Canadian Cross Border issues for US Citizens

Canadian Cross Border issues for US CitizensPresented to Democrats Abroad VancouverApril 2013

Presented by JPS Financial and Accounting Services

1AgendaWho should think about US tax complianceWhat forms should be filed with the IRSNewer forms and changesOffshore Voluntary Disclosure InitiativeFATCA (foreign account tax compliance act)

2Who should file US tax returnIf you are a US citizen you should be filing a US tax returnResident aliens who lived or worked in USGreen card holdersAnyone who does business in the US

3Living in CanadaCanada taxes people based on residencyUS taxes people based on citizenship or residencyTreaty has rules designed to eliminate double taxationIn general an individual will pay taxes that equal the higher of the two countriesUS will give you credit for taxes that you paid to CanadaCanada will give you credit for taxes paid to USUnused Credit can be used 1 year back & forward 10 yearsUS offers extensions to file tax, Canada has no extensions4A few popular forms

5Forms to file

Form 1040 US Individual Income Tax Return

automatic 2 month extension if living outside US on April 15th therefore due date = June 15thExtension available up to Oct 15th Even if you have zero income, file to establish statue of limitations on returnPenaltiesLate filing 5% of tax due each month up to 25% of tax60 days or more late = lessor of a) $135 or b) tax dueInterest charged on unpaid tax from due date to date paidCompare to Cdn T1 (Cdn tax return) due April 30 & no extensions 6Forms 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 dont pay enough for the year or you underpay one or more of the instalment dates7Forms to file

Form 2555 Foreign Earned Income

US allows a set amount of foreign earned income to be excluded from income tax2012 exclusion limit is $95,100Form 2555 is used to elect the use of an excluded amountEarned income includes salary, wages, professional fees, home or car allowances paid to youForeign earned income does not include: pension or social security, dividends, capital gains, or alimonyAlso used for the housing deduction and exclusion calculationDue Date - submit this with your 1040 return

8Forms to file

Form 2555 Foreign Earned Income

To Qualify to use this form one of two tests must be met:

Bonafide residence (part II of form 2555)Resident for one full tax year

Physical Presence (part III of form 2555)Resident for 330 days within 12 month period

9Form 1116 Foreign Tax CreditThis 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 separatelyCatagories included are:Passive dividends, interest, rents, royalties, General wages, salary, business income901(j) income from certain sanctioned countries (no credit for tax)Income re-sourced by TreatyLump sum distributions from pensionForms to file

10Forms that are sometimes overlooked

some forms are commonly missed probably because they are informational and dont 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 AssetsForm 5471 Information return of US persons with respect to certain foreign corporationsForm 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)Form 3520 A & Form 3520 Foreign Trusts with US ownerForm 8891 U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement PlansForm 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

11Form 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 yearAccounts included are:Bank accounts (incl GICs), brokerage, TFSA, RESP, RRSPComplete form and file if:Total value of non-US accounts equal or > $10K any time during the yearForms to file

12Forms 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 systemThis form is not sent to IRSPenaltiesUp to $10K per violationPossibly nothing if a good reason is givenWilfully not filing can be larger of a)$100K or b) 50% of balance at time of violation13Form 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 2011Due Date : Form is due with tax returnWho files:US citizens, resident aliens of US & non resident who makes election to be treated as residentVarious reporting thresholds based on value of assets compared to filing status

Forms to file

14Form 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

15

16

17Form 8938Statement of Specified Foreign Financial Assetsno need to report assets already recorded on forms8891, 8621, 3520, 5471, or form 8865Fill out Part IV of form 8938 to indicate where the assets are recordedValue assets at FMV using year end exchange rateFinancial management services has 1$ US = .9950 Can as at Dec 31, 2012Anything with a negative value, report as zeroPenalties$10K + $10K for each month past 90 days after notification (to $50K max)Forms to file

18Canadian version of US Form 8938Canada has its own similar form requesting information on foreign assets: Form T1135 Foreign Income Verification StatementFill out form ifyou owned assets outside of Canada at any time during the year, that cost more than $100KSome assets includedNon-Cdn bank accounts, shares of corporations, mortgages, interest in trust or partnership, foreign rental property (check list on form for more)Some assets not includedIRAs, vacation property, property used to carry on active business (check list for more)Due date file with Canadian tax returnPenalties - $25 per day (minimum $100 and maximum $2,500).

Forms to file

19Form 5471Information return of US persons with respect to certain foreign corporationsThis 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

20Form 5471Information return of US persons with respect to certain foreign corporationsSelf employed that are incorporated complete this formDormant corps still need to fileFiled pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporation (type in top margin of first page)Due Date - due with income tax returnPenalties$10K + $10K for each month past 90 days after notification (to $50K max)10% (plus) reduction in foreign taxes used for foreign tax creditsForms to file

21Form 8833Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)

One form for each position takenDue date attach and file with tax returnForms to file

22Form 3520 A & 3520Foreign trusts annual return and transaction reportingForm 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 individualForm 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 orGifts valued at more than $14,723 from foreign corporations or foreign partnerships

Forms to file

23Form 3520 A & 3520Foreign trusts annual return and transaction reportingTFSAs and RESPs are reported using these formsDue Date 3520 same as income tax return but do not mail with your return. 3520 A 15th day of 3rd month after year endMailed to a separate address, do not attach to tax returnPenaltiesForm 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

24Form 8891U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement PlansUsed to report RRSPs and RRIFs one form per planLine 6 is where you tick the box to defer incomeIf line 6 ticked, do only lines 1-8Keep records to support reported valuesCanada gives deduction for contributions (and taxes later), US does not give deduction so that contribution is tax paid in USDue date attach and file with income tax return

Forms to file

25Form 8621Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing FundPFICs are defined by testNon US corporation > 75% of income is passive or > 50% of assets are passiveThis captures Canadian Mutual fundsOne form per PFIC per yearHigher tax rates on included income amountsAccuracy penalty is doubled when associated with understatement of PFIC tax

Forms to file

26Form 1040NRU.S. Nonresident Alien Income Tax ReturnWho 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 USCanadians with rental property in the USForm also completed to get refund of over withheld amounts on payments received.Due Date If US wages received April 15, 2013If no US wages received June 17, 2013Forms to file

27New for 2012for those who havent been filing US returnsThis new option is aimed directly at those that are outside of the US, havent been filing their US returns or FBARs and want to become compliant. Also, gives relief to RRSP holders who havent filed their form 8891New Streamlined option available as of Sept 1, 2012New option allows you to get caught up (in compliance) by filing3 years worth of tax returns6 years worth of FBARsNo penalties or other enforcementTaxes and interest will apply

28New Streamlined OptionTo qualify:have lived outside US since Jan 1, 2009have not filed US returns during this timeare considered to be a low compliance riskLow compliance riskif submitted returns = < $1500 tax each yearYou dont have identified high risk factorsNew for 2012for those who havent been filing US returns29New Streamlined OptionHigher compliance risk if:Returns submitted claim a refundA lot of US activity seen (ie: an active US business)Undeclared income in the country of residenceTaxpayer is already under audit / investigation by the IRSFBAR penalties have already been assessed, or letter recd regarding FBARsTaxpayer has financial interest or authority over account outside of country of residenceTaxpayer has interest in one or more entities located outside country of residenceUS source incomeIndication of tax avoidance or complex tax planning

New for 2012for those who havent been filing US returns30New Streamlined OptionIf not low compliance risk, then returns are more closely scrutinized, maybe audited, maybe more than 3 years requiredA SSN or ITIN is needed to use this optionThe only amended return that qualifies under this option is one filed to include late filed form 8891sOnce you submit under this new option, OVDP is no longer available

New for 2012for those who havent been filing US returns31New Streamlined OptionProcedure to use this optionSubmit last 3 years of returns & type Streamlined on top of page 1Pay all tax due and interestSubmit FBARs for last 6 years (not to FBAR address)Submit a completed questionnaireNew for 2012for those who havent been filing US returns32New Streamlined OptionProcedure for using this option to include only late filed 8891sSubmit an amended return with no adjustments to income or deductionsInclude a statement requesting extension of time to make election to defer income under Article XVIII(7) of Canada / US Income Tax TreatyInclude form 8891 for each plan / RRSP for each tax yearDescription of each planDated & signed statementWhy election wasnt made in the first placeHow you came to know it should be made or reporting to be doneIf you used a professional describe the nature of their responsibilitiesNew for 2012for those who havent been filing US returns33New Streamlined OptionAll documents are packaged and sent to:

Internal Revenue Service3651 South I-H 35Stop 6063 AUSCAttn: StreamlinedAustin, TX 78741New for 2012for those who havent been filing US returns34

Offshore Voluntary Disclosure Program

OVDPThe 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 imposedUnlike prior programs there is no deadline for disclosure2012 program may change at any timePenalty is 27 % of highest balance of foreign entities / accounts or asset value during the disclosure periodAll undisclosed accounts are added together & the highest balance found throughout the 8 year period will have penalty of 27 % appliedThis is in addition to tax, interest and accuracy penalties35OVDPReduced OVDP penaltiesIn specific cases, the following reduced penalties will be available instead of the 27.5%5% penaltyTaxpayers are foreign residents and unaware they are US citizens orTaxpayer did not open account, withdrew $1 K or less, & had infrequent contact with the account & funds were tax paid orTaxpayer 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 only12.5% penaltyHighest balance in all the foreign accounts is < $75 K each year

Offshore Voluntary Disclosure Program

36OVDPSubmission Requirements (for the 8 year disclosure period):Copies of previously filed tax returnsAccurate amended tax returns for years requiring amendmentCopy of signed Offshore Voluntary Disclosures Letter & attachmentCheque to US Treasury (tax, interest, & penalties) or proposed pymnt schedule & collection information statementCompleted foreign account or asset statement for each undisclosed foreign account or asset during the disclosure periodCompleted penalty computation worksheetSigned agreements to extend time to assess tax & FBAR penaltiesCompleted FBARs (TD F 90-22.1) if applicableOffshore entity disclosure

Offshore Voluntary Disclosure Program

37

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 accountstakes effect Jan 1, 2014Foreign 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 institutionThe FFI will need to get a waiver signed by the account holdersForm 8938 is part of FATCA the part that the individual is most familiar as this is where foreign assets are to be reported

38

For those doing their own returns

Some notable itemsTaxpayers with AGI< $57K can e-file for freeUse IRS link to freefileSoftware is available to help you prepare & e-fileMake sure it accommodates a foreign addressIf your living in Canada, Soc Security should be taxed in Canada not the US and15% of SSN is not taxable at all39If 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 1000Remember, everything is reported in US $Use the link on the IRS site to get foreign exchange rates

For those doing their own returns

40Some links / pathsPath to 2012 Offshore Voluntary Disclosure http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-ProgramPath to New Streamlined Procedure optionhttp://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

41Cross Border IssuesWere Done!42Sheet1Some common scenarios and the forms required by the US

WhoTransaction10401040NR54718865TD F 90-22.1889189381120F3520 (A)

US citizen in CANemployed in CANXowns a business in CANXXowns a partnership in CANXX

bank accounts (incl RRSPs) > $10 KXRRSP'sXowns foreign assets > multiple limitsXhas TFSA or RESPX

CAN citizen in CANworked in the USXdoes business in the USXhas a rental property in the USXsells real property in the US X

CAN corporationdoes business in the USX

Sheet2

Sheet3