U.S. Tax and Estate Law Impacting Canadian Clients · 3 U.S. Tax and Estate Law Impacting Canadian Clients ... gross proceeds of security sales). ... • Coordination of Chapter 3

U.S. Tax and Estate Law Impacting Canadian Clients March 6, 2013

Agenda

Changes to U.S. Tax Rates Peter Megoudis U.S. Tax Status Peter Megoudis FATCA – Registration as a Participating FFI David Jerome Americans Investing in Canadian Mutual Funds Lisa Stanley Canadians Investing in U.S. Securities Peter Megoudis Renouncing U.S. Citizenship Peter Megoudis SEC Forms 13F/13H Jack Rader

Changes to U.S. Tax Rates Peter Megoudis, Deloitte & Touche LLP

© Deloitte LLP and affiliated entities.

Legislative sources

• Changes effective as of January 1, 2013:

• Health Care and Education Reconciliation Act of 2010 (commonly referred to as “Obamacare”)

• Additional 0.9% Medicare tax (s. 3101(b)(2) of the Code) • Additional 3.8% tax on investment income (Ch. 2A of the Code, s. 1411)

• American Taxpayer Relief Act of 2012 (commonly referred to as “Fiscal Cliff

Legislation”)

• New 39.6% top income tax rate • New 20% long term capital gains and qualified dividends rate • Reintroduction of phaseout of personal exemptions and itemized deductions • New estate tax rate of 40% • New estate and gift tax exclusion of $5,000,000 (indexed)

• Other (ex Rev-Proc 2012-77 and 2013-15)

U.S. Tax and Estate Law Impacting Canadian Clients 3


SUMMARY CHARTS OF TOP RATES WAGES: 2012 vs. 2013; US vs. ONT or ALTA

US FEDERAL US FEDERAL ONTARIO ALBERTA

(1) WAGES 2012 2013 2013

(Taxable Income >$450k MFJ, $425k HH, $400k Single, $225k MFS) 35% 39.60% 49.53% 39%

FICA OASDI (max employee w/h) $4,624.20 $7,049.40

max earnings $110,100 $113,700

employee withholding 4.20% 6.20%

employer match 6.20% 6.20%

FICA MEDICARE TAX (employee, excess >$250k of wages, MFJ) 1.45% 2.35%

($250k MFJ, $200k HH and Single, $125k MFS)

FICA MEDICARE TAX (employee, first $250k of wages, MFJ) 1.45% 1.45%

($250k MFJ, $200k HH and Single, $125k MFS)

FICA MEDICARE W/H (excess >$200k) (each employee, regardless of status) 1.45% 2.35% CPP $2,356.20

FICA MEDICARE W/H (first $200k) (each employee, regardless of status) 1.45% 1.45%

FICA MEDICARE W/H (employer portion, regardless of earnings/status) 1.45% 1.45%



OTHER: 2012 vs 2013; US vs ONT or ALTA US

FEDERAL US

FEDERAL ONTARIO ALBERTA 2012 2013 2013

(2) Interest (TI>$450k MFJ, $425k HH, $400k Single, $225k MFS) 35% 39.60%

Interest plus 49.53% 39.00%

Plus: Net Investment Income Tax 0 Foreign

NIIT (mAGI>$250k MFJ, $200k HH and Single, $125k MFS) 3.80% Investment

43.40% Income (3) Long Term Gains

(TI>$450k MFJ, $425k HH, $400k Single, $225k MFS) 15% 20% 24.77% 19.50%

Plus: NIIT (mAGI>$250k MFJ, $200k HH and Single, $125k MFS) 0 3.80%

23.8% (4) Short Term Gains

(TI>$450k MFJ, $425k HH, $400k Single, $225k MFS) 35% 39.60% 24.77% 19.50%

Plus: NIIT (mAGI>$250k MFJ, $200k HH and Single, $125k MFS) 0 3.80%

43.4% (5) Qualified Dividends

(TI>$450k MFJ, $425k HH, $400k Single, $225k MFS) 15% 20% eligible 33.85% 19.29%

Plus: NIIT (mAGI>$250k MFJ, $200k HH and Single, $125k MFS) 0 3.80% non-eligible 36.47% 27.71%

23.8% (6) Estate/Gift Tax Rate 35% 40% 0 0

Exemption $

5,120,000.00 $5,250,000


U.S. Tax Status


US Federal Income Tax Status

• Income Tax – WORLDWIDE INCOME TAXATION

• US Citizen • US Permanent Resident (Green Card Holder) • US Resident

– Substantial Presence test (3 year/183 day test) – Election

– 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



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 affected by:

• Moving to Canada • (< June 2008): Filing US nonresident income tax return under treaty • Not filing or renewing returning resident permit • Having card’s expiry date lapse


Questions

FATCA – Registration as a Participating FFI David Jerome, RBC Investor Services

Agenda

What is FATCA 3 Evolution of FATCA 4 Final Regulations 5 More Information to Come 6 Pre-Registering Responsibilities 7 Registration Process 8 Sponsored FFI 9 IGA 10 Summary of Application of Final Regs to IGAs 11 Key FATCA Dates 12 FATCA Acronyms 13

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1. What is FATCA?

Purpose Impact on FFIs

Encourage Foreign Financial Institutions (FFIs) to sign an agreement with the IRS in order to identify and report accounts of defined US persons holding financial assets outside the US so that they pay appropriate US tax on those assets.

If FFIs do not agree to enter into a reporting agreement with the Internal Revenue Service (IRS), they will be subject to 30% tax on all US source withholdable payments (such as interest, dividends and gross proceeds of security sales).

FATCA (Foreign Account Tax Compliance Act) was passed into US law on March 18, 2010 as part of The Hiring Incentives to Restore Employment Act (HIRE Act).

To avoid the withholding tax, FATCA requires FFIs to obtain and report information to the IRS on its accounts held by one or more specified US persons or US owned foreign entities.

Evolution of FATCA

(1) The United States, France, Germany, Italy, Spain and the United Kingdom have agreed to explore a common approach to FATCA implementation through

domestic reporting and reciprocal automatic exchange and based on existing bilateral tax treaties. This may impact the timeline and reporting processes. (2) The United States, Japan and Switzerland announced their intent to develop a framework to comply with FATCA. While the framework closely resembles the

intergovernmental model proposed between the US, UK, Germany, France, Italy, Spain and Japan, the notable difference in the Swiss framework is that it proposes that Swiss financial institutions would report information directly to the IRS rather than through a local tax authority.

18/03/2010 HIRE Act Signed

into Law

27/08/2010 Notice

2010-60

08/04/ 2011 Notice

2011-34

14/07/ 2011 Notice

2011-53

15/07/ 2013

Start of FFI registration

31/12/2013 Effective date FFI agreement

08/02/ 2012

Proposed regulations

17/01/ 2013 Final

regulations

08/02/2012 Intergovernmental

intention with 5 countries (1)

07/06/2012 Draft version of

W-8BEN (individuals) W-8BEN-E (entities)

08/06/2012 Overview of the FFI

registration procedures

21/06/2012 Joint statements with Japan and Switzerland(2)

26/07/2012 IGAs models: 1 reciprocal,

1 non-reciprocal

24/10/ 2012

Announcement 2012-42

31/12/2013 Effective date

IGA agreement

12/09/2012 Model I IGA – UK signed

14/11/2012 Model II IGA

?

Final Regulations

• Released January 17, 2013

• Applying a “Risk-Based Approach” Remove unnecessary burdens and minimize administrative costs

• Focus of FATCA is on identification & reporting of US Persons, not collecting

additional withholding tax revenues from FFIs

• Definition of Financial Institutions includes investment entities similar to IGAs such as: Entities that provide individual or collective portfolio management to customers; Entities otherwise investing, administering funds, or managing funds, money, or financial assets on

behalf of other persons; Entities managed by another FI.

• New Sponsored investment entity

More Information to Come

• Additional Regulations such as Passthru Payments

• FFI Agreements

• New W8 forms and instructions

• Coordination of Chapter 3 and Chapter 61 with FATCA Chapter 4

• Form 8966 FATCA reporting on US persons

• Regulations and guidance from foreign governments to implement Intergovernmental Agreements (IGAs)

Pre-Registering Responsibilities

• Select a Responsible Officer, and for larger organizations “Responsible Office”

• Conduct analysis on legal entity structure to ensure entities are not excluded from the EAG or Sponsored FI group

• Choose the type of registration (i.e.. Lead FFI, DCFI etc.)

Registration Process

Paperless registration process: • Within 5 months (July 15, 2013), FATCA registration portal will be available

online.

• Portal will available to: register PFFIs, DCFFI and FFIs covered under an IGA Issue GIINs Responsible Officer to certify online Allow FFI to interact with IRS

• October 25, 2013 is the last day to register on the portal, to be included on the IRS’s first list of FFIs, to be posted on December 2, 2013.

• Canadian IGA is hopefully signed by then

Sponsored FFI

• The Final Regulations create a registered deemed-compliant FFI, if the FFI is sponsored by a Sponsoring Entity.

• The Sponsoring Entity agrees on behalf of the FFI to perform all due diligence, withholding and reporting.

• Particularly beneficial for investment funds.

IGA

• Two Model IGAs (bilateral agreements with the US)

Reciprocal Agreement (Model 1), governed by local law Non-Reciprocal Agreement (Model 2), governed by FATCA regulations

• Applies to all FFIs within the local country • Local country will enforce the IGA for Model 1 • Exceptions from withholding taxes • Privacy concerns eliminated for Model 1 as reporting is to local country • 9 signed or initialled IGAs and about 60 other countries engaged or

exploring options of an IGA. • More fairness increases complexity for multi-national FFIs • IGAs expire in 2017, unless renewed

Summary of Application of Final Regulations to IGAs

Model 1 Model 2 FFI Agreement Not required for IGA Partner Country

FFIs Partner Country FFIs must agree to comply with FFI agreement

Registration with IRS Through IRS Portal to obtain GIIN Required Verification of compliance Partner Country tax authorities/ IRS Partner Country tax authorities/ IRS Identification and due diligence requirements

Annex I unless Partner Country tax authority provides option, and FFI chooses to exercise option, to apply requirements under the regulations to some or all accounts

Annex I unless FFI chooses to exercise option to apply requirements under the regulations to some or all accounts

Deemed compliant, exempt entities and exempt accounts

Regulations and Annex II exclusions Regulations and Annex II exclusions

Requirement to close, transfer or block US and recalcitrant accounts

No No

Reporting To local tax authorities To IRS Information Reporting Requirements Based on IGA & local requirements Based on regulations regulations Reporting of US accounts Automatic Consent required Reporting of recalcitrant accountholders Treated as Reportable US accounts

(Recipient specific reporting) Treated as US accounts (pooled reporting)

Withholding on NPFFIs Yes, under the IGA Yes, subject to the requirements under the regulations

Withholding on recalcitrant accountholders

No No

Key FATCA Dates

FFI Registration with IRS

Register with IRS through on-line portal

New Client On-Boarding Implement changes to new account opening processes and procedures

Pre-Existing Client Due-Diligence Complete due diligence for prima facie FFIs Complete due diligence for high value accounts Complete due diligence for all remaining accounts

Withholding Begin withholding on US source income (FDAP) payments Begin withholding on US gross proceeds Begin withholding on foreign passthru payments (at the earliest)

Reporting of US Accounts Report account static data and 2013 and 2014 year-end account balances/values Report information above plus interest, dividends, and all other income paid or credited to the account during

the year (2015 & subsequent years) Report information above plus for custodial accounts—report gross proceeds (2016 & subsequent years)

Reporting of NPFFIs Transitional Reporting for 2015 & 2016

Responsible Officer Certifications Certifications re preexisting accounts and procedures due Filing of first RO Certification regarding PFFI’s compliance; Subsequent filings due 60 days after the at the end

of each following 3-year certification period is the 3 calendar year period.

Final Regs

15-Jul-13 to 25-Oct-13

1-Jan-14

30-Jun-14 31-Dec-14 31-Dec-15

1-Jan-14 1-Jan-17 1-Jan-17

31-Mar-15 31-Mar-16

31-Mar-17

31-Mar-16

29-Feb-2016 1-Mar-2017

FATCA Acronyms

C-DCFFI – Certified Deemed Compliant FFI DCFFI – Deemed Compliant FFI EAG – Expanded Affiliated Group EBO – Exempt Beneficial Owner FATCA Status = Chapter 4 Status FI – Financial Institution (includes US and non-US FIs) FFI – Foreign Financial Institution GIIN – Global International Intermediary Number IGA – Intergovernmental Agreement NFFE – Non-Financial Foreign Entity NPFFI – Non Participating FFI OD-FFI – Owner Documented FFI PFFI – Participating FFI QI, WT or WP – Qualified Intermediary, Withholding Foreign Trust or Withholding Foreign Partnership R-DCFFI – Registered Deemed Compliant FFI W/H Agent – Withholding Agent

Questions

Passive Foreign Investment Companies (PFIC) Lisa Stanley, Deloitte & Touche LLP


Passive Foreign Investment Companies (PFIC) - Identification

What is a PFIC? • A non-U.S. corporation -

– 75% or more of its gross income earned from passive sources, or – 50% or more of its assets produce or are held for the production of

passive income

• Subject to anti-deferral taxation for – U.S. citizens or residents (green card holders) where ever they reside – Non-U.S. citizens or residents who spend a significant amount of time

in the United States



Background – Passive Foreign Investment Companies (PFIC) U.S. anti-deferral rule • For U.S corporations and mutual funds, there is current taxation at either the

corporate level, shareholder level, or both.

– U.S. corporations are taxed currently on their earnings. When those earnings are distributed to shareholders, the shareholders are also taxed on those dividend distributions.

– U.S. Registered Investment Companies (Mutual Funds) can avoid corporate level tax by distributing their earnings to shareholders who are taxed currently.

• If a U.S. taxpayer invests in a foreign corporation, any earnings of the foreign corporation avoid U.S. taxation until actually distributed to the U.S. shareholder in the form of a dividend. This results in deferral of tax and an incentive to invest in foreign corporations/mutual funds.

• Congress enacted the PFIC rules in 1986 to close this loophole and remove any advantage to investing in foreign mutual funds.



Canadian Mutual Funds

Canadian mutual fund trusts (MFT) Generally structured as trusts IRS views mutual fund trusts as business entities (not taxed as trusts) U.S. entity classification rules control. So even if the entity is considered a trust in the foreign jurisdiction, it may still be a corporation for U.S. tax purposes.

• Under the Sears regulations, an investment trust will only be classified as a trust if the

trustee cannot vary the investment of the certificate holders. • A typical mutual fund manager buying and selling the holdings of the fund would violate

this rule and therefore most mutual funds would not be a trust for U.S. tax purposes.

Any entity not properly classified as a trust is a “business entity”; therefore, treated as either corporations or partnerships under U.S. rules

• Default: “corporation” if members have limited liability, “partnership” if unlimited liability;

most provinces have liability protection for members – therefore, default in US is taxation as corporation

• Default can be overridden if fund files US check the box election to be taxed as partnership; election rare, as could create US estate tax issues for Canadians



Canadian Mutual Funds (cont…)

As a “corporation” a mutual fund trust is likely a PFIC, if it would satisfy either the asset or income test:

– 50% or more of assets are involved in earning passive income, or – 75% or more of income is passive income

• Note: If entity holds < 25% of an OPCO – the OPCO is a passive asset and

generates passive income

Are your funds PFICs?


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US owners of PFICs

30 U.S. Tax and Estate Law Impacting Canadian Clients


PFIC Taxation Overview – General - IRC § 1291

General taxation of US persons owning PFIC shares Barring certain available taxpayer elections, owners of PFIC shares are subject to taxation under US Internal Revenue Code (IRC) § 1291. The treatment is generally unfavorable for most U.S. taxpayers. Excess distributions are allocated over the entire holding period of the taxpayer and are subject to a special tax and interest charge. Non-excess distributions are treated as ordinary dividends.

• An excess distribution is the amount by which the current year distribution from the PFIC

exceeds 125% of the average of the three previous year’s distributions. Practically this means that as long as the annual distribution increases by no more than 12% there will not be an excess distribution.

• Any gain from the disposition of PFIC stock is also treated as an excess distribution

Tax can be 31% - 39.6% depending on the year, plus late payment interest from the due date of the return of the allocation year to the due date of the current return.



PFIC Reporting Overview

Prior year general reporting requirements • Form 8621: Passive Foreign Investment Companies (PFICs) only required to

be filed if there are current year distributions or sales of PFIC stock or if a mark-to-market or QEF election was made.

HIRE Act reporting for PFICs • All U.S. owners of PFICs are required to file Form 8621 disclosing PFIC

ownership, even if no elections, distributions, or sales.

• Originally required as of 3/18/2010;

• HIRE Act rule currently suspended until regulations issued;

• Once required taxpayers will have to attach Form 8621 for the suspended year(s) to their next tax return, i.e., 2011 and 2012 Forms 8621 may have to be filed with 2012 returns;

• Taxpayer files these forms; not fund.



Shareholder Mark-to-Market and Qualified Electing Fund (QEF) Elections Two elections available to provide relief if certain requirements are met; generally best made in 1st year of ownership

1) Mark-to-Market Election -

Taxpayer’s election requires shareholder to annually includes the increase in market value in the PFIC shares as taxable ordinary income for the year.

• Loss of capital character, is ordinary income, but - • Avoids interest charge • Any decrease in value is allowed as a loss to the extent of prior year increases in

income (unreversed inclusions).

Only available for regularly traded, marketable stock • Regularly traded means the class of shares held by the taxpayer must be traded, other

than in de minimis quantities, on at least 15 days during each calendar quarter



Shareholder Mark-to-Market and QEF Elections

The Mark-to-market election is only available for marketable securities: Stock which is regularly traded on a US or foreign regulated national securities exchange, or Stock of any foreign corporation which is comparable to a regulated investment company in the US; which offers for sale or has outstanding any stock of which it is the issuer and which is redeemable at its net asset value; and the foreign corporation meets the following conditions with regard to the class of stock held by the taxpayer:

– Foreign MFT must have more than 100 shareholders – Class must be readily available for purchase by the public at net asset value and not require an

initial investment over $10,000 US – Quotations published no less frequently than weekly – Independent and publicly available financial statements including balance sheets – Supervised or regulated as an investment company by local government – No senior securities authorized or outstanding, including debt, at any time – 90% of gross income and average % of assets of the fund must produce passive income



Shareholder Mark-to-Market and QEF Elections (continued) - 2) Qualified Electing Fund (QEF) -

Taxpayer’s election to be taxed currently on share of the fund’s income, split between ordinary income and net capital gains.

• In order to make the election, an PFIC Annual Information Statement must be

issued by the fund providing certain IRS required information

• A PFIC Annual Information Statement must include: • The unitholder’s pro-rata shares of

– Ordinary income and taxable gain; and – The amount of cash and FMV of other property distributed during the taxable year.

• A statement that the fund must also agree to permit the shareholder access to examine the books and records of the PFIC.

These requirements may make a QEF election impractical as the PFIC may not be willing to comply.



Shareholder Mark-to-Market and QEF Elections (continued) - • If a QEF election is not filed in the first year of owning PFIC -

– Individual taxed on distribution basis – Distributions from PFIC: Ordinary, not qualified, dividends – Portion of distribution may qualify as “excess distributions” if distributions

exceed 125% of distributions in 3 prior years – Portion of excess distribution attributable to prior years: subject to highest tax

rate plus interest charge – Gain on sale of shares – “Excess distribution”; not capital gain

• If a QEF election is filed (Form 8621) in the first year of owning PFIC - – Individual taxed on annual accrual basis – Two types of income: long term capital gains, and ordinary earnings – Ordinary earnings taxed at graduated rates (ie not highest rate) – No interest charge – Gain on sale of shares – Long term or short term capital gain



Shareholder Mark-to-Market and QEF Elections (continued) -

If a Canadian Mutual Fund is a PFIC and no QEF election is made: • Cannot treat as trust/flow through; can’t simply report T3 income/gains on flow

through basis • Must report ALL distributions (including return of capital) • Must determine if year’s distributions exceed 125% of distributions of prior 3

years • If not, then all distributions reported as current-year ordinary dividends • If yes, then portion reported as current year ordinary dividends • Remainder subject to PFIC tax (i.e., highest tax rate plus interest charge) • Calculated and Reported on Form 8621

• Form 8621 needs to be filed each year of PFIC (even if no distributions)


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PFIC Annual Information Statements for QEF Elections



Annual PFIC Information Statements – Data Requirements

• Capital gains, losses of fund must be determined under U.S. tax principles

– Apply U.S. tax rules, including: – FIFO or specific lot method tax basis for determining gains and losses,

long term and short term – Wash sales – Corporate actions – Application of return of capital amounts – Reclass of capital gains to ordinary income for certain debt instruments – Trade date recognition – Foreign currency conversion – End product: Fund’s LT/ST capital gain or loss



Annual PFIC Information Statements – Data Requirements – Other Considerations

• Prepare other U.S. tax adjustments and determine earnings (other than gains) for U.S. purposes – Common adjustments include adjustments for expenses, taxes, foreign

exchange • Allocate pro-rata amounts to US Shareholder, or provide sufficient information

for US Shareholders to determine their pro-rata shares • Prepare Annual PFIC Information Statements; communications with client • Considerations

– Provide individualized statements, or – Provide generalized informational statements, or – Publish information on website – Include information with other shareholder statements?



PFIC Annual Information Statement (Example)

PFIC Annual Information Statement

1) This Information Statement applies to the taxable year of [Name of PFIC] beginning on ________________ 20__ and ending on ______________, 20__.

2) [Name of Shareholder] has the following pro rata share of the ordinary earnings and net capital gain of [Name of PFIC] for the taxable year of [Name of PFIC] specified in paragraph (1):

Ordinary Earnings: _________________________________________

Net Capital Gain: __________________________________________

3) The amount of cash and fair market value of other property distributed or deemed distributed by [Name of PFIC] to [Name of Shareholder] during the taxable year specified in paragraph (1) is as follows:

Cash: ___________________________________________________

Fair Market Value of Property: ________________________________

4) [Name of PFIC] will permit [Name of Shareholder] to inspect and copy [Name of PFIC]’s permanent books of account, records, and such other documents as may be maintained by [Name of PFIC] that are necessary to establish that PFIC ordinary earnings and net capital gain, as provided in section 1293(e) of the Code, are computed in accordance with U.S. income tax principles. [Name of PFIC]

Date: __________________________ By: ______________________________________

Title: ___________________________


Questions

Canadians Owning U.S. Securities, U.S. Estate and Gift Tax Peter Megoudis, Deloitte & Touche LLP


(1) Gift Tax – US citizens/residents

• US citizens and domiciles subject could be subject to US gift taxes on gratuitous transfers of worldwide assets – Applies to all assets (tangible and intangible, US and non-US, real

and personal property) – Applies to full FMV, not just accrued gains – $5,250,000 (for 2013) lifetime gift tax exemption – $14,000 annual gift tax exemption for gifts to non-spouse donee – Marital exemption for gifts to US citizen spouse;

– $143,000 (for 2013) annual exemption if spouse not a US citizen – Unlike for estate tax: no treaty relief – Unlike for estate tax: no treaty FTC in Canada for US gift taxes paid



(1) Gift Tax – US NR

• US NR (i.e., non-citizens, non-domiciles) are only subject to US gift tax on tangible US situs assets – Unlike for US citizens/residents, does not apply to non-US assets – Unlike for US estate tax, does not apply to intangible assets like US securities

(ex. stocks, bonds) – Unlike for US citizens/residents: no [$5.25m] lifetime gift tax exemption – Marital exemption if spouse US citizen; if not - $143k annual exemption – $14,000 annual gift tax exemption for gifts to non-spouses

• Unlike for estate tax: no treaty relief

• Unlike for estate tax: no treaty FTC in Canada for US gift taxes paid



(1) Gift Tax – Scenarios

• US NR transfers US securities to children or non-US spouse – US situs asset, but intangible: no US gift tax implications

• US NR gifts US real estate to children

– US real estate: tangible asset; portion of gift > $14,000 subject to US gift tax

• US NR buys US real estate, and then transfers ½ title to non-US citizen spouse – US real estate: tangible asset; portion of gift > $143k subject to US gift tax

• US NR transfers cash to Canadian trust, which then acquires US real estate

– IRS may deem transfer to be indirect transfer of US real estate to trust, and thus taxable gift

• US citizen sets up RESP/TFSA/family trust, which then distributes to beneficiaries – When gift is complete, portion of gift > $14,000 subject to $5.25m limit



(2) US Estate Tax – US citizens/residents

• US citizens and domiciles could be subject to US estate taxes on FMV of worldwide assets held on death – Applies to all assets (tangible and intangible, US and non-US, real

and personal property) – Applies to full FMV, not just accrued gains – $5,250,000 (for 2013) estate tax exemption – Marital deduction for bequests to US citizen spouse; – No marital deduction for bequests to non-US citizen spouse

• Instead, potential QDOT exemption, or treaty exemption – QDOT spousal trust: estate tax payable on distribution from trust to spouse, or death of

spouse – Treaty Exemption: Doubling up of general estate tax exemption

– Treaty FTC Relief: US FTC for Canadian capital gains tax on Canadian situs assets; Canadian FTC for US estate tax on US situs assets



(2) US Estate Tax – US NR

• US nonresidents could be subject to US estate taxes on FMV of US situs assets held on death – Applies to US situs tangible and intangible assets (US real estate,

shares and bonds of US corporations) – Applies to full FMV, not just accrued gains – Not entitled to $5,250,000 (for 2013) exemption. Instead, entitled to:

• $60,000 exemption, or • If Canadian resident, special prorated treaty exemption (see next slide)

– Marital deduction for bequests to US citizen spouse; no marital deduction for bequests to non-US citizen spouse • Instead, potential QDOT exemption, or treaty exemption, for spousal trusts

– QDOT spousal trust: estate tax payable on distribution from trust to spouse, or death of spouse

– Treaty Exemption: Doubling up of general (ie prorated) estate tax exemption

– Treaty FTC Relief: Canadian FTC for US estate tax on US situs assets



(2) Estate Tax – Treaty Exemption for Cdns

• Where a NR of US who is a resident of Canada dies owning US real estate, the US estate tax exemption is greater of: – US $60,000, and – (under the Treaty):

• General US Estate tax exemption (currently US $5.25m) * – US estate / Worldwide Estate

• If the property passes to a Canadian-resident spouse of the deceased,

the executor can elect to claim an additional marital treaty credit, equal to the credit calculated above.



(2) US Estate Tax – US Securities

• The following assets are included in the US estate of the US nonresidents (ie could be subject to US estate taxes on FMV at death) – US situs assets (shares and bonds of US corporations) held directly, even

though intangible – US securities held in Canadian or US brokerage account – US securities held in Canadian RRSP/TFSA/RESP – US securities held in partnership – US securities held in joint tenancy with spouse, where NR provided 100% of

the funds to acquire the assets – US securities held in family trust that were transferred by NR and to which NR

still holds beneficial interest – US securities held in family trust over which NR has the power to distribute to

himself (i.e., has a “general power of appointment”)

• Should not apply to US securities held in Canadian corporation • Should not apply to US bank accounts, or T-bills, or registered bonds



(3) Structures for the ownership of US securities by Canadian residents/US NR - Individual

1. Direct ownership by a Canadian-resident individual • Direct ownership of US securities is the simplest structure but offers no

shelter from US estate tax • No full deduction for recourse investment loan (only prorated deduction)

• Joint tenancy ownership with right of survivorship can result in US estate

tax on both deaths. – On the death of the first spouse to die, 100% of the value of the assets is

considered includable in that spouse’s estate for US estate tax purposes, unless the executor can prove that the surviving spouse contributed to the purchase of the property

• Thus, where only one spouse contributed funds, better to hold property as “tenants in common”



(3) Structures - Corporation

2. Ownership by a Canadian corporation • Can be effective protection against US estate tax.

• Transfer to corporation should not be subject to US gift tax (intangible

assets) or US capital gains tax



(3) Structures - Trust

3. Ownership by a Canadian-resident trust • Can be effective way of structuring ownership to avoid US estate tax and

minimize Canadian tax • In order to effectively avoid exposure to US estate tax, the trust must be

established by the person supplying the cash to acquire the property and that person cannot retain any beneficial interest in the trust, nor can he or she exercise any control over the trust

• Issues: – Canadian capital gains tax on transfer of securities with accrued gains to

trust – Canadian 21 year deemed disposition rule


Questions

U.S. Expatriation Peter Megoudis, Deloitte & Touche LLP


US Expatriation

• For Loss of Status by US Citizens or Long Term (8 out of past 15 years) Permanent Residents:

• “New Rules” (Period C) apply to individuals who commit an expatriating

act on or after June 17, 2008. • Old Rules A apply to individuals who commit an expatriating act before

June 4, 2004. • Old Rules B apply to individuals who commit an expatriating act after

June 3, 2004 but before June 17, 2008.



Expatriation Penalties for “Covered Expatriates”

• “Covered Expatriate”: Expatriate, and any of these 3 tests applies:

(a) Has personal net worth of at least $2m, (don’t include spouse’s net worth)

(b) Has average net tax liability over past 5 years of at least $124,000 (indexed – now $155,000 for 2013) (count joint tax liability for joint returns), or

(c) Has not certified that he has complied with his US tax obligations for past 5 years



Exceptions to tests (a) and (b) for “Covered Expatriate” status: Period C • Dual Citizens

– At birth: Both US citizen and citizen of country X, – Still citizen AND Tax Resident of country X, and – Satisfied the 183 day residency test for not more than 10 of prior 15

years

• Minors – Loss of citizenship < 18 ½ years old, and – Satisfied the 183 day residency test for not more than 10 years

• Note: these are not exceptions to test (c) – Still need to file US returns for past 5 years



Summary of Period C Penalties on Covered Expatriates

• Period A/B expatriation consequences don’t apply (including 10 year filing/modified NR tax rule and 30 day physical presence rule) – File 8854 only in year of expatriation

• Deemed Disposition of Assets (above exemption threshold) – 30% withholding tax on actual distributions from eligible deferred

compensation plan – Deemed distribution of assets from ineligible deferred compensation

plan – 30% withholding tax on distributions from non-grantor trust – Tax on US taxpayer receiving gifts or bequests from covered

expatriate – Deemed distribution of assets within IRA, 529 plan…



Consequences – Deemed Disposition

• Deemed disposition of all property at FMV on day before expatriation (“departure tax” on capital or non-capital gain)

– Exemption for first $600,000 (indexed; 2013: $668k) of gains, applied

prorata to each gain asset – Can defer payment of tax on gains (on asset by asset basis) until due

date of return for year assets disposed of, by posting security (however, interest charged) • Annual Form 8854 filing requirement

– Applies to US and non-US real estate

– If property held when became resident of US, basis = FMV on residency start date (unless contrary election)



Consequences – Deemed Disposition (cont.)

• Deemed disposition of all property at FMV on day before expatriation (“departure tax” on capital or non-capital gain)

– Does not apply to deferred compensation, IRAs, or nongrantor trust

interests – Includes assets held within TFSA, RESP, Canadian or US brokerage

accounts (grantor trusts; not deferred compensation)

– Includes assets held within RRSP and RRIF • However; Article XVIII(7) Treaty exemption for deemed gain? • 877A later in time to Treaty, so 877A trumps Treaty?



Example

• On Expatriation Date in 2012 – Asset X: Deemed Gain $1.8m – Asset Y: Deemed Gain $200k – Asset Z: Deemed Loss $300k

• $651k exemption applied prorata to X and Y – X: $1.8m/$2m * $651k = $585,900 – Y: $200k/$2m * $651k = $65,100

• X: Gain of $1,241,100 • Y: Gain of $134,900 • Z: Loss of $300k



Consequences – Deferred Compensation Plan

• “Deferred Compensation”: Very broad – Funded or unfunded, vested or unvested, 409A exempt or not; (ex

RPPs, options, SARs, RSUs, DSUs,….) – Does not include RRSPs and RRIFs (grantor trusts)

• Eligible Deferred Compensation Plans – Employee needs to elect “eligible status” by filing Form W-8CE/8854 – If foreign employer, employer also needs to elect to be treated as “US

payor”

• 30% withholding tax on distributions – No foreign tax credit (FTC) for foreign taxes on foreign income – Exempt: Amounts for services rendered outside US while NR of US



Consequences – Deferred Compensation Plan

• Non-Eligible Deferred Compensation Plans – Deemed receipt of present value of (vested and unvested) accrued

benefit on date of expatriation – Tax in year of expatriation (no deferral) – Potential FTC for foreign taxes on foreign source income

• If no foreign taxes payable in year of expatriation, may be able to claim foreign taxes carried forward from past 10 years, or carried back from 1 future year.

– Exempt: Amounts for services rendered outside US while NR of US



Consequences – IRAs/Non-grantor trusts

• IRA and 529 Plans (“specified tax deferred accounts”) – Deemed distribution of entire interest in account on day before

expatriation – No 10% early withdrawal penalty

• Non-grantor trusts – 30% withholding on distributions – Annual Form 8854 filing requirement



Consequences – Gift/Inheritance Tax

• Gifts/inheritances from covered expatriate – “Inheritance tax” on US citizens or residents or US trusts receiving

gifts or bequests from covered expatriate (except for gifts within annual ($14,000) limit, gifts to US citizen spouse or charity, or amounts subject to US gift/estate tax)

– Tax at top gift or estate tax rate (currently 40%) – NOT an estate or gift tax (no exemptions or credits) – US credit for foreign gift or estate tax on transfer

• BUT: there are no Canadian gift or estate taxes – No credit for Cdn capital gains tax (XXIX-B(7) credit does not apply – only applies against US estate taxes)

– NO Canadian FTC for US tax • (XXIX-B(6) credit does not apply – US tax not an estate tax)



This presentation contains general information only and the respective speakers and their firms are not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. The respective speakers and their firms shall not be responsible for any loss sustained by any person who relies on this presentation.

Questions

SEC Forms 13F and 13 H Reporting Jack Rader, ACA Compliance Group

Documents

U.S. Tax and Estate Law Impacting Canadian Clients · 3 U.S. Tax and Estate Law Impacting Canadian Clients ... gross proceeds of security sales). ... • Coordination of Chapter 3