SURPRISE! DO YOU HAVE CLIENTS WITH U.S. INCOME AND ESTATE TAX

OBLIGATIONS?Michelle Connolly, Vice President, Wealth Planning, CI Investments

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As income tax time approaches, did you ever notice:When you put the two words “The” and “IRS” together, it spells THEIRS …

U.S. tax from Maxine’s perspective

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Have you heard of …

Transfer Tax Regime – Estate, Gift and Generation Skipping Taxes

Form 8840 – Closer Connection

Exception Statement for Aliens

Anti-Deferral Income Tax Regime - PFIC

Snow Birds, Citizens and

Green Card Holders

FATCA

American Taxpayer

Relief Act of 2012

1040 and 1040 NR

Unified Credit

U.S. Situs Assets

New Streamlined Filing Procedures

Two scenarios to consider:

1. Canadian resident/citizen taxpayer owning U.S. situs assets – exposure to U.S. Income and Transfer Tax Regimes; and

2. U.S. taxpayer living in Canada – U.S. tax filings and impact on Canadian investment accounts.

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Canadians owning U.S. assets

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Client scenario - business owner

• Steve (60), divorced owns successful operating business

• Wants to redeem $1M next week to purchase house in Scottsdale, AZ. House is a steal - five years ago - $2M

• FMV of assets:

– Business $4M

– House $1.5M

– RSPs $300K

– Non-reg $1.5M – CI Corporate Class

– Non-reg $200K – bank brokerage, all U.S. equities

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What are U.S. situs assets?

• Real property and tangible personal property situated in the U.S.

• U.S. securities

• Certain U.S. debt obligations

• U.S. mutual funds including money market funds

• Interests in certain trusts if assets are U.S. situs

• Business related assets owned by a sole proprietor, or a partner

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Relief from U.S. estate tax

1. Unified Credit Exemption – some resolution finally …

• $5.25M unified exemption estimated; and

• Maximum 40% tax rate

2. Canada-U.S. Tax Treaty, which provides Non-refundable Spousal Credit Exemption

• If assets inherited by spouse

• Definition of spouse

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U.S. estate tax exposure

Steve, divorcedUS situs assets 1,200,000$ Worldwide assets 7,500,000$

Estate Tax 425,800$ Unified Credit * (327,300)$ Additional Spousal Credit ** -$ Potential Estate Tax Liability 98,500$

Have assumed $CDN = $USD* Prorated Unified Credit - US situs assets to worldwide assets** No spouse assumed

Canadian tax reporting – new form T1135

• As announced in 2013 Federal Budget - Form T1135 “Foreign Income Verification Statement” updated for 2013 tax year

• The updated T1135:

– Calls for more detailed information to be disclosed regarding foreign property;

– New exclusion for specified foreign property; and

– Expanded re-assessment period

• Additional burden borne by taxpayer – responsible for tracking and maintaining cost records or paying an advisor to do so

• Canadian mutual funds that hold foreign property do NOT have to be reported on the T1135

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Client scenario - Snowbird

• Kate (75), widow

• Last five years rented and stayed in Palm Springs, CA for October through to mid May

• FMV of assets:

– House $1M

– RRIF $800K (CI Corporate Class)

– Non-reg $300K (CI Corporate Class)

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Substantial presence

An individual is considered a resident alien if physically present in the U.S. for at least:

• 183 Days or more in the current year; or

• 31 days during a year; and

• 183 weighted days during the current and previous two years

(1 * current year + 1/3 * previous year + 1/6 * second previous year)

Kate was present in the U.S. > 183 days the last five years

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Exemptions from Resident Alien status

If substantial presence test met, there are two possible exemptions:

1. Exemption under the Closer Connection Exception

– Spent less than 183 days in the U.S.; and

– Demonstrate a Closer Connection to another tax jurisdiction by filing Form 8840 “Closer Connection Exception Statement for Aliens” annually

2. Exemption under the Canada-U.S. Tax Treaty

– Treaty tie-breaker rules

– While tax liability is relieved, Treaty does not alleviate individual from obligation to file all U.S. income and information forms

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Beware “Snowbird Visa” tax bomb

• On June 27th, 2013 U.S. Senate passed broad immigration reform bill Bill included “Snowbird Visas”, namely a visa for retirees and a Canadian 240-day extended stay visa

• Will make it easier for Canadians and retirees to obtain non-immigrant status in the U.S.

• IMMIGRATION law is not the same as TAX law

• To the uninformed, the “Snowbird Visa” tax bomb could result in unintended, detrimental tax consequences

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The best advice to avoid owing this man is…

BE AWARE

Wants your clients $$

Uncle Sam

Clients who have U.S. situs assets and/or spend time in the U.S. may potentially be exposed to U.S. taxes

Common ownership alternatives

• Individual

• Canadian Spousal Joint Name

• Trust

• Canadian single purpose corporation

• Other considerations

Have your clients considered renting?

Canadians acquiring U.S. real property

• Form 1040NR must be filed to report the income – due June 15th year following

• 10% withholding tax applies on gross selling price

• 10% withholding can be reduced by filing Form 8288-B, “Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests”

• U.S. tax withheld can be claimed as a foreign tax credit and applied against Canadian tax otherwise owing

• Exceptions from 10% withholding

– Personal use property costing less than $300,000 and will be occupied as principal residence

Canadian selling U.S. real property – U.S. tax filing requirements

U.S. taxpayers residing in Canada

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A U.S. taxpayer Is

An individual who:

• Is a U.S. citizen;

• Possesses a valid U.S. Green Card;

• Is deemed a U.S. resident (>183 days); or

• Satisfies “Substantial Presence Test” and has not filed Form 8840

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If you have U.S. taxpayers as clients…

Chuck your traditional Canadian estate and tax planning ideas out the window

Tax filings and other tax information - considerations for U.S. taxpayers

1. U.S. Personal Tax Return (1040) must be filed annually reporting worldwide income along with relevant information returns;

2. Anti-Deferral Income Tax Regime - PFIC;

3. Transfer Tax Regime – Estate, Gift or Generation Skipping Taxes; and

4. Foreign Reporting Requirements, Offshore Voluntary Disclosure programs and FATCA

U.S. may impose significant penalties for non-compliance and late filings!

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U.S. annual tax and information reporting

• Form 1040, “U.S. Individual Income Tax Return”

• Form 8891, “U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans”

• Form 5471, “U.S. Information Return of U.S. Persons with Respect to Certain Foreign Corporations (CFC)”

• Form 8621, “Return by a Shareholder of a Passive Foreign Investment Company (PFIC) or Qualified Electing Fund (QEF)”

• Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”

• Form 3520A, “Annual Information Return of Foreign Trust With a U.S. Owner”

• Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts (FBAR)”

• Form 8938, “Statement of Foreign Financial Assets”

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U.S. annual tax and information reporting

Canadian tax treatment differs from U.S. tax treatment

• Capital dividends

• Sale of CCPC/Farm – Capital Gains Exemption

• Lottery winnings

• Tax free rollovers/estate freezes or other corporate reorganizations

• Undistributed income from an estate or family trust

• Receipt and exercise of stock options

• Gifts to children

• RRSP/RRIF, RCA, IPP, TFSA, RESP and RDSP

• Capital gains – FIFO vs. weighted average and short term vs. long term

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American taxpayer relief act of 2012

• Legislation that averted the proverbial U.S. “fiscal cliff”

• New income tax measures target the “affluent” U.S. taxpayer:

– >$200K ($250K married) the Obamacare Surtaxes - 0.9% on payroll and 3.8% on net investment income

– >$250K ($300K married) reducing benefits associated with certain itemized deductions and personal exemptions phased out or limited

– >$400K ($450K married) new top marginal tax rate of 39.6% (up from 35% in 2012) and new federal tax rate on investment income (namely long-term capital gains and qualified dividends)

– New federal tax rate on investment income (long-term capital gains and qualified dividends) of 20% ***

*** In addition to 3.8% Obamacare Surtax

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U.S. anti-deferral income tax regime

• A Passive Foreign Investment Corporation (PFIC) is a corporation (trust and other structures may be deemed) where:

– >75% gross income; or

– >50% average FMV of assets is passive in nature

• Common examples of PFIC:

– Shares of a Canadian investment holding company

– Units of a Canadian mutual fund trust* or shares of a Canadian mutual fund corporation*

– Units of a Canadian exchange traded fund*

* non-registered accounts

PFIC rules are punitive and with FATCA on the horizon – the IRS has more power and foreign asset information to enforce compliance

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U.S. transfer tax regime (estate, gift and generation skipping taxes)

Unified Credit Exemption – some resolution finally …

• $5.25M unified exemption; and

• Maximum 40% tax rate

Gifts (all inter-vivos transfers not at FMV consideration) by a U.S. taxpayer are subject to tax unless:

• U.S. $5.25M cumulative lifetime exemption (note will reduce unified credit – estate tax exemption)

• U.S. $14K per year to an unlimited number of recipients

• Unlimited exclusion of gifts to a U.S. spouse

• U.S. $143K estimated to non-U.S. spouse

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Foreign reporting requirements

Form TDF 90-22.1 Foreign Bank and Financial Accounts Reporting (FBAR)

• Applies to any U.S. taxpayer who has financial interest in, signing or other authority over any foreign financial accounts that have an aggregate value exceeding $10K USD (Canada’s T1135 is $100K cost basis) at any time during the year

• Filed with the Treasury Department by June 30th – Bank Secrecy Act

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Foreign reporting requirements

Form 8938 - Statement of Foreign Financial Assets

• NEW FORM implemented 2011

• All specified foreign financial assets (FFA), not just foreign financial accounts must be reported

• Examples of specified FFA (if not in a foreign financial account):

– Stock issued by a non-U.S. corporation

– Capital or profit interest in a non-U.S. partnership

– Note, bond or debenture, or other form of indebtedness issued by a non-U.S. person

– Interest in a non-U.S. estate or trust

• Filed with the IRS with 1040

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Voluntary disclosure program

• On January 9th, 2012, IRS announced its third Offshore Voluntary Disclosure program with no end date (previous two had expiry dates)

• 30,000 taxpayers worldwide filed under the first two programs (2009 and 2011) resulting in collections of $4.4B in taxes, penalties and interest

• What does OVD program offer?

– No criminal prosecution

– No penalties on late filed Forms 5471, 3520, etc.

– Reduced penalties on late filed FBARs

– No reduction in late filing penalties or interest on 1040s

Very little incentive to come clean and become compliant

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As of September 1, 2012 - new streamlined filing procedures for non-resident U.S. taxpayers

Effective September 1, 2012

New streamlined filing procedure:

1. Tax and information returns for the past three years;

2. FBARs for the past six years;

3. Dated statement explaining why there is reasonable cause for previous failures to file; and

4. Additional information regarding compliance risk factors as requested.

• All submissions reviewed, intensity of review determined by compliance risk. Low compliance risk - review will be expedited and no penalties or follow up actions.

• Low compliance risk = simple returns with little (>$1,500 tax/year) or no tax, no indications of sophisticated tax planning or avoidance, or if there is no material economic activity in the U.S.

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Alternatives to voluntary disclosure program

• What are alternatives to OVD?

– “Reasonable Cause” approach – probably most practical for innocent non-filers;

– “Quiet Disclosure” approach; or

– Do nothing – not really an option given FATCA

• No innocent filer relief if enter OVD

• Costs to enter OVD – all taxes, interest, and penalties paid upfront

• OVD best option for tax evaders with large liabilities who want to avoid criminal prosecution and jail time

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“You can run but you can’t hide” – U.S. expatriation rules

• All U.S. citizens who relinquish their citizenship status and “former long-term residents” who give up their green cards after June 17, 2008 are subject to U.S. expatriation rules if they meet any of the following three tests:

– Net Income Tax Test

– Net Worth Test

– Certification Test

• Such individuals are known as “covered expatriates”

U.S. expatriation rules

• What is the definition of a “former long-term resident”?

– Individual who has held a green card for any portion of at least eight of the fifteen tax years preceding expatriation

– Does not include individuals who have been in U.S. for eight years under any other immigration status such as a work visa

• Exemption from U.S. expatriation rules if an individual meets one of the following conditions:

– Dual-Citizen Exception

– Exception for Certain Minors

U.S. expatriation rules

• Deemed sale of all assets on the day before the date of expatriation for fair market value. The first $600,000 (indexed annually) of net gain not taxable

• A U.S. person who receives a gift from a covered expatriate is subject to U.S. tax on the receipt of such gift at the highest applicable gift tax rate

• Special rules applicable to deferred compensation assets such as 401K or IRA

• Waives any claim to withholding tax reduction under any U.S. treaty for eligible deferred deferred compensation

Starting in 2014, all Foreign Financial Institutions (FFIs) and Non-Financial Foreign Entities (NFFEs) must enter into an agreement with the IRS to disclose information - income and asset information for clients that are U.S. taxpayers or viewed as a substantial U.S. owner

U.S. taxpayers can no longer hide from the IRS…

The IRS can’t

find me

FATCA – Foreign Account Tax Compliance Act

FATCA – what? how? why?

• Imposes burden on global financial community and non-financial entities to set up infrastructure to report to IRS – no longer self-reporting of income

• FFI must enter into an agreement with IRS to disclose information on U.S. accounts in excess of $50K unless FFI in jurisdiction that has signed an intergovernmental agreement (“IGA”)

• Purpose is to curb offshore tax evasion by U.S. taxpayers• July 12, 2013 IRS and Treasury announced revised timelines for

implementation. By extending deadlines:

– IRS more time to issue forms, guidance, clarification and interpretation;

– Treasury and more FATCA partners more time to agree and sign IGAs; and

– FFI more time to implement changes in order to be FATCA/IGA compliant

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FATCA – CI corporate impact

CI as a participating FFI will have the following obligations:

• Comply with IRS information requests on U.S. account holders

• Withhold and remit 30% on specified payments made to recalcitrant account holders (those that refuse to clarify their U.S. status)

• Review accounts in existence and on an ongoing basis to identify whether account holders have U.S. indicia

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investment results.

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For advisor use only

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