US Taxation of Canadian RRSP (with Common Examples)

US Taxation & Reporting of Canadian RRSP : FBAR & FATCA Form 8938

US Tax of Canadian RRSP

The RRSP (Registered Retirement Savings Plan) is one of the most common types of investments that Canadians can make toward their retirement. It is important to note that, unlike a TFSA, the RRSP receives preferred treatment in the United States from a tax and reporting perspective.  For example, while the RRSP is reportable on the FBAR and Form 8938, it is typically not required to be disclosed on the more comprehensive international reporting forms 3520 and 3520-A. In addition, even if the RRSP contains mutual funds and ETFs, the taxpayer can typically avoid having to file a Form 8621 under the exception for investments that are in a treaty country. And, while in years past Taxpayers were required to make an annual election on form 8891 to avoid annual tax on the growth, that is no longer required at the federal level — although some states do tax RRSP income.  Let’s review some of the more common RRSP tax and reporting situations:

*For all examples, please note that the Taxpayers are U.S. persons for tax purposes who have not made any treaty elections to be treated as a Non-Resident Alien (NRA). Also, these examples are for illustrative purposes only and Taxpayers should consult with a Board-Certified Tax Law Specialist if they have specific questions about their reporting requirements and not rely on this article for legal advice.

First, What is an RRSP?

An RRSP is a type of retirement savings plan that is used by Canadians to help supplement their retirement needs. As provided by the Canadian Revenue Agency:

Owned Before Becoming a US Person

Even if the taxpayer owned the RRSP before they became a U.S. person, they are still required to report the existence of the plan on the various international information reporting forms. In other words, there is no exemption for accounts that were held before the taxpayer became a US person for tax purposes:

• • • Example: Frank is a Canadian Citizen and U.S. Lawful Permanent Resident (LPR). Before becoming an LPR he had several investments in Canada, including RRSPs. Even though he owned the RRSPs before he became a U.S. Person, he is still required to report the information on his U.S. Tax Return and FBAR.

    • Example: Fred is a Canadian Citizen who is in the U.S. on a B1/B2 tourist visa. All his income is earned in Canada, but he qualifies as a U.S. Person for tax purposes under the Substantial Presence Test. Fred must report his foreign income (unless he qualifies for an exception to substantial presence) and report his RRSP.

FBAR and Form 8938

The RRSP is considered a type of foreign financial account that is reported on the FBAR. The RRSP is also reportable on Form 8938 in accordance with FATCA:

• • • Example: Cliff is a U.S. Person who does not have any income from any sources, so he is not required to file a U.S. tax return. He does have an RRSP in Canada worth $650,000. Cliff is required to file the FBAR to report the RRSP – even if it does not distribute income and even if he is not required to file a tax return.

    • Example: Charlie is a U.S. Person with no bank accounts in Canada aside from his RRSP investment, which has $800,000 in it. Even though Charlie does not have any bank accounts, the RRSP is still reportable on the FBAR (and Form 8938).

      • As provided by the IRS:

        • • “Example: Canadian Registered Retirement Savings Plan (RRSP), Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro) and Mexican Administradoras de Fondos para el Retiro (AFORE) are foreign financial accounts reportable on the FBAR.”

Is Form 8621 Required for RRSP?

While taxpayers who maintain foreign mutual funds and ETFs have to file Form 8621 to disclose the ownership of each PFIC/fund, there is a certain exception that may apply in situations in which the taxpayer owns a PFIC in a treaty country in a trust/pension type of investment such as an RRSP:

• • • Example: Scott is a U.S. Person who has an RRSP which contains several foreign mutual funds and ETFs (PFICs). Scott will file the FBAR and Form 8938 but relies on the PFIC Pension Fund Exception Under US Tax Treaty to avoid parsing out each PFIC.

    • Example: Sam is a U.S. Person who also has an RRSP which contains several foreign mutual funds and ETFs (PFICs). He prefers to err on the side of caution and parse out each PFIC, even though it may not be required.

Rev Proc 2014-55

Revenue Procedure 2014-55 exempts RRSPs and certain other types of foreign registered retirement plans from being reported on the more complex international information reporting forms such as Form 3520 — although it is still reportable for FBAR and FATCA.

• • • Example: Peter has several investments, including two RRSPs. Even though from a technical standpoint the RRSP could be considered a trust, revenue procedure 2014-55 exempts the RRSP from having to be reported on a form 3520 or 3520-A.

    • Example: Phil has multiple investments outside of the United States, including a large value RRSP. Recently, he began receiving distributions from his RSP and while these distributions are taxable in the U.S., he can take the position that he should not have to file a form 3520 (trust distributions).

RRSP Annual Growth

Taxpayers do not typically have to report growth within the RRSP as income for federal tax purposes as long as their income is not being distributed. In addition, taxpayers are no longer required to file an 8891 to make the annual RSP election:

• • • Example: Charles is a US person that has multiple RRSP’s in Canada. His investments have been doing very well and the value of the RSP has increased significantly period since Charles has not yet received any distributions, he does not have to pay tax on the growth at the federal level (some states do require taxpayers to include this growth for the state income tax purposes).

    • Example: Cliff is a US person who also has multiple RRSP accounts in Canada. Cliff decides he wants to transfer his RRSP into a TFSA because it receives certain tax deferential treatment in Canada. It is important to note that a TFSA does not receive the same tax deferred treatment as an RSP even though technically it has tax-free components under Canadian tax law.

RRSP Distributions

In general comment distributions from an RRSP are going to be taxable unless the taxpayer qualifies for an exception or an exclusion such as the closer connection exception or possibly a treaty election:

• • • Example: Greg is a U.S. citizen who is receiving distributions from his RRSP. Greg is required to report these distributions on his U.S. tax return and pay U.S. income taxes.

    • Example: Glenn is a U.S. person because he meets the substantial presence test as a H1B visa holder. Even though Glenn meets the Substantial Presence Test, he believes that he may have a closer connection with Canada and therefore may take the position that he should not be subject to U.S. tax on his worldwide income, and he may be able to exempt his RRSP from income taxes in the United States.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

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