Americans in Canada will now receive automatic tax deferral on income they earn in their RRSPs and RRIFs without having to make a special annual U.S. tax filing, the U.S. Internal Revenue Service (IRS) announced on Tuesday.
In addition, the IRS is also simplifying filing procedures for Americans who own either of the two registered plans by eliminating the requirement that they annually report the contributions made, income earned, and distributions made on any plan.
Finally, the IRS is also offering retroactive relief to U.S. taxpayers in Canada who own RRSPs and RRIFs who failed to file Form 8891 — also known as a U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans — to obtain tax deferral on their registered retirement plans in the past.
“The IRS is eliminating Form 8891, and taxpayers are no longer required to file this form for any year, past or present,” the U.S. tax authority announced.
The tax authority did not provide a reason for the change in its announcement, but did note that many Americans in Canada in the past have failed to file IRS Form 8891.
The U.S. bases its tax system on citizenship rather than residency, meaning that Americans around the world must file a U.S. tax return annually and fulfill all other U.S. tax filing obligations regardless of where they reside.
Under a provision in the U.S.-Canada tax treaty, U.S. citizens are allowed to defer tax on income accruing in their RRSP or RRIF until it is distributed. Without this provision, income earned annually from these plans would be taxable under the U.S. tax system, even if the income wasn’t distributed.
To receive the deferral, U.S. taxpayers had to complete a Form 8891 and attach it to their U.S. return, electing to take the tax treaty benefit. They would also have had to report details about each RRSP and RRIF, even if they didn’t take the election.
The initial reaction from one industry group to the change was positive, if tempered: “This is a step in the right direction,” noted Andrea Taylor, managing director with the Toronto-based Investment Industry Association of Canada, in a statement. “But we really need similar treatment for TFSAs, RESPs, and RDSPs.”
Americans who own Tax-Free Savings Accounts, Registered Education Savings Plans, and Registered Disability Savings Plans do not receive the tax deferred or tax-free benefits of these plans under the U.S. tax system as there is no provision for them under the tax treaty.
In the announcement, the IRS noted that the change in administrative procedure for Americans in Canada owning RRSPs and RRIFs did not change the requirement for U.S. citizens who meet certain asset thresholds to report on any foreign bank account they hold with a Fin CEN Form 114, formerly known as the Report of Foreign Bank and Financial Accounts (FBARs), or on any specified foreign assets with a Form 8983.