Essential US Tax Forms for RRSPs - Part 2
In the last article, we discussed how the IRS and State Tax Agencies treat Canadian RRSPs. Here we will discuss the various forms required to be filed when completing your annual tax return in the US.
US Tax Reporting for Non-Residents:
Those individuals who are US nonresidents for tax purposes have a different filing requirement from that of a US tax resident. Generally, a nonresident is only taxable on income earned within the US. Any earnings within RRSPs do not have to re-reported to the IRS if the individual is a nonresident. However, a number of states require a nonresident alien to report global income on the state tax return. In states like California, this includes any earnings within RRSPs. For example, if a Canadian tax resident on a TN Visa works a temporary assignment in California and earns $20,000, works in Canada and earns $20,000 and earns $2,000 of income within their RRSP’s, California will require the individual to report $42,000 of global income (assume exchange rate parity). California will calculate the tax on all $42,000 of earnings however; the actual tax will be 20/42 of the tax of $42,000. If California did not require the reporting of the income in the RRSPs, then the tax would be 20/40 of the tax on $40,000. This ratio is also applied to the standard deduction or itemized deductions that the tax payer claims.
US Tax Reporting for Residents:
US tax residents have more complicated filing requirements than nonresidents. It may be good to stop here and clarify what is meant by a US tax resident. A US citizen and a green card holder are automatically US tax residents. For TN Visa holders, the tax residence is determined by a number of factors including the number of days spent in the US and whether the United States-Canadian tax treaty modifies this determination in favor of one nation over the other. Tax treaties trump domestic law so while the Canadian TN Visa holder may live in the US for an entire year and satisfy the 183 days substantial presence test, if the tax treaty determines that the individual is a Canadian resident, then the treaty prevails. Determination of residence can fill an entire article, but this information is sufficient for our purposes. One important thing to keep in mind is that immigration status does not correlate with tax residency status.
If a US tax resident holds Canadian RRSPs, there are potentially three forms that are required to be filed:
1. 8891 – required of all RRSP/RRIF holders
Regardless of the value of the account, all earnings in RRSPs and RRIFs must be reported to the IRS on the annual tax return. This form also requires the reporting of the year in value as well as any distributions are taken from the account. Additionally, Form 8891 is where a holder of an RRSP can make an election to defer all tax on earnings until the day that the taxpayer receives distributions. This is an irrevocable election but it provides RRSPs the same tax treatment of an US IRA or similar deferred plan. As mentioned earlier, some states still tax earnings within the RRSPs so these elections have no force the state level. Form 8891 is filed with the annual US tax return.
2. TDF/FBAR – required for accounts greater than $10,000 in aggregate
While form 8891 is required of all RRSP and RRIF holders, an FBAR (Foreign Bank Account Report) is required for anyone holding more than $10,000 in foreign accounts on an aggregate basis. The value of each individual account does not determine the filing requirement. If the individual has more than $10,000 spread through different accounts (hence the term “aggregate”), a FBAR is required. Additionally, the $10,000 is not based on the year end amounts. It is based on the maximum value of accounts during the course of the calendar year. This form is not sent to the IRS - it is sent to the U.S. Treasury office in Detroit and is due on June 1 of every year.
3. 8938 – required for larger accounts
Form 8938, Statement of Foreign financial Assets, is the newest reporting requirement. The threshold for filing form 8938 depends upon the filing status of the individual, the value of their accounts at year, maximum value during the year and whether the taxpayer is living permanently in a foreign country. Individuals can hold other foreign assets besides RRSPs and trigger this requirement. For those who have already filed an 8891 to report their RRSPs and meet the threshold for filing form 8938, the form is still required, however, the taxpayers simply references the filing of form 8891.
Sound like a lot? The IRS has become very aggressive in pursuing US tax residents who hold funds in other countries. Since a US tax resident is taxable on worldwide earnings regardless of source, locating these funds is imperative to effective tax collection.
In the next article, we will explore the issue of tax residence in how the United States – Canadian tax treaty coordinates with domestic law.
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