New rules allow Americans in Canada to defer U.S. taxes on retirement savings

The IRS estimates as many as 20,000 people will benefit
By Neil Cohen
|CHRR, Guide to Pensions & Benefits|Last Updated: 06/20/2002

For U.S. citizens and residents, participation in Canadian pension plans has been a tax headache. Under U.S. law, a citizen or resident of the United States is subject to current income tax on the accrued income from a Canadian pension plan. This includes accrued income from a registered pension plan (RPP), registered retirement income fund (RRIF), registered retirement savings plan (RRSP), or deferred profit sharing plan (DPSP) even though the income has not yet been distributed.

Under Canadian law these plans are not subject to income tax until the income is actually distributed. This situation creates a potential “mismatch” in the timing of U.S. and Canadian income taxes. As a result, some individuals have been subject to double taxation on their accrued income, with no relief available.

To prevent this timing mismatch, the United States’ Internal Revenue Service (IRS) has recently issued Revenue Procedure (Rev. Proc.) 2002-23, under Article XVIII(7) of the U.S. – Canada Income Tax Convention (the Tax Treaty) enabling affected individuals to elect to defer U.S. income tax on the accrued income in an eligible Canadian retirement plan until the plan’s funds are actually distributed.