U.S. Reporting Requirements for
Canadian RRSPs/RRIFs

By Neil A.J. Sullivan, CPA, Scarsdale, NY, Member, AICPA Tax Division’s Tax Legislation and Policy Committee, International Tax Technical Resource Panel’s (TRP’s) International Reporting Requirements Task Force and Trust, Estate and Gift Tax TRP’s Expatriation Tax Task Force

As requested by the AICPA Tax Division’s Form 3520 Task Force in August 2003,¹ Notice 2003-75² sets forth a simplified reporting regime for taxpayers with interests in Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs), effective for tax years beginning after 2002.

A Canadian RRSP is similar to a Sec. 401(k) plan. Canadian employers often contribute on a tax-deferred basis to an account in an employee’s name. The difference is that current-year earnings of an RRSP or RRIF need to be reported on Form 1040, unless an affirmative election is made to defer tax until funds are distributed.

Scope

This reporting regime is in lieu of filing obligations under Sec. 6048 (Forms 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner) that otherwise apply to U.S. citizens and resident aliens with interests in RRSPs and RRIFs and to custodians of such plans.

Notice 2003-75 discusses a new form being developed under the authority of Sec. 6001, which U.S. citizens and resident aliens with RRSP and RRIF interests will have to attach to Form 1040. The new form will coordinate the reporting rules for electing under ArticleXVIII(7), Pensions and Annuities, of the U.S.–Canada income tax treaty, to defer U.S. income taxation of income accrued in an RRSP or RRIF. Interim reporting rules are set forth in Rev. Proc. 2002-23,³ Section 4. On Aug. 26, 2004, the IRS issued a draft Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans. At press time, the Service was still reviewing the comments received and had not yet released the final form and instructions.

Rules

For current-year undistributed earnings (i.e., interest, dividends or capital gains), one can either (1) report income currently on Form 1040, Schedule B or D or (2) elect to defer reporting income until funds are distributed to the account holder. The election is made by attaching a statement to the return containing information prescribed in Rev. Proc. 2002-23, Section 4 and Notice 2003-75, Section 2.02.

Section 2.03 of Notice 2003-75 sets forth additional interim disclosure requirements for beneficiaries not electing to defer Federal income tax on current-year undistributed earnings. Section 2.04 describes the interim reporting rules for annuitants of RRSPs and RRIFs.

The recipient U.S. citizen or resident must report the total and taxable amounts (as determined under Sec. 72) of any distribution made from an RRSP or RRIF during the tax year on Form 1040, lines 16a and 16b, respectively.

Complete distribution: An entire distribution from an RRSP to a participant qualifies for special lump-sum distribution treatment if the participant was born before 1936. The U.S.–Canada income tax treaty sets forth a preferential income tax rate on periodic pension payments, not to exceed 15% at the Federal level, per Article XVIII(2(a)). However, this provision does not apply to lump-sum distributions; it applies only to periodic pension payments.

No early withdrawal penalty: Even if the recipient is under age 59¹/2, the Sec. 72(t) 10% early withdrawal penalty does not apply. This is disclosed by attaching to Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, a statement that the distribution is not subject to the Sec. 72(t) 10% early withdrawal penalty, because it was made from other than a U.S. qualified plan (as defined in Sec. 4974(c)); the distribution was made from a foreign, Canadian, RRSP.

Canadian Law

Canada Customs and Revenue Agency statute requires an RRSP to withhold 25% of the gross distribution at source. Similar to Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., Canadian Form NR4 (Summary, Return of Amounts Paid or Credited to Non-Residents of Canada), code 43 (lump-sum distribution) discloses in Canadian currency both the gross distribution and the amount withheld. These amounts need to be converted to U.S. dollars as of the distribution date. The tax withheld is eligible for the foreign tax credit computed on Form 1116, Foreign Tax Credit.

Also, an individual’s Canadian income tax liability needs to be computed to determine whether there is a refund due the taxpayer or additional tax due Canada. If tax is owed, it may be possible to elect under Canadian Income Tax Act section 217 to file a Canadian return and report the Canadian-source income. The taxpayer will pay tax on the income under an alternative taxing method. If the tax has been overpaid, a refund claim may be filed.