Canadian RRSPs, RRIFs and Other Foreign Funded Retirement Plans: Tax Planning and Reporting for 402(b) Funded Plans

Transcription

1 FOR LIVE PROGRAM ONLY Canadian RRSPs, RRIFs and Other Foreign Funded Retirement Plans: Tax Planning and Reporting for 402(b) Funded Plans TUESDAY, JUNE 7, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 Canadian RRSPs, RRIFs and Other Foreign Funded Retirement Plans June 7, 2016 C. Edward Kennedy, Jr., CPA, JD, Partner Alison N. Dougherty, J.D., LL.M., Senior Manager GrossDukeNelson & Co., Atlanta Aronson, Rockville, Md. Max Reed, LLB, BCL, Tax Lawyer SKL Tax, Vancouver, BC

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 skltax.com Canadian pension and savings plans Max Reed LL.B, BCL SKL Tax

6 Outline Overview of the different Canadian registered plans US income tax consequences of those plans How to disclose these plans Plans may not be entities separate from their owners Plans may not be trusts for US tax purposes Plain paper disclosure preferable Canada Pension and Savings Plans Max Reed 6

7 Types of Registered Plans Registered Pension Plan (RPP) Registered Retirement Savings Plans (RRSP) Tax Free Savings Account (TFSA) Registered Education Savings Plan (RESP) Registered Disability Savings Plan (RDSP) Canada Pension and Savings Plans Max Reed 7

8 Registered Pension Plan Employer sponsored pension plan (i.e. similar to a 401K) Contributions to Canadian pension plan tax deductible for US federal tax purposes if certain criteria met No special form required to take treaty deferral Not reportable on FBAR (Form FinCen 114) Reportable on Form 8938 Canada Pension and Savings Plans Max Reed max@skltax.com 8

9 RRSP Government sponsored pension plan (i.e. IRA) Income is tax deferred under Article 18(7) of Canada-US Treaty No special form required to take treaty deferral Form 8891 was eliminated by Rev. Ruling Reportable on FBAR (Form FinCen 114) Reportable on Form 8938 Canada Pension and Savings Plans Max Reed 9

10 RRSP (2) According to IRS, RRSP is an annuity After tax contributions should increase basis in the plan Canadian who moves to the US and takes out money from RRSP should have high basis and low US tax Sell and re-purchase assets with gains before move to US to increase RRSP basis Canada Pension and Savings Plans Max Reed 10

11 Tax Free Savings Account Investment income inside the plan is tax free in Canada Investment income is taxable in the US to the holder Similar to a Roth IRA Reportable on FBAR (Form FinCen 114) Reportable on Form 8938 Canada Pension and Savings Plans Max Reed max@skltax.com 11

12 Registered Education Savings Plan College savings plan (like a 529) Parent contributes money, sometimes matched by government Child withdraws money and pays tax on part of it Investment income is tax deferred in Canada Investment income is taxable in the US to the holder Reportable on Form 8938 Reportable on FBAR (Form FinCen 114) Canada Pension and Savings Plans Max Reed max@skltax.com 12

13 Registered Disability Savings Plan Plan allows relatives to save for disabled dependent (an ABLE plan) Relatives contribute money, government matches it Disabled dependent withdraws money Investment income is tax deferred in Canada Investment income is taxable in the US to the holder Reportable on Form 8938 Reportable on FBAR (Form FinCen 114) Canada Pension and Savings Plans Max Reed 13

14 Disclosing these plans No IRS guidance on how to report Canadian registered plans except for RRSP Plans may not be an entity separate from their owner Plans are unlikely to be classified as trusts This is because they are more akin to bank accounts Plain paper disclosure is recommended as an insurance policy against penalties Canada Pension and Savings Plans Max Reed 14

15 Not separate entities Entity classification regime only applies to those that are separate from owners Rev. Rul (re: Delaware Statutory Trust) sets out criteria for when an entity is separate from its owners: Recognized under local law as a separate entity Creditors may not assert claims against property held by the entity The entity can be sued Entity s beneficial owners have limited liability Entity can be merged with other entities Entity must have a business purpose Canada Pension and Savings Plans Max Reed max@skltax.com 15

16 Not separate entities (2) These plans more closely resemble bank accounts than legal entities Unlikely to be trusts under Canadian law Unlikely (but unclear) that they have legal personality under Canadian law They don t have a business purpose If not entities then no disclosure necessary Canada Pension and Savings Plans Max Reed max@skltax.com 16

17 Plans are unlikely to be trusts Definition of trust under (a): Trustee takes title to property Usually not created by beneficiary Purpose of arrangement is arrangement is to vest in trustees responsibility for the protection and conservation of property Financial institution would be trustee Financial institution does not take title Financial institution may not have responsibility for property Canada Pension and Savings Plans Max Reed 17

18 Plans are unlikely to be trusts (2) Mexican Land Trust Revenue Ruling Supports this view (Rev Rul ) Even if trustee takes title, not a trust if beneficiary has sole tax responsibility Applies best to TFSA but also to other plans If not a trust, then no Forms 3520/3520-A required and compliance cost of plans reduced significantly Canada Pension and Savings Plans Max Reed max@skltax.com 18

19 How to disclose No tax avoidance purpose all income reported Attach form letter to Form 1040 that describes plan and asks for IRS guidance Even if IRS takes position that Form 3520 required, reasonable cause may excuse penalties James v. United States [2012 U.S. Dist. LEXIS (MD FL 2012)]: citing Internal Revenue Manual reasonable cause = good faith effort was made to comply with the law Plain paper disclosure is textbook good faith Canada Pension and Savings Plans Max Reed max@skltax.com 19

20 Ed Kennedy Partner GrossDukeNelson & Co. PC

21 21

22 Applies to funded employee s trusts not qualifying for exemption under IRC 501(a) Employer contributions to such trusts are includible in income under IRC 83 Occurs when property is not subject to a substantial risk of forfeiture Generally occurs when property vests If employee vests in plan during a taxable year, the value of the employee s interest in the plan is taxable in full at such time Treas. Reg (b)-1(b)(1) 22

23 An employee s trust is a trust created or organized in the United States and forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaries Foreign employee s trusts are for the most part are not established in the U.S. and thus do not constitute qualified trusts, but are considered nonqualified employee s trusts 23

24 Distributions (and vestings) are taxable under Section 72 Taxation depends on the investment in the contract Employer contributions are considered investment in the contract only if: The amounts were includible in the employee s income, or If such amounts had been paid directly to the employee at the time they were contributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contribution 24

25 However, IRC 72(w) provides that employee or employer contributions are not included in a plan participant s basis if: The employee was a nonresident alien at the time the services were performed with respect to which the contribution was made; The contribution is with respect to compensation for labor or personal services from non-u.s. sources; and The contribution was not subject to income tax under the laws of the United States or any foreign country. 25

26 A beneficiary of an employee s trust under IRC 402(b) will generally not be considered as an owner of the trust under the grantor trust rules Conversely, if the retirement plan does not qualify as an employee s trust, then the plan must be reviewed to determine if it constitutes a grantor trust 26

27 If the plan is discriminatory (also referred to as being not broad-based ), any increase in value in a highly compensated employee s vested portion (i.e., earnings and accretions) during the year will be taxable. 27

28 Retirement plans not constituting employee s trusts are taxed under general tax principles depending on their nature 28

29 IRC 409A exempts many foreign plans from its applicability: Foreign social security plans that are government-mandated or covered by a U.S. Social Security Totalization Agreement. Foreign plans which are covered by section 402(b), in which the plan assets are in trust and not exposed to the creditors of the funding employer, and therefore do not allow for a deferral under U.S. tax principles in any event. Participation in certain foreign broad-based plans by a nonresident alien, a resident alien under the substantial presence test, or a bona fide resident of a U.S. possession. Deferrals in respect of income that would be excluded under a treaty. Likely not to apply in the case of 402(b) or other funded plans, but worth checking 29

30 30

31 Certain countries require employer contributions to funded benefit plans under their social security laws Hong Kong Mandatory Provident Fund Singapore Central Provident Fund Brazilian FGTS In addition, many countries allow employees to participate in funded tax-favored private retirement plans Australian Superannuation Fund Canadian plans discussed earlier 31

32 Under IRC 402(b)(3), beneficiaries are generally not considered as owners of the plan under the grantor trust rules In situations where the foreign retirement plan is selffunded by the taxpayer, such as a self-funded Australia Superannuation Fund, or more than 50% of the assets in the plan are attributable to the taxpayer s contributions, some or all of the plan will be considered a grantor trust If so, the plan is reportable on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner 32

33 TAM CC-TAM-PMTA (10/10/97) Involved employer contributions to the Singapore Central Provident Fund (CPF) Employer required to contribute percentage of employees to CPF Contributions are non-elective CPF holds funds in trust for employee Separate accounts are maintained Amounts are nonforfeitable and can be withdrawn at age 55, or upon death or disability 33

34 IRS concluded that employer contributions were includible in the employee s income under IRC 402(b) Because these amounts were included in income under IRC 402(b) and not IRC 61, employer contributions could not be considered as foreign earned income eligible for the IRC 911 exclusion Employee contributions were income under IRC 61 and thus considered as foreign earned income eligible for the IRC 911 exclusion 34

35 Key takeaway is the employer contributions to funded plans may be taxable There is very little guidance in this area The Singapore ruling would appear to apply to most similar provident-fund type plans Care should be exercised in reviewing these plans to determine appropriate U.S. taxability 35

36 Certain U.S. income tax treaties grant relief from U.S. taxation for employer contributions and earnings and accretions of foreign pension plans Examples: Relief for pension contributions but not earnings Austria France Italy Relief for both Belgium Canada Germany 36

37 Confirm that specific plan is covered by the treaty Watch out for savings clause limitations Determine length of time treaty relief is available 37

38 Is the plan held in a foreign bank account? FinCEN 114 reporting a possibility Are the assets considered Specified Foreign Financial Assets (SFFAs) An interest in a social security, social insurance, or other similar program of a foreign government is not a specified foreign financial asset However, retirement plan assets held by a nongovernmental institution (Canadian RRSP, Australian Superannuation Fund) are not exempt from reporting SFFAs are reported on Form 8938, unless required to be reported elsewhere 38

39 Has the plan invested in a PFIC? Form 8621 must be filed for each PFIC Exempts U.S. persons treated as the owner of any portion of a foreign grantor trust that is a foreign pension fund operated principally to provide pension or retirement benefits if, pursuant to an income tax treaty, income earned by the pension fund is taxed as income of the U.S. person only when and to the extent it is paid to or for the benefit of that person. Only relatively few income tax treaties to which the United States is a party provide this relief. These include the treaties with Belgium, Canada, Germany, Malta, the Netherlands, South Africa, and the United Kingdom. 39

40 Does the beneficiary have a >50% interest in a trust that holds the retirement / pension account Forms 3520 and 3520-A Is the plan held by a CFC? Form 5471 PFICs, trusts and CFC assets do not need to be separately reported on Form 8938, but values need to be included in determining whether Form 8938 reporting is required 40

41 41

42 U.S. citizens / residents are taxed on worldwide income so planning is limited, if not nonexistent Planning should come into play at or before time individual arrives in the U.S. because once tax resident in the U.S. limited opportunity to plan 42

43 Vesting of foreign plans while U.S. tax resident means that all or a portion of the total balance will be taxable in the U.S. Investment in the contract does not include employer / employee contributions exempt from tax in home country Accelerate or defer vesting until no longer U.S. resident Review IRC 409A implications if already U.S. tax resident 43

44 Canadian RRSPs no longer need to file Form 3520 but need to determine whether to defer taxation until distribution Plans which have invested in PFICs need to determine which election is best given the taxpayer s circumstances If taxpayer does not intend to remain in the U.S. permanently, electing to defer tax until distribution may be preferable 44

45 Determine if distribution can be deferred until after termination of U.S. tax residency If not, carefully review plan to determine investment in the contract 45

46 C. Edward Kennedy Jr Partner International Tax GrossDukeNelson & Co. PC Ed has over 35 years of experience dealing with a variety of international tax matters. He specializes in tax consulting services to a wide variety of clients ranging from closely held companies to multinational businesses. His expertise includes domestic and foreign income and social security tax planning, tax compliance for individuals and corporations, tax treatment of incentive compensation plans, international assignment program administration, and international assignment policy design. Prior to joining the firm, Ed was with KPMG LLP, where, in addition to providing the above services, he served as the US firm s lead for international social security matters. Ed s technical skills include all aspects of international tax and social security planning, including individual and corporate tax reporting of foreign assets, including controlled foreign corporations, foreign trusts, passive foreign investment companies, and foreign bank accounts, compliance with domestic and foreign income and social security tax planning for individuals and corporations, domestic and international individual and corporate income tax compliance, and tax treatment of incentive compensation plans. GrossDukeNelson & Co Perimeter Park Drive Suite 100 Atlanta, GA Tel Fax ed.kennedy@grossdukenelson.com 46

47 U.S. International Tax Reporting for Canadian Retirement Plans Alison N. Dougherty Aronson LLC June 7,

48 I.R.S. Revenue Procedure Rev. Proc (10/7/2014) allows an automatic treaty election under Article XVIII(7) of the U.S. income tax treaty with Canada for the deferral of U.S. Federal tax on accrued but undistributed income and simplifies reporting of income from Canadian retirement plans including RRSPs and RRIFs. Eligible individuals Report distributions from Canadian retirement plans on U.S. Federal tax return in the year of distribution. U.S. citizen or resident at any time while a beneficiary of the Canadian retirement plan Filed a U.S. Federal Form 1040 individual tax return for each year as required Has not previously reported accrued but undistributed income from the plan on a U.S. Federal tax return Has reported all distributions received from the plan in accordance with treaty election for all taxable years Ineligible individuals who have previously reported accrued but undistributed income from Canadian retirement plan on a U.S. Federal tax return Must continue to report undistributed income unless they obtain consent from the IRS

49 Form 8891 Now Obsolete Before Rev. Proc , Form 8891 was required to be filed to elect deferral of U.S. Federal tax on accrued but undistributed income from Canadian RRSPs and RRIFs. According to Rev. Proc , Form 8891 is now obsolete as of 12/31/2014. Previously, if Form 8891 was filed, the Canadian retirement plan was not required to be reported on Form 8938 Statement of Specified Foreign Financial Assets. Without Form 8891, the Canadian retirement plan is now required to be reported on Form

50 Forms 3520 and 3520-A Foreign Trust Reporting Rev. Proc , Section 5 provides that beneficiaries and annuitants of Canadian retirement plans are not required to report contributions to, distributions from and ownership of Canadian retirement plans under the I.R.C. Section 6048 Form 3520 reporting requirements. Custodians also are not required to file the Form 3520-A with respect to a Canadian retirement plan. Rev. Proc definition of Canadian retirement plan is any trust, company, organization or other arrangement that is within the scope of Article XVIII(7) of the U.S. income tax treaty with Canada. Forms 3520 and 3520-A are potentially required for foreign trusts such as an Australian Superannuation Fund that are not within scope of the treaty or otherwise excepted specifically for transfers to foreign trusts described under I.R.C. Sections 402(b), 404(a)(4) and 404A

51 FinCEN Form 114 Report of Foreign Bank and Financial Accounts FBAR filing requirement U.S. person with a financial interest in or signature authority over foreign bank and financial accounts FBAR reporting threshold = highest aggregate balance of all reportable foreign accounts is greater than $10,000 USD at any time during the calendar year Accounts reportable on FBAR include Canadian RRSPs and RRIFs Penalties for the failure to file FBAR include: $10,000 USD civil penalty Greater of $100,000 USD or 50% of account balance for willful failure to file FBAR Criminal penalties for willful failure to file FBAR

52 Form 8938 Statement of Specified Foreign Financial Assets Form 8938 filing requirement - Specified individual (U.S. persons and certain nonresident individuals) with an interest in a specified foreign financial asset Form 8938 reporting threshold Single filing status living in United States total value of all reportable foreign assets combined is more than $50,000 USD at 12/31 or $75,000 at any time during calendar year Married filing jointly status living in United States total value of all reportable foreign assets combined is more than $100,000 USD at 12/31 or $150,000 at any time during calendar year Reportable assets include Canadian RRSPs, RRIFs and foreign pension plans If maximum value of share of assets in foreign pension plan cannot be determined then report the actual payment amounts from foreign pension plan Form 8938 failure to file penalty $10,000 USD plus additional $10,000 USD penalty up to a maximum of $50,000 USD for each 30 day period that failure to file continues after 90 days following IRS notice

53 Form 8833 Treaty-Based Return Position Disclosure Rev. Proc appears to imply that the treaty election is automatic for the deferral of U.S. Federal tax on accrued but undistributed income from Canadian retirement plans. File Form 8833 Treaty-Based Return Position Disclosure as a protective filing to support deferral of U.S. Federal tax on accrued but undistributed income from Canadian retirement plan for eligible individuals. Include reference to Article XVIII(7) of the U.S. income tax treaty with Canada in description of treaty position on Form Otherwise according to Rev. Proc , eligible individuals must report on their U.S. Federal income tax return any income that has accrued in the plan when it is distributed

54 Form 5471 Information Return for U.S. Shareholders of a Foreign Corporation Form 5471 is filed by a U.S. person to report ownership of a foreign corporation. Category 2 filer U.S. officer or director in a year when any U.S. person acquires 10% of the vote or value of a foreign corporation Category 3 filer U.S. person who acquires or disposes of a 10% ownership interest in a foreign corporation or who becomes a U.S. person while owning 10% Category 4 filer U.S. person who controls (i.e., owns more than 50%) of a foreign corporation during the tax year Category 5 filer U.S. person who owns at least 10% of the voting stock of a foreign corporation when more than 50% of the vote or value is owned by U.S. persons Form 5471 penalty is $10,000 USD for the late, inaccurate or incomplete filing or failure to file per foreign corporation per year

55 Form 8621 Information Return by U.S. Shareholder of PFIC or QEF Canadian RRSP and RRIF plan accounts typically hold ownership interests in passive foreign investment companies (PFICs). Form 8621 reporting is required for an ineligible individual s ownership of PFICs held through the U.S. individual s Canadian RRSP or RRIF. Eligible individuals may qualify for relief from annual Form 8621 reporting requirements under Temp. Treas. Reg. Section T(b)(3)(ii). As a protective filing, the U.S. individual should file the Qualified Electing Fund election on the Form 8621 in the year when the Canadian RRSP or RRIF acquires the PFIC interest. An issue is whether Rev. Proc allows automatic deferral of U.S. Federal tax on undistributed QEF/PFIC income for eligible individuals that own PFIC interests in their Canadian RRSP and RRIF accounts. One position is that deferral is allowed based on the treaty

56 Form 1116 Foreign Tax Credit for U.S. Individuals A U.S. individual may be required to pay foreign individual income tax on distributions of income from a foreign retirement plan. A U.S. individual may clam a foreign tax credit as a dollar for dollar offset against U.S. Federal individual income tax liability on the same foreign source income from the foreign retirement plan. The foreign tax credit is subject to limitation on the U.S. Federal tax return. The limitation is based on the proportionate amount of the U.S. taxpayer s foreign source income divided by total worldwide taxable income. Any excess foreign taxes paid that are not creditable due to the limitation may be carried forward for 10 years or carried back one year. Compensation from performing services is included in the general limitation category. Note that special rules may apply for lump-sum distributions from foreign pension plans and resourcing under treaties

57 ALISON N. DOUGHERTY SENIOR MANAGER, TAX SERVICES ARONSON LLC Alison N. Dougherty provides tax services as a Senior Manager at Aronson LLC. Alison specializes in international tax compliance, consulting, planning and structuring as a subject matter leader of Aronson s international tax practice. She has extensive experience assisting clients with U.S. tax reporting and compliance for offshore assets and foreign accounts. She provides outbound U.S. international tax guidance to U.S. individuals and businesses with activities in other countries. She also provides inbound U.S. international tax guidance to nonresident individuals and businesses with activities in the United States. She has worked extensively in the area of U.S. international tax reporting and compliance with the preparation of the U.S. Federal Forms 5471, 926, 8865, 8858, 5472, 1042, 1042-S, 8621, 8891, 8804, 8805, 8813, 8288, 8288-A, 8288-B, 1116, 1118, 3520, 3520-A, 2555, 5713, 8938 and FBAR. She has counseled U.S. taxpayers regarding the outbound formation, capitalization, acquisition, operation, reorganization and liquidation of foreign companies. She has significant experience with U.S. Federal nonresident tax withholding, foreign partner tax withholding and FIRPTA withholding. She works closely with nonresident individuals and businesses regarding inbound U.S. real property investment. She often assists U.S. taxpayers with IRS amnesty program disclosures of offshore assets and foreign accounts. Alison completed the LL.M. (Master of Laws) with academic distinction at Georgetown University Law Center. She completed the LL.M. (Master of Laws) in Taxation and the Juris Doctor at the University of Denver College of Law. She holds a Bachelor of Arts degree in Foreign Language from Virginia Commonwealth University ADougherty@aronsonllc.com Aronson LLC 805 King Farm Blvd Third Floor Rockville, Maryland USA