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Favorable Tax Treatment on Canadian Retirement Plans and Annual Reporting Requirements Simplified

On Oct. 7, 2014 the Internal Revenue Service made it easier for those of us holding interests in either registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) to receive favorable U.S. tax treatment. In short, the IRS eliminated Form 8891, and taxpayers are no longer required to file this form for any year, past or present.

The IRS is to provide retroactive relief to eligible taxpayers who failed to properly choose this benefit in the past and has eliminated the special applicable annual reporting requirement. In general, U.S. citizens and resident aliens will qualify for this special treatment as long as they filed and continue to file U.S. returns for any year they held an interest in an RRSP or RRIF. Any distributions as income are to be reported on corresponding U.S. returns.

The change relates to a longstanding provision in the U.S.-Canada tax treaty that enables U.S. citizens and resident aliens to defer tax on income accruing in their RRSP or RRIF until it is distributed. Otherwise, U.S. tax is due each year on this income, regardless of distribution.

Prior to this change, Form 8891 was to be attach along with choosing the tax treaty benefit to one's annual return get the tax deferral. This is something many eligible taxpayers failed to do. Thus, to correct this omission in the past one would have to secure a private letter ruling which was often both time-consuming and expensive.

Please note that this revenue procedure does not modify any other U.S. reporting requirements that may apply under the Bank Secrecy Act (BSA) and section 6038D. See FinCEN Form 114 due by June 30 of each year, and Form 8938 attached to a U.S. income tax return for more information about the reporting requirements under the BSA and section 6038D. Different reporting thresholds and special rules apply to each of these forms.

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