Are Canadian NRSP Accounts Taxable and Reportable in the U.S.?

Are Canadian NRSP Accounts Taxable and Reportable in the U.S.?

Are Canadian NRSP Accounts Taxable and Reportable

When it comes to Canada, there are many different types of investments that taxpayers can make. For example, there are investments which are retirement-based, such as RRSPs (Registered Retirement Savings Plans) and RRIFs (Registered Retirement Income Funds). Taxpayers who qualify may also invest in an RDSP, which is a Registered Disability Savings Plan. Canadians can also make investments in accounts such as TFSA (Tax-Free Savings Accounts) and GIC (Guaranteed Investment Certificate), the latter of which is comparable to a US CD or Indian FD.  Another common type of investment that a taxpayer can make in Canada is the NRSP, which is a Non-Registered Savings Plan. Let’s take a brief introductory look at what an NRSP is, how it is treated for U.S. tax and reporting, and the pros and cons of an NRSP.

NRSP (Non-Registered Savings Plan) Pros

A non-registered savings plan is a Canadian type of investment account that is not ‘registered,’ meaning that it is not registered with the Canadian government. From a benefits perspective, this means that there is no limitation to how much a taxpayer can contribute to the NRSP. In addition, since it is non-registered, there are more options available to the taxpayer to determine how they would like to invest their money into specific products — with the opportunity to invest in a diverse range of mutual funds, ETFs, etc. 

The Cons of an NRSP

Unlike other types of investment accounts in Canada, such as an RRSP, the NRSP does not receive the same type of tax advantages. For example, this means that while the investment is growing within the NRSP, the taxpayer does not receive tax-deferred treatment. In addition, contributions made into the account are not tax-deductible. Finally, if the taxpayer decides they want to transfer their investments into a different type of account, such as an RSP or TFSA, there may be tax implications at that time.

NRSP For U.S. Tax Purposes and Reporting

Similar to other types of Canadian investment accounts, the NRSP income is taxable while the investment is growing within the fund, so that if there are capital gains, interest, or dividends, they must be reported on the US tax return. Likewise, since an NRSP is an account at a financial institution is also reportable for FBAR and Form 8938 purposes — although it may also be reportable on Form 8621, depending on what type of investments are held within the account.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Late-Filing Disclosure Options

If a Taxpayer is out of compliance, there are various international offshore tax amnesty programs that they can apply to safely get into compliance. Depending on the specific facts and circumstances of the Taxpayers’ noncompliance, they can determine which program will work best for them.

*Below please find separate links to each program with extensive details about the reporting requirements and examples.

Streamlined Filing Compliance Procedures (SFCP, Non-Willful)

The Streamlined Filing Compliance Procedures is one of the most common programs used by Taxpayers who are non-willful and qualify for either the Streamlined Domestic Offshore Procedures or Streamlined Foreign Offshore Procedures.

Streamlined Domestic Offshore Procedures (SDOP, Non-Willful)

Taxpayers who are considered U.S. residents and file timely tax returns each year but fail to report foreign income and/or assets may consider the Streamlined Domestic Offshore Procedures.

Streamlined Foreign Offshore Procedures (SFOP, Non-Willful)

Taxpayers who are foreign residents may consider the Streamlined Foreign Offshore Procedures which is typically the preferred program of the two streamlined procedures. That is because under this program Taxpayers can file original returns and the 5% title 26 miscellaneous offshore penalty is waived.

Delinquent FBAR Submission Procedures (DFSP, Non-Willful/Reasonable Cause)

Taxpayers who only missed the FBAR reporting and do not have any unreported income or other international information reporting forms to file may consider the Delinquent FBAR Submission Procedures — which may include a penalty waiver.

Delinquent International Information Returns Submission Procedures (DIIRSP, Reasonable Cause)

Taxpayers who have undisclosed foreign accounts and assets beyond just the FBAR — but have no unreported income — may consider the Delinquent International Information Return Submission Procedures. Before November 2020, the IRS was more inclined to issue a penalty waiver, but since then this type of delinquency procedure submission has morphed into a reasonable cause request to waive or abate penalties.

IRS Voluntary Disclosure Procedures (VDP, Willful)

For Taxpayers who are considered willful, the IRS offers a separate program referred to as the IRS Voluntary Disclosure Program (VDP). This program is used by Taxpayers to disclose both unreported domestic and offshore assets and income (before 2018, there was a separate program that only dealt with offshore assets (OVDP), but that program merged back into the traditional voluntary disclosure program (VDP).

Quiet Disclosure

Quiet disclosure is when a Taxpayer submits information to the IRS regarding the undisclosed foreign accounts, assets, and income but they do not go through one of the approved offshore disclosure programs. This is illegal and the IRS has indicated they have every intention of investigating Taxpayers who they discover intentionally sought to file delinquent forms to avoid the penalty instead of submitting to one of the approved methods identified above.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.