ARTICLE
29 September 2015

RRSPs, RRIFs, And The US Net Investment Income Tax

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KPK Law LLP

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KPK Law LLP is a business law firm dedicated to offering comprehensive, results-driven, and cost-effective legal services. At KPK Law LLP, we are committed to providing unparalleled legal services. Our expertise includes corporate and commercial law, corporate and business taxation, dental, medical and regulated professionals, real estate law, and wills and estates.
The United States does not recognize an RRSP or a RRIF as a qualified pension plan, and thus there is no Code deduction for a contribution to such a plan.
Canada Tax

The United States does not recognize an RRSP or a RRIF as a qualified pension plan, and thus there is no Code deduction for a contribution to such a plan. Moreover, earnings accumulated in an RRSP or a RRIF are not tax-deferred: annual RRSP and RRIF income is taxable even if it is not distributed. Article XVIII(7) of the Canada-US treaty allows a US person to seek a deferral of US income tax against accumulating earnings, but the new net investment income tax (NIIT) may apply to distributions.

From 2004 to October 6, 2014, a US person in Canada was required to attach IRS form 8891 ("U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans") to his or her return in order to qualify under the article XVIII(7) exemption from income taxation on accumulating earnings. From October 7, 2014, form 8891 is not required to be attached to form 1040, and a US person who holds an RRSP or a RRIF now automatically qualifies for an income tax deferral similar to the deferral for a participant in a US IRA or 401(k) plan. This treatment is available only to a US person who has filed and continues to file a US return for any year in which he or she held an RRSP or a RRIF interest and who included distributions as income on his or her US income tax return.

By deferring US tax until a distribution is made, a US person can claim a foreign tax credit for Canadian income tax paid against his or her US income tax. However, starting after calendar 2012, a distribution from an RRSP or a RRIF held by a US person is subject to the NIIT of 3.8 percent. The NIIT cannot be offset with a foreign tax credit for Canadian income tax paid on the distribution. Qualified pension plans are NIIT-exempt under Code section 1411(c) (5), which exempts any distribution from a qualified plan and arrangement set out in Code section 401(a). RRSPs and RRIFs are not qualified plans or arrangements for these purposes.

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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