Got a Canadian Retirement Plan? IRS Simplifies Procedures

The IRS recently announced that it has made it easier for taxpayers who hold interests in either of two popular Canadian retirement plans to get favorable U.S. tax treatment. The tax agency also took additional steps to simplify procedures for U.S. taxpayers with these plans. (IRS Revenue Procedure 2014-55)

As part of this guidance, the IRS provided retroactive relief to eligible taxpayers who failed to properly choose this benefit in the past. In addition, the IRS is eliminating a special annual reporting requirement that has long applied to taxpayers with these retirement plans.

Who Is Eligible?

An eligible individual is a beneficiary of a Canadian retirement plan who:

  • Is or at any time was a U.S. citizen or resident while a beneficiary of the plan;
  • Has satisfied any requirement for filing a U.S. Federal income tax return for each tax year during which the individual was a U.S. citizen or resident;
  • Hasn’t reported as gross income on a U.S. Federal income tax return the earnings that accrued in, but were not distributed by, the plan during any tax year in which the individual was a U.S. citizen or resident; and
  • Has reported any and all distributions received from the plan as if the individual had made an election under Article XVIII(7) for all years during which the individual was a U.S. citizen or resident.

Under these changes, eligible Americans and Canadians with registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) now automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. In general, U.S. citizens and resident aliens qualify for this special treatment as long as they filed — and continue to file — U.S. returns for any year that they held an interest in an RRSP or RRIF and include any distributions as income on their U.S. returns.

The change relates to a longstanding provision in the U.S.-Canada tax treaty, which enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, the IRS explained, U.S. tax is due each year on this income, even if it is not distributed.

In the past, however, taxpayers generally would get tax deferral by attaching IRS Form 8891 to their return and choosing this tax treaty benefit — but the process was complex and many eligible taxpayers failed to take the necessary steps. Before today’s change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process.

Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment.

Good news: The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any past or present year.

However, like many pieces of good news from the IRS, the new revenue procedure may have other unintended consequences so affected taxpayers should consult with their tax advisers.

The IRS emphasized that the revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. This includes the Report of Foreign Bank and Financial accounts (FBAR, due by June 30 of each year, and IRS Form 8938, Statement of Specified Foreign Financial Assets, which is attached to a U.S. income tax return. Different reporting thresholds and special rules apply to each of these forms. Again, consult with your tax adviser about your reporting obligations.

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