RRSP Taxability

nelsona · Post by **nelsona** » Fri May 13, 2005 12:38 am

In your position I would not bother making any treaty election on your RRSP, simply treat it as an ordinary account (you should probably just collapse it and be done with it too, but that is another story). reprt any incomeand losses just as if it were a brokerage account.

The only problem is that for 2002 and 2003 tax years you are supposed to report the mere existence of your RRSP, by using a 3520 for those years, and for 2004 onwards using 8891. This is not the tax deferral election, it is a reporting requirement.

You wouldn't have to ammend the 2002 and 2003 returns simply to file 3520. These were to be filed separately from your return anyways.
You may have to ammend the returns in order to include any gains/losses on your 1040 for those years.

Remember too, that for capital losses to count, you MUST report them in the year they occur, and THEN claim the losses as you are able to.
So if you sell your current stock for a small loss, that ios all you can report this year, not sum up all your previous unreported losses.

nelsona non grata... and non pro

Russ · Post by **Russ** » Fri May 13, 2005 2:04 pm

Thanks Nelson.

Good info as always.

However, I'm think I'm misunderstanding what you mean in your last paragraph.

If I treat the account as a brokerage account, then by selling the stock positions, I now show over the last few years the loss of about $20K CDN. I didn't report in each year the loss of a few thousands dollars, as at that point, they weren't sold and therefore no capital loss?

So, going forward, I would report this $20K CDN loss and then simply write-off the $3K US limit for capital losses for this year (2005) and every future year when I prepare my US taxes.

Correct?

nelsona · Post by **nelsona** » Sat May 14, 2005 12:19 am

I added the last paragraph just in case you had triggered some losses in tha past and thought you might roll them up into this year.

In any event, my inforamtion still is valid for anyone else. Losses have to be reported in the year they occur. They occur, generally, only when you sell.

nelsona non grata... and non pro

nelsona · Post by **nelsona** » Tue May 17, 2005 3:45 pm

sajith, It is bad form to ask for other CPAs on this website.

Besides, the size of a refund is immaterial; I could generate a $15,000 tax refund by having an extra $300/wk withheld from my wages.

nelsona non grata... and non pro

marge · Post by **marge** » Fri Jun 10, 2005 11:44 am

Hi, at the beginning of this topic, Mark Serbinski and Nelson had a debate about the taxability of RRSP contributions. As far as I could see, the discussions concentrated on US residents.

I wonder if I could obtain clarification as it relates to US citizens living in Canada and living on RRSP income?

I've attended tax seminars at the US Consulate here for years, given by IRS employees. Astonishingly, they have not always been very knowledgeable about the differences in tax laws. For example, this year, the lady answered a question I had last year, about which figure to use when delcaring dividends, the taxable amount or the actual amount. Last year, she said she didn't know, but told me to use the taxable amount for now, and she would get back to me about it. This year, she told us we should be using the actual amount.

However, all the IRS representatives agreed about RRSP contributions. They said that since the RRSP contribution was exempt from Canadian tax at the time of the contribution, but is taxable upon withdrawal, it cannot be considered as exempt from US taxes even though it is included in the foreign income exclusion amount. Therefore, they said, the contribution amounts are subject to US tax, just as they are subject to Canadian tax, at the time of withdrawal.

This would mean that if I have an RRSP of $300K of which $220K was contributions, and I have always deferred the RRSP per the US-Canada treaty, and then if I drew income of $20K a year once retired, the full income of $20K would be taxable.

However, if the contributions can be counted as already excluded, and not subject to tax, I presume I would only have to base my tax on a fraction of the $20K.

This is an enormous difference, and I would dearly love to know which is correct, as I am hoping to retire soon and am trying to plan my finances.

Is there more than one opinion on contributions by Americans living in Canada also?

Thanks,
Marge

nelsona · Post by **nelsona** » Fri Jun 10, 2005 12:28 pm

Rev Proc 89-45, which was THE governing document until 2002, stated that contributions by US citizens were to be considered investments.

To quote from 89-45: <blockquote id="quote">quote:<hr height="1" noshade id="quote">The "taxpayers's investment in the contract" shall be determines as follows: ...
i)Employee contributions from after-tax (that is, after US tax) earnings, and
ii)Employer contributions included in the US gross income of the employee.(these contributions do not include payments exempt from US tax under section 911)<hr height="1" noshade id="quote"></blockquote id="quote"> parenthesis theirs not mine.

The fact that they clarify that it is after US tax, makes the contribution portion part of the investment, since your RRSP contributions are not tax deductible in US. Had they merely said after-tax dollars, then this would exclude the contributions from the investment, since canada does allow a dedcution. Irt was not be accident that they added that clarification.

Section 911 is the foreign earned income exclusion, but it applies ONLY to employer contributions (ie. the employer's portion of any group RRSP, or a rollover from a pensiion to an RRSP).

So, if you used 2555, you are still allowed to track YOUR OWN RRSP contributions as 'investemnt in the contract', but can only include EMPLOYER contributions to your RRSP (by whatever means) if you did not include these in the 2555 exemption.

There has been nothing in RP 2002-23, nor in Section 72 of the code that would change this.

What should trouble you is that, since this consultation was sometime between 1989 and 2002, that they would have this completely wrong.

nelsona non grata... and non pro

marge · Post by **marge** » Fri Jun 10, 2005 2:05 pm

Hi, Thanks for the speedy answers!

Do you mean that the only thing I should worry about is that these people were all wrong, even though the proper information has been out there for a long time? i.e. The tax seminars won't help me? I always figured I was getting information directly from the people who apply the rules.

About the employer contribution vs personal, what if the company writes me a cheque for the contribution allowable for 2004, the cheque is deposited to my RRSP by the end of Feb., and the contribution is recorded as part of my salary for the 2005 year? (The company remits the QPP and medicare amounts on the cheque amount every year when we do this, which would seem to help prove my contributions to be salary, and therefore personal contriubtions.)

Would the IRS consider that a personal contribution, because it's salary, or a company contribution, because goes straight into an RRSP account?

I've always included the contributions in the income exclusion, just because on my T4s, my year's salary always includes it, and I never gave it a thought.

What about Mark Sebinski's arguments? Do they apply to me? (I know you humbly beg to differ with him [;)])

Thanks again,
Marge

nelsona · Post by **nelsona** » Fri Jun 10, 2005 2:43 pm

<blockquote id="quote">quote:<hr height="1" noshade id="quote">About the employer contribution vs personal, what if the company writes me a cheque for the contribution allowable for 2004...<hr height="1" noshade id="quote"></blockquote id="quote">

This arrangement sounds awful fishy. But if it is received by you and then put in your own RRSP, then that is YOUR Contribution.

Employer contributions are, in my opinion, more direct.

nelsona non grata... and non pro

marge · Post by **marge** » Fri Jun 10, 2005 3:36 pm

Hmm. Does it still sound fishy if it's our company? (i.e. It's my husband's, but I work there.)

We've been doing this ever since the beginning (1979), as our accountant advised us to, and I've never questioned it...Eew, we sure aren't fishy people! [:(]

Would the IRS frown?

nelsona · Post by **nelsona** » Fri Jun 10, 2005 5:31 pm

Its just strange that an employer, regardless of who it is, would make a specific payment to an employee to funfd their RRSP.

This does indeed seem like pension funding. why not simply be paid an equal monthly salary?

nelsona non grata... and non pro

marge · Post by **marge** » Mon Jun 13, 2005 1:05 pm

Hi, Nelson, Not sure I'd convince you without getting embroiled in never-ending details, so will let the fishes stay where they are.[8)]

But how could it be a company pension plan, if the company doesn't administer it?

Also, I've tried several times to locate the text of the US-Canada Tax Treaty, and I can't seem to find it. I've seen an IRS pub. about it, but not the actual text. Do you know where I can find the full text of section 72, with amendments? I'd like to read it for myself, and see if I can figure out how it applies to me.

Thanks!

steph · Post by **steph** » Mon Jun 13, 2005 5:15 pm

Here is a link where you can get the full text of the treaty
on the IRS web site

http://www.irs.gov/businesses/internati ... 39,00.html

and section 72 at

http://straylight.law.cornell.edu/uscod ... -000-.html

nelsona · Post by **nelsona** » Mon Jun 13, 2005 5:49 pm

It should be poited out that none of the online versons of Section 72 are up-to-date with the laws enacted in Oct 2004.

And the Finance Canada website has a version of the treaty in which all the protocols have been consolidated

nelsona non grata... and non pro

marge · Post by **marge** » Tue Jun 14, 2005 11:34 am

Thanks a lot to both of you! I will go fishing.[:)]
Marge

Montreal_us · Post by **Montreal_us** » Thu Jun 16, 2005 6:18 pm

Can you direct me to where I can find RP02-23 to be used for years prior to 2004?thank you