U.S. taxpayers who own a Canadian Registered Retirement Savings Plan (RRSP), Canadian Registered Retirement Income Fund (RRIF) or own or are the beneficiary of a Canadian Registered Education Savings Plan (RESP) may have special tax reporting requirements.
Reporting Requirements for all RRSPs, RRIFs, and RESPs
Some IRS reporting requirements are the same for RRSPs, RRIFs, and RESPs. For all three types of accounts, U.S. taxpayers who have an interest in, or signatory or other authority over these foreign accounts must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), if the aggregate value of the foreign trust accounts exceeds $10,000 at any time during the calendar year. As of October 1, 2013 the FBAR form must be filed through the Financial Crimes Enforcement Network’s (FinCEN’s) Bank Secrecy Act E-Filing System on or before June 30th of the year following the calendar year being reported. For example, to report foreign accounts held open in 2013, the taxpayer must file the FBAR by June 30, 2014.
In addition to filing an FBAR form, the U.S. taxpayer with an interest in these Canadian accountsmust follow certain reporting requirements on his or her annual tax return. First, the U.S. taxpayer must include a completed Schedule B, Interest and Ordinary Dividends, with his or her annual tax return. On Schedule B, the taxpayer will complete Part III, Foreign Accounts and Trusts. Questions 7a asks whether, at any time in the year, the taxpayer had a financial interest in or signatory authority over a foreign financial account. Question 7b also asks whether the taxpayer is required to file an FBAR, and if so, in which foreign country the financial account was located. Finally, Question 8 asks whether the U.S. taxpayer received a distribution from, or was the grantor of, or transferor to, a foreign trust, which includes RESPs.
The U.S. taxpayer may also be required to file Form 8938, Statement of Specific Foreign Financial Assets with his or her annual tax return. Whether a taxpayer is required to file this form depends on where the taxpayer lives, the taxpayer’s filing status, and the value in the accounts. For example, unmarried taxpayers living in the United States must file Form 8938 if the total value of your interest in the foreign accountsis more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.
RRSPs and RRIFs Unique Reporting Requirement
RRSPs and RRIFs have one unique filing requirements. These two accounts are two types of Canadian retirement account for holding assets, similar to a U.S. IRA or 401(k) retirement plan. Also similar to U.S. IRA and 401(k) plans, RRSPs and RRIFs enjoy tax-deferral benefits in Canada. By default, U.S. taxpayers who have an interest in an RRSP or RRIF do not have tax-deferral benefits on their U.S. income tax returns. However, a U.S. taxpayer may elect to receive similar tax-deferral status of their RRSP or RRIF by filing a Form 8891.
Even if a U.S. taxpayer does not elect tax-deferral status of their RRSP or RRIF, he or she must still file a Form 8891 a) to report contributions to RRSPs and RRIFs; b) to report undistributed earnings in RRSPs and RRIFs; and c) to report distributions received from RRSPs and RRIFs.
RESPs Unique Reporting Requirements
By contrast, a Canadian RESP is generally treated as a foreign trust and must follow similar reporting requirements to a foreign trust.
When the RESPexperiences a “reportable event,” the U.S. taxpayer must file Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Reportable events generally occur when the taxpayer makes a contribution to or receives distributions from an RESP.
The U.S. taxpayer must also file a Form 3520-A, Annual Information Return of Foreign Trust
With a U.S. Owner. This form is an annual information return that provides information about the RESP, its U.S. beneficiaries, and any U.S. person who is treated as an owner of any portion of the RESP.
A U.S. taxpayer who transfers money or property to a foreign trust may also be required to file a Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Generally, a U.S. taxpayer who transfers money or property totaling more than $14,000 for the year must file a Form 709. Form 709 is a separate tax return, which is not submitted with the taxpayer’s annual tax return.
Finally, RESPs do not enjoy the tax-deferral benefits afforded to RRSPs and RRIFs by making the Form 8891 election. Accordingly, the owner of an RESP must include any earnings in the RESP on his or her annual U.S. income tax return.
Failure to comply with the above reporting requirements can result in steep penalties to the unwitting taxpayer. Failure to file an FBAR may result in civil penalties for negligence, pattern of negligence, non-willful, and willful violations. These penalties range from a high penalty for willful violations, equal to the greater of $100,000 or 50% of the balance in the account at the time of violation, to a low penalty of $500 for negligent violations. For failing to file a correct Schedule B or Form 8938, the taxpayer could face a failure-to-file penalty of $10,000, criminal penalties, and if the failure to file results in underpayment of tax, an accuracy-related penalty equal to 40% of the underpayment of tax and a fraud penalty equal to 75% of the underpayment of tax.
Failure to file a correct and complete Form 3520results in an initial penalty of the greater of $10,000, 35% of the gross value of any property transferred to or distribution from a foreign trust, or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. taxpayer. An additional 5% penalty of any unreported foreign gifts may also apply for each month for which the failure to report continues.
Finally, failure to file a Form 709 may come with penalties for willful failure to file a return on time, willful attempt to evade or defeat payment of tax, and valuation understatements that cause an underpayment of the tax. A 20% penalty of the tax underpayment may be imposed on both a substantial valuation understatement (the reported value of property listed on Form 709 is 65% or less of the actual value of the property) and a gross valuation understatement (the reported value listed on the Form 709 is 40% or less of the actual value of the property).
U.S. taxpayers who have an interest in a Canadian RRSP, RRIF, or an RESP would benefit from the experienced tax attorneys of the Law Office Of Jeffrey B. Kahn, P.C. representing you to avoid the pitfalls associated with failure to comply with the reporting requirements associated with having an interest in a foreign trust.
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