IRS Issues Tax Relief for U.S. Citizens and Residents with Canadian Retirement Plans

In Revenue Procedure 2014-55, issued on October 7, 2014, the IRS provided tax relief for U.S. citizens and residents with Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). The general rule is that a U.S. citizen’s or resident’s accrued but undistributed income in an RRSP or RRIF is subject to U.S. federal taxation. For Canadian tax purposes, such income is not taxable until a distribution is actually received. The difference in the U.S. and Canadian tax rules creates a mismatch in the timing to recognize the income from an RRSP or RRIF. This results in double taxation for which there was not any U.S. tax relief.

Background

The 1995 Protocol added Article XVIII(7) to the U.S. income tax treaty with Canada. Article XVIII(7) provides an election for U.S. citizens and residents to defer U.S. taxation on the accrued but undistributed income from a Canadian retirement plan. A 2007 protocol to the treaty continued to allow the deferral. The IRS had previously issued guidance which provided a procedure for U.S. citizens and residents to follow to make the election for the deferral. In 2004, the IRS released Form 8891 which U.S. citizens and residents are currently required to file to elect the deferral and to report distributions from, contributions to and undistributed earnings of an RRSP or RRIF.

Eligibility

Rev. Proc. 2014-55 makes Form 8891 obsolete as of December 31, 2014. The new guidance provides that “eligible individuals” will be treated as having made the election to qualify for the deferral under the treaty without filing the Form 8891. This allows eligible individuals to qualify automatically for U.S. tax deferral on undistributed earnings from a Canadian RRSP or RRIF.  An eligible individual is defined as a beneficiary of a Canadian retirement plan who:

1. Is or any time was a U.S. citizen or resident while the individual was a beneficiary of the plan.
2. Has filed a U.S. federal Form 1040 individual income tax return as required for each taxable year during which the individual was a U.S. citizen or resident.
3. Has not reported the undistributed earnings from the Canadian retirement plan on a U.S. federal income tax return during any taxable year when the individual was a U.S. citizen or resident.
4. Has reported any and all distributions received from the plan as if the individual had made the election for deferral under the treaty for all years when the individual was a U.S. citizen or resident.

There are other procedures outlined for individuals who are not eligible individuals.

Practical Application

Rev. Proc. 2014-55 provides the following example of an eligible individual who will qualify for relief:

• The taxpayer is a U.S. citizen and a resident of Canada who established an RRSP in 2004.
• The taxpayer filed a U.S. federal Form 1040 individual income tax return for 2004 and all subsequent years.
• The taxpayer did not attach Form 8891 or an election for deferral under the treaty to any Form 1040.
• The taxpayer did not include any accrued earnings from the RRSP in taxable income on the Form 1040 for 2004 or any subsequent taxable years.
• The taxpayer has not received any distributions from the RRSP.
• The taxpayer is an eligible individual.

The taxpayer will be treated as having made an election under the treaty to defer current U.S. income tax on the undistributed income of the RRSP for 2004 and all subsequent tax years through the tax year in which there is a final distribution from the RRSP. When the taxpayer receives distributions from the RRSP, the entire amount of each distribution will be subject to U.S. federal income tax. The taxpayer is not required to report his or her interest in the RRSP on the Form 8891, 3520 or 3520-A. However, the taxpayer may need to report the interest in the RRSP on the Form 8938 Report of Specified Foreign Financial Assets and/or the FinCEN Form 114 Foreign Bank Account Report.

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