A Surprise for US Persons With Undeclared Canadian Retirement Plans

We have a few clients who are Canadian or lived in Canada. We have two who lived in Toronto through last year before moving to Wisconsin. Nothing like that warmer weather!

Anyway…

There is a very specific tax issue if you are Canadian and emigrating to the U.S. It has to do with Canada’s version of IRAs and 401(k)s. Canada calls them Registered Retirement Savings Plans (RSSP) or Registered Retirement Income Funds (RRIF).

In Canada these accounts are tax deferred (just like IRAs and 401(k)s in the US). In the US they are not UNLESS you make certain tax elections. The IRS otherwise considers these accounts to be just another broker’s account and will tax you annually on the interest, dividends and capital gains.

Rev Proc 2002-23 states the procedures to make an election on your US tax return. You have to make a separate election for each plan. The form you use is Form 8833 Treaty Based Return Position Disclosure. You state that you are claiming the benefit of Article XVIII(7) of the US-Canada Income Tax Convention. You’ll have to include the name of the financial institution where the account is kept, the account number of the plan, and the account balance at the beginning of the year.

If somewhere down the road you finally draw on the Canadian plan, you will owe Canadian tax. If you truly have emigrated, then Canada will consider you a nonresident and withhold – at 25%, I believe.

If you paid tax annually to the US, the US tax calculation at that moment could be hair-pulling. You would have “basis” in some of the account – to the extent you paid tax – and not have “basis” in the rest.

If this is you, please get professional advice.