Form 8891: Effect of no Article XVIII election for years?

[tomcat]

I'm a dual citizen resident in Canada since '88. In all the years of filing Form 8891 and it's hand-composed predecessors, I never invoked the Article XVIII election to defer U.S. income tax on RRSP income but, rather, included all of the interest income in Schedule B over the years, letting the Standard Deduction, Personal Exemption and Foreign Tax Credit wipe out any tax owing. So, to my way of thinking, as of my previous 1040, all of my tax liability to the U.S. on the RRSP's income has been disposed of. Two questions, then:

1. At the time of a future distribution from the RRSP, how would I compute the value for line 7b of Form 8891? I.e., how do I figure the "cost"? Would it be the total value of the RRSP up to the previous year's 1040, seeing as how I declared all of the income up to that time?

2. If I were to take the irrevocable Article XVIII election this year, since the Std Deduct, Personal Exemp. and FTC don't wipe out the tax owing, what would the effect be down the road on line 7b when I start drawing down the RRSP?

The instructions for Form 8891 direct the filer to Pub. 939, page 2 of which says "If your annuity starting date is after Novermber 18, 1996, you must use the Simplified Method for annuity payments from a qualified plan. This method is covered in Publication 575."

Neat. Then in Publication 575, I got over to page 14, where I found "Taxation of Nonperiodic Payments", which is what I suspect I'll be using when doing cash withdrawals from the RRSP down the line. The first subsection of that section, "Figuring the Taxable Amount" never states explicitly HOW to figure the taxable amount. Heck, I couldn't even figure out an IMplicit method. Frustration... So...

I called the Philly office for international tax help. I'm not making this up: The IRS agent apologized but said that he wasn't allowed to answer my questions, since the RRSP is considered a foreign trust. But if I screw up line 7b at withdrawal time, the IRS can ding me? Great. I think I just fell down Alice's rabbit hole.

Fantastic web site, by the way.

[nelsona]

1. In essence, yes, since you have been reporting income, the net taxable pension amount will always be ZERO, and you will merely report income form that year on the subsequent lines. It would be more complex if you had been a non-US citizen, and had not had to report yearly income. At that point, some of your withdrawal would be taxable pension, and some would be normal income.

2. Your cost would now become frozen at ZERO (with only non-deductible contributions being added to your cost basis).

I would not worry about how the tax is calculated from Pub 939.. It is not an annuity. You would simply weight the taxable and non-taxable part. You just need to be consistent.

Don't bother with IRS telephlunkies.

I'm curios to your statement that 8891 "direct the filer to Pub 939 page 2..." I've never seen that specific direction anywhere. It merely refers to the publication.

[tomcat]

I can't begin to tell you what a sense of relief you've given me. Yours is the first response that I've gotten that makes any sense to me, this after wading for days through the IRS web site and speaking with the Philly international tax office twice, the first one ending in them telling me to call back and the second one ending with the agent telling me that I probably know more about the technical details than he/she does and that I should engage a tax accountant, which I have done via my RRSP bank's services. Of course, this being Newfoundland, the tax accountant that the bank directed me to turned out to be my wife's second cousin. We have quite the shallow gene pool out here.

Anyway, to reply to your final comment first, from the second page of Form 8891, the Instructions page, there is this quote:

"Line 7(b)
For information on figuring taxable distributions, see section
72 and Pub. 939, General Rule for Pensions and Annuities."

That aside, I am confused in the case of your answer to my second question, when you write that "Your cost would now become frozen at ZERO (with only non-deductible contributions being added to your cost basis.)"

Let's say that for the past 20 years, either through the earlier method of a hand-composed note or, in the past bunch of years, via Form 8891, I have NOT been taking the Article XVIII election to defer taxes.

Then, let's say that, starting with my 2010 Tax Year return, I DO take the irrevocable Article XVIII election to defer taxes going forward, say for another 5 years (or 10 or whatever). Then after that 5 years (or 10 ... etc.), I start taking cash withdrawals from the RRSP.

I feel stunned asking this, and it's probably intuitively obvious to you, but would my cost on the first such withdrawal be the sum of all the contributions that I will have made from January 1 of the year (this year, probably) that I take the election up to the year I take the first withdrawal?

You'll have to excuse my seeming denseness. I only have an M.Sc. in Mathematics, two years of post masters level course work in math and stats, and 35+ years of experience as an R&D computing specialist in the sciences. But when someone puts a dollar sign in front of a number, my frontal lobes shut down and I start lip-diddling. I had to get married so that my checkbook would balance. I told my wife that I wanted a Japanese style marriage: I give her my paycheck, and she gives me a few bucks walkin' around money. So, whereas 3.14159265358979 means something to me, $ 3.14159265358979 means exactly doo-doo to me. So, I hope that you can appreciate what an enormous help you have been.

[nelsona]

Yeah, sorry about the confusion. The moment you elect, your cost would be frozen at the current book value at previous year-end (the taxable portion being zero). Then, only non-deductible RRSP contributions would add to that cost basis.

[tomcat]

Many thanks!

[tomcat]

Hi, Nelsona...

Thanks for all the help over the past week or two. In your posting of March 9 at 8:30 p.m., you state "I would not worry about how the tax is calculated from Pub 939.. It is not an annuity". Not that I understand the difference between an annuity and a pension (I sure as heck do not), but I did find a 1980 link to the Treasury Department Technical Explanation of the 2007 Protocol of the U.S.-Canada Tax Treaty at this address:

http://www.irs.gov/businesses/internati ... 03,00.html

If you click on the "Technical Explanation - 2008" link and check out the very top of page 30 of that document, you'll find this quote:

"Further, the definition of “pensionsâ€￾ includes, for example, payments from individual retirement accounts (IRAs) in the United States and from registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada."

So, maybe that Publication 939 might well in fact be applicable?

Cheers,
Tomcat...

[nelsona]

Its a pension, not annuity, just like I said.