Under the US-Canada Income Tax Treaty, U.S. taxpayers who
participate in Canadian registered retirement savings plans (RRSPs)
and registered retirement income funds (RRIFs) (the Canadian Plans)
are not required to pay tax on the annual income and investment
gains on their accounts. Tax is owed only when distributions are
received from the accounts. However, this tax deferral has not been
automatic. In order to claim this special tax treatment,
participants in Canadian Plans were required to file Form 8891
annually (providing information about contributions, income and
distributions) by attaching it to their U.S. federal income tax
The Problem: Many taxpayers who should have
filed these forms did not do so, and the requirement to provide
information about participation in the Canadian Plans applies even
if the treaty deferral is not claimed. In order to claim the tax
deferral retroactively if timely filings were not made, taxpayers
had to obtain a private letter ruling from the U.S. Internal
Revenue Service with its attendant cost. And, of course, those
individuals subject to U.S. filing requirements who weren't
filing returns at all or for particular years, perhaps on the
mistaken theory that if they owed no U.S. tax, no penalties would
apply, haven't claimed the relief.
The IRS Solution: IRS has simplified the rules
for those who filed U.S. tax returns, even if they failed to attach
Form 8891. Under the new procedures, the
deferral will be available for those who filed U.S. income tax
returns and didn't include earnings on the accounts in income,
and for those in this situation in the future. This is a welcome
development for those who try to be compliant.
The Gap: What about those who were eligible to
defer the tax on their accounts but did not file income tax returns
for every year? The new rules seem to leave them in limbo. Even
worse, they may become subject to a $10,000 penalty for not filing
a form reporting participation in Canadian plans.
Should There Be An Amnesty? The IRS has
implemented amnesties for those dual taxpayers who have not been
filing U.S. federal income tax returns. This allows non-filers to
come into compliance without onerous penalties. A similar special
one-time amnesty should be created for those not eligible for
automatic relief under this revenue procedure. Alternatively, the
IRS should issue guidance on application of the current amnesty
rules to participants in Canadian Plans.
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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