US Tax on RRSP

GC-Canadian · Post by **GC-Canadian** » Thu Jan 03, 2013 3:02 pm

We recently received our Green Cards (two weeks ago) after being in the US (from Canada) since 2007. We have sold our house before the move, but kept our bank account to pay off our Line of Credit.
We are now cashing in our RRSP's. We are not at Retirement Age yet, but want to get rid of the debt.
We are to pay 25% tax in Canada on the money.
How do we report this on our US Tax form?
Will we be taxed again / if so, how much?

nelsona · Post by **nelsona** » Thu Jan 03, 2013 3:25 pm

First, make sure that you have been correctly filing your 8891's for your RRSP every year.

You will need to determine the tax-free amount for your RRSP, based on the BOOK value they had at the time you moved. I've adressed how this is done countless times and will not repeat it here.

You will report the gross amount of your RRSP on 8891 and the taxable amount, and this will transfer to your 1040 line 16 a/b.

You will then decide if you take the 25% NR tax as a credit (you will not get full credit), or as a deduction, at year end.

Your RRSP manager was to be informed that you left canada in 2007. Did you do this? Otherwise you will not be correctly withheld (25%) on your withdrawal.

GC-Canadian · Post by **GC-Canadian** » Thu Jan 03, 2013 5:01 pm

I believe that we've NOT been filing an 8891 - I'll have to look into that.
I'm new to the forum so I'll have to look back on your posts, but sounds like we are in trouble.
I'll look up all your previous posts on the topic. Thanks for your reply.

GC-Canadian · Post by **GC-Canadian** » Thu Jan 03, 2013 5:20 pm

Would the fact that we've been here on a work visa (L1 A/B) up until now make any difference?

nelsona · Post by **nelsona** » Thu Jan 03, 2013 5:38 pm

No. You are a US tax resident, and thus subject to US tax laws, which include reporting of foreign trusts, which RRSPs definitely are, and thus should have been filing 8891's since at least 2008, and probbaly 2007 depending on how you filed your 1040 that year.

So, yes, you are in a spot of trouble, that you MUST try and fix BEFORE you take any money out of your RRSP. Unfortunately, as of 2 weeks ago, IRS closed the door to simple back-filing of form 8891, so now you will have to request permission to back-file, or pay the penalties for failure to report the income, and/or failure to report the trust (Form 3520 expalins those penalties).

GC-Canadian · Post by **GC-Canadian** » Thu Jan 03, 2013 5:47 pm

We stopped all payments into the RRSP's when we moved and the fund had been losing a lot of money until now, hence the cash out at this point.
I guess we need a good tax person for this :cry:

nelsona · Post by **nelsona** » Thu Jan 03, 2013 5:50 pm

Even though the portfolio may have lost money, it no doubt made some year-end distributions in the form of new shares. This is income, and without having elected to defer US taxation, it is rpertable income.

Have you been filing your FBAR forms for your Cdn accounts. This also carries a hefty failure to file penalty.

GC-Canadian · Post by **GC-Canadian** » Thu Jan 03, 2013 6:25 pm

No, we haven't been filing FBAR's either. Let me look into that too. Ignorance WAS bliss, but no more!!

GC-Canadian · Post by **GC-Canadian** » Thu Jan 03, 2013 6:34 pm

We idin't need to file a FBAR as we had less that $10 000 in our Canadian account. THat will change with the RRSP pay-out though. Thank you for making me aware that it even exist!

nelsona · Post by **nelsona** » Thu Jan 03, 2013 9:36 pm

Your RRSP counts toward the 10K limit. It is for ALL Cdn accounts, including bank rrsp brokerage, etc.

You are in violation.

GC-Canadian · Post by **GC-Canadian** » Fri Jan 04, 2013 1:58 pm

We'll file FBAR and 8891 for the 2012 Tax year.
I'll write a letter to accompany old FBAR's (6 years)
Don't know what to do about the 8891's. How do you request permission to back file without the very expensive letter?

GC-Canadian · Post by **GC-Canadian** » Fri Jan 04, 2013 2:01 pm

Meant to say Thank You for your advise. I looked up your previous posts on how to determine the Book value etc. Wow! Thanks!

nelsona · Post by **nelsona** » Fri Jan 04, 2013 2:45 pm

The new era started 3 weeks ago, so I do not know if there is any other way than PLR. You might need to contact the international IRS office.

All the recent discussions about "relief from the IRS for failure to timely elect" is for US non-residents.

GC-Canadian · Post by **GC-Canadian** » Fri Jan 04, 2013 3:24 pm

I just got off the phone with an IRS representative and this is what he said:

File the 8891 with your 2012 Tax return and attach a letter stating why you didn't file this form for the previous years.
They will contact us if they need any further information.

Let's hope it is that simple...

nelsona · Post by **nelsona** » Fri Jan 04, 2013 3:53 pm

Well, it won't be, because without the election and without the previous 8891's, you are not in compliance with foreign trust rules AND you have underreported your income.