RRSP Tax and Reporting Treatment
While there are many different types of foreign pension plans that are common to US persons, the RRSP (Registered Retirement Savings Plan) is one of the most popular. A few years back, our international tax lawyers authored a very detailed article about how RRSP is treated for tax purposes in accordance with the United States/Canada Tax Treaty — but we also want to offer a more basic summary of how the Canadian RRSP is treated for both tax and international information reporting purposes (FBAR, FATCA, etc.). For tax purposes, the RRSP may be treated differently depending on whether or not it is being reported for federal or state taxes. For reporting purposes, the disclosure rules are relatively straightforward. Let’s take a look at the basics of how RRSP is treated for U.S. tax and reporting purposes.
Federal Income Tax and RRSP
In general, the income from the RRSP is not taxable until the taxpayer begins receiving distributions. Previously, U.S. taxpayers had to report RRSP (and RRIF) ownership annually on Form 8891 — but several years ago, the Internal Revenue Service eliminated this requirement.
State Income Tax and RRSP
The state income tax rules for RRSP may differ from the federal rules because there is no blanket rule that applies to all the different states uniformly. Thus, a taxpayer may be required to pay state income tax on accrued, non-distributed RRSP earnings while the same income may escape tax at the federal level until distributions are made out of the RRSP to the taxpayer.
FBAR and RRSP
The RRSP qualifies as a foreign account which is reportable on the annual FBAR (Foreign Bank and Financial Account Reporting, FinCEN Form 114). As provided by the IRS in Publication 5569, page 4:
- “Example: Canadian Registered Retirement Savings Plan (RRSP), Canadian Tax-Free Savings Account (TFSA), Mexican individual retirement accounts (Fondos para el Retiro) and Mexican Administradoras de Fondos para el Retiro (AFORE) are foreign financial accounts reportable on the FBAR.”
Form 8938 and RRSP (FATCA)
Form 8938 aka FATCA (Foreign Account Tax Compliance Act) is similar to the FBAR and requires US taxpayers who have ownership of foreign pension plans such as an RRSP to report the information to the IRS directly on Form 8938.
*See Form 8938 Instructions for more detail about foreign pension reporting.
Form 3520 and RRSP
Revenue Procedure 2014-55 exempts the RRSP from having to be reported as a foreign trust on Form 3520 (the Form 3520 reporting requirements are much more comprehensive than the FBAR and Form 8938 reporting requirements).
Specifically:
- Reporting Rules for a Beneficiary or Annuitant of a Canadian Retirement Plan. Subject to any future guidance that may be issued by the Treasury Department and the IRS, beneficiaries (regardless of whether they are “eligible individuals” within the meaning of section 4.01 of this revenue procedure) and annuitants are not required to report contributions to, distributions from, and ownership of a Canadian retirement plan under the simplified reporting regime established by Notice 2003-75 (Form 8891) or pursuant to the reporting obligations imposed by section 6048 (Form 3520).
- In addition, custodians are not required to file Form 3520-A with respect to a Canadian retirement plan.
- This revenue procedure does not, however, affect any reporting obligations that a beneficiary or annuitant of a Canadian retirement plan may have under section 6038D or under any other provision of U.S. law, including the requirement to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), imposed by 31 U.S.C. § 5314 and the regulations thereunder.
Form 8891 and RRSP
Form 8891 was previously required to be filed each year by U.S. citizens or residents who had ownership of a registered retirement savings plan – but this form is no longer required.
Late Filing Penalties May Be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
