The New York State Society of Certified Public Accountants first addressed the recognition of income from Canadian Registered Retirement Savings Plans (RRSPs) in a comment letter to the IRS . The U.S.-Canada Tax Treaty allows U.S. individuals with funds in an RRSP to make an election to defer recognition of income from the RRSP until the funds are distributed.
However the Society contends individuals and many tax professionals do not know about their reporting requirements and fail to make an election. To make a late election, they must get a private letter ruling from the IRS, which is very costly.The group recommends the IRS treat all relevant taxpayers as if they had made the election to defer income reporting, and give them a choice to opt out. Otherwise, the Society suggests the IRS introduce a more streamlined method of filing a late election.
As for other foreign retirement plans, the letter says U.S. persons with investments in retirement plans in jurisdictions not covered by any U.S. tax treaty or retirement plans in locations with treaties that do not address the tax treatment of retirement plans, are often left in a difficult situation. To the extent that the retirement savings plan is a trust, they may be required to recognize the income currently (as in the case of a grantor trust) or, to the extent that the retirement savings plan is a corporation, it could be a controlled foreign corporation resulting in current income inclusion or a passive foreign investment company resulting in either current income recognition or a harsh interest charge at the time of distribution of the income.
“Such treatments are inconsistent with the shared objective of the U.S. and foreign government, i.e. financial security in retirement for the U.S. person,” the Society wrote.
The group recommended:
- Introducing provisions to future tax treaties and protocols that would mirror the election allowed in the Treaty; and
- Legislation to provide for the deferral of tax on compulsory employer contributions to foreign retirement plans and income in legitimate foreign retirement savings plans that were compulsorily established by a U.S. person while they were living or working outside the U.S.
The comment letter is at http://www.nysscpa.org/commentletter/rrsp.pdf.
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