FTC income category for RRSP income

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
bwafusion
Posts: 18
Joined: Wed Aug 08, 2012 12:47 pm
Location: Canada

FTC income category for RRSP income

Post by bwafusion »

In previous posts on this forum, periodic withdrawals from an RRSP/RRIF have been referred to as "general limitation income" for FTC calculations. I am unable to find any clearly written and specific statement in Form 1116, Pub 514, or IRC 904 that this is so. GLI is essentially a catch-all for income that does not fall into the other defined categories. And yet RRSP withdrawals are essentially interest, dividend, or capital gains (all "passive income") that are paid out in periodic payments by the plan. So I'm not convinced that these withdrawals fall into the GLI category. Can anyone provide a clear interpretation of this (over and above just a default position that it doesn't "fit" into the passive category)? A specific IRS interpretation bulletin for this would be nice.
nelsona
Posts: 16947
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: FTC income category for RRSP income

Post by nelsona »

RRSPs are considered PENSION both for income and foreign tax credit purposes, not passive income, and as such are general limit income.

The US/Canada treaty defines them as such, and, I'm quite sure that you have been treating them as such ever since you have become a US taxpayer (ie. you have not paid tax year-by-year on internal generated income).

The old Form 8891 which was specifically designed for RRSPs, also specified which line income from RRSPs should be reported: lines 16a/16b on old form 1040, which was the pension line.

IRS Rev. Proc 2014-55, which abolished 8891 also consistently refers to RRSP/RRIF income as Pension income.

https://www.irs.gov/pub/irs-drop/rp-14-55.pdf

That, and thousands of others filing in such a way without question from IRS.....
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
bwafusion
Posts: 18
Joined: Wed Aug 08, 2012 12:47 pm
Location: Canada

Re: FTC income category for RRSP income

Post by bwafusion »

Sure it's clear that RRSPs are PENSION income. That's not debated. What is not clear is why it is GLI. Article XVIII of the Treaty deals with Pensions and does not stipulate that Pension income is GLI, as far as I can see. So where is this concept defined??
nelsona
Posts: 16947
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: FTC income category for RRSP income

Post by nelsona »

Since, as I seem to have conclusively proven, the income is not considered passive, nor does it meet any of the other categories, then it must be GLI, and has been accepted as such for decades. Look at the 1116 instructions.

I'll leave it at that.

Is there some angle you are trying to explore to get more out of the tax credit?
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
bwafusion
Posts: 18
Joined: Wed Aug 08, 2012 12:47 pm
Location: Canada

Re: FTC income category for RRSP income

Post by bwafusion »

The only reference on how to categorize pension income in the Form 1116 instructions is on page 5 under "lump sum distributions", which has its own category. In my circumstance I will be taking periodic payments from a RRIF (which is different from lump sum) and I want to be sure the tax on same is categorized properly. I guess I will need to accept that, by default, is is GLI since it is not explicitly included in the passive category (although to be honest I remain unconvinced that this is so). Thanks
bwafusion
Posts: 18
Joined: Wed Aug 08, 2012 12:47 pm
Location: Canada

Re: FTC income category for RRSP income

Post by bwafusion »

Not to beat a dead horse but it seems to me that the money in a RRSP/RRIF comes from two sources. One is contributions, which is base on earned income (employment). When this portion (essentially the basis) is withdrawn and taxed it would fall into the GLI category since it is related to wages. The other source of money is earnings from investment (interest, dividends, cap gains). When this portion is withdrawn it should fall into the passive category. So I see pension income as potentially falling into both GLI and passive categories.
nelsona
Posts: 16947
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: FTC income category for RRSP income

Post by nelsona »

The horse is dead. It is pension income, and thus general income FTC is anything not otherwise defined.

If you were in a way back machine, in the 1980's and chose not to treat the RRSP as a pension (that choice is no longer available) you could hav treated the account as a normal investment account, and then, yes, the internal income would be passive. Problem being that you would need to withdraw funds from the RRSOP every year to generate the Cdn tax resquired to get some form of foreign tax credit. So Canada asked that this unfair system be rectified in the treaty, so that one could match the pension income in the same year in both countries.

But, I'll ask again, even if it was passive ftc, how would you propose to benefit from having it declared as such? You would still have Cdn tax that exceeds the US tax, so there is no squeezing more FTC. You have some angle on this?

All pensions are part work part investment. But it is all pension.
I am taking my usual break from this site until May. Always too many tax-form specific questions at this time of year...
nelsona non grata. Non pro. Search previous posts. Happy Browsing :D
Post Reply