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US Relief Sought For Canadian Tax-Exempt Savings

Tuesday, March 8, 2016

In a March 4 letter, the American Institute of Certified Public Accountants (AICPA) pressed the US Treasury Department to adopt recommendations that would provide tax relief to citizens of the United States and Canada who have various cross-border deferred and tax-exempt savings accounts.

The AICPA urged Treasury to work with the Canadian Department of Finance to provide relief as appropriate. Similar requests comparable to the AICPA's are being submitted by the Chartered Professional Accountants of Canada to the Canadian Department of Finance, and by the American Chamber of Commerce in Canada to both Treasury and the Canadian Department of Finance.

In his letter, Troy Lewis, Chair of the AICPA Tax Executive Committee, explained that both the US and Canada have tax provisions that allow individuals to establish tax-deferred and/or tax-exempt savings accounts.

However, while the US-Canada double taxation agreement provides for various qualified or registered pension or retirement plans, it does not provide any relief from double taxation or current inclusion in income for other plans and accounts, such as education plans, disability savings plans, and, under certain circumstances, Roth individual retirement accounts (IRAs).

Lewis identified individuals who are impacted as those Americans living in Canada, Canadians living in the United States, Americans living in the United States who contributed to Canadian plans while living in Canada, and Canadians living in Canada who contributed to a US plan while living in the United States.

"Frequently, a cross-border move will result in adverse tax consequences, such as the unanticipated inclusion in income of amounts saved in a tax-deferred or tax-exempt account which may require the cross border individual to liquidate the accounts to avoid the adverse tax consequences," Lewis stated.

"Often, the forced liquidation itself can result in unanticipated taxable income," he added. "Furthermore, the United States imposes complex reporting requirements, such as those regarding foreign trusts and passive foreign investment companies (PFICs), for individuals participating in Canadian plans. These tax implications can adversely impact the individuals and their families, the social objectives of the countries, and cross-border mobility."

The letter recommended that Treasury should provide US citizens and residents tax-deferred or tax-exempt treatment, comparable to that offered by Canada to its citizens and residents, for their contributions, income, and withdrawals from Canadian Registered Education Savings Plans (RESPs), Canadian Registered Disability Savings Plans (RDSPs), and Canadian Tax Free Savings Accounts (TFSAs).

It should also exempt Canadian RESPs, RDSPs, and TFSAs from classification as grantor trusts, and exempt US citizens and residents from various onerous statutory filing requirements for foreign trusts and PFICs which can currently exist for these plans, it said.

It added that Treasury should work with its Canadian counterparts to provide similar relief from taxation and burdensome reporting requirements for Canadian citizens and residents who hold and contribute to 529 tuition plans, qualified ABLE (Achieving a Better Life Experience) accounts, and Roth IRAs in the United States.