Changes coming to RRSP reporting

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nelsona
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Changes coming to RRSP reporting

Post by nelsona »

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nelsona
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Post by nelsona »

Issue Number: IR-2014-97

Inside This Issue


IRS Simplifies Procedures for Favorable Tax Treatment on Canadian Retirement Plans and Annual Reporting Requirements

WASHINGTON ― The Internal Revenue Service today made it easier for taxpayers who hold interests in either of two popular Canadian retirement plans to get favorable U.S. tax treatment and took additional steps to simplify procedures for U.S. taxpayers with these plans.

As part of this, the IRS provided retroactive relief to eligible taxpayers who failed to properly choose this benefit in the past. In addition, the IRS is eliminating a special annual reporting requirement that has long applied to taxpayers with these retirement plans.

Under this change, many Americans and Canadians with registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) now automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. In general, U.S. citizens and resident aliens qualify for this special treatment as long as they filed and continue to file U.S. returns for any year they held an interest in an RRSP or RRIF and include any distributions as income on their U.S. returns.

The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed.

In the past, however, taxpayers generally would get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before today’s change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process.

Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment. The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present.

The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D. Different reporting thresholds and special rules apply to each of these forms.

Further details on today’s change can be found in Revenue Procedure 2014-55, posted on IRS.gov.
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nelsona
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Post by nelsona »

Follw this space as we find out more, especailly the release of RP 14-55. The news bulletin is a little skimpy on details....
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Post by nelsona »

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nelsona
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Post by nelsona »

In a nutshell:

Income:

1. If you have never reported undistributed income (you have always deferred) you are considered to have ALWAYS been alowed to defer and that deferral continues, regardless if you never submitted form 8891 or not.

2. If you HAVE repported indistributed internal income (ie. you chose not to defer) youi cannot change, without permission. You must continue to report income every year.

3. The reporting of income from distributions is now done directly on 1040, as 8891 is now obsolete.
HOWEVER:
In the example provided by IRS, there are two (in my mind) conflicting statements: Section 6 states that distributions"must be included in gross income by the beneficiary or annuitant in the manner provided under section 72..." This has always meant that some portion of the RRSP distribution is considered non-taxable (ie. the "investment" in the account, which was different for US citizens and non-citizens).

The the example Section 7, a US citizen with an RRSP since 2004 (prior to IRS permitting deduction of RRSP contributions):"When Taxpayer receives distributions from the RRSP, the entire amount of each distribution will be subject to U.S. Federal income tax". This has never been the case previously, if the taxpayer had undeducted contributions. That is why 8891 had a gross and net income line (7a/7b), as does 1040 (16a/16b).

I don't know if this is simply a misunderstanding of the word "subject" to tax as simply being reported or meaning it is all taxable.

Reporting:

1. Neither trust reporting or year-end value is required. So Form 8891 is now obsolete and 3520/3520-A no longer required.

2. Foreign account reporting (FinCen) remains unchanged.
HOWEVER:
3. Foreign asset reporting (Form 8938) is unclear at the moment. While the RRSP continues to be a specified foreign asset, these were "Excepted" because of being reported on 8891. because 8891 and 3520 are no longer needed, will this mean that one must provide more details for the assets in these accounts? We may have to see a revision of Form 8938 (which will at ayt a minimum remove 8891 checkbox.
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nelsona
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Post by nelsona »

So, a big win for thsoe who had never filed 8891 in the past. No more choice as to deferral or not (you've already made your choice one way or the other).

But in terms of 8938 and actual tax, some questions.
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DesertBound
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Post by DesertBound »

Just in case anyone is in my position, i.e., 2013 was first year of residency in the US AND have filed for an extension to submit tax return by October 15, 2014:

"This revenue procedure obsoletes Form 8891 as of December 31, 2014. Beneficiaries who have a valid extension in effect under section 6081 for taxable year 2013 and who have not filed a U.S. income tax return for taxable year 2013 by the date this revenue procedure is published in the Internal Revenue Bulletin may wish to attach Form 8891 to such return in order to satisfy the requirements of Treas. Reg. § 1.6038D
-
7T(a)(1). See section 2.08 above. Even though such beneficiaries are not required to file Form 8891 pursuant to the relief set forth in section 5.01, they may do so in order to report on Form 8938 that they have filed Form 8891 with respect to an RRSP or RRIF.
nelsona
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Post by nelsona »

Yes,as i explained, by having form 8891 filed one could omit details of one's RRSPs on form 8938. That is still available for 2013 (and 2012 if needed).

However it does not mean one doesn't include RRSps in their foreign asset report, and this leaves opne what happens in 2014.

For that we will need to await the 2014 rev of 8938.
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MGeorge
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Post by MGeorge »

Thank you for posting this - very interesting.
If the entire amount of the distribution will be taxable, I wonder if this means that any contributions will be deductable as if they were IRA contributions. That would be good.
DesertBound
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Post by DesertBound »

Yes, thanks from me, too, for posting. An interesting development, for sure. If nothing else, it should reduce the amounts of paperwork!
nelsona
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Post by nelsona »

Well, RRSP contributions made through employers have been deductible for 5-6 years now, but private RRSP contribs have never been, so I would not put too much stock in this example.

Frankly, RRSP deductibility on 1040 is not very useful , since US taxpayers resident in Canada are not taxed in US anyways.

As far as I'm concerned, since nothing has changed in the treaty, deductibility remains the same (company, yes; private, no), and since nothing has changed in section 72, taxability has not changed either. I'm just concerned that the Rev Proc example (as opposed to the body) was poorly worded.
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eeyore
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Post by eeyore »

"US taxpayers resident in Canada are not taxed in US anyways."

Could you please elaborate?
victoriaguy
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Post by victoriaguy »

One problematic development with respect to this revenue procedure is that to be eligible, you had to have made "any" tax filing in "each" year. This opens a big question about the streamlined foreign offshore procedures meant to help delinquent taxpayers get into compliance.

Until now the procedures were designed to allow late elections to defer taxation on undistributed income in RRSP's. Without those procedures, late electors are left with an anything but certain application process for late deferral that currently costs US$6900 (last year it cost US$10,000).

I contacted the streamlined procedures hotline to find out if this would override the streamlined proceudres, or vice versa, or whether the two procedures would be coordinated somehow, as I am in the process of helping several people prepare applications under those procedures. It's quite a glaring oversight for the IRS to publish 14-55 with absolutely no reference to the streamlined procedures.

Their response to me was that "they had no guidance at this time". That they would be updating their instructions web page in due course.
taxeve
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Post by taxeve »

RRSPs: Prior to 2014 I always completed form 8891 declaring the interest received on RRSPs. There were no distributions. I did not elect to defer; always simply checked 'No' on line 6a of form 8891. Then I included all the interest from the RRSPs on Schedule B and line 8a of the 1040. It was very small interest amount and had almost no impact on my total income.

Now, without the 8891, I will continue to declare the tiny interest on Schedule B and include the interest on line 8a of the 1040. Still no distributions. I still do not wish to defer interest payments although I understand that will be the default with the new rules.

The value of, and interest from, the RRSPs and other foreign assets are well below the filing threshold for Form 8938 so no need to file that one. So, where else do I declare the existence of my RRSPs, having already identified them and then listed the interest on Schedule B?

Would appreciate any guidance on this. Thanks.
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