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Canadian Cross Border issues for US Citizens. Presented to Democrats Abroad Vancouver April 2013 Presented by JPS Financial and Accounting Services. Agenda. Who should think about US tax compliance What forms should be filed with the IRS Newer forms and changes - PowerPoint PPT Presentation
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Canadian Cross Border issues for US Citizens
Presented to Democrats Abroad VancouverApril 2013
Presented by JPS Financial and Accounting Services
Agenda
1. Who should think about US tax compliance
2. What forms should be filed with the IRS
3. Newer forms and changes
4. Offshore Voluntary Disclosure Initiative
5. FATCA (foreign account tax compliance act)
Who should file US tax return
If you are a US citizen you should be filing a US tax return
Resident aliens who lived or worked in US
Green card holders
Anyone who does business in the US
Living in CanadaCanada taxes people based on residencyUS taxes people based on citizenship or
residencyTreaty has rules designed to eliminate double
taxation◦ In general an individual will pay taxes that equal the
higher of the two countries◦ US will give you credit for taxes that you paid to
Canada◦ Canada will give you credit for taxes paid to US◦ Unused Credit can be used 1 year back & forward 10
yearsUS offers “extensions” to file tax, Canada has
no extensions
A few popular forms
Some common scenarios and the forms required by the US
Who Transaction 1040 1040NR 5471 8865 TD F 90-22.1 8891 8938 1120F 3520 (A)
US citizen in CANemployed in CAN Xowns a business in CAN X Xowns a partnership in CAN X X
bank accounts (incl RRSPs) > $10 K XRRSP's Xowns foreign assets > multiple limits Xhas TFSA or RESP X
CAN citizen in CAN worked in the US Xdoes business in the US Xhas a rental property in the US Xsells real property in the US X
CAN corporation does business in the US X
Forms to file
Form 1040 – US Individual Income Tax Return
automatic 2 month extension if living outside US on April 15th therefore due date = June 15th
Extension available up to Oct 15th
Even if you have zero income, file to establish statue of limitations on return
Penalties◦ Late filing – 5% of tax due each month up to 25% of tax◦ 60 days or more late = lessor of a) $135 or b) tax due◦ Interest charged on unpaid tax from due date to date paid
Compare to Cdn T1 (Cdn tax return) due April 30 & no extensions
Forms to File
1040 ES – Estimated Tax Payments
If after all the tax calculations you are left with taxes due of $1000 or more you are expected to make estimated payments going forward.
Instalment dates: April 15th, June 15, Sept 15th, Jan 15th
Penalty may be applied if you don’t pay enough for the year or you underpay one or more of the instalment dates
Forms to file
Form 2555 – Foreign Earned Income
US allows a set amount of foreign earned income to be excluded from income tax
2012 exclusion limit is $95,100
Form 2555 is used to elect the use of an excluded amount
Earned income includes salary, wages, professional fees, home or car allowances paid to you
Foreign earned income does not include: pension or social security, dividends, capital gains, or alimony
Also used for the housing deduction and exclusion calculation
Due Date - submit this with your 1040 return
Forms to file
Form 2555 – Foreign Earned Income
To Qualify to use this form one of two tests must be met:
1. Bonafide residence (part II of form 2555)◦ Resident for one full tax year
2. Physical Presence (part III of form 2555)◦ Resident for 330 days within 12 month period
Form 1116 – Foreign Tax Credit
This form will calculate the foreign tax credit available for use against US taxes.Taxes paid on excluded income are not
included hereEach category of income and taxes paid on
that income are reported separately◦ Catagories included are:
Passive – dividends, interest, rents, royalties, General – wages, salary, business income 901(j) income – from certain sanctioned countries (no credit
for tax) Income re-sourced by Treaty Lump sum distributions from pension
Forms to file
Forms that are sometimes overlooked
some forms are commonly missed probably because they are informational and don’t calculate tax BUT they still need to be completed and filed.
TD F 90-22.1 Report of Foreign Bank Accounts (FBAR)
Form 8938 Statement of Specified Foreign Financial Assets
Form 5471 Information return of US persons with respect to certain foreign corporations
Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
Form 3520 A & Form 3520 Foreign Trusts with US owner
Form 8891 U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans
Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
Form TD F 90-22.1Report of Foreign Bank and Financial Accounts (FBAR)
This is an informational form listing out the details of all non-US financial accounts and their highest balances during the year
Accounts included are: Bank accounts (incl GICs), brokerage, TFSA,
RESP, RRSP
Complete form and file if: Total value of non-US accounts equal or > $10K
any time during the year
Forms to file
Forms to file
Form TD F 90-22.1Report of Foreign Bank and Financial Accounts (FBAR)
Due Date – to be received by June 30th
Online filing possible using BSA (Bank Secrecy Act) e-filing system
This form is not sent to IRS
Penalties◦ Up to $10K per violation◦ Possibly nothing if a good reason is given◦ Wilfully not filing can be larger of a)$100K or b) 50% of
balance at time of violation
Form 8938Statement of Specified Foreign Financial AssetsThis is an informational form listing out the details of all non-US financial assets and their highest balances during the year
Form started in 2011 Due Date : Form is due with tax return
Who files: US citizens, resident aliens of US & non resident
who makes election to be treated as resident Various reporting thresholds based on value of
assets compared to filing status
Forms to file
Form 8938Statement of Specified Foreign Financial Assets
Assets to be reported include:All financial accounts FBAR items – (Part 1)All other assets, such as notes, bonds, trust
interests, stock of foreign companies, partnership interests (Part 2)
Assets not included are :CPP & OASDirect interest in real estate
Forms to file
Form 8938Statement of Specified Foreign Financial Assets
no need to report assets already recorded on forms◦ 8891, 8621, 3520, 5471, or form 8865◦ Fill out Part IV of form 8938 to indicate where the assets are
recorded
Value assets at FMV using year end exchange rate◦ Financial management services has 1$ US = .9950 Can as at
Dec 31, 2012◦ Anything with a negative value, report as zero
Penalties◦ $10K + $10K for each month past 90 days after notification (to
$50K max)
Forms to file
Canadian version of US Form 8938
Canada has its’ own similar form requesting information on foreign assets: Form T1135 – Foreign Income Verification Statement
Fill out form if◦ you owned assets outside of Canada at any time during the year, that
cost more than $100K
Some assets included◦ Non-Cdn bank accounts, shares of corporations, mortgages, interest
in trust or partnership, foreign rental property (check list on form for more)
Some assets not included◦ IRAs, vacation property, property used to carry on active business
(check list for more)
Due date – file with Canadian tax return
Penalties - $25 per day (minimum $100 and maximum $2,500).
Forms to file
Form 5471Information return of US persons with respect to certain foreign corporations
This is an informational form that will report the details of your ownership interests in foreign corporations (one form for each corp). Your ownership or amount of control will dictate the amount of information you need to provide.
Who files: US person or resident who owns or acquires 10%
or more of foreign corporation (& US officers & directors of said corporation)
US person that has control of foreign corporation
Forms to file
Form 5471
Information return of US persons with respect to certain foreign corporations
Self employed that are incorporated complete this form
Dormant corps still need to file◦ “Filed pursuant to Rev. Proc. 92-70 for Dormant Foreign
Corporation “ (type in top margin of first page)
Due Date - due with income tax return Penalties
◦ $10K + $10K for each month past 90 days after notification (to $50K max)
◦ 10% (plus) reduction in foreign taxes used for foreign tax credits
Forms to file
Form 8833Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
One form for each position taken
Due date – attach and file with tax return
Forms to file
Form 3520 A & 3520Foreign trusts annual return and transaction reporting
Form 3520 A is an informational annual return filed by the trust / trustee giving details (non US trust with US owner / beneficiary)
Form 3520 is used to report transactions that occurred in the trust during the year – filed by the individual
Form 3520 is also used to report receipt of foreign gifts:
◦ Gifts or bequests valued at more than $100 K from a nonresident alien individual or foreign estate
or◦ Gifts valued at more than $14,723 from foreign
corporations or foreign partnerships
Forms to file
Form 3520 A & 3520Foreign trusts annual return and transaction reporting
TFSAs and RESPs are reported using these forms
Due Date ◦ 3520 – same as income tax return but do not mail with your return.
◦ 3520 A – 15th day of 3rd month after year end
Mailed to a separate address, do not attach to tax return
Penalties◦ Form 3520 – greater of $10K or b) 35% of gross distributions /
contributions
◦ Form 3520A – greater of a) $10K or b) 5% of gross value of assets owned by US person
Forms to file
Form 8891U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans
Used to report RRSPs and RRIFs – one form per plan
Line 6 is where you tick the box to defer income◦ If line 6 ticked, do only lines 1-8
Keep records to support reported values◦ Canada gives deduction for contributions (and taxes
later), US does not give deduction so that contribution is tax paid in US
Due date – attach and file with income tax return
Forms to file
Form 8621
Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
PFICs are defined by test
◦ Non US corporation > 75% of income is passive or > 50% of assets are passive
◦ This captures Canadian Mutual funds
One form per PFIC per year
Higher tax rates on included income amounts
Accuracy penalty is doubled when associated with understatement of PFIC tax
Forms to file
Form 1040NRU.S. Nonresident Alien Income Tax Return
Who would file: Non US citizen, not resident in the States would
file this return if they were engaged in a business or trade within the US
Canadians with rental property in the US
Form also completed to get refund of over withheld amounts on payments received.
Due Date
◦ If US wages received – April 15, 2013
◦ If no US wages received – June 17, 2013
Forms to file
New for 2012for those who haven’t been filing US returns
This new option is aimed directly at those that are outside of the US, haven’t been filing their US returns or FBARs and want to become compliant. Also, gives relief to RRSP holders who haven’t filed their form 8891
New “Streamlined” option available as of Sept 1, 2012
New option allows you to get caught up (in compliance) by filing◦ 3 years worth of tax returns◦ 6 years worth of FBARs
No penalties or other enforcement Taxes and interest will apply
New Streamlined Option
To qualify:◦ have lived outside US since Jan 1, 2009◦ have not filed US returns during this time◦ are considered to be a low compliance risk
Low compliance risk◦ if submitted returns = < $1500 tax each year◦ You don’t have identified “high” risk factors
New for 2012for those who haven’t been filing US returns
New Streamlined Option
Higher compliance risk if:◦ Returns submitted claim a refund◦ A lot of US activity seen (ie: an active US business)◦ Undeclared income in the country of residence◦ Taxpayer is already under audit / investigation by the
IRS◦ FBAR penalties have already been assessed, or letter
rec’d regarding FBARs◦ Taxpayer has financial interest or authority over account
outside of country of residence◦ Taxpayer has interest in one or more entities located
outside country of residence◦ US source income◦ Indication of tax avoidance or complex tax planning
New for 2012for those who haven’t been filing US returns
New Streamlined Option If not low compliance risk, then returns are
more closely scrutinized, maybe audited, maybe more than 3 years required
A SSN or ITIN is needed to use this option
The only amended return that qualifies under this option is one filed to include late filed form 8891s
Once you submit under this new option, OVDP is no longer available
New for 2012for those who haven’t been filing US returns
New Streamlined Option
Procedure to use this option Submit last 3 years of returns & type
“Streamlined” on top of page 1 Pay all tax due and interest Submit FBARs for last 6 years (not to FBAR
address) Submit a completed questionnaire
New for 2012for those who haven’t been filing US returns
New Streamlined OptionProcedure for using this option to include only late filed 8891s Submit an amended return with no adjustments to
income or deductions Include a statement requesting extension of time to make
election to defer income under Article XVIII(7) of Canada / US Income Tax Treaty
Include form 8891 for each plan / RRSP for each tax year Description of each plan Dated & signed statement
◦ Why election wasn’t made in the first place
◦ How you came to know it should be made or reporting to be done
◦ If you used a professional – describe the nature of their responsibilities
New for 2012for those who haven’t been filing US returns
New Streamlined Option
All documents are packaged and sent to:
Internal Revenue Service3651 South I-H 35Stop 6063 AUSCAttn: StreamlinedAustin, TX 78741
New for 2012for those who haven’t been filing US returns
Offshore Voluntary Disclosure Program
OVDP
The whole point of the program is to get taxpayers that have undisclosed foreign accounts or entities back into compliance with the IRS and US law by reporting these accounts knowing ahead of time the penalties that will be imposed
Unlike prior programs there is no deadline for disclosure
2012 program may change at any time
Penalty is 27 ½ % of highest balance of foreign entities / accounts or asset value during the disclosure period◦ All undisclosed accounts are added together & the highest
balance found throughout the 8 year period will have penalty of 27 ½ % applied
◦ This is in addition to tax, interest and accuracy penalties
OVDPReduced OVDP penalties
In specific cases, the following reduced penalties will be available instead of the 27.5%
5% penalty◦ Taxpayers are foreign residents and unaware they are US
citizens or◦ Taxpayer did not open account, withdrew $1 K or less, & had
infrequent contact with the account & funds were tax paid or◦ Taxpayer is foreign resident who timely complied with tax
reporting and payment of foreign country and has less than $10 K of US source income – reduced penalty applies to non-financial assets only
12.5% penalty◦ Highest balance in all the foreign accounts is < $75 K each
year
Offshore Voluntary Disclosure Program
OVDP
Submission Requirements (for the 8 year disclosure period):
◦ Copies of previously filed tax returns◦ Accurate amended tax returns – for years requiring amendment◦ Copy of signed Offshore Voluntary Disclosures Letter &
attachment◦ Cheque to US Treasury (tax, interest, & penalties) or proposed
pymnt schedule & collection information statement◦ Completed foreign account or asset statement for each
undisclosed foreign account or asset during the disclosure period
◦ Completed penalty computation worksheet◦ Signed agreements to extend time to assess tax & FBAR
penalties◦ Completed FBARs (TD F 90-22.1) if applicable◦ Offshore entity disclosure
Offshore Voluntary Disclosure Program
FATCA Foreign Account Tax Compliance Act
FATCANew US law aimed at requiring Foreign Financial Institutions to provide to the US information on the financial institutions US account holders accounts
takes effect Jan 1, 2014
Foreign Financial Institutions (FFI) are required to enter into agreements with the IRS to provide this information or face a 30% withholding tax on payments going out of the US to the institution
The FFI will need to get a waiver signed by the account holders
Form 8938 is part of FATCA – the part that the individual is most familiar as this is where foreign assets are to be reported
For those doing their own returns
Some notable items
Taxpayers with AGI< $57K can e-file for free◦ Use IRS link to “freefile”
Software is available to help you prepare & e-file
◦ Make sure it accommodates a foreign address
If your living in Canada, Soc Security should be taxed in Canada – not the US and
◦ 15% of SSN is not taxable at all
If you have property in the US, be sure to tick the box on the Cdn T1 return and fill out form
Cross border issues are handled by Philadelphia office - phone 1 267 941 1000
Remember, everything is reported in US $◦ Use the link on the IRS site to get foreign
exchange rates
For those doing their own returns
Some links / paths
Path to 2012 Offshore Voluntary Disclosure ◦ http://
www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program
Path to New Streamlined Procedure option
◦ http://www.irs.gov/uac/Instructions-for-New-Streamlined-Filing-Compliance-Procedures-for-Non-Resident-Non-Filer-US-Taxpayers
Path to Foreign Currency exchange rate ◦ http://www.fms.treas.gov/intn.html
For those doing their own returns
Cross Border Issues
Were Done!