THE U.S. TAX DEPARTMENT SIMPLIFIES ITS PROCEDURES:
ELIMINATION OF U.S. FORM 8891 FOR CANADIAN RRSP AND RRF
On October 7, the Internal Revenue Service (“IRS”) simplified its administrative procedures for U.S. residents with Registered Retirement Savings Plans (“RRSPs”) and/or Registered Retirement Income Funds (“RRIFs”). Prior to this relaxation, they were offered the choice of deferring the timing of taxation of income accumulated annually in their RRSP/RRIF to the time of withdrawal, thereby synchronizing the timing of taxation of such income in Canada and the U.S. For this purpose, the term “U.S. residents” includes U.S. citizens living in the U.S. or abroad, “green card” holders, as well as individuals who stay in the U.S. for more than 183 days a year, and who do not qualify except for those with closer ties to another country (Closer Connection Exemption).
With reference to paragraph XVIII(7) of the Canada-U.S. Tax Treaty, U.S. residents are permitted to defer tax on income accumulated in their RRSPs or RRIFs until the funds are distributed. Otherwise, U.S. residents are taxed annually on income accumulated in their RRSPs or RRIFs.
U.S. residents wishing to take advantage of the treaty relief were required to complete Form 8891, “U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans”, and file it with their U.S. income tax return. This form had to be completed annually until the funds were completely withdrawn from their pension plan. In addition, Form 8891 had to be completed not only to elect to defer taxation, but also to report the details of RRSP/RRIF accounts, i.e. contributions made in the year, income generated and distributions. Many taxpayers who failed to comply with this requirement had to go through the voluntary disclosure system to avoid penalties.
The IRS has therefore decided to eliminate Form 8891 for the past, present and future. U.S. residents with RRSPs/RRIFs are automatically eligible for tax deferral on income accumulated in their RRSP/RRIF. This tax deferral is similar to that already offered for Individual Retirement Accounts (IRAs). As a result, even if the form has never been produced, it is no longer necessary to do so, as the deferral is considered automatic.
However, this relief does not affect other reporting requirements for bank accounts and RRSPs/RRIFs. The FinCEN Form 114, “Report of Foreign Bank and Financial Accounts”, must be completed and transmitted electronically by June 30 of each year, and must include the highest balance of RRSP/RRIF accounts. In addition, RRSP/RRIF account details must be reported on Form 8938, “Statement of Specified Foreign Financial Assets”. This must be sent with the tax return.
This article was originally published in: Stratège |
U.S. tax authorities simplify procedures
| December 2014
