Cross-border tax practitioners are applauding a decision by U.S. tax authorities. Americans in Canada now will receive an automatic tax deferral on the income they earn within an RRSP or registered retirement income fund (RRIF) without having to make an annual tax filing.
“Clearly, there’s no anti-avoidance going on with Americans owning RRSPs,” says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce‘s wealth advisory services division. “So, why did you have to bother filling out a form every year [under the old rules]?”
However, tax practitioners who have reviewed the guidance from the U.S. Internal Revenue Service (IRS) say the new rules also raise a number of troubling questions, including: who will be eligible to benefit from the automatic deferral?
Although there’s little question that the IRS intends that the new procedures will offer relief to Americans who own RRSPs, the new rules appear to fall short of fulfilling that goal.
“[The new procedures are] a mixed offering of good, bad and outright confusion,” according to a blog post by Roy Berg, director of U.S. tax law with Moody Gartner Tax Law LLP in Calgary.
Under a provision in the U.S./Canada tax treaty, U.S. citizens are allowed to defer taxes on income accruing within an RRSP or a registered retirement income fund (RRIF) until the money is distributed. Absent this provision, income earned annually from these plans would be taxable under the U.S. tax system, even if the income wasn’t distributed.
To receive the deferral, American taxpayers previously had to complete Form 8891 – a.k.a. the U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans – make an election on the form to take the tax treaty benefit and attach the form to their U.S. tax return. These taxpayers also had to report the details about each RRSP and RRIF, regardless of whether they chose to make the election.
In October, the IRS announced that it was eliminating Form 8891 – and providing retroactive relief to “eligible individuals” who failed to file this form in the past. Also, American taxpayers resident in Canada who own RRSPs and RRIFs no longer have to report details about each retirement savings account.
This new procedure appears to simplify the reporting requirements for American taxpayers who own RRSPs and RRIFs.
“At first glance,” says Terry Ritchie, director of cross-border wealth services with Cardinal Point Wealth Management LLC in Calgary, “this change generally should make things a bit easier for many Americans in Canada.”
One of the sticking points is the way the IRS may define who is an “eligible individual.” Among other criteria, an eligible individual is someone who has “satisfied any requirement for filing a U.S. federal income tax return for each year during which the individual was a U.S. citizen or resident.”
This requirement may be problematic for many American taxpayers resident in Canada who have not been compliant with their U.S. tax-filing obligations, Berg says: “[These individuals] will not be classified as eligible individuals and, therefore, will not be entitled to the simplified procedures.”
The new procedures also may introduce some confusion, Berg adds, regarding the U.S. tax treatment of distributions from RRSPs and RRIFs. Normally, under the U.S. tax code, only income, not capital, from these savings accounts is taxable when distributed. However, the guidance provided for the new reporting procedures suggests that all distributions from the plans will be taxable.
Tax practitioners are hopeful that the IRS will provide some clarification regarding the apparent inconsistencies in the guidance.
“It doesn’t make much sense to provide retroactive relief to some and not to others,” says Andrea Taylor, managing director with the Toronto-based Investment Industry Association of Canada. “It’s not clear whether the lack of clarity or the omission [of certain information] is intentional or an oversight.”
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