What is the new Revenue Procedure 2020-17?
There is a lot of confusion online surrounding the new Revenue Procedure 2020-17 and the filing requirements for expats in Canada. The procedure covers Tax-Favoured Foreign Trusts (TFFTs), the first type being foreign retirement plans, and the second foreign trusts that are non-retirement savings trusts. The procedure provides an exemption from information reporting requirements under section 6048. So, the IRS has essentially waived the need for burdensome filing.
Do I need to file Form 3520 and 3520-A for my RESP?
Those with Canadian RESP’s (Registered Education Savings Plans) have previously dealt with reporting them as foreign trusts to the US. If the following criteria is met, these trusts no longer have the burdensome US filing requirements:
- The purpose of the non-retirement savings trust: the trust must have been set up for medical, disability or education savings.
- The RESP is tax-favoured: a Canadian RESP will qualify for a tax-favoured non-retirement savings trust because these plans are typically tax-favoured in Canada.
- There is an annual reporting requirement to the Canadian government.
- The trust meets the annual contribution limits. This is where a lot of other non-retirement savings trusts are failing to meet the criteria. You need to look at the annual limit or lifetime limit for contributions.
- Any withdrawals or distributions of the trust have to be made for the specific purpose it was set up for. Any amount taken from an RESPS must be for educational purposes. Technically, you can take money out for whatever reason but will be subject to penalties.
If all five criteria are met, then this procedure provides a huge relief to those with an RESP as you can stop filing Form 3520 and 3520-A. You will still need to report the presence of a foreign trust and any income generated in the trust on Form 1040.
What are the annual and lifetime RESP contribution limits?
Until 2006, the annual contribution limits towards RESPs were $4,000 and the lifetime limit was $42,000. In 2007, it was changed so that there were no longer annual limits and lifetime limits have been increased to $52,000.
For RESP plans designed as family plans, more than 4 named beneficiaries can exceed the $2,000 USD lifetime contribution limit, but this will still be disclosed on US tax returns. If you stay under the contribution limit, you can get away with not filing foreign trust returns. If you exceed the contribution limit, all returns are back on the table for filing.
If the contributions exceed the limit, you will have to pay tax of 1% of the over-contribution monthly until it is withdrawn. All contributions made to the beneficiary, even if they have been withdrawn, count toward the limit.
Will the revenue procedure 2020-17 remove any penalties for prior late filing of Forms 3520 and 3520-A?
There are also provisions for individuals penalised in the past for the late filing of these forms, giving relief to prior year penalties. With the new revenue procedure, you can apply for an abatement of the penalties already issued against you for not reporting or reporting late information regarding foreign trusts. If you have penalties, definitely look into this revenue procedure and discuss with a tax professional.
What if I have a TFSA?
This is therefore great news for those in Canada with RESPs, however, those with TFSAs are still required to file Forms 3520 and 3520-A. This is because a TFSA does not have a specific reason for its set up, as instead it is for general savings.