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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!