IRS hits Canadians
Every month I receive three or four e-mails from Canadians who are moving to the States and want to know what to do about their RSPs or RRIFs.
Until now, the answer has been straightforward: keep them. The Canada-U.S. Tax Treaty provides very favourable treatment for registered plans owned by Canadians moving south. If you file a special election with the Internal Revenue Service (IRS), which must be included with the first U.S. return you prepare, the investments in your plan can continue to grow tax-sheltered. When you begin to draw income, you’ll only pay U.S. taxes on the amount earned in the plan after you became a resident.
But now the IRS has thrown a money-wrench into this sweet deal, one that will catch many expatriate Canadians unaware and could cost them thousands of dollars – perhaps more money than is actually in their plans.
In a decision that has been described as “shocking”, the IRS is demanding that all U.S. residents with a Canadian RRSP or RRIF who made contributions to the plan or received distributions from it in 2002 file a complicated six-page form (#3520) by Aug. 15. Another form may also be required, 520-A. Failure to comply can result in a penalty of 35% of the value of the contribution or distribution.
The ruling is complex and controversial and there is some debate over exactly who is affected by it.
My suggestion is that if you have any Canadian friends relatives who live in the U.S., you should do them a favour and let them know about this. Suggest they discuss their situation with a tax advisor as soon as possible.
Adapted from an article that originally appeared in The MoneyLetter, published by MPL Communications. For subscription information, call 1-800-804-8846.