Withdrawing/Closing RRSPs while a Resident of US - REV-PROC 89-45, 2002-23, 2003-25, 2003-57, 2003-75, 8891 T D F 90-22.1 -

QUESTION:

My wife and I are permanent residents of the United States.  We moved in 1996 and still have several RRSPs in Canada.  We have been reporting the deferment of tax on the gains in the RRSP under the tax treaty since 2002
(now with Form 8891). 

In 2007 we closed a couple of small RRSPs, and the Nonresident tax of 25% was deducted at the source.   I have a couple of questions about reporting this income, and trying to avoid being double taxed:

1. Is the taxable amount of income from this withdrawal based on the value when we entered the US.  If so, can I use the number from my reporting in 2002, or do I need to use the value from 1996.  Either way do I need to include a statement proving this value, or simply hold it in my records.

2. To receive credit for the tax I paid Canada on the RRSP withdrawal, do I use form 1116 to claim a foreign tax credit. 

3. Is there any relief from the Canada US Tax treaty.  It seems that funds from pensions, which RRSPs seem to be, should ultimately be taxed at a rate of only 15%



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david ingram replies:

1.  Read the form 8891.  And remember or be aware that the same reporting rules have existed since 1989 when IRS REV-PROC 89-45 was introduced.  The part that is taxable is the amount that your RRSP increased in value since the day you immigrated to the USA. Using form 8891, the total amount of the withdrawal from the RRSP goes on line 16a and the taxable amount (the increase in value since 1996 in US dollars) goes on line 16b.  Technically, you were in serious violation from 1996 to 2002.  The official penalty for that violation was 35% of the money in the RRSP plus 5% for every year unreported.  However, to make you feel better, I have never seen that particular penalty enacted. or enforced. You do not mention filing form TDF 90-22.1 however.  That penalty of $10,000 to $500,000 I have seen 1,000 times or more including one $10,000 penalty applied to a 105 year old lady for failure to report her account at the Royal Bank of Canada in Edgement Village in North Vancouver.  See questions 7 and 8 at the bottom of schedule B for the hint about the TDF and 8891 forms.  Note that the 8891 is now the replacement for a Canadian to use instead of the 3520 mentioned.

2.   Yes - the only form you can use is form 1116 on the federal return.  For the state you would use the state's form.  California is 540'S' for instance.

Remember that if you are in California, Form 8891 or its predecessor reporting rules do NOT apply to the state.  If you are in California, annual internal earnings of your Canadian RRSP are taxable as you go but lower the taxable part in the future. 

3.   Why.  If you cash it in the tax is clearly 25% under Canadian tax law when a non-resident cashes in an RRSP.  If you roll it over into a RRIF, then the Canadian tax is only 15% but the US tax is whatever your US marginal tax bracket is.  If you are in a 28% tax bracket at that point, you would pay an extra 13% to the Feds and whatever your state tax is to the State.

You can read the 2002-23, and 2003-25, and 2003-75 bulletins at

 http://www.centa.com/CEN-TAPEDE/archive/Week-of-Mon-20050307/001707.html

2003-57 is at http://www.centa.com/CEN-TAPEDE/2003/august/foreign_general_trust.htm

and a different version of 2002-23 at  http://www.unclefed.com/Tax-Bulls/2002/rp02-23.pdf

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This was the answer to a 2003 question

QUESTION: I am a new US citizen as of '03. I moved from Canada in '93 to the US, under a visa/green card. Upon my departure I ceased any further contributions to my Cdn RRSP and opened an IRA. My RRSP has been idle since '93 with no contributions nor disbursements. It's value has dramatically dropped since my departure in '93 but there still remains a balance under $40,000. I would like to close out this account and understand I'll face a 25% Cdn withholding tax (plus the dollar conversion). Will I incur any additional taxes/implications ...AND... does the CDN withholding also dbl as a tax credit towards my US income tax return for the year I close the account?? Flagged by IRS 2003-25. Please help... ==================================== david ingram replies: Your RRSP should have been reported to the IRS REV.PROC 89-45 and to the Department of the treasury on a TDF-90 for the ten years you were in there already. You have quoted the IRS 2004-25 above so you know that there is a very real and very punitive procedure if you are caught as it were. You should amend your 2002 1040 by filing a 1040X and including the REV-PROC 2002-23 (which replaced 89-45 for 2001 and 2002) and file the TDF-90 forms associated with any Canadian accounts including the RRSP. Our policy is to look after these past matters for you for $400.00 Canadian for the first RRSP and $100 per extra RRSP. To do so, we need the Dec 31st 2001 and Dec 31st 2002 year end statements for the RRSP and the details of any other financial accounts you have in Canada. Now that 2002 is looked after, you will need to do essentially the same thing for 2003 and 2004. When you cash in the RRSP in 2004, you will pay the 25% tax to Canada and then report any internal earning on the plan (since you left Canada) to the US and calculate the tax to the US on those earnings. Remember that even if the overall value went down, there were internal dividends or interest paid during those years). To explain that, pretend you bought $10,000 worth of a mutual fund which paid you $700 in dividends. At the end of the year, the fund is only worth $9,000 but you owe tax on the $700.00 worth of dividends. You only realize (get to claim) the $loss when you sell the fund. And in the case I just used as an example, the loss would be $1,700 (not 1,000) because your input was $10,000 plus the reinvested $700 dividend and you sold it for $9,000 which is a $1,700 capital loss. You will likely have an overall loss for US tax purposes from your Canadian RRSP. -----------------------------------------------------------------