There is another problem with RRSPs owned by U.S. residents or citizens. An RRSP meets the definition of being a “foreign trust” in U.S tax law. This means that there is a U.S. paperwork requirement that must be satisfied.

The paperwork requirement applies to a U.S. taxpayer (that is you, the Canadian living in the United States) who puts money in a foreign trust (that is you, who made a contribution to an RRSP before you came to the United States) or who is eligible to receive money from a foreign trust (the fact that it is your RRSP means you’re entitled to the money in the RRSP, so you are a beneficiary of a foreign trust).

The paperwork required consists of two forms: Form 3520 and Form 3520-A. In addition, on Form 1040, Schedule B, there is a question for you to answer with a “Yes.”

The IRS has mostly solved the problem for you, except the official solution is incomplete and ambiguous.

2001 and earlier: no Form 3520 or Form 3520-A required

The Internal Revenue Service has announced that it will not require Form 3520 and Form 3520-A for RRSPs for calendar years 2001 and earlier:

Treasury and the Internal Revenue Service have become aware that many taxpayers with interests in Canadian registered retirement savings plans (RRSPs), as well as the custodians of such plans, are unfamiliar with the requirements for filing Forms 3520 and 3520-A. Under the circumstances, the IRS has determined that it will enforce neither filing requirements, nor penalties under section 6677, for Forms 3520 and 3520-A with respect to such plans for tax years before 2002. . . .[ref]See Notice 2003-25, 2003-1 C.B. 855, which applies the Section 6048 foreign trust reporting requirements to RRSPs.[/ref]

2003 and later: no Form 3520 or Form 3520-A required

For 2003 and later, RRSPs are not subjected to the rules that require you to file Form 3520 and Form 3520-A:

[P]ursuant to section 6048(d)(4), no reporting will be required under section 6048 with respect to RRSPs and RRIFs that have beneficiaries or annuitants who are subject to the new simplified reporting regime. . . .[ref]Notice 2003-75, Section 3. This is effective for calendar years 2003 and later; see Notice 2003-75, Section 5.[/ref]

Section 6048(d)(4) says that the IRS has the ability, via administrative pronouncement, to change the reporting requirements for foreign trusts. The quoted text is the IRS’s recognition that RRSPs should not be subjected to the routine paperwork requirements imposed on foreign trusts.

Note with care what the Notice says: the reporting under Section 6048 (namely, Form 3520 and Form 3520-A) is not required for RRSPs that have “beneficiaries or annuitants” (that would be you, a Canadian living in the United States) who are “subject to the new simplified reporting regime.”

The “new simplified reporting regime” is contained in Revenue Procedure 2002-23. So how do we figure out if, under the rules in Revenue Procedure 2002-23, you are “subject” to these rules? Here is who is “subject” to the new rules:

This revenue procedure applies to an individual who is a citizen or resident of the United States and a beneficiary of one of the following Canadian plans (an “eligible plan”): a RRSP, a RRIF, a registered pension plan, or a deferred profit sharing plan.[ref]Rev. Proc. 2002-23, Section 3.[/ref]

Note that it is not a requirement to file Form 8891 instead of Form 3520 and Form 3520-A. The reporting requirements are eliminated entirely. Even if you never file Form 8891, you will be safe from the Form 3520 and Form 3520-A penalties for 2003 and later years.

2002: Form 3520 and Form 3520-A required

Whether by design or accident, the IRS left standing the application of the foreign trust reporting rules to 2002. But the problem was relegated to a nearly “no harm/no foul” situation.

Notice 2003-57 says:

First, with respect to the 2002 taxable year, if the beneficiary of an RRSP or RRIF (a) makes or has made an election with respect to the plan in accordance with section 4 of Revenue Procedure 2002-23 or section 3 of this notice, (b) complies or has complied with the annual reporting requirements of Revenue Procedure 2002-23 for the taxable year, and (c) received no distributions from the plan during this or her 2002 taxable year, then no Form 3520 or Form 3520-A with respect to the plan is required.[ref]Notice 2003-57, Section 2.[/ref]

This sentence says that if you did the required paperwork under Rev. Proc. 2002-23 in prior years, and you do the paperwork for 2002 as required in Rev. Proc. 2002-23, and you didn’t receive an RRSP distribution in 2002, then you do not have to file Form 3520 and Form 3520-A. In other words, Form 3520 and Form 3520-A are eliminated but you have to plug some magic language from Rev. Proc. 2002 into your 2002 income tax return. Somewhat helpful, but it doesn’t apply to all situations, obviously. And it still leaves you with some work to do.

Notice 2002-57 continues:

Second, an individual, RRSP or RRIF that has filed or files a Form 3520 or Form 3520-A for the 2002 taxable year that does not provide all appropriate information may be requested by the IRS to provide such information. Unless the IRS requests such information and the individual or plan fails to provide the IRS with the information identified in such request, no individual or plan that has filed or files a Form 3520 or Form 3520-A with respect to the 2002 taxable year will be subject to failure to file penalties. The individual or plan should write the following on the top of the first page of the Form 3520 or Form 3520-A: “CANADIAN RRSP” OR “CANADIAN RRIF” as the case may be.[ref]Notice 2003-57, Section 2.[/ref]

This merely gives you a hall pass: if you filed an incomplete Form 3520 or Form 3520-A in 2002, you don’t have to clean it up unless the IRS asks you to. (Trust me, this is not going to happen).

It also, in a clunky way, seems to tell us that there will be no penalties imposed on people who never filed Form 3520 or Form 3520-A for 2002. Technically this paragraph says that the only people who will be subject to “failure to file” penalties are those for whom the IRS requests information and the person fails to provide the information.

This means that you only face penalties for failure to file Form 3520 and Form 3520-A in the improbable situation where the IRS asks you for this information for 2002, and you do not give it to them.

It’s a silly glitch. Why couldn’t they have handled this as cleanly as they did for all of the other years?

All years: Form 1040, Schedule B

Even though the Form 3520 and Form 3520-A reporting requirements have been eliminated for RRSPs, the fact remains that they meet the technical definition of a “foreign trust” for U.S. tax purposes. You will need to be alert to the other provisions of the Internal Revenue Code which affect foreign trusts. We discussed one such consequence in Chapter xx: since an RRSP is a foreign grantor trust, you are taxable every year on the investment earnings of your RRSP.

Another provision in U.S. tax law is a reporting requirement on Form 1040, Schedule B. At the very bottom of the page, you are asked whether you are a beneficiary or a grantor of a foreign trust. See, the IRS did not say “You have no reporting requirements for your RRSP-as-a-foreign-trust.” They just eliminated one of the reporting requirements. Schedule B still stands.

You are a beneficiary and a grantor of a foreign trust. You will need to check the box and answer “Yes” to this question.