Last week the IRS released Revenue Procedure 2014-55, which greatly simplifies the U.S. tax treatment of RRSPs and RRIFs.
Under U.S. domestic law, a U.S. citizen or resident who is the beneficiary of a foreign retirement plan will generally be subject to current U.S. income taxation on income accrued in the plan even though the income is not currently distributed to the beneficiary, unless the plan is an employees’ trust within the meaning of Code §402(b) and the individual is not a highly compensated employee subject to the rule of Code §402(b)(4)(A).
RRSPs and RRIFs are similar to U.S. Individual Retirement Accounts (“IRAs”). Just as with IRAs, RRSPs and RRIFs have no link to an employee-employer relationship. Consequently, the IRS has not treated RRSPs and RRIFs as “employees’ trusts” under Code §402(b).
Article XVIII(7) of the Canada-U.S. Income and Capital Tax Treaty provides that beneficiaries of RRSPs and RRIFs may defer taxation of any income accrued in but not distributed by the plan. Revenue Procedure 2002-23 provided guidelines for making the election under the Treaty. In 2004, the IRS released Form 8891, U.S Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans. The form allowed individuals to make the deferral election and the form had to be filed on an annual basis.
As indicated above, Revenue Procedure 2014-55 greatly simplifies the treatment of RRSPs and RRIFs. If an individual has not been including in gross income the amount of earnings accrued but not distributed by an RRSP or RRIF, then the individual is generally deemed to have made the deferral election in the first year it could have been made. This change eliminates the cumbersome and costly approach of obtaining a private letter ruling from the I.R.S. to make a late deferral election.
The revenue procedure also makes Form 8891 obsolete. This Form no longer needs to be filed, and no Forms 3520 or 3520-A need to be filed either. However, RRSPs and RRIFs must continue to be included on the FBAR and Form 8938.