I would like to verify my understanding of the following issues related to this topic and ask a few questions. I moved to the U.S. from Canada and have subsequently become a U.S. citizen.
1) I believe that the U.S. cost basis in a Canadian RRSP that contains only savings accounts and CDs at the time of becoming a US resident would be the CDN$ balance in the plan on the final day of Canadian residence converted to US dollars by using the appropriate exchange rate on that day. Accrued interest that has not been paid on CDs would not be part of the cost basis.
2) I believe that the U.S. cost basis would be reduced by the non-taxable portion of distributions, if any, previously received while a resident of the U.S.
3) I made free-form elections to defer the interest income in the plan for U.S. tax purposes under XXIX(5) and then XVIII(7) of the Treaty. I believe that my free form elections met the requirements of Revenue Procedures 89-45 and then 2002-23. I kept filing my free-form election for both 2004 and 2005. I believe that you would recommend that I file a 1040X and the 8891 forms for both 2004 and 2005 and use "2002" for line 6b of the 8891 form. I have been filing free-form elections since 1994.
4) Under what circumstances would it be necessary to file an 8833 "Treaty-Based Return Position Disclosure" form related to my RRSPs?
5) I believe that it is necessary to include the RRSP accounts on a TD F 90-22.1 form to be forwarded to the Treasury department each year.
6) I believe that if I were to collapse my plan the amount to be reported on line 16a of my 1040 would be the total gross proceeds before the Canadian 25% withholding tax is deducted converted to U.S. dollars on the day of the withdrawal. I believe that the amount to be reported on line 16b of the 1040 would be this amount minus my cost basis in the plan as defined in 1) and 2) above.
7) If I were to withdraw 1/2 of my balance, how would the taxable portion be calculated for entry onto line 16b of the 1040? Would you prorate the cost basis?
8) If I were to withdraw funds, I believe that I would be eligible for a foreign tax credit in the year of withdrawal to be calculated on form 1116. If I cannot utilize the entire credit for the Canadian withholding tax, can I deduct the unused balance in the same year as I take a partial credit? Would the deduction be the amount of Canadian withholding tax converted to U.S. dollars on the distribution date less the FTC claimed on the 1040. Where would the deduction be reported on the 1040?
Thanks
US Taxation of Canadian RRSPs
Moderator: Mark T Serbinski CA CPA
1. Correct
2. Correct
3. Correct, except that for 2003 forward, you needed to add the information requested from notice 2003-75, or file 3520. This was in essence, adding the year-end balance to your rev proc statement. 8891 adressed this for 2004 onwards.
4. Never. One could file an 8833 if, say, some portion of your RRSP were to be withdrawn or transferred as a non-taxable event IN CANADA. This would be non-taxable in US as well, so an expalnation on 8833 would be in order.
5. Of course.
6. Correct
7. there is some flexibility here. It would be either 50% of the cost basis, or you could simply include as taxable, all income that was deferred up til that tax year as the taxable portion.
Small example: You have $10 cost basis and your RRSP is worth $12 now. You withdraw $6. 16a would be $6. You could either split the cost basis, $5, and report $1 on 16b. You would have $5 cost basis left. OR you could decide to report all income that you have defeered by treaty over the years, $2. line 16b would be $2, and you would have $6 left as cost basis.
You may ask wh yreport more than I have to? To use up more of the tax as a credit, see #8.
You would then need to be consistent in this choice.
8. No, Once you use any credit, you cannot use a deduction. You can only carry forward/back any unused credit. To use the deduction you cannot use the credit, nor can you save it for another year. The deduction is reported on scedule A foreign tax. This could get you into AMT territory.
It is very rare that much Cdn tax is credited on an RRSP collapse, so calculate before doing this.
2. Correct
3. Correct, except that for 2003 forward, you needed to add the information requested from notice 2003-75, or file 3520. This was in essence, adding the year-end balance to your rev proc statement. 8891 adressed this for 2004 onwards.
4. Never. One could file an 8833 if, say, some portion of your RRSP were to be withdrawn or transferred as a non-taxable event IN CANADA. This would be non-taxable in US as well, so an expalnation on 8833 would be in order.
5. Of course.
6. Correct
7. there is some flexibility here. It would be either 50% of the cost basis, or you could simply include as taxable, all income that was deferred up til that tax year as the taxable portion.
Small example: You have $10 cost basis and your RRSP is worth $12 now. You withdraw $6. 16a would be $6. You could either split the cost basis, $5, and report $1 on 16b. You would have $5 cost basis left. OR you could decide to report all income that you have defeered by treaty over the years, $2. line 16b would be $2, and you would have $6 left as cost basis.
You may ask wh yreport more than I have to? To use up more of the tax as a credit, see #8.
You would then need to be consistent in this choice.
8. No, Once you use any credit, you cannot use a deduction. You can only carry forward/back any unused credit. To use the deduction you cannot use the credit, nor can you save it for another year. The deduction is reported on scedule A foreign tax. This could get you into AMT territory.
It is very rare that much Cdn tax is credited on an RRSP collapse, so calculate before doing this.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best