If you’ve never heard of RRSPs and RESPs, then you may not be one of the many expats in Canada. For Americans who do live in Canada, find out whether or not these investment accounts carry a hefty tax burden, and how to determine if they are the right choice for your financial situation. Our guide to RRSPs and RESPs for expats can save you both time and money.
Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan is a retirement savings and investment account for employees and self-employed people in Canada. RRSPs are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets rules governing annual contribution limits and contribution timing. The RRSP has two main advantages on the Canadian tax front. First, contributors may deduct contributions against their income. Second, growth of RRSP investments is tax sheltered.
The US-Canada Income Tax Convention provides that a beneficiary of a Canadian RRSP may elect to defer US income taxation for income accrued in the plan but not distributed until a distribution is made from the plan. Previously, the election to defer income from an RRSP was made on Form 8891. But, in 2014, The IRS issued a procedure that provides that eligible US citizens and residents with interests in certain Canadian retirement plans will be treated as automatically making the treaty election to defer US income tax on income accruing in their Canadian retirement plans until a distribution is made. Great news: this procedure made reporting the RRSP on Form 8891 obsolete!
Eligible individuals will be treated as having made the election in the first year in which they would have been entitled to make the election under the treaty—i.e., retroactive relief. The guidance also removes a previous annual reporting requirement concerning interests held in the identified Canadian retirement plans. However, the revenue procedure does not affect any other reporting obligations that a beneficiary or annuitant of a Canadian retirement plan may have, including the requirement to file a Form 8938 (FATCA), and FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Failure to disclose the account on FBAR and Form 8938 can result in significant penalties.
Note that there may not be similar deferral treatment for state income tax purposes as states are not parties to the Canada-US treaty. Some states may implicitly follow the treaty when treating Federal US AGI as income for state purposes, but each state’s law should be reviewed to determine if an addback or inclusion of RRSP earnings is required for state purposes.
Registered Education Savings Plan (RESP)
The Registered Education Savings Plan is an investment account in Canada geared towards saving for children’s education. The child’s parent or guardian makes contributions to the RESP. The Canadian government matches 20% on the first $2,500 contributed annually to an RESP, to a maximum of $500 per child per year. The contributions to an RESP are not deductible for expats in Canada for income tax purposes. The RESP allows investments inside the account to grow tax-free, meaning no annual reporting of income accrued in this account in the parent’s Canadian income tax return.
However, this is not the case for US expats in Canada. Unlike the RRSP, US law and the Canada-US treaty do not provide tax-preferred status for RESP accounts. Therefore, the US tax treatment of a Canadian RESP is complex for individuals who have made past or current contributions to such accounts and who are taxed as citizens or residents of the US. All income earned annually on the funds in an RESP is taxable on the contributor’s individual income tax return.
An RESP is considered a foreign grantor-type trust and thus necessitates the filing of Form 3520 or Form 3520-A. It is preferable to have a non-US person be the contributor (i.e., non-US spouse or grandparent) to avoid income inclusions and foreign reporting requirements. The deadline for Form 3520-A is March 15. An automatic extension can be obtained by filing Form 7004 by the deadline. The filing of this form extends the due date from March 15 to September 15. Form 3520 is due at the same time as a taxpayer’s return, including extensions.
If the funds in the RESP are invested in mutual funds, the contributor of the RESP must report income from the PFIC (Passive Foreign Investment Company) and file Form 8621 as if the taxpayer owned the PFIC directly.
An RESP is a foreign financial account for purposes of reporting the account on your FBAR since you would have a direct financial interest in the plan. Failure to disclose the account can result in significant penalties, as you might expect.
Sign Up for a Tax Consultation With Greenback to Determine If RRSP and RESP Accounts Will Work for You
Should expats in Canada utilize one of these accounts? It depends on whether or not the benefits outweigh the US tax and filing requirements that RRSPs and RESPs will trigger. Sign up for a consultation with our experts, so that you can make the most financially sound decision.