I'm a canadian working in the US with US resident status. Previously, I completed form 8891 and elected irrevocable distribution of income and earnings in the RRSP until withdrawal date.
Now, am I allowed to continue contributing to that same RRSP plan while I continue residing in the US. If I add new RRSP contributions from the US each year, are those ongoing contributions still eligible to be deferred under the tax treaty.
I spoke with IRS rep, who didn't seem like an expert; however, she said the way she read the treaty article, one can make ongoing contributions to RRSP and still tax defer it from IRS. Is that correct?
Also, I first became US resident in 1998. I had a RRSP prior to moving to US in 1998. I only became aware of the 8891 form last year. So I filed in 2010 with my 1040 to do irrevocable election to defer.
Do I need to do anything like go back to 1999-2009 tax years and refile 1040s with a 8891 form? I don't even think there was an 8891 form back in 1998.
When I asked IRS, the same clueless lady suggested that no I don't need to. If I would have had to, they would have notified me about the issue after i filed my 2010 return.
Any thoughts ?
Ongoing Deferred Contributions to RRSP while US tax resident
Moderator: Mark T Serbinski CA CPA
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calicanuck
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From a legal point of view there is no problem with IRS or CRA for a US resident to make RRSP contributions.
HOWEVER< since you have notified your RRSP mananager that you are living tin the US (you have done this, right?), THEY may have rules about not accepting new contributions from foreign or US residents.
But if they do not have a problem with this, then go aheaed. Realize that the RRSPs contributions cannot be deducted from your US tax retur, and since you are not taxable on US income in canada, and are not building up any contribution room, there is little point to making these contributions as you are simply increasing your taxable income in future.
From a US point of view, since they are not tax deductible, you are adding to your cost basis, so a larger portion of your RRSP will come out tax-free in US.
But that does not help you in canada. You are essentially putting funds in an account, getting no tax deduction, but then having to pay at least 15% tax on it from canada when you take it out. No the wisest move.
as to backfling. While you eledcted to defer from 2010,. you will still eventually be taxable on all increase made after your arrival in 1998 (minus contributions). I would go back to 5 years before to be safe, but three years for sure. make the earliest year you go back to your FIRST election year on all other forms.
HOWEVER< since you have notified your RRSP mananager that you are living tin the US (you have done this, right?), THEY may have rules about not accepting new contributions from foreign or US residents.
But if they do not have a problem with this, then go aheaed. Realize that the RRSPs contributions cannot be deducted from your US tax retur, and since you are not taxable on US income in canada, and are not building up any contribution room, there is little point to making these contributions as you are simply increasing your taxable income in future.
From a US point of view, since they are not tax deductible, you are adding to your cost basis, so a larger portion of your RRSP will come out tax-free in US.
But that does not help you in canada. You are essentially putting funds in an account, getting no tax deduction, but then having to pay at least 15% tax on it from canada when you take it out. No the wisest move.
as to backfling. While you eledcted to defer from 2010,. you will still eventually be taxable on all increase made after your arrival in 1998 (minus contributions). I would go back to 5 years before to be safe, but three years for sure. make the earliest year you go back to your FIRST election year on all other forms.
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calicanuck
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Nelsona,
Not sure if I follow everything. If I understand you correctly, legally it is fine.
I am in the US working now (canadian citizen). Was I supposed to notify RRSP maanger I'm in US now? oops...what does that do?
In terms of contribution room, I have forgotten the eligibility rules to contribute to a regular RRSP. Does one need Canadian income to be able to invest in regular RRSP? Obviously, I do not as I am in the US.
I have US income but it is not taxable in Canada. So, basically, since I have no taxable Canadian income, are you saying I can not contribute to the RRSP?
Even if my contribution were not tax-deductible in the US), I still would like to contribute to an RRSP so that i can defer taxation on income & growth until withdrawl/distribution. I'd rather pay taxes on my investments later as opposed to now.
If not the RRSP, can I contribute to the canadian equivalent of a Roth IRA- I forget what it's called, or are there Canadian taxable income requirements to contribute to one of those. If I can contribute, would a Canadian version of Roth IRA be taxable in US under form 8891 can/us tax treaty.
From your backfiling reply, can you clarify? I only filed in 2010 the 8891 form for the first time. However, I became resident in US in 1998. Are you saying I'm not eligible to defer taxation on the income & gains from 1998 to 2010? However after 2010, the gains and income are deferred until withdrawal.
I guess from 1998 to 2010, then I may not care....as there would be a capital loss so it may not effect me. There may be some interest though.
It would be a nightmare for me to go back to 1998 to file the first 8891 form (if one even existed back then). Are you suggesting I go back to 5 years before last year (2010) tax filing and submit 1040xs with new 8891s?
Aarghh..nightmare.
Not sure if I follow everything. If I understand you correctly, legally it is fine.
I am in the US working now (canadian citizen). Was I supposed to notify RRSP maanger I'm in US now? oops...what does that do?
In terms of contribution room, I have forgotten the eligibility rules to contribute to a regular RRSP. Does one need Canadian income to be able to invest in regular RRSP? Obviously, I do not as I am in the US.
I have US income but it is not taxable in Canada. So, basically, since I have no taxable Canadian income, are you saying I can not contribute to the RRSP?
Even if my contribution were not tax-deductible in the US), I still would like to contribute to an RRSP so that i can defer taxation on income & growth until withdrawl/distribution. I'd rather pay taxes on my investments later as opposed to now.
If not the RRSP, can I contribute to the canadian equivalent of a Roth IRA- I forget what it's called, or are there Canadian taxable income requirements to contribute to one of those. If I can contribute, would a Canadian version of Roth IRA be taxable in US under form 8891 can/us tax treaty.
From your backfiling reply, can you clarify? I only filed in 2010 the 8891 form for the first time. However, I became resident in US in 1998. Are you saying I'm not eligible to defer taxation on the income & gains from 1998 to 2010? However after 2010, the gains and income are deferred until withdrawal.
I guess from 1998 to 2010, then I may not care....as there would be a capital loss so it may not effect me. There may be some interest though.
It would be a nightmare for me to go back to 1998 to file the first 8891 form (if one even existed back then). Are you suggesting I go back to 5 years before last year (2010) tax filing and submit 1040xs with new 8891s?
Aarghh..nightmare.
Yopu can only backfile 8891 for 6 years, say 2006. You should make 2006 your first year of election. What happened before is past. But you cannoy take credit for any income that you did not pay tax on. So, you are still left with determining what your origianl cost of your RRSP was in 1998.
As to RRSP, I think you will find that having lied (yes, lied) to your funds manager for all these years will not be met with a big thank you. You will proabb ly be told to move your business else where.
And of course you must be eligible to contribute RRSP or youy will ahve a penalty for overcontribution. So you canonly contribute your limit from 1998. But eevne if you have limit room, it is pointless to contribute now with no tax deduction, and pay more tax later on everything.
It makes no sense to do what you are planning. Better to shelter your money in a Roth, or 401(k). where you either get the tax deduction now, or tax-free later.
As to RRSP, I think you will find that having lied (yes, lied) to your funds manager for all these years will not be met with a big thank you. You will proabb ly be told to move your business else where.
And of course you must be eligible to contribute RRSP or youy will ahve a penalty for overcontribution. So you canonly contribute your limit from 1998. But eevne if you have limit room, it is pointless to contribute now with no tax deduction, and pay more tax later on everything.
It makes no sense to do what you are planning. Better to shelter your money in a Roth, or 401(k). where you either get the tax deduction now, or tax-free later.
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calicanuck
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Thanks....I don't quite follow what you are saying:
"You can only backfile 8891 for 6 years, say 2006. You should make 2006 your first year of election. What happened before is past. But you cannoy take credit for any income that you did not pay tax on. So, you are still lteft with determining what your origianl cost of your RRSP was in 1998. "
Do you mean I can not defer tax on RRSP income from 1998 to 2006 since initial 8891 filing wasn't done until 2006. What do you mean by take credit??
"And of course you must be eligible to contribute RRSP or youy will ahve a penalty for overcontribution. So you canonly contribute your limit from 1998. But eevne if you have limit room, it is pointless to contribute now with no tax deduction, and pay more tax later on everything. "
Why does it not make sense to make a non-deductible RRSP contribution if permitted? I still get benefit of deferring taxes on income & capital gains on contribution until everything is withdrawn. Of course, I'm assuming tax bracket rates won't be too much higher in future, but I have the benefit of investing for 30 years the income that is not taxed until then.
Ideally if one could do a ROTH type RRSP in Canada (I forget what it's called) and have it be deferrable under 8891 tax treaty, then I'd prefer that. HOwever, I'm not sure if a ROTH type RRSP is tax deferrable with 8891. Is it? If so, I'd prefer to contribute to that. If not but I can convert the regular RRSP to a ROTH type RRSP, I'd do that also....but I'm not sure if that's allowable with 8891. Any idea if it is?
In US, I've already maxed out ROTH and I don't have a 401k option.
"You can only backfile 8891 for 6 years, say 2006. You should make 2006 your first year of election. What happened before is past. But you cannoy take credit for any income that you did not pay tax on. So, you are still lteft with determining what your origianl cost of your RRSP was in 1998. "
Do you mean I can not defer tax on RRSP income from 1998 to 2006 since initial 8891 filing wasn't done until 2006. What do you mean by take credit??
"And of course you must be eligible to contribute RRSP or youy will ahve a penalty for overcontribution. So you canonly contribute your limit from 1998. But eevne if you have limit room, it is pointless to contribute now with no tax deduction, and pay more tax later on everything. "
Why does it not make sense to make a non-deductible RRSP contribution if permitted? I still get benefit of deferring taxes on income & capital gains on contribution until everything is withdrawn. Of course, I'm assuming tax bracket rates won't be too much higher in future, but I have the benefit of investing for 30 years the income that is not taxed until then.
Ideally if one could do a ROTH type RRSP in Canada (I forget what it's called) and have it be deferrable under 8891 tax treaty, then I'd prefer that. HOwever, I'm not sure if a ROTH type RRSP is tax deferrable with 8891. Is it? If so, I'd prefer to contribute to that. If not but I can convert the regular RRSP to a ROTH type RRSP, I'd do that also....but I'm not sure if that's allowable with 8891. Any idea if it is?
In US, I've already maxed out ROTH and I don't have a 401k option.
I'm saying that you cannot take the position that income you failed to report between 1998 and 2010 as water under the bridge, and then add that to your cost of investement. Since you did not report the inocme on your 1040 and pay tax, your cost of investement remains the 1998 value, and all gains since then will be taxable when you take the money out of the RRSP.
I'm saying whether you defer the tax or not, you will still ahve to pay tax on it when you take the withdrawal down the road.
Itdes not make sense because you are NEITHER getting a tax deduction now, when you put it in NOR when you take it out. There are plenty of investment vehicles that will give you one or the other of these benefits, so why not use them. Otherwise, you have your home, and tax-managed funds.
Besides, this is all acedemic, since you aren't allowed to contribute, since you ahve no contribution room, and once you inform your broker in Canada, he won't want you to contribute either.
I'm saying whether you defer the tax or not, you will still ahve to pay tax on it when you take the withdrawal down the road.
Itdes not make sense because you are NEITHER getting a tax deduction now, when you put it in NOR when you take it out. There are plenty of investment vehicles that will give you one or the other of these benefits, so why not use them. Otherwise, you have your home, and tax-managed funds.
Besides, this is all acedemic, since you aren't allowed to contribute, since you ahve no contribution room, and once you inform your broker in Canada, he won't want you to contribute either.
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calicanuck
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Nelsona,
I apologize as I'm clearly missing something here that you you're trying to explain. I'm not planning to treat the income from 1998 to 2010 as water under the bridge. I just did not know about form 8891 until last year so the first year I filed 8891 was in 2010 for an RRSP that was last contributed in 1998.
"the position that income you failed to report between 1998 and 2010 as water under the bridge, and then add that to your cost of investement. Since you did not report the inocme on your 1040 and pay tax, your cost of investement remains the 1998 value, and all gains since then will be taxable when you take the money out of the RRSP. "
Regarding your statement above, I'm a bit confused. With RRSPs (or even a US traditional IRA), there is no basis generally with the contribution amount as the contribution amount is tax deductible (barring income limitations).
I've never paid tax on the RRSP contributions, so come withdrawl/retirement the whole RRSP balance/amount (capital gains, income, dividends & contribution amount) are taxable at income bracket rates.
So, I'm a bit confused why there is an issue about the cost of investment; it does not matter as I'll get taxed on the entire amount at withdrawl. However, up until a distribution is taken or up until retirement, there's no taxation as everything is deferrred in the RRSP (or traditional IRA) under 8891.
To my understanding, the point of the 8891 was to report to IRS that one has a Canadian RRSP so that one qualifies for the ongoing IRS deferral of tax until distribution/retirement. Unfortunately, I don't think the 8891 existed when I first moved here...I only was made aware of it in 2010 when I filed.
So the main question I have is does the IRS care that the initial filing was done in 2010 as opposed to 1998? When I talked the IRS rep a week ago, she said if it was a problem, they would have notified me, and she said not to worry about it since I submitted one in 2010. Again, I have absolutely no basis at all in my RRSP account as I never paid taxes on the contribution. So the entire RRSP balance will be taxable at withdrawal.
My question though is that for me to be completely 100% safe that I qualify for the ongoing tax deferral of RRSP, do I need to go back and report 8891 all the way back to 98. IRS rep said I was fine but I don't know if that's right. My cost of investment doesn't matter as it along with capital gains, dividends, interest will all be taxable as ordinary income bracket rates at retirement.
Regarding the other issue, I completely agree that I will get taxed down the road at the end. However, given the choice of paying taxes now versus later at withdrawal, paying taxes later is better assuming I'm not in a higher tax bracket. I can earn a return on the tax money I would have otherwise paid each year.
May I ask what would be your preferred choices or avenues for deferring taxes on investments now? I'm looking at 25 year investment in equities. If I've already maxed out IRAs and 401ks, the only thing left to give me tax deferral is annuities and muni bonds . Annuities have too high expenses and I'd prefer equities as longr term investment to munis.
What tax managed funds do you suggest? Would that be a better option/return then just parking non-tax deductible contributions in a deferred RRSP equity index mutual fund?
I do believe I have unused carryover contribution room if I look all the way back to 1991.
Regarding the broker issue, I guess I don't follow why that matters. Why won't the broker want to deal with me anymore? Sorry I'm a bit clueless here.
Thanks and sorry for all the questions!
I apologize as I'm clearly missing something here that you you're trying to explain. I'm not planning to treat the income from 1998 to 2010 as water under the bridge. I just did not know about form 8891 until last year so the first year I filed 8891 was in 2010 for an RRSP that was last contributed in 1998.
"the position that income you failed to report between 1998 and 2010 as water under the bridge, and then add that to your cost of investement. Since you did not report the inocme on your 1040 and pay tax, your cost of investement remains the 1998 value, and all gains since then will be taxable when you take the money out of the RRSP. "
Regarding your statement above, I'm a bit confused. With RRSPs (or even a US traditional IRA), there is no basis generally with the contribution amount as the contribution amount is tax deductible (barring income limitations).
I've never paid tax on the RRSP contributions, so come withdrawl/retirement the whole RRSP balance/amount (capital gains, income, dividends & contribution amount) are taxable at income bracket rates.
So, I'm a bit confused why there is an issue about the cost of investment; it does not matter as I'll get taxed on the entire amount at withdrawl. However, up until a distribution is taken or up until retirement, there's no taxation as everything is deferrred in the RRSP (or traditional IRA) under 8891.
To my understanding, the point of the 8891 was to report to IRS that one has a Canadian RRSP so that one qualifies for the ongoing IRS deferral of tax until distribution/retirement. Unfortunately, I don't think the 8891 existed when I first moved here...I only was made aware of it in 2010 when I filed.
So the main question I have is does the IRS care that the initial filing was done in 2010 as opposed to 1998? When I talked the IRS rep a week ago, she said if it was a problem, they would have notified me, and she said not to worry about it since I submitted one in 2010. Again, I have absolutely no basis at all in my RRSP account as I never paid taxes on the contribution. So the entire RRSP balance will be taxable at withdrawal.
My question though is that for me to be completely 100% safe that I qualify for the ongoing tax deferral of RRSP, do I need to go back and report 8891 all the way back to 98. IRS rep said I was fine but I don't know if that's right. My cost of investment doesn't matter as it along with capital gains, dividends, interest will all be taxable as ordinary income bracket rates at retirement.
Regarding the other issue, I completely agree that I will get taxed down the road at the end. However, given the choice of paying taxes now versus later at withdrawal, paying taxes later is better assuming I'm not in a higher tax bracket. I can earn a return on the tax money I would have otherwise paid each year.
May I ask what would be your preferred choices or avenues for deferring taxes on investments now? I'm looking at 25 year investment in equities. If I've already maxed out IRAs and 401ks, the only thing left to give me tax deferral is annuities and muni bonds . Annuities have too high expenses and I'd prefer equities as longr term investment to munis.
What tax managed funds do you suggest? Would that be a better option/return then just parking non-tax deductible contributions in a deferred RRSP equity index mutual fund?
I do believe I have unused carryover contribution room if I look all the way back to 1991.
Regarding the broker issue, I guess I don't follow why that matters. Why won't the broker want to deal with me anymore? Sorry I'm a bit clueless here.
Thanks and sorry for all the questions!
I said "don't" take a posistion, and you said you aren't, so fine.
You are NOT 100% taxable in US on your RRSP. you areonly taxable on gains made after arrival in US. That seems to be what you are missing. But you hqave to determine that cost.
You are NOT 100% taxable in US on your RRSP. you areonly taxable on gains made after arrival in US. That seems to be what you are missing. But you hqave to determine that cost.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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calicanuck
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Nelsona,
Thanks! Oh...now I get what you are saying. I guess I misunderstood the treaty. The point of my confusion was I thought IRS could tax the entire RRSP amount at withdrawal time.
Does that mean the way the treaty works (if I'm a canadian citizen working in the US as permanent US resident), the income & gains on RRSP since arriving in US are deferred but taxable at retirement by the IRS, but the RRSP contribution amount prior to arriving in the US would be taxed by Revenue Canada at RRSP withdrawal time?
I guess that makes sense since the RRSP contribution amount was deferred taxable income earned while in Canada.
I understand what you are saying now.....The funny thing is my basis was actually higher I think at the time of arriving in US. My RRSP balance dropped in value from the time I arrived in US and the time I filed initial 8891 recently.
Thanks! Oh...now I get what you are saying. I guess I misunderstood the treaty. The point of my confusion was I thought IRS could tax the entire RRSP amount at withdrawal time.
Does that mean the way the treaty works (if I'm a canadian citizen working in the US as permanent US resident), the income & gains on RRSP since arriving in US are deferred but taxable at retirement by the IRS, but the RRSP contribution amount prior to arriving in the US would be taxed by Revenue Canada at RRSP withdrawal time?
I guess that makes sense since the RRSP contribution amount was deferred taxable income earned while in Canada.
I understand what you are saying now.....The funny thing is my basis was actually higher I think at the time of arriving in US. My RRSP balance dropped in value from the time I arrived in US and the time I filed initial 8891 recently.
ALL your RRSP will forever be taxable by CRA, All of it. That is why it is pointless to put money in an RRSP now, when you are not getting any tax deduction, just to have the privilege of having ot all taxed later.
When you begin withdrawing your RRSP while living in US, you will pay 15% tax to Canada. and you will pay marginal tax rate in US (and state) on the taxable portion of your withdrawal.
Your basis is in USD at the time you entered, so while it may drop in C$, the big gains in Cdn dollar in past 5-6 years will no doubt make some of it taxable.
When you begin withdrawing your RRSP while living in US, you will pay 15% tax to Canada. and you will pay marginal tax rate in US (and state) on the taxable portion of your withdrawal.
Your basis is in USD at the time you entered, so while it may drop in C$, the big gains in Cdn dollar in past 5-6 years will no doubt make some of it taxable.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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calicanuck
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nelsona,
Thanks for all your help. I get what you are saying now.
So ALL of the RRSP will be taxable by CRA! I sure hope foreign tax credit is available from the IRS for the double tax we're paying when taking RRSP distributions. That doesn't seem fair to be charged 15% tax from Canada and marginal income tax rate from IRS at time of withdrawal.
I did not factor in C$ exchange rate gains. This is messier than I was expecting.
I get what you are saying about it being pointless now. I didn't realize CRA could tax it all.
To recap, the first year I filed 8891 was 2010 tax year when I was first made aware of it. I became US resident in 1998. From reading some of your other posts, it seems like I should backfile and submit 1040x with 8891 for 3 years: 2008 2009 2010?
I'm about to file 2011 but I won't have time to do 1040x s for prior years yet with 8891 added. Should I just file 2011 with 8891 referring to first year elected deferral as 2010 still? Then later on, do 1040x with 8891 for 2008-2011 referring to 2008 as 1st year of 8891 election deferral.
Why is it not necessary to backfile to 1998?
Thanks for all your help. I get what you are saying now.
So ALL of the RRSP will be taxable by CRA! I sure hope foreign tax credit is available from the IRS for the double tax we're paying when taking RRSP distributions. That doesn't seem fair to be charged 15% tax from Canada and marginal income tax rate from IRS at time of withdrawal.
I did not factor in C$ exchange rate gains. This is messier than I was expecting.
I get what you are saying about it being pointless now. I didn't realize CRA could tax it all.
To recap, the first year I filed 8891 was 2010 tax year when I was first made aware of it. I became US resident in 1998. From reading some of your other posts, it seems like I should backfile and submit 1040x with 8891 for 3 years: 2008 2009 2010?
I'm about to file 2011 but I won't have time to do 1040x s for prior years yet with 8891 added. Should I just file 2011 with 8891 referring to first year elected deferral as 2010 still? Then later on, do 1040x with 8891 for 2008-2011 referring to 2008 as 1st year of 8891 election deferral.
Why is it not necessary to backfile to 1998?
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calicanuck
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Thanks, I have filed 2011 with 8891 referencing 8891 1st election from 2004. I spoke to IRS and they said that would be fine provided I get the 8891&1040x's in shortly.
I will go all the way back to 2004 as you suggest 6 years.
Unfortunately, this leads me to another question. I arrived in 1998 and became us resident for tax purposes then. 8891s did not exist before 2004. Do i need to do anything for 1998-2004?
I will go all the way back to 2004 as you suggest 6 years.
Unfortunately, this leads me to another question. I arrived in 1998 and became us resident for tax purposes then. 8891s did not exist before 2004. Do i need to do anything for 1998-2004?