RRSP Capital Gains/Amended Returns/California

[kleonard]

Hi,

I've read many posts on this forum already around RRSPs, and have learned a lot. However, I still need some advice for my tax situation. Here are the major issues:

1. I, like many others, did not realize that RRSPs were required to be reported to FBAR (above $10K) or on form 8891. I HAD elected to defer taxes on any gains, back in 2001, but did not ever file the form 8891 when it came into existence (I assumed I was covered because of that original statement, so ignored any references to RRSP reporting in subsequent years.) I see the forum posts recommending amending past returns (6 years) and filing delinquent FBARs. This was my plan, until I read about the Rev Proc 2014-55 that obsoletes form 8891. So, should I still amend my federal returns, with the old form? If that form is obsolete and it no longer matters if or when I made the election to defer taxes on gains, is there any point in amending the returns now? I would still have an updated Schedule B, to check that I had foreign accounts, and check (on the appropriate years) when my balance was high enough to trigger FBAR reporting (it only past that threshold in 2011).

2. I took a distribution from my RRSP in 2014 and now have to report the capital gains for my federal return. I've seen many posts about how to do the calculation, and believe that my cost basis is the value on the day I became a US resident (in 2001) using the 2001 exchange rate, and not the 2014 rate. As others have noted, this is unfavorable for me, as the CDN dollar has got stronger since that time, and seems unfair as I did not actually realize any gain resulting from a change in the US/CDN dollar. However, I can obey the rules (it's only a ~$1K difference on my capital gain using the old rate compared to using constant dollars). I had tried to find this explained in any IRS documentation (form instructions, publications, Rev Proc's, etc), but did not. (Searching online for an explanation lead me to this forum.) Does anyone have a pointer to IRS documentation that shows the capital gains calculation using the corresponding years' exchange rates?

3. Both questions 1 and 2 are further complicated because I live in California, and learned that I was to report and pay tax on my RRSP interest/dividends/capital gains annually. I planned to amend the last 6 years of state returns, and pay the taxes due (in most cases, my tax is only $10/year, the worst year is $60). If I amend my returns, how do I calculate the capital gains for my 2014 distribution for California? I only have dividends all those past years (no sales that would trigger reporting of capital gains, and no interest). So, if I only report 6 years of dividends, should I include the other dividends (from 2001 to 2008) in the capital gains line for my 2014 state return? Or, just ignore those dividends and report only the 2014 dividends, and true capital gain (from my cost basis until the sale)?

Thanks in advance for the last-minute advice.

Karen.

[nelsona]

2. All calculations of "gains" are done based on US dollar at the time of cost and proceeds. This is simply known fact. Of course, RRSP income you report is not "gains", it is pension income. The book value of your RRSP in 2001 was fixed back then, so you've known that value for 14 years now. It only changes if you add to your RRSP or you take a withdrawal.

I've explained how to calculate the taxable portion of your withdrawal elsewhere.

With the new rules, you no longer have to worry about failure to file 8891, but FBAR is another issue.


3. Since you "pay as you go" in California, you only pay on the actual gsin cused by the withdrawal, if you, say, sold an investment. You treat the account like it is not sheltered. the ncome you generate in 2014 is what you report in 2014, unlike federal, which you report a portion of the growth since 2014.

[tony]

Nelsona,
I am still rather confused with "Internal income" of RRSP when residing in California.
I am clear that I don't need to pay tax on RRSP to IRS.
However, in california that treaty is not recognized. Hence, I need to pay tax on internal income even though not distributed (no withdrawal) based on this website:
http://www.palmspringstaxandtrustlawyer ... nings.html

However, it contradicts with what you say. I pay only when there is withdrawal.
Which one is correct?

[nelsona]

No it doesn't. California taxes RRSP internal income, Always has, and that has always been clearly stated here.

IRS, your federal 1040, does NOT tax RRSP until you take a withdrawal.

So, you will treat your RRSP differently for each tax return.

And I have supplied more than enough information on this

[tony]

Thanks I am clear on that now.

My equity-type of investment fund (in RRSP) doesn't alter the book cost in each quaterly report (assuming no new contribution). As some type of investment such as fixed income will have re-invest its profit such as interest. This type of fund will have different book cost every period of time.

So, does it means that if I convert all my investment into equity type of fund, it will not alter the book cost. Hence, there is no INTERNAL INCOME. Thus, I can conclude that there is no tax to be paid to California until it's gain is realized?

[nelsona]

No. Your equity book value is established ONCE on the day you arrive. That is all. Cash has a book value that is the same as market value. You will know this value and it will never change until you start collapsing your RRSP.

For California, you will pay tax each year on interest dividends, and gains from internal transactions.

Again, all explained before.

I'm afraid i'm going to have to stop answering your questions for now. Come back in the spring.