The United States taxes not just individuals living in the
United States, but also U.S. citizens and residents living abroad.
It is possible to be a resident of the United States, even if you
live in Canada, for instance, by holding a 'green
There are many Americans (living in the U.S., Canada and third
countries) who hold individual Canadian retirement accounts. These
accounts come in a range of flavours. The ones addressed here
Registered Retirement Savings Plan (RRSP)
Registered Retirement Income Fund (RRIF)
Locked-in Retirement Account (LIRA)
Life Income Fund (LIF)
Locked-in Retirement Income Fund (LRIF)
There is some uncertainty as to whether a 'group' RRSP
would fall into this category. This is a very technical question
that is not addressed in this blog.
A Tax-Free Savings Account (TFSA) doesn't fall into this
category. For the treatment of a TFSA, see my article in Wolters Kluwer Tax Topics #2146, April 25,
This article does not address pension plans or other group
The old rules ('current taxation')
The default U.S. tax treatment of these plans is that they are
'grantor trusts'. This means the contributor has the
ability to obtain back the money he or she put in. This is clearly
the case for a regular plan; it's a little more complicated for
a spousal plan, but the result is the same.
With a grantor trust, the plan is seen merely as an account like
any other. This means income and gains earned inside the plan are
taxable to the individual as they are earned.
There are two problems with this, in relation to taxation and
1. For Canadian purposes, the income earned inside the plan is
tax-deferred until it is withdrawn. The U.S. timing doesn't
match, meaning that it is possible that the U.S. foreign tax credit
mechanism won't work – it's easy to get double
2. The default reporting of these plans (forms 3520 and 3520-A) is a
lot of work and complicated.
The old fix ('deferral election')
To deal with this problem, it has been possible to elect under the
Canada-U.S. tax treaty to defer the U.S. recognition of the income
earned inside the plan until withdrawal. Since 2004, individuals
have been able to file form 8891 to make the election, which is
much less work than the 3520/A (these forms are not required
The negative here is that it has historically been necessary to
make the election, which means filing the forms. Many people
don't think to do this, but if they did think about it, they
believed that simply doing nothing yielded the same result.
Deferral is the new default
The IRS is essentially reversing the default treatment. In
general, an individual will be considered to have made the treaty
election for deferral, unless they opt out. You no longer need to
file form 8891.
Not everyone falls into this category. Basically, it's open to
anyone who hasn't already filed a U.S. return utilizing the
non-treaty approach (the 'old default', above). So to be
eligible for the new treatment, a U.S. person must have:
Not reported undistributed earnings on any of those returns;
Reported previous distributions (if there were any) as though
he or she had made the treaty election.
One really great thing about this new approach is that it
applies retroactively. If you meet the criteria above, you have the
"deferral" treatment back to the first date it would have
applied (the later date between when you made the contribution and
the date you became a U.S. person).
Once you are using the 'deferral' approach, in order to
move to the 'current taxation' approach, you have to ask
the IRS for permission. If you don't meet the eligibility
requirements above (basically, you've reported the plan income
on a contemporaneous basis), you're stuck with that approach
unless you get permission to change from the IRS.
No need to file form 8891
Regardless of whether you use the 'current' or
'deferral' approach, the requirement to file form 8891 is
revoked for tax year 2013 and future years (and forms 3520/A are
also not required).
Because contributions are non-deductible for U.S. purposes, it
is important to track them. The U.S.-taxable amount of withdrawals
will be different than the Canadian amount.
Foreign financial account and asset reporting
Individuals who have to report foreign (non-U.S.) financial
accounts and assets (see
my blog here) still have to do that. The above changes
don't affect this requirement. Where one does not file form
8891 the balance in the plan must be reported on form 8938
(assuming the total assets are above the filing threshold).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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