Rev. Proc 2002-23, rsp dist. - Clarification and help

[txocanada]

Background - I have read all kinds of message boards, googled, used turbo tax help, and called Price Waterhouse Coopers (who has not got back to me - surprise!!!) I have not been able to nail down concretely what I need to do. My tax situation is very simple - with a few glitches:

1) We are resident aliens L1 Visa, living in Texas, Corp. move from O'Canada to US in 2004; Price Waterhouse Coopers prepared a dual status return, and a canadian return, they were aware of all of our info (I had included a statement from my personal banker showing the holdings in our brokerage account which was all rsp's - this statement was printed for me the day we crossed the border to move).

2) 2005 return was prepared by me using turbo tax. We have a simple return W2, some int. income, 2 kids, no other surprises.

3) 2006 I withdrew $44K from my rsp that was sitting in the brokerage in cash ie) no growth at all. I was taxed at 25%.


I am now trying to file for 2006 and have discovered that the Rev Poc. 2002-23 was NOT filed by Price Waterhouse Coopers, as I thought. I am not sure how to fix this. I do not want to amend our 2004 return as it was very complicated because we paid tax in the US on both our Canadian and US income for the whole year (I had a business in Canada), We also filed and paid taxes in Canada. It was complex and I do not want to open this year up to scrutiny, not because I think we have done something wrong but rather because I did not prepare the return and have absolutely no faith in PWC and their revolving staff.


Questions:

Soooo, here is the skinny, which forms do I use to report the distribution and show that their was no growth, as well as claim the foreign tax paid (25%), - I am assuming that because there was no growth that I will not be taxed on this distribution but am still able to claim the tax credit.


Additionally how do I fix this rev. proc 2002-23 problem, and finally in future years how do I continue to file the rev. proc 2002-23 to stay in compliance.

[nelsona]

You should be filing form 8891 for 2004 and 2005.

As you will see on form 8891 for 2006 (which I'm puzzled that you did not come accross in all your searches), there is a space to indicate the total RRSP withdrawal, and the taxable portion.

Remember that you must come up with the book value (which is not the market value, unless it was cash) of your RRSP in USD values the day you became US tax resident. Your withdrawl is then the USD value on the day you took it.

This may or may not be a loss, given the plunge in the USD.

Once you determine the taxable portion, you can use the 25% Cdn tax as a credit, but this will only be against the taxable portion, which is likely to be very little.

Your best be will be to use it as a deduction on schedule A, minding the AMT. Youy can use all the 25% there, even if none of your Cdn income is taxable in US.

Ifg it turns out that you have, say $500 taxable income from your RRSP, this will yeild only about a $50 foreign tax credirt, regardless of how much Cdn tax you paid.

[txocanada]

Thanks for the response Nelsona.

I do in fact have form 8891, but was still confused whether I used it in addition to the rev. proc.

Call me stupid {and I sincerely hope you choose not to}, after all if I knew, I wouldn't ask.

I intend to use form 8891 for 2006 for the RSP dist. PWC has just got back to me this morning and they have said that they will use Rev. Proc. 2002-23 to send a letter with my statements to the IRS with my 2004 and 2005 returns attached explaining that the treaty election was missed in error. They have then advised me to use the Form 8891 for 2006. At this point my faith in PWC knowledge and procedures is compromised and my money is on this forum.

Is this what you recommend or do I use the Form 8891 for 2004 and 2005 as previously indicated. If so do I just send it in with a letter and statements with copies of my returns for those years? Also in either case do I indicate on my 2006 Form 8891 section 6a that "I have previously made an election under Article XVIII to defer..."

And finally, do I need to use a 1099R (lines 16a and b in my Turbo Tax point to this form). I think part of my confusion stems from my Turbo Tax software. Do you recommend scrapping it and filing a paper return?

Thanks in advance.

[nelsona]

There is nothing in your 1040 for 2005 and 2005 to ammend. merely send in 8891s for those years attached to a 1040-X with no other changes. Indicate on those and any future 8891s that you fist made the election in 2004.

PWC is obviously trying to 'pad' their account by sending in lots of paperwork. Further evidence of them not knowing what they are doing. Besides, 1040_x specifially stes NOT to send in unrelated maeterail including a copy of the 1040.


Rev proc 2002-23 is not quite upto date for 2004 and 2005, since it was updated with Notice 2003-75, as indicated in the instructions of 8891. So PWC insisting on using RP 2002-23 is a tad knockleheaded.

Yes. you fake a 1099-R, making sure that the taxable ammount is correct by your own calculations (explained elesewher on this site), and that you are not taxed the additional 10% for early withdrawl: this does not apply to RRSPs.

Then proceeed with your foreign tax crdit or deduction as you see fit.

[txocanada]

Thank you so much.