How is an RRSP treated on a US tax return?

Why RRSP growth is deferred in the US

A Registered Retirement Savings Plan is recognized in the Canada-US tax treaty as a pension arrangement. Article XVIII(7) allows a US citizen or resident who is a beneficiary of a Canadian plan to defer US tax on the income accruing inside it until a distribution is made, matching the Canadian treatment. Without the treaty, the IRS would tax the interest, dividends and gains inside the plan every year, because the RRSP is not a qualified plan under US law.

For many years the deferral had to be claimed annually on Form 8891, and people who missed the form were technically taxable on the growth. In October 2014 the IRS issued Revenue Procedure 2014-55, which made the deferral automatic for eligible individuals and retired Form 8891. Anyone who has been filing US returns and has not been reporting the internal RRSP income as taxable is treated as having made the election. People catching up on missed returns through the streamlined procedures come into the same automatic treatment once their returns are filed.

The same revenue procedure confirmed that RRSPs and RRIFs do not require Forms 3520 or 3520-A, which removed a second layer of paperwork that had worried many filers.

What you still have to report every year

Deferral is not invisibility. The RRSP remains a foreign financial account and a specified foreign financial asset, so it appears on two annual reports:

• FBAR (FinCEN Form 114). The RRSP counts toward the US$10,000 aggregate threshold and is listed at its highest value during the year, converted at the Treasury year-end rate. Our FBAR guide explains the mechanics for Canadian accounts.
• Form 8938. Once your total specified foreign assets exceed the FATCA thresholds for taxpayers living abroad, the RRSP is disclosed with its year-end value.

One more piece of relief matters. Canadian mutual funds and ETFs are passive foreign investment companies, but PFIC stock held inside an RRSP or RRIF is exempt from Form 8621 and from the PFIC tax rules while it stays in the plan. That makes the RRSP the natural home for Canadian funds in a US citizen's portfolio, a point we expand on in our PFIC answer. The same protection does not extend to a TFSA, which is why the two accounts are treated so differently on a US return.

Are RRSP contributions deductible on a US return

For most US citizens living and working in Canada, no. A personal RRSP contribution reduces your Canadian taxable income but does nothing to your US taxable income. The treaty carves out limited exceptions, mainly for cross-border commuters who live in one country and work in the other, and for contributions through employer-sponsored group arrangements, and even then the US deduction is capped at what a comparable US plan would allow. Claiming one of these positions generally requires a Form 8833 treaty disclosure.

In practice the lack of a deduction rarely creates a US tax bill by itself, because the foreign tax credit usually covers the difference. What it does is widen the gap between your Canadian tax and your US tax in years of large contributions, which reduces the credit available and can affect the exclusion-versus-credit decision. The ten-year credit carryforward absorbs most of that effect over time.

How withdrawals are taxed on both sides of the border

When you take money out, both countries tax it in the same year, and the credit mechanism prevents double tax. The following table summarizes the treatment for a US citizen living in Canada, with the non-resident case noted where it differs.

One detail needs records rather than rules. Contributions you made while you were already a US citizen or resident were never deducted on a US return, and in many cases they give you US basis in the plan, so part of a withdrawal can come out free of US tax. Working that out requires contribution history back to the first year you were a US person, which is why we ask clients to keep every RRSP contribution receipt indefinitely. The treatment of basis is fact-specific and depends on when you became a US person relative to when you contributed.

How we handle RRSPs for US citizens

We treat the RRSP as the anchor of a cross-border portfolio. On each year's return we confirm the deferral applies, list the plan on the FBAR and Form 8938 at the correct values, and keep Canadian funds inside the RRSP rather than in taxable or TFSA accounts where they become PFICs. When withdrawals begin, we coordinate the T1 and the 1040 so the credit lines up in the same year and track basis from your contribution history. For clients moving south we plan the withdrawal pattern around the treaty rates before the move, and our 401(k) and IRA to RRSP guide covers the reverse direction for people arriving in Canada with US plans.

Source: IRS - Revenue Procedure 2014-55.