A new bulletin from the Investment Dealers Association of Canada explains the current rules for compliance with U.S. tax laws for RRSP beneficiaries.

Under Canadian tax law, income accrued in a Canadian RRSP is generally not taxed until it is distributed to the beneficiary. However, because a RRSP does not meet certain requirements of U.S. tax law, accrued income of a RRSP is taxed currently in the U.S. if the RRSP owner is either a U.S. citizen or a U.S. tax resident.

According to the IDA, this disparate treatment can result in mismatches in the timing of income and payment of tax, and, potentially, double taxation.

As a relief measure, the Canada-United States Income Tax Convention allows a U.S. beneficiary to elect to defer tax in the U.S. with respect to income accrued in a RRSP. If this election is made, the U.S. will not tax income accrued in the RRSP until such amounts are distributed to the U.S. beneficiary.

Historically, it was unclear to what extent a U.S. beneficiary was required to file additional information with the U.S. Internal Revenue Service. The IDA says that in April, the IRS clarified (and, at least to some extent, changed) its position regarding the requirement that U.S. beneficiaries of RRSPs to file certain forms. The IDA bulletin explains these requirements.

It also notes that the IRS indicated that it is interested in establishing a simpler information reporting regime for future years, but gave no indication as to what such regime would be or when it would be instituted.

The IDA says it is working with a consortium that includes The American Chamber of Commerce in Canada to propose a more simplified filing process for US beneficiaries of RRSPs.

This consortium is currently arranging a meeting in Washington with the U.S. Department of Treasury and the IRS in early June.