Taxable distributions on 8891 form

[rajlic]

My family moved in USA during 2008 and we filed 8891 forms with 2008 tax return deferring USA income tax on earnings under our RRSPs.
We collapsed our plans in 2009 and 25% was witheld for CRA. An accountant that prepares the 2009 return for us claims that full distribution from these RRSPs is taxable in USA, i.e. and we can only offset this, by claiming credit for foreign taxes paid.

From everything I read here, taxable portion should be only gains after we moved to USA, not the whole distribution.

My accountant's understanding is that our contributions were pre-tax while in Canada, and earnings were not subject to tax prior to distribution, then "the investment in the contract (basis) is zero". Accordingly, the entire distribution is subject to tax, before offset of foreign tax credit.


Which part of the IRC section 72 detail how this should be calculated?

Thanks in advance!

[nelsona]

The accountant is incorrect.

Only the difference in value between the arrival cost and the final distribution is taxable in US.

[nelsona]

When an accountant (one based in US no doubt) starts trying to quote Section 72, they are neglecting the treaty and the rev procs that went before explaining US taxability of RRSPs.

[rajlic]

Should the value reported on 8891 forms, when we first time filled USA tax, be used as the value at time of arrival?
Hopefully he can finish the return and I can find someone with more experience in these matters to review the return before filling.
Again thanks!

[nelsona]

No, the amount first reported on your 8891 was the MARKET value at year-end of the first year you became taxable in US.

Your "investment" in the RRSP (the portion which is tax-free in US) is the BOOK value (NOT THE MARKEt VLAUE) of your holdings on the day you became a US taxpayer, which is either your residency starting date of that first year if you fileed dual-status, or january 1st of that year if you filled full year 1040.

[rajlic]

So the book value is equal to my or my company deposits since inception of the rrsp?
Does that mean that gains, while we were Canadian residents, are taxable in USA?? Thanks!

[nelsona]

No. Your book value it the cost basis of the assets you had when you became taxale in US. If you bought a stock at $10 and it was $12 (MARKET value) when you crossed the border, your BOOK value is $10. Cash and GICs always have the same BOOK and MARKET value.

That is why all Cdns moving down to US areencouraged to bump up the book value of their holdings by swapping things around within RRSP.