Under the US-Canada Income Tax Treaty, U.S. taxpayers who participate in Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) (the Canadian Plans) are not required to pay tax on the annual income and investment gains on their accounts. Tax is owed only when distributions are received from the accounts. However, this tax deferral has not been automatic. In order to claim this special tax treatment, participants in Canadian Plans were required to file Form 8891 annually (providing information about contributions, income and distributions) by attaching it to their U.S. federal income tax return.
The Problem: Many taxpayers who should have filed these forms did not do so, and the requirement to provide information about participation in the Canadian Plans applies even if the treaty deferral is not claimed. In order to claim the tax deferral retroactively if timely filings were not made, taxpayers had to obtain a private letter ruling from the U.S. Internal Revenue Service with its attendant cost. And, of course, those individuals subject to U.S. filing requirements who weren’t filing returns at all or for particular years, perhaps on the mistaken theory that if they owed no U.S. tax, no penalties would apply, haven’t claimed the relief.
The IRS Solution: IRS has simplified the rules for those who filed U.S. tax returns, even if they failed to attach Form 8891. Under the new procedures, the deferral will be available for those who filed U.S. income tax returns and didn’t include earnings on the accounts in income, and for those in this situation in the future. This is a welcome development for those who try to be compliant.
The Gap: What about those who were eligible to defer the tax on their accounts but did not file income tax returns for every year? The new rules seem to leave them in limbo. Even worse, they may become subject to a $10,000 penalty for not filing a form reporting participation in Canadian plans.
Should There Be An Amnesty? The IRS has implemented amnesties for those dual taxpayers who have not been filing U.S. federal income tax returns. This allows non-filers to come into compliance without onerous penalties. A similar special one-time amnesty should be created for those not eligible for automatic relief under this revenue procedure. Alternatively, the IRS should issue guidance on application of the current amnesty rules to participants in Canadian Plans.