Wednesday, October 8, 2014

IRS Grants Automatic Treaty Relief for Canadian RRSPs and RRIFs (10/8/14)

The IRS has adopted a revenue procedure to provide relief for U.S. taxpayers with certain Canadian retirement plans (RRSPs and RRIFs).  Previously, provided an election under the U.S. Canada double tax treaty was made, those plans were exempt from current taxation for contributions and internal build-up, provided that the taxpayer made an election, with taxation deferred until distribution (much like U.S. IRAs).  The IRS was liberal in granting relief for late elections.  The relief is now automatic in most cases without an election provided that the taxpayer has otherwise complied with the U.S. filing requirements.

The press release is IR-2014-97 (10/7/14), here.  Key excerpts (virtually all) of the notice summarizing the new revenue procedure are:
The Internal Revenue Service today made it easier for taxpayers who hold interests in either of two popular Canadian retirement plans to get favorable U.S. tax treatment and took additional steps to simplify procedures for U.S. taxpayers with these plans. 
As part of this, the IRS provided retroactive relief to eligible taxpayers who failed to properly choose this benefit in the past. In addition, the IRS is eliminating a special annual reporting requirement that has long applied to taxpayers with these retirement plans. 
Under this change, many Americans and Canadians with registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) now automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans. In general, U.S. citizens and resident aliens qualify for this special treatment as long as they filed and continue to file U.S. returns for any year they held an interest in an RRSP or RRIF and include any distributions as income on their U.S. returns. 
The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed. 
In the past, however, taxpayers generally would get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do. Before today's change, a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process. 
Many taxpayers also failed to comply with another requirement; namely that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made. This requirement applied regardless of whether they chose the special tax treatment. The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present. 
The revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D. Different reporting thresholds and special rules apply to each of these forms.
Rev. Proc. 2014-55 is here.


  1. Hey Jack,

    Here are some of the problems I see with the Rev Proc:

    1. The Rev. Proc. substitutes a form for which there is no failure to file penalty (form 8891) for a form that contains a $10,000 failure to file penalty (form 8938).

    Currently a beneficial interest in a Canadian RRSPs is reportable only on the form 8891. There was no penalty for failing to file the form 8891. Starting in 2012, and pursuant to 6038D interests in RRSPs were required to be reported on the form 8938 UNLESS the form 8891 was filed.

    Further, the $10,000 penalty is enhanced if the individual does not respond to requests for further information within 90 days per 6038D(d)(2). If the individual does not respond within 90 days there are additional penalties of $10,000 per 30 days (not to exceed $50,000).

    2.The Rev. Proc. addresses only income accrual
    in RRSPs and NOT deductibility of contributions to such plans.

    In SECTION 4.01 the Rev. Proc. makes clear that it addresses
    only the income accrual of RRSPs (Article XVIII:7 of the Treaty) and not the
    deductibility of such contributions for US purposes (Article XVIII:8). This is
    important because contributions to an RRSP are only deductible if made to a
    group RRSP and not an individual RRSP. This is important in the incongruous
    conclusion regarding distributions from RRSPs. See 4, below.

  2. Well, Nina.....Not only a whole new industry for risk, but a even more monstrous industry for FATCA compliance, the newest complex to survive on the government teat. And all for a pittance in return. Even Steven Miller is now saying this.....

    JURY OUT ON FATCA? A former acting IRS commissioner who helped oversee the rollout of the anti-tax evasion law said he’s unsure whether it will be worth the hassle it brings, our Rachael Bade reports. “We’ll see,” said Steven Miller of the Foreign Account Tax Compliance Act. “I can’t even say with conviction that I am sure that looking strictly on a cost-benefit basis, FATCA benefits will outweigh the cost,” he said, ticking off compliance challenges for banks, from lost customers to installing new IT systems. .......

    But of course, we know FATCA was born from ideological conviction and fever, and without regard to cost benefit analysis. That is why it was enacted by stealth. Couldn't stand on its own in the bright light of hard analysis.

  3. Nina Olson does in fact know what FATCA is about. She tells us clearly with her simple question "Why are we tormenting them in this way?"

    FATCA is not about taxes. It is about "tormenting" and punishing honest people for having the audacity to live outside the U.S. and for becoming loyal citizens of other countries.

    The U.S. used to punish people for becoming citizens of other countries by stripping them of U.S, citizenship. Now the U.S. punishes and torments by trying to force U.S. citizenship on them so they can stalk them and torment them for money, information and control for life. They even torment those whom they insisted decades ago were permanently and irrevocably relinquishing U.S. citizenship.

  4. Thanks, Roy. I learn from your comments and hope readers do as well.

    Jack Townsend

  5. Another thing - the Rev. Proc. says that if the individual has
    previously reported the income, they are not an eligible individual for
    purposes of the deferral election and must "seek the consent of the
    Commissioner" to make a deferral election. Individuals who previously
    decided that it was just as easy to report the income earned inside the
    RRSP, perhaps because no tax was arising anyway and the amounts were
    small and easily determined, now find that they are denied the benefits
    of a treaty election (presumably, absent the significant cost of
    obtaining a Private Letter Ruling). Yet there was no way to anticipate
    this at the time they began to report the income - previously, the
    deferral election was irrevocable, but a choice not to elect did not
    affect the ability to elect in future. In effect, they are being
    treated as if when they chose to report the income they were intending
    to make an irrevocable election never to claim the treaty deferral
    election, when in fact they had no idea at the time that this was the
    case. Why couldn't the Rev. Proc. have only applied this to income
    reported in returns filed after 2014, so at least everyone has a chance
    of knowing the rules of the game going in?

    Allan McBurney

  6. Here's real alife experience with FATCA. Banks want to avoid costs and risks, so the way many comply with FATCA is 1)refuse accounts to US citizens; that way there's nothing to report and 2) in the rare cases where forced to provide accoutns to US persons (resident not just in the country where the bank is located but in its province or canton) provide the minimum required (plain vanilla account for depositing paycjheck and paying bills; no interest, no stocks, no multual funds.) As a US rsident with relatives in Europe and a need for an account there I found only one bank which would accept me in one European country. Accept me, not welcome me.

  7. IRS Warns financial institutions of scams to steal FATCA data:


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