Cost basis RRSP distribution by U.S citizen, U.S. resident

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
Lori
Posts: 12
Joined: Thu Jan 11, 2018 6:11 pm

Cost basis RRSP distribution by U.S citizen, U.S. resident

Post by Lori »

I have searched and read all the previous threads on this topic that I could find. I couldn't find my precise situation. My husband and I lived in Canada for a few years. We are U.S. citizens, now returned to the U.S. since 2016. He has just taken a distribution from his RRSP.

For his U.S. return, my understanding is that the employer contribution cannot be counted as part of the cost basis. I am unsure of how to calculate my husband's contributions toward the cost basis.

So, for an imaginary year, he has an income of $100,000. He and his employer each contribute $5,000 to an RRSP. He takes the (hypothetical) $90,000 maximum foreign earned income exemption. Is his cost basis for that year's contribution $0, because it is 'first in' to be included in the foreign earned income exemption, or is it $5,000, because it is 'last in' to be included in the exemption? Or -- is it $500 because he exempted 90% of his income, and thus 90% of his contribution?

Or is it something else?

Thanks!
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

First off, let's clarify what can be claimed as cost basis.

US taxpayers are allowed, by treaty, to deduct both the employer ans emplyee portion of work-sponsored RRSP plan from their wages. If they do this, then NONE of the RRSP has any cost basis for US tax purposes.

If however, the employee included either or both of these contributions in his wages on 1040, then the included portions can be considered cost basis.

So, for your husband, which parts did he include in his wages? That is the cost basis, before we include the effet of FEIE.

For FEIE, I would use the proportional method. So, if 90% of his wages were excluded, then 10% of the contributions he included in those wages are considered basis.

Once you do this for evey year that he worked in canada, you will have the cost basis for that RRSP, and can begin drawing down the RRSP, a part of wheich will be non-taxable in US. You can use all the 25% Cdn tax related to the withdrawal for your tax credit.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Lori
Posts: 12
Joined: Thu Jan 11, 2018 6:11 pm

Post by Lori »

Thanks SO much!

No, he didn't deduct his or his employers contributions from his wages, on the 1040. We just used the FEIE.

So it sounds like the cost basis for the imaginary year would be $1,000 -- 10% of the employer and employee contributions.

That makes good sense, and I'm very happy to have an answer on this!
Lori
Posts: 12
Joined: Thu Jan 11, 2018 6:11 pm

Post by Lori »

I just need to double check, and will clarify our situation at the bottom.

This was posted by NELSONA in 2007, so is partly obsolete (viewtopic.php?t=2029):

"Regardless of whether his RRSP [u]contributions [/u]were taxed in US or not (there is no deduction fo contributions), that portion is withdrawable tax-free. Even if he used 2555 to exclude the income."

So the use of the 2555 exclusion IS now a factor?

----------------------------------------------------------------

From viewtopic.php?p=35482&highlight=#35482 posted in 2014:

"Their future RRSP taxability in US is based on the non-deductible contributions they make to their RRSP, which means ALL RRSP contriutions before 2009, and personal (not through employee plans) contributions made thereafter. that is why the tracking needs to be done year by year, with the exchange rate of that time.

All growth is taxable. All deductible contributions are taxable.

...So, the only contributions you need to be tracking now are his PERSONAL RRSP contributions made OUTSIDE of work, since those made at work are deductible on his 1040. If he is not making any private RRSP contributions, then he is not building up any non-taxable portion.

...Its up for some debate whether the portion that your husband contributes at work, but does not claim on his 1040 is considered "non-deductible".

If he were Cdn, that would definitely be the case, but the rule that makes his contributions taxable may apply specificically to non-US citizens, I would have to dig on this. 72(w) is one of the IRC clauses that applies. the Old Rev Proc which governed this mentions after-US-tax earnings. Since the contributions should not be included in his US income, they should nott be considered as after-tax, in my opinion. Only private RRSP contributions qualify as after tax..

But, certainly, the employer's contributions, as well as the growth WILL be taxable in US.

...Like I said, there could be some debate on this, and it has only been 4-5 years that the concept of deductibility of RRSP contributions has been around.

But there is plenty of IRS examples that indicate that if something was deductible and the taxpayer did not or could not deduct it, the IRS doesn't accept that it was not dedcutible."

So, no part of the employer contribution is part of cost basis? Or has this also been superceded by new law or new interpretation?

---------------------------------------------------------------------------

My husband's contributions and his employer's contributions were withheld from his paycheck in an employer sponsored RRSP. We filed the 8891 annually until it was discontinued. We did NOT take a deduction on the 1040. We tracked his and his employer's contribution amounts for each year in U.S. dollars (Let's just say that it was $25,000 his contributions and $25,000 employer contributions). We moved back to the U.S. and then took a lump sum distribution equal to half the value of the RRSP.

I am still confused about the cost basis, and how to explain the reason if we are asked to explain.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

The only non-taxable portion is your husband's contributions that were not deductable at the time on his 1040.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Lori
Posts: 12
Joined: Thu Jan 11, 2018 6:11 pm

Post by Lori »

Would the proportion excluded on the 2555 only apply to the employer contribution? That could be fairly considered to be deferred compensation, since it wouldn't be available to the employee who did not have an RRSP.

The part that is the employee compensation would be available without the RRSP, so wouldn't be deferred compansation. It should be treated the same as any income used to buy any investment -- a house, a savings account -- with the return of principal tax free. Even if excluded on the 2555.

Ugh, my mind is just swimming in this stuff. Having read so far back on these threads, of course I got some things that were outdated and confusing.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

EmployeR contributions are always taxable at withdrawal, since they would never have been included in your income, neither in Canada nor US. This is also covered by IRC 72(w) which specifically makes this income taxable, since that was from an employer plan that was never subject to Cdn tax. It is the same as foreign pension contribs made by your employer.

I'm going to leave it at that for now since its too late in season to get into.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Lori
Posts: 12
Joined: Thu Jan 11, 2018 6:11 pm

Post by Lori »

Thank you.

I think I'll have to conclude that my husband has no cost basis from his contributions, either. They were made between 2012 and 2016 with a Canandian employer, not deducted, but never exceeded the allowable limit for contributions to an RRSP nor the annual limit for contributions to a 401K.

So I presume they were deductible.
nelsona
Posts: 18311
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona »

That is what I would conclude. Only contribs to his personal RRSP would be non-taxable in US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Post Reply