The evolution of U.S. reporting requirements for Canadian retirement accounts.

• Author: Whittall, Rob

This item explains the evolution of the IRS reporting requirements for Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs).

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An RRSP is a retirement savings plan that a taxpayer establishes, the Canada Revenue Agency registers, and the taxpayer and his or her spouse or common law partner contribute to. Under Canadian tax law, the contributions to the RRSP are deductible on a Canadian tax return and thus reduce Canadian tax liability. Under Canadian tax law, any income earned in the RRSP is usually exempt from tax as long as the funds remain in the plan; a taxpayer generally has to pay Canadian tax when he or she receives payments from the plan (see Income Tax Act, R.S.C. 1985, ch. 1 (5th supp.), Section 146(1)).

An RRIF is an arrangement between a taxpayer and a carrier (an insurance company, trust company, or bank) that Revenue Canada registers. The taxpayer transfers property to the carrier from an RRSP, for example, and the carrier makes payments to the taxpayer. The minimum amount must be paid to the taxpayer in the year following the year the RRIF is entered into. Earnings in an RRIF are tax-free, and amounts paid out of an RRIF are taxable upon receipt (see Income Tax Act, R.S.C. 1985, ch. 1 (5th supp.), Section 146.3(1)).

U.S. Tax Treatment of RRSPs and RRIFs

RRSPs and RRIFs are not treated as pension plans under U.S. tax laws. Rev. Proc. 89-45 states:

Canadian [RRSPs] are provided certain income tax benefits for Canadian tax purposes; however, these plans do not meet the requirements for qualification as individual retirement accounts under section 408(a).... As a result, the earnings of such a plan are includable currently in the gross income of the beneficiary of the plan for United States income tax purposes. Thus, there could be a mismatch of the recognition of income for U.S. and Canadian income tax purposes, i.e., the possibility of double-taxation. However, there is an election provision in the United States-Canada tax treaty to mitigate this issue, which is discussed below.

RRSPs and RRIFs for U.S. Reporting Purposes

For U.S. tax purposes, RRSPs and RRIFs are foreign grantor trusts, as the contributor can obtain all the money back that he or she contributed. This means that absent an exception, a U.S. taxpayer with one would be required to file a Form 3520-A, Annual Information Return ofForeign Trust With a U.S. Owner, and Form 3520, Annual Return to...