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Barbara Lamar
Barbara Lamar, Tax Lawyer, CPA
Category: Tax
Satisfied Customers: 188
Experience:  JD, MBA University of Texas at Austin, over 18 years representing small businesses
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US resident for 6 years from Canada has Canadian RRSPs.

Customer Question

Hi, I have Canadian RRSP’s that automaticly renew as CD’s every tear. I was initially told there were no tax consequences for this since no withdrawals were ever made and will not be for several years. Someone else has told me that the interest has to be reported yearly, but that a simplified form is coming. Does someone have advice what to do in this situation? The RRSP’s have accrued interest anually from 1999 to 2004 with automatic instructions to renew at the prevailing interest rate.
Submitted: 11 years ago.
Category: Tax
Expert:  Tammy F. replied 11 years ago.

 The interest will not be taxable until you withdraw the funds. 

Let me know if you have more questions.

Customer: replied 11 years ago.
Reply to Tammy Falkner's Post: Hi, thanks for the answer, but I was hoping for an explanation concerning reporting. I was referring to the weird rules for forms 3520 and 3520-A. The paragraph below "explains" it sort of!

In April, the US Internal Revenue Service issued Notice 2003-25, in which it indicated it has become aware that many taxpayers with interests in Canadian RRSPs are unfamiliar with the requirements for filing US tax forms 3520 and 3520-A. This notice was followed by a subsequent notice, Notice 2003-57, in August. Previous instructions had indicated that RRSPs were exempt from filing Form 3520. The IRS has stated it will not require Forms 3520 and 3520-A to be filed for taxation years before 2002, but it will require them to be filed for 2002, and it has granted an extension for filing until August 15. Where a taxpayer has filed an election under the Canada-US Treaty to exempt RRSP earnings from current US taxation, following the procedure in Revenue Procedure 2002-23, the requirement to file Form 3520-A and Form 3520 is waived for the 2002 taxation year. However, Form 3520 has to be filed if there was a distribution from the plan during 2002. The latest notice also states where a Form 3520 or Form 3520-A has been filed for 2002 and is incomplete, the IRS will not assess penalties for failure to file unless it requests such information and the taxpayer fails to submit the requested information. If a tax-payer has failed to file an election under Revenue Procedure 2002-23 for 2002 to defer US tax on accrued income within the plan, he or she may make the election by filing an amended US return by August 15, 2003. The IRS has said that it is working to develop a more simplified reporting regime for Canadian retirement plans for future tax years.

I am not sure what the above means. Do you or anyone else understand what to do?
Expert:  Barbara Lamar replied 11 years ago.
To understand what these Notices are talking about, you have to go back to Internal Revenue Code Section 6048 ("Information with Respect to Certain Foreign Trusts"). Sub-paragraph c of this section says:
c)    Reporting by United States beneficiaries of foreign trusts.
      6048(c)(1)In general.
      If any United States person receives (directly or indirectly) during any taxable year of such person any distribution from a foreign trust, such person shall make a return with respect to such trust for such year which includes—
            6048(c)(1)(A)the name of such trust,

            6048(c)(1)(B)the aggregate amount of the distributions so received from such trust during such taxable year, and

            6048(c)(1)(C)such other information as the Secretary may prescribe.
Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts) and Form 3520A (Annual Information Return of a Foreign Trust with a US Owner) were orginally not required for Candian RRSP's, but IRS changed its position on this in 2003, so now U.S. citizens and residents with interests in Canadian RRSP's have to file 3520A every year, whether or not they take any distributions or make any contributions; and 3520 when they take distributions or make contributions to RRSP's.

The law on when income from the trusts is taxable has not changed, just the filing requirements.

Although the law provides for a penalty of 5% of the trust assets for late filing, to the best of my knowledge, IRS will be lenient about accepting late filings for 2003.

These forms are a real hassle to fill out, and I'd love to see a flood of letters to Congress to do away with this law, but because not that many U.S. citizens have interests in RRSP's I don't expect Congress to do anything to help. This is part of the general effort of the U.S. government to get more information about foreign transactions of U.S. citizens and residents.

You can find the forms online here:

Form 3520:

Form 3520A:

You'll probably need to contact the custodian of the trust to get all the information asked for on the forms.

I hope this was helpful, but you still may have a tough job ahead, filling out the forms.

Barbara Lamar, Tax Lawyer, CPA
Category: Tax
Satisfied Customers: 188
Experience: JD, MBA University of Texas at Austin, over 18 years representing small businesses
Barbara Lamar and 3 other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Barbara Lamar's Post: Thanks for the answer, I was hoping for something simple but no such luck with the IRS.

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