RRSP redemptions and 1040

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langda
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RRSP redemptions and 1040

Post by langda » Mon Mar 14, 2005 11:57 am

I have read numerous posts on this topic but still need some clarification. For example, suppose I cash in my RRSP's completely (worth $60,000 CDN). I have been filing the Rev Procs and all that good stuff. The RRSPs were worth $40,000 CDN when I entered the States in 1997. Canada takes $15,000 (25% withdrawal tax on $60k). Do I report $60k (converted to US dollars) on line 16a and $20k on line 16b? For the Foreign Tax Credit on Form 1116, do I report the full $15k that Canada took or am I only allowed $5k (i.e. 25% on the $20k gains)?

nelsona
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Post by nelsona » Mon Mar 14, 2005 1:17 pm

You report $60K on 16a and $20K on 16b.

You can use the entire $15K as a tax credit, but as you will no doubt see, this amount will be reduced DRASTICALLY, to about $5K, depending on your oyther income and marital status, as it will be in essence the tax you pay on $20K as a percentage of your total income, and you will be left with a HUGE foreign tax credit Carryforward, to be used in other years (which is unlikely to be used, if RRSP was your only Cdn ties).

You may simply want to take the $15K as a deduction on your 1040 Sched A.

Do it both ways and see which yeilds the lower total US tax.



<i>nelsona non grata... and non pro</i>

langda
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Post by langda » Tue Mar 29, 2005 2:46 am

Thanks for the info Nelson. One more question - what category does the RRSP Redemption fall under on Form 1116? Is it "Lump-Sum Distribution" or "General Limitation Income"?

nelsona
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Post by nelsona » Tue Mar 29, 2005 8:11 am

General limitation.

As an aside, next year, the 1116 will only have 2 categories: Genearl and passive (RRSPs will remain General).


<i>nelsona non grata... and non pro</i>

drothspam
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Post by drothspam » Tue Mar 29, 2005 12:11 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by nelsona</i>

You report $60K on 16a and $20K on 16b.

You can use the entire $15K as a tax credit, but as you will no doubt see, this amount will be reduced DRASTICALLY, to about $5K, depending on your oyther income and marital status, as it will be in essence the tax you pay on $20K as a percentage of your total income, and you will be left with a HUGE foreign tax credit Carryforward, to be used in other years (which is unlikely to be used, if RRSP was your only Cdn ties).
You may simply want to take the $15K as a deduction on your 1040 Sched A. Do it both ways and see which yeilds the lower total US tax.



<i>nelsona non grata... and non pro</i>
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

Assuming the $40k and $60k figures are $CDN, how would you do the currency conversion in calculating the taxable portion? $CDN60k*0.80 - $CDN40k*0.62 = $US23.2k or ($CDN60k - $CDN40k)*0.80 = $US16k ???

nelsona
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Post by nelsona » Tue Mar 29, 2005 12:27 pm

The basis and final figures MUST be determined at the time, so the basis would be in US$ at the time that the investment was purchased, and the dstribution would be in current US$


so, your first equation, with 2 different exchange rates would be more accurate.

It is more likely a matter of needing several historical US exchange rates to determine basis, unless everything inside the RRSP was bought on the same day.

<i>nelsona non grata... and non pro</i>

langda
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Post by langda » Tue Mar 29, 2005 12:54 pm

Instead of looking for historic Exchange Rates for the basis of every investment in your RRSP, wouldn't you just take the exchange rate in effect for the first year you entered the States? In this case, the first equation, with 2 different exchange rates, is still correct.

nelsona
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Post by nelsona » Tue Mar 29, 2005 1:12 pm

To establish basis, you need to deterrmine the value in US dollars at the time you bought the investment, which is not necessarily the day you moved to US.

IRS generally doesn't like the 'yearly' exchange rate that you allude to as much as CRA does. They 'prefer' excahnges done on a per transaction basis. You could justify using the yearly average for determining, say, weekly Cdn wages in US, but on a one time thing like a stock purchase, daily rate usually makes more sense.



<i>nelsona non grata... and non pro</i>

langda
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Post by langda » Tue Mar 29, 2005 1:35 pm

Wait a second here! I thought the point of all these discussions on Rev-Procs, Form 8891s etc. is that the IRS is only interested in taxing the GAINS since the first year you entered the US. What happened before that is not the business of the US. If this is correct, wouldn't it make more sense just to take, as a basis, the value of your RRSPs in US dollars as at December 31st of the first year you entered the States?

nelsona
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Post by nelsona » Tue Mar 29, 2005 2:33 pm

No. Under RRSP rules as outlined by IRS many years ago, must take into account the untriggered gains that occured before arrival.

So, you bought at $5, moved to US when at $6, your basis is still $5. If you sell later at $12, your gain in IRS eyes is $7.

That is why, universally, cross-border tax pros have always advised to crystallize any gains in your RRSPs before moving to US (or at Dec 31 of the year <b>before </b> you move, if you opt for full-year US taxataion).

It is why I am always careful to point out that it is the BOOK VALUE on arrival (or on Jan 1 of arrival year), not the MARKET VALUE on arrival date that is used to determine any post-arrival gains.

This, by the way, is the treatment of all investments by IRS, so RRSP investments are no different.

If you hold a property outside RRSP before arrival in US, and sell it subsequently, IRS expects you to pay tax on the entire gain, not just post arrival gain. IRS has no deemed acquisition rules. This has always been the IRS stand on investment income from any country.

Only a special treaty protocol (in effect now, but not yet in the US-Canada treaty) allows one to use the deemed dispo price when leaving Canada as your new basis.

But since RRSPs are not subject to deemed dispo, this wouldn't apply anyways.


So, langda, when you said your RRSPs were worth $40K Cdn when you arrived, I should have taken you to task, since that figure is meaningless in the context of US taxation of RRSPs.

I should have gotten you to clarify (a) what their book value was, and (b) what that was in US$, on the day you first were considered a US tax resident, which could be a Jan 1 of the year you moved (if you file full year), your first day in US in the year you moved (if you filed dual-status), or jan 1 of the year following your move (if you filed as a non-resident).



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Carson
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Post by Carson » Tue Mar 29, 2005 2:53 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote"><i>Originally posted by nelsona</i>

Only a special treaty protocol (in effect now, but not yet in the US-Canada treaty) allows one to use the deemed dispo price when leaving Canada as your new basis.

But since RRSPs are not subject to demmed dispo, this wouldn't apply anyways.
<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

That is very true Nelson. We have also observed that it would appear that a Canadian emigrant with say, a long held Canadian cottage property that is NOT a principal residence, could be forced tp pay extra tax in the US (and by extension in the State of residence) on the gain, because there is no deemed disposition on Canadian real estate. I suppose that electing to have a deemed disposition on emigration (and posting of security to avoid paying the tax currently) might be prudent to avoid this.

Regards,

Carson

nelsona
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Post by nelsona » Tue Mar 29, 2005 3:20 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">I suppose that electing to have a deemed disposition on emigration (and posting of security to avoid paying the tax currently) might be prudent to avoid this.<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">

I do not think the election to pay deemed dispo would be sufficient to alleviate the US taxation on the entire gain, but as you say, posting of security would keep one from having to pay the tax until selling, such that the Cdn tax could be used as a foreign tax credit.

And, While the Cdn tax would be used against the US fed tax, it would not adress the state tax, as you point out.



<i>nelsona non grata... and non pro</i>

langda
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Post by langda » Tue Mar 29, 2005 6:06 pm

Nelsona

I talked to the IRS to find out how to determine what amount goes on Line 7b of the new Form 8891. The lady I spoke to told me that it was the FULL AMOUNT of my cashed-in RRSP?!! She mentioned "Section 72(w) of Rev-Proc 2002-23, amended in Oct 22nd, 2004". I just read through the Topic heading "RRSP Taxability", started by Mark Serbinski and note that you maintain that it is the GAINS ONLY since entering the States. Who is correct?!

Do you still maintain that an RRSP is classified as a "Trust", not a "Pension" and therefore subject to special treatment? Tax deadline is fast approaching so should I go ahead with the "Gains only" approach? Thanks.

nelsona
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Post by nelsona » Tue Mar 29, 2005 7:12 pm

RRSPs are a trust.

Otherwise there would be no need for any of this Rev Proc, 8891 and 3520 nonsense.

IRS phone line is incorrect.



<i>nelsona non grata... and non pro</i>

langda
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Post by langda » Fri Apr 01, 2005 11:49 am

Nelsona

Thanks for correcting me on how to calculate my "gains".

BTW, I found this in Pub. 575. Is this enough justification for putting ONLY the "gains" from my RRSP redemptions on Line 7(b) of Form 8891 (and Line 16b of 1040)?! The notes for Form 8891, Line 7(b) says "see section 72 and Pub 939, General Rule for Pensions and Annuities", which in turn, led me to Pub. 575.

<i><b>Foreign employment contributions while a nonresident alien.</b> In determining your cost, special rules apply if you are a U.S. citizen or resident alien who receives distributions after October 21, 2004, from a plan to which your contributions were made while you were a nonresident alien. Your contributions and your employer’s contributions are not included in your cost if the contribution:

• Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and

• Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed.</i>

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