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IRS Simplifies Filing for Americans in Canadian Retirement Plans

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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.

The IRS’ Oct. 7 notice states that it is eliminating Form 8891, and that taxpayers are no longer required to file this form for any year, past or present.

Before the change, taxpayers generally would “get tax deferral by attaching Form 8891 to their return and choosing this tax treaty benefit, something many eligible taxpayers failed to do,” the IRS said. Prior to the Oct. 7 modification, “a primary way to correct this omission and retroactively obtain the treaty benefit was to request a private letter ruling from the IRS, a costly and often time-consuming process.”

Many taxpayers, the IRS says, also failed to comply with another requirement: “that they file Form 8891 each year reporting details about each RRSP and RRIF, including contributions made, income earned and distributions made.” This requirement, the IRS says, “applied regardless of whether they chose the special tax treatment.”

Marylouise Serrato, ACA’s executive director, said in the statement that ACA “encourages Congress to extend automatic recognition to foreign pension and retirement savings plans throughout the world.”

Said Serrato: “Reducing the double taxation burden caused by foreign retirement plans would make it easier for Americans to compete in overseas markets.”

— Check out 10 U.S. Companies With Lowest International Tax Rates on ThinkAdvisor.