Canadian Cross Border issues for US Citizens

Report
Canadian Cross Border issues for
US Citizens
Presented to Democrats Abroad Vancouver
April 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 Canada
Canada taxes people based on residency
 US taxes people based on citizenship or residency
 Treaty 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 years

US 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 CAN
employed in CAN
owns a business in CAN
owns a partnership in CAN
X
X
X
X
X
bank accounts (incl RRSPs) > $10 K
RRSP's
owns foreign assets > multiple limits
has TFSA or RESP
CAN citizen in CAN worked in the US
does business in the US
has a rental property in the US
sells real property in the US
CAN corporation
does business in the US
X
X
X
X
X
X
X
X
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:
Bonafide residence (part II of form 2555)
1.
◦
Resident for one full tax year
Physical Presence (part III of form 2555)
2.
◦
Resident for 330 days within 12 month period
Forms to file

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 here
 Each 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 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
Forms to file
Form TD F 90-22.1
Report 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
Form TD F 90-22.1
Report of Foreign Bank and Financial Accounts (FBAR)

Due Date – to be received by June 30th

Online filing possible using BSA (Bank Secrecy Act)
system

This form is not sent to IRS

Penalties
e-filing
◦ Up to $10K per violation
◦ Possibly nothing if a good reason is given
◦ Wilfully not filing can be larger of a)$100K or b) 50% of balance at time
of violation
Forms to file
Form 8938
Statement of Specified Foreign Financial Assets
This is an informational form listing out the details of all non-US financial
assets and their highest balances during the year
Form started in 2011
 Due Date : Form is due with tax return

Who files:
 US citizens, resident aliens of US & non resident who makes
election to be treated as resident
 Various reporting thresholds based on value of assets
compared to filing status
Forms to file
Form 8938
Statement of Specified Foreign Financial Assets
Assets to be reported include:
 All financial accounts FBAR items – (Part 1)
 All other assets, such as notes, bonds, trust interests,
stock of foreign companies, partnership interests (Part
2)
Assets not included are :
 CPP & OAS
 Direct interest in real estate
Forms to file
Form 8938
Statement of Specified Foreign Financial Assets

no need to report assets already recorded on forms
◦ 8891, 8621, 3520, 5471, or form 8865
◦ Fill out Part IV of form 8938 to indicate where the assets are recorded

Value assets at FMV using year end exchange rate
◦ Financial management services has 1$ 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 5471
Information 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 8833
Treaty-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 & 3520
Foreign 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 & 3520
Foreign 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 8891
U.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 1040NR
U.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
New for 2012
for 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 for 2012
for those who haven’t been filing US returns
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 2012
for 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 2012
for 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 2012
for 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 2012
for those who haven’t been filing US returns
New Streamlined Option
Procedure 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 2012
for those who haven’t been filing US returns
New Streamlined Option
All documents are packaged and sent to:
Internal Revenue Service
3651 South I-H 35
Stop 6063 AUSC
Attn: Streamlined
Austin, TX 78741
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
Offshore Voluntary Disclosure Program
OVDP
Reduced 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
FATCA
Foreign Account Tax Compliance Act
FATCA
New 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
For those doing their own returns

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-DisclosureProgram

Path to New Streamlined Procedure option
◦ http://www.irs.gov/uac/Instructions-for-New-Streamlined-FilingCompliance-Procedures-for-Non-Resident-Non-Filer-USTaxpayers

Path to Foreign Currency exchange rate
◦ http://www.fms.treas.gov/intn.html
Cross Border Issues
Were Done!

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