David,
I am US citizen, married to Canadian. We lived in Montreal for 2.5 years and I have returned to US this year. I have an RRSP (15k), but would like to cash it out. I am having trouble finding out what the US will tax me for when I do this.
Do you have any advice or could point me in the right direction would be wonderful!
Merci,
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david ingram replies:
While you were in Montreal and preparing your US tax returns, you should have been filling out US form 8891 and attaching it to your US 1040 each year you had the RRSP.
If done properly, the 8891 shows how much of the RRSP will be taxable on the US return when you cash it in.
It may, in fact, be nothing with the recent losses in the stock market.
As well as the 8891, you should have been filing US forms TDF 90-22.1. these two forms are indicated on the bottom of US schedule B on questions 7 and 8. Although not clear on Schedule B, the 8891 is a substitute for the 3520 mentioned in Question 8.
failure to file these forms can result in significant US fines from $10,000 to $500,000 plus 5 years in jail, 35% of the money in the RRSP, etc, etc.
When you cash the RRSP in as a non-resident, the Canadian financial institution must withhold 25% as tax. when you decide how much of the RRSP is taxable, 25% of that amount an be used as a foreign tax credit on US form 1116.
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QUESTION:
RRSP Redemption and taxes
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david ingram replies:
I have no idea what the question is but this is likely the answer
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My wife (57) and I (61), now living in Michigan, both have small RRSPs from our years of working in Canada. Previously I was told that I could do nothing with the money, not move it to an RRIF or even move it within the family of the Investment Company. Now I'm told I may be able to withdraw it in increments of less than 5k for a 10% withholding. If this is possible what are benefits/drawbacks of withdrawing now vs. waiting till retirement? Also, I'm unsure about reporting requirements; I've only just heard about form 8891.
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david ingram replies;
Dealing with a Canadian RRSP has become much easier over the years.
You have been dealing with people who are inexperienced in dealing with non-residents of Canada who live in the USA.
The minimum/maximum tax for you to pay on the withdrawal is 25%. If you roll it into a RRIF, the withholding is 15% under Article XVIII of the US Income Tax treaty.
You should have been filling out form 8891 or its equivalent under 89-45 since 1989. Thankfully, the IRS and treasury have not been enforcing the onerous penalties associated with non-reporting (35% of the principal PLUS 5% per year of non-reporting for the 8891 or equivalent and up to $500,000 PLUS up to 5 years in jail for failure to file form T DF 90-22.1 .
See this older answer
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This is not the result of a question but is the result of an IRS Tele-conference on June 20, 2007.
The subject was the reporting of foreign bank on form T D F 90-22.1.
In particular, the tele-conference made the point that June 30th "IS" the deadline and that fines are being increased and in particular, there are / will be severe penalties for non-compliance.
It would seem that there is NOW a $10,000 penalty for failure to file the form although that is in the regulations and not on the form.
I know from other sources that some 1,000 clients of former advisor Jerome Schneider are in the process of being fined as I write this.
I also admit that I have not worried much about the June 30th filing date in the past.
However, the teleconference made the point that practitioners are subject to fine for not following up on these filings.
As I write this Terry or Phyllis ?? is making it very clear that RRSP accounts must be reported but that the Company Pension does not have to be reported.
So--- if you have not being reporting your foreign accounts - report now.
AND, they also made the point that everyone with foreign accounts MUST file schedule B, even if there is no earnings form the accounts.
AND, they also made the closing remark that if they have NOT been filed in the past, taxpayers should file back SIX years.
.
david ingram
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QUESTION:
We have watched the Cdn$ rise against the US$ and now wonder what the impact is if we cash in the RRSP's and bring the cash back to the USA. It seems that the exchange rate would offset the tax impacts 9presuming of course that the exchange rate is temporarily high).
Logically there is Cdn penalty withholding and then the cash would be taxed at non resident rates. Can we cash in smaller amounts to get reduced rates?
In the US what would happen?
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david ingram replies:
I am one of the people that thinks the Canadian Dollar will be worth $1.20 US. However, I have been wrong before and will be wrong again. However, you might want to hedge your bets and just transfer 50% and be happy you did not do it three years ago.
A non-resident of Canada owes the Canadian government 25% withholding tax when he or she withdraws an RRSP as a non-resident.
The principal part of the RRSP is not taxable in the US.
The total withdrawal (including the tax deducted) goes on line 15a and the taxable portion goes on line 15b on put zero on 15b and put the actual growth on schedules B and D if you know what the interest, dividends and capital gains portions of the increase are. The increase in exchange will go on Schedule D for instance.
The taxable portion is the increase in value since the day you crossed the border to the US and will be the part you have been reporting and exempting every year on form 8891 and the previous reporting you did under 89-45 and 2003-57, etc., etc.
Any tax paid to Canada will be deductible as a foreign tax credit on US form 1116 on a pro-rata basis.
You have also, of course been reporting the existence of the RRSP on form TDF 90-22.1 - the hint about these two forms are the two questions at the bottom of schedule B. The 8891 is a new simpler form for the last three years and takes the place of the draconian 3520 mentioned in the bottom question.
This older Q & A will help you I hope.
I am a Canadian citizen and legal US resident. I've lived in Florida for 25 years and now, at 65, I'm considering taking distributions from a spousal RRSP with Royal Bank.
Unfortunately, income tax information I've received from different sources is terribly conflicting and, at worst, indicates that my nest egg will be gobbled up by governments. Is this something you can steer me straight on?
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david ingram replies:
If you roll the RRSP into an RRIF (Registered retirement investment Fund), The payer will have to deduct 15% non resident withholding tax under the terms of Article XVIII of the US . Canada Income Tax Convention (Treaty).
You will then report it again on form 8891 of your 1040 and there may or may not be US tax to pay. If your income is high enough that you are in a federal 28% tax rate, there 'will' be tax to pay on the RRIF.
You will claim the 15% tax paid to Canada on US form 1116.
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Now, you have been supposed to report the existence of that account to the Department of the Treasury in Detroit on form TDF 90-22.1 since 1989 when that law was passed and shown in bulletin 89-45. Failure to report can be a penalty of a minimum of $10,000 to a maximum of $500,000 PLUS up to 5 years in jail for each year you did not report it. See the bottom question on schedule B of your 1040 where your foreign trust requires the preparing and filing of a 3520.
Thankfully, you do NOT have to do a 3520. the 8891 takes it place and is much easier.
The penalty for not also reporting the RRSP and its internal earnings to the IRS (it was the Dept of Treasury above) is 35% of the principal plus 5% for each year it was not reported since 1989 when the reporting rules started. The form 8891 is an exemption for paying the tax on those internal earnings.
See form 8891 at: http://www.irs.gov/pub/irs-pdf/f8891.pdf
RELIEF
Although I know of over 1,000 people who have paid $10,000 fines for not filing form TDF 90-22.1, I (at this time) do not know personally of a single individual who has been fined under the 8891 / 3520 rules. I also have NEVER seen a person fined for filing the TDF 90-22.1 forms late and voluntarily.
In my opinion, you should file the TDF 90-22.1 forms retroactively for six years.to the Department of the Treasury.
See Form TDF 90-22.1 at http://www.irs.gov/pub/irs-pdf/f90221.pdf Note the penalty of up to $500,000 plus five years in jail for failure to file. The minimum fine is now $10,000.
You should file retroactive 8891 forms with a 1040X to the IRS for the same years. Note that you are the BENEFICIARY so follow the Beneficiary rules. The 8891 form is actually only 3 years old. Before that, you just wrote out the information on a free form page but it is a convenient form to use retroactively.
Hope this helps and we would be glad to assist if needed.
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SUGGESTED PRICE GUIDELINES - Aug 5, 2008
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This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.
$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
$1,200 would be the same with one rental
$1,300 would be the same with one business no rental
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits no move in or out
$1,700 would be for two people with income from two countries
$3,000 would be all of the above and you moved in and out of the country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
A Business for $400 - Rental and business likely $550 to $700
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales) are likely $50.00 for the first and $20.00 each after that.
Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable. In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years. We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund.
Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files. As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files. It can take us a valuable hour or more to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance.
This is a guideline not etched in stone. If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.
--IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.--
-Disclaimer: This question has been answered without detailed information or consultation and is to be regarded only as general comment. Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation in connection with personal or business affairs such as at www.centa.com or www.garygauvin.com. If you forward this message, this disclaimer must be included." -
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