Cross-Border travel and transfers: immigration and tax complications Joel Guberman and Peter Megoudis EXPAND IN THE USA June 17, 2015

Cross-Border traveland transfers: immigrationand tax complications

Joel Guberman and Peter Megoudis

EXPAND IN THE USAJune 17, 2015

General IncomeTax Principles

3 Presentation Name © Deloitte & Touche LLP and affiliated entities.

US Federal Income Tax Status

• WORLDWIDE INCOME TAXATION

– US Citizen

– US Permanent Resident (Green Card Holder)

– US Resident

– Substantial Presence Test (SPT, 3 year/183 day test)

– 31 US days in current year, plus

– 100% of current year days + 1/3 of prior year days + 1/6 of second prior year days =>183

– Any part of the day counts (whether personal or work), unless in US for medical emergency

– Exception for individuals in the US on a student visa, or daily commuters

– SPT can be overriden by Filing Form 8840 Closer Connection Statement or by Filing 1040NR/Form 8833 Treaty Residency in Canada

– Election

– Residency can be overridden by tax treaty

TAXATION ONLY ON US SOURCE INCOME

– US Non-Resident


US Federal Estate/Gift Tax Status

• Estate/Gift Tax

– TAX ON WORLDWIDE ASSETS

– US Citizen

– US Resident (i.e., Domicile)

– TAX ON US SITUS ASSETS

– US Nonresident

– Limited US Estate Tax Exemption

– No Gift Tax Exemption

– Gift tax on gifts of US Tangible Assets

– Vs. Estate tax also re US Intangible Assets (ex stocks/bonds)


Citizens and Green Card Holders

• US citizenship

– Individuals born in the US

– Individuals born outside the US, where both parents are US citizens

– What if one parent is a US citizen?

• US green card holder (permanent resident status)

– Still have status until actual surrender/seizure of card

– Not automatically affected by:

– Moving to Canada

– Not filing or renewing returning resident permit

– Having card’s expiry date lapse


(Federal) Taxation of US Citizens/Residents

• Employment, business, pension, rental, interest income, short term capital gains (i.e., <1 year): graduated rates

• US (qualified) dividends: 15% or 20% rate

• Long Term capital gains: 15% or 20% rate

• As of 2013: If total income >$250k, investment income subject to new 3.8% net investment income tax (NIIT)

– Cannot be reduced by FTCs on US return

– Therefore, US tax even if all Canadian source income subject to higher Canadian taxes


(Federal) Taxation of US NR – ECI income

• US source business or employment income: taxed at graduated rates (plus potentially state taxation for services in State)

– Potential treaty exemption (Articles VII and XV)

• US source rental income: taxable at either:

– Graduated Rates on net income – with election, or

– Flat 30% tax on gross rents

– Plus, potentially, state taxation if real estate in State

• Capital gains on US real estate, US real estate corporations, US business assets: taxed at 15% or 20% rate

– Plus potentially State taxation if real estate in State


(Federal) Taxation of US NR – FDAP Income

• US source dividends: Subject to 30% (or 15% under Treaty) US withholding tax on “Fixed, Determinable, Annual, Periodic” (FDAP) income

• US source interest: mostly exempt (portfolio interest, or Treaty)

• Pension income from US payor (ex 401k, IRA): Subject to 30% (or 15% under Treaty) US withholding tax on FDAP income

– Can elect to report US source portion of pension (based on US workdays) on tax return, taxed at graduated rated

• US social security income: Subject to 30% US withholding tax on FDAP income

– Exempt for Cdn residents, under Canada-US Treaty

• Can reduce withholdings to Treaty rate by filing Form W-8BEN with payor of income

• 3.8% NIIT does not apply to US NR


Comparison: Highest tax rates

United States Canada (Ontario)

2012 top tax rates 2015 top tax rates 2014 top tax rates

Employment, Business, Rental, Pension income

Federal FICA/Medicare:

35.00%1.45%

Federal: FICA/Medicare: HI:

39.60%

1.45%

0.90%

49.53%

Eligible (Canada)/ qualified (US) dividends

Federal:

15.00%

Federal: NIIT:

15/20.00%3.80%

33.82%

Non-eligible (Canada)/ ordinary (US) dividends

Federal:

35.00%

Federal: NIIT:

39.60%3.80%

40.13%

Short term capital gainsFederal:

35.00%

Federal:NIIT:

39.60%3.80%

24.77%

Long term capital gainsFederal:

15.00%

Federal: NIIT:

15/20.0%3.80%

24.77%

Other investment incomeFederal:

35.00%

Federal:NIIT:

39.60%3.80%

49.53%

Estate/Gift Tax Rate 35% 40%

Estate/Gift Tax Exemption $US 5,120,000 $US 5,430,000

Specific tax issues:

Canadian employeesworking in the US


US Immigration Issues

• Individuals who do not have US citizenship, US green card, or US work visa are limited in # of days they can spend in the US

• Generally, cannot spend more than 6 months a year in the US (on a tourist (B-2) visa)

• So far, US has been tracking entries to the US; Canada has not been tracking entries from the US to Canada

• Starting in the summer 2014, Canada will be tracking entries from the US to Canada and sharing the info with the US

• US will now be able to verify whether you exceed 6 months in the US

– Can deny you subsequent entry to the US


(A) Corporate Tax Issues

• Activities of employee in the US can mean:

– Canadian employer has US ECI

– Has to file (at least) treaty based Form 1120F

– Canadian employer has PE in the US

– Subject to US federal corporate taxes

– Ex. Fixed base, signing authority, services PE

– Exception: secondment

– Canadian employer has nexus in a US State

– Subject to US State corporate taxes


(B) Payroll Issues

• US source wages subject to US income tax withholdings and W2 reporting

– Federal and State

– Some states have no income taxes: Florida, Texas, Nevada, Washington…

– Treaty Based Withholdings Waiver: Form 8233

• US Social security taxes (FICA) vs Canadian (CPP/QPP)

• ITIN vs SSN for employee


(C) Taxation of NR employee in the US

• Taxable on US source wages: 1040NR reporting

– But: Exempt from US federal (and maybe even State) tax on US wages if:

– US wages < $US 10,000, OR

– Present in the US < 184 days, AND compensation not borne by or paid by US PE or entity

– Ex secondment to US entity loses the exemption

– Caution: some states don’t following the treaty (ex. California, New Jersey)


(D) Employee taxation in the US: specific considerations

• US deferred compensation rules (section 409A)

• Planning with incentive stock options and restricted stock grants

• Deductibility of pension contributions


(E) Employee’s Residency Issues

• Ceasing to be a Canadian resident

– Canadian departure tax

– Loss of CCPC status

– Cdn trust ceases to be Cdn resident

• Becoming a US federal income tax resident

– For information return reporting purposes only

– For information return and tax liability purposes

• Becoming a US State income tax resident

• Become a US federal gift and estate tax resident


Canadian Departure Tax and the US

• Generally, US cost base of asset = historical purchase price

• However, can elect under Treaty Article XIII(7) to have a deemed disposition (and re-acquisition, at FMV) for US purposes as well

• If US taxpayer at date of Canadian departure:

– Deemed disposition is a taxable event in the US, and could be subject to US capital gains tax

– However, can thus match FTCs

• If not US taxpayer at date of Canadian departure:

– Deemed disposition not a taxable event in the US; just get a bump in basis

• Election must be filed by due date of US return for year of Canadian departure

• Election must apply to all assets that were deemed to have been disposed of in Canada


5 US Federal Income Tax Status

• (1) US citizen or green card holder

– “US Person”. Taxable on worldwide income. Subject to special filings.

• (2) Individual does not meet the substantial presence test

– Not a “US Person”. Not taxable on worldwide income. Not subject to special filings.

• (3) Individual meets the SPT, but spends less than 183 days in US in current year

– Not a “US Person” and not taxable on worldwide income and not subject to special filings - as long as files a timely Form 8840 Closer Connection Statement.

– If Form 8840 not timely filed, or not eligible, need to go to (4)


5 US Federal Income Tax Status

• (4) Individual meets the SPT, spends more than 182 days in US in current year, but is a Treaty Resident of Canada

– While not taxable on worldwide income (can file Form 1040NR):

– Still a “US Person” and still subject to special filings

• (5) Individual meets the SPT, spends more than 182 days in US in current year, and is not a Treaty Resident of Canada

– “US Person”, taxable on worldwide income, subject to special filings


(F) Filing Requirements

• FinCen 114 (“FBAR”): Total Foreign Deposit and Custodial (i.e., brokerage) accounts exceed $10,000

– Also include accounts over which one only has signing authority

• Form 8938: If Total Foreign Financial Assets (deposit/custodial accounts, shares, bonds, deferred compensation, pensions):

– (For individuals living outside the US) exceed $400,000 at end of year/$600,000 at any time in year

• Form 3520-A: owner of a foreign grantor trust (ex TFSA, RESP, revocable family trust, RRSP/RRIF (if no Form 8891 filed))

• Form 3520:

– owner of a foreign grantor trust (annual filing);

– beneficiary receiving distribution from foreign trust; or

– gift/inheritance from foreign person, if > $100,000


Filing Requirements (cont.)

• Form 8891 (pre-2015 filings): RRSP/RRIF accounts (exemption from filing 3520-A/3520)

– Filing requirement abolished as of January 1, 2015

• Form 5471: In year taxpayer acquires/disposes of 10% interest in foreign corporation, OR, for each year controlling foreign corporation

– Category 3: Year you acquire 10%, or further 10%, of corp – need to file Form 5471 that year

– Category 4: You, directly, indirectly, or through attribution, control corp – need to file Form 5471 annually

– Category 5: You own =>10% of a CFC (foreign corp controlled by US persons who are each 10% shareholders) – need to file Form 5471 annually

• Form 8621: Reporting interest in passive foreign investment corporation (PFIC) – ex. Canadian mutual funds?


US Informational Filings

Form Required

Who Must File (Direct, Indirect or Constructive Ownership)

Civil Penalties for Non-Compliance

3520 US owners of foreign trusts and US benefichiaries receiving distributions

Greater of $10,000, and 35% of distributions or contributions

3520-A- Foreign trust with US owner (signed by trustee)

Greater of $10,000, and 5% of gross value of trust assets

926 Certain US transferors to foreign corporations

10% of transfer up to $100,000

5471 Certain US transferors to owners and directors of foreign corporations

$10,000 plus reduction of foreign tax credits

8621 US owners of PFICs; also used to make PFIC related elections

$10,000

8858 US owners of foreign disregarded entities


8865 US transferors to and owners of foreign partnerships


8886 US owners and beneficiaries of foreign trusts participating in reportable transactions

$10,000 to $100,000, depending on transaction

FinCen 114 US owners of and signatories over foreign bank accounts

$10,000 per account, up to 50% of the account value

8938 US owners of foreign financial asset

$10,000, up to $60,000 per year


(G) Caution: Investing in LLCs

• Income from LLC (reported on US K-1)

– In the US, LLC’s income taxable to member on a flow through basis

– Even for US NR – taxable on US ECI

– Distributions taxable in Canada as foreign investment income, even if flow through in the US

– Unless CFA and FAPI income

– Timing mismatch, FTC issue

– Even if distributions in same year - Subject to 15% FTC limit

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Cross-Border travel and transfers: immigration and tax complications Joel Guberman and Peter Megoudis EXPAND IN THE USA June 17, 2015