Federal / International Tax

US Tax: Canadian Retirement Plans

Originally published in Canadian Tax Highlights, Volume 18, Number 12, December 2010. Reprinted with permission.

The US taxation of a Canadian retirement plan depends on whether it satisfies US qualifications for US-based plans, a result made unlikely by the extreme complexity of the US requirements. US citizens and residents are thus generally taxable under the Code on income accrued or earned in a Canadian retirement plan, even if the income is not currently distributed. Income earned by a plan that satisfies certain requirements under Canadian law is not subject to Canadian income tax until its distribution from the plan. The timing mismatch between the taxation in the two countries may cause an individual to suffer double taxation unless available treaty relief applies.

For years beginning after 1995, Canada-US treaty article XVIII(7) (pensions and annuities) allows a US citizen or resident to elect to defer the current US taxation of income accrued in certain Canadian retirement plans until its distribution and thus eliminate the timing mismatch. The election may be made for arrangements generally exempt from income taxation in Canada and “operated exclusively to provide pension or employee benefits” subject to rules established by the IRS. Thereafter, both US and Canadian tax is imposed on distributions from the plan and a Canadian tax credit should be available to affect the US tax.

IRS Rev. proc. 2002-23 (2002-15 IRB 744) provides rules for the treaty election only with respect to so-called eligible plans: a Canadian registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), a registered pension plan (RPP), and a deferred profit-sharing plan (DPSP). It appears that the election and consequent treaty relief are not currently available for other Canadian retirement plans, such as tax-free savings accounts, registered education savings plans, and registered disability savings plans.

A US citizen or resident who is an RRSP or RRIF beneficiary may elect to defer US taxation under treaty article XVIII(7) by filing form 8891 (“U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans”) along with his or her individual federal income tax return (form 1040). Before the introduction of form 8891 in 2004, a US beneficiary could attach an election statement to his or her US tax return in accordance with Rev. proc. 2002-23, a practice that presumably still applies to make the election for an RPP and a DPSP.

The election is irrevocable for the taxable year in which it is made and all subsequent taxable years. A separate form 8891 or election statement must be filed for each RRSP, RRIF, or other eligible plan. If both spouses must file form 8891, each must file a separate form.

The information reported on form 8891 includes the amount of (1) contributions to an RRSP and a RRIF, (2) undistributed earnings in an RRSP and a RRIF, and (3) distributions received from an RRSP and a RRIF. The election is due at the time the form 1040 is due (including extensions); a late election may result in a US beneficiary’s being subject to tax currently on the plan’s income as earned. Once the election is made, form 8891 or an election statement must be filed (with form 1040) for each subsequent taxable year until a final distribution is made from the plan. Taxpayers are advised to retain supporting documentation for information that must be reported, including Canadian forms T4RSP, T4RIF, and NR4, and periodic or annual statements issued by the RRSP or RRIF custodian.

An extension of time to late-file the election may be granted under procedures described in Treasury regulation sections 301.9100-1, 301.9100-2 and 301.9100-3. If form 1040 was timely fi led, an automatic extension of six months from the return’s due date to make the election may be granted (section 301.9100-2). In other cases, a request for relief under section 301.9100-3 is generally granted if the taxpayer acted reasonably and in good faith and the grant of relief will not prejudice the government’s interests. The request for relief is made as a request for a private letter ruling.

A beneficiary of an RRSP or RRIF no longer need file form 3520 (“Annual Return To Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts”), but may be required to fi le form TD F 90-22.1 (“Report of Foreign Bank and Financial Accounts”).

Many US citizens living in Canada with Canadian retirement plans should familiarize themselves with the US tax treatment of the plans and with the filing requirements. If a plan is eligible for the treaty’s deferral election but an election was not timely made, the affected US citizen should consider requesting relief to file late. Depending on how much income was earned in the plan, it may be more cost-efficient to file amended US tax returns to include the income and pay any tax, interest, and possibly penalties owing.

Marla Waiss
Hodgson Russ LLP, Buffalo