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1 U.S.-Canadian Dual Taxation Pitfalls: Reporting Issues and Planning Opportunities for U.S. Taxpayers Navigating Tax Treaties to Minimize Tax on Passive Income and Pass-Through Income THURSDAY, APRIL 27, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. FOR LIVE PROGRAM ONLY WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 U.S.-Canadian Dual Taxation Pitfalls April 27, 2017 Grant Gilmour, International Tax Partner Gilmour Group CPAs, Vancouver, B.C. C. Edward Kennedy, Jr., CPA, JD Brady Ware & Company, Atlanta

4 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

5 US-Canadian Dual Taxation Pitfalls Thursday April 27, 2017 Tim Horton meets Uncle Sam 5

6 Dated Material THE MATERIAL CONTAINED IN THESE COURSE MATERIALS IS CURRENT AS OF THE DATE PRODUCED. THE MATERIALS HAVE NOT BEEN AND WILL NOT BE UPDATED TO INCORPORATE ANY TECHNICAL CHANGES TO THE CONTENT OR TO REFLECT ANY MODIFICATIONS TO A TAX SERVICE OFFERED SINCE THE PRODUCTION DATE. YOU ARE RESPONSIBLE FOR VERIFYING WHETHER OR NOT THERE HAVE BEEN ANY TECHNICAL CHANGES SINCE THE PRODUCTION DATE. 6

7 Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY GROSSDUKENELSON & CO., PC AND GILMOUR GROUP, CPAS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. 7

8 Agenda General U.S. / Canada income tax concepts in crossborder situations U.S. Canada tax treaty highlights Limitation of Benefit provisions U.S. and Canadian income tax implications of various investment structures U.S. and Canadian taxation of passive and other unearned income treatment in cross border situations and U.S. reporting obligations 8

9 Course Objectives Identify key provisions of the U.S.-Canada Income tax treaty Recognize the tax treatment for Canadian citizens owning shares of a U.S.-based LLC Discern the tax implications of U.S. citizens owning shares in ULCs in Canada and potential planning techniques Identify tax planning opportunities to avoid double taxation and minimize the overall effective tax rate across the two countries Determine when a non-resident might have a taxable presence in the U.S. 9

10 General U.S. / Canada income tax concepts in cross-border situations 10

11 Liability for tax in host country Host country is the country where the individual or business is performing services or investing Home country is the country where the individual or business is resident for tax purposes The extent to which an individual or business is taxed depends on the following factors: For employees, individuals who are residents, as defined in domestic law and under the treaty, are taxed on their worldwide income All other employees are considered nonresidents and are only taxed on income sourced in the host country Independent contractors and businesses which have a permanent establishment in the other country are taxed on income attributable to that permanent establishment Passive income is generally subject to a final withholding tax 11

12 Canadian Residency Decision Tree 12

13 U.S. Residency Decision Tree 13

14 Treaty exemption for nonresident individuals An individual resident in either the U.S. or Canada performing services in the other (host) country is exempt from host country tax if the following requirements are met: 1. The individual earns less than $10,000 or less in the host country currency OR 2. The individual is present in the host country for less than 183 days in the calendar year, AND The remuneration is NOT borne by an employer who is a resident of the host country or by a permanent establishment or fixed base which the employer has in the host country. 14

15 Canada s Domestic Law and Employment Although there is a 183 day limit Canada exercises the right to withhold taxes from employees with pay between $10,000 and 183 days. This causes a lot of confusion. The withholdings can be refunded to the employee by filing a Canadian tax return and claiming treaty protection. The withholdings can also be waived if an application process is followed in advance. The challenge is that many employers are unaware of the application process and end up in an awkward spot with the tax authorities. See forms R102-R and CRA site for regulation

16 Permanent Establishment decision tool Section Article V 2 Article V2 Article V 2 Article V 2 Article V 2 Article V 2 Article V 3 Article V 4 Criteria Place of Management A branch An Office A Factory A Workshop Place of extraction of natural resources A building site or construction site constitutes a permanent establishment Use of an installation or rig to exploit natural resources 16

17 A permanent establishment includes: Permanent Establishment decision tool Section Criteria Article V 5 Article V 6 A person acting in a contracting state on behalf of a resident of the other contracting state if such a person habitually exercises an authority to conclude contracts Permanent establishment shall be deemed not to include a place of business when following activities are solely engaged: Use of facilities for purpose of storage/delivery to resident Maintenance of a stock of goods Purchase of goods Advertising Article V 7 Article V 8 A resident of a contracting state shall not be deemed such merely because the resident carries on business through a broker or agent The fact that a company resident in the contracting state, or controlled by a company of another contracting state shall not constitute the company a permanent establishment 17

18 A permanent establishment includes: Permanent Establishment decision tool Section Article V 9 Criteria Subject to Article V 3 where an enterprise of a contracting state is not found to have a permanent establishment by virtue of the preceding paragraphs that enterprise shall be deemed to provide those services through a permanent establishment if and only if: Services are performed by an individual who is present for 183 days or more and more than 50% of income is derived from the services performed Services are performed for 183 days or more in a 12 month period 18

19 U.S. Taxation of Passive Income The U.S. has several tax regimes which tax passive income of nonresidents and enterprises with no permanent establishment in the U.S. If the income is attributable to a permanent establishment in the U.S., it is taxed at the regular graduated rates If the income is not attributable to a permanent establishment or an individual is a nonresident, it is subject to a final withholding tax Gain on the sale of U.S. real property is subject to 10%/15% withholding tax on gross proceeds at time of sale It is possible to obtain a withholding certificate to reduce this tax to the actual tax liability if requested prior to the actual sale 19

20 Key take away learning Determining if you are resident or being nonresident is an important starting point Determining if there is a permanent establishment is an important starting point The determination can change from year to year 20

21 U.S. Canada income tax treaty highlights 21

22 Passive Income Includes: Dividends Interest Rental Income Royalties Capital Gains/Losses Other passive income 22

23 Dividends Article X Type of Dividend Canadian Domestic Rate Individuals U.S. Domestic Rate Ordinary Dividends 41% Ordinary Income Rates 15% Qualified Eligible Dividends 31% 15% 15% Foreign Dividends and other income in general 48% Ordinary income rates 15% Treaty Withholding Rate Dividends to 10% or more owner Same as above Ordinary Income Rates 5% 23

24 Interest Article XI Generally, Canadian source interest received by U.S. residents is exempt from Canadian income tax. Because the treaty is reciprocal the same is true of US source interest received by Canadian residents. The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. 24

25 Interest Article XI Interest Income Canadian Domestic Rate Individuals U.S. Domestic Rate Treaty Withholding Rate Interest 48% Ordinary income rates Exempt, but see note below The exemption does not apply if the owner of the interest carries on, or has carried on, a business in the other country through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. 25

26 Income from Real Property Income derived by a resident of a Contracting State from real property (including from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. Real property" includes any option or similar right in respect thereof. The term shall in any case include usufruct of real property and rights to explore for or to exploit mineral deposits, sources and other natural resources. Ships and aircraft shall not be regarded as real property. 26

27 Royalties Article XII Type of Property Rate of Tax Copyrights Exempt Television programs 10% Computer software Exempt Patents Exempt Royalties attributable to PE Fully taxable Natural resources Fully taxable 27

28 Gains from the sale of property - Article XIII Capital Gains Canadian Domestic Rate Individuals Capital Gains Individuals - 24% top rate U.S. Domestic Rate Individuals Short-term gains - ordinary income rates Long term gains 15%-20% Corporations Ordinary income rates Treaty Withholding Rate Domestic withholding 25% in Canada; U.S. 0% 28

29 Gains from the sale of property - Article XIII Person Canadian Taxation U.S. Taxation U.S. Resident holding Canadian personal property (not real property) with no PE in Canada. Example: Securities Canadian Resident holding U.S. personal property with no PE in U.S. Example: Securities Exempt Taxable Taxable Exempt 29

30 Gains from the sale of property - Article XIII Person Canadian Taxation U.S. Taxation U.S. Resident personal property with PE in Canada Canadian Resident personal property with PE in U.S. Gain on sale of real property in other country Taxable Taxable Taxable - 25% gross withholding; must file return to get refund based on actual tax liability. Taxable Taxable Taxable subject to 10%/15% FIRPTA withholding on sale; prior to sale may be able to reduce withholding to actual tax liability 30

31 Other Income Article XXII Other income received by a resident of one country which is sourced in the other country, may be taxed in the source country 31

32 Key take away learning The treaty is the fully reciprocal. Meaning that U.S. income subject to the treaty in Canada follows the same definitions and processes as Canadian income subject to the treaty in USA. The key challenges are Domestic law in each country which can make income either eligible or ineligible for treaty provisions and benefits available under the treaty like reduced withholding rates Layering of complexity with different ownership structures on each side of the border Domestic withholding tax that can be refunded later but exceeds treaty rates. The key mechanism that the treaty has for reducing double taxation is to reduce withholding rates. Thus being eligible for these reduced rates is important. 32

33 Limitation of Benefit Provisions Designed to prevent treaty shopping 33

34 Who are eligible for treaty benefits ( Qualifying Individuals )? Natural persons Governmental agencies Estates and certain pensions, trusts, nonprofits and tax exempts Certain corporations Persons with an active trade or business that is substantial Non-qualifying persons may receive derivative benefits 34

35 Which companies are eligible for treaty benefits? Companies whose principal shares are primarily and regularly traded on a recognized stock exchange in either country The principal shares are those common shares of the company that constitute the majority of the voting power and value of the company Includes private companies who have more than 50% of their shares owned by five or fewer persons that qualify under this provision Applies to subsidiaries of publicly traded companies as well 35

36 Qualifying Company U.S. Publicly Traded Parent Limitation on Benefits Provision is Satisfied Even though Nephew Sam, Inc. is not publicly traded, since 5 or fewer qualified persons own >50% of its shares, this requirement is satisfied Uncle Sam, Inc. (Publicly Traded U.S. company) Uncle Sam, Inc Establishes Nephew Sam, Inc. Nephew Sam, Inc., establishes Tim Horton s Inc. 36

37 What About FTE s? Limitation on Benefits Provision is Satisfied LLC s are not recognized as qualifying entities Look to ownership of LLC Qualified Taxpayer Uncle Sam, Inc. (Publicly Traded U.S. company) Uncle Sam, Inc Establishes Nephew Sam, LLC Nephew Sam, LLC acquires Tim Hortons Inc. 37

38 Base Erosion Requirements At least 50% of its shares are owned by residents entitled to the benefits of this Treaty AND Less than 50% of the company s gross income was paid directly or indirectly to persons who are not residents of either country 38

39 What About FTE s? 51% U.S. Ownership 49% non-u.s. or Canada ownership Limitation on Benefits Provision May be Satisfied If: 5 or Fewer qualifying people own more than 50% of the shares of Uncle Sam LLC LOB not applicable to the remaining 49% interest Uncle Sam LLC Uncle Sam LLC Establishes Nephew Sam, Inc. Nephew Sam, Inc. acquires Tim Horton s Inc. 39

40 Active Trade or Business Active trade or business that is substantial Treaty benefits are extended to residents that do not otherwise qualify, but who are engaged in the active conduct of a trade or business in their country of residence 40

41 Derivative Benefits Test Could the owner of the nonqualifying company have used its own country s treaty? 41

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43 U.S. and Canadian income tax implications of various investment structures 43

44 Canadian investment structures In Canada you can have many structures between the individual that will ultimately enjoy the income and the foreign (USA) income that they are to receive. These include Personal direct ownership Personal indirect ownership (often through a partnership) Tower ownership structures with corporations and other entities stacked between the individual and the income Proxy ownership. For example a trust owns the investment and flows profits to the individual 44

45 U.S. investment structures In the U.S., income may be taxed on several levels Corporations are taxed on their income Corporations cannot deduct dividends paid Taxation of dividends 20%-30% of dividends paid to domestic corporate affiliates are taxed again at the corporate affiliate level depending on ownership Dividends paid to foreign owners are subject to a withholding tax Dividends paid to individual shareholders are taxed at either 15% (qualified dividends) or the regular graduated rates (all other dividends) Individuals are taxed on 100% of dividends received 45

46 U.S. investment structures As a result, U.S. income tax planning involves reducing the layers of taxation The goal is to have income taxed once at the corporate level (if necessary) and once at the individual level Many times this results in investments through Limited Liability Companies (LLCs), S corporations, or general (GP) or limited partnerships (LLPs) LLCs, S corporations and LLPs also insulate owners from unlimited liability 46

47 Key Takeaways Canada and the U.S. investments structures often serve differing purposes The goal of cross border tax planning is to establish an optimal business structure to minimize tax in both jurisdictions We will now talk about common structures and the tax implications of each But first.. 47

48 Let s meet the cast of characters with apologies to copyright holders Tim Horton Canadian Individual Tim Hortons Inc. Canadian Corporation Uncle Sam U.S. Individual Uncle Sam, Inc. U.S. Corporation 48

49 Assumptions U.S. individual income tax rate is 40% (ignore state tax and NIIT) U.S. corporate tax rate is 35% (ignore state tax) U.S. partnership with non-u.s. partners withholds at the maximum individual and corporate rate for these partners; ultimately taxed at marginal rates but have to file return to claim refund Canadian individual income tax rate is 48% Canadian combined corporate tax rate is 27% (rates change from province to province) Dividends are considered non-qualifying dividends We are only looking at controlled foreign affiliates (more than 50% ownership) Dividend withholding rate Generally the treaty withholding rate is 15% reduced to 5% with some corporate structures These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. However a Canadian branch tax of the same rate can apply 49

50 Assumptions LLCs can elect to be taxable as an entity not separate from its owner (if only one owner), a partnership (if more than one owner) or an association taxable as a corporation. This discussion assumes the following: A single member U.S. LLC is considered as an entity not separate from its owner. A single member LLC which elects to be an association taxable as a corporation will have the same U.S. taxation result as if it were a C or S corporation A U.S. LLC with more than one owner is considered a partnership. An LLC with more than one owner which elects to be an association taxable as a corporation will have the same U.S. taxation result as if it were a C or S corporation Election is made on Form 8832, Entity Classification Election 50

51 Structural differences Canadian tax is built on an entity basis. Each entity has its own taxation and when you have tower structures there are credits built in to each step to recognize tax paid at a lower step on the tower. Fiscally transparent entities are not the default in Canada. The major ones Canada considers fiscally transparent are partnerships. U.S. tax planning is built on minimizing the levels of taxation. Thus using FTE s can make a complex structure have a simple taxation result. 51

52 U.S. Individual Directly Invests in Canadian Corporation Canadian Implications Non-resident controlled companies pay the top corporate tax rates of 27% combined. Uncle Sam buys 100% of the shares of Tim Hortons Inc Tim Hortons Inc. has a net profit of $100,000 U.S. Implications Dividends Canadian 5% treaty withholding tax is creditable on Uncle s return Deemed paid FTC Reporting obligations Forms 8938, 8621 (if PFIC),

53 Tax Cost of this Approach Canadian Tax Implications Net income $100,000 Canadian income tax ($27,000) Dividend paid $73,000 Canadian withholding tax (5%) ($3,650) Net dividend received $69,350 53

54 Tax Cost of this Approach U.S. Tax Implications Dividend received $73,000 U.S. income tax $29,200 Less Canadian withholding tax ($3,650) Total U.S. tax liability $25,550 Net amount received $43,800 Total taxes paid $56,200 Effective rate 56.2% Note only FTC available is the Canadian withholding tax; there is no deemed paid FTC at the individual level 54

55 Canadian Individual Directly Invests in U.S. Company Canadian Implications Taking the entity approach the Canadian system recognizes that tax was paid at the corporate level in Uncle Sam Inc. However since an individual owns the shares the income is fully taxable. Tim Horton personally buys 100% of shares of Uncle Sam Inc. Uncle Sam Inc. U.S. Implications Dividends 5% Withholding If Tim is treaty resident no further U.S. tax 55

56 Tax Cost of this Approach U.S. Implications Net income $100,000 U.S. income tax ($35,000) Net available for dividend distribution $65,000 U.S. withholding tax $3,250 Net dividend received $61,750 56

57 Tax Cost of this Approach Canadian Implications Dividend received $65,000 Canadian income tax ($31,200) Less U.S. withholding tax $3,250 Total Canadian tax liability ($27,950) Net amount received $33,800 Total taxes paid $66,200 Effective rate 66.2% 57

58 U.S. Corporation Establishes Canadian Subsidiary Canadian Implications Non-resident controlled companies pay the top corporate tax rates of 27% combined. Ownership of Uncle Sam 100% U.S. Owner Uncle Sam Inc. owns 100% of shares of Tim Hortons Inc. Tim Hortons Inc. has $100,000 of earnings; pays the net amount as a dividend to USI U.S. Implications Dividends Canadian 5% treaty withholding tax is creditable on Uncle s return Deemed-paid FTC 58

59 Tax Cost of this Approach Corporate Level Canadian Implications Net Income $100,000 Canadian income tax ($27,000) Net available for dividend distribution $73,000 Canadian withholding tax ($3,650) Net dividend paid $69,350 59

60 Tax Cost of this Approach Corporate Shareholder Level U.S. Consequences Dividend amount (this amount is grossed-up for the Canadian taxes paid (the deemed-paid FTC) $100,000 U.S. Income Tax $35,000 Less foreign tax withheld ($3,650) Less foreign tax credit ($27,000) Net U.S. tax $4,350 Total Tax $35,000 Effective corporate rate 35% 60

61 Tax Cost of this Approach Individual Shareholder Level U.S. Consequences Dividend amount $65,000 U.S. Income Tax $26,000 Less foreign tax credit ($0) Net U.S. tax $26,000 Total Tax $51,000 Combined individual and corporate effective rate 51% 61

62 Canadian Corporation Establishes U.S. Subsidiary Canadian Implications Taking the entity approach the Canadian system recognizes that tax was paid at the corporate level in Uncle Sam Inc. and a credit kicks in Ownership of Tim Hortons 100% Canadian Owner Tim Hortons Inc. owns 100% of shares of Uncle Sam Inc. Uncle Sam Inc. has $100,000 of earnings and pays the net amount as a dividend to THI U.S. Implications Dividends U.S. 5% treaty withholding tax 62

63 Tax Cost of this Approach Corporate Level U.S. Implications Net income $100,000 U.S. income tax ($35,000) Net available for dividend distribution $65,000 U.S. withholding tax ($3,250) Net dividend paid $61,750 63

64 Tax Cost of this Approach Corporate Shareholder Level Canadian Consequences Dividend amount $65,000 Canadian income tax (ignores RDTOH) $0 Less withholding tax (not useful) $3,250 Net Canadian tax $0 Net Canadian after-tax income $65,000 Total Tax $38,250 Effective corporate rate 38.25% 64

65 Tax Cost of this Approach Individual Shareholder Level Canadian Consequences Dividend amount $61,750 Canadian income tax $(19,143) Less foreign tax credit (none at this level) ($0) Net Canadian tax $19,143 Net U.S. income tax $38,250 Total Tax $57,393 Effective rate 57.4% 65

66 Comments With tax rates this high tax planning professionals start thinking of structures that can lower tax. In the Canadian owning a US business example we can consider eliminating the corporate entity in the USA and thus the corporate level of entity tax is eliminated for Canadian tax. Most planning would replace this entity with a FTE, which allows a tax credit in Canada of the full U.S tax paid. This is why tax planners have looked to Limited Liability Partnerships or LLC s for both limited liability and to try to be FTE for the treaty. The problem is that the Canadian tax authorities view many U.S. structures as corporations subject to entity tax when the U.S. views them as FTE. This view by the Canadians works to deny treaty benefits. The only sure way to be an FTE for Canadian purposes is to have unlimited liability, as in a general partnership, or operate as an S Corporation This view by the Canadians works to deny treaty benefits. 66

67 The Problem with LLC s and Most Other FTE s 67

68 Comment on Partnerships and FTEs in Canada In Canada a partnership is the most available FTE. For U.S. persons, S Corporations and LLCs may also be used as an FTE. Canada Revenue Agency requires information filings but the income is reported by the partners. Thus Canadians are often drawn to U.S. partnerships for the same FTE treatment. The challenge is that the CRA views many U.S. partnerships and LLCs as corporations. This mismatch of views leads to denial of treaty benefits including reduced withholding tax rates. This denial of treaty reduced withholding rates creates double taxation as the Canadian domestic system limits foreign tax credits to 15%. That means that withholding rates in excess of 15% result in unrecoverable foreign taxes paid. There is a mechanism to deduct foreign taxes from income but that is far less valuable as a tax reduction strategy than a full credit. 68

69 Canadian Individual or Corporation Invests in U.S. through LLC (same result if LLP or LLLP) Canadian Implications Taking the entity approach the Canadian system recognizes that tax was paid at the corporate level in Uncle Sam Inc. Tim Horton owns 100% of shares of Uncle Sam Inc. LLC Uncle Sam Inc. LLC has $100,000 of earnings U.S. Implications Taxed at shareholder level 69

70 Canadian Individual or Corporation Invests in U.S. through LLC (same result if LLP or LLLP) Individual Corporate US Side: US Earnings $100,000 $100,000 US Tax $40,000 $35,000 US BPT $6,500 Net $60,000 $58,500 Canadian Side: Net earnings/dividend $60,000 $100,000 Taxed as FAPI $28,800? FTC limited to 15% $4,320? Net Tax $24,480? Combined Tax $64,480? Effective Rate 64% 69%? 70

71 Continuation Dividend to Individual Shareholder Individual Corporate Combined Tax $64,480 $68,500 Effective Rate 64% 69% Dividend $31,500 Canadian Income Tax $9,765 Combined Tax $78,265 Effective Rate 78% 71

72 U.S. Individual or Corporation Invests in Canadian Business Through LLC (or other FTE) Canadian Implications PE creates Canadian tax liability U.S. individual owns Uncle Sam LLC Uncle Sam LLC operates in Canada as Tim Hortons LLC Tim Hortons LLC has $100,000 of earnings U.S. Implications Earnings are taxed at shareholder level Shareholder claims FTC for Canadian taxes paid 72

73 U.S. individual or corporation directly invests in Canadian business through LLC Individual Corporation Canadian Income Tax Return: Net Canadian profit $100,000 $100,000 Canadian income tax $48,000 $27,000 Net amount to be paid to U.S. shareholder $52,000 $73,000 Canadian Withholding Tax / BPT $0? $3,650 73

74 U.S. individual or corporation directly invests in Canadian business through LLC Individual Corporation U.S. Income Tax Return: Net Canadian profit $100,000 $100,000 U.S. income tax $40,000 $35,000 U.S. foreign tax credit ($40,000) ($30,650) Net U.S. tax $0 $4,350 74

75 U.S. individual or corporation directly invests in Canadian business through LLC - cost when dividend is paid to individual shareholder Individual Corporation Net dividend to shareholders $65,000 Shareholder level tax $26,000 Combined individual and corporate tax $53,000 $61,000 Effective rate 53% 61% 75

76 U.S. Individual or Corporation Invests in Canada though U.S. or Canadian General Partnership Canadian Implications Uncle Sam or Uncle Sam Inc. owns Tim Hortons GP Tim Hortons GP has $100,000 of earnings U.S. Implications Earnings are taxed at shareholder level Shareholder claims FTC for Canadian taxes paid 76

77 U.S. Individual or Corporation Directly Invests in Canadian Business through General Partnership Taxation depends on how CRA sees partnership May tax as individual or corporation See CRA Form 301,302, and 303 for entity classification 77

78 U.S. Individual or Corporation Invests in Canada though U.S. General Partnership Individual Corporation Canadian Income Tax Return: Net Canadian profit $100,000 $100,000 Canadian income tax $48,000 $27,000 Canadian Branch Profits Tax $0?? $3,650 U.S. Income Tax Return: Net Canadian profit $100,000 $100,000 U.S. income tax $40,000 $35,000 U.S. foreign tax credit ($40,000) ($30,650) Net U.S. tax $0 $4,350 78

79 U.S. Individual or Corporation Invests in Canada though U.S. General Partnership Cost when Dividend is Paid to Shareholder Individual Corporation Net dividend to shareholders $65,000 Shareholder level tax $26,000 Combined individual and corporate tax $53,200 $61,000 Effective rate 53.2% 61% 79

80 U.S. Individual Invests Directly in Canadian Assets Through S Corporation U.S. individual owns Uncle Sam (S) Inc. Canadian Implications PE creates Canadian tax liability Uncle Sam (S) Inc. operates in Canada as Tim Hortons U.S. Implications U.S. individual taxed on income of Uncle Sam Inc. Actual distribution is irrelevant Tim Hortons has $100,000 of earnings 80

81 U.S. individual or corporation directly invests in Canadian business through S Corporation Taxation depends on how CRA sees S Corp May tax as individual or corporation See CRA Form 301,302, and 303 for entity classification 81

82 U.S. individual or corporation directly invests in Canadian business through S Corporation Individual Corporation Canadian Income Tax Return: Net Canadian profit $100,000 $100,000 Canadian income tax $48,000 $27,000 Canadian Branch Profits Tax $0??? $3,650 U.S. Income Tax Return: Net Canadian profit $100,000 $100,000 U.S. income tax $40,000 $35,000 U.S. foreign tax credit ($40,000) ($34,300) Net U.S. tax $0 $700 82

83 U.S. individual or corporation directly invests in Canadian business through S Corporation cost when dividend is paid to individual shareholder Individual Corporation Net dividend to shareholders $65,000 Shareholder level tax $26,000 Combined individual and corporate tax $53,200 $61,000 Effective rate 53.2% 61% 83

84 Canadian Individual or Corporation Invests in U.S. though U.S. General Partnership Canadian Implications FTE recognized for Canadian purposes Tim Horton or Tim Hortons Inc. owns Uncle Sam GP Uncle Sam GP has $100,000 of earnings U.S. Implications Earnings are taxed at partner level 84

85 Canadian individual or corporation directly invests in U.S. business through GP Individual Corporation U.S. Income Tax Return: Net U.S. profit $100,000 $100,000 U.S. income tax $40,000 $35,000 Net Profit U.S. branch profits tax $0 $6,500 Canadian Income Tax Return: Net U.S. profit $100,000 $100,000 Canadian income tax $48,000 $27,000 Canadian foreign tax credit/ deduction ($40,000) ($27,000) Net Canadian tax $8,000? $0? 85

86 Canadian individual or corporation directly invests in U.S. business through GP cost when dividend is made to shareholder Individual Corporation Net dividend to shareholders $58,500 Shareholder level tax $10,609 Combined individual and corporate tax $48,000 $69,109 Effective rate 48.0% 69.1% 86

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88 U.S. and Canadian taxation of passive and other unearned income treatment in cross border situations 88

89 Canadian taxation of passive income How is passive income different from active income? Let s look at a Canadian investing in the U.S. Active income is not taxed until it is repatriated to Canada. Passive income is subject to FAPI (Foreign accrual property income) which means it is taxed in the year it happens but that the cash might arrive in Canada years later. Or may never arrive. So the Canadian taxpayer needs cash to pay the taxes but has not received any cash. The foreign tax credit for the taxes paid in the U.S. For example in a rental property might not offset the Canadian tax because the tax credit is for cash income. In FAPI what happens is tax paid surplus is calculated and there may be a mismatch. 89

90 U.S. Taxation of Passive Income The U.S. has several tax regimes which tax passive income of nonresidents and enterprises with no permanent establishment in the U.S. If the income is attributable to a permanent establishment in the U.S., it is taxed at the regular graduated rates If the income is not attributable to a permanent establishment or an individual is a nonresident, it is subject to a final withholding tax Gain on the sale of U.S. real property is subject to 10%/15% withholding tax on gross proceeds at time of sale It is possible to obtain a withholding certificate to reduce this tax to the actual tax liability if requested prior to the actual sale 90

91 U.S. Reporting (and Taxation) of Passive Income U.S. persons are required to report ownership of all foreign assets through several mechanisms: FinCEN 114 (Foreign Bank Accounts) Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation) Forms 3520 and 3520-A (Foreign Trusts) Form 5471 (Controlled Foreign Corporation) Form 5472, (Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) Form 8621 (Passive Foreign Investment Company or PFIC) Form 8858, (Foreign Disregarded Entities) Form 8865 (Foreign Partnerships) Form 8938 (Foreign Financial Asset Reporting) Passive income is reported and taxed currently to shareholder Significant penalties exist for failure to comply 91

92 FinCEN 114 A United States person must file an FBAR if that person has a financial interest in or signature authority over any financial account(s) outside of the United States and the aggregate maximum value of the account(s) exceeds $10,000 at any time during the calendar year. A United States person means: A citizen or resident of the United States; An entity created or organized in the United States or under the laws of the United States. The term entity includes but is not limited to, a corporation, partnership, and limited liability company; A trust formed under the laws of the United States; or An estate formed under the laws of the United States. 92

93 What is a Financial Account? A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution). A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (i.e., a fund that is available to the general public with a regular net asset value determination and regular redemptions). Due to the expansive definition of financial account, it is recommended that any account which might be considered a financial account be reported 93

94 What is a Foreign Financial Account? A foreign financial account is a financial account located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account. 94

95 What is a Financial Interest? A United States person has a financial interest in a foreign financial account for which: The United States person is the owner of record or holder of legal title, regardless of whether the account is maintained for the benefit of the United States person or for the benefit of another person; or 95

96 What is a Financial Interest? A United States person has a financial interest in a foreign financial account for which: The owner of record or holder of legal title is one of the following: A trust of which the United States person: (i) is the trust grantor and (ii) has an ownership interest in the trust for United States federal tax purposes; A trust in which the United States person has a greater than 50 percent present beneficial interest in the assets or income of the trust for the calendar year; or Any other entity in which the United States person owns directly or indirectly more than 50 percent of the voting power, total value of equity interest or assets, or interest in profits. 96

97 FBAR (FinCEN 114) Filing and Reporting Considerations FBAR reporting threshold = highest aggregate balance of all reportable foreign accounts is greater than $10,000 USD at any time during the calendar year Penalties for the failure to file FBAR include: $10,000 civil penalty Greater of $100,000 or 50% of account balance for willful failure to file FBAR Criminal penalties for willful failure to file FBAR 97

98 Common situations where an FBAR might be needed Canadian investment property where C$ are needed to service the debt and pay or expenses U.S. person with elderly Canadian relatives being asked to have signatory authority over their Canadian accounts 98

99 Form 926 Form 926 reports certain transfers of tangible or intangible property to a foreign corporation required by section 6038B Whenever transfer property outside the U.S. review the transaction to determine whether this form needs to be filed Penalties for failure to file and failure to properly value the property transferred 99

100 Forms 3520 and 3520-A Form 3520 is used to report the following: Certain transactions with foreign trusts, Ownership of foreign trusts under the rules of sections 671 through 679, and Receipt of certain large gifts or bequests from certain foreign persons. 100

101 Forms 3520 and 3520-A Form 3520-A is used to report the following: Information about the foreign trust; Its U.S. beneficiaries; Any U.S. person who is treated as an owner of any portion of the foreign trust under the grantor trust rules Income Statement Balance Sheet Beneficiary Reportable Items 101

102 Form 3520 Penalties A penalty generally applies if Form 3520 is not timely filed or if the information is incomplete or incorrect. The initial penalty is equal to the greater of $10,000 or 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust or 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution or 5% of the gross value of the portion of the trust's assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information 102

103 Form 3520-A Penalties A penalty generally applies if Form 3520-A is not timely filed or if the information is incomplete or incorrect. The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust's assets treated as owned by the U.S. person at the close of that tax year Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting 103

104 Form 5471 Controlled Foreign Corporations Four situations where this form might be need to be filed: 1. U.S person is officer or director of foreign corporation when any U.S. persons acquires stock which results in that person having a 10% or more ownership in the company 2. The U.S. person does any of the following during the U.S. person's year: a. Acquires enough stock in the corporation to meet 10% stock ownership requirement; b. Acquires additional stock that meets the 10% stock ownership requirement; c. Becomes a U.S. person while meeting the 10% stock ownership d. Disposes of sufficient stock in the corporation to reduce his or her interest to less than the 10% stock ownership requirement; e. Meets the 10% stock ownership requirement with respect to the corporation at a time when the corporation is reorganized 104

105 Form 5471 Four situations where this form might be need to be filed: 3. The U.S. person controls (i.e. has more than 50% ownership of) the foreign corporation for an uninterrupted period of 30 days or more during the foreign corporation's annual accounting year ending with or within such U.S. person's taxable year 4. The U.S. person is a United States shareholder of a CFC a. U.S. person owns more than 10% of the voting power of the corporation b. More than 50% of the corporation is owned by U.S. shareholders 105

106 Form Penalties A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day eriod has expired. The additional penalty is limited to a maximum of $50,000 for each failure. 106

107 Form 5472 Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business This form is used for require covered corporations to: Disclose information about transactions with certain foreign and U.S. related parties Maintain detailed records and undertake to make them available to the IRS In some cases, appoint a U.S. agent. 107

108 Form 5472 Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business This form is used for require covered corporations to: Disclose information about transactions with certain foreign and U.S. related parties Maintain detailed records and undertake to make them available to the IRS In some cases, appoint a U.S. agent. 108

109 Form 5472 Who must File Every reporting corporation that had reportable transactions with a U.S. or foreign related party during a taxable year must file Form 5472 for that year to report such transactions. Reporting Corporation is a corporation where one foreign persons owns at least 25% of the total voting power of all classes of stock of the corporation or the total vale of all classes of stock of the corporation (a 25-percent foreign shareholder ). A Reportable Transaction is any transaction that can affect the income tax liability of the reporting corporation 109

110 Form 5472 Who must File A related party includes: any 25% direct or indirect foreign shareholder of the reporting corporation; any person who is related to the reporting corporation or to a 25% foreign shareholder of the reporting corporation within the meaning of 267(b) ; and Any other person who is related to the reporting corporation within the meaning of 482 (a potentially very wide definition, as it focuses on effective control based on the facts and circumstances). 110

111 Form 8621 Is the investment in stock of a Passive Foreign Investment Company (PFIC)? A PFIC is foreign corporation which meets either the income or asset test described below. Income test: 75% or more of the corporation's gross income for its taxable year is passive income (as defined in section 1297(b)). Asset test: At least 50% of the average percentage of assets (determined under section 1297(e)) held by the foreign corporation during the taxable year are assets that produce passive income or that are held for the production of passive income 111

112 Form 8621 Form 8621 is used for the following purposes: Make any of the available elections with respect to that PFIC under the PFIC rules, Report PFIC distributions and dispositions subject to tax under 1291 s interest-charge rules, or Report interests in any PFIC with respect to which a qualified electing fund (QEF) election had been made under 1295 or a mark-tomarket (MTM) election under 1296, even if no income was included with respect to that PFIC for the year. There is no apparent penalty for failure to file Form 8621, although one could not make a valid election under the PFIC rules without filing Form

113 Form 8865 Foreign Partnerships U.S. persons are required to report: Information regarding foreign partnerships that they control; and Information regarding foreign partnerships in which they are a 10% partner and which are controlled by U.S. persons (a controlled foreign partnership or CFP 113

114 Form 8865 Foreign Partnerships There are four classes of filers A Category 1 filer is defined as a U.S. person who controlled the foreign partnership at any time during the partnership's taxable year (referred to in the regulations as a controlling fifty-percent partner ). For this purpose, control is defined as ownership of more than 50% of the capital or more than 50% of the profits, or ownership of an interest to which more than 50% of the deductions or losses are allocated A Category 2 filer is defined as a U.S. person who at any time during the taxable year of the foreign partnership meets both of the following two tests with respect to a foreign partnership. First, the U.S. person must own at least 10% of capital or profits in the partnership, or be allocated at least 10% of the losses and deductions of the partnership. Second, more than 50% of the capital or profits of the partnership must be owned, or more than 50% of the losses and deductions of the partnership must be allocated, to one or more U.S. persons, each of whom would be treated as a 10% partner under the above test. 114

115 Form 8865 Foreign Partnerships A Category 3 filer is defined as a U.S. person who contributed property during his taxable year to a foreign partnership in exchange for an interest in the partnership but only if either: That person owned directly or constructively at least a 10% interest in the foreign partnership immediately after the contribution; The value of the property contributed by that person (when added to the value of any other property contributed to the partnership by such person, or any related person, during the 12-month period ending on the date of transfer) exceeds $100,

116 Form 8865 Foreign Partnerships A Category 4 filer is a U.S. person that had one of the following five reportable events with respect to a foreign partnership during the year: 1. The U.S. person acquired a direct interest in a foreign partnership, or had his or her proportionate interest in the partnership increase such that he had less than a direct 10-percent interest before the transaction and a direct 10% interest afterwards. A 10-percent interest is an interest in at least 10% of the foreign partnership's capital or profits, or an interest to which at least 10% of the partnership's losses and deductions are allocable. 2. The U.S. person increased his or her direct interest in a foreign partnership, compared with the last time when he or she had a reportable event, by at least a 10% interest, i.e., acquired an additional 10% direct interest in partnership capital or profits, or an additional 10% of partnership losses and deductions. 116

117 Form 8865 Foreign Partnerships 3. The U.S. person disposed of his or her direct interest in a foreign partnership, or had his or her proportionate interest in the partnership reduced, such that he or she held a 10% interest in the partnership beforehand, but not afterwards. 4. The U.S. person decreased his or her direct interest in a foreign partnership, compared with the last time when he or she had a reportable event, by at least a 10% interest, i.e., reduced his interest in partnership capital or profits, or his or her share of partnership losses and deductions, by at least 10 percentage points. 117

118 Form 8865 Foreign Partnerships 5. The U.S. person otherwise had an increase or decrease to his or her proportionate direct interest in the foreign partnership, even if not properly viewed as an acquisition or disposition, since the last time when he or she had a reportable event, by the equivalent of a 10% interest in the partnership, i.e., 10% of the partnership's capital or profits, or a 10% share of losses or deductions. 118

119 Form Penalties A $10,000 penalty is imposed for each annual accounting period of each foreign partnership for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day eriod has expired. 119

120 Form Foreign Disregarded Entities If a U.S. person owns a foreign disregarded entity (FDE) either directly or through a foreign partnership or foreign corporation, Form 8858 needs to be filed to report the earnings to be reported on the U.S. person s tax return, either directly or indirectly This form must be filed with the applicable income tax return Form 1040, 5471, or 8865 There is no specific penalty for failure to file this return, but it appears that the IRS would view the associated return as substantially incomplete, and assess penalties at the owner level and possibly hold open the statute of limitations 120

121 Form 8938 Form 8938 is a catch-all form which is used to report foreign financial assets not reported elsewhere Unless an exception applies, specified persons must file Form 8938 to report interests in specified foreign financial assets and the value of those assets is more than the applicable reporting threshold. Reporting is required even if none of the assets affect the taxpayer s tax liability for the year. Form 8938 has a failure to file penalty of $10,000 plus additional $10,000 penalty up to a maximum of $50,000 for each 30 day period that failure to file continues after 90 days following IRS notice 121

122 Form 8938 Filing Thresholds Form 8938 is required to be filed if all SFFAs (including SFFAs reported on other forms) exceed the following amounts: Status Single and MFS living in U.S. Single and MFS living outside the U.S. Total Value of all FFAs at end of Year $50,000 $75,000 $200,000 $300,000 MFJ living in U.S. $100,000 $150,000 MFJ living outside the U.S. $400,000 $600,000 Maximum value of all FFAs at any time during year 122

123 Form 8938 Reporting Considerations Specified Individuals A U.S. citizen. A resident alien of the United States for any part of the tax year A nonresident alien who makes an election to be treated as a resident alien for purposes of filing a joint income tax return. A nonresident alien who is a bona fide resident of American Samoa or Puerto Rico. 123

124 Form 8938 Reporting Considerations Specified Foreign Financial Assets 1. Financial accounts maintained by a foreign financial institution. 2. The following foreign financial assets if they are held for investment and not held in an account maintained by a financial institution: a. Stock or securities issued by someone that is not a U.S. person (including stock or securities issued by a person organized under the laws of a U.S. possession), b. Any interest in a foreign entity, c. Any financial instrument or contract that has an issuer or counterparty that is not a U.S. person (including a financial contract issued by, or with a counterparty that is, a person organized under the laws of a U.S. possession). 124

125 Form 8938 Reporting Considerations Examples of other specified foreign financial assets include the following, if they are held for investment and not held in a financial account. Stock issued by a foreign corporation. A capital or profits interest in a foreign partnership. A note, bond, debenture, or other form of indebtedness issued by a foreign person. An interest in a foreign trust or foreign estate. An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty. An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer. 125

126 Form 8938 Reporting Considerations With the exception of the FinCEN 114, there is no duplicative reporting. FFAs reported on Forms 3520, 3520-A, 5471, 8621 and 8865 do not need to be reported on Form Just indicate the number of these forms filed on Form These FFAs reported on these other forms are considered in determining whether the taxpayer meets the reporting thresholds discussed later. Form 8938 and FinCEN 114 reporting are different. Assets may be required to be reported on both forms if they meet the relevant criteria. For a comparison of the Form 8938 and FinCEN 114 filing requirements, click on this link: 126

127 IRS AMNESTY PROGRAMS FOR FAILURE TO PROPERLY REPORT OFFSHORE ASSETS 127

128 IRS Amnesty Programs for Delinquent Filers 2012 Offshore Voluntary Disclosure Program The IRS Offshore Voluntary Disclosure Program is working with taxpayers whose penalties may be reduced. The IRS began an open-ended OVDP in January 2012 because of strong interest in the 2009 and 2011 programs. The IRS may end the 2012 program at any time in the future. The IRS is offering taxpayers with undisclosed income from offshore accounts another opportunity to get current with their tax returns. The 2012 OVDP has a higher penalty rate than the previous programs, but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution. 128

129 IRS Amnesty Programs for Delinquent Filers Streamlined Filing Compliance Procedures Eligibility criteria for the streamlined procedures Taxpayers must certify that conduct was not willful. IRS has not initiated a civil examination of taxpayer's returns for any taxable year. Taxpayers eligible to use streamlined procedures who have previously filed delinquent or amended returns must pay previous penalty assessments. Taxpayers who want to participate in the streamlined procedures need a valid Taxpayer Identification Number. 129

130 IRS Amnesty Programs for Delinquent Filers Streamlined Filing Compliance Procedures for U.S. taxpayers U.S. taxpayers (U.S. citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)) are eligible to use the Streamlined Domestic Offshore Procedures must For each of the most recent 3 years for which the U.S. tax return due date file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), For each of the most recent 6 years for which the FBAR due date has passed (the covered FBAR period ), file any delinquent FBARs (FinCEN Form 114, previously Form TD F ), 130

131 IRS Amnesty Programs for Delinquent Filers Streamlined Filing Compliance Procedures for U.S. taxpayers Pay all tax and interest due, and Pay a Title 26 miscellaneous offshore penalty. The Title 26 miscellaneous offshore penalty is equal to 5 percent of the highest aggregate balance/value of the taxpayer s foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period. The full amount of the tax, interest, and miscellaneous offshore penalty due in connection with these filings should be remitted with the amended tax returns. 131

132 IRS Amnesty Programs for Delinquent Filers Streamlined Filing Compliance Procedures for non-resident U.S. taxpayers Individual U.S. citizens or lawful permanent residents, or estates of U.S. citizens or lawful permanent residents, meet the applicable nonresidency requirement if, in any one or more of the most recent three years for which the U.S. tax return due date (or properly applied for extended due date) has passed, the individual did not have a U.S. abode and the individual was physically outside the United States for at least 330 full days. 132

133 IRS Amnesty Programs for Delinquent Filers Streamlined Filing Compliance Procedures for nonresident U.S. taxpayers For each of the most recent 3 years for which the U.S. tax return due date has passed, file amended tax returns, together with all required information returns (e.g., Forms 3520, 3520-A, 5471, 5472, 8938, 926, and 8621), For each of the most recent 6 years for which the FBAR due date has passed (the covered FBAR period ), file any delinquent FBARs (FinCEN Form 114, previously Form TD F ) and Pay any tax and interest due. There is no Title 26 miscellaneous offshore penalty 133

134 IRS Amnesty Programs for Delinquent Filers Failure to file information returns with no tax due Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who: have not filed one or more required international information returns, have reasonable cause for not timely filing the information returns, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. 134

135 IRS Amnesty Programs for Delinquent Filers Failure to file FBAR returns Taxpayers who have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN Form 114, previously Form TD F ), Who reported all income for the foreign financial accounts on their tax returns, Are not under a civil examination or a criminal investigation by the IRS, and Have not already been contacted by the IRS about the delinquent FBARs Should file the delinquent FBARs according to the FBAR instructions 135

136 Grant Gilmour Partner International Tax Gilmour Group CPA s Grant is a corporate tax advisor. He has been in the CA business since 1988, starting his own practice in His practice focuses on corporate clients in manufacturing and distribution industries that sell products internationally. Grant has a vast knowledge of tax planning, international tax issues and Scientific Research and Development tax credits, and is a graduate of the CICA In-Depth Tax Course. GrossDukeNelson & Co Street Langley, Metro Vancouver, BC V2Y 0E2 Tel: Fax: grantg@gilmour.ca 136

137 C. Edward Kennedy Jr International Tax Brady Ware & Company Ed has over 36 years of experience dealing with a variety of international tax matters. He specializes in tax consulting services to a wide variety of clients ranging from closely held companies to multi-national businesses. His expertise includes domestic and foreign income and social security tax planning, tax compliance for individuals and corporations, tax treatment of incentive compensation plans, international assignment program administration and policy design. Prior to joining the firm, Ed was with KPMG LLP, where, in addition to providing the above services, he served as the US firm s lead for international social security matters. GrossDukeNelson & Co Perimeter Park Drive Suite 100 Atlanta, GA Tel Fax ckennedy@bradyware.com 137