Canadian Spousal Annuitant on RRIF

antonio · Post by **antonio** » Sun Feb 06, 2011 1:43 pm

I am a 78 year old, American born dual citizen, resident in Canada for over 40 years (since 1966). I held only Canadian citizenship from the early 1970's (when dual citizenship was not an option) until the mid 1990's, at which time I took out an American passport, thinking my wife and I might retire to the United States. I did not understand the tax implications of dual citizenship when I took this step, mistakenly believing that taxation is based on country of residence.

My Canadian wife, almost 15 years younger than me, is the spousal annuitant on my RRIF. All my RRSP contributions were made during the period when I held only Canadian citizenship,but I no longer have the investment statements for the RRSP/RRIF prior to the 2003 tax year.

All our tax planning and budgeting has been based on my wife's age (making the mandatory RRIF withdrawals based on her younger age, and living on her earned income) to ensure her financial security when I am gone.

18 months ago, I was stunned to learn that I had to pay taxes to the US. I have taken care of the back filing, but am both confused and distressed about what lays ahead for my wife.

How will the US treat the RRIF, which passes to my Canadian wife tax free in Canada? [/u]

nelsona · Post by **nelsona** » Sun Feb 06, 2011 4:33 pm

If it's any consolation, your action of taking a US passport had no impact on your US taxation. You were a US citizen, and were always taxable.

I'll discuss the reporting/tax of your RRIF later.

Could you clear up one thing? Is it YOUR RRIF, which you contributed to, or is it your RRIF converted from a spousal RRSP contributed on your behalf by her. It may not make a differnce, but I just want to be sure we are talking about the same thing.

antonio · Post by **antonio** » Thu Feb 10, 2011 9:51 am

This is MY RRIF, to which I made contributions on my own behalf. I have named my wife as successor annuitant on the plan. Our understanding was that the RRIF would pass tax free to her, with no deemed disposition or anything of that sort. I am sick that the decisions she made to accommodate our age difference may have jeopardized her financial future.

As for the citizenship issue - it's so confusing. I DID relinquish my American citizenship in the early 1970's, though I highly valued it, because there was no option if I wished to be able to vote in Canada. I have nothing that indicates what taking out my passport did - did it wipe out all those years when I was NOT an American citizen, or did citizenship start anew when I took out the passport? Irrelevant at this point I guess.

nelsona · Post by **nelsona** » Thu Feb 10, 2011 10:48 am

Lets put aside the the issue of when and how you "relinquished' US citizenship, considering that regardless of whether or not you were taxable in the 70's, 80's and 90,s, you have been since mid '90's, and more importantly, they aren't going to come after you for those past years, but you are taxable now.
The ease at which you regained citizenship would lead me to believe however that you never really were considered by US govt (which is the only entity that matters in this) to have renounced your citizenship.

So, back to the RRIF. There will be no Cdn or US INCOME tax on the RRIF transfer to her when you die. The transfer is not taxable in canada, thus not in US either.
Who lead you to believe that your RRIF was taxable in US upon death? Your preparer?

What will be taxable in US and Canada will be any withdrawals you personally make. After you die her withdrawals will only be taxed in canada, unless, she becomes a US citizen, or lives in US.

Since Cdn taxation is almost invariably higher than US taxation, you should not have any US tax to pay regardless of how much RRIF income is taxable in US. I trust that you have not had any additional tax to pay when making these back-filings for the past years. If you did, I'd be reviewing your returns for mistakes. Repeat: you shoudl not have had any tax to pay in US on the recently filed 1040's unless you have some very unusual financial situation. The credit the IRS would give you for any Cdn tax you paid would surely wipe out the US tax. If it didn't, your preparer has some explaining to do.

What there *might* be is US estate tax when you die, based on how much your estate is worth, what assets you have in the US, and what the non-citizen spousal exemption (which is currently > $2Million and increasing) is at the time you die.

nelsona · Post by **nelsona** » Thu Feb 10, 2011 10:50 am

You do need to be filing form 8891 and FBAR forms every year to protect your RRIF from US taxation.

antonio · Post by **antonio** » Thu Feb 10, 2011 1:35 pm

I don't know what to say. I'm stunned. I've read your reply three times now, to let it sink in.

I've been following your forum for a while, and it was clear to me that you are the most knowledgeable person out there on US/Canada tax issues. I wanted to post my question but was so fearful of your confirmation of what I had been told that I kept putting it off - and suffering mightily from stress, sleepless nights and guilt.

Yes, I have had tax to pay on my prior filings, but it was explained to me that this was because my wife and I had been splitting my RRIF earnings. Since my wife does not file in the US, I could not receive credit for the taxes she had paid to Canada on those RRIF earnings allocated to her under the Canadian Pension Splitting option. I therefore had to pay the difference to the US for those few years, plus penalties and interest.

Yes, my preparer did make one other error last year of which I am aware (on US taxation of my Social Security). I was so shocked to receive a refund from the IRS for some of the taxes I sent to them for that year that I phoned them to check that they hadn't made a mistake - I was afraid to deposit the cheque!

I don't have the words to properly express my gratitude to you. Thank you.

antonio · Post by **antonio** » Thu Feb 10, 2011 1:42 pm

Yes, I am filing both the FBAR and the 8891 forms.

Serbinski Accounting will probably be seeing me in future. It's so hard to find people who understand the complexities of the Canada/US situation. How any ordinary person can be expected to work their way through this is beyond me.

nelsona · Post by **nelsona** » Thu Feb 10, 2011 2:14 pm

You mean you filed all those back-filed 1040's on your own.

I admire your effort, but at least the first 1 or 2 returns should be handled or at least reviewed by a cross-border pro.

worryfreeinvestor · Post by **worryfreeinvestor** » Mon Aug 12, 2013 5:53 pm

Why would your Canadian wife have any implications from your backfiling U.S. taxes? Perhaps you should file as a single non-resident rather than married filing jointly?

If your wife lives in Canada is not a U.S. citizen, her income and assets are of no interest to the IRS - even less so once you have passed on.

nelsona · Post by **nelsona** » Tue Aug 13, 2013 9:19 am

A married person can NEVER file singly. They can file Married filing separately.

worryfreeinvestor · Post by **worryfreeinvestor** » Tue Aug 13, 2013 4:01 pm

OK: He files married filing separately. She doesn't file at all. I still don't see how or why the IRS can lay a hand on his widow as long as they never move to the U.S.

nelsona · Post by **nelsona** » Tue Aug 13, 2013 4:27 pm

This is an old post. Whay are we discussing this?