Back in my 1996 return, as discussed in this thread
http://forums.serbinski.com/viewtopic.p ... 19073c81c1
I claimed a difference on my California Schedule CA, in which I factored out the federal impact of a withdrawal from my Canadian RRSP. My belief is that California treats an RRSP "just like a bank account" and requires holders to pay tax as interest accrues so, unlike the feds, California cannot tax withdrawals of capital.
The FTB has just sent me an assessment, stating "In this instance, California tax law is the same as federal tax law". This seems incorrect - whether or not itemized deductions are handled the same in California as in the federal, the feds tax defer Canadian RRSPs (if you so elect), and California does not, and the impact of that difference in itemized deductions should be a valid Schedule CA difference.
Has anyone protested this kind of thing in the past and have comment? If I go forward with a protest, do I need to include some magic technical jargon in the explanation of why I believe it wrong? Should I be pursuing this through a tax lawyer, or is this process amenable to us unwashed masses?
Thanks in advance.
Protest hints? California FTB disallowed RRSP adjustment
Moderator: Mark T Serbinski CA CPA
I said "protest" as that is what they seem to call it on FTB 7275 that they included with the notice ("Protest (Disagree)"). Is there a separate appeal process they don't mention?
I made two claims on Schedule CA that both seem to have been disallowed:
On line 16a, I reduced the pension income by the amount of my rrsp withdrawal.
On line 41, I increased itemized deduction by the amount that was reduced federally due to higher income when I included RRSP income. That is, on federal schedule A, 7.5% of my income limited my medical expense. When the income is recalculated excluding RRSP income, the medical expense is not limited. On schedule CA line 41, I included the medical expense that would have been allowed federally were it not for my RRSP income.
I made two claims on Schedule CA that both seem to have been disallowed:
On line 16a, I reduced the pension income by the amount of my rrsp withdrawal.
On line 41, I increased itemized deduction by the amount that was reduced federally due to higher income when I included RRSP income. That is, on federal schedule A, 7.5% of my income limited my medical expense. When the income is recalculated excluding RRSP income, the medical expense is not limited. On schedule CA line 41, I included the medical expense that would have been allowed federally were it not for my RRSP income.
The FTB announcement that clarified their handling of RRSPs specifically stated that the CONTRIBUTIONS to your RRSP were tax exempt (note that this is NOT the 'value at arrival in US that is used for IRS purposes) and that income which was subsequently taxed was also to be added to your exempt income.
I don't have a problem with what you are claiming, but I'm not the one you need to convince.
The first thing you need to do is get a hold of the original FTB expalnatory statement on RRSPs.
I don't have a problem with what you are claiming, but I'm not the one you need to convince.
The first thing you need to do is get a hold of the original FTB expalnatory statement on RRSPs.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Does "I don't have a problem" mean you think the argument has merit, or just that you don't care? :)
I'm not sure about the *original* FTB explanatory letter, do you have a pointer to this that you could forward?
A search just now turns up FTB Information Letter No. 2003-0040 written by Jeanne Sibert at the FTB saying:
[i]Basically, the Franchise Tax Board considers a RRSP to be similar to a savings account. The Franchise Tax Board will treat a taxpayer's original contributions to the RRSP, made while a Canadian resident, as a capital investment in the RRSP. A California resident must include any earnings from their RRSP in their taxable income and pay taxes on this income in the year earned. After a taxpayer pays tax on these earnings, the earnings will also be treated as capital invested in the RRSP. Therefore, when a taxpayer receives a distribution from their RRSP, the amount consisting of the contributions and the previously taxed earnings is considered a nontaxable return of capital.[/i]
http://www.ftb.ca.gov/law/infoletter/20030321.pdf
I made all my RRSP contributions to the RRSP while a Canadian resident before 1996, and have paid tax on the earnings since ("in the year earned"). My expectation seems well aligned with the above statement, that my withdrawals should be nontaxable, which i interpret to mean they should constitute a California difference that is reportable on schedule CA.
The missing bit may be what your refer to as "NOT the value at arrival" ... are you suggesting that I would be expected to pay CA tax on distribution of gains within the plan that accrued before I came to CA? Blech! In any particular distribution, what portion is capital vs what portion is earnings? This seems unreasonable anyway: if I move from Oregon to CA, and deposit $100 in a savings acct in Oregon before I move, and pay Oregon tax on $5 earned on that $100 again before I move; then move to CA with withdraw $105, do I need to pay CA tax on any of it?
But even so, the FTB seems to be disallowing my entire claim, not a portion relevant to the "untaxed" earnings.
I'm not sure about the *original* FTB explanatory letter, do you have a pointer to this that you could forward?
A search just now turns up FTB Information Letter No. 2003-0040 written by Jeanne Sibert at the FTB saying:
[i]Basically, the Franchise Tax Board considers a RRSP to be similar to a savings account. The Franchise Tax Board will treat a taxpayer's original contributions to the RRSP, made while a Canadian resident, as a capital investment in the RRSP. A California resident must include any earnings from their RRSP in their taxable income and pay taxes on this income in the year earned. After a taxpayer pays tax on these earnings, the earnings will also be treated as capital invested in the RRSP. Therefore, when a taxpayer receives a distribution from their RRSP, the amount consisting of the contributions and the previously taxed earnings is considered a nontaxable return of capital.[/i]
http://www.ftb.ca.gov/law/infoletter/20030321.pdf
I made all my RRSP contributions to the RRSP while a Canadian resident before 1996, and have paid tax on the earnings since ("in the year earned"). My expectation seems well aligned with the above statement, that my withdrawals should be nontaxable, which i interpret to mean they should constitute a California difference that is reportable on schedule CA.
The missing bit may be what your refer to as "NOT the value at arrival" ... are you suggesting that I would be expected to pay CA tax on distribution of gains within the plan that accrued before I came to CA? Blech! In any particular distribution, what portion is capital vs what portion is earnings? This seems unreasonable anyway: if I move from Oregon to CA, and deposit $100 in a savings acct in Oregon before I move, and pay Oregon tax on $5 earned on that $100 again before I move; then move to CA with withdraw $105, do I need to pay CA tax on any of it?
But even so, the FTB seems to be disallowing my entire claim, not a portion relevant to the "untaxed" earnings.
You ask about what portion of your distribution is earnings and what is capital. Well, you would have already had to make this determination on your 1040, no?
When you took the distribution, how much did you report on 16a vs. 16b?
When you took the distribution, how much did you report on 16a vs. 16b?
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
True. So that's squared away.
I guess that brings us back to the original question: Not having appealed or protested a proposed assessment before, I'm trying to learn what to expect. Can I make the argument in plain English, or am I better advised to work through a pro licensed to practice in front of the FTB? Or try it on my own first and bring in a pro if the FTB persist?
I guess that brings us back to the original question: Not having appealed or protested a proposed assessment before, I'm trying to learn what to expect. Can I make the argument in plain English, or am I better advised to work through a pro licensed to practice in front of the FTB? Or try it on my own first and bring in a pro if the FTB persist?
I filed a protest / challenge / whatever back in August, they acknowledged receipt, but haven't responded to my claim. Seems appropos. After all, they have little motivation to be speedy since apparently if I'm in the wrong they can charge me interest at a far higher rate than a bank pays until I actually pay.
If anyone has comments on how long I might wait, or if they are just likely to let this sit forever with no closure, I'd be interested. I've been sorta waiting for a resolution before making another RRSP withdrawal.
If anyone has comments on how long I might wait, or if they are just likely to let this sit forever with no closure, I'd be interested. I've been sorta waiting for a resolution before making another RRSP withdrawal.
PS: The FTB notice states that when distributions are made, the contributions and previously taxed earnings is treated as nontaxable return of capital.
http://www.garygauvin.com/WebDocs/State ... _RRSPs.pdf
This implies that the growth under Canadian residency becomes taxable in California but it's not very comprehensive regarding a change of tax jurisdiction.
http://www.garygauvin.com/WebDocs/State ... _RRSPs.pdf
This implies that the growth under Canadian residency becomes taxable in California but it's not very comprehensive regarding a change of tax jurisdiction.
You would need to crystalize any growth made while non-resident of California to ensure that Cali would not tax it.
So one would shuffle around their investments before returning to Cali.
So one would shuffle around their investments before returning to Cali.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Following up for those as may be interested, I finally heard back from the CA FTB today on my protest (10 months after filing). "Based on the information you provided in your letter of protest, we cancelled the Notice of Proposed Assessment ..."
I feel like I should frame this letter or something. :)
I feel like I should frame this letter or something. :)