Reproduced with the permission of the Canadian Tax Foundation from, Thomas W. Nelson, "Simplified RRSP Reporting" (2003) vol. 12, no. 1 Canadian Tax Highlights.

Canadian Tax Highlights
January, 2004

by Thomas W. Nelson

IRS Notice 2003-75, dated November 26, 2003, describes a new reporting regime for US resident and citizen RRSP and RRIF holders applicable for tax years beginning after 2002. The onerous prior regime required the filing of IRS forms 3520 and 3520-A; the IRS-estimated time for compliance was 50 and 40 hours, respectively, compared with 5 hours or less under the new regime.

A new tax reporting form now being designed is the centrepiece of the new regime. The notice states that the information to be provided on the form will be limited to that readily available to RRSP and RRIF holders. The new form will also coordinate the reporting rules for making the Canada-US treaty election to defer US income tax on income accrued in the RRSPs and RRIFs each year, pursuant to Rev. proc. 2002-23. The new form will be attached to the plan holder's form 1040; interim reporting rules apply for 2003 form 1040s filed before the new IRS form is available. An RRSP or RRIF beneficiary who elects on a US return to defer US tax on the plan's accrued earnings must (1) attach a copy of the election to the form 1040; (2) indicate the RRSP or RRIF balance at year-end, either on the election or by attaching a copy of a statement issued by the plan custodian; and (3) report both the total amount and the taxable amount of plan distributions on lines 16(a) and 16(b) of form 1040. In general, the taxable amount is determined by using the rules applicable to annuities (Code section 72). An RRSP or RRIF beneficiary who does not elect to defer US income tax on the accrued plan income must attach to the form 1040 a statement that includes personal information, such as his or her name, social security number, and address; information on the plan, such as the custodian's name and address; the plan account number; the amount of contributions made during the year; undistributed plan earnings during the year, broken into income type such as interest, dividends, and capital gains; distributions received during the year; and the plan's year-end balance. The notice describes these reporting requirements in more detail, including where to provide such information on the form 1040. Taxpayers are cautioned to retain supporting documentation, including forms T4RSP, T4RIF, and NR4, and periodic or annual statements issued by the plan custodian. Reporting requirements for US individuals who are RRSP or RRIF annuitants are also described.

On a related subject, Canadian-resident non-citizen RRSP and RRIF holders who subsequently move to the United States and become US residents are reminded that the starting US tax basis in their RRSPs or RRIFs generally equals the amount of plan contributions plus any plan earnings that arose before the holder became a US resident. The tax basis generally does not include unrealized appreciation in plan assets. In appropriate situations, holders may be well advised to sell appreciated assets in their plans before they change their residency.