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November 06, 2014 at 10:06 AM
The Internal Revenue Service recently simplified the filing procedures for Americans with Canadian registered retirement plans and allowed for those plans to qualify as “tax free” savings.
Under the change, the IRS said that Americans with Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) now automatically qualify for tax deferral similar to that available to participants in U.S. individual retirement accounts and 401(k) plans.
Jackie Bugnion, director of the tax team at Washington-based American Citizens Abroad, said in a Thursday statement that “ACA has long advocated for a correction to the tax treatment of foreign pension and retirement savings plans, most of which mirror their U.S. equivalent of a pension plan and of a tax-free IRA or 401(k), but are generally not treated as such for U.S. tax reporting purposes.”
Before the change, she said, “both individual and company contributions of foreign plans [were] generally taxed as income.”
With an estimated 1 million Americans living in Canada, ACA says that the IRS “understood that there was a problem and has worked to correct it.”
The IRS explained that the change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, even if it is not distributed.
