2010 Cross-border tax update
Vancouver
2
Topic summary
US tax update:
 PFIC update – reporting
 Foreign Bank Account reporting
 Tax rate changes
 Voluntary D...
PFIC
Passive Foreign Investment Company
(PFIC) Update
PFIC shareholder must file annual return
Previously only when taxabl...
PFIC
What is a PFIC?
Canadian mutual funds – trusts v. corporation
If trust for U.S. purposes, not subject to PFIC
However...
PFIC
Sample PFIC Calc – Non-QEF or Mark-To
Market
U.S. Citizen Buys Canadian Junior Mining Stock in 2007 for
$ 1,000 US
Se...
FBAR redux
Additional Disclosure Required: new form
“Specified Foreign Financial Asset” disclosure
Includes:
Deposits (or ...
US tax rate changes
Changes to U.S. Individual FTCs -As of 2009
Foreign Dividends in excess of $ 20,000 US are subject to ...
US tax rate changes
Personal Income tax rates:
MFS:
Over $70,000 but not over $125,000. $17,964.25, plus 36% of the
excess...
US tax rate changes
US Healthcare bill: requires US persons to have
healthcare coverage that meets US standard. Penalties ...
FTC strip + tax rate rates
Facts: Employment income $400,000
Cdn eligible divs $ 50,000*
* Actual amount
US tax consequenc...
US tax rate changes
Estate taxes Exemption $1M – 3.5M?
• Retro-active?
• The estate tax exemption will drop to $1 million....
Vol Dec update
Voluntary Disclosure Update
• Mitigation of Penalties
Up to Audit Manager assigned to file
If “offer” rejec...
Vol Dec update
Non-Compliance Going Forward
• No “quiet disclosure”
IRS is setting up programs to trigger inspections of
m...
CFC refresher IRC 951-957
What is a Controlled Foreign Corp?
• 5 or fewer US persons with at least 10%
interest (combined ...
CFC – IRC 954
IRC 954 Subpart F Income
What comprises PHC income?
1. Dividends, interest, rents, royalties, and annuities;...
CFC – IRC 954
Limitation:
• The subpart F income of a controlled
foreign corporation for a taxable year
cannot exceed the ...
CFC – IRC 954
IRC 954 fix for CFCs with Subpart F income:
ULC
Pros & Cons:
• Income retains character in hands of US
perso...
Miscellaneous legislative changes
Codification of economic substance:
IRC 7701(o)
Substantial penalties for transactions l...
Miscellaneous
Purpose of legislation:
• sham transactions - sole purpose of obtaining tax
benefits and the transaction is ...
Miscellaneous
Adequate Disclosure (Rev Proc 2010-15)
a.k.a. why the cost of compliance just went up
Applies to all tax fil...
Miscellaneous
Inadequate disclosure includes:
• Unclear descriptives
• Compensation of officers (Sch E)
• Repairs
• Combin...
Miscellaneous
Restructuring at IRS
• High net worth individuals (>$10M) now
part of “corp” audit group
Washington B&O tax
...
Miscellaneous
Canadian trust – vacation property
US person or non-compliant snowbird meeting substantial
presence who is g...
Canadian tax potpourri
Foreign tax credit generators
Proposed amendments: restrict entitlement
to deductions & credits for...
Canadian tax potpourri
Taxable Canadian property
Non-public company shares excluded unless
anytime in last 60 months more ...
Canadian tax potpourri
Tax avoidance transactions:
Following US and QC models?
Meets two of three “hallmark” tests:
1. Pro...
Canadian tax potpourri
Employee stock options:
• Elimination of deferral for pubco stock options
Result: better matching o...
Canadian tax potpourri
TD Securities (USA) LLC v. Queen 2008-
2314(IT)G, April 8, 2010
Held: US LLC was resident entitled ...
Questions?
Questions?
Thanks for your time.
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2010 Personal Cross Border Tax Update

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Joint presentation with Katri Ulmonen on current updates to U.S. filing requirements.

Published in: Economy & Finance, Business
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2010 Personal Cross Border Tax Update

  1. 1. 2010 Cross-border tax update Vancouver
  2. 2. 2 Topic summary US tax update:  PFIC update – reporting  Foreign Bank Account reporting  Tax rate changes  Voluntary Declaration process update  CFC update  Miscellaneous legislation Canadian tax update:  Foreign tax credit generators  Taxable Cdn property rule changes  Tax avoidance transactions  Stock option changes  Quebec - model for Feds?
  3. 3. PFIC Passive Foreign Investment Company (PFIC) Update PFIC shareholder must file annual return Previously only when taxable event occurred or election made Statute of limitations suspended INDEFINITELY for failure to file annual return Further, the statute of limitations is suspended INDEFINITELY for failure to file ANY informational return (recently clarified)
  4. 4. PFIC What is a PFIC? Canadian mutual funds – trusts v. corporation If trust for U.S. purposes, not subject to PFIC However U.S. person likely has U.S. trust reporting (subject to penalties) If corporation for U.S. purposes, generally subject to PFIC determinations Limited purpose trust, open ended, unincorporated, created for investment purposes Management of trust has powers to “vary the investments” Certain Canadian corporations Junior investment stock likely PFICs IPOs Certain REITs Likely not subject to PFIC if active property management by REIT itself Most CEFs Includes privately owned companies! Information circulars (and other fund documents) are starting to
  5. 5. PFIC Sample PFIC Calc – Non-QEF or Mark-To Market U.S. Citizen Buys Canadian Junior Mining Stock in 2007 for $ 1,000 US Sells all of the stock in 2010 for $ 10,000 US The $ 9,000 US gain will be taxed at an effective rate of 37% in the United States* The longer the hold of the stock, the higher the effective rate Annual distributions can create “excess distributions” as well *(assuming the underpayment interest rate in 2010 is the same as 2009)
  6. 6. FBAR redux Additional Disclosure Required: new form “Specified Foreign Financial Asset” disclosure Includes: Deposits (or custodial accounts) at foreign financial institutions To the extent not held at a financial institution: Stocks or securities issued by foreign persons Any other financial instrument or contract held for investment that is issued or has a counterparty that is not a U.S. person Any interest in a foreign entity. Aggregate value of the assets must exceed $ 50,000 US If you can’t prove aggregate value, IRS will assume you met the threshold Congress does not believe this to be a duplicative reporting to FBAR (which is still in effect) Failure to disclose is $ 10,000 US for every tax year Statute of limitations is suspended INDEFINITELY if never filed
  7. 7. US tax rate changes Changes to U.S. Individual FTCs -As of 2009 Foreign Dividends in excess of $ 20,000 US are subject to FTC stripping Changes to U.S. Individual Tax Rates -As of 2011 Top marginal rate goes to 39.6% Long-term capital gains rate to 20% Qualified dividends ordinary rates - no longer 15% Foreign tax credits – un-pooling, again Impact for planning: • foreign exchange rate implications • Dividend tax credit issues
  8. 8. US tax rate changes Personal Income tax rates: MFS: Over $70,000 but not over $125,000. $17,964.25, plus 36% of the excess over $70,000. Over $125,000....... $37,764.25, plus 39.6% of the excess over $125,000. MFJ: Over $140,000 but not over $250,000. $35,928.50, plus 36% of the excess over $140,000. Over $250,000....... $75,528.50, plus 39.6% of the excess over $250,000.
  9. 9. US tax rate changes US Healthcare bill: requires US persons to have healthcare coverage that meets US standard. Penalties for insufficient coverage – no exemption for U.S. persons living outside US. Q:How does this impact US Persons living in Canada? Private insurance required? 2012: 3.8% healthcare surtax on investment income where AGI over $250,000 MFJ Planning: analysis for high net-worth individuals
  10. 10. FTC strip + tax rate rates Facts: Employment income $400,000 Cdn eligible divs $ 50,000* * Actual amount US tax consequences: Taxes 2008 2009/10 2011 2012 Employment 118,000 118,000 118,000 118,000 Dividends 6,000 7,000 15,000 17,000 FTC: Employment (118,000) (118,000) (118,000) (118,000) Dividends ( 6,000) (5,000) (7,000) (7,000) Net US tax Nil 2,000 8,000 10,000
  11. 11. US tax rate changes Estate taxes Exemption $1M – 3.5M? • Retro-active? • The estate tax exemption will drop to $1 million. • The GST exemption will drop to an inflation-adjusted $1 million (it is likely this amount will be at least $1,340,000). • The top estate, gift, and GST tax rate will increase to 55% (60% for estate and gift tax transfers between $10 million and $17,184,000). • The estate and gift tax system will again be unified. • The state death tax credit will be restored.
  12. 12. Vol Dec update Voluntary Disclosure Update • Mitigation of Penalties Up to Audit Manager assigned to file If “offer” rejected, proceed to audit • Additional Requests Account statements for 2003 through 2008 Not all agents request this Some won’t discuss mitigation unless we provide this first Copies of Canadian tax returns filed Includes corporate returns of CFCs
  13. 13. Vol Dec update Non-Compliance Going Forward • No “quiet disclosure” IRS is setting up programs to trigger inspections of multiple/previous year’s filings Is considered a willful failure to file and will be subject to no relief of penalties • All non-compliance must be sent to Voluntary Disclosure department No guidance on what the procedures and likeliness of penalty mitigation at this time
  14. 14. CFC refresher IRC 951-957 What is a Controlled Foreign Corp? • 5 or fewer US persons with at least 10% interest (combined filing allowed) • Attribution rules (family, psps, trusts,corps IRC 318) • Subpart F income = FAPI – dividend at ordinary rates (results in double taxation) • Failure to file penalty: $10,000 per corp • Complex form – requires USD and US gaap Recent case: CCA 200645023 – complexity not reasonable cause
  15. 15. CFC – IRC 954 IRC 954 Subpart F Income What comprises PHC income? 1. Dividends, interest, rents, royalties, and annuities; 2. Income equivalent to interest (without regard to the exceptions for amounts apportioned like interest); 3. Foreign currency gains or loss (without regard to the exception for gain or loss directly related to business needs); 4. Gain or loss from commodities transactions (without regard to the exclusions for qualified active sales and qualified hedging transactions); and 5. Gain or loss from certain property transactions (without regard to the exceptions for sales of inventory and dealer property).
  16. 16. CFC – IRC 954 Limitation: • The subpart F income of a controlled foreign corporation for a taxable year cannot exceed the earnings and profits of the corporation for that year • Claw-back rule for subsequent profits
  17. 17. CFC – IRC 954 IRC 954 fix for CFCs with Subpart F income: ULC Pros & Cons: • Income retains character in hands of US person (capital gains, dividends) • Requires maintenance of portfolio in CAD and USD • issue with US investments? Treaty? Code?
  18. 18. Miscellaneous legislative changes Codification of economic substance: IRC 7701(o) Substantial penalties for transactions lacking economic substance (20% - 40%) economic substance is a conjunctive test—that is, a transaction (or series of transactions) to which the economic substance doctrine applies is treated as having economic substance only if (1) it changes in a meaningful way (apart from any U.S. federal income tax effects) the taxpayer's economic position; and (2) the taxpayer has a substantial purpose (apart from U.S. federal income tax effects) for entering into the transaction
  19. 19. Miscellaneous Purpose of legislation: • sham transactions - sole purpose of obtaining tax benefits and the transaction is devoid of any reasonable opportunity for economic profit • sales leasebacks Result: potentially wide-ranging – could impact typical reorganization planning eg. Sale of US stocks to spouse
  20. 20. Miscellaneous Adequate Disclosure (Rev Proc 2010-15) a.k.a. why the cost of compliance just went up Applies to all tax filers and preparers Substantial understatement of tax: IRC 6662(1) Individuals: understatement exceeds greater of 10% or $5,000 Corporations: understatement exceeds lesser of 10% or (or if greater $10,000) $10M
  21. 21. Miscellaneous Inadequate disclosure includes: • Unclear descriptives • Compensation of officers (Sch E) • Repairs • Combining unlike items • Schedule A Itemized deduction details • Trade or business Consider Form 8275 or 8275-R disclosure?
  22. 22. Miscellaneous Restructuring at IRS • High net worth individuals (>$10M) now part of “corp” audit group Washington B&O tax • Sweeping changes to nexus rules – any activity directed at WA residents/businesses • If activity stopped “trailing nexus” for current + next year
  23. 23. Miscellaneous Canadian trust – vacation property US person or non-compliant snowbird meeting substantial presence who is grantor or beneficiary of trust occupies US ppty – fair market value of use of residence as distribution (taxable amt limited to net income but may have deemed rental income)
  24. 24. Canadian tax potpourri Foreign tax credit generators Proposed amendments: restrict entitlement to deductions & credits for foreign taxes in respect of foreign-source income Target: hybrid instrument structures Unintended result? – partnership structures Denial of % of FTCs if income under other country rules is less than Cdn equivalent
  25. 25. Canadian tax potpourri Taxable Canadian property Non-public company shares excluded unless anytime in last 60 months more than 50% of FMV (direct or indirect) combo of: 1) Real or immovable property 2) Resource 3) Timber 4) Options or interests in above Similar rules apply to NR corps, psp interests, mutual fund trusts Exchange taint under section 85 • Shares received by transferor deemed TCP for 60 months following transfer
  26. 26. Canadian tax potpourri Tax avoidance transactions: Following US and QC models? Meets two of three “hallmark” tests: 1. Promoter/tax advisor fees (a) attributable to benefit; (b) contingent on tax benefit; or (c) # of participants; 2. Promoter requires “confidential protection”; 3. Taxpayer receives “contractual protection”; Result: any tax benefit sought not available until reported and, if applicable, penalty for failure is paid.
  27. 27. Canadian tax potpourri Employee stock options: • Elimination of deferral for pubco stock options Result: better matching of Cdn & US tax consequences • Remittance obligations – amounts must be remitted for stock option benefit as if cash payment (with reduction for 50%) Applies: 2011 exercises Exemption: a) stock options granted prior to 2011; b) entered to prior to March 4, 2010; and c) restrictions on disposition.
  28. 28. Canadian tax potpourri TD Securities (USA) LLC v. Queen 2008- 2314(IT)G, April 8, 2010 Held: US LLC was resident entitled to treaty benefits under former convention Fact pattern: Two tier US C corporation blocker with LLC
  29. 29. Questions? Questions? Thanks for your time.

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