Good news for US taxpayers with RRSPs or RRIFs Tax Insights

Tax Insights
from Human Resource Services (HRS)
Issue 2014-37
Good news for US taxpayers with
October 14, 2014
In brief
A recent US Internal Revenue Service (IRS) announcement (Rev. Proc. 2014-55) makes it easier for
Americans and Canadians who hold interests in registered retirement savings plans (RRSPs) or
registered retirement income funds (RRIFs) to get favourable US tax treatment.
In general, you will now automatically qualify for tax deferral, similar to participants in US individual
retirement accounts (IRAs) and 401(k) plans, if you are a US citizen or resident alien and you:
filed and continue to file US tax returns for any year you held an interest in an RRSP or RRIF
never reported as income earnings accrued in (but not distributed from) these plans, and
included any RRSP and RRIF distributions as income on your US returns
In detail
The IRS announcement, made
on October 7, 2014, relates to a
provision in the Canada-US
income tax treaty that enables
US citizens and resident aliens
to defer tax on income accruing
in their RRSPs or RRIFs until
the income is distributed.
Absent this provision, US tax
would be due each year on that
income, even if it is not
The previous rules
Previously, the IRS required an
election to be made, for RRSPs
and RRIFs, to defer income
accrued that was not
distributed. Generally, to get the
deferral, you had to file
Form 8891, “U.S. Information
Return for Beneficiaries of
Certain Canadian Registered
Retirement Plans” with your US
personal tax return and choose
this tax treaty benefit.
Late or incomplete election
If Form 8891 was filed late or
was incomplete, the election was
not available unless you
requested a private letter ruling
from the IRS to correct the
omission and retroactively
obtain the treaty benefit.
Making this request was usually
time-consuming and costly.
In addition, failing to make a
timely or complete election
caused income in your RRSP or
RRIF to be taxable to you for US
tax purposes, if your Canadian
taxes were not sufficient to
offset your US taxes, as a foreign
tax credit on your US return.
This potential for double
taxation arose because
Canadian tax is not payable
until funds are distributed from
your RRSP or RRIF.
The new rules
The changes apply retroactively
to taxpayers who did not
properly file Form 8891 in any
previous year. Because the
income deferral is now
automatic, you no longer need
to file Form 8891 – for any year,
past or present.
Tax Insights
However, it appears that if you
already reported undistributed
income accrued in a Canadian
retirement plan for US tax purposes,
you will likely remain taxable on that
income unless you seek the consent of
the IRS Commissioner for a treaty
election with respect to the plan.
The takeaway
The good news is that the new rules
reduce the amount of information that
you must disclose with your US
personal income tax return.
However, the news is not all good.
Previously, if you filed Form 8891 you
were exempt from disclosing your
RRSP and RRIF accounts on
Form 8938, “Statement of Specified
Foreign Financial Assets.” Because
Form 8891 is no longer required, you
will now have to disclose these
accounts on Form 8938.
Foreign Bank and Financial Accounts
As a final note, the IRS announcement
applies only to income accrued in a
Canadian retirement plan and not to
contributions to the plan. A separate
analysis of US tax and treaty rules is
necessary to determine the tax
treatment of contributions.
The changes do not modify any other
US reporting requirements that may
apply under FinCEN 114, “Report of
Let’s talk
For a deeper discussion of these issues, please contact any of the following or your PwC HRS adviser.
Chantal Farrell-Carter
+1 (416) 815 5012
[email protected]
Martha Kittell
+1 (514) 205 5348
[email protected]
Diane Akelaitis
+1 (604) 806 7011
[email protected]
Suzanne Peever
+1 (403) 509 6377
[email protected]
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