Question about US tax on disbursal from Canadian RSP account

[Satman]

Hello,
I am a US citizen, living in the US. My wife is a longtime permanent resident alien, living in the US since 1984. We have filed joint US returns since that time. She is 58 years old. We live in Texas, where there is no state income tax.

She has a Canadian locked in RSP account valued at about $28,000 CDN. She has not contributed to it since 1992.

We would like to take a full disbursement, and pay the 25% Canadian tax. My question, then, is how do I report this on my US taxes, and can I claim all or any of the 25% Canadian tax against my resulting US tax liability?

I realize this is probably a common question, so I apologize in advance for any duplication of your effort.

Thank you.

[nelsona]

First off, your spouse needs to get compliant on her 8891 and TD-90 filings for the past 6 years BEFORE collapsing her RRSP (LIRA). There are 100's of threads on thsi.

next , she needs to determine how much sghe contributed to her LIRA. If she does not know, she shoud assume zero.

When she files her final 8891 for the coolapse sghe will report the gross amount on line 16a of your 1040, and the taxable amount (the gross minus her contributions) on 16b. This ammount is what she will pay US tax on.

Then you will fill (using tax software) a Form 1116, on which you will calculate how much of the 25% Cdn tax you will get credit for on your 1040 as a foreign tax credit. Usually, depending on your other US income, you get to claim about 1/2 of it.

So, assuming she had no contributions, and your are in the 25% marginal bracket. she should expect to pay, on $28K: $7K to Canada, and $3.5K to US, maybe more.

If you want an idea, just add 28K to your 2009 return ,and calcualte the tax credit, you will see that you don't get it all back.

If she were to take the money slowly over the next 10-15 years, she would only pay 15% to canada and perhaps nothing to 5% extra to US, so she should think about that, given that she has waited all this time. treat it like a pension. It should have been taken as a lump-sum years ago (non-residents can break locked-in accounts).

[Satman]

Thank you. This is very helpful. I will search the other threads on how to file the forms for the past six years.

We always intended to use this money for retirement--but financial circumstances dictate that we get it in a lump sum now.

Again, thank you.

[Satman]

Oops--one final question. Assuming we get compliant and take the disbursal this year, do I file the necessary IRS forms (8891) when I do my 2010 taxes next year... or is this something I need to complete and file prior?

Thank you for your time and assistance.

[nelsona]

I would get compliant on the 8891 and TD (FBAR) forms now (you are liable to penalties for not having filed, and a disbursment can be reported to IRS without your knowing which would get them scratching long before you filed your 2010 return.

Then when you file 2010 1040, all you will be concerned with is the final 8891 and FBAR form, and the calculation of tax owing.

There will be nothing to file in canada, unless your spouse has no other income, in which case she can file a 217 return in Canada, which cabn result in some of the 25% tax being refunded. More on that if you wish.

[Satman]

This is very valuable guidance, thank you.

Regarding her filing to recoup some of the tax paid in Canada, is it a complicated process, or could she/we do it ourselves? She hasn't worked for some time, has no individual income, and files jointly here in the US with me.

Again, thank you.

[nelsona]

Not complicated. It is called a section 217 return, which in essence allows her to treat her pension income as if it was paid as a Cdn resident, if this results in less than the tax withheld.

If she has no income, I would definitely be looking to split the disbursement over the next 2 years: take half now and half in january.

I guarantee, that she will end up paying no more than about 12-13% tax, even less when she includes all your medical expenses for the year (including any premiums you paid).

This would all be done after the fact.

[nelsona]

This will coincide better with your US tax. the only thing is that since she is breking up a LIRA, they will sometimes insist that the whole thing be taken lump-sum.

Has she been looking into the steps required to breake her LIRA?

[Satman]

Yes, we are working with her fund company now. I am sure there will be an additional question or two... as we work on this. Sincere thanks for the assistance.