RRSP contributions by US residents
Moderator: Mark T Serbinski CA CPA
RRSP contributions by US residents
My wife and I have been paying US tax on undistributed dividends since 1993, based on the ratio of contributions made while US residents. The paid tax is a basis. How is this calculated and reported?
We moved to US in 1993 as Canadian citizens. I was on TC/TN, then H1B, then Green Card, now US citizens, and maintain Canadian Citizenship. Lived in US entire time. We first lived near Niagara Falls NY. My wife continued to work in Canada 1993 to 1998 and made RRSP contributions. My buyout from GM was salary continuation, so I made RRSP contributions '93 & '94. My US job was not with GM, but I used the accounting firm that would do GM cross border transfers, I think it was Delloite. They set up the treaty election to defer taxes, but that only applied to the undistributed dividends in the ratio of contribution while residents of Canada. We have been declaring the balance of the undistributed earnings in the US every year. I turn 71 next year and must take distributions. The instructions for obsolete form 8891 has a reference to calculating the taxable portion line 7b, but I cannot find what form replaces it, and instructions on how to handle the already paid taxes.
I don't know where deloitte came up with this scheme of only owing tax on portions of your yearly RRSP internal income. The rules have always been -- since 1985 - that you EITHER deferred ALL income, or you paid tax on ALL income.
This income would not only include distributions and dividends, but also any cap gains from internal sales and swaps between funds/stocks that you had. You talked only of dividends.
You should have been deferring all tax all these years. Not only was deloitte wrong in their application of the regs, they gave you wrong advice, which you have used for the last 20 years.
In any event, to your question.
Once you begin taking distributions from your RRSP or RRIF, the cost basis (called "investment in the contract" by IRS), is the book value of your RRSP on the date you became US taxpayer (in 1993), PLUS any contributions you made since that time that were not deducted on 1040, PLUS any income that you declared to IRS in that period (the tax you paid is not the important amount, the income reported is what matters).
So, say you had an RRSP worth 50K in 1993 and you contributed $30K since then, and you declared $5K of income over the years, and the RRIF is now worth $300K.
Your cost basis is 50+30+5 = 85K. that portion is not taxable in US. the 215K portion is.
When you take your frst years payment, say $10K, you will report 10K as gross pension income, and 10 *(215/300) = $7166 as taxable. Subsequent years will be adjusted by the taxable and non-taxable amounts you reported.
You will have 15% withheld by Canada, which you can use on your form 1116 as a tax credit.
But, just for others to realize, when you move to US, you cannot choose what you want taxed and what you don't. RRSP internal income is ALL taxable in US, or ALL deferred until such time as you take withdrawals. This has been the rules since 1985. before 2002 you could make this decision each year, since 2002, once you deferred, you could not change. Form 8891 made this somewhat clear. The notice that did away with 8891 made it clearer.
This income would not only include distributions and dividends, but also any cap gains from internal sales and swaps between funds/stocks that you had. You talked only of dividends.
You should have been deferring all tax all these years. Not only was deloitte wrong in their application of the regs, they gave you wrong advice, which you have used for the last 20 years.
In any event, to your question.
Once you begin taking distributions from your RRSP or RRIF, the cost basis (called "investment in the contract" by IRS), is the book value of your RRSP on the date you became US taxpayer (in 1993), PLUS any contributions you made since that time that were not deducted on 1040, PLUS any income that you declared to IRS in that period (the tax you paid is not the important amount, the income reported is what matters).
So, say you had an RRSP worth 50K in 1993 and you contributed $30K since then, and you declared $5K of income over the years, and the RRIF is now worth $300K.
Your cost basis is 50+30+5 = 85K. that portion is not taxable in US. the 215K portion is.
When you take your frst years payment, say $10K, you will report 10K as gross pension income, and 10 *(215/300) = $7166 as taxable. Subsequent years will be adjusted by the taxable and non-taxable amounts you reported.
You will have 15% withheld by Canada, which you can use on your form 1116 as a tax credit.
But, just for others to realize, when you move to US, you cannot choose what you want taxed and what you don't. RRSP internal income is ALL taxable in US, or ALL deferred until such time as you take withdrawals. This has been the rules since 1985. before 2002 you could make this decision each year, since 2002, once you deferred, you could not change. Form 8891 made this somewhat clear. The notice that did away with 8891 made it clearer.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
ELECTION TO DEFER U.S. TAX ON EARNINGS IN A CANADIAN REGISTERED RETIREMENT SAVINGS PLAN (RRSP) UNDER US-CANADA INCOME TAX TREATY
TAX YEAR 2014
TAXPAYER'S NAME
TAXPAYER'S SOCIAL SECURITY NUMBER
TAXPAYER'S ADDRESS IN COUNTRY OF RESIDENCE
TAXPAYER IS: U.S. Citizen
NAME OF TRUSTEE OF THE PLAN TD Waterhouse
PLAN ACCOUNT NUMBER
TOTAL AMOUNT OF THE PLAN'S EARNINGS IN CURRENT YEAR (A)
TOTAL AMOUNT OF CONTRIBUTIONS MADE TO THE PLAN DURING CANADIAN RESIDENCY (INCLUDING ROLLOVER AMOUNTS), AS OF THE END OF THE TAXABLE YEAR (B)
TOTAL AMOUNT CONTRIBUTED TO THE PLAN (INCLUDING ROLLOVER AMOUNTS) IN ALL YEARS (C)
AMOUNT OF EARNINGS DEFERRAL; (A x B)/C
CURRENT YEAR'S ENDING BALANCE IN THE PLAN
I have been paper filing all years, and including a sheet with the above statements, and the data and calculations, and no one from the IRS has ever questioned it.
Thank you very much for the corrected information.
Is there a form number for entering the information when I start taking distributions next year?
TAX YEAR 2014
TAXPAYER'S NAME
TAXPAYER'S SOCIAL SECURITY NUMBER
TAXPAYER'S ADDRESS IN COUNTRY OF RESIDENCE
TAXPAYER IS: U.S. Citizen
NAME OF TRUSTEE OF THE PLAN TD Waterhouse
PLAN ACCOUNT NUMBER
TOTAL AMOUNT OF THE PLAN'S EARNINGS IN CURRENT YEAR (A)
TOTAL AMOUNT OF CONTRIBUTIONS MADE TO THE PLAN DURING CANADIAN RESIDENCY (INCLUDING ROLLOVER AMOUNTS), AS OF THE END OF THE TAXABLE YEAR (B)
TOTAL AMOUNT CONTRIBUTED TO THE PLAN (INCLUDING ROLLOVER AMOUNTS) IN ALL YEARS (C)
AMOUNT OF EARNINGS DEFERRAL; (A x B)/C
CURRENT YEAR'S ENDING BALANCE IN THE PLAN
I have been paper filing all years, and including a sheet with the above statements, and the data and calculations, and no one from the IRS has ever questioned it.
Thank you very much for the corrected information.
Is there a form number for entering the information when I start taking distributions next year?
We don't file an election anymore.
the equation you use as never an option.
Were you not filing 8891 when that became available? your 'election" had no basis in any procedure or instruction.
Rev Proc 89-45, which looks a little like what you were filing, did not have provision for partial reporting of RRSP income either. As I said earlier, it only had provision to include or exclude ALL income (not just earnings) for a particular calendar year.
You will report your gross RRSP/RRIF pension income on 16a and the taxable portion (asd I described in my previous post) on 16b. And remember, none of any LIF payment is non-taxable. (except in your case where you have mistakenly reported some income over the years, which now forms basis).
There has NEVER been a form or line provided by IRS to track the taxable and non-taxable portion of the plan. It was described in Rev Proc 89-45 and left to the individual to determine ever since.
the equation you use as never an option.
Were you not filing 8891 when that became available? your 'election" had no basis in any procedure or instruction.
Rev Proc 89-45, which looks a little like what you were filing, did not have provision for partial reporting of RRSP income either. As I said earlier, it only had provision to include or exclude ALL income (not just earnings) for a particular calendar year.
You will report your gross RRSP/RRIF pension income on 16a and the taxable portion (asd I described in my previous post) on 16b. And remember, none of any LIF payment is non-taxable. (except in your case where you have mistakenly reported some income over the years, which now forms basis).
There has NEVER been a form or line provided by IRS to track the taxable and non-taxable portion of the plan. It was described in Rev Proc 89-45 and left to the individual to determine ever since.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
From the equation you've posted, at least you did not have to report too much income using it, so you haven't "hurt" yourself too much.
At least you were consistent. it should be pretty simple, for the 2 accounts you have, to go back and find what income you reported, and in the case of your RRSP, what it was worth when you moved. Remember to do all your calculations of income/contributions/value in USD, basd on the exchange rate when these events occurred.
the only danger you face, is the following:
With the release of Rev Proc 2014-55, which did away with 8891, the IRS "rewards" those who made the Rev Proc 2002-23 election in previous years (your form does not qualify for the election, form 8891 with the election made does, but you cjose instead to report income, which is by definition not taking the election) by not having to do anything going forward, and punished those who have not, by not allowing them to change their non-election.
Since you never made the 2002 election, the IRS *could* view you as non-eligible to make the election (they have not in the past, but maybe becoming more aware of this issue with the new method.) If that was the case you would need to report ALL internal income on a yearly basis, rather than a calculated amount based on the formula I gave you. That might not be bad for you, if the amount you are withdrawing is equivalent to or more than the internal growth of your RRIF or LIF.
I would not worry much about that, since they have been silent on your statement for all these years. Just a warning. If it happens you could appeal to IRS to be allowed to make the election going forward, based on the statements you filed and your lack of knowledge of the varous changes over the years.
At least you were consistent. it should be pretty simple, for the 2 accounts you have, to go back and find what income you reported, and in the case of your RRSP, what it was worth when you moved. Remember to do all your calculations of income/contributions/value in USD, basd on the exchange rate when these events occurred.
the only danger you face, is the following:
With the release of Rev Proc 2014-55, which did away with 8891, the IRS "rewards" those who made the Rev Proc 2002-23 election in previous years (your form does not qualify for the election, form 8891 with the election made does, but you cjose instead to report income, which is by definition not taking the election) by not having to do anything going forward, and punished those who have not, by not allowing them to change their non-election.
Since you never made the 2002 election, the IRS *could* view you as non-eligible to make the election (they have not in the past, but maybe becoming more aware of this issue with the new method.) If that was the case you would need to report ALL internal income on a yearly basis, rather than a calculated amount based on the formula I gave you. That might not be bad for you, if the amount you are withdrawing is equivalent to or more than the internal growth of your RRIF or LIF.
I would not worry much about that, since they have been silent on your statement for all these years. Just a warning. If it happens you could appeal to IRS to be allowed to make the election going forward, based on the statements you filed and your lack of knowledge of the varous changes over the years.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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d_oakville
- Posts: 14
- Joined: Tue Oct 27, 2015 10:21 am
RSP claim
Sorry to jump on this thread but you said something that intrigued me. "The rules have always been -- since 1985 - that you EITHER deferred ALL income, or you paid tax on ALL income. " As a USA citizen, is it better for me to NOT defer the income I put into my RSP; that is pay taxes on that amount? Assume I will be retiring in the USA in 15 years (currently am working in Canada with no plans to leave soon. This is my first year of giving to an RSP).
Unless you are not taxable in US (if you have no other income for example), or if you live in Canada, it is ALWAYS best to defer reporting until you take the money out, since then you will also have Cdn tax to use against the US tax.
And once you do NOT defer, you can not later change your mind. So you would need a pretty good reason not to defer.
And once you do NOT defer, you can not later change your mind. So you would need a pretty good reason not to defer.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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d_oakville
- Posts: 14
- Joined: Tue Oct 27, 2015 10:21 am
Incorrect. One defers the reporting of income on a yearly basis, thus resulting in the deferral of taxes. If you report the income in any year, you are NOT deferring taxation, and are giving up the right to defer reporting the income on a yearly basis.
So, just defer. Doesn't sound like you have figured an angle that benefits you.
That means do nothing with the account for US purposes until you take funds out -- except track the contributions you make every year.
So, just defer. Doesn't sound like you have figured an angle that benefits you.
That means do nothing with the account for US purposes until you take funds out -- except track the contributions you make every year.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
If I read this post correctly, it seems like if you've got significant RRSPs in Canada, and are a US Resident, you should withdraw your RRSPs in a way that you incur lowest taxes (though I am not sure how to calculate how to calculate that amount). I guess because RRSP interest is taxable in the US?