Emptying out an RRSP for the Home Buyers' Plan

Jyrki21 · Joined: 04 Jun 2010 Posts: 8 Location: Ottawa, ON

Last year I held two RSP accounts -- a savings account and a GIC. When I bought a home in June, I made use of the Home Buyers' Plan and made a large withdrawal from the savings account, and simply emptied the GIC entirely (i.e. a premature withdrawal that combined it briefly with my normal savings account before I made my downpayment).

As a result, that RRSP account no longer exists, and the money it contained was applied toward the HBP. How do I treat this on form 8891? Is its former contents a "distribution received" on line 7a, but not taxable on line 7b? (I understand there is also a treaty election form to fill out).

And then I simply cease filing 8891s for this account in future tax years?

nelsona · Joined: 27 Oct 2004 Posts: 5917 Location: Nowhere, man

For US taxapayers living in canada, the HBP withdrawal is not considered pension income for that year. However it is considered a distribution that would require you to report previous deferred income.

So, as a result of the withdrawl, you need to report all gains that teh account made over and above your contributions over the years. If there was noen, the taxable ammount ofr US is ZERO.

Since this account no longer exists you have no 8891 to file after this last one. However, as you know, you are now required to re-fill an RRSP over the next few years or be taxed, ao you will probably be starting a new one. thsi will have a new 8891 to fill.
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Jyrki21 · Joined: 04 Jun 2010 Posts: 8 Location: Ottawa, ON

OK thanks. I had planned to repay the HBP amount into the still-existing RRSP account (from which a withdrawal was also made), so it will be, I presume, the same 8891 I would have filed anyway in succeeding years.

So to be clear from your answer, on line 7a *and* 7b of form 8891, I would fill in the interest amounts that had accumulated in that RRSP from the time I set it up to the time of my HBP withdrawal. Then I would take a treaty position on form 8833 with regards to that income, and *not* include it as taxable income on 1040?

(Incidentally, these amounts are quite small. Is there any downside to simply not deferring them at all on form 8891?)

Jyrki21 · Joined: 04 Jun 2010 Posts: 8 Location: Ottawa, ON

Or sorry -- correction to the first part of my question -- I would put the entire amount of the distribution on line 7a (including my own contributions), and then only the accumulated interest income on line 7b.

nelsona · Joined: 27 Oct 2004 Posts: 5917 Location: Nowhere, man

You would have to pay tax on the interest that the PRRSP earned before being collapsed.

The HBP is considered a distribution from the RRSP, and thus previously deferred income becomes due.

What is not taxabale is the entire withhdrawal, since it was not taxable in canada. But the previouslt deferred income is.

Subtle difference that arises from HBP.

Just to sum up: You put in US$10K over the years. Your HBP was $11K. You report $11K on 7a, and $1K on 7b. These get transferred to your 1040.

To be safe, you also write a 8833 to explain thta this HBP withdrawl was not taxable in canada, and that is why the entire amount is not taxble in US. This is more to protest you in future years, s hould you decide not to repay the HBP, there will be no claim that the HBP non-repayment should be considered income in US (even though it will in canada).

AS you refill your RRSP, the contributions you make will make up the non-taxable portion of your future RRSP withdrawal.
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nelsona non grata... and non pro

nelsona · Joined: 27 Oct 2004 Posts: 5917 Location: Nowhere, man

As to not deferring: How long have you had the RRSP. If you earned interst in past years, you would have hasd to report and pay interest in US on that income back then. You have to pay it now anyways because of the HBP. So no difference. Except thatback taxes have interest and paenaly, which you avoid by electing to defer.
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Diskdoctor · Joined: 21 Apr 2010 Posts: 15

If the RRSP was a term deposit or bank account would you take the interest earned each year and convert it to USD using the exchange rate at the time rather than take the final value minus the starting value and converting using the current tax years exchange rate?

Mutual funds or other securities would be a different calculation I suppose? I need to figure that out yet too.

nelsona · Joined: 27 Oct 2004 Posts: 5917 Location: Nowhere, man

That would indeed be the deferred income.
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Diskdoctor · Joined: 21 Apr 2010 Posts: 15

Nelson,

Many thanks for your helpful advice and effort you put into this message board. It's greatly appreciated.

What is the treaty position you recommend taking on the 8833 in this case? Article XVIII(7) only seems to address income within the trust not a distribution.

Diskdoctor · Joined: 21 Apr 2010 Posts: 15

I guess the relevant paragraph is paragraph 1? This is considered a pension payment?

Diskdoctor · Joined: 21 Apr 2010 Posts: 15

Sorry for all the posts. Should I mention the deferred (taxable) income in the form 8833 position or treat that completely separately?

nelsona · Joined: 27 Oct 2004 Posts: 5917 Location: Nowhere, man

XVIII(1). IRS can only include as income what CRA includes as income.
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nelsona non grata... and non pro