The IRS has just simplified the process for taxpayers who hold interest in Canadian retirement plans. Prior to now, the reporting for Canadian retirement accounts was different than other countries, and this led to failed compliance by many taxpayers.
It is necessary to point out that U.S. citizens are taxed on their worldwide income regardless of where they live. So, a U.S. citizen living aboard should be filing a U.S. tax return every year. The filing of these returns is complicated by the fact that each country has a unique tax structure and unique types of retirement accounts.
Canadian Retirement Plans Previous Requirements
As stated above, Canadian Registered Retirement Savings Plan (RRSP) and Registered Retirement Income Funds (RRIF) have been taxed differently than one would expect. The accumulation of income within these plans was taxable every year, unless an election was made. Many individuals were unaware that an election was required, and treated these plans like an Individual Retirement Account (IRA) in the United States.
RRSP and RRIF information was required to be reported annually on form 8891, whether an election to defer this income is made or not. The different components of income inside the accounts would need to be reported in a similar manner to a brokerage account income.
The IRS now has now made it so that those with RRSF or RRIF accounts automatically quality for tax deferral, similar to U.S. IRA and 401(k) plans. In addition, the requirement to file for 8891has been eliminated.
Author: Patrick Mutchler