U.S. citizens and residents with interests in Canadian retirement plans will automatically be treated as making beneficial elections under a provision of the U.S.-Canada income tax treaty. Rev. Proc. 2014-55 provides that eligible individuals will be treated as having made the election in the first year in which they would have been entitled to make it under the treaty (i.e., the relief is retroactive).
Eligible U.S. citizens and residents with interests in certain Canadian retirement plans will be treated as automatically making an election, under a provision of the United States-Canada income tax treaty, to defer U.S. income tax on income accruing in their Canadian retirement plans until a distribution is made, according to an advance copy of Rev. Proc. 2014-55, released on October 7, 2014, by the U.S. Internal Revenue Service (IRS).1
The Rev. Proc. provides that eligible individuals will be treated as having made the election in the first year in which they would have been entitled to make the election under the treaty – i.e., the relief is retroactive.
The Rev. Proc. also removes a previous annual reporting requirement with respect to interests held in the identified Canadian retirement plans – registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs).
The revenue procedure provides retroactive relief for eligible taxpayers who failed to properly elect relief under the prior IRS guidance. Accordingly, individuals with RRSPs and RRIFs automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts (IRAs) and 401(k) plans.
Moreover, administrative burdens are eased for taxpayers with such accounts, as the guidance eliminates a special annual reporting requirement on Form 8891 for taxpayers with interests in these Canadian retirement plans.
U.S. tax law generally provides that an individual who is a citizen or resident of the United States and a beneficiary of a Canadian retirement plan is subject to current U.S. income taxation on income accrued in the plan – even though the income is not currently distributed to the beneficiary.
However, such individuals generally would not be subject to Canadian income taxation with respect to the accrued income until the income is actually distributed from the plan. Because of this “mismatch” between the timing of the U.S. tax and the Canadian tax, there could be instances of double taxation.
Article XVIII(7) of the United States-Canada income tax treaty (as added by a 1995 Protocol) was intended to address this timing mismatch and basically provided relief to an individual with an interest in a Canadian pension plan (by allowing an election to defer taxation in the United States). This treaty relief provision was further amended by a 2007 Protocol.2
The IRS issued guidance – first, Rev. Proc. 2002-23 and then two IRS notices were issued in 2003 – for making an election under Article XVIII(7) of the income tax treaty.
Rev. Proc. 2014-55 replaces the existing procedures that an individual would use to make an election to defer U.S. tax under Article XVIII(7) of the income tax treaty with respect to a Canadian retirement plan.
Rev. Proc. 2014-55 provides that any election made under the guidance issued on October 7, 2014, is made on a plan-by-plan basis, and that these rules apply whether or not the beneficiary was a resident of Canada at the time the contributions were made to the retirement plan.
As explained by the IRS in a separate release3 (IR-2014-97) Rev Proc. 2014-55 provides retroactive relief to eligible taxpayers who failed to properly elect relief under the prior IRS guidance. Accordingly, individuals with RRSPs and RRIFs automatically qualify for tax deferral similar to that available to participants in U.S. IRAs and 401(k) plans. In general, U.S. citizens and resident aliens qualify for this special treatment as long as they filed and continue to file U.S. returns for any year they held an interest in an RRSP or RRIF and include any distributions as income on their U.S. returns.
Taxpayers who may have already reported on their U.S. federal income tax returns undistributed income that has accrued in a Canadian retirement plan during a tax year, need to note that under Rev. Proc. 2014-55, they are not “eligible individuals” and will remain currently taxable on the undistributed income. These taxpayers, if they now want to make an Article XVIII(7) election with respect to a Canadian retirement plan, must seek the consent of the IRS Commissioner.
The IRS also is eliminating a special annual reporting requirement on Form 8891 for taxpayers with interests in these Canadian retirement plans. Taxpayers are no longer required to file Form 8891.
The revenue procedure does not modify any other U.S. reporting requirements that may apply (e.g., FinCEN Form 114 (FBAR) filings required under the Bank Secrecy Act and Form 8938 filings as required under section 6038D).
1 See Revenue Procedure 2014-55 (PDF 39 KB).
2 For prior coverage of the 2007 Protocol, see the following issues of GMS Flash Alert (formerly “Flash International Executive Alert”): 2008-152 (September 16, 2008), 2008-025 (January 28, 2008), 2007-166 (September 24, 2007), and 2007-163 (September 20, 2007).
3 See IR-2014-97 (October 7, 2014).
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