Since it’s that wonderful time of the year again, I’m reading the Federal Register a little more closely than usual. Not that this is a chore, mind you: the official notices coming out of Washington, D.C. are quite entertaining. Some of them are even true! Last week, for example, the State Department finally got around to cancelling regulations that were 37 years out of date — they were promulgated under a law that got repealed during the Carter administration. That was worth at least a chuckle.
But today, the funny men at the IRS have gone one-up on those State Department bores, and submitted this side-splitting, thigh-slapping article:
Revenue Procedure 2002-23 provides guidance for the application by U.S. citizens and residents of the U.S.—Canada Income Tax Treaty, as amended by the 1995 protocol, in order to defer U.S. Income taxes on income accrued in certain Canadian retirement plans.
Current Actions: There are no changes being made to the revenue procedure at this time.
Type of Review: Extension of a currently approved collection.
Affected Public: Individuals or households.
Estimated Number of Respondents: 20,000.
And I’m not the first one to notice this comedy gold, either.
About Revenue Procedure 2002-23 and Form 8891
Revenue Procedure 2002-23 is the IRS’ implementation of Article XVIII(7) of the Canada–U.S. Tax Treaty. It created Form 8891, which allows U.S. Persons with RRSPs to avoid the brain damage suffered by U.S. Persons with RESPs, RDSPs, TFSAs, or any non-Canadian retirement plan.
Form 8891 does not need to be filed The election under Rev. Proc. 2002-23 does not need to be made in each tax year — only once with a timely-filed return. (For amending earlier returns, the IRS said in Private Letter Ruling 201225002 that a Form 8891 should be attached to each of the backfiled returns — but going forwards, no more 8891s need be filed the election doesn’t need to be made again, but contributions, distributions, and assets must continue to be reported.)
Also, Form 8891 is not mandatory. If you don’t want the benefits of the tax treaty, you don’t have to file! The IRS helpfully assumes that a U.S. Person who does not include this obscure piece of paperwork with their tax return is standing up and saying, “Yes, I’d like to waive the benefits of the tax treaty this year and incur current U.S. taxation on my RRSP gains!”
However, for purposes of this post, I am going to make the opposite assumption that the average RRSP holder does not want to incur current U.S. taxation on their RRSP gains every year. Of course, my assumption will tend to inflate the number of Form 8891 filers. I presume this does not do too much damage to readers’ confidence in my estimates.
How many U.S. Persons have RRSPs?
Offhand, I’m not able to find exact statistics about the number of RRSPs, but as a floor, the Financial Post says (citing Statistics Canada) that about 6 million Canadian tax filers made a contribution to an RRSP in 2012. Note that not everyone who has an RRSP makes a contribution to it in any given year; commercial surveys suggest that in total, more than half of Canadians have an RRSP.
In the 2011 Census, around 370 thousand Canadians reported American ancestry. Many more who do not identify as American at all may have clinging U.S. status. Furthermore, many RRSP holders are not Canadian tax filers in the first place — for example, some of the perhaps eight hundred thousand Canadians living in the U.S., who are also affected by this whole mess.
So it seems safe to say that there are a minimum of half a million U.S. Persons who hold RRSPs. Probably there are far more.
Is that 20,000 an annual number or a total number?
We estimate that approximately 20,000 United States citizens or residents are beneficiaries of eligible Canadian pension plans.
I can’t tell what this is supposed to mean. Perhaps the IRS really is insane enough to imagine that out of hundreds of thousands of Canadians in the U.S. and Americans in Canada, only 20,000 have RRSPs.
More likely, however, this 20,000 is based on the actual number of Form 8891s which the IRS receives each year. Government departments seem to make these estimates based on past filings rather than honest attempts to figure out how many people should be filing. This is what we’ve seen previously with FinCEN’s Paperwork Reduction Act filings on FBAR — they assume that they’re getting nearly 100% compliance, because to assume otherwise is to admit that they have utterly failed at their job of educating taxpapers about all this useless paperwork they insist on creating.
How many people should be filing Form 8891?
Given the above facts about Form 8891, the filer population making an election for the first time should consist of three categories of people:
(i) RRSP holders who newly acquire U.S. Person status
(ii) U.S. Persons who open a new RRSP
(iii) People who held both U.S. Person status & an RRSP for a long time but just found out about Form 8891
Statistics Canada states that in 2006, 52,500 non-U.S.-born people moved from Canada to the U.S., while 23,600 non-Canadian-born people moved from the U.S. to Canada. Going with the estimate that half of the former group have RRSPs and half of the latter group set one up, and assuming that migration rates remain roughly the same in 2013 , that should mean that in categories (i) and (ii) above there are around 40,000 people per year (rounding to one significant figure) who should file Form 8891.
That leaves category (iii). Earlier I stated an (extremely conservative) total estimate of half a million U.S. Persons with RRSPs. What proportion have ever made a Form 8891 election? And of those who haven’t, how many each year have their “OMG moment” and realise they should file one?
As mentioned in the last section, the “20,000″ which the IRS puts in their Paperwork Reduction Act filings probably means they’ve been getting 20,000 Form 8891s per year after they created the thing in 2002. By simple subtraction, that means that at least a quarter of a million U.S. Persons with RRSPs have not filed Form 8891. (Probably more, since some people who filed Form 8891 in previous years either lose the RRSP or their U.S. Person status, and are replaced by new migrants who don’t know anything about Form 8891.) Every year, some proportion of them have their “OMG Moment”, and then go ahead and file it. How many? I don’t know. If it’s 16% (which seems low in this era of FATCA and threatening letters from banks), that should result in another 40,000 per year.
So my back-of-the-envelope estimate for how many people should file Form 8891 to make the deferral election each year: 80,000.
Obviously this is highly dependent on the parameters (e.g. what proportion of migrants between Canada & the U.S. have an RRSP, how large is the stock of non-filers, how many of them come into compliance each year, etc.). But to get to the IRS’ much lower estimate of 20,000, you would have to make rather unreasonable assumptions: for example, that only an eighth of people moving between Canada & the U.S. have or establish RRSPs, and that only 4% of existing non-filers newly come into compliance each year.
Now, does anyone else want to take a crack at the estimated number of people making QEF elections for their PFICs? The IRS also claimed today that this number should be only 275,000 people per year, and that it will take them only 25 minutes each to do so. I think I’d better go read something less funny than the Federal Register before I hurt myself with all this laughter.