Tax relief for Canadians living in the U.S.

October 9, 2014 | By: Robert A. Green, CPA

In the past, many Canadians living in the U.S. were surprised and dismayed to learn they owed U.S. taxes, penalties and interest on income accumulating inside their Canadian retirement plans. These U.S. residents figured their Canadian retirement plans were automatically afforded the same tax-deferral treatment as U.S. retirement plans, with income only being taxable when distributed from the plan. They were unaware they had to file an IRS election for deferral treatment.

That wasn’t the only surprise — many Canadians didn’t realize they had to report Canadian retirement plans on U.S. Treasury FBAR filings (foreign bank account reports).

We’re happy to see the IRS acknowledged the tax-deferral problem and it now provides relief. In Revenue Procedure 2014-55, the IRS repeals the need for filing a tax election, which means Canadian retirement plans automatically qualify for tax deferral. The new rules are retroactive, so it abates back taxes, interest and penalties and that spells “relief.”

This relief applies to U.S. taxpayers with Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). The IRS altered regulations governing annual reporting requirements, mostly doing away with the election requirement and there is no longer a need to file Form 8891 (U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans).

Foreign retirement accounts must still be reported on FinCEN Form 114, Report of Foreign Bank and Financial Account. (Read more on International Tax Matters in our Trader Tax Center.)

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