Problems with new IRS procedures for Canadian #RRSP and #RRIF retirement plans http://t.co/6hfO2RUPGu – excellent article by @RoyBerg1
— U.S. Citizen Abroad (@USCitizenAbroad) October 23, 2014
On October 7, 2014 I posted the new IRS procedures for dealing with Canadian RRSPs and RRIFs (or more precisely the reporting requirements). I posted only the IRS announcement without commentary. As might be expected, the post attracted some interesting comments, including the following comment from Roy Berg.
The Rev. Proc. is a problematic for a multitude of reasons, including:
1. it substitutes a form for which there is no failure to file penalty (8891) for a form that contains a $10,000 failure to file penalty (8938).
Further, the $10,000 penalty is enhanced if the individual does not respond to requests for further information within 90 days per 6038D(d)(2). If the individual does not respond within 90 days there are additional penalties of $10,000 per 30 days (not to exceed $50,000).
2. It addresses only income accrual in RRSPs/RRIF/etc. and NOT deductibility of contributions to such plans.
3. Most catch-up Canadians will NOT be eligible for the simplified procedure and therefore must seek a private letter ruling to defer the tax on income generated by the account.
SECTION 4.01 defines “Eligible Individual” to include only an individual who:
(B) Has satisfied any requirement for filing a U.S. Federal income tax return for each taxable year during which the individual was a U.S. citizen or resident.
Most Canadian residents who are U.S. citizens have missed several years of filing obligations and therefore seek to come current under Streamlined Filing, which requires filing of only 3 years of returns. If an individual has been resident in Canada , say, 30 years, he would have to file 30 years of returns in order to be deemed an “Eligible Individual.”
4. Conflicting direction regarding taxability of distributions from RRSPs/etc.
SECTION 6 and SECTION 4.02 provide that accrued income on RRSPs must be reported by the individual for US tax purposes. Further, SECTION 6 provides that the accrued income must be reported consistent with §72 of the Code. In other words, only the income from RRSPs is taxable in the U.S. when it is distributed.
This result is directly contrary to SECTION 7, which provides that the entire amount of the distribution is subject to taxation in the U.S. This result makes sense IF the contribution to the RRSP is deductible for U.S. purposes but makes no sense if the contribution is not deductible.
The above tweet references a separate article by Mr. Berg on this topic. He explains this comment in more detail. The article includes:
The effect of the Revenue Procedure on other IRS voluntary disclosures programs
The Offshore Voluntary Disclosure Program (“OVDP”), Streamlined Domestic Offshore Procedures, and Streamlined Foreign Offshore Procedures provide taxpayers a clear protocol for becoming compliant with tax and filing obligations when there have been prior-period omissions. All three of these voluntary disclosure protocols afford the participant the ability to make late elections regarding RRSPs and RRIFs by following certain rules.
What is unclear, however, is the manner in which these protocols will work with Revenue Procedure 2014-55, if at all. If the Revenue Procedure supplants the procedures found in the voluntary disclosure programs, many Canadians will be left in the unenviable position of having to request a ruling in order to defer the income generated by these common Canadian retirement plans, which will add cost, complexity, and uncertainty to their participation.
Conclusion
In simple terms the new US procedures for electing US tax deferral for Canadian RRSPs and RRIFs do not live up to their billing. While the rules under Revenue Procedure 2014-55 do afford a better option for Eligible Individuals, many Canadian residents will not qualify because they have not filed any returns for one or more tax years. As such, these individuals will be left with little choice but to seek leave to file a late election pursuant the complex, expensive, and uncertain ruling procedure.
I recommend the complete article. It’s a valuable contribution to the discussion. I would also recommend rereading some of the other interesting and insightful comments to the original post of October 7.
This is a fine example of why it makes no moral or practical sense for the US to continue citizenship-based taxation. If it actually tries to be fair about it to US “persons” living outside the US, it will have to craft its tax regulations separately for each country in which such persons reside, taking into account the specific nature of that country’s own retirement plans and other savings and investment plans for which each country provides its own tax incentives. That’s an impossible job for the US Congress and the IRS to undertake and get right. CBT simply cannot be made fair to US citizens resident outside the country. The only fair and practical thing for the US to do is to change to residence-based taxation. How much longer will it take them to realize that?
Why bother making a change like this and promoting it as making things easier? Do they really think we are stupid? Exchanging a penalty free form for one with a penalty is not making anything better except for them. Why are there any special forms to avoid taxation of the RRSP? In Canada the RRSP is part of our tax treaty and the US tries to find ways to tax it anyway. They have just put all the so called amnesty programs on hold. Fairness is not in the vocabulary of the US. By the time the US realizes all the damage they have done to themselves as well as others, it will be too late.
I am reminded of an earlier time when Mr. Berg was a welcome contributor to Brock. He has a fine mind and is an astute analyst. How unfortunate the remark “hyperbolic, jingoistic rhetoric” at the FINA meeting in Ottawa on May 13 of this year. I am sure he felt he was giving the Committee the correct advice regarding the IGA because FATCA “is US law.” However, by dismissing our point of view and situation as simply being nonsense and irrelevant, he opened himself up to the torrent of criticism of being nothing more than an unwelcome “compliance condor.”
As suspected from the beginning, (though likely more from incompetence rather than intent), Streamlined is not as safe as it sounds and it is valuable to know that an “Eligible Individual” is unlikely to include a large majority of those who intend to enter it. I for one, did not read the entire Revenue Procedure and did not catch that fact. So I will thank Mr. Berg for pointing that out.
There is also another new-to-me observation that is really important; the incongruity regarding income (only) or the entire distribution being taxed when received. As most of us will likely feel none of this should be taxable, we would want this addressed in future changes to the U.S.-Canada Tax Treaty. Again, my thanks to Mr. Berg for making this understandable.
What would be the point of the US taxing its non-residents if every country in the world carved out exemptions for everything that the US currently taxes? A make work program for the IRS when they’re already stretched too far? As it is, CBT really only benefits the compliance industry, and would be a real money loser for the IRS if every US person complied. I guess Koskinen doesn’t care mych about that, just as long as they get full obedience.
@AnonAnon.
The IRS doesn’t even understand the US tax code so it isn’t surprising they don’t understand the code of other countries. To expect the bureaucracy that caused the problems to find solutions to those problems is lunacy. I almost feel sorry for the front line IRS workers because they are the ones who have to deal with this sorry mess on a daily basis.
Yes, CBT needs to be abolished, but instead we can expect Congress and the IRS to continue to pound a square peg into a round a hole in ever more complicated ways. My guess is that it will take them somewhere between a very long time and never to realize this.
The IRS is and will continue to be overwhelmed. The Dems give them more to do; the Repubs cut their funding. They can’t do the job. How likely is is that they will go after the minnows? Don’t jump into the boat in spite of Moody’s garter
From John Koskinen’s testimony to tax analysts, quoted in The Wall Street Journal
One option is to close the account before the end of the year and if you open a new account, declare that in FBAR and if they ask why you didn’t report it before, it’s because you just opened the account in 2014. As time marches on the accounts you closed are further in the background and fewer years of the account are prosecutable. This applies to persons who want to bring themselves into compliance.
Pingback: The Isaac Brock Society | What are the benefits of the coming into U.S. tax compliance through the Streamlined program?