Collapsing RSP

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

Post Reply
drothspam
Posts: 4
Joined: Thu Oct 28, 2004 4:37 pm

Collapsing RSP

Post by drothspam » Thu Oct 28, 2004 4:56 pm

I'm a permanent resident in the US and I want to deregister my RSP and bring the cash to my US brokerage account. I've confirmed with my trustee in Canada how to request this. Also they have confirmed that, as a CDN nonresident, the withholding will be 25%. I have been filing a Rev-Proc XXX treaty declaration with my 1040 tax returns since taking US residence.

My question is about the taxation of this income in the US. Let's say my RSP is valued at $100k, so I receive $75k proceeds. Do I declare $100k income on my IRS return with a $25k foreign tax credit? Or do I declare only the growth of my RSP since taking US residence?

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Thu Oct 28, 2004 5:28 pm

As clearly indicated on Rev Notice 2003-75, you report the entire $100K on line 16a, and you report the TAXABLE portion on 16(b).

Now, the taxable portion is basically the value of your RRSP when you cash it minus the BOOK value on the day you moved to US.

Once that is determined, you can either claim the $25K tax as a credit on a general limitation 1116 form, and work out how much of the 25K will be credited, OR you can use the entire $25K as a tax deduction (schedule A foreign tax). which ever one gives you the lower US tax.

Note the credit is generally more valuable, and can be carried forward or back against other foreign income, but it is limited to the tax rate you pay on the foreign INCOME you report (which will be the number you on 16(b) and which will be considerably less than the full $100K you get form RRSP).

And if you have no other foreign income in the next few years, any surplus will be lost.

So, determine how much of your RRSP is taxable in US, then run the numbers on a 1116 (using a tax program will be most accurate on this as the calcs are not as straight forward as 1116 would appear) and then as a straight deduction.

<i>nelsona non grata</i>

drothspam
Posts: 4
Joined: Thu Oct 28, 2004 4:37 pm

Post by drothspam » Fri Oct 29, 2004 2:36 pm

Thanks Nelson - especially for the reference to Rev Notice 2003-75. Does anyone know what the state reporting requirements are for MA? Is it similar to the IRS requirements? Is there a MA tax document corresponding to 2003-75?

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Fri Oct 29, 2004 3:30 pm

My advice on state issues is the following:

Unless you hear otherwise, the treatment is no different. Don't ask your state about it. Don't ask your accountant to ask the state about it.

Asking your state about it will only raise the issue to them, as it did in California, with much headaches for RRSP-holders there.

As far as MA is concerned you have 16(a) income and 16(b) income and whatever credit or deduction you chose on the fed will or will not carry thru to state just like any other foreign income/tax.

<i>nelsona non grata</i>

worryfreeinvestor
Posts: 144
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Post by worryfreeinvestor » Thu Mar 24, 2005 6:25 pm

If you don't report to the state, is that not illegal and potentially catastrophic, not only in terms of tax-penalties but visa status in US? I.e. one becomes "undesirable"? Is the risk of the state auditing you truly zero?

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Fri Mar 25, 2005 1:23 am

No.

The taxation of RRSPs is very unclear.

If a state wishes to tax RRSPs (as California does) they will make it very clear (as California has), and will provide for time to comply with any current ruling.


Tax deliquency might be a reason to deport (I doubt it), but that is not the same as being audited, and not the same as simply owing tax, which would be the case if your state came to the decision that RRSPs were taxable year by year.



<i>nelsona non grata... and non pro</i>

langda
Posts: 7
Joined: Mon Mar 14, 2005 11:55 am

Post by langda » Tue Mar 29, 2005 2:47 pm

What goes on Line 1 of Form 1116? The value on Line 16a of the 1040 ($100K) or the value on Line 16b (the TAXABLE income)? I only ask because the form itself is confusing - the header says "Taxable Income from sources outside the United States" but the blurb on Line 1 says "Gross income from sources..."?

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Tue Mar 29, 2005 3:25 pm

LIne 16b, the taxable income.

The term 'gross' here refers to before any deductions (ie. the next several lines) from that are taken into account to determine your net foreign income for use in the credit calculation.





<i>nelsona non grata... and non pro</i>

Post Reply