Tax Insights from Human Resource Services (HRS) Issue 2014-37 Good news for US taxpayers with RRSPs or RRIFs 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 Background 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 distributed. 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. www.pwc.com/ca/taxinsights 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 (FBAR).” 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] Tax News Network (TNN) provides subscribers with Canadian and international information, insight and analysis to support well-informed tax and business decisions. Try it today at www.ca.taxnews.com or 1 866 Tax News (1 866 829 6397) . © 2014 PricewaterhouseCoopers LLP, an Ontario limited liability partnership. All rights reserved. PwC refers to the Canadian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for 2 further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisers. pwc