Finally IRS has come to their senses. Prior to October 7, 2014 Canadians subject to U.S. income taxes had to make a written election to avoid paying tax on what they earned in RRSPs and RRIFs. If a Canadian failed to make the election on their first return, they had to report and pay tax on the earnings in their RRSP or RRIF every year. Fortunately, the pain could be stopped by making a later election but the taxpayer could not get the tax back for years prior to the election.
RRSP and RRIF acronyms
RRSP = registered retirement savings plan
RRIF = registered retirement income funds
These Canadian plans are similar to the U.S. individual retirement plans (IRAs). plan.
The Change
This is probably one of the most frequently missed elections. I have a hard time figuring out who would not want to make this election if they knew about it. Now the IRS will assume affected taxpayers made the election unless they the taxpayer affirmatively elects out by reporting the income and paying the tax each year. Not only does it help Canadians who are new U.S. taxpayers, it also retroactively helps those who did not make the election and did not report the income all the way back to 1996.
You can read the press release (IR-2014-97) at the IRS website. At the bottom of the release, IRS provides a link to a PDF with the official announcement.
Please note that this notice does not eliminate the need for other forms such as the FinCen Form 114 that reports foreign financial accounts. The RRSPs and RRIFs may also have to be reported on Form 8938. Penalties for failing to file either form are quite severe, especially the penalty for FinCen 114.
IRS – protecting Canadian retirement savings since 2014!