Non-compliance with a transferred RRSP

[Sylvia]

Here's a situation I haven't read in the forums yet I hope you can help me with.

While I was a perm resident in the US from 2006-2010, I had a pre-existing RRSP with CIBC which I had no idea I needed to report via 8891. During that whole time, there were no contributions, no dividends and no distributions (just some unrealized capital gains to start and then a whole lot more unrealized losses due to the global banking crisis).

Moved back to Canada in 2010 (dual status year) and filed as a U.S. Resident in 2011 (as spouse of U.S. citizen). I still didn't know about the 8891 in those 2 years. I am revoking that choice starting in the 2012 filing year.

This year (2013), I transferred the full amount (in cash) of the RRSP to another broker (didn't have the in-kind option). I'm assuming that since I'm a NRA now, there's no IRS claim on my realized capital gains (tiny as they are).

I had plans to refile amendments for the last 3 years anyway and include the 8891 (I also missed the TFSA & RESP requirements, naturally).

But what can I do about the years of rrsp non-compliance preceding that? There's a 3-year limit on amendments, right? Since that particular account doesn't even exist anymore, do they have some kind of claim on future distributions from my new RRSP (not that I have any income to report from that time)?

Incidentally, the transfer had nothing to do with trying to avoid tax -- I didn't even think until now whether this might have some repercussions. Any thoughts?

[nelsona]

There is a SIX year limit when one has underreported income.

You need to ask IRS permission to back-date the election to 2006 for the old . you still have to back-date the old account, so that the new account will then inherit it's election date (2006).

[Sylvia]

That's good news about 6 years, then -- it will cover the entirety of my U.S. residence.

But if there wasn't any income in the RRSP anyway, do I need to elect at all? Couldn't I just file each year with an unelected 8891s and instead report the "income" on the amendment (income which actually doesn't exist).

Then when I do retire, I don't even have to think twice about the IRS because I didn't defer anything, right?

Regarding the transferred/new RRSP, since I'm a NRA starting 2012 filing year and the new RRSP was created in 2013, the IRS has no claim at all on this one, so I don't need to worry about "passing along" an existing deferral, right?

[Sylvia]

On a related note, if I choose to never make the election for the now-defunct RRSP, would the IRS consider that I sold my "PFIC" at FMV in 2012 when I ceased to be beholden to the IRS as a NRA? If so, would it mean that I would have to pay tax on any capital gains which were unrealized (still pretty much non-existent at that point).

That RRSP did still exist for the full 2012 tax year, I didn't xfer it until about a month ago.

[nelsona]

Almost all RRSPs produce reportable income evrey year in thge form of some distributions. Remember that jsut because a certain stock or fund loses VALUE in a particular year, it still generates taxable income, which is added to the cost basis. It is only by selling the fund that one triggers any losses.

Whnether you defer or not,m if you are not an IRS taxpayer, you would not owe taxes.

However by not deferring now, you do owe taxes on some of the income from the past 6 years (IRS will only grant any losses for past 3 years).

But each year you are included on a US tax retunr, you will have to file 8891, regardless of whther you elect to defer or not.

On your question of what IRS has claim on: they have claim on any income that was produced in the past years of residency, plus any years that you are included on your spouses return. It is often advantageous to be included as joint filer.

I would not worry about IRS taxation of your RRSP. it will be zeroed out by all the Cdn tax you will pay on it. That is why electing to defer makes sense.

RRSPs are exempt from all the PFIC mess.

[nelsona]

just to clrify: RRSPs are exempt from the PFIC mess IF YOU ELECT TO DEFER.

[Sylvia]

Re: RRSPs being exempt from the PFIC mess, are you saying that whenever I would go to report the income (whether now or in the future at retirement), I would need to do the 3520, etcetctec? Is that what you mean by PFIC mess?

[nelsona]

Well, for RRSP you must do either 3520 or 8891, as well as fbar. You have no option about this, whether you elect to defer or not.

You must also file these in any year which you file jointly with your spouse. You thus have to track your deferred income every year that YOU file a 1040.

The PFIC mes refers to another form(8621) , and is related to investments held outside one's RRSP.

I misspoke earlier, investments held in RRSPs are always exempt from 8621 reporting, regardless of election to defer or not.

[Sylvia]

Your point about the internal losses/gains/distributions is well taken. I have financial statements for this fund and the amount per-share for each is hard to figure out. But if they are low enough (I don't own a lot of shares) then the amounts may be less than my exemptions. Wouldn't it make sense in that case to claim the income now and have one less thing to worry about in retirement?

I have no plans to ever file jointly with my U.S. husband (or U.S. daughter) and embroil myself in all this mess ever again. All the "troublesome accounts" will be in my name only.

Yes, I will be amending all 6 years of past returns with the 8891 and submitting amended FBARS to include my RRSP.

Maybe it sounds silly, but given the choice, I'd rather eat my frog now and not force my future self to deal with the IRS, as long as the tax impact of getting it over with now is minimal. Everybody on this forum is working hard to build savings and investments for ourselves and our kids and when you look at all the reporting requirements and punitive penalties for innocent mistakes, it's hard not to feel like the IRS beach bully has kicked over your sandcastle.

[nelsona]

"Wouldn't it make sense in that case to claim the income now and have one less thing to worry about in retirement?"

If you aren't going to file with your husband, then you won't have anything to worry about regarding IRS and RRSP in either case. Either you will be living in US and will have to report, or you'll be living elsewhere and won't have to report.

Your decision to comply is based solely on the past, not on the future -- imediate or long-term. You will have nothing to do with IRS from 2013 on in any event.


For 2006 to 2012, you filed jointly with spouse, so any income your RRSPs had is fully taxable, since I'm sure your spouse and you earned more than your exemptions (whatever that means). So you will need foreign tax credits to overcome any US tax on this income, and that would only be from 2011 and 2012, for previous years you definitely owe tax, interest and penalties if you do not elect to defer.

So, I'd be swallowing a smaller frog by electing to defer (you still have all the other requiremnts to meet), and be done with it.

[Sylvia]

OK, you've convinced me I should defer. I'll do it starting on the 2006 amended return and cross my fingers.

Thanks for your time on this. I realize you're not pro, but you're certainly informed and I will feel better informed when I do talk to an accountant.

Also, one more thing that made me do a double take -- are you saying that since I won't have to file at retirement (because I won't be filing with my husband), then I DON'T have to report the 2006-2012 RRSP income to the IRS?? I just assumed that I'd have to do a 1040NR or something and figure out exactly how much I owed from back during that time.

[nelsona]

No, if you are not a US taxpayer during the years that you are taking your RRSP, then you do not have to pay tax to the IRS for the deferred income.

as to being better informed, I'm quite sure you will be MORE informed that the acct you talk to, judging by how so many posters here report their experience with uninformed cpa's.

[Sylvia]

I find that shocking... so somebody could go years, maybe even decades, deferring RRSP income and then stop filing with their US spouse at retirement (or renounce their own citizenship) and never have to pay the piper. It seems bizarre that the IRS would make filers go to all the trouble of accounting for the RRSP for years and then allow them renege on their "promise to pay later". I guess I shouldn't look a gift horse in the mouth.

[nelsona]

They will pay the piper. The Cdn taxes you pay on your RRSP will far outweigh anything that IRS would charge.

Even if you were to report the income when you started taking it out, with the Cdn tax you paid as a credit, you would noy owe anything to IRS.

The point of deferall is not to pay tax later, it is to merge the Cdn tax with the US, so that you pay no US tax. IRS understands this.

[nelsona]

If they renounce citizenship however, they mak=y have tax to pay, not because they defrred, but becasue of the total worth of their holdings.