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Very good question. Most of the time I see U.S. Citizens with RRSPs or RRIFs making this election. The reason being is that the timing of taxation by Canada and the U.S. is the same (this helps with foreign tax credit planning purposes).
Being a U.S. citizen you are taxed on your worldwide income. This includes the income generated by the RRIF/RRSP. By making this election you are electing to tax the income the RRIF/RRSP has made when you take a cash distribution from the account, not as it is earned in the account.
Generally it is preferably to make this election for foreign tax credit planning purposes. When you take a cash distribution Canada will tax you on it, and assuming you have made the election, the U.S. will tax you on it as well. Given the foreign tax credit the U.S. tax basically gets canceled out. Absent the election the U.S. will tax you on the annual income the RRSP/RRIF earns but you won't have any Canadian taxes paid to get a foreign tax credit. Absent the election you'll pay tax in the U.S. on it as it is earned and in Canada as you take cash distributions. (generally not preferable)
Don't forget to file an FBAR and the 8938 to report the account and asset.
Please let me know if you have any further questions.
Ok so your husband became a U.S. resident/citizen in 1996 and has not made contributions to the RRIF since 1996. Being that he is a U.S. citizen/resident he should have been disclosing the RRIF on Form 8891 (see below) annually and including the income from the RRIF on his Form 1040.(absent the election)
1.) Do we still want to answer affirmatively to the Article XVIII(7) deferral? - the choice is yours. If you do not elect deferral then any income the fund earns during the year must be reported and it will be taxed as if it were distributed. (see my comments on the prior post, generally most U.S. citizens whom own such assets make this election)
2.) Will we get the Canadian taxes back? - You probably won't get the Canadian taxes back. The RRIF was contributed to with "PRE-Tax" dollars so Canada will tax it on distribution. You might be able to file a Canadian return to get a refund of the taxes paid.
3.)Are we now subject to the "double taxation"?? - not really but somewhat (absent the election). If you don't elect you won't get the benefit of the foreign tax credit until Canada taxes the distribution. The U.S. will tax the earnings even though it is not distributed. With the election you get to report the "distribution" as income to both countries in the same year and maximize the foreign tax credit.
I hope this helps, please let me know if you have any further questions. If you choose to make the election (which is strongly preferable) be sure to mark part 6c of the 8891 so that the election is irrevocable for the current year and all subsequent years.
Form 8891 - http://www.irs.gov/pub/irs-pdf/f8891.pdf