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!