This chapter tells you how to prepare and file Form 8891 with your calendar year 2009 U.S. tax return.

Form 8891 is a special U.S. tax form to be used by people who have RRSPs. It is used to:

• make an election (if you want to) for tax exemption on investment earnings for the RRSP using the income tax treaty between the United States and Canada;
• report distributions from your RRSP;
• collect and report information about income from your RRSP that is taxable in the U.S.

Here are the step-by-step instructions for how to complete this form.

Lines 1 through 5: you and your RRSP

Start first with the part about the plan and your relationship to it. These questions are unremarkable (Lines 1 through 5) and the information will come from the account statements that you get from your RRSP’s custodian.

Line 6: the treaty election

This is where the important things happen. By answering the questions at Line 6, you will be making an election (or not, if that is your decision) under the income tax treaty.

Line 6a asks about any prior income tax treaty elections for your RRSP. You will answer “Yes” if:

• You filed a Form 8891 in 2004 through 2008; or
• You did some complicated stuff[ref]You would have attached a statement to your 2002 or 2003 income tax returns using the methodology described in Rev. Proc. 2002-23. Alternatively, you might have done something using the procedures in Rev. Proc. 89-45.[/ref] on your U.S. tax returns before 2004 (and trust me, you would remember this!).

You will answer “No” for any other situation.

Line 6b is the “prove it” line. If you answered “Yes” at Line 6a, fill in the year when you made that first election.

Line 6c is where you invoke the income tax treaty to make your investment earnings inside the RRSP tax-exempt in the United States, exactly as they are in Canada. If this is the first time you make the election to make your RRSP investment earnings tax-exempt, check the box. This is an irrevocable election, so consider it carefully before you do this.

Line 7—RRSP distributions in 2009

Line 7 is where you report distributions from your RRSP in 2009. There are two components to the answer: total distributions you have received, and taxable (in the United States) distributions you have received.

Line 7a asks for the amount of distributions you received from your RRSP in 2009.

If you received no distributions from your RRSP in 2009, enter zero here.

If you did receive a distribution from your RRSP in 2009, you would enter the amount of the distribution on Line 7a. If you did an RRSP rollover that was tax-exempt in Canada, it is not a distribution. You do not report it here on Line 7a.

You also write this amount on Form 1040, Line 16a. That is where you report total distributions from pensions.

Line 7b reports the portion of the distribution that is taxable in the U.S. If you received no distributions from your RRSP in 2009, enter zero here.

If you did a tax-free rollover (RRSP to RRIF, for instance) in 2009, enter zero here.

If you received a distribution from your RRSP in 2009, you need to compute how much of that distribution is taxable income to you in the United States.

The number that you write in on Line 7b will also go to Form 1040, Line 16b and thereby becomes taxable income to you.

Line 8—year-end plan balance

Line 8 asks for the plan balance on December 31, 2009. That should be on your year-end RRSP account statement. Write it in. Use U.S. dollars, so make the conversion.

Treaty election people, you’re finished

Line 8 tells you to stop at Line 8 and do not complete the rest of Form 8891 if:

• you made the treaty election in prior years (Lines 6a and 6b), or
• you are making the election for the first time in 2009 (Line 6c).

If you are making the treaty election, this is the end of your job. You do not complete the rest of Form 8891.

Line 9: Contributions to RRSPs (“no treaty election” people only)

You complete Line 9 only if you are not making the election under the income tax treaty to eliminate U.S. income taxation of RRSP investment earnings.[ref]You will NOT make the treaty election if you answer “No” on Line 6a, and you leave the box un-checked at Line 6c. Remember that NOT making the treaty election is generally suboptimal for tax purposes: the RRSP investment income is tax-free in Canada but taxable in the United States if you do not make the treaty election.[/ref]

Contributions to an RRSP in the current calendar year are reported on Line 9 of Form 8891.

Line 10: investment earnings (“no treaty election” people only)

Line 10 is where you see the consequences of the U.S. view that an RRSP (without the treaty election) is taxed as a foreign grantor trust–as if the income earned in the RRSP is earned directly by you. Line 10 asks you to separately report your RRSP’s current year investment earnings, then transpose those numbers to your Form 1040.

This line applies only to people who do NOT make an election under the income tax treaty.

If you do not make the treaty election at Line 6, insert the RRSP investment earnings information on Line 10, and insert those numbers from Form 8891 at the indicated places on Form 1040. This is how investment earnings on your RRSP end up as taxable income on your U.S. income tax return.

Multiple RRSPs

Prepare one Form 8891 for each RRSP that you own.

You need not be consistent with the treaty elections. You might make the treaty election for one RRSP to shelter its investment income from U.S. taxation, and not make the treaty election for another RRSP. Why you would do this is another matter. But it is technically feasible.

File it

Attach Form 8891 to your 2009 Form 1040.[ref]Here is some not-so-secret insider knowledge about the sequence forms to an income tax return. Look in the upper right corner of Form 8891. There is a box that says “Attachment Sequence No. 139.” Every Federal tax form has an Attachment Sequence Number. When you assemble your income tax return, start with Form 1040 (it has two pages), then attach all of the other Forms and Schedules behind Form 1040 starting with the lowest Attachment Sequence Number first.[/ref] You cannot file Form 8891 as a stand-alone document.

File your 2009 Form 1040 with the Internal Revenue Service and you are finished.