How to move from an RRSP to a RRIF https://t.co/06Ov56YQll via @financialpost – A RRIF = new account and is subject to a #FATCA Inquisition
— Citizenship Lawyer (@ExpatriationLaw) December 5, 2015
This is a problem that I have dealt with a couple of times (at least) in the last few months. Sooner or later your contributions (no later than the year you turn 71) must cease. At that point your RRSP savings must be converted to income. A RRIF is a popular way to convert that RRSP to income.
Remember that by creating a RRIF you are opening a new account. Interestingly some banks are treating the opening of the RRIF account as grounds to subject the retiree to the complete “due diligence” FATCA inquisition. This is strange. Annex II of the FATCA IGA clearly specifies that RRIFs are NOT subject to FATCA reporting.
U.S. citizenship creates planning problems to be solved!
This is just one of a legion of unintended and likely unforeseen administrative consequences of the US citizenship-based taxation policy. If one considers the administrative overhead required in formulating legislation that actually addresses all these legislative accidents, getting the legislation through Congressional committee, a floor vote, avoiding a presidential veto, one begins to get insight into why there has not been any progress in solving this issue.
Fortunately, there’s a simplified legislative approach to at least the first problem. It’s not a full solution, but it would nicely address a great many of the manifold problems faced by US citizens living abroad, while being simple enough even for your average Congressperson to understand.
The US has double taxation treaties with many if not most of the places in which US citizens live abroad. These treaties consider all of the various kinds of income from investments, salary, short-term stays, etc. These treaties required a lot of effort for both the State Deparment civil servants and their foreign counterparts. The main text of these treaties for the most part reads fairly for all concerned, both US citizens living in the other country and citizens of the other country living in the US. The only place where things break down is the so-called “saving clause,” which typically says that “nothing in this treaty shall be construed as to interfere with the right of the US to tax its citizens and residents” as if the treaty didn’t exist. I do not know of a situation in which there is a similar savings clause for citizens of the other country.
So the simplified interim solution would be to pass US legislation saying that the US unilaterally abrogates enforcement of these savings clauses for its citizens who are not residents. In order to appease those congressmen worried about billionaires upping stakes and moving overseas, one could limit the exclusion to “non-resident citizens” with a net worth less than x million, where x would be some reasonable figure that could be subject to periodic review. The idea would be to not let the big fish gett away, while administratively uncomplicating things for the poor working stiffs who had to go abroad.
Once this law was in place, there would be no need for any changes to the voluminous, arcane US tax code. Whenever a citizen resident abroad runs into one of the many difficulties caused by CBT, they would file an 8833 Tax Treaty Benefits Claim Form referencing the relevant clause in the appropriate tax treaty and the law abrogating the savings clause.
I’m sure it’s possible to find issues with this approach, but it’s only an interim solution until the US pushes through comprehensive tax reform. On the other hand, even with such tax reform, the tax treaties would need to be renegotiated, so there’s at least some assurance of continuity for people who set up businesses abroad. But it would provide real relief for practically all of the many of the problem cases we’ve all seen reported in which US citizens abroad are being reduced to financial ruin and forced to consider giving up their citizenship just to survive.
It’s really time Congress made a move on this, or else we’ll continue seeing horror stories such as these for the foreseeable future. And honest, hard-working people’s live will be ruined, simply because they don’t fit into the US homelander paradigm.
The nice thing about it (well, nice if you’re a FATCA control freak) is it doesn’t touch FATCA. So this might make the relief measure more palatable to those Washington bureaucrats who have staked their career on this disastrous legislation.