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U.S. expats in Canada, the IRS is eyeing your RRSPs

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From Americans Living in Canada – Smile, The IRS is Watching You, by David A. Altro and Jonah Z. Spiegelman. Copyright © Altro Levy LLP, 2014. Reprinted with permission of Altro Levy LLP

The Registered Retirement Savings Plan (RRSP) program is fundamental to Canadian retirement planning, and most Canadian residents participate. The beauty of the RRSP is that any contributions in a given year are deductible from income (up to a limit), and growth within the account is not included in the owner's income as earned. Rather, RRSPs are only taxed upon withdrawal from the RRSP account, presumably occurring after retirement when the taxpayer is earning less and consequently paying less tax.

US domestic law considers RRSPs to be foreign grantor trusts, and the income is taxable to the contributor as earned.

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This can cause compliance problems for Canadian-resident US citizens who assume that RRSPs do not need to be specifically dealt with on the US tax side and therefore do not report them.

The Canada-US Tax Treaty (Treaty) does provide some relief in this situation. Under Article XVIII(7), a US taxpayer may elect to defer tax on the growth within an RRSP account for US purposes. Form 8891 must be completed to obtain these benefits under the Treaty, and (of course) the FBAR requirement still applies to RRSPs.

In particular, US law does not allow for a deduction from income for contributions made to an RRSP. As such, maximizing contributions to an RRSP may result in a higher taxable income for US purposes than Canadian purposes. Usually, the higher rate of Canadian tax will still provide sufficient foreign tax credits to offset the US tax payable in that year. However, there could be situations where US tax is payable due to the difference in taxable income levels.

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