Citizens of the United States with Canadian RRSPs face increased U.S. tax filing paperwork that comes with heavy penalties and taxes for failing to comply, thanks to an announcement released by the U.S. Internal Revenue Service on April 11, 2003.

Jim Yager (Partner, International Executive Services at KPMG said, “These rules create an unfair burden on the many Americans who own RRSPs.”

For example, Yager said, “a married American couple with four RRSP accounts may have to complete 40 pages of complex forms every year just because they invested in Canadian retirement accounts. If they fail to file these forms, this American family could lose a significant portion of their pension to the U.S. government.”

U.S. citizens are required to file U.S. tax returns every year whether they are resident in the U.S. or another country, including Canada.

The April 11, 2003 IRS Notice 2003-25 requires U.S. citizens to file a complex, six-page form with many required attachments for each year in which they have any contributions to or distributions from an RRSP. The U.S. tax law imposes a penalty of 35% of the contribution or distribution if the form is filed late or is incomplete or incorrect.

The form (Form 3520) is generally due on April 15 (or later if an extension is requested) after the year of the contribution or distribution.

American RRSP holders are also required to file an information return, a complex four-page form with many required attachments, every year that they have their RRSPs. This form is due on March 15 following the year in which the U.S. citizen had an ownership interest in an RRSP. Failure to file this form (Form 3520-A) on time results in a penalty of 5% of the RRSP’s assets.

Both these forms require an American RRSP holder to obtain a beneficiary statement from the bank or trust company that holds the RRSP if there is a distribution from the RRSP. If the U.S. citizen fails to obtain this form, any distribution from the RRSP would be subject to U.S. income tax and an interest charge. If Canadian financial institutions fail to provide this statement, the RRSP holder will pay a stiff U.S. tax.

Yager said an RRSP holder who made a $10,000 contribution to his or her RRSP on January 1, 2002 and later withdrew the money on December 31, 2006 could pay $13,000 in tax — a rate of over 130% — if he or she did not conform with these filing requirements, even if there is no income earned in the RRSP.

In the past, the IRS has provided administrative relief from these requirements, allowing taxpayers to forgo filing the forms. The notice indicates that the IRS will no longer provide this relief.

However, the notice does make some concessions. For example, the IRS will not enforce penalties for tax years before 2002, and it has automatically extended the filing deadline for 2002 until August 15, 2003. If taxpayers comply with certain other reporting requirements, they will not have to file the annual information return, Form 3520-A.

Yager said well over 100,000 people may be affected, even though requiring American RRSP holders to file these forms may not provide any benefit to the U.S. government. “There is little or no possibility of tax evasion with RRSPs, since they are strictly controlled by the Canadian government and are subject to Canadian tax on distribution.”

Yager pointed out, “Americans must already report the existence of an RRSP account with a disclosure on their U.S. tax return and file a report on their RRSPs with the U.S. Treasury. These simpler forms should provide the IRS all the information it needs to monitor Americans’ investments in RRSPs.”