If you are a US citizen or resident and own liquid assets in a foreign country (including Canada), you may be required to file Form 8938, Statement of Specified Foreign Financial Assets along with your 2011 US income tax return, i.e., Form 1040, 1041, 1120, 1065, etc., depending on whether the return is for an individual, trust or estate, corporation or LLC, respective.
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A common problem for US citizens or permanent residents moving to Canada is what to do with an IRA account. Additional contributions are not advisable because they would not be deductible in Canada. For Canadian tax purposes, an IRA or 401(k) (but only to the extent of the employee’s contributions) may be rolled over tax free to a RRSP or RRIF. But no tax free rollover is allowed for US tax purposes, meaning that the owner must pay US income taxes (usually a 15% withholding tax) and the Section 72(t) 10% penalty (if the owner is under 59 ½) on the distribution.
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The closest Canadian equivalent to an IRA or 401(k) is the Registered Retirement Savings Plan, which is commonly known as the “RRSP.” Contributions are tax deductible, and tax is payable as distributions are taken, which may occur at any time. The maximum annual RRSP contribution is roughly 18% of earned income, up to a maximum of $22,000 CAD. At age 71, a RRSP must either be distributed or converted into a Registered Retirement Income Fund (or “RRIF”), which has characteristics similar to an RRSP except that no contributions may be made and there are mandatory annual withdrawals. The Canadian equivalent to a Roth IRA is the Tax-Free Savings Account (or “TFSA”). Contributions are not deductible, but distributions (which may be taken at any time) are not taxable.
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Navigating the tax complexities of naming a trust or estate as IRA beneficiary is not for the faint of heart.
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In limited circumstances it is prudent to name a trust as IRA beneficiary. The practice should be used sparingly, however, because it adds a layer of complexity and increases the administrative burden.
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