For Americans with Canadian Retirement Plans, a very welcome change has come! The IRS has announced changes at the end of last year that will make it easier for those who hold interests in either of two popular Canadian retirement plans (RRSPs and RRIFs) to get favorable tax treatment when filing US taxes and simplified procedures for US taxpayers with these plans.
What has changed?
In a nutshell, Americans and Canadians with registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) automatically qualify for a tax deferral until the earned income is distributed. This deferral is much like how US individual retirement accounts (IRAs) and 401(k) plans are treated in the US–you are only taxed on the income generated once it’s distributed.
Who qualifies for this?
In general, US citizens and resident aliens qualify for this special tax treatment. But they must have filed US tax returns and continue to file for any year they held an interest in an RRSP or RRIF. In addition, any distributions received must be reported as income on their US tax returns. If you haven’t been filing US tax returns, you can get caught up on your tax filings through the IRS’ Streamlined Filing Procedures. You’ll file the last 3 years’ tax returns and last 6 years’ FBAR (Foreign Bank Account Report), and then moving forward, you must continue filing and reporting your distributions as income.
Do I need to file anything?
In the past, US expats in Canada were able to invoke the US-Canada tax treaty provision that enables US citizens and resident aliens to defer tax on income in these Canadian Retirement Accounts until the income was distributed. This required the filing of Form 8891, which reports the earnings, contributions, distributions and the fair market value of the RRSP and RRIF. You no longer need to file this form, as it is not necessary to invoke the treaty. The deferral is now automatic. Even if you are getting caught up on past returns, you will not need to file Form 8891 for those older returns.
What if I didn’t invoke the treaty in the past?
Many US taxpayers failed to use the US-Canada tax treaty to defer the tax on their RRSP or RRIF. For these individuals, you have the opportunity to amend your returns and retroactively take advantage of the change to US tax policy. This could be a huge relief to those who reported large amounts of income from these retirement plans and didn’t know to use Form 8891 to defer the tax.
Does this mean I don’t have to report my foreign bank accounts?
No! This change in tax treatment of Canadian Retirement Plans has no impact at all on your possible FBAR or FATCA reporting requirements. If your foreign bank accounts have a balance of $10,000 or more at any point during the tax year, FBAR Form 114 must be filed through the BSA e-filing system. FATCA Form 8938 must be filed if the value of certain specified foreign assets exceed the thresholds (which vary based on filing status and residency). (Learn more about the FATCA filing thresholds here.)
Need more information about your Canadian Retirement Accounts or filing US taxes?
Trust our experts to walk you through the process of filing US taxes step-by-step. Gain the peace of mind you deserve by knowing our accountants work with expats 100% of the time and know the ins and outs of filing US taxes! Get started today!