November 2010, Kevin Stickle, CPA

US Tax Issues for Canadians and Their Accountants
Kevin Stickle, CPA, MS-Tax
November 4, 2010

Basic Principles
US taxes citizens on worldwide income
Must file full-blown US tax returns (Form 1040)
Subject to same tax rules as US residents
Individuals who are neither US citizens nor US residents are taxed only on US “sourced” income (Form 1040NR, maybe)
Foreign corporations, trusts, estates and partnerships are taxed only on US-sourced income (Form 1120-F, 1065, 1040NR)

How Foreign Persons and Activities Become Subject to US tax
A foreign person is taxed on business income if engaged in a US trade/business
Foreign persons with no presence in US taxed on income arising from sources within the US
Very different tax treatment for US business income vsnonbusiness income

Foreign Tax Credits
Nonrefundable credit arising from foreign-source income on which foreign tax is paid or assessed
Foreign source vs US source income
Canadian tax typically higher for individuals
US citizen in Canada: usually no US tax owing on Canadian sourced income due to the FTC
Form 1116

US Federal Tax System (As of 2010)
Ordinary Income – up to 35%
Capital Gains and most dividends – 15%
Individual Tax brackets – much higher income levels than Canada before high brackets start
Joint filing option
Major differences in allowed deductions

US Entity Selection for Business
Individual – 1040 form
Partnership -1065 form
LLC- 1065 form (or 1120)
C-Corporation – 1120 form
S-Corporation – 1120S form

Taxation of Foreign Persons on US Income and Operations
General Rule: Flat 30% rate tax on gross US SOURCE income without any deductions, unless an exception in US law or treaty reduction/ elimination of rate -1042S form
The major US tax law exception – income “effectively connected” with a USTB is taxed at the marginal rates on a net basis
Bank account interest income – exempt under US tax law
Rental income – file US income tax returns – or else!

Withholding Tax on Payments to Foreigners
The person controlling the amount subject to withholding must withhold a 30% tax (or lower rates in certain cases) at source from certain U.S.-source amounts (e.g., interest and dividends) paid to nonresident aliens and foreign corporations.
Is documentation (W8) available for:
Treaty reduction or elimination of rate?
Foreign status of payee?
ITIN or EIN present?
Source of income?

Investment in US Real Estate
Risk of exchange rate fluctuation gains/losses
US requires depreciation to be taken on rental properties
Losses can be carried forward
State income tax filings
Exposure to US estate tax risk

Dispositions of US Real Estate
Treated as if a trade or business conducted in the US – 1040NR/1120F filing
10% withholding tax required on sale proceeds-8288A form
US real property can include stock
Limited exceptions to 10% w/h tax
Gift/inheritance
Sale is less than $300k and buyer uses it as a primary residence
Certificate can be filed prior to close to prove less w/h tax is needed – Form 8288B

US Citizens in Canada
RRSP’s or RRIF’s? - 8891 form
Control a Canadian Corp? Onerous informational filing (5471)
Beneficiary of a Canadian trust? Onerous informational filing (3520)
Foreign tax credits
Exchange rates
Find out what’s US income vs Canadian

US LLC’s and Partnerships
Foreign partner subject to 35% withholding tax on allocable share of profits-8805 form
Foreign partner must file US income tax return
Problems with US inbound investment using LLCs by Canadians
Canada considers the LLC a corp
No treaty benefits for inbound-to-US
Mis-timed foreign tax credits?

Impact of US-Canada Tax Treaty
Treaty is a bilateral tax agreement between the 2 countries
There is often substantial modification of US and foreign tax consequences
Always consider the relevant tax treaty between the US and the payee’s country of residence
Might apply if some activity is going on in the US, or income coming from the US
Check for changes to treaty

Specific Common Treaty Provisions
Reduce or eliminate withholding tax rates on investment income
Define residency to determine who has the right to tax-tiebreaker
Restricts host country taxation of business income to profits attributable to a P/E
Deducting charitable contributions
Taxation of US Gambling winnings
Soc Sec/CPP/OAS – only country of residence taxes
Must have US tax ID # and file appropriate forms
Form 8833

US Estate Tax
Value of US property at death >$60k
If Canadian resident, watch for US real estate and/or stock holdings
Some limited deductions available
Some treaty benefits
Effective allowance of US exemption
Limited marital credit to non-US citizen spouse
Basis step up
What happens after 2010??

State Tax Issues
Consider each state almost like a separate country
Must register in each before conducting business there (Nexus=business presence)
States do not abide by treaty
Income tax / Sales tax / Franchise tax
All states have different systems and laws for sales/franchise taxes

Foreign Bank Account Reporting Rules
US persons must report foreign bank accounts in which they have direct signature authority if the aggregate of the highest monthly balance in these accounts exceeds $10,000
Use TD F 90-22.1 forms
Direct yes/no question on tax return
File by 6/30 for the prior calendar year-no extensions
Steep penalties for non-filing
Disregard fiscal years

Questions?
In a global economy, the chance of running into US tax issues for your clients has never been higher

November 2010, Kevin Stickle, CPA

by FVCAA on Sep 22, 2011

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November 2010, Kevin Stickle, CPA — Presentation Transcript