Tag Archives: 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.