US citizen, RRSP HBP and bears, oh my

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gunderwood
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Joined: Mon Apr 16, 2012 1:10 am

US citizen, RRSP HBP and bears, oh my

Post by gunderwood »

I'm a US citizen and lived in Canada from Jan 2005 to Sep 2011. I was a little lax in doing my US taxes (no excuse - I got lazy), but now that I'm back in the states and need to file them, I need to catch up. Most of them are straight forward, except for the last couple years.

In 2010 I borrowed money from my RRSP under the Home Buyers Plan to make a down payment on a condo. How do I report this to the US? I gather it's not taxable income - Canada doesn't count it as income as it's a loan. Do I put it down on form 8891 on line 7a as a distribution, with 0.00 on the taxable distribution line, 7b? Or do I not report it at all?

And does this affect the tax-free status of the rest of my RRSP money? Google searches turn up some chatter about Canadian citizens taking money from RRSPs and this causing the rest of the income to be taxable, but I don't know if this applies to US citizens... mainly because I don't see anyone quoting a source that explains why that is so. If I could find the original documentation I could probably read it and figure out if it applies to my situation or not.

The follow-on question is that I didn't repay the loan when I left in 2011, so for my 2011 US taxes, how do I handle it? Again - it shouldn't be taxable in the US - I'll take it as income on my Canadian taxes and pay whatever tax is due there. But I'm assuming the US will want to know about it and have all the T's crossed and I's dotted. What's the procedure here?

Thanks!
nelsona
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Post by nelsona »

THe HBP is not taxable in itself, however, it is a withdrawal from an RRSP, which triggers reporting of defferred income, so it requires inclusion of gains from before your HBP; its not pretty.
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gunderwood
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Post by gunderwood »

nelsona - thanks for replying! That sounds like the info that I mentioned google turning up regarding Canadians in the US and them using their HBP. Can you give me more details, and/or point me to the right documents to read so I can figure out what it means specifically?

EG: Do I have to amend previous year's returns to indicate my deferred income? Or do I just need to provide info on my contributions and earnings up to the withdrawal on the year I withdrew? And how do I do that? Do I need to continue to report on that going forward (2011, and on) or is it a one-time thing for the year of the withdrawal? Do I have to now pay taxes on that deferred income (seems unlikely), or is it just more documentation work to keep track of the value of things?

So many questions! :D
nelsona
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Post by nelsona »

There is no document, other than the treaty. The treaty (and the election taken on 8891) simply say that one defers UIS tax on RRSP internal income until a withdrawal is made.

So, you made a withdrawal under the HBP, so now you are taxed, in the year you too kthe withdrawl (you've been defferring all along, right?) ,so you would need to file your 2010 return and pay tax on what had been deferred.

Quick example: say you had contributed 20K to your RRSP and at that moment your RRSP was worth 25K, you took out $15K for HBP.

For 2010: you would report on form 8891 the 15K withdrawal, and 5K would be taxable, the reason would not be because the withdrawal was taxable in canada, but because the $5000 gain had previously been deferred.

That is why HBP is not great for US citizens, becuase yo uahve US tyax to pay in a year when you had no Cdn tax to pay on the same income. Could reslut in US tax liability over-all, which is rare for USC's living in canada.

Now the $5000 you reported gets added to your $20K contributions for the purposes of future non-taxability.

So, now you leave canada, you have to pay back the 15K or add it to your income. This is purely a Cdn matter. If you don't pay it back, there is nothing to report in regards to IRS. If you do pay it back, again, tere is nothing to report on 8891.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
gunderwood
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Joined: Mon Apr 16, 2012 1:10 am

Post by gunderwood »

Interesting...

That contradicts other info I found that suggested the HBP wouldn't be considered a withdrawal until the year it was taxed in Canada (IE: 2011, when I left w/o paying it back). There's a fair amount of verbiage out there about how the tax treaty is set up to try and make it so you have tax liability in both countries at the same time. So I would claim it as income in Canada in 2011, pay taxes in Canada, and use 1116 in 2011 to tell the US to not worry about it, Canada covered the taxes.

But you're saying this is an edge case, where that falls apart a bit, and that I'll have to pay taxes in the US in 2010? Is there a way to tell Canada that I did that, to offset the tax burden for 2011 in Canada? From the sound of your post, I'm guessing you're not aware of anything like that and I'm just going to get hit twice with taxes on the HBP money... which does make it less than desirable.

A followup question - for the example you gave with 20k initial, 25k at withdrawal and a 15k withdrawal - you say 5k would be taxable. Is that because they're assuming you're withdrawing the interest first and then principal? If the example was instead an initial deposit of 10k, a value of 25k at the time of withdrawal and a 15k withdrawal, would I be withdrawing entirely from the interest and therefore have it all be taxable income in the US? That sounds ... painful. I'd assume they'd go the other way, or have you do a % calculation and assume the amount you withdrew is the same % of principle and interest. Though I suppose I can see - withdraw from interest to keep your principle intact... guh. Hmm. So, where do you get your info from on how to calculate what portion is taxable?

Since this is all internet "advice", do you know of someone whom I could talk to that could give me actual advice (and presumably charge me an arm and a leg while they're at it)?

Thanks!
nelsona
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Post by nelsona »

I have no problem making the withdrawl blended. I wasn't going to cover all aspects of this ion my example, and won;t now. But the treaty itself uses the term "defer taxation... until such time and to the extent" which means if you deferred 10K of income, you need to report 10K of income if you take a distribution of any more that that amount. But, for regular periodic pension withdrawals, the IRS has had no problem with blended withdrawals. HBP is a one-time deal.

But, unless you csn show me otherwise, I have been informed by several reputable sources that an HBP meets the definition of a distribution, and that HBP nopn-repayment is NOT pension income by IRS terms. And I'll be quite frank that I am quite in the know about RRSP/IRS issues and have discussed these with over a dozen other cross-border experts.

XVIII(7) refers to deferral until such time as "a distribution is made". HBP is such a distribution.

So, as I said earlier, while the HBP withdrawl itself is not taxable, by Article XVIII(1), it is a trigger for recapture XVIII(7).

It would be nice if HBP was a non-issue until you made a non-payment, but that is not what the treaty says.

As to having canada offset the burden, why? Its their source income. US would be where you need to relief from. Foreign tax creits are not given against home-sourced income.

Your other choice, since you apparently ahve not made the election, is to pay as you go, and just declare the income every year on your 1040. That way the HBP is a non-event tax-wise, as I have already said.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
gunderwood
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Post by gunderwood »

Thanks again for getting back to me! This is quite a problem to sort through and I appreciate your help. I want to be clear that I'm in no way discounting the information you've been giving me! It does contradict what I found before, but I wasn't sure that previous info applied to me. And I've found both sets of info online and not in the form of paid tax advice from a professional (whether you're a professional or not - I'm not paying you for this discussion so it's not "Advice", yah?), so I have to weigh them accordingly. You do seem very confident and knowledgeable, and I'm very grateful you're sharing that knowledge!

Hopefully you can see my perspective - I'm getting conflicting info from sources that I didn't hire to give me that advice... unless I can resolve that conflict to my satisfaction I think the best course of action for me is to read as much as I can of the source material and/or talk to a professional that I've hired for that purpose. They can then give me advice that can be called Advice w/o disclaimers, etc. That's all I meant, and I'm sorry if it came across differently. That wasn't my intention.


Back to the meat of the problem at hand!

I have been taking the deferral on income from the RRSPs, and have not been reporting anything beyond the end-of-year value on my 8891 forms through 2009. I have not been paying any taxes on income from them in either the US or Canada. Which if I understand you, means I'm in the situation of taking the HBP as income in the US in 2010, and then dealing with Canada in 2011.

Deferral, distribution and recapture - I'm not sure I follow - hopefully you can help me understand this! So, to use a different example, let's say I had 10k of my own contributions, 10k of accrued interest (it was a good few years or something). And let's say I withdrew 3k for the HBP. Would I need to report all 10k of accrued interest, or just the 3k I took out? And would I need to continue reporting on any future accrued value, or is it a one-off?

Source income, canada vs us and tax burden relief - so, if I understand this, you're saying I could ask the US to adjust my 2011 US tax burden based on the fact that I paid tax in the US in 2010 for the HBP money, and then Canada wants tax for it in 2011?

As for blended vs non - I didn't realize there were possibilities there. Let's stick with the simple example for now and I'll sort that out later. I'm sure there are good reasons to do it one way or the other, but yeah, you're right - not worth going into at the moment. I'm still understanding the basics of the situation. :)

Thanks again for helping me understand this!
nelsona
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Post by nelsona »

You would report the $3K, since that is the extent of your distribution, if the distribution wer $13 k, you would report $10K as taxable.

As to tax relief, there is none, since you did not pay Cdn tax. This is how foreign tax credits work. You need to have foreign income AND foreign tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Post by nelsona »

Now, you could have built up foreign tax credit in previous years, when repoting on 1116, and this could be used in 2010, but I'm guessing you did not do this. US FTC has a nice feature that you can carry forward unused FTC, so every year in canada, you should be reporting and building up FTC, forthese types of situations.

See what you can do on yoru 2008, 2009 returns to build up general income FTC.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
gunderwood
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Post by gunderwood »

Ok. So any money I took out comes out of profit first, and is therefore taxable. I'm still not clear on if triggering recapture means I have to be more detailed in future 8891 filings. Or is it just for 2010?

I'll look at my '08 and '09 taxes (good thing I held off sending them in yesterday!) and see if I can scrape up some FTC to carry forward. Can I go back and amend my '06 and '07 to get more carry forward FTC?

Thanks again!
nelsona
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Post by nelsona »

No. Three years max, which make 2008 probably too late as of yesterday.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
gunderwood
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Post by gunderwood »

Nertz. Oh well. Don't know that it would have been much anyway. I'll send in 2008 then and look over 2009 to see if I can scrape anything out of it. Kind of doubt it - 2009 was a pretty simple year.

Thanks again for your help!
nelsona
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Post by nelsona »

Well, consider that if you choose not to exclude your wages using 2555, then pretty much all your non-investment income falls under genearl, so you could raise quite a lot of unused foreign tax in 2009, and in 2010.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
gunderwood
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Joined: Mon Apr 16, 2012 1:10 am

Post by gunderwood »

Oh! Now that's an interesting idea.
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