within these accounts until distribution. This treatment was intended to give similar treatment to RRSP that was given to IRAs.

Rev. Proc. 2014-55, under section 4.02, now allows certain eligible individuals the same treatment of RRSPs’ undistributed earnings on deferral basis, but without the need to file form 8891. This simplified procedure assumes that the election for this treaty benefit was claimed in the first year that the taxpayer was entitled to elect it. This election will apply individually to each RRSP account held by the taxpayer.

This does not change the tax treatment of RRSP withdrawals or distributions. All withdrawals continue to be taxable in the year received. Caution must be taken to deduct or exclude from income any allowable portion of the original contributions in the year that it was made. The U.S. Canada tax treaty makes special allowance for this. The deduction/exclusion of the contribution would thus avoid the double taxation treatment of this original contribution in the year of withdrawal. As specifically outlined in this Rev. Proc. “When a taxpayer receives distributions from the RRSP, the entire amount of each distribution will be subject to U.S. Federal income tax.”

This new Revenue Procedure does not eliminate the need to report each RRSPs and RRIFs account on a on an FBAR (FinCEN form 114). Taxpayers with RRSPs and RRIFs must report the highest balance of each account on a yearly basis, as imposed by 31 U.S.C. § 5314.

When filing your cross border tax returns be sure to find a tax preparer that is experienced in the benefits afforded by tax treaty.

Serge Gautron has been preparing Canadian tax returns for over 20 years. He specializes in self-employed, artist, musician and estate tax returns.
Starting in 2010, Serge undertook the preparation of U.S. tax returns. Serge specialize in U.S. tax returns for U.S. citizens living in Canada as well as Canadians earning income in the U.S.
Cross-Border taxation brings on a whole new dimension to the world of tax returns. Understanding the Canada/U.S. tax treaty and its implications is paramount in successfully completing both countries’ tax returns.

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