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US RESIDENTS AND US CITIZENS WITH CANADIAN RRSP, RRIF "OR" RRIF
ACCOUNTS - BEWARE - THOUSANDS OF DOLLARS OF PENALTIES FOR FAILURE
TO REPORT FOREIGN TRUSTS Properly.
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 a COPY OF THE 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 but that you would have to fill it in if you withdrew money
from your RRSP. Another person 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 states that it will be included in an
Internal Revenue Bulletin 2003-18 to be released on May 5, 2003
and can be released now, I think that it was too soon for
everyone answering the phone to get their ducks in order. I hope
that by May 5th, there is more consensus about what needs to be
done.
For instance, 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 RRIF's or RPP's was mentioned in the NOTICE or were
considered in the AMCHAM Press release which was the basis of
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 42.5 hours for record keeping,
4.5 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.
Then 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 do not want to
expose average US to the punitive penalties involved.
I will also be explaining this on Fred Snyder's Radio Show on
CFUN This Saturday
at 2 PM - 1410 on your AM dial in VANCOUVER.
And, as I write this, a US citizen client has just come in with
four RBC SECURITIES "in trust" documents for trusts he has set up
for his grandchildren. He needs a 3520 for each of them it would
seems. Let's see now, 4 trusts x's 6 hours, I can retire soon.
If you want to get a jump on all this,
You can download Form 3520 at:
http://www.irs.gov/pub/irs-fill/f3520.pdf
You can download the instructions for form 3520 at:
http://www.irs.gov/formspubs/page/0,,id%3D10489,00.html
You can download form 3520-A at:
http://www.irs.gov/pub/irs-fill/f3520a.pdf
You can download instructions for form 3520A at:
http://www.irs.gov/formspubs/page/0,,id%3D10490,00.html
REV.PROC 2002-23 can be found at page 744 at:
http://www.irs.gov/pub/irs-irbs/irb02-15.pdf#page=9
david ingram - [email protected]
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 913-9133 - (604) 913-9123 www.centa.com
Cell is (604) 657-8451 (10 AM to 10 PM seven days a week)
US / CANADA / MEXICO
Working Visa and Income Tax Specialists
Be ALERT, the world needs more "lerts"
david ingram - [email protected]
108-100 Park Royal South
West Vancouver, BC, CANADA, V7T 1A2
(604) 913-9133 - (604) 913-9123 www.centa.com
Cell is (604) 657-8451 (10 AM to 10 PM seven days a week)
US / CANADA / MEXICO
Working Visa and Income Tax Specialists
Be ALERT, the world needs more "lerts"
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