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November 2010, Kevin Stickle, CPA


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International (Candada & Us) Tax - Larson Gross PLLC

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November 2010, Kevin Stickle, CPA

  1. 1. US Tax Issues for Canadians and Their Accountants<br />Kevin Stickle, CPA, MS-Tax<br />November 4, 2010<br />
  2. 2. Basic Principles<br />US taxes citizens on worldwide income<br />Must file full-blown US tax returns (Form 1040)<br />Subject to same tax rules as US residents<br />Individuals who are neither US citizens nor US residents are taxed only on US “sourced” income (Form 1040NR, maybe)<br />Foreign corporations, trusts, estates and partnerships are taxed only on US-sourced income (Form 1120-F, 1065, 1040NR)<br />
  3. 3. How Foreign Persons and Activities Become Subject to US tax<br />A foreign person is taxed on business income if engaged in a US trade/business <br />Foreign persons with no presence in US taxed on income arising from sources within the US<br />Very different tax treatment for US business income vsnonbusiness income<br />
  4. 4. Foreign Tax Credits<br />Nonrefundable credit arising from foreign-source income on which foreign tax is paid or assessed<br />Foreign source vs US source income<br />Canadian tax typically higher for individuals<br />US citizen in Canada: usually no US tax owing on Canadian sourced income due to the FTC<br />Form 1116<br />
  5. 5. US Federal Tax System (As of 2010)<br />Ordinary Income – up to 35%<br />Capital Gains and most dividends – 15%<br />Individual Tax brackets – much higher income levels than Canada before high brackets start<br />Joint filing option<br />Major differences in allowed deductions<br />
  6. 6. US Entity Selection for Business <br />Individual – 1040 form<br />Partnership -1065 form<br />LLC- 1065 form (or 1120)<br />C-Corporation – 1120 form<br />S-Corporation – 1120S form<br />
  7. 7. Taxation of Foreign Persons on US Income and Operations<br />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<br />The major US tax law exception – income “effectively connected” with a USTB is taxed at the marginal rates on a net basis<br />Bank account interest income – exempt under US tax law<br />Rental income – file US income tax returns – or else!<br />
  8. 8. Withholding Tax on Payments to Foreigners<br />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.<br />Is documentation (W8) available for:<br />Treaty reduction or elimination of rate?<br />Foreign status of payee?<br />ITIN or EIN present?<br />Source of income?<br />
  9. 9. Investment in US Real Estate<br />Risk of exchange rate fluctuation gains/losses<br />US requires depreciation to be taken on rental properties<br />Losses can be carried forward<br />State income tax filings<br />Exposure to US estate tax risk<br />
  10. 10. Dispositions of US Real Estate<br />Treated as if a trade or business conducted in the US – 1040NR/1120F filing<br />10% withholding tax required on sale proceeds-8288A form<br />US real property can include stock <br />Limited exceptions to 10% w/h tax<br />Gift/inheritance<br />Sale is less than $300k and buyer uses it as a primary residence<br />Certificate can be filed prior to close to prove less w/h tax is needed – Form 8288B<br />
  11. 11. US Citizens in Canada <br />RRSP’s or RRIF’s? - 8891 form<br />Control a Canadian Corp? Onerous informational filing (5471)<br />Beneficiary of a Canadian trust? Onerous informational filing (3520)<br />Foreign tax credits<br />Exchange rates<br />Find out what’s US income vs Canadian<br />
  12. 12. US LLC’s and Partnerships <br />Foreign partner subject to 35% withholding tax on allocable share of profits-8805 form<br />Foreign partner must file US income tax return<br />Problems with US inbound investment using LLCs by Canadians<br />Canada considers the LLC a corp<br />No treaty benefits for inbound-to-US<br />Mis-timed foreign tax credits?<br />
  13. 13. Impact of US-Canada Tax Treaty<br />Treaty is a bilateral tax agreement between the 2 countries<br />There is often substantial modification of US and foreign tax consequences <br />Always consider the relevant tax treaty between the US and the payee’s country of residence<br />Might apply if some activity is going on in the US, or income coming from the US<br />Check for changes to treaty<br />
  14. 14. Specific Common Treaty Provisions<br />Reduce or eliminate withholding tax rates on investment income<br />Define residency to determine who has the right to tax-tiebreaker<br />Restricts host country taxation of business income to profits attributable to a P/E<br />Deducting charitable contributions<br />Taxation of US Gambling winnings<br />Soc Sec/CPP/OAS – only country of residence taxes<br />Must have US tax ID # and file appropriate forms<br />Form 8833<br />
  15. 15. US Estate Tax<br />Value of US property at death >$60k<br />If Canadian resident, watch for US real estate and/or stock holdings<br />Some limited deductions available<br />Some treaty benefits<br />Effective allowance of US exemption<br />Limited marital credit to non-US citizen spouse<br />Basis step up<br />What happens after 2010??<br />
  16. 16. State Tax Issues<br />Consider each state almost like a separate country<br />Must register in each before conducting business there (Nexus=business presence)<br />States do not abide by treaty<br />Income tax / Sales tax / Franchise tax<br />All states have different systems and laws for sales/franchise taxes<br />
  17. 17. Foreign Bank Account Reporting Rules<br />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<br />Use TD F 90-22.1 forms<br />Direct yes/no question on tax return<br />File by 6/30 for the prior calendar year-no extensions<br />Steep penalties for non-filing<br />Disregard fiscal years<br />
  18. 18. Questions?<br />In a global economy, the chance of running into US tax issues for your clients has never been higher<br />