We continue to have numerous inquiries about the US tax liabilities of RDSP beneficiaries and holders. We posted on this question back in August. Our advice remains substantially the same – consult a cross border tax specialist. We would add, do so with some caution as we have heard stories of people racking up huge expenses trying to deal with this issue.
The issue also needs to be dealt with on the public policy side. Cross border taxes are dealt with by the Convention between Canada and the United States of America with Respect to Taxes on Income and on Capital. Article XXVIII deals with pensions and subsection 3 mentions “disability plan” but Registered Disability Savings Plans are not dealt with explicitly.
If there is an understanding between the two states that an RDSP is a pension plan and that income, which would be exempt from tax in one state will be exempt from tax in the other state, then the Government of Canada should communicate this broadly and explicitly.
If this understanding does not exist, then Canada needs to add this to the agenda next time the Convention is reviewed. US citizens, who are Canadian residents and often Canadian citizens, need to know that income earned in RDSPs, which is exempt from taxation in Canada by way of being held in a Registered Disability Savings Plan, is also exempt from taxation in the United States.
(I’m literally on my way out the door — Peace on Earth, Happy Holidays, Merry Christmas to all.)
Is there any legal or cross-border person who can analyze and relay information on how US citizens in Canada who are holders of RDSPs for their US ctizen in Canada family member should comply with IRS rules based on the following?
http://gswlaw.com/irsblog/2010/08/25/us-tax-compliance-foreign-grantor-trusts-foreign-gifts/
Summary U.S. Tax Compliance Foreign Grantor Trusts (Foreign Gifts)
When a U.S. person receives a foreign gift (WOULD THIS BE A CANADIAN BOND OR GRANT?), or establishes a foreign grantor trust (IS THE RDSP A FOREIGN GRANTOR TRUST?), the following U.S. tax compliance is required:
1. Form 56 (upon trust formation)
2. Form SS-4 (for trust formation)
3. Form 3520 (on both trust formation within 90 days of the reportable event, or annually upon receipt of foreign gifts)
4. Form 3520-A (annually)
5. Form 709 (Gift Tax Returns) for transfer of Assets to fund a Foreign Trust
A copy of both Form 3520 and 3520-A is to be attached to the U.S. person’s tax return, with separate copies filed with the IRS in Ogden, Utah.
“The U.S. Grantor of a Foreign Trust (as a responsible party) must notify the IRS of a reportable event: i.e., the creation of a foreign trust by a U.S. person, the transfer of money to a foreign trust by a U.S. person (including a transfer by reason of death), the death of a U.S. citizen or resident (if the decedent was treated as the owner of any portion of a foreign trust under the grantor trust rules or if any portion of the trust estate was included in the gross estate of the decedent).
The notice of “reportable event” is due on or before the 90th day after the reportable event and is satisfied by the Responsible Party filing Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts).
Responsible parties include: the grantor of an inter vivos trust, the transferor in a reportable event (other than by death), and the executor of a decedent’s estate.
U.S. beneficiaries of foreign trusts are subject to IRS reporting requirements, if they receive a distribution from the trust. IRS reporting includes: the name of the trust, the aggregate amount of the distributions received from the trust during the trust year (satisfied by filing Form 3520 with the IRS).”
PENALTIES (for not understanding how the RDSP is defined) ARE DISCUSSED IN THE ABOVE LINK.
I cannot answer your specific question, calgary, but I just found out that a TFSA is considered a foreign trust and requires the filing of Form 3520 or 3520-A!
http://www.starkmarsh.com/files/usresident_tax.pdf
Also this might be relevant to RDSP though it is not specifically mentioned:
http://www.moodystax.com/blog/33-us-taxation-services/159-act-now-to-fix-the-us-income-tax-problem-with-your-rrsp-that-you-probably-didnt-know-you-had.html
Warning: it’s written by a tax firm so it’s full of the usual “you’re going to die in pauper’s prison and your kids will be sold into slavery unless you hire a professional (like us) to make it all better”.
Thanks, foxyladyhawk.
Since the Registered Disability Savings Plan (RDSP) was modelled after the Registered Education Savings Plan (RESP), I THINK, but DON’T KNOW, the RDSP would require the filing of Form 3520 or 3520-A and perhaps the ones quoted for formation of a trust???
The RRSP and RRIF are dealt with in the US / Canada Tax Treaty, saying the account holder must make an annual election, using IRS Form 8891, to elect tax-deferred treatment of the RRSP or RRIF. That Tax Treaty does not, yet, address the RESP, the RDSP or the TFSA, thereby negating benefit to Canadians who are also “US persons”.
And, we do need clarification to be able to further avoid IRS penalties, going forward, or for not properly reporting these in the past three years.
Bloody insane!!
I suppose you could either call the IRS and ask about it, or file your returns including dealing with the RDSP the same way as RRSPs, and attach a note saying that you couldn’t find any information about how to handle an RDSP so you made the assumption it was the same, and that if it would substantially affect your return or “the interests of the US government”, would they please advise you on the matter. (;>P
That way you’ve shown a good faith effort, and you have reported it, and now the ball’s in their court.
Any question I’ve asked the IRS they state is too complex and ask me to consult with a tax accountant or lawyer.
So, I like your suggestion of filing with my interpretation and saying that if it would substantially affect my return or their interests, please advise on the matter!!
Did they talk about our good faith efforts in their latest missive to us?
@calgary411;
This doesn’t help with the practical details that you asked about… but,
Was noticing that the US ADA Americans with Disability Act site notes the US Federal agencies designated to investigate complaints filed against US State and local gov. programs. I was wondering who then was responsible for investigating when Congress and the IRS discriminates against US citizen/’persons’ ‘abroad’ AND their US citizen/’person’ guardians by requiring FBARs and FATCA reporting on their accounts and assets, but won’t recognize their Canadian RDSPs (registered disability savings plans) as tax and reporting exempt. http://rdspresource.ca/index.php/2011/11/treatment-of-rdsps-by-the-us-internal-revenue-service/ http://rdspresource.ca/index.php/2011/12/update-for-us-citizens-in-canada/
from: http://www.ada.gov/investag.htm
U.S. Department of Justice
Civil Rights Division
Disability Rights Section
“ADA DESIGNATED INVESTIGATIVE AGENCIES
December 2006
Nine Federal agencies are designated to investigate disability-related discrimination complaints filed against State and local government programs under Title I or Title II of the Americans with Disabilities Act (ADA). Each agency is responsible for investigating complaints involving the topics described. In addition, under Section 504 of the Rehabilitation Act, these agencies investigate complaints involving the programs they fund.
“Other Government Functions, including Law Enforcement. Complaints about programs, services, or activities related to law enforcement or public safety; administration of justice, including courts and correctional institutions; commerce and industry, including general economic development, BANKING, finance, consumer protection, insurance, and small business; State and local government support services (e.g., audit, personnel, comptroller, administrative services); and all other government functions not assigned to other designated agencies should be directed to:
U.S. Department of Justice
Civil Rights Division
950 Pennslyvania Avenue, N.W.
Disability Rights Section, NYAV
Washington, D.C. 20530
http://www.usdoj.gov/crt/ada/enforce.htm#anchor218282
http://www.ada.gov/infoline.htm
They can’t deal with the specifics of the IRS filings, but I wonder if they would entertain a complaint re the barriers/discrimination against disabled US citizens ‘abroad’ with ‘foreign’ accounts, since the FBAR and FATCA reporting are not required of US residents?
@Brock — I couldn’t find too much specific regarding specific discrimination to these individuals in Canada in the ‘Americans with Disability Act’. But I did glean the following portion, which talks about discrimination ‘economically’.
The Congress finds that
(1) physical or mental disabilities in no way diminish a person’s right to fully participate in all aspects of society, yet many people with physical or mental disabilities have been precluded from doing so because of discrimination; others who have a record of a disability or are regarded as having a disability also have been subjected to discrimination;
(2) historically, society has tended to isolate and segregate individuals with disabilities, and, despite some improvements, such forms of discrimination against individuals with disabilities continue to be a serious and pervasive social problem;
(3) discrimination against individuals with disabilities persists in such critical areas as employment, housing, public accommodations, education, transportation, communication, recreation, institutionalization, health services, voting, and access to public services;
THESE INDIVIDUALS HAVE (SOMETIMES) EMPLOYMENT, HOUSING, PUBLIC ACCOMMODATION, EDUCATION, TRANSPORTATION, COMMUNICATION, RECREATION, HEALTH SERVICES!!!!!, VOTING, ACCESS TO PUBLIC SERVICES IN CANADA — THAT IT WOULD BE DIFFICULT TO PROVIDE FOR THEM IN THE US (WITHOUT THEIR FAMILIES WHO ARE ALSO IN CANADA).
(4) unlike individuals who have experienced discrimination on the basis of race, color, sex, national origin, religion, or age, individuals who have experienced discrimination on the basis of disability have often had no legal recourse to redress such discrimination;
(5) individuals with disabilities continually encounter various forms of discrimination, including outright intentional exclusion, the discriminatory effects of architectural, transportation, and communication barriers, overprotective rules and policies, failure to make modifications to existing facilities and practices, exclusionary qualification standards and criteria, segregation, and relegation to lesser services, programs, activities, benefits, jobs, or other opportunities;
(6) census data, national polls, and other studies have documented that people with disabilities, as a group, occupy an inferior status in our society, and are severely disadvantaged socially, vocationally, economically, and educationally;
THESE INDIVIDUALS ARE DISCRIMINATED AGAINST ECONOMICALLY; I.E. THEIR CANADIAN BENEFITS ARE DIMINISHED IF THEIR PARENTS / GUARDIANS / TRUSTEES ARE NOT ALLOWED TO MAKE THE DECISION FOR THEIR BEST INTERESTS TO RENOUNCE THEIR US CITIZENSHIP, WHICH BECOMES A SEVERE ECONOMIC HARDSHIP FOR THEM LIVING IN CANADA OR ANOTHER COUNTRY. IF THEY HAVE IN THEIR NAME A CANADIAN REGISTERED DISABILITY SAVINGS ACCOUNT OR A TAX-FREE SAVINGS ACCOUNT, IT DOES NOT GIVE THEM THE SAME VALUE FOR THOSE LEGAL TAX-SAVINGS PLANS AS A CANADIAN WITH A DEVELOPMENTAL OR OTHER DISABILITY COMPARED TO THE SAME CANADIAN WITHOUT AN ADDITIONAL US CITIZENSHIP AND ITS RESPONSIBILITIES.
(7) the Nation’s proper goals regarding individuals with disabilities are to assure equality of opportunity, full participation, independent living, and economic self-sufficiency for such individuals; and
THESE INDIVIDUALS CANNOT HAVE ECONOMIC SELF-SUFFICIENCY — IT IS INCOMPATIBLE WITH AN EXTRANEOUS US CITIZENSHIP.
(8) the continuing existence of unfair and unnecessary discrimination and prejudice denies people with disabilities the opportunity to compete on an equal basis and to pursue those opportunities for which our free society is justifiably famous, and costs the United States billions of dollars in unnecessary expenses resulting from dependency and nonproductivity.
THIS IS FURTHER DISCRIMINATION BY NOT LETTING THE PARENTS / GUARDIANS / TRUSTEES OF DEVELOPMENTALLY OR OTHERWISE DISABLED CANADIANS RENOUNCE US CITIZENSHIP ON THEIR BEHALF, WHICH DENIES THESE INDIVIDUALS THE OPPORTUNITY TO COMPETE ON AN EQUAL BASIS (IN THE COUNTRY WHERE THEY RESIDE AND HOLD CITIZENSHIP), THEREBY CREATING MORE DEPENDENCY AND MORE RESULTING EXPENSES. THE COST OF ADMINISTRATION OF THEIR EXTRANEOUS US CITIZENSHIP IN CANADA (OR ANY OTHER COUNTRY) CREATES LITTLE, OR IN MOST CASES $0.00, FOR THE US. IT DOES GIVE MONEY TO CROSS-BORDER ACCOUNTANTS AND US TAX LAWYERS IN CANADA (OR ANY OTHER COUNTRY) — NOTHING FOR ANY SERVICES IN THE US. WHAT ARE THE OPPORTUNITIES FOR THESE INDIVIDUALS FOR WHICH THE US IS JUSTIFIABLY FAMOUS THAT IS BETTER THAN WHAT CANADA, IN THIS CASE, PROVIDES?
I will send it on to the lawyer that I have engaged regarding whether or not I am able (and thus, others) to renounce on my son’s behalf. Thanks again!!
Thanks for this additional information, Brock!
@ calgary411, you’re very welcome. I would be in a similar position for a dependent sibling and possibly for a disabled (dementia) parent if not for the passage of time and more recency of this issue coming into full effect.
It is crazy to have passed the ADA act – (20 year anniversary in 2010) which in some ways is held up as a model for Canada, but not to include IRS and taxation issues under the area of discrimination is just wrong.
I think it is a travesty, and hope that other readers will mention this specific injustice in any correspondence with politicians and with the Taxpayers Advocate SAMS. I wish that would be of some help with the immediate situation.
@Brock — we’ll just keep plugging away. Karma or sensibility will win out one day. Thanks for all you’re doing!!!