Summary: Treasury automates the process for U.S. taxpayers making an election to defer taxation of Canadian RRSPs and RRIFs and to eliminate some information reporting requirements as to those accounts.
U.S. persons are generally not subject to U.S. income tax on individual retirement accounts (“IRAs”) until distributions are taken. Canada has retirement accounts similar to IRAs. These are known as Canadian registered retirement savings plans (“ RRSPs” ) and registered retirement income funds (“ RRIFs” ). Similar to U.S. treatment, Canada does not impose its income tax on these accounts until distributions are made from them.
If the beneficiary of an RRSP or an RRIF is a U.S. citizen or resident for U.S. income tax purposes, the deferral of U.S. income tax on earnings of the funds that applies to U.S. IRAs does not apply under U.S. income tax law because these are not U.S. IRAs. This can leave the beneficiary in the unhappy situation of being taxed by the U.S. on the earnings of the Canadian retirement accounts as those earnings accrue but are not distributed, and then being taxed by Canada when distributions are made from the account. Since these events may occur in different tax years, foreign tax credits may not be available to eliminate this double taxation.
The Income Tax Convention between the U.S. and Canada provides a relief mechanism for U.S. taxpayers who are beneficiaries of RRSPs and RRIFs. Under Article XVIII(7) of the Convention, as amended by the 2007 Protocol, a natural person who is a citizen or resident of the United States and who is a beneficiary of a trust, company, organization or other arrangement that is a resident of Canada, generally exempt from income taxation in Canada and operated exclusively to provide pension or employee benefits, may elect to defer taxation in the United States, subject to rules established by the competent authority of the United States, with respect to any income accrued in the plan but not distributed by the plan, until such time as and to the extent that a distribution is made from the plan or any plan substituted therefor.
In Rev.Proc. 2002–23, a procedure for making the treaty election was established, which required the filing of a statement each year with the beneficiary’s income tax return. In 2004, the IRS released Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans. This Form facilitated the required reporting and the making of the election.
In Rev.Proc. 2014-55, Treasury has now further simplified the treaty election and reporting process. Essentially, qualified taxpayers are treated as having made the treaty election simply by including in gross income distributions made from the RRSP or RRIF. There is no other notice or filing requirement necessary.
This is a little confusing, since most tax elections require some type of statement or filing with the IRS. Here, while the plan is being held and no distributions are being made, no income is reportable pursuant to the election. But the election itself is not made until a later distribution is made that is reported as income. Even that election itself is odd because no statement is made or boxes checked – the reporting of the income on the return is the whole election. Such election is then given retroactive effect per the statement in the Rev.Proc. that provides the taxpayer “will be treated as having made the election in the first year in which the individual would have been entitled to elect the benefits under Article XVIII(7) with respect to the plan.” The election procedures under Rev.Proc. 2002-23 or under Form 8891 no longer apply.
There are 4 requirements before this automatic, retroactive election applies. These are that the beneficiary:
A) is or at any time was a U.S. citizen or resident (within the meaning of section 7701(b)(1)(A)) while a beneficiary of the plan;
B) has satisfied any requirement for filing a U.S. Federal income tax return for each taxable year during which the individual was a U.S. citizen or resident;
C) has not 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 taxable year in which the individual was a U.S. citizen or resident; and
D) has reported any and all distributions received from the plan as if the individual had made an election under Article XVIII(7) of the Convention for all years during which the individual was a U.S. citizen or resident.
Once made, the election cannot be revoked without the consent of the Commissioner.
If a beneficiary has previously reported the undistributed income of the Canada plan in his or her U.S. gross income, this election is not available without the consent of the Commissioner.
The Rev.Proc. also simplifies the U.S. information reporting in regard to these accounts. Regardless of whether the beneficiary is eligible to make the above election, Forms 8891, 3520 and 3520-A need no longer be filed for these accounts. However, information reporting on Form 8938 and on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR) will still apply. Previously, there was an exception for Form 8938 reporting if Form 8891 reporting occurred – but since Form 8891 is now obsolete this exception should not apply anymore.
Rev. Proc. 2014-55, 2014-44 IRB, 10/07/2014