Generally, a U.S. citizen or resident, who is a beneficiary of a Canadian retirement plan, will be subject to current U.S. taxation on income accrued in the plan even though the income is not actually distributed.
Article 7 of the U.S.-Canada Income Tax Treaty provides an option to elect to defer current U.S. taxation on the accrued income. This cures the mismatch of U.S. and Canadian income taxation that may result in double taxation because the accrued income will only be taxed when it is actually distributed from the plan after the election is made.
The rules for making an Article 7 election are set out in Revenue Procedure 2002-23, 2002-1 CB744. Under these rules, U.S. beneficiaries of certain Canadian retirement plans can make the election by attaching to their timely filed U.S. federal income tax return a statement which includes specified information.
Information reporting is also generally required for a U.S. beneficiary of a Canadian retirement plan. Notice 2003-75, 2003-2 CB 1204 provides the reporting requirements for U.S. individuals who hold an interest in Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) and for the custodians of such plans.
U.S. beneficiaries of RRSPs or RRIFs can file Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans, to report distributions received from, contributions to, and undistributed earnings of their RRSPs or RRIFs.
US individuals who have not previously made an election under Revenue Procedure 2002-23 to defer U.S. income tax on income that has accrued in an RRSP or an RRIF, but that has not been distributed, may make the election to apply Article 7 on Form 8891.
Revenue Procedure 2014-55 provides that an eligible individual who did not previously make an election under Article 7 to defer current U.S. income taxation on the undistributed income of a Canadian retirement plan will be treated as having made the election in the first year in which the individual would have been entitled to elect the benefits under Article 7 with respect to the plan. Consequently, such eligible individual will not be required to make the election for that first year or for any subsequent years either on Form 8891 or under the procedures set forth in Revenue Procedure 2002-23.
An eligible individual is a beneficiary of a Canadian retirement plan who:
- is or at any time was a U.S. citizen or resident while a beneficiary of the plan;
- has satisfied any requirement for filing a U.S. Federal income tax return for each tax year during which the individual was a U.S. citizen or resident;
- hasn’t reported as gross income on a U.S. Federal income tax return the earnings that accrued in, but were not distributed by, the plan during any tax year in which the individual was a U.S. citizen or resident; and
- has reported any and all distributions received from the plan as if the individual had made an election under Article 7 for all years during which the individual was a U.S. citizen or resident.
This relief applies only to income accrued in a Canadian plan and not to any contributions to the plan. If an eligible individual had an interest in more than one Canadian retirement plan, this provision applies separately to each such plan. Eligible individuals must report on their U.S. Federal income tax return any income that has accrued in the plan when it is distributed, subject to any applicable treaty provision.
The election made under Revenue Procedure 2014-55 is in effect for all later tax years through the year in which a final distribution is made from the plan, unless the election is revoked with IRS’s consent.
Beneficiaries who are not eligible individuals will remain currently taxable on the undistributed income. If such beneficiaries want to make an Article 7 election with respect to a Canadian retirement plan, they must seek IRS’s consent.
Under Revenue Procedure 2014-55, a beneficiary who has made an Article 7 election with respect to a Canadian plan under Revenue Procedure 2002-23 or on Form 8891, or an individual who is treated as having made the election under Revenue Procedure 2014-55, is not required to file Form 8891 or a similar statement for tax years ending after December 31, 2012.
Revenue Procedure 2014-55 also provides that a beneficiary of a Canadian retirement plan is not required to report information regarding the plan under Notice 2003-75 (Form 8891) and under Sec. 6048 (Form 3520). However, the Revenue Procedure will not affect any reporting obligations under Code Sec. 6038D (Form 8938) or under any other provision of U.S. law, including the requirement to file FinCEN Form 114 (FBAR). A U.S. beneficiary is still required to file Form 8938 (to report foreign financial assets) and FBARs (to report foreign financial accounts) to report his/her interest in the plan if the reporting threshold is met.