Canadian RRSP

Here are some references I found in my notes, but I don't remember details from the one and only time I have ever had a client with a Canadian RRSP.

Notice 2003-75, Form 3520 Instructions, Form 8891.

I suspect you could become familiar enough with this situation to handle it yourself, if you have access to decent professional tax research services and don't mind using them. And, of course, if the client doesn't mind paying for your time...

The RRSP is Canada's equivalent to the US IRA. (Just to get it out of the way... No, you can't roll it over into a US plan.) Under the tax treaty, distributions are treated as pension income. Canada will tax the distribution 15%. The US will tax it as pension income. The amount subject to US tax can not be greater than the amount subject to tax by Canada. Assuming there is no cost basis in the account, that means the gross distribution is taxable by both countries. You can complete Form

1116 to calculate a foreign tax credit Canada and the US both tax it.

Here comes the however.... Under US tax law, the annual undistributed earnings of the RRSP are subject to US income tax unless the taxpayer has/had made an irrevocable election under the treaty to not have the US tax them. This would have been accomplished by using Form 8891. So, assuming that no election has been made, and assuming that there have been earnings in the past, the taxpayer owes tax and any interest and penalties for understating US income tax. Assuming that the amount of earnings has never reached 25% of annual gross income, the IRS is barred from going back more than 3 years. If someone had been declaring the undistributed earnings, that amount would have created a US cost basis in the plan. I do not know how the IRS has reacted to taxpayers who never made the election, never declared the undistributed earnings and then takea a distribution from an RRSP and declares it as a taxable pension. I don't know if they attempt to obtain back taxes, interest and penalties. Clearly, a taxpayer in this situation has two choices: 1. Pay tax on the distribution and do nothing about past years' earnings and hope the IRS does nothing about 2008 (this year closes 4/15/12), 2009 and 2010. 2. File an amended return for 2008 with the 8891 making the election. This covers tax years 2008, 2009 and 2010 and 2011.

Someone more familiar with how the IRS has been reacting to taxpayers who never made the election is best suited to answer that. From my perspective, assuming that only 3 years are open (earnings never reached

25% of gross income and extended the statute of limitations to 6 years) I see no reason why you shouldn't amend 2008 to make the election. Any earnings in 2008 and subsequent years would not be subject to tax. Any prior years would be closed.

It should have been declared on Form 8891 a long time ago. As I understand it (which you shouldn't depend on), he must specifically elect to defer income from his RRSP on Form 8891. Until he does that, he should have been paying tax on the income all along.

See Form 8891, and IRS Bulletin 2003-50.

As far as I can tell, only by withdrawing all the money. paying the tax, and making a taxable contribution to an IRA, but that makes little sense. So, no.

In my experience the international expertise of most US tax pros is exhausted once they fill out form 1116. (It's not because they're inept, it's because most Americans have no foreign accounts. My quite competnent CPA was surprised when I told her that an extension for form 1040 doesn't give you an extension for your FBAR.) As to where to look, I suppose you might look in places like Buffalo and Detroit where there's a lot of people moving back and forth across the border, or look in Montreal, Toronto, or Vancouver for someone who specializes in US expats.

R's, John

Which is actually just Notice 2003-75 that I already referenced.

The taxpayer in the OP is not a US expat, but a Canadian. But presumably the same rules apply in this case, if he is subject to US tax law as a resident.