Advocating for the Canadian Registered Education Savings Plan and Registered Disability Savings Plan to Be Exempt from Annual Foreign Trust Reporting Requirements (IRC Sections 6048, 6677)1
By Marsha Laine Dungog & Liguo Cooper Xu2
I. EXECUTIVE SUMMARY
The U.S. taxation of contributions, accruals and distributions from foreign plans that are structured as foreign trusts ("Foreign Plans") with U.S. person3 ("USP") owners or beneficiaries remains a controversial area of U.S. tax law that requires definitive guidance as both the number of USP residing outside and foreigners relocating to the United States increases. The complexity arises in part because many Foreign Plans do not fit squarely with the types of plans available to U.S. residents in the United States. Until the U.S. tax classification and treatment of such Foreign Plans is addressed by the U.S. Congress in the Internal Revenue Code of 1986, as amended4 (the "Code") or by the Department of Treasury by administrative or legislative regulations, the annual U.S. tax reporting of USP outside the United States (collectively, "U.S. expats") and foreign persons who are tax residents in the U.S. with respect to their interests in certain Foreign Plans remains fraught with proverbial traps for the unwary.
Many Foreign Plans that are foreign trusts would generally fall within the parameters of Code section 6048, which would cause USP owners and beneficiaries of such Foreign Plans to file the Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner. In the absence of specific guidance from federal tax authorities on many Foreign Plans, tax practitioners have defaulted to reporting Foreign Plans owned by USPs (either directly or beneficially) as foreign trusts subject to U.S. foreign trust reporting requirements, as well as under the Report of Foreign Bank and Financial Accounts ("FBAR") and Foreign Account Tax Compliance Act ("FATCA").