Flexibility on RRSP election?

[sbpattison]

Hi, I'm a U.S. citizen, resident in Canada for 35 years filing U.S taxes for 2004-10. I fear I may be in a tax owing position due to large short-term capital gains in 2009 and 2010. I did however suffer net capital losses in my RRSP from 2004-08, and if I can include them it will help me plenty. Am I correct in thinking that I can elect to have income in my RRSP tax deferred (the election on line 6c of Form 8891) beginning in whatever year, say 2009, suits me? I've not yet made any such election never having filed U.S. taxes.

Also since the RRSP changes from a taxable account to a tax deferred account is there a deemed disposition of my holdings in that account for U.S. tax purposes? (like deemed disposition when stocks are moved from a taxable account to a tax deferred account here in Canada) and in which year would it occur? Much thanks.

[nelsona]

There is no deemed disposition, but there is the possibility to increase the "investment" in your RRSP by the ammount of income you report on a return.

Reporting a loss actually would decrease your investement, which is by rule the contributions you made. the only thing that can increase the investement is repoting income, which you have never done.

So, yes, if you really thing that you may owe tax on other cap gains, then you can report a loss in your RRSP for years before you maake election, but this will add to the ammount that is taxable in future (which may or may not be bad).

You still have to use 8891 even if you do not elect to defer.

[sbpattison]

Thanks, Nelsona, but I'm confused. If I'm careful i should never have to pay tax to the U.S. Does defering my election to defer on 8891 impact what i will eventually have to pay in Canadaian taxes? And if I include my RRSP income/loss in my U.S. filings for some years do i have to notify the CRA about that now?

[nelsona]

Your elections for US change nothing in canada. Your RRSP will always be 100% reportable in canada, and either taxed at graduted rates, or flat taxed if you are non-resident.

You never have to notify CRA about anything you report on your US taxes, since you are not going to get any foreign tax credit.

What I'm saying is that IRS will only 'credit' you (as non-taxable investement) with any initial contributions you make to your RRSP (that are not tax deductible on your 1040), and any income that you actually report on your 1040. You will ahve to report as taxable the growth in your RRSP, plus any losses you ionclude, minus any income you report.

[nelsona]

I'll give a short example, because the case you describe is unusual.

You are a US citizxen.

You have contributed, say, $50K to your RRSP over theyear up to 2009. It was worth $100K on jan 2009, and then it was worth $80K on Jan 1, 2010, after selling off some losers, etc.

Of course, as a US citizen not having made the election to defer taxation, you have "forgotten" to report this income on your 1040. No problem becus the statute of limitations has run out.

You decide you need to get compliant, so you want to file 2009 1040 and forward.

You decide (quite allowed) to NOT elect to defer taxation on your RRSP for that year, so you report $20K loss (supported by actual transactions for the 2009 tax year, not just market value loss).

Then in 2010, you elect to defer going forward.

Fine.

A person who made the election in 2009, would have $50K of investment in their RRSP: their original contributions.

You however, would only have $30K: the 50K you contributed MINUS the $20K loss you reported on the RRSP for 2009.

When you start pulling out the RRSP in later life, a greater portion of the RRSP wil be taxable in US than would have been if you always elected.

This is not necessarily a bad thing, because, in general, if you live in canada, your Cdn tax on your RRSP withdrawl will always be more than the US tax.

So, really its not a bad strategy.

And just so we are clear, this has absolutely no impact on your RRSP reporting and taxation for CRA. The yget first crack at all tax on this income, and give no credit for any US tax owed.

[sbpattison]

Much clearer now. thanks again Nelsona.