Canadian Investments & U.S. Taxes (IRS Canadian Investment Guide) – Golding & Golding
Canadian Investments & U.S. Taxes (IRS Canadian Investment Guide)
The United States and Canada have multiple bilateral Tax Agreements in place, which eases the pain for tax and reporting — and may eliminate certain taxes (such as tax on the growth of non-distributed RRSP and RRIF gains).
When it comes to the taxation of Canadian investments, there are multiple types of investments for U.S. taxpayers to be aware of.
For example, an RRSP may escape tax and reporting (at the federal level) but a TFSA (Tax Free Savings Account) does not escape taxability in the U.S.
And, both would need to be “reported” on an FBAR and Form 8938 (if the thresholds are met)
Common Canadian Investments
The following is a list (non-comprehensive) of common investments a person may have in Canada.
With Canada, each investment should be analyzed according to general tax law, along with the three main U.S./Canadian Tax agreements, which include:
- Bilateral Tax Treaty
- Totalization Agreement
- FATCA Agreement
RRSP (Registered Retirement Savings Plan)
This plan is recognized by the U.S. Therefore, until a person takes any distributions, they do not have to report any income on the accrued growth within the fund (States may tax the growth).
An individual taxpayer used to have to make an annual election, but that was eliminated a few years back and applied retroactively.
If a person enters the Streamlined Program (and previous OVDP), the penalty associated with the RRSP was waived.
RRIF (Registered Retirement Income Fund)
Like an RRSP, this plan is recognized by the U.S. Therefore, until a person takes any distributions, they do not have to report any income on the accrued growth within the fund (States may tax the growth).
An individual taxpayer used to have to make an annual election, but that was eliminated a few years back and applied retroactively.
If a person enters the Streamlined Program (and previous OVDP), the penalty associated with the RRIF was waived.
RESP (Registered Educational Savings Plan)
Similar to an 529A, this plan is used as a Savings Plan in Canada. It receives the same benefits as indicated above, BUT when it comes to the Streamlined Program or prior OVDP, the RESP was not specifically excluded from the penalty base – although the taxpayer can take the position that it too should be waived.
Bank and Investment Interest
Bank interest is taxable. This is the general rule, even if you have a common TD Canada investment account or similar bank account, and even if the money is not being withdrawn.
Mutual Funds
Canadian Mutual Funds (aka Foreign Mutual Funds) are very complicated. Generally, Foreign Mutual Funds are considered PFIC (Passive Foreign Investment Company). If you do not receive any distributions, the analysis may be more simplified.
But, if you did receive distributions (even if they were re-invested) there may be some significant tax analysis and reconciliations required to determine if you have any excess distributions.
Foreign mutual funds are disclosed and calculated using IRS Form 8621.
Dividends and Capital Gains
Dividends and Capital Gains are generally taxable (aside from non-distributed gains from RRSP and RRIF). Depending on the type of investment, you may be able to receive preferred qualified dividend treatment, or long-term capital gain.
Generally, the $250K/$500K primary home exclusion and depreciation rules (40 years S/L) also apply.
Professional Corporations
Many of our clients in Canada have a Professional Corporation – they are very common due to the tax deferred treatment of (usually) a large portion of income. That income is deferred into various investments, and only taxed at distribution, similar to a 401K.
With the introduction of GILTI, the IRS may no longer treat the deferred portion of the income as non-taxable – even though technically they are “retained earnings” deferred into approved Canadian Investments.
Out of Compliance?
If you are out of U,S. tax and reporting compliance, you may consider getting safely back into compliance by submitting to one of the approved IRS Offshore Disclosure programs.
Golding & Golding, A PLC
We have successfully represented clients in more than 1,000 streamlined and voluntary disclosure submissions nationwide and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.