The two nasty surprises for the NII are as follows:
1. No foreign tax credit for the NII.. this means the 3.8% tax will result in double taxation
2. As drafted, the NII rules will subject RRSP (and other CDN retirement plans) to the new tax:
a. Currently as income is earned in the RRSP; and
b. Upon distribution from the account.
Published on April 4, 2013 in Moodys Tax Advisors Blog:
On April 2, 2013, Roy Berg and James Gifford were in Washington DC to present the Canadian perspective on the proposed regulations under IRC 1411, the provision that implements the 3.8% tax on net investment income that was enacted as part of the US health care overhaul in 2010. The IRS had requested public comments on the proposed regulations issued on December 5, 2012. Moodys submitted a comment articulating a number of our concerns.
Two areas of greatest concern are the treatment of Canadian RRSPs and pensions and whether foreign tax credits may be used to offset the NII. Unless the proposed regulations are modified a new 3.8% tax will likely apply to US citizens resident in Canada or Canadians who are resident in the US on the following types of income:
Income generated in Canadian retirement plans (including RRSPs, DPSPs, LIRAs, TFSAs, etc.), even though this income is not taxable under the Canada-US Treaty;
Even if #1 does not apply, distributions from Canadian retirement plans will likely be subject to the tax;
Payments made to retirees under the Canada Pension Plan (“CPP”); and
Recipients of government pensions.
Further, unless there are changes to the proposed regulations, Canadian snow birds that rely on the Treaty to “tie-break” back to Canada may have their net investment income subject to this tax.