FAQ

Non-Residents Providing Services in Canada – Tax Implications (Regulation 105)

 

Contact UHY Canada US Tax Team for assistance with your Regulation 105 issues

crossbordertax@uhyvictor.com 

 (514) 282-0067

 

We have expertise in filing requirements, applying for waivers and filing corporate and personal income tax returns to recoup Regulation 105 withholdings.

 

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DOWNLOAD OUR CANADA/U.S TAX SURVIVAL GUIDE

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   Regulation 105 – Withholding Taxes

Regulation 105 of the Canadian Income Tax Act imposes a 15% withholding tax on fees, commissions or other amounts earned from services rendered in Canada by non-resident individuals and corporations. If these services are rendered in the province of Quebec, they will be subject to an additional Quebec withholding of 9%.

These amounts must be withheld by the Canadian payor even if the non-resident providing the services has no permanent establishment in Canada.

However even if the non-resident has no permanent establishment in Canada, these withholding taxes can be recouped. The non-resident entity must file a Canadian (and Quebec) tax return at the end of the non-resident’s fiscal year and claim a refund to the extent permitted on those tax returns.

Purchasers of services from non-residents are relieved from the obligation to withhold taxes only if the non-resident obtains a waiver from the CRA and the MRQ, where applicable.

The withholding tax on services is called Regulation 105 withholding. It applies to services only and NOT to the sale of goods (in bundled contracts) or the reimbursement of expenses where no profit is earned.

Penalties for not withholding can be high – 10% of the tax (and 20% in cases of gross negligence).

Non-residents have to apply to CRA for a business number (BN) and they should receive a tax slip (T4A NR) from each of their Canadian customers showing the gross amounts paid and the taxes withheld on a calendar year basis. The filing deadline for a T4A NR is February 28 of the year following to the payment(s).

 

Regulation 105 – Waivers

The 15% withholding is not the final tax of the non-resident. CRA considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts.

Where a non-resident can demonstrate that the withholding is higher than their potential tax liability in Canada, either due to treaty protection or income and expenses, the CRA may reduce or waive the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit a waiver application to the CRA tax services office in the area where their services are to be provided. Waiver applications have to be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services.

Waivers from withholding taxes can be applied for by the non-resident. These waivers can be one of two types:

  • Treaty-Based Waiver complete exemption
  • Income and Expense Waiver– exemption to withhold on the basis of income net of expenses and at normal income tax rates.

The non-resident must provide a letter from Canada Revenue Agency authorizing a waiver or reduction of the withholding amount. If you do not receive such a letter, you have to withhold the usual 15%.

 

Form: Regulation 105 Waiver Application Form

Use this form if you are a non-resident self-employed individual or corporation and want to apply for a reduced amount of Regulation 105 withholding tax from amounts paid to you for services provided in Canada.

 

Regulation 105 – Tax Filing Obligations of the Non-Resident

Every non-resident providing services in Canada must file a Canadian tax return (and Quebec tax return where applicable) and report the income that it earned in Canada. This obligation is the same whether or not the non-resident has or is deemed to have a PE.

If the non-resident is an individual and has or is deemed to have a PE in Canada, then they will pay income taxes based on graduated tax rates without entitlement to any personal exemptions.

Corporations pay part I tax (29% to 35%, depending on the province in which they operate) as well as a branch tax (5% for US corporations), with an exemption on the first $500,000 of business profits.

Individuals have filing deadlines of June 15 of the following calendar year. Corporations have to file within 6 months after their year-end.

Regulation 105 withholding can be refunded by completing a Canadian tax return. The refunds could be received more than 18 months after the taxes are withheld. These taxes are not refundable if tax returns are filed more than 3 years after the relevant taxation year-end.

Regulation 105 – Goods and Services tax (GST)

GST and its provincial counterparts, HST & QST, have to be charged on supplies (goods and services) made in Canada.

Non-residents have to register for GST if they have a PE in Canada.

PE definition for GST purposes is broader than for income tax purposes – the only criterion which must be met for PE to exist for GST purposes is the existence of a fixed place of business like an office or a workshop.

Note that non-residents can voluntarily register for GST if they don’t have a PE in Canada. Registration for GST will entitle the non-resident to claim a refund on GST it incurs in its commercial activities in Canada. In this case, CRA requires the non-resident to post security. The security is waived if the non-resident’s taxable supplies in Canada do not exceed $100,000 annually and whose annual net tax is between $3,000 payable and $3,000 recoverable.

Regulation 105 – Permanent Establishment

Non-residents who provide services through a permanent establishment in Canada must file Canadian income tax returns. They must report and pay Canadian income taxes on the income they generate from the services provided.

Americans must refer to Article V of the US Canadian tax treaty for the definition of permanent establishment:

  • A fixed place through which business is carried on;
  • A person acting as an agent, other than an independent agent, who has the authority to conclude contracts;

Note that an independent agent who is acting in the ordinary course of his business does not create a PE;

PE specifically excludes a fixed place of business used solely for:

– Storage, display or delivery of goods

– Purchase of goods; and

– Advertising or supply of information or scientific research.

 

Regulation 105 – The US-Canada Tax Treaty and the Fifth Protocol

Changes to the rules on the taxation of services rendered by a US non-resident came into effect on January 1, 2010.

Article XIV was eliminated and new deeming rules were introduced and inserted at the end of Article V of the Treaty (paragraphs V(9)(a) & (b)).

The rules now state that if PE does not in fact exist based on the existing rules, then it will be deemed to exist if:

  • 9(a) The Single individual Test (for Individuals)

Services are performed by an individual who is present in the other Contracting State for more than 183 days in a 12-month period and, during this period, more than 50% of the gross active revenues of the enterprise are generated from these services; or

  • 9(b) The Enterprise Test (for Corporations)

Services are provided in the other Contracting State for more than 183 days in a 12-month period with respect to the same or connected project for a customer’s PE in the other Contracting State.

Collective presence of more than one individual providing services during one calendar day will only count for one day of physical presence by an enterprise in the other state.

Regulation 105 – Tips for Non-Residents Providing Services in Canada

Review any on-site installation and training activities in Canada to ensure that appropriate Canadian tax filings and payments are made.

Review and complete the CRA’s checklist (T2 SCH 91 E) to determine PE status in Canada.

If a PE is deemed to exist in Canada consider alternatives for recovering a portion of Regulation 105 withholding tax based on actual income earned on the contract in Canada.

Ensure that contracts with Canadian customers clearly distinguish between services provided in Canada and elsewhere. If the distinction is not clear, the entire contract would be subject to Regulation 105 withholding tax.

Review the obligation to register for GST/HST and QST where applicable.

Given the delay in receiving a refund of Regulation 105 withholding and the fact that the IRS will not grant a foreign tax credit on foreign taxes which should be refunded, the US resident should consider creating a PE in Canada in order to expedite the recovery of its foreign taxes.

Click here to find out more information about the UHY Canada/ U.S. Tax Team

Sources

CRA Information Circular IC 75-6R2 “Required Withholding from Amounts Paid to Non-Residents Performing Services in Canada”

Quebec TP-1016-V

Interpretation Revenu Quebec ADM. 7-, “Reduction in Source Deductions in Income Tax in Respect of a Payment for Services Rendered in Quebec by a Person Not Resident in Canada”.

Applications for a waiver or a reduction of withholding

The 15% withholding is not the final tax of the non-resident. Canada Revenue Agency considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts.

Where a non-resident can demonstrate that the withholding is more than their potential tax liability in Canada, either due to treaty protection or income and expenses, Canada Revenue Agency may waive or reduce the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit a waiver application to the Canada Revenue Agency tax services office in the area where their services are to be provided. Waiver applications have to be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services.

The non-resident must provide a letter from Canada Revenue Agency authorizing a waiver or reduction of the withholding amount. If you do not receive such a letter, you have to withhold the usual 15%.

Waiver application form: Regulation 105 Waiver Application Form

Use this form if you are a non-resident self-employed individual or corporation and want to apply for a reduced amount of Regulation 105 withholding tax from amounts paid to you for services provided in Canada.

Any person, whether a resident of Canada or not, who pays a non-resident for services rendered in Canada has to withhold a portion of the gross payments and remit this amount to the Receiver General for Canada.

The withholdings are set at a base rate of 15%.

A further 9% must be withheld to the Quebec Minister of Revenue for services provided in Quebec.

 Contact UHY Canada U.S. Tax Team  for more information regarding this important change to the US Canada Tax Treaty.

crossbordertax@uhyvictor.com
(514) 282-0067

 

Click here for information regarding withholding taxes for Americans providing services in Canada.

What is an FBAR?

An FBAR is the “Report of Foreign Bank and Financial Accounts” that must be filed with the US Department of Treasury. The FBAR is now filed on FinCen Report 114 (formerly form TD F 90-22.1).

Click here for a review of options for Americans who are non-compliant with their FBAR filing requirements.

What is the 2018 filing deadline?

 

Who Must File an FBAR?

United States persons are required to file an FBAR if:

  • The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
  • The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

United States person means U.S. citizens; U.S. residents; Green Card Holders, entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

 

Reporting and Filing Information

A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.

The FBAR is a calendar year report, which must be filed with the Department of Treasury on or before June 30 of the year following the calendar year reported. Generally, extensions of time to file an FBAR are not granted.

The FBAR is not filed with a federal tax return. Any filing extensions of time granted by the IRS to file a tax return does not extend the time to file an FBAR.
Since July 1, 2013– Electronic filing of FBARs is mandatory

 

UHY Victor LLP is authorized to file FBAR’s electronically on behalf of the person who has the obligation to file an FBAR. US taxpayers holding foreign financial assets may also need to file Form 8938 (Statement of Specified Foreign Financial Assets) with their 1040 US tax return.

See:

 

US expats are asking whether or not they are going to have to purchase health insurance that qualifies under the Affordable Care Act (Obamacare) or be penalized if they do not.

There is an exemption in the law that states that if an American is eligible to take the foreign earned income exclusion (Form 2555)  [see: IRC 911] either as a bonafide resident of a foreign country or under the physical presence test, the individual is exempted from the health insurance requirements of the Act.

Also, an American who is working abroad and is covered by the US employer Group Plan or covered by medicare is exempt from the Affordable Care Act. Those who only work temporarily abroad for a few months and then return to the US are not exempted from the Acts requirements and must obtain health insurance or suffer penalties

Nonresidents who are not in the US long enough to become permanent residents (usually 183 days or more) are not required to obtain health coverage.

Question:
Can I still purchase a US health care insurance policy if I reside outside the United States?

Answer:
No. In order to buy the insurance as an individual, you must be living in the US (2).

Question:
How will ObamaCare impact me as an expat? Will I owe taxes?

Answer:
If you are a taxpayer that is considered a high-income earner:

  • Single filer with an AGI (adjusted gross income) over $200,000
  • Married filing jointly with an AGI over $250,000
  • Married filing separately with an AGI over $125,000
  • Head of Household with an AGI over $200,000
  • Qualifying widow(er) with an AGI over $250,000

You will have to pay an additional 3.8% tax on net investment income which includes but is not limited to interest, dividends, capital gains, rental income, royalty income, non-qualified annuities income from businesses involved in trading of financial instruments or commodities, businesses that are passive activities to the taxpayer.

It appears that the additional 3.8% tax paid by US citizens residing in Canada will not qualify for a foreign tax credit on their Canadian tax filing.

 

Resources:

Voluntary Disclosures – Overview

 

The Canada Revenue Agency (CRA) and Quebec Minister of Revenue (Revenue Québec) have Voluntary Disclosure Programs (VDP) that allow taxpayers who have not fulfilled their tax obligations to voluntarily rectify their situation without facing penalties and potential legal prosecution. When a Voluntary Disclosure application is accepted, the taxpayer only pays the relevant taxes owed plus interest. These programs are not meant for all situations and have certain restrictions, and taxpayers should consult with a professional before initiating a Voluntary Disclosure.
The main advantage of making a voluntary disclosure is that the taxpayer will not be liable for penalties which might otherwise be assessed in respect of unreported income. These penalties can be substantial – often in excess of 50% and even 100% of the taxes owing. In addition, partial interest relief may also be granted.

A taxpayer can also obtain protection from criminal prosecution in certain cases through a Voluntary Disclosure.

Voluntary Disclosures – Conditions Taxpayers are expected to remain compliant after their Voluntary Disclosure. In order for a Voluntary Disclosure to be valid, it must meet all of the following conditions:

  • The disclosure is voluntary:
The disclosure must be made before the taxpayer became aware of any compliance action taken against them.
  • A penalty applies to the undisclosed income:
If the taxpayer does not owe any taxes or have any penalties to pay, they may not qualify for the Voluntary Disclosure Program.
  • The information is at least one year overdue:
The Voluntary Disclosure Program is not for current filings, although it can include the current year if it is a part of a disclosure going back multiple years.
  • The information is complete:
When submitting the Voluntary Disclosure, the taxpayer must provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts associated with the taxpayer.

Voluntary Disclosures – Applicability

When the conditions are met, Voluntary Disclosure Program relief may be granted in cases that:

  • You did not fulfill your obligations under the applicable act;
  • You did not report taxable income you received;
  • You claimed ineligible expenses on your tax return;
  • You did not remit your employees’ source deductions;
  • You did not report an amount of GST/HST;
  • You did not file information returns; or
  • You did not report foreign-sourced income that is taxable in Canada.

 

The Voluntary Disclosure Program does not accept disclosures relating to:

  • Bankruptcy returns;
  • Income tax returns with no taxes owing or with refunds expected;
  • Elections;
  • Advance pricing arrangements;
  • Rollover provisions; and
  • Post-assessment requests for penalty and interest relief.

 

Voluntary Disclosures – Assessment Methods
(Note – these are only general guidelines) While the CRA and Revenue Québec programs have similar conditions to qualify, the respective agencies have very different approaches when processing Voluntary Disclosures. Canada Revenue Agency: Generally, the CRA will tax the unreported income going back 10 years plus interest.
Revenue Québec: Normally, Revenue Québec will begin by taxing the taxpayer’s unreported opening capital (with the assumption that it was never reported when it was earned), and then tax any income going back 6 years.

However, depending on the scenario other methods of calculating the taxes owing are accepted by Revenue Québec from time to time.

Voluntary Disclosures – Named versus Anonymous When initiating a Voluntary Disclosure, the taxpayer can either:

  • Provide full information including name and address at the time of initial contact or;
  • Open the file on an anonymous basis. The taxpayer then has up to 90 calendar days to reveal their identity. When opening the file anonymously the taxpayer must provide all of the same information as above except for their name (but they must provide the first three digits of their postal code.)

There are pros and cons with both of the above options, which should be reviewed prior to initiating contact with the CRA and Revenue Québec.

For more information about the Canada Revenue Agency (CRA) Voluntary Disclosure Program, click here. For more information about the Revenue Québec Voluntary Disclosure program, click here. For more information about the recent changes to Revenue Québec’s Voluntary Disclosure program, click here.

Our office has processed a large number of voluntary disclosures with both the Canada Revenue Agency (CRA) and the Quebec Minister of Revenue. We have developed systems to efficiently summarize financial information and create reports designed present information in a format acceptable to Voluntary Disclosure processing officers with both the Canada Revenue Agency (CRA) and the Quebec Minister of Revenue.

 

Please contact:

Contact UHY Canada U.S. Tax Team

crossbordertax@uhyvictor.com
(514) 282-0067

On a strictly confidential basis if you have questions regarding the VD program.

Disposition of Taxable Canadian Property:

 

Non-resident sale of Quebec real estate
  • A non-resident vendor of real estate situated in Quebec must inform the Canadian and Quebec governments of the sale of real estate within 10 days of the sale.
  • The purchaser of the property (usually via the notary in charge of closing the sale transaction) is required to withhold non-resident taxes of 25% (federal) and 12% (Quebec) of the gross proceeds of sale.
  • To reduce the withholding of non-resident taxes, the non-resident owner can file forms within 10 days of the sale with both the CRA and Revenue Quebec, together with evidence regarding the sale proceeds and the adjusted cost base of the property. If approved, the forms enable the non-resident taxes withheld to be limited to the tax on the actual gain realized on the sale.
  • After their review of the non-resident’s forms, the CRA and Revenue Quebec will issue a Certificate of Compliance. This Certificate permits the purchaser to reduce the taxes withheld on the sale. Generally the notary will issue cheques from their trust account holding the sale proceeds to cover the amounts owing calculated on the certificate requests.
  • Once the non-resident taxes are paid, the notary will generally distribute the remainder of the proceeds to the non-resident vendor.

Note that this process describes the withholding taxes only. The actual income tax liability is determined by filing Canadian and Quebec tax returns by April 30 of the following year.

Contact us directly if you require assistance with the sale of real estate located in Quebec.

Resources:

Canada U.S. transfer pricing agreements 

 

For more information contact our Canada U.S. Tax Team at crossbordertax@uhyvictor.com. UHY Victor (Montréal) prepares transfer pricing reports.

Click here to obtain the most recent copy of our UHY Global Transfer Pricing Guide.

Canada U.S. transfer  pricing  – A definition
Transfer prices are prices that companies charge for goods, services, tangible and intangible assets they trade with subsidiaries and other controlled entities. Given that these transfer prices are set internally by management, they are frequently subject to scrutiny by both the IRS and the CRA.

Tax authorities concur that the proper transfer price is one which two parties dealing at arm’s length would agree to. Consequently, the objective of transfer pricing experts is to determine what is the “arm’s length price” or “market price” is for any particular situation.

In recent years both the CRA and the IRS have increased their emphasis on transfer pricing audits. Both these tax authorities require companies to have documentary evidence supporting their transfer prices.

The Pacific Association of Tax Administrators (PATA), which include Australia, Canada, Japan and the United States, have created a “Transfer Pricing Documentation Package” so that one set of transfer pricing documentation can meet the respective transfer pricing documentation requirements in multiple jurisdictions, and these are integrated into the following text.

A proper analysis of many factors is required to determine a transfer price, including:

  • Nature of the company’s activities
  • Risks
  • Tangible and intangible assets employed
  • Characterization of the entities and comparability of arm’s length with non-arm’s length transactions.

Canada U.S. transfer pricing agreements – Regulations in Canada
In the absence of proper transfer pricing documentation, the tax auditor is required to assess a penalty of 10% of the net adjustment of the transfer price. In addition, companies are required to have transfer pricing documentation that is current ,and it must be provided to the CRA within three months of a written request to do so.

Canada U.S. transfer pricing agreements – An overview
Companies start their transfer pricing analysis by identifying the transactions between related parties, which generally fall into the following areas:

  • Transfer of tangible products such as inventory.
  • Transfer of services such as management and administration services.
  • Transfer of intangible assets such as the use of a patent or copyright.
  • Transfer of tangible capital assets such as machinery and equipment.
  • Intra-group loans.

Canada U.S. Transfer pricing agreements – Industry & Market analysis
The industry and market analysis provides a description of the general business environment, and includes:

  • Industry profile.
  • Market size and level of concentration.
  • General profiles of competitors, their size, strategies and market shares.
  • Current trends in the industry.
  • Critical success factors.

Canada U.S. transfer pricing agreements – Functional analysis
Functional analysis is at the core of the transfer pricing study and includes analysis of: 
Functions which entity carries out the following which activities:

  • Design
  • Manufacturing
  • Financing
  • Inbound logistics
  • R & D
  • Inventory management
  • Outbound logistics
  • Marketing
  • Sales activities
  • After-sale services
  • Supporting activities

Risks – which entity bears the risks associated with the transaction, and include:

  • Financial risk
  • Credit and collection risk
  • Operational risk
  • Market risk
  • Product risk

Intangible assets which entity:

  • Developed the intangibles
  • Has the legal ownership of the intangibles
  • Receives the benefit of the intangibles.

Canada U.S. transfer pricing agreements – Selection of a Transfer pricing method
The CRA provides the following hierarchy of the following five methods:

  • Comparable Uncontrolled Price (CUP) method
  •  Resale Price (R-) method
  • Cost Plus (C+) method.
  • Profit Split (PS) method
  •  Transactional Net Margin method (TNMM).

The CRA requires that the CUP method be used if possible. In cases where the CUP method is not feasible, one of the remaining four methods are to be used. In the rare case that it is not possible to use any of the above methods, other unspecified methods may be used. However, in general, it is not advisable to use unspecified methods.

The selection of a method will depend on the functional analysis and availability of comparable transactions. If it is possible to use the internal CUP method, then the selection of a method can be relatively straight-forward.

 Canada U.S. transfer pricing agreements– Economic Analysis
The economic analysis provides the following:

  • Selection of comparable transactions or companies
  • Consideration of the quality of data
  • Assumptions and comparability factors
  • Selection of appropriate economic and statistical methods
  • Profit level indicators
  • Quantification of appropriate adjustments

Canada U.S. transfer pricing agreements– Recommendation
The recommendation is a clear statement of the recommended transfer pricing policy.

 Canada U.S. transfer pricing agreementsImplementation & Monitoring
This section details the most efficient method of implementing the selected transfer pricing policy. A transfer pricing study should be updated each year to reflect any material changes in the transactions under consideration. Provided that no material changes have occurred, an update is generally simple and straightforward.

Since every study must be prepared by the filing due date (generally 6 months after the corporate year end), it is advisable to monitor and document all the changes as they occur during the year. If circumstances change such that some or all transactions did not represent an arm’s length price, it is possible to record a compensating year-end adjustment. This adjustment should be fully documented.

Canada U.S. transfer pricing agreements – Documentation (Appendices)
The appendices should include documentation that supports conclusions reached regarding the transfer price.

 

 Canada U.S. transfer pricing agreements- Resources 

CRA:
Income Tax Act Section 247
IC 87-2R International Transfer Pricing
IC 94-4R International Transfer Pricing: Advance Pricing Arrangements (APAs)
IC 71-17R4 Requests for Competent Authority Considerations

CRA Forms:
T106 – Information Return of Non-Arm’s Length Transactions with Non-Residents
T1134A – Information Return Relating to Foreign Affiliates That Are Not Controlled Affiliates
T1134B – Information Return Relating to Controlled Foreign Affiliates
T1141 – Information Return in Respect of Transfers or Loans to a Non-Resident Trust
T1142 – Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust

Canadian Treaties – Ministry of Finance
Canada – US Tax Convention

IRS: Internal Revenue Code – section 482

OECD:
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

Other:
PATA Transfer Pricing Documentation Package

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DISCLAIMER:
While every effort has been made to ensure that this site contains accurate information, it is possible that errors do exist in the materials presented. All of the information provided here is provided “as is”, with no guarantees of completeness, accuracy or timelines, and without warranties of any kind, express or implied. The information presented on this site should not be considered to be, or construed as legal, economic, tax, or accounting advice.

 

UHY Victor – For Montréal Transfer Pricing

759 Square Victoria, Suite 400

Montréal, Québec, H2Y 2J7

If you owe the IRS taxes on your 1040, there are several payment options available to you including electronic payments.

Payment options include:
  • Direct Pay: This free online tool allows individuals to pay their income tax directly from bank accounts without any fees or pre-registration. Any taxpayer who uses the tool receives instant confirmation that their payment was submitted.
  • Electronic Federal Tax Payment System: This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online. To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
  • Electronic funds withdrawal: E-file and e-pay in a single step.
  • Credit or debit card: Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors. Though the IRS does not charge a fee for this service, the card processors do
  • Same-day wire federal tax payments: You can verify with your Financial Instituition if they are able to do same-day wire. There maybe cut-off times and costs
  • Check or money order: Make your check or money order payable to “U.S. Treasury”. Also, print on the front of the check or money order: “2016 Form 1040”; name; address; daytime phone number; and Social Security number. To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.
  • Cash: It can take up to seven days to have yourself set up to make a cash payment. Please read all the steps carefully on the IRS site.

More information is available at IRS Payment Options https://www.irs.gov/payments

The CRA 2018 automobile limits and rates are as follows:

  • The general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers for 2018 is 25 cents / kilometer. For taxpayers employed principally in selling or leasing automobiles, the prescribed rate will be 22 cents / kilometer. The additional benefit of having an employer-provided vehicle available for personal use (i.e., the automobile standby charge) is calculated separately and is also included in the employee’s income.
  • The limit on the deduction of tut and Yukon, the tax-exempt allowance is set 4 cents higher, to 59 cents / kilometer for the first 5,000 kilometers driven and to 53 cents for each additional kilometer tax-exempt allowances paid by employers to employees that use their personal vehicle for business purposes is 55 cents / kilometer for the first 5,000 kilometers driven and 49 cents for each additional kilometer. For the Northwest Territories, Nunav
  • The ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes will remain at $30,000 (plus applicable federal and provincial sales taxes). This ceiling restricts the cost of a vehicle on which CCA may be claimed for business purposes.
  • The maximum allowable interest deduction for amounts borrowed to purchase an automobile will remain at $300 / month for loans related to vehicles acquired after 2016.
  • The limit on deductible leasing costs will remain at $800 / month (plus applicable federal and provincial sales taxes) for leases. This limit is one of two restrictions on the deduction of automobile lease payments. A separate restriction prorates deductible lease costs where the value of the vehicle exceeds the capital cost ceiling.

 

The CRA 2017 automobile limits and rates are as follows:

  • 54 cents / kilometer for the first 5,000 kilometers driven
  • 48 cents for each additional kilometer

 

For more information about the 2018 Automobile Deduction Limits and Expense Benefit Rates, click here.

For more information about Automobile Deduction Limits and Expense Benefit Rates, click here.

New FBAR Deadline- Effective in 2018

FinCen has announced a new filing date for the FBAR (FinCEN Form 114). The due date has now been changed from June 30th to April 15th 2018 for the 2017 tax year to coincide with the Federal Income tax filing date. An extension of six months, for an October 15th filing completion date has been automatically granted.

https://www.irs.gov/uac/rda-2018-01-11-2017-fincen-form-114

US persons are required to file an FBAR if:

  1. The US person has either a financial interest in, or signature authority over at least one financial account located outside of the US.
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

The following are considered US persons:

  • US citizens
  • US residents
  • Green card holders
  • Individuals electing non-resident status under a tax treaty
  • Entities which include: Corporations, Partnerships, Limited Liability Corporations, Trusts or Estates formed under the laws of the US.

 

For more information on the FBAR see the below links:

What is an FBAR?

FBAR- what should a non-compliant American do?

Personal income tax installments are due on:

  • March 15
  • June 15
  • September 15
  • December 15

 

For more information on Personal Income Tax Installments, click here.

The Tax-Free Savings Account (TFSA) is an account that provides tax benefits for Canadians. It may contain cash or investments such as mutual funds, certain stocks, bonds, or GICs.

 

How the TFSA works:
  • All Canadian residents aged 18 and over can contribute to a TFSA.
  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  • Contributions are not tax-deductible.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
  • Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death.
Annual Contribution Limit:
  • The annual TFSA dollar limit for 2016 is $5,500.
  • The annual TFSA dollar limit for 2015 was $10,000.
  • The annual TFSA dollar limit for 2013 and 2014 was $5,500.
  • The annual TFSA dollar limit from 2009-2012 was $5,000.
  • The current cumulative total contribution limit is $46,500.
US Citizens

Please note that the TFSA does not exist in the US and is taxed and treated as a foreign trust by the IRS which requires certain foreign reporting forms to be filed which involve large penalties if they are filed late.

For more information on the TFSA, click here.

The late-filing penalty is 5% of the balance owing and an additional 1% of the balance owing for each full month that your return is late, to a maximum of 12 months.

NOTE: The penalty may be higher if you’ve already been charged the late-filing penalty in any of the three previous years. If you missed the tax-filing deadline because of circumstances beyond your control, Canada Revenue Agency (CRA) may waive the penalty and applicable interest.

The deadline to file your 2017 personal income tax return is on or before June 15, 2018. If you have a balance owing from 2017, you have to pay it on or before April 30, 2018.

However; if you, your spouse, or common-law partner carried on a business in 2017, your return must be filed on or before June 15, 2018.

For more details please visit the Canada Revenue Agency (CRA).

The Canadian Payments Association (CPA) has announced new specifications which all cheques must conform to by December 2006. The new cheque specifications are in effect right now. Printers and companies that print their own cheques are encouraged to begin making the required system changes as early as possible. All Canadian business cheques should conform with the new specifications by December 31, 2006.

Each year businesses face a choice – what report do they want on their year-end financial statements. There are several types of financial statements that we can prepare, including the following: audited financial statements (most costly), reviewed financial statements, compiled financial statements.

 

Audit Report: We give an opinion as to whether the financial statements, taken as a whole, are fairly presented. This opinion is given after extensive tests of the accounting records are made. The tests include confirmation with outside parties, analytical procedures, inquiry of client personnel and a detailed study of the accounting records.

Review Engagement Report: We express limited assurance that we have not noted any items that would require adjustments that should be made to the statements in order for them to be in conformity with accepted standards. The accountant must conduct a review and be satisfied as to the reasonableness of the statements through inquiry and analytical procedures.

Compilation Report: We expresses no assurance on the correctness of the financial statements. We only disclose, in the form of financial statements, information that is the representation of the management of the business entity.

The most common reason for obtaining the more costly audited financial statements include the requirements of outside parties (such as banks, bonding companies, creditors, absentee owners, or potential purchasers). Reviews are adequate for many businesses, because they give us enough familiarity with our clients to provide tax planning advice and a consulting perspective where appropriate. Compilations are generally appropriate for simple situations where limited business and tax advice is required.

If you operate a sole proprietorship, a partnership, or a corporation that has gross sales over $30,000 in a fiscal year, you are required to register for and collect GST and QST. If your sales are less than $30,000, registration is optional.

  • Sole proprietors operating more than one business must combine the income from all businesses when determining if they need to register.
  • If you are a public service body, such as a charity, you do not have to register for the GST/QST until your total revenues exceed $50,000.
  • If your income exceeds the $30,000 threshold for any four consecutive quarters, or in any quarter, you must register. You have 29 days from the time that your revenues reach $30,000 to register with Canada Revenue Agency (CRA) so that you can charge GST/QST.

Pros: Often businesses that are not yet required to register for the GST/QST do so anyway. One benefit of registering early is that you can claim back the GST/QST you paid for start-up purchases. For some businesses charging the GST/QST adds credibility, as customers won’t know that the company is earning less than $30,000 a year.

Cons: Being registered means that you have extra paperwork to do. And of course, you also have to charge and remit the tax.

One of the most popular year-end tax-planning strategies is tax-loss selling, which can help you reduce your capital gains tax. Particularly with the recent strong performance in the Canadian stock market, you may have significant taxable capital gains, triggered by selling stocks at a profit. Half of your net capital gain is taxable at your marginal rate. However, you can offset your capital gains with capital losses. While no one likes selling a stock at a loss, it can make sense when the stock no longer meets your investment objectives – and you can use the loss to reduce your taxes. Your investment advisor can help you identify which stocks are suitable candidates for tax-loss selling.

Key dates: For Canadian tax purposes, a sale takes place on the “settlement date” – normally three days after you initiate the sale. If you are considering a tax-loss sale, make sure you allow enough time for the transaction to settle in 2018.

Initiate sale by:
  • Canadian securities – December 27, 2018
  • US securities – not yet published

Offsetting gains in past or future years: Capital losses have to be used to offset capital gains the current year first. If the losses exceed the gains, then you can apply the excess amount against capital gains in the three previous years (2015, 2016, or 2017) or you can carry it forward indefinitely.

Superficial losses: Simply selling a stock to trigger a loss, and then buying it back within 30 days is considered a “superficial loss” by the Canada Revenue Agency, which means that the loss will be denied. The superficial loss rule also applies when your spouse or a corporation controlled by either you or your spouse acquires or reacquires the same security 30 days before or after the sale.

Is it better to lease or buy a car?

 

This is a common dilemma and for many people, it can be unclear which option is better.

Leasing  is really a form of automobile financing, and therefore the real comparison is between leasing and taking out a car loan to buy the vehicle. The lease payments are generally lower than the car loan payments, because a lease only finances the use of the vehicle for a few years, rather than the purchase of the entire vehicle. Some people prefer to lease because you can get a more expensive car for lower monthly payments.

However, this ignores the “payment-free” period you benefit from when buying after you pay off the car loan. If you crunch the numbers, purchasing and holding the vehicle for a longer period of time is almost always less expensive than leasing in the long run.

The benefit of leasing is that most people lease a new vehicle every two or three years, and therefore have no major repair risks, and also enjoy the pleasures of a new car more often. The tax rules for deducting the use of a vehicle are complex, whether leased or purchased. However, Canada Revenue Agency (CRA) attempts to structure the tax rules so that the tax savings will be similar whether you lease or buy a vehicle.

Overall drivers looking for a less expensive option will come out ahead in the long run if they purchase. However, some people are willing to pay more to change their vehicle every two or three years, and this is easier to do with a lease.

(Note-that the zoning of the listing is not a relevant factor in determining the answer to this question).

The key factor is how the building was used by the present owner (ie – the seller).

If the building was used primarily as a place of residence then the sale is exempt from GST and QST. In the case of a split-use property (part residential and part non-residential) then GST and QST would apply to the value of the non-residential portion. If the buyer requests it, the seller must provide a statement when the sale occurs, as to whether all or any part of the property is exempt from GST and QST. This statement is generally found in the deed of sale, but should also be sought in a binding offer to purchase.

Note-that if the buyer is registered for the GST and QST, then GST and QST does not have to be charged on the transaction. It is the duty of the notary to ensure that the GST and QST is charged if required, and they will do this at or before the closing.

A student may be required to file an income tax return.

If they are not required to file, there are many reasons for a student to consider filing a personal income tax return, which include:

  • GST/QST refund which can total almost $400 per year
  • Claiming tuition and education amounts, which can be transferred or carried forward
  • Income tax refunds
  • Property tax refund
  • Create RRSP room

For more information regarding Students and Income Tax Returns, click here.

Under the US-Canada Treaty, and the US and OECD Model treaties, a Canadian corporation becomes taxable in the United States only where its activities in the United States give rise to a permanent establishment.

A permanent establishment is generally defined to include either a fixed place of business (e.g., an office, branch, place of management, factory, etc.) or a dependent agent who habitually exercises the authority to conclude contracts on behalf of the corporation in the United States.

The Fifth Protocol to the US-Canada Treaty which includes a clause that became effective January 1, 2010 provides that a Canadian corporation may be deemed to have a US permanent establishment if it either:

  • Performs services in the United States through an individual present in the United States for an aggregate of 183 days or more in any given twelve-month period and certain other conditions are met, or
  • Provides services in the United States for an aggregate of 183 days or more in any given twelve-month period with respect to the same or connected project for US customers.

If a Canadian corporation has or is deemed to have a permanent establishment in the United States, the Canadian corporation will be subject to US tax return filing obligations and will be required to pay US tax on business profits attributable to that permanent establishment.

If profits of a permanent establishment that are taxed by the United States are also taxed in Canada and foreign tax credits are unavailable to offset the full amount of the US tax payable, double taxation on the US source income of the Canadian resident may result. Moreover, if a Canadian corporation fails to file a US tax return because it believes its US activities do not constitute a permanent establishment, that Canadian corporation (if it is later found to have had a US permanent establishment during taxable periods for which a US return was not filed) may be denied the ability to subsequently claim any deductions against income attributed to its US permanent establishment.

 

 For more information contact our  Canada/U.S. Tax Team for issues:

Contact UHY Canada U.S. Tax Team

crossbordertax@uhyvictor.com
(514) 282-0067

 

There are many reasons why one might decide to use a holding company, which include:

 

  • Corporate Planning:

If you are a business owner you transfer the shares of your operating company (Opco) to a holding company (Holdco) and then you can pay part of the earnings of Opco to Holdco as a dividend each year. This is generally a tax-free, intercorporate dividend. Holdco then uses that money to purchase investments such as real estate, marketable securities, and other private businesses. If Opco requires more cash for any reason, Holdco can lend the money back to Opco.

If the business owner personally withdraws the same earnings from Opco, the dividend will be taxable. However since the dividend to the holding company does not trigger any taxes, more funds are available to invest, and therefore more investment income can be generated.

In addition, a Holdco can pay income to the business owner and other family members. If other family members are in low tax brackets, they will pay less tax on the income distributions than the major shareholder would.

One can consider a holding corporation as a private pension plan. The owners can accumulate funds in a holding company during high earning years, and then withdraw these funds when they are required, often when they are taxed in lower brackets.

Another benefit is the excess earnings are transferred out of the operating company every year. As a result, these amounts are generally protected from the creditors of the operating company. If necessary, Holdco can lend that money back to Opco on a secured basis to retain that protection from creditors.

  • Estate Planning:

If you die with many investments owned as an individual, each asset will have to be re-registered in the name of an heir, unless they are held in joint ownership with the intended heir. However if you owns the same investments in a company, transferring assets to an heir can be accomplished by simply transferring the shares of the holding company to the beneficiary.

If you own investments personally, the use of a holding company can allow you to do an estate freeze so that future growth accrues to your intended heirs, perhaps children or grandchildren. Properly structured, future growth goes to your heirs’ common shares, but voting control stays with you. Your estate’s potential tax liability will be limited to the value of the investments at the date of the freeze – the taxes on the future growth will be deferred to sometime in the future.

If you reside outside of Quebec, there may also be some advantages in using a holding company to reduce probate fees.

  • US Estate Tax:

Canadian residents could be subject to US estate tax if they own “US sites property,” which includes shares in US corporations, among other things. If you’re otherwise subject to US estate tax on those securities, you can hold these investments in a Canadian holding company to avoid the estate tax.

  • OAS Claw-back:

Taxpayers start to repay any federal OAS received when their income exceeds $67,668. If the individual can transfer investments to a holding company, the individual’s personal income may be reduced below the level where the OAS claw-back applies.

Notice: While holding companies offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

A family trust is established when legal title to property is transferred by a person (the “settlor”) to a trust, that is created for a particular purpose. A wide variety of assets can be held by family trusts, including real estate, cash, a portfolio of securities such as shares, bonds and mutual funds, and the shares of privately held corporations.

Once the assets are transferred to the trust, they are then administered by one or more trustees for the benefit of the beneficiaries, who have an interest in the trust’s property and/or income. The beneficiaries may be individually listed when the trust is formed, or may be identified later as part of a specified group (such as “children” or “grandchildren”).

The settlor and trustees execute a trust deed evidencing the settlor’s intention to create the trust, as well as setting out the rights, duties, and obligations of the trustees, and the principles governing the trust.

Once the assets are transferred to a trust, they are legally separate and distinct from the assets of the settlor, trustees and beneficiaries.

Potential Benefits of using Family Trusts

Income Splitting:

      • The owner/manager of a business who would like to split income with a spouse and adult children with low incomes (for example, university students) in order to reduce taxes.
      • For those who own significant investment assets or have an investment corporation, family trusts can be used to split income from the investment assets or corporation among adult children.
      • A Family Trust can be a tax-effective way to provide for a former spouse and/or children of a previous marriage.
      • A Family Trust can be a tax-effective vehicle for providing for elderly parents or other adult relatives who require financial support.

Succession Planning:
For an owner of a business with children who may or may not be interested in becoming active shareholders, Family Trusts can be a very useful succession-planning tool, providing a vehicle for ongoing management and control of the business. In this case, the trustees of the Family Trust could hold the shares of the corporation for the benefit of the entire family until the succession of the business has been determined.

Creditor Proofing:
For someone who is concerned about possible financial difficulties in the future, a Family Trust can help to provide creditor proofing and financial security for his or her family.

If all income and capital distributions are at the discretion of the trustees, the beneficiaries’ creditors generally cannot seize any of the Family Trust’s assets. In addition, under an appropriately established Family Trust, the Trust may help to provide some protection of assets from future marital property claims involving a beneficiary.

Tax Planning for the sale of a business:
Beneficiaries may be eligible to claim the $750,000 enhanced capital gains exemption on the capital gain allocated to them from the disposition of the shares of a Canadian business. As a result, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust.

Reduction of taxes on death:
A Family Trust could be used as a means of transferring the growth in the value of a family business to the next generation on a tax-deferred basis.

Support for Elderly or Special Needs Individuals:
A Family Trust can be an effective way to provide for their ongoing financial needs.

By holding assets in a family trust the above benefits can be achieved while the trustees maintain full control (subject to their fiduciary duties as trustees) over the trust property. It is important to note that it is the trustees who control the trust property and not the settlor. The settlor, however, sets the terms of the trust in the trust deed and the trustees are bound to act according to the terms of the trust deed as well as general trust law. In addition, the settlor can be a trustee of the family Trust.

Notice: While family trusts offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

There are several benefits to owning life insurance in a corporation:

  • The main benefit is cost. Life insurance premiums paid by a corporation are generally not tax deductible. However it is generally cheaper to have a corporation pay the premiums than to withdraw funds from a corporation and to pay the premiums personally.
  • When a corporation receives life insurance proceeds upon a person’s death these amounts are generally received non-taxable to the beneficiary corporation.
  • The life insurance proceeds can generally be withdrawn tax-free from the company. This is achieved by making use of the Capital Dividend Account (CDA) mechanism to declare a capital dividend, which will be received tax-free by shareholders resident in Canada for most or all of the insurance proceeds.
  • In addition, many shareholders prefer to spend corporate funds for life insurance premiums, and save personal dollars for other purposes.
  • Some individuals prefer having the life insurance in a company, which gives increased assurance that funds are available to pay required premiums and that these premiums are paid on a regular basis.
Notice: While corporate owned life insurance can make sense for certain situations, the rules can be complex and this route should not be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

A trust is a legal entity which is separate from its settlor (the person transferring property to the trust), its beneficiary (the person who can benefit from the transferred property) and its trustee (the person who controls and administers the trust property).

 

Spousal Trusts: A trust that is set up through a will upon one’s death is called a testamentary trust. A spousal trust is a form of a testamentary trust whereby specific property is set aside from the estate to be used to provide for the maintenance and support of the deceased individual’s survivor spouse. Generally the income earned on the assets is paid to the surviving spouse, who also has the right to encroach upon capital if required.

Upon death, Canadian tax laws deem that a disposition of one’s property occurs at its fair market value as at the date of death. As a result, the appreciation in value of a deceased person’s assets can trigger income taxes payable on the deceased’s final return. However if certain conditions are met, the assets transferred directly to a testamentary spousal trust are deemed to be disposed at their original cost, which defers the income taxes otherwise payable on their unrealized gains.

Creating a Testamentary Spousal Trust in a will can accomplish the following:
  • Defers the income tax on the deceased’s unrealized capital gains until the death of the surviving spouse.
  • Creates a separate entity for tax purposes which allows income generated from the transferred property to be taxed in the trust. This effectively doubles the lower income brackets available to each individual thereby reducing the income taxes on income generated by the transferred property.
  • Protects the deceased individual’s capital from exposure to potential creditors of the surviving spouse.
  • Allows the deceased to appoint responsible trustees to safeguard the capital in the Spousal Trust from inappropriate investments and risks.
  • Helps ensure payment of the income generated by the assets in the trust to the surviving spouse.
  • Helps ensure that the deceased’s capital is protected and will eventually be transferred to the deceased’s chosen beneficiaries after the death of the surviving spouse. This may be important in second marriages where the spouses have children from a prior marriage.
Notice: While spousal trusts can make sense in certain situations, the rules can be complex and this route should not be taken without first consulting with a qualified tax adviser.

Please contact Ken Shemie if you have any questions or comments.

For technical details refer to the CRA’s IT305R4 “Testamentary Spouse Trusts”.

There are many reasons why one might decide to incorporate a business, which include:

Limited  liability
A corporation is a legally separate entity from the owners. Accordingly the shareholders’ personal assets can be protected from claims made by creditors of the business.

Tax advantages
Income taxes advantages can often be realized because:

  • Business and professional incomes are generally taxed at lower income tax rates if they are earned by a corporation rather than earned personally.
  • Substantial income taxes can be deferred if the owner-manager does not require all of the earned income for personal needs.
  • Taxes can also be reduced by choosing to draw a calculated mix of salary and dividends.

Income splitting
Family members can also own shares of a corporation, which can allow for the payment of dividends (directly or through a family trust) to other adult family members who are in lower tax brackets.

Estate planning
Incorporating a business enables the owner-manager to freeze the value of the assets of the company so that the taxes on future increases in the value of the business can be deferred.

Small business capital gains exemption
The tax authorities permit the first $750,000 of capital gains on the sale of a Canadian business to be tax-free.

Succession planning 
The use of a corporation can enhance the orderly transition of a business to family members or to acquirers of a business.

Continuity of existence
A corporation is a legally separate entity from the owners. Therefore the death of a shareholder does not bring about the end of a business. The businesses activities can continue uninterrupted, and the new owner will be the party that inherits the companies shares from the deceased individual’s estate.

Other considerations
The benefits of an incorporation must be weighed against the additional costs and effort that are required to set-up and administer a corporation.

Notice: While the use of corporations offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax adviser.

Please contact Sylvie Plante if you have any questions or comments.

US Citizens and US Permanent Residents in Canada

 

A US citizen is subject to US federal estate taxes no matter where s/he lives in the world.

Upon death, US federal estate taxes are calculated based on the fair market value of worldwide taxable assets, which generally includes the value of all of one’s property interests at the time of death.

Under current rules, estate taxes are calculated on an American’s taxable assets at rates of up to 40%. However the estate taxes payable amount is reduced by an exemption on the first USD $5.34 million of assets, which means that US taxpayers are only subject to estate taxes if their worldwide taxable assets exceed $5.34 million.

This USD $5.34 million exemption applies to estate taxes, generation-skipping transfer taxes (GST) as well as gift taxes.

Gifts are integrated into the estate tax regime, and the USD $5.34 million estate tax exemption is reduced by any gifts which exceed USD $14,000/year (for 2013) made during an US citizen’s lifetime. Note that the threshold for gifts to a non-resident alien spouse is USD $140,000/year.

The gift tax is designed to prevent individuals from gifting assets during their lifetime to their heirs, thereby reducing the estate taxes due on their death.

Relatively new rules (referred to as “portability”) permit any unused portion of an individual’s USD $5.34 million exemption to be transferred to a surviving American spouse, which then gets added to their own USD $5.34 million exemption. Note that this provision applies to the exemption amount for estate taxes only. In addition, an individual who has been widowed more than once may only use the most recent spouse’s available exemption amount.

Canadians

Upon death, US federal estate taxes can be due if you own “US situs assets”. US situs assets include:

  • US real property net of non-recourse debt (including real estate investment properties, country places and condominiums)
  • US personal property (including boats, vehicles)
  • Stocks of US corporations incorporated or continued into the US (including those held in RRSP`s and RRIF`s). Note that maintaining a brokerage account in Canada to hold US securities does not avoid exposure to US Estate Tax
  • Debts of US companies and persons
Excluded assets include:
  • US bonds
  • US bank accounts
  • US life insurance policies (excluded but included in the world wide assets values)
  • Canadian mutual funds which hold US investments

Canadians who die holding US situs assets in excess of USD $60,000 are subject to US federal estate taxes, which are calculated on the total value of their US situs assets at a rate of up to 40%.

However the estate will be reduced by an exemption of USD $5.34 million x the ratio of US situs gross assets over worldwide assets.

Therefore if a Canadian dies with US situs assets making up 50% of their USD $8 million of world assets, they will have an exemption of:

USD $5.34 million x $4 million/$8 million = USD $2.67 million.

On death, a Canadian will generally pay taxes in Canada on any accrued gains on US assets on their terminal Canadian income tax return. Depending on the specifics, the Canadian Revenue Agency (CRA) will permit a foreign tax credit to be claimed and applied in Canada for the US estate taxes paid on those assets.

However the provinces generally do not allow a foreign tax credit for US estate taxes paid and, as a result, the estate may be subject to some double taxation at the provincial level.

The filing deadline for a US estate tax return is generally nine months after the date of death.

Planning for Estate Tax Liabilities

If your estate is potentially subject to US estate taxes, there may be planning strategies available to reduce your US estate tax exposure. Contact us if you require assistance analyzing your exposure to US estate taxes, and how this liability can be reduced.

Notice: US estate tax rules are complex and no planning actions should be taken without first consulting with a qualified tax adviser.

Please contact our Canada U.S. Tax Team  if you have any questions or comments.

crossbordertax@uhyvictor.com

IRS Information

For additional information from the IRS click here

This is a complicated and often challenging question!

Click here to find out what is an FBAR.

What is the 2018 filing deadline?

We regularly assist Americans residing in Montreal and across Canada and other countries deal with late FBAR filings, and their potentially expensive FBAR late-filing penalties.

Usually we start reviewing the details, such as:

  • Are they compliant with their Canadian income taxes.
  • Are the US 1040 personal income tax return filings up-to-date?
  • If the US tax returns were filed, were they deficient in some way? Problematic and often overlooked forms/issues can include form 3520, 3520a, 8891, 5471, sub-part “f” income, US Income Sourcing, etc.
  • What is the nature/location/magnitude of the accounts to be reported on the FBAR?
  • Has all income been reported completely/correctly on the Canadian tax returns?
FBAR – Streamlined Program

The IRS “Streamlined Program” commenced in September 2012. This program is designed to facilitate the process for non-compliant individuals who are considered to be “low-risk” to bring their US tax filings up-to-date and potentially avoiding late filing penalties.

This program requires filing 6 years of FBAR’s and 3 years of tax returns, and can resolve the FBAR issue at the same time as the unfilled US tax returns.

However the “Streamlined Program”:

  • Does not deal with the scenario where the tax returns (1040’s) were filed and the FBAR’s were not filed;
  • Does not offer the structural protections that exist for filers using other options such as the Voluntary Disclosure Program (OVDI), and;
  • Many individuals do not qualify for the “Streamlined Program” because they do not meet the criteria for “low risk“. For instance, if their US tax returns reflect taxes payable of greater than $1,500/year, the submission is not considered “low risk”.

Clearly most Americans who are not compliant with their FBAR filings are concerned with the penalties that can be levied on late FBAR’s. While the Streamlined Program does not provide any guarantees, it can be an attractive option for those who’s US tax returns meet the IRS criteria of “low risk”.

FBAR – Voluntary Disclosure

A voluntary disclosure is one method of rectifying deficient tax filings.
Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process.

Note FAQ 17 of the OVDI web page states:

“The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters. Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process.”

However many US and Canadian tax attorneys still recommend using the OVDI program because this FAQ appears to be IRS “policy” only, and is not actual law.

The OVDI is an option which should be considered, but keep in mind that the voluntary disclosure process can be expensive and arduous. Our experience is that the IRS OVDI program is backlogged with files, and processing a file can take several years.

FBAR – Quiet Disclosure

Another option is the “Quiet Disclosure”, which consists of quietly mailing in late filings with no special program or cover information.

Quiet Disclosures were often successful in the past based on the experience that the IRS processed these tax filings and penalties were rare.

We do not recommend this option because the IRS has been alerted to this issue, and we have been informed that their ability to identify late-filings has increased, and they are intending to assess been late-filing penalties.

FBAR – Noisy Disclosure

Some practitioners are still advocating the “Noisy Disclosure” approach, which involves bringing taxpayers through the normal filing process, but with a carefully worded legal letter and personal contact with the IRS.

The “Noisy Disclosure” option has not been endorsed by the IRS, and therefore there is little comfort that it avoids late filing penalties.

FBAR – New Filing Procedures

Effective July 1, 2013, FBARs must be filed electronically using the E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This mandatory electronic filing requirement applies to all FBARs, and to amendments of previously filed FBARs, that are submitted by individuals or by entities on or after the effective date.

FBAR – Final Comment

American residents in Canada and elsewhere are becoming increasingly aware of FBAR filing issues.

Great care should be taken when filing late FBAR’s because the penalties can be onerous. Note that in extreme cases individuals can be subject to criminal prosecution with jail sentences as well as high financial penalties.

Violation Civil Penalties Criminal Penalties Comments
Negligent Violation Up to $500 N/A 31 U.S.C.
§ 5321(a)(6)(A)
31 C.F.R. 103.57(h)
Non-Willful Violation Up to $10,000 for each negligent violation N/A 31 U.S.C. § 5321(a)(5)(B)
Pattern of Negligent Activity In addition to penalty under § 5321(a)(6)(A)
with respect to any such violation, not more than $50,000
N/A 31 U.S.C. 5321(a)(6)(B)
Willful – Failure to File FBAR or retain records of account Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $250,000 or 5 years or both 31 U.S.C. § 5321(a)(5)(C)
31 U.S.C. § 5322(a)
and 31 C.F.R. § 103.59(b) for criminal.
The penalty applies to all U.S. persons.
Willful – Failure to File FBAR or retain records of account while violating certain other laws Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $500,000 or 10 years or both 31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal
The penalty applies to all U.S. persons.
Knowingly and Willfully Filing False FBAR Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. $10,000 or 5 years or both 18 U.S.C. § 1001,
31 C.F.R. § 103.59(d) for criminal. The penalty applies to all U.S. persons.
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d).

If you would like to discuss FBAR’s, contact :

Contact UHY Canada U.S. Tax Team

crossbordertax@uhyvictor.com
(514) 282-0067

(Montreal, Quebec, Canada) from our U.S. Tax Group.

Tax Cuts and Jobs Act: IRC Section 965 “Repatriation Tax”

Newly enacted section 965 imposes a “Repatriation Tax” on certain previously untaxed earnings of specified foreign corporations (SFCs) of U.S. shareholders by deeming those earnings to be repatriated.

  • Foreign earnings held in the form of cash and cash equivalents: taxed at a 15.5% rate;
  • Remaining earnings: taxed at an 8% rate.

The repatriation tax generally may be paid in installments over an 8 year period.

Controlled Foreign Corporations (CFC’s) subject to the “Repatriation Tax”

Under the “Repatriation tax” rules, a US shareholder of an SFC must include in its/his/her income the pro rata share of the accumulated post-1986 deferred foreign income of the corporation for the last taxable year beginning before Jan. 1, 2018.

Guidance provided by the IRS (Notice 2018-07) and the Tax and Jobs Cuts Act indicates that the repatriation tax on deferred foreign income is applicable to all US shareholders (including individuals, LLC’s, partnerships and corporations) who own a 10% or more voting interest in SFC’s. SFC’s include controlled foreign corporations (CFCs) and 10/50 companies, but not passive foreign investment companies (PFIC’s) that are not CFC’s.

 

Controlled Foreign Corporations (CFC’s) subject to the “GILTI”

The “global intangible low-taxed income” (GILTI) imposes a tax on the excess income of CFC’s over a 10% rate of routine return on tangible business assets. This restricts the benefits of the tax deferral that could exist in CFC’s.

 

Americans residing on Canada who own Canadian Corporations

The “Repatriation Tax” and GILTI applies to Americans residing in Canada who own Canadian corporations. These individuals must carefully consider the implications of the “Repatriation Tax”. Our Canada-US Tax Team has established a “Repatriation Tax Task Force’, which has identified a number of methods of reducing the “Repatriation Tax” amounts payable.
For further details please contact Jonathan Levy CPA, CA at jlevy@uhyvictor.com.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Tax Cuts and Jobs Act

Tax Cuts and Jobs Act: Section IRC 965 “Repatriation Tax” and GILTI applies to Americans who reside in Canada and own Canadian Corporations.