US Taxation of RRSP form 8891 - TDF 90-22.1 - Expert Income Tax help on cross Border tax and immigration and divorce and RRSP

I  will be speaking about this on Fred Snyder's Show on CFUN
Radio in Vancouver at 2 PM April 19, 2003.  call 604 280-CFUN
with your questions.

On April 15th, I read Jonathon Chevreau's column and thought that
it "had to be wrong".  I phoned him and told him so after about
three hours of research and ONLY after talking to THREE different
people -(the first one passed the buck - and the second one
answered and then had a more senior buck call me back) - at the
US office of Voluntary Compliance in Philadelphia.   I was
reassured.  Not only did they not know anything about it but they
could not find the NOTICE 2003-25 quoted in the article. In fact,
they were extremely annoyed with my taking up their time on April
15th and were only slightly mollified when I sent them a copy of
the Article.

I started thinking that the American Chamber of Commerce and
Jonathon Chevreau had been caught in an April FOOLS joke
However, your scribe continued and can now tell you that it was
"NOT" an April fool's joke and that every US resident or US
Citizen with a Canadian RRSP has a whole new set of rules to deal
with.
Here is the article which I have copied from:
http://www.Canada.com/search/story.aspx?id=36dff6b8-b741-470a-88a
a-f6085b536727
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      Jonathan Chevreau
      Financial Post
Tuesday, April 15, 2003
An estimated 100,000 Americans holding Canadian RRSPs are being
asked to submit to onerous new paperwork requirements, along with
stiff fines for those who fail to comply.
While today is the tax-filing deadline for Americans, the
deadline to comply with the new compliance regime has been
extended to Aug. 15, according to The American Chamber of
Commerce in Canada (Amcham).
Last Friday, the U.S. Internal Revenue Service (IRS) issued
Notice 2003-25, which Amcham treasurer Jim Yager describes as a
"departure" from previous procedures.
U.S.-Canadian tax experts familiar with the new forms are "quite
upset at the unbelievable paper burden and complexity," says KPMG
national tax partner Paul Hickey.
The complex six-page form 3520 has to be filled out by any U.S.
citizens receiving distributions from Canadian RRSPs, a form
which also requires additional attachments. While the form itself
may be easily obtained over the Internet, filling it out will
require the cooperation of financial institutions. Mr. Yager
isn't sure all financial institutions will be willing to
accommodate. Failure to file results in a penalty of 5% of the
assets held in the trust.
While reporting transactions on foreign trusts like RRSPs were
required in the past, "they weren't really interested in
receiving the forms," Mr. Yager said in an interview.
Instructions for the 2001 and 2002 tax years didn't require the
forms to be filed as long as an exemption was claimed under the
Canada-U.S. tax treaty.
Mr. Yager, who is also a partner with KPMG's U.S./Canada tax
practice, provides an example in a bulletin issued by Amcham. It
involves a U.S citizen who contributed $10,000 to an RRSP on Jan.
1, 2002, and who experienced no growth because of poor financial
markets.
Even so, if he withdraws the same $10,000 on Dec. 31, 2006 --
essentially a return of capital -- the taxpayer is hit with two
35% penalties for failing to file form 3520 both on the
contribution and on the "distribution" plus a 5% annual penalty
for failing to file form 3520A, plus U.S. income tax on the
distribution, plus interest charges.
The total cost of U.S. taxes and penalties on the original
$10,000 RRSP contribution hits $13,917, even though no income was
earned.
The notice indicates penalties will not be enforced for tax years
before 2002.
While Mr. Yager estimates there are also 100,000 Canadians saving
in U.S. 401K plans or IRAs, Canada tax law does not require
comparable reporting of those plans.
[email protected]
© Copyright 2003 National Post

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I tried to contact Jim Yager but his executive assistant,
Barbara Wolek was kind enough to send me what they had received.
It was dated April 11, 2003.  I have scanned the PDF file and
converted it to  Word and am putting it in here so that everyone
has an original source document.
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April 11, 2003
ADVANCE COPY OF INTERNAL REVENUE BULLETIN ITEM
Attached is an advance copy of Notice 2003-25, describing
Canadian Retirement Plan Trust Report.
It will appear in Internal Revenue Bulletin 2003-18, dated May
5,2003.
You may release this notice immediately.
Communications Division
Part III - Administrative, Procedural, and Miscellaneous
Canadian Retirement Plan Trust Reporting
Notice 2003-25
Internal Revenue Code section 6048 requires information reporting
with respect to certain foreign trusts. Persons subject to these
information reporting rules must file Form 3520 (Annual Return to
Report Transactions with Foreign Trusts and Receipt of Certain
Foreign Gifts) or Form 3520-A (Annual Information Return of
Foreign Trust with a U.S. Owner), as applicable.
Form 3520 is generally filed on an annual basis on or before the
due date for the U.S. owner's or U.S. beneficiary's income tax
return. A person may obtain an extension of time to file Form
3520 by obtaining an extension of time to file the applicable
income tax return. Form 3520-A is generally due by the fifteenth
day of the third month after the end of the trust's tax year. A
person may seek an extension of time to file Form 3520-A by
filing Form 2758 (Application for Extension of time to File
Certain Excise, Income, Information, and Other Returns). Specific
penalties under Internal Revenue Code section 6677 apply if a
Form 3520 or Form 3520-A is not timely filed or if the required
information is incomplete or incorrect.
Treasury and the Internal Revenue Service have become aware that
many taxpayers with interests in Canadian registered retirement
savings plans (RRSPs), as well as the custodians of such plans,
are unfamiliar with the requirements for filing Forms 3520 and
3520-A. Under the circumstances, the IRS has determined that it
will enforce neither filing requirements, nor penalties under
section 6677, for Forms 3520 and 3520-A with respect to such
plans for tax years before 2002, and will grant additional time
to file these forms for 2002. Any person who is required to file
a 2002 Form 3520 or Form 3520-A with respect to an RRSP or other
eligible plan within the meaning of section 3 of Revenue
Procedure 2002-23,2002-1 C.B. 744, is granted an automatic
extension of time to file until August 15, 2003. If a person
obtains an extension of time to file a Form 3520 or Form 3520-A
for a date later than August 15, 2003, then such later extension
date applies- Penalties for failure to file will not apply to a
person who files by the relevant extension date.
In addition, if the beneficiary of an eligible plan has made an
election in accordance with section 4 of Rev. Proc. 2002-23 and
the beneficiary complies with the annual reporting requirements
of Rev. Proc. 2002-23, the plan is relieved of any obligation to
file Form 3520-A for any year for which such requirements are
met.
Treasury and the IRS are interested in establishing for future
taxable years a simplified reporting regime for RRSPs and persons
with interests in RRSPs. In addition to streamlining the
reporting requirements, Treasury and the IRS are considering
coordinating them with the election described in Rev. Proc.
2002-23. Treasury and the IRS also will consider whether there
are other pension plans similar to RRSPs for which similar
simplified reporting is appropriate.
The principal author of this notice is Amanda A. Ehrlich of the
Office of Associate Chief Counsel (International). For further
information regarding this notice contact Amanda A. Ehrlich or
Willard W. Yates on (202) 622-3880 (not a toll-free call).
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WHAT HAPPENED NEXT?
 I then phoned (202) 622-3880 and after talking to a couple of
people, managed to get through to Amanda Ehrlich and Willard
Yates and (with both their knowledge) talked to both of them and
some others who were unfortunate enough to have answered the
phone..
I found out two things:      
ONE:    The new rule is correct and will be enforced.
                                         
TWO:    They are still not positive exactly "WHAT" has to be done.

For instance, I was given the clear impression by one person that
the 3520 did not have to be filled in if you were just buying an
RRSP.  Another one contradicted that statement and was of the
opinion that a 3520 form "would" have to be filed if a person put
any money into an RRSP even though the actual instructions for
form 3520 would seem to exempt that transaction.
It seems to me that Notice 2003-25 was released prematurely.
Although this Advanced copy  It states that it will be included
in an Internal Revenue Bulletin 2003-18 to be released on May 5,
2003 and it might be that by that time there is more consensus
about what needs to be done.
The "instructions" for form 3520 clearly state that the form does
"NOT"  need to be filed if the transaction is a transfer to a
CANADIAN REGISTERED RETIREMENT SAVINGS PLAN.
There is also a form 3520-A which is suppose to be filed to
calculate the internal earnings of the RRSP / RRIF / RPP.  Yes,
one person I talked to was adamant that when filing the 3520, I
should write RRSP / RRIF / RPP across the top of the form.  I was
really concerned about that statement because that means   that
it would apply to a RRIF AND a Company Pension.
Neither of those were considered in Jonathon Chevreau's article.
WHAT AM I DOING AND RECOMMENDING TO OUR CLIENTS?
I am telling everyone to hold tough until May when we will get a
chance to find out just where this is going.  The Instructions
for the form state that it takes 42 hours for record keeping, 4
hours to learn about the form, 6 hours and 28 minutes to prepare
the form and just 16 minutes to mail it to the IRS.
They have clearly extended the deadline to August 15th, 2003.  We
are going to track down every US / Canadian client for the last
five years to warn them about the rules.
The we will have two or three local seminars and then we will try
and computerize to get rid of a 6 hour preparation time.
However, although one US lawyer in Canada has already volunteered
to be a guinea pig (by just putting his name on the form and the
amount of his contribution down and mail it in) I so not want to
expose average US to the punitive penalties involved.

There is more but this gives you an idea of what happened
 

QUESTION:
I am a dual citizen who lives and works in Canada. Can I deduct RRSP =
contributions in Canada from my income reported on the US tax returns? =
If so, how do I show that?
=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=
=3D=3D=3D=3D=3D=3D=3D=3D
david ingram replies:
You cannot deduct a Canadian RRSP contribution on your US tax return.
Not only that, there are major reporting requirements for a US citizen =
(anywhere) or a Canadian with an RRSP living in the US.
I would be glad to look after the reporting for you if you need help.
 =20
The following National Post article is of extreme importance to any US =
resident or US Citizen with a Canadian RRSP, RRIF or RPP that they have =
contributed to.
http://www.nationalpost.com/search/site/story.asp?id=3DA5F6348F-EDA6-493A=
-A822
Because some people do not like opening files, I have pasted and copied =
it at the end as well..
Jonathon Chevreau has done a yeoman's job in searching down and tracking =
a variety of opinions on the new reporting rules.
I did a quick search of our computer data base and came up with 14 =
people who had withdrawn money from an RRSP - I think but have not =
verified that 8 of them are US citizens and will require a 3520 by =
August 15th or a further extension date.
I have another 212 who have an amount on line 115 - and at least half of =
them are US citizens.  My understanding is that any US citizen taking =
money out of a RRIF or a Canadian Company pension which he or she =
contributed to, must file a form 3520 as well. However, if they took =
money out of a Company pension plan that they did NOT contribute to, the =
US person does NOT need to file a 3520.
At any rate every US person conform to REV.PROC 2002-23,  This means =
that (for each RRIF, RRSP, RPP) we must provide:
Section 4    Election Procedures
.01    In General
(i).    A Statement that the taxpayer is claiming the benefit of Article =
XVIII(7) of the US / Canada Income Tax Convention
(ii)    The name of the trustee of  the plan and the account number
(iii)   The balance of the plan at the beginning of the current year.
.02   Reporting
Beneficiaries shall attach a copy of the statement required in 4.01 =
until the tax year in which a final distribution is made.
.03    ROLLOVERS
If a rollover is made to a plan that does not attract Canadian Income =
Tax, and qualifies under Revenue Ruling 89-95, the previous election is =
deemed to carry over to the transferee plan.
.04    Transferee Plan Reporting
In the year of transfer, the beneficiary shall attach an additional =
statement
(i).    A Statement that the taxpayer is claiming the benefit of Article =
XVIII(7) of the US / Canada Income Tax Convention
(ii)    The name of the trustee of  the transferee plan and the account =
number
(iii)   The name of the trustee of  the transferor plan and the account =
number
(iv)   The total amount of income accrued in the transferer plan on =
which United States Income tax was deferred under Article XVIII(7) or =
former Article XXIX(5); and
(v)    The initial balance in the transferee plan.
Beneficiaries of a transferor plan shall attach a copy of the statement =
required in paragraph 4.02 (transferor plan)  and a copy of the =
statement required in this paragraph 4.04 (transferee plan) to their =
timely filed (including extensions) United States federal income tax =
return for each year subsequent to the transfer year until the tax year =
in which a final distribution is made from the transferee plan.
.05    MULTIPLE PLANS
An individual who is a beneficiary of more than one eligible plan must =
make a separate election and file a separate statement for each eligible =
plan.
.06    Extension of time for Making an Elections
An extension of time for making an election under paragraph 4.01 may be =
available under the procedures applicable under sections 301.9100-1 and =
301.9100-3 of the Procedure and Administration regulations.
.07    PROSPECTIVE CHANGE OF ELECTION
An election once made cannot be revoked except with the consent of the =
Commissioner.
SECTION 5. DISTRIBUTIONS FROM AN ELIGIBLE PLAN
Distributions received by a beneficiary from an eligible plan shall be =
included in gross income by the beneficiary in the manner provided under =
section 72 of the Internal Revenue Code, subject to any other applicable =
provision of the Convention.
(The above is excerpted from Revenue Procedure 2002-23).
To our clients - START GETTING THE INFORMATION ASKED FOR ABOVE READY.  =
WE NEED TO GET IT IN BY Aug 15, 2003.
david ingram
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Jonathon Chevreau's National Post Article follows with four varying =
interpretations of what is going on.
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      Uncle Sam discovers RRSPs
      New IRS reporting rules part of broader crackdown
             =20
            Jonathan Chevreau  =20
            Financial Post=20
      Saturday, May 03, 2003
                =20
                =20
            =20
          =20
      Just before the April 15 tax filing deadline for American =
citizens, the Internal Revenue Service dropped a bomb which scared or =
confused the 100,000 Americans believed to hold Canadian Registered =
Retirement Savings Plans.
      These include expatriate Canadians living in the United States, =
and U.S. citizens and green-card holders living in Canada.
      On April 11, when 90% of Americans would already have filed this =
year's taxes, the IRS issued Notice 2003-25, requiring U.S. citizens =
receiving withdrawals from Canadian RRSPs to fill out a complex six-page =
form called the 3520 [Annual Return to Report Transactions with Foreign =
Trusts and Receipts of Certain Foreign Gifts.]
      The new rules are being applied retroactively to this year's =
returns, although the deadline was extended to August 15.
      If the U.S. citizen or resident files certain simplified forms and =
elects deferral of taxation through the Canada/U.S. income tax treaty, =
they won't have to file form 3520 for contributions or form 3520-A for =
ownership of an RRSP.
      Failure to file these simplified forms can result in penalties of =
35% of all contributions to RRSPs and 5% of the balance in the RRSP,
      Form 3520 must also be filed for any withdrawals from RRSPs, which =
includes draw downs for Home Buyers Plans, Lifelong Learning Plans and =
rollovers to Registered Retirement Income Funds, but not rollovers =
between RRSPs.
      David Ingram, a Vancouver consultant with almost 2,000 clients =
affected by the new red tape, describes the changes as "a secondary U.S. =
Treasury backlash" to Canada's lack of military support for the Iraq =
invasion. The U.S. consulate and IRS deny this interpretation.
      When the Post revealed the IRS changes in mid-April, Ingram was so =
flabbergasted at the onerous requirements he thought it was an April =
Fool's joke. His subsequent investigation revealed it was no joke, =
although he found few U.S. tax officials aware of the changes.
      The 1980 tax treaty and a 1996 amendment clearly exempted Canadian =
RRSPs from U.S. taxation, he says. But after 9/11, the U.S. Treasury =
started looking more seriously at money laundering, he says.
      The 2001 instructions for form 3520 removed the withdrawal =
exemption for RRSPs, but left the deposit exemption in place. "With =
Canada's failure to support the U.S. in Iraq, a natural next step would =
be to remove the last exemption of deposits. The people at Treasury =
suddenly felt Canada is not trustworthy."
      Until April 11, Canada was considered the friendliest nation. "If =
you were an American in Australia, France or Germany, with a foreign =
pension plan, you always had to file 3530. Now Canada has to be treated =
like the rest of the world."
      Ingram found the new rules also apply to Registered Pension Plans =
and RRIFs. He says the IRS author of 2003-25 advised clients to write =
RRSP, RPP or RRIF across the top of form 3520, which is required for =
each RRSP, RPP or RRIF held, regardless of value.
      The law is unclear on reporting requirements on RPPs and pension =
plans, says Jim Yager, partner with KPMG's U.S./Canada tax practice. He =
believes an exemption for these distributions may yet be granted but "if =
not, the scope for reporting will be huge since it will not be directed =
at just Canadian plan distributions."
      Yager says the reporting requirements for RRSPs are part of a =
broader crackdown by the IRS against offshore tax havens. As treasurer =
of the American Chamber of Commerce in Canada, Yager says he first =
noticed a change in the IRS's position with the filing instructions for =
form 3520 in the 2001 tax year. That conflicted with the 2000 =
instructions, which exempt transfers in or out of RRSPs.
      One U.S. citizen who has lived in Canada 20 years and files U.S. =
returns says he's baffled by the IRS's position, which he describes as =
"nonsensical, counter-productive, wasteful and pointless."
      "The requirement is a lose-lose proposition for the U.S. =
government." IRS costs will rise but little extra revenue will be raised =
by its efforts in Canada.
      "Chronic non-filers get one more reason to stay underground. U.S. =
tax filers can't use RRSPs for tax evasion because Canadian government =
strictly controls the flow of money and its reporting."
      The IRS has long had a problem getting Americans resident in =
Canada and green card holders to file tax returns. "This requirement =
simply creates another disincentive."
      Thanks to the foreign exemption on earned income and the foreign =
tax credit, few Americans and green card holders in Canada owe U.S. tax, =
so the exercise is a wasteful paper chase.
      The previous reporting procedure at least provided the IRS and tax =
filers with a paper trail; retirees making withdrawals faced no U.S. tax =
on capital coming out since the U.S. granted no deduction for =
contributions going in.
      Cross-border tax specialist David Lesperance of Burlington, =
Ont.-based Global Relocate Consultants says the new rules reflect =
renewed "IRS avarice." The American consulate has a similar view: "It's =
just the IRS trying to get every nickel and dime out of everyone."
      Lesperance says large financial institutions known as "qualified =
intermediaries" play a greater role alerting the IRS to American =
citizens in Canada with U.S. tax filing obligations. "With the Patriot =
Act, qualified intermediaries and increased co-operation between the =
U.S. and Canada, it's like shooting fish in a barrel to collect in =
Canada."
      One qualified intermediary who didn't want to be named says =
financial institutions are still assessing their obligations and =
potential liabilities. "It's unclear at this point what [Canadian] =
financial institutions will have to do .... [We] may have to make an =
interpretation of tax law in some way."
      Kevyn Nightingale, an accountant with Toronto-based International =
Tax Services Group, says those scared by the new rules need to "calm =
down."
      In an article published by CCH Reports entitled "IRS says Boo, =
Scared Yet?", Nightingale says the problems can be avoided by giving the =
IRS some basic information and a declaration the taxpayer elects to =
defer U.S. taxation on income earned inside plans but not distributed in =
the year.
      Why then the panic? "The IRS determined that many people who have =
RRSPs are not reporting," says Nightingale. "For people already =
reporting, there's nothing to fear and nothing extra to do. For those =
not reporting, it's not hard to hop on board."
      They have till Aug. 15 to do so.
      [email protected]


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and a couple of more things you might want to look up for the historical record.

-The following explains the method of presenting a proposal for changes to IRS procedures.  Perhaps we can reverse REV.PROC 2003-23's demands for forms 3520 and 3520-A to be filed for Canadian RRSP, RPP and RRIF accounts.
If you wish to add your voice to the submission I will be making, please email (and snailmail your signed original) your opinions, concerns, doubts and possible solutions to me. My mailing address is at the bottom.   Please note that I need everything by May 10th or so.
Please also note that there will be another pro America Rally this next Saturday, April 24th at 11 AM at the Seaforth Park at the south end of the Burrard Street Bridge.  Bring your American, Canadian, Australian, Mexican, Great Britain and other flags and any home made signs you may desire.  This is NOT a pro war rally.  It is a solidarity rally to get things moving again and let the US population know that Canadians are friends even if some of our federal politicians do not seem to get it.  I also recommend Fazil Mihlar's column on page A6 of the April 21, 2003 Vancouver Sun.  This column "Free trade is a friend of the Environment" gives some very interesting statistics.  
For those who want to know more about the new reporting for Americans or American residents with Canadian RRSP, RPP or RRIF accounts, read Jonathon Chevreau's column on FP12 in the National Post on April 15th, or email for a copy of my newsletter on the subject if you killed it.
 
david ingram
IR-2003-52
REVISED INDUSTRY ISSUE RESOLUTION PROGRAM PROCEDURES PUBLISHED; NEXT
SELECTIONS MADE FROM REQUESTS RECEIVED BY MAY 15, 2003
WASHINGTON - The Internal Revenue Service has published revised
procedures for the Industry Issue Resolution (IIR) Program. Under the
revised procedures, business taxpayers, industry associations and other
interested parties can submit frequently disputed or burdensome business
tax issues at any time for possible resolution under the program.
In past years, issues have been submitted by industry associations and
others representing both small and large business taxpayers. These
submissions have resulted in tax guidance that has affected thousands of
taxpayers. Recent guidance issued under the IIR Program includes standard
rates for meals provided by family day care providers and an inventory
valuation method for re-buildable motor vehicle cores.
Requests received will be reviewed semi-annually, generally after
March 31 and August 31 of each year, for inclusion in the program.
However, to allow time for initial IIR submissions, the March 31 review
date has been changed to May 15, 2003, for this year. All requests
received by May 15, 2003, will be considered for IIR project selections
that are expected to be included in the 2003-2004 Treasury and IRS
Guidance Priority List.
For each issue selected for the program, IIR team consisting of IRS and
Treasury personnel will meet with taxpayers or other interested parties
affected by the issue. The goal is to recommend guidance which will
resolve the tax issue. This benefits both taxpayers and IRS by saving time
and expense that would otherwise be expended on resolving the issue
through examinations.
For information on the IIR Program and how to submit issues for
consideration, see Revenue Procedure 2003-36 at www.irs.gov.
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