From our former topic:
quote:
--------------------------------------------------------------------------------
Originally posted by Mark T. Serbinski, CA CPA
Hi Nelson:
Just to clarify what is taxable in the U.S. in respect of RRSP withdrawals...
The entire RRSP withdrawal is defined by Article 9(7) of the Third Protocol to the Convention as a "pension", and is taxed in accordance with Article XVIII(1) of the Convention. Of course, a foreign tax credit may be used to eliminate double taxation in the U.S.
Since XVIII(1) taxes the entire pension income in the U.S., but in the same manner as it would be taxed in Canada, there appears to be no relief from U.S. tax for any pre U.S. entry RRSP contributions.
Regards,
Mark T. Serbinski, CA, CPA
--------------------------------------------------------------------------------
This is incorrect, as Rev Proc 2002-23 clearly points to IRS code as allowing for a calculation of both taxable and non-taxable portion, since pre-arrival income (for non-US citizens) was not subject to taxation. Section 72 or 74 is the relevant code.
Historically, Rev Proc 89-45 clearly stated the pre-arrival gain were not to be included in income. It also stated that contributions by US citizens were not taxable, as return of principle.
Moreover, a US citizen would not be taxed on the contribution portion of the RRSP in any case, and thus by non-discrimination clause, neither would a Cdn be so taxed.
California, which does not allow deferral, also follows the principle of allowing pre-arrival value to be the new basis.
Finally, if the entire withdrawal was to be taxable at 16(b), why would the brand new 8891 Form prepared by IRS, go thriu elaborate detail as to howe to figure out the taxable portion of the withdrawl. They would simply say to include it all.
No, Mark, on this one you have been wrong for quite a number of years, but should change your view given the all the new info from IRS on this since Rev. Proc 2002-23.
nelsona non grata
--------------------------------------------------------------------------------
Edited by - nelsona on Dec 01 2004 18:34:37
Regards,
Mark T. Serbinski, CA, CPA
RRSP Taxability
Moderator: Mark T Serbinski CA CPA
-
Mark T Serbinski CA CPA
- Site Admin
- Posts: 611
- Joined: Tue Oct 26, 2004 8:05 pm
- Contact:
-
Mark T Serbinski CA CPA
- Site Admin
- Posts: 611
- Joined: Tue Oct 26, 2004 8:05 pm
- Contact:
Hello Nelson:
According to IRS Notice 2003-75:
<font size="2"><i>".05. Distributions. A U.S. citizen or resident alien who has received any distributions during the taxable year from an RRSP or RRIF must report the total amount of distributions received during the taxable year from all such RRSPs and RRIFs on line 16a of the Form 1040 and the taxable amount of all such distributions (as determined under section 72) on line 16b of the Form 1040. "</i></font id="size2">
This does imply that some part of RRSP and RRIF distributions could be non taxable, as determined under IRC 72. Let's look at IRC 72 to see what that portion could be:
<font size="2"><i>"72(a) GENERAL RULE FOR ANNUITIES. --
Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.
72(b) EXCLUSION RATIO. --
72(b)(1) IN GENERAL. --
Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date)."</i></font id="size2">
OK. This says that the portion of an annuity received from an RRSP (not a lump sum) could be exempt from tax if it has an "investment", and the exclusion ratio is applied.
But let's read on to see what this means for non resident aliens:
<font size="2"><i>"72(w) APPLICATION OF BASIS RULES TO NONRESIDENT ALIENS. --
72(w)(1) IN GENERAL. --Notwithstanding any other provision of this section, for purposes of determining the portion of any distribution which is includible in gross income of a distributee who is a citizen or resident of the United States, the investment in the contract shall not include any applicable nontaxable contributions or applicable nontaxable earnings.
72(w)(2) APPLICABLE NONTAXABLE CONTRIBUTION. --For purposes of this subsection, the term "applicable nontaxable contribution" means any employer or employee contribution --
72(w)(2)(A) which was made with respect to compensation --
72(w)(2)(A)(i) for labor or personal services performed by an employee who, at the time the labor or services were performed, was a nonresident alien for purposes of the laws of the United States in effect at such time, and
72(w)(2)(A)(ii) which is treated as from sources without the United States, and
72(w)(2)(B) which was not subject to income tax (and would have been subject to income tax if paid as cash compensation when the services were rendered) under the laws of the United States or any foreign country."</i></font id="size2">
As I read this, it means that if an amount was contributed to an RRSP, and was therefore not subject to tax in Canada, nor the U.S., then this contribution is NOT eligible for the exclusion ratio. This means it is fully taxable.
Why then would there be references to non taxable portions of RRSP withdrawals?
The only way that a portion of a distribution is non taxable would be if it were subject to tax in the U.S. previously. This could occur only when a U.S. citizen lived in Canada and contributed to an RRSP, but still needed to include it on his 1040.
I hope this clears this issue up.
Regards,
Mark T. Serbinski, CA, CPA
According to IRS Notice 2003-75:
<font size="2"><i>".05. Distributions. A U.S. citizen or resident alien who has received any distributions during the taxable year from an RRSP or RRIF must report the total amount of distributions received during the taxable year from all such RRSPs and RRIFs on line 16a of the Form 1040 and the taxable amount of all such distributions (as determined under section 72) on line 16b of the Form 1040. "</i></font id="size2">
This does imply that some part of RRSP and RRIF distributions could be non taxable, as determined under IRC 72. Let's look at IRC 72 to see what that portion could be:
<font size="2"><i>"72(a) GENERAL RULE FOR ANNUITIES. --
Except as otherwise provided in this chapter, gross income includes any amount received as an annuity (whether for a period certain or during one or more lives) under an annuity, endowment, or life insurance contract.
72(b) EXCLUSION RATIO. --
72(b)(1) IN GENERAL. --
Gross income does not include that part of any amount received as an annuity under an annuity, endowment, or life insurance contract which bears the same ratio to such amount as the investment in the contract (as of the annuity starting date) bears to the expected return under the contract (as of such date)."</i></font id="size2">
OK. This says that the portion of an annuity received from an RRSP (not a lump sum) could be exempt from tax if it has an "investment", and the exclusion ratio is applied.
But let's read on to see what this means for non resident aliens:
<font size="2"><i>"72(w) APPLICATION OF BASIS RULES TO NONRESIDENT ALIENS. --
72(w)(1) IN GENERAL. --Notwithstanding any other provision of this section, for purposes of determining the portion of any distribution which is includible in gross income of a distributee who is a citizen or resident of the United States, the investment in the contract shall not include any applicable nontaxable contributions or applicable nontaxable earnings.
72(w)(2) APPLICABLE NONTAXABLE CONTRIBUTION. --For purposes of this subsection, the term "applicable nontaxable contribution" means any employer or employee contribution --
72(w)(2)(A) which was made with respect to compensation --
72(w)(2)(A)(i) for labor or personal services performed by an employee who, at the time the labor or services were performed, was a nonresident alien for purposes of the laws of the United States in effect at such time, and
72(w)(2)(A)(ii) which is treated as from sources without the United States, and
72(w)(2)(B) which was not subject to income tax (and would have been subject to income tax if paid as cash compensation when the services were rendered) under the laws of the United States or any foreign country."</i></font id="size2">
As I read this, it means that if an amount was contributed to an RRSP, and was therefore not subject to tax in Canada, nor the U.S., then this contribution is NOT eligible for the exclusion ratio. This means it is fully taxable.
Why then would there be references to non taxable portions of RRSP withdrawals?
The only way that a portion of a distribution is non taxable would be if it were subject to tax in the U.S. previously. This could occur only when a U.S. citizen lived in Canada and contributed to an RRSP, but still needed to include it on his 1040.
I hope this clears this issue up.
Regards,
Mark T. Serbinski, CA, CPA
the portion referring to 'non-resident' aliens of course does not apply here, for 2 reasons:
First Cdns living in US are not non-resident aliens.
Second the non-discrimination clause of the treaty forbids Cdns to be treated more severely than Americans in taxation.
Since by the sections you quote, an American withdrawing from an RRSP would not be taxed on the contributions one made to that RRSP, nor can a Cdn.
Please refer to the seminal Rev Proc on this matter (89-45) which clearly outlines how both Cdns and Americans were to report the taxable portion of their.
It clearly shows that neither Americans nor Cdns are liable for US tax on the entire portion of their RRSP withrawal.
You are definitely an outsider on this issue, as Cdn tax pros Universally adhere to 'post-arrival' gains method. (otherwise, why are ALL cdns advised to crystallize any and all gains made in an RRSP before leaving Canada; by your method this is pointless).
I'm sure, when the instructions for 8891 (which have not yeat appeared) are released, a full expalnation as to why 16 a and 16b CANNOT be the same will be evident.
Until then,
<i>nelsona non grata</i>
First Cdns living in US are not non-resident aliens.
Second the non-discrimination clause of the treaty forbids Cdns to be treated more severely than Americans in taxation.
Since by the sections you quote, an American withdrawing from an RRSP would not be taxed on the contributions one made to that RRSP, nor can a Cdn.
Please refer to the seminal Rev Proc on this matter (89-45) which clearly outlines how both Cdns and Americans were to report the taxable portion of their.
It clearly shows that neither Americans nor Cdns are liable for US tax on the entire portion of their RRSP withrawal.
You are definitely an outsider on this issue, as Cdn tax pros Universally adhere to 'post-arrival' gains method. (otherwise, why are ALL cdns advised to crystallize any and all gains made in an RRSP before leaving Canada; by your method this is pointless).
I'm sure, when the instructions for 8891 (which have not yeat appeared) are released, a full expalnation as to why 16 a and 16b CANNOT be the same will be evident.
Until then,
<i>nelsona non grata</i>
... and just one more point.
If all RRSP/RRIF withdrawals were to reported, why does Rev Proc 2002-23 (currently in force) ask one to determine, when transferring an account, exactly w=how much income had previously been deferred?
It is so that when fianlly making a withdrawal from this new account, one will include (a) the defferred income from the 1st account , plus (b) the GAIN from the second account.
By the way, 89-45 refers to all the salient sections of 72 which provide for tax relief for RRSP, both for US citizens and not.
<i>nelsona non grata</i>
If all RRSP/RRIF withdrawals were to reported, why does Rev Proc 2002-23 (currently in force) ask one to determine, when transferring an account, exactly w=how much income had previously been deferred?
It is so that when fianlly making a withdrawal from this new account, one will include (a) the defferred income from the 1st account , plus (b) the GAIN from the second account.
By the way, 89-45 refers to all the salient sections of 72 which provide for tax relief for RRSP, both for US citizens and not.
<i>nelsona non grata</i>
-
Mark T Serbinski CA CPA
- Site Admin
- Posts: 611
- Joined: Tue Oct 26, 2004 8:05 pm
- Contact:
Nelson:
Read 72(w)(1) (quoted above) very carefully. It refers to current citizens or residents of the U.S., who, at the time the contribution was made may have been non resident aliens. This section is definitely on point, but you have elected to ignore it.
The law is clear in that it identifies RRSP amounts which were NEVER subject to tax, either in Canada or the U.S., and makes them subject to tax. This is very logical.
You should read the actual law, since it clearly outlines what is taxable, rather than making judgements on what you believe should be fair. Tax law is not always "fair".
There is also a danger in following what you say "all Canadian tax pros" follow. If all of your friends jumped off the bridge....
In any event, when a foreign tax credit is applied, there is normally no significant tax cost to including an RRSP in U.S. income (as is required by a former non resident alien taking a distribution while a current resident or citizen of the U.S.).
Regards,
Mark T. Serbinski, CA, CPA
Read 72(w)(1) (quoted above) very carefully. It refers to current citizens or residents of the U.S., who, at the time the contribution was made may have been non resident aliens. This section is definitely on point, but you have elected to ignore it.
The law is clear in that it identifies RRSP amounts which were NEVER subject to tax, either in Canada or the U.S., and makes them subject to tax. This is very logical.
You should read the actual law, since it clearly outlines what is taxable, rather than making judgements on what you believe should be fair. Tax law is not always "fair".
There is also a danger in following what you say "all Canadian tax pros" follow. If all of your friends jumped off the bridge....
In any event, when a foreign tax credit is applied, there is normally no significant tax cost to including an RRSP in U.S. income (as is required by a former non resident alien taking a distribution while a current resident or citizen of the U.S.).
Regards,
Mark T. Serbinski, CA, CPA
mark or nelson,
i've been reading this thread and it assumes that the whole of the RRSP can be cashed in and the proceeds brought to the U.S. but how does this apply to a locked in retirement account held under an RRSP, specifically an Ontario LIRA?
my research says withdrawls can not be made from Ontario LIRA's except in hardship cases and even at that, it's only small amounts. i have found no provision that allows them to be closed entirely or even moved to another province that does allow them to be closed.
have either of you worked with someone that was able to close out their Ontario RRSP LIRA's because they were a non-resident canadian with no intention of retiring back in canada?
i've been reading this thread and it assumes that the whole of the RRSP can be cashed in and the proceeds brought to the U.S. but how does this apply to a locked in retirement account held under an RRSP, specifically an Ontario LIRA?
my research says withdrawls can not be made from Ontario LIRA's except in hardship cases and even at that, it's only small amounts. i have found no provision that allows them to be closed entirely or even moved to another province that does allow them to be closed.
have either of you worked with someone that was able to close out their Ontario RRSP LIRA's because they were a non-resident canadian with no intention of retiring back in canada?
-
Mark T Serbinski CA CPA
- Site Admin
- Posts: 611
- Joined: Tue Oct 26, 2004 8:05 pm
- Contact:
Mark, where do you find 72(w)(1)? I've looked at a couple of online versions of the IRC and both show section (w) as a list of references only.
I'm no tax expert, but I do wish to politely disagree with your statement "The law is clear in that it identifies RRSP amounts which were NEVER subject to tax, either in Canada or the U.S., and makes them subject to tax. This is very logical."
That's not logical at all. At the point at which a foreigner e.g. Canadian first moves to the US, they may have all kinds of assets accumulated under the foreign tax regime. Some of these assets may have been excluded from tax although they would have been taxed had the individual been a US citizen or resident at the time the income was acquired. Canadian lottery winnings, for example. As far as I know, the IRS does not make a practice of reviewing one's entire lifetime income history and retroactively applying "missing" taxes to US standards. Instead, they just start applying their rules based on whatever you've got when you arrive in the US. By this reasoning, there's no "logic" to making past Canadian RRSP contributions taxable by the IRS when withdrawn in the US. In fact it would seem highly unreasonable to me.
I am well aware that tax systems are not necessarily reasonable or logical, so the unreasonableness of taxing past Canadian RRSP contributions would not necessarily stop the IRS. But I can't seen anything in section 72 that says they wouldn't be excluded.
http://frwebgate.access.gpo.gov/cgi-bin ... e:+26USC72
I'm no tax expert, but I do wish to politely disagree with your statement "The law is clear in that it identifies RRSP amounts which were NEVER subject to tax, either in Canada or the U.S., and makes them subject to tax. This is very logical."
That's not logical at all. At the point at which a foreigner e.g. Canadian first moves to the US, they may have all kinds of assets accumulated under the foreign tax regime. Some of these assets may have been excluded from tax although they would have been taxed had the individual been a US citizen or resident at the time the income was acquired. Canadian lottery winnings, for example. As far as I know, the IRS does not make a practice of reviewing one's entire lifetime income history and retroactively applying "missing" taxes to US standards. Instead, they just start applying their rules based on whatever you've got when you arrive in the US. By this reasoning, there's no "logic" to making past Canadian RRSP contributions taxable by the IRS when withdrawn in the US. In fact it would seem highly unreasonable to me.
I am well aware that tax systems are not necessarily reasonable or logical, so the unreasonableness of taxing past Canadian RRSP contributions would not necessarily stop the IRS. But I can't seen anything in section 72 that says they wouldn't be excluded.
http://frwebgate.access.gpo.gov/cgi-bin ... e:+26USC72
Mark's inclusion of 72(w) is indeed interesting, as it refrs to a new section of the code.
However, as it has been explained to me, this applies to company pensions (what Cdns call RPPs), NOT RRSPs, (note the references to 'service' from 'without the US'). An RRSP has never been recognized as a foreign company pension (thus the need for special treatment under IRS rules). You'll note that there are no special forms for Cdn company pensions (RP 02-23 merely temporarily required the reporting of the existence of a RPP), only RRSPs as these have ALWAYS fallen thru the cracks. An RRSP is not a company pension and is not based on service performed anywhere (unlike a 401(k) or SEP for example). IRS is always quick to point out that an RRSP does NOT meet the requirements of any of the current tax-advantaged savings schemes, and nor does it have the blanket treatment accorded Cdn company pensions.
Otherwise 8891 would refer to all Cdn 'pension plans' not merely RRSPs and RRIFs.
72(w) was added to remove an advantage that ALL erstwhile foreign workers had with respect to their company pensions: the ability to reduce the taxable portion based on the ammount of foreign service which made up that pension. Foreign company pensions are now 100% taxable by 72(w). This aspect of the law change was well-publicized a couple of years ago, by Brunton , Keats et al.
It should be pointed out though that Mark (<i>Please correct me if I'm wrong, Mark</i>), even in 2000 -- before 72(w) was enacted -- was advising his clients to include RRSP withdrawal 100%. This was indeed contrary to Rev Proc. 89-45 which was in full force at that time.
For Mark to state that all other tax pros who used the 89-45 model as imitative 'jumpers' merely puts me in the mind of the Proud Mother watching her son in the parade and proclaiming "Everyone is out of step but my Johnie!"
I would contend that Rev Proc 2002-23 did <b>nothing </b> to change how the taxable portion of an RRSP is calculated; it merely set out more clear and simple reporting requirements (requirements which were being ignored by the vast majority of US-person RRSP holders). Nor has 72(w) changed anything, as this was aimed which was aimed squarely at employer-sponsored, performance based pension.
<i>nelsona non grata</i>
However, as it has been explained to me, this applies to company pensions (what Cdns call RPPs), NOT RRSPs, (note the references to 'service' from 'without the US'). An RRSP has never been recognized as a foreign company pension (thus the need for special treatment under IRS rules). You'll note that there are no special forms for Cdn company pensions (RP 02-23 merely temporarily required the reporting of the existence of a RPP), only RRSPs as these have ALWAYS fallen thru the cracks. An RRSP is not a company pension and is not based on service performed anywhere (unlike a 401(k) or SEP for example). IRS is always quick to point out that an RRSP does NOT meet the requirements of any of the current tax-advantaged savings schemes, and nor does it have the blanket treatment accorded Cdn company pensions.
Otherwise 8891 would refer to all Cdn 'pension plans' not merely RRSPs and RRIFs.
72(w) was added to remove an advantage that ALL erstwhile foreign workers had with respect to their company pensions: the ability to reduce the taxable portion based on the ammount of foreign service which made up that pension. Foreign company pensions are now 100% taxable by 72(w). This aspect of the law change was well-publicized a couple of years ago, by Brunton , Keats et al.
It should be pointed out though that Mark (<i>Please correct me if I'm wrong, Mark</i>), even in 2000 -- before 72(w) was enacted -- was advising his clients to include RRSP withdrawal 100%. This was indeed contrary to Rev Proc. 89-45 which was in full force at that time.
For Mark to state that all other tax pros who used the 89-45 model as imitative 'jumpers' merely puts me in the mind of the Proud Mother watching her son in the parade and proclaiming "Everyone is out of step but my Johnie!"
I would contend that Rev Proc 2002-23 did <b>nothing </b> to change how the taxable portion of an RRSP is calculated; it merely set out more clear and simple reporting requirements (requirements which were being ignored by the vast majority of US-person RRSP holders). Nor has 72(w) changed anything, as this was aimed which was aimed squarely at employer-sponsored, performance based pension.
<i>nelsona non grata</i>
-
Mark T Serbinski CA CPA
- Site Admin
- Posts: 611
- Joined: Tue Oct 26, 2004 8:05 pm
- Contact:
Agreed.
If it were that simple in IRS eyes however, Rev Proc 2002-23 would have simply been one line:
"A Cdn RRSP is considered a pension, with all gross distributions being reported on both line 16(a) and 16(b)."
That is how the Company Pension I will recieve from my former Cdn employer will be reported, as there is no other choice in the matter.
<i>nelsona non grata</i>
If it were that simple in IRS eyes however, Rev Proc 2002-23 would have simply been one line:
"A Cdn RRSP is considered a pension, with all gross distributions being reported on both line 16(a) and 16(b)."
That is how the Company Pension I will recieve from my former Cdn employer will be reported, as there is no other choice in the matter.
<i>nelsona non grata</i>
One last point:
While the treaty does classify RRSP under pensions, this only means that IRS must put in place a way for Cdn/US taxpayers to defer taxation. That is the only stipulation in the treaty.
The manner in which it decides to tax is only LIMITED to include the income that the 'source' state includes as income.
IRS treats RRSPs as TRUSTS, not Pensions. Proof of this is the requirement in 2002 to file Forms 3520 and/or 3520-A because of their status as TRUSTS.
Thus 72(w) does not apply now, and certainly didn't apply before it was enacted.
<b>No, RRSPs continue to be taxed in the manner outlined in Rev. proc 89-45. US citizens exclude their contributions; and non-US citizens exclude the basis upon arrival in US.</b>
<i>nelsona non grata</i>
While the treaty does classify RRSP under pensions, this only means that IRS must put in place a way for Cdn/US taxpayers to defer taxation. That is the only stipulation in the treaty.
The manner in which it decides to tax is only LIMITED to include the income that the 'source' state includes as income.
IRS treats RRSPs as TRUSTS, not Pensions. Proof of this is the requirement in 2002 to file Forms 3520 and/or 3520-A because of their status as TRUSTS.
Thus 72(w) does not apply now, and certainly didn't apply before it was enacted.
<b>No, RRSPs continue to be taxed in the manner outlined in Rev. proc 89-45. US citizens exclude their contributions; and non-US citizens exclude the basis upon arrival in US.</b>
<i>nelsona non grata</i>
No, you are completely ON TOPIC.
These are recognized PENSION PLANS, and are thus treated like any other pension in the US (ie. fully taxable upon withdrawal, no special reporting requirements).
RRSPs are treated specially, both in the mannner in which they are disclosed to IRS, and the manner in which they are taxed.
This is completely in accord with the trearty, which allows the Competant Authority (IRS) to establish the rules by which Cdn pensions should be reported, in order to grant deferral. For true Pensions, nothing needs to be done. For RRSPs RP 89-45, then RP 02-23, then Notice 2003-75 and now Form 8891 are the 'rules'.
<i>nelsona non grata</i>
These are recognized PENSION PLANS, and are thus treated like any other pension in the US (ie. fully taxable upon withdrawal, no special reporting requirements).
RRSPs are treated specially, both in the mannner in which they are disclosed to IRS, and the manner in which they are taxed.
This is completely in accord with the trearty, which allows the Competant Authority (IRS) to establish the rules by which Cdn pensions should be reported, in order to grant deferral. For true Pensions, nothing needs to be done. For RRSPs RP 89-45, then RP 02-23, then Notice 2003-75 and now Form 8891 are the 'rules'.
<i>nelsona non grata</i>
Nelson,
Based on your judgement that 72(w) applies only to company pensions, thus making them ineligible to establish basis and making them 100% taxable, I believe I made a GREAT choice by opting to roll my DB plan into a LIRA when I quit my CDN employer and moved to the US. I believe now I have a legitimate vehicle to establish basis (total value at rollover) and thus limit my US tax liability come time to convert to an annuity. Have I got that right?
Based on your judgement that 72(w) applies only to company pensions, thus making them ineligible to establish basis and making them 100% taxable, I believe I made a GREAT choice by opting to roll my DB plan into a LIRA when I quit my CDN employer and moved to the US. I believe now I have a legitimate vehicle to establish basis (total value at rollover) and thus limit my US tax liability come time to convert to an annuity. Have I got that right?