Presentation

Canada – U.S. Cross-Border Tax
Update

PREPARED AND PRESENTED BY:

Alpesh Joshi, CA, CPA (New Jersey)

7676 Woodbine Avenue, Markham, Ontario L3R 2N2 Tel (647) 977-2572 Fax (416) 628-2511
www.alpeshjoshi.ca www.ustaxsolutions.ca

Thinking About Tomorrow… Today

OVERVIEW
•What we do? Value Added Service of AJPCA
•Relevancy of Cross Border issues in Banking
Industry.
•Current U.S. and International Tax Issues.
•Business Development and Banking Service.
•Questions?


WHAT SERVICE WE PROVIDE…
We offer corporate tax services to businesses and individuals opening
cross-border branches, subsidiaries or filling tax returns for expat
employees. We also provide consultation services for companies who
are considering doing business in the U.S. or Canada. These Services
include:
 US- Cross Border Tax Compliance;

 Canadian Tax Compliance and Planning;

International Tax;

Transfer Pricing;

Consulting and Advisory Services.


Circular 230 Disclaimer

 Any U.S. tax advice contained herein was not intended or written to
be used, and cannot be used, for the purpose of avoiding penalties that
may be imposed under the Internal Revenue Code or applicable state
or local tax law provisions.

 These slides are for educational purposes only and are not intended,
and should not be relied upon, as accounting or tax advice.


WHY RELEVANT TO EVERYONE
Cross Border Concerns, no longer problem of the wealthy or the
multinational companies;

COMMON INDIVIDUAL ISSUES:
 The Purchase of U.S. property, for Rental or Recreational Use;

To be non-resident withholding taxes in U.S. source income or
gambling winnings;
To work in U.S. as an employee or contractor;

Snowbirds;

Dual residents and citizens.


WHY RELEVANT TO EVERYONE

Typical Canadian Corporation Cross Border Issues:
 To sell Products and Services into the U.S.;

 To have an U.S. branch or subsidiary office;

To own U.S. properties;

To hire U.S. contractors or employees.


TREATY PROTOCOL
(Guiding Document for Cross Border Taxation)

Canadian- based companies doing business directly in the U.S. must
pay U.S. taxes, based in the U.S. amount of income earned from their
U.S. business.

The Canada-U.S. Tax Treaty makes it possible for Canadian
companies doing business in the U.S. to prevent the double taxation
that might otherwise arise due to their U.S. tax exposure.

Some recent changes to the Tax Treaty, contained in a new 5 th
Protocol, will help Canadian companies conduct cross-border
business; others, however, have the potential to negatively impact this
business.


The potential impact of three of the Protocol
changes
1. “Permanent establishment” definition now includes
“providing services”

Whether a Canadian resident is liable to tax in the U.S. is no longer
limited to such criteria as having a “fixed place of business”, permanent
establishment in the U.S. now includes providing services in the U.S.

If anyone from a company travels into U.S. for an aggregate of 183
days or more, in any 12-month period, the company is liable to tax in
U.S.


changes
2. “Hybrid entities” may be subject to higher taxes

“Hybrids” are entities that are regarded one way by Canadian tax law
and another way by U. S. tax law.

The new Protocol, a hybrid entity utilized to make an investment in the
U.S. that might previously of lower Tax Treaty rates, may now be
subject to a 30 percent U.S. withholding tax rate.


changes
3. Eliminating withholding taxes on cross-border
interest payments

Under the new Protocol, withholding tax is generally being eliminated
for payments between non- related parties. Guarantee fees generally
will no longer be subject to withholding tax as well.

This new provisions should reduce borrowing costs and have a positive
impact on cross- border investment.

Also, cross-border businesses have more flexibility in choosing and
working with their bankers. * Important for Bankers


Individual Taxpayer Identification Number
(ITIN)
ITIN is a tax processing number issued by the Internal Revenue
Service. IRS issues ITINs to individuals who are required to have a
U.S. taxpayer identification number but who do not have, and are not
eligible to obtain a Social Security Number (SSN) from the Social
Security Administration (SSA).

ITINs are issued regardless of immigration status because both
resident and non-resident aliens may have a U.S. filing or reporting
requirement under the Internal Revenue Code.

AJPCA is a Certifying Acceptance Agent registered with the IRS to
process W-7 applications for getting an ITIN.

AJPCA also provides services to corporations including U.S. incorporation and obtaining
an Employer Identification Number (EIN) from IRS;


Questions to ask your clients:

Are you a US Citizen or resident that spends more then 183 days in the
US?

Do you own US property for recreation or business use?

Do you earn any income or incur any expenses against that investment
property.

Does your company sell products or services into the United States?

Do you plan to retire in the United States?


Foreign Bank and Financial Accounts Reporting
(FBAR)

 Would require taxpayers to file FBAR form with the taxpayer’s tax return,
accordingly turning the FBAR into tax return information and making it
easier for the IRS to enforce FBAR filing requirements.
 Penalty: Equal to the lesser of $10,000 per reportable transfer or 10% of
the cumulative amount or value of the unreported covered transfers.
 Double 20% accuracy- related penalty when an understatement arises
from a transaction involving a foreign account.
 The statute of limitations relating to information returns for six years.
 Information sharing that IRS has with the CRA and with Canadian Banks
have got many people nervous.
 There are Offshore Voluntary Disclosure Initiatives out in the
Market.
 AJPCA has been successful at reducing or removing these
penalties.


Revisions to Foreign Bank Account Report
(Form TDF90-22.1)
 Who must file:
U.S. persons with an interest in foreign bank account, brokerage account and
financial accounts (including mutual fund and RRSP) that have aggregate balance
value of these accounts exceeds $10,000 at any time during the calendar year.

 When to file:
File by June 30 for the prior calendar year.

 How it is file:
Information report;
Consolidation basis;
Not filed with a taxpayer’s income tax return, must file TDF90-22.1

 Penalty for not filing the form: $10,000 (could be higher), may result in
potentially civil penalties, criminal penalties or both.


United States Income And Sales Tax Issues
(NEXUS)
Nexus in general means a connection or contact, different from Permanent
Establishment.

The term nexus is used in tax law to describe a situation in which a
business has a "nexus" or presence in a state and is thus subject to
state income taxes and to sales taxes for activity within that state.
Nexus describes the amount and degree of business activity that must
be present before a state can tax an entity's income. If a taxpayer has
nexus in a particular state, the taxpayer must pay and collect/remit
taxes in that state. As Nexus is required for states to tax, it is often
referred to as “jurisdiction to tax”.

Nexus is determined differently for income taxes and for sales tax
purposes.


For Income Tax Purposes
In general, nexus is created for income tax purposes if an entity
derives income from sources within the state, owns or leases property
in the state, employs personnel in the state in activities that exceed
"mere solicitation," or has capital or property in the state.
For Sales Tax Purposes
Nexus is determined for sales tax purposes more loosely. Here are
some cases in which a business might have a sales tax nexus in a
state:

 If the business has a physical location in the state;
 If there are resident employees working in the state;
 If the business has property (including intangible property) in the state;
 If there are employees who regularly solicit business in the state.


NEXUS

Sales and Use tax is the most common US tax exposure for Canadian companies doing
business in the United States.

It is imposed by 45 states, 14,000 plus local jurisdictions.

Rules vary from state to state; but rates range from 4 % to 10 % plus

Generally applies to sales of tangible personal property to end used and may apply to
certain services.

Also applies to property brought into the state (Use tax), Use tax is the compliance of the
purchaser.

Non Compliance makes it your gross receipts tax.
The terms Virtual Nexus, Attribution Nexus and Economic Nexus have also begun to
develop;

These are grey areas and as mentioned above, and they vary from State to State:


U.S. Estate Taxes- Brief
U.S. estate tax applies to the fair market value of the world-wide
property of a U.S. citizen, a Green Card holder and an individual
resident in the U.S. at the time of their death. As well, U.S. estate tax
generally applies to property situated in the U.S. that is owned by
Nonresidents of the U.S. In calculating an individual’s taxable estate,
deductions for debts and certain expenses are permitted. However, for
Canadian residents, the permitted deductions are prorated based on
the value of their U.S. gross assets over their world-wide assets.


U.S. Estate Taxes- Brief
A Canadian who dies in 2008 owns a Florida condominium worth $600,000 U.S. and
non-U.S. situs assets worth $2.4 million U.S.
In this case, the net U.S. estate tax will be calculated as follows:

Estate Tax on $600,000 U.S.:
Tax on the first $500,000 U.S. $155,800
Tax on balance at 37% 37,000
192,800
Less:
Prorated unified credit
$600,000/$3,000,000 x $780,800 156,160
Net U.S. Estate Tax in 2008 $ 36,640

As you can see from this example, the Canada-U.S. tax treaty only provides partial relief
where the value of a Canadian’s U.S. property is low in relation to the total value of their
estate.


U.S. Vacation and Rental Homes
The decline in value of U.S. real estate and the relative strength of the
Canadian dollar compared to the U.S. dollar has recently increased the
amount of investment by Canadians in U.S. real estate.

Many techniques can be used to plan for potential purchase of property
and limit the potential U.S. estate tax liabilities:
 Being Non-resident alien in U.S.;
 Non-recourse Mortgage;
 Ownership Alternatives;
 Canadian Discretionary Trust.


Non-resident alien in U.S.
If a U.S. vacation property is held for personal use, a Canadian
resident
who is also a resident or citizen of the U.S. needs not be concerned
about U.S. income taxes or the need to file U.S. income tax return,
unless the property is sold during the lifetime.

If the US property is used to generate rental income, the person paying
the rent is obliged to withhold and remit 30% of the gross rent to the
Internal Revenue service on behalf of the nonresident alien.

The non-resident alien should provide a particular withholding waiver to
its tenant prior to collecting any rent so as to avoid the 30% withholding
above. W-8BEN, W-8ECI and other election with the tax return.


Non-recourse Mortgage
Non-recourse Mortgage is a financing instrument where the lender’s
security and collection rights are limited to the collateral posted by the
borrower, who is not personally liable for any debt in excess of the
value of collateral.
Non-recourse Mortgage are effective Estate Tax avoidance methods
because any outstanding balance of such a mortgage is deducted from
the fair market value of the US property for purposes of calculating the
Estate Tax liability thereon. As the fair market value of the U.S.
property serves as the base upon which Estate Tax and the available
Unified Credit are calculated, reducing the fair market value of the U.S.
property directly reduces a decedent's Estate Tax liability.
For Canadian tax purposes, interest is generally deductible if the
borrowed funds are used to generate income.


Ownership Alternatives
Corporation
In the past, many Canadians used a Canadian corporation (known as a
“single-purpose corporation”) to hold personal-use U.S. real estate to
avoid U.S. estate tax on the property. Shares of a Canadian company
are not U.S.-Situs property for U.S. estate tax purposes. As long as the
sole purpose of the corporation was to own the U.S. property and all
expenses related to the property were paid personally by the
shareholders, the Canada Revenue Agency (CRA) would not consider it

The shareholders to have received a taxable benefit for the personal
use of the property. However, using a corporation to hold the property
can increase the total tax on any capital gain realized on the disposition
of the property.

Note: Renting will disqualify the corporation.


Ownership Alternatives
Personal Ownership

Personal Ownership avoids the cost and inconvenience associated
with
introducing new entities and reporting for them.

Also, it avoids the relatively high U.S. corporate tax rates on income
and capital gains from U.S. property.


Canadian Discretionary Trust
A Canadian discretionary trust may be a useful way for a wealthy
individual or couple to mitigate their Estate Tax liability. Through the
trust, Estate Tax is deferred until the death of the beneficiaries of the
trust.

The trust uses the parent’s money to purchase the U.S. property. The
parents are generally excluded as beneficiaries of the trust; rather the
parents’ child or children are named. They must conduct themselves
around the trust.

It is generally desirable to avoid generating income and/or capital gains
in the trust because various U.S. and Canadian compliance
obligations,
as well as potential taxable benefits.


Snowbirds
A Canadian snowbird will be considered a resident alien if spent in
United States:
183 days or more in the current year;
between 31 and 182 days in the current year, he/she may meet the
substantial presence test, as well.

If a Canadian snowbird wants to be exempted from being considered a
non resident alien–there are two possible exemptions you can claim:

a) Exemption under the “Closer Connection Category” of the U.S.
Internal Revenue Code;
b) Exemption under the Canada-U.S. Tax Treaty.


Transfer pricing
Transfer prices are prices that companies charge for goods, services,
tangible and intangible assets they trade with subsidiaries and similar
controlled entities in foreign markets.

According to the tax law in Canada, United States, and other developed
countries, the proper transfer price is one which two parties dealing at
arm's length would agree to for a certain transaction.

The idea is to force the related companies to sell their goods, services,
tangible and intangible assets to one another at market prices for tax
purposes.

From a Banking perspective this can impact Financial Statements, Covenant
Requirements, have Tax Implications.


Regulation 105

It requires businesses to withhold 15 per cent of fees, commissions,
and any other amount paid to non-resident contractors for services
rendered in Canada.

The amount withheld is not a final tax, 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.

If the required amount is not withheld, the company must pay (on
behalf of the non-resident) the amount plus interest and applicable
penalties.


Thin Capitalization Rules
Under these rules, interest paid by Canadian corporation on loans
received from non-resident shareholders that own 25 per cent or more
of the shares of the corporation will not be deductible to the extent that
such loans exceed increasingly the equity of the corporation.

In order to be ensured the system remains effective in protecting
Canada’s tax base, the Panel recommended that the current thin
capitalization rules be retained, but that the maximum debt-to-equity
ratio be reduced from 2:1 to 1.5:1, and that scope of the thin
capitalization rules be extended to partnerships, trusts and Canadian
branches of non-resident corporation. For IRS there is no definite thin
capital limitation but 2:1 and 3:1 have been guidelines used in
past.


Benefits of Cross Border Taxation to Bankers

Being Aware of contemporary issues that concern your clients
 Making a statement that you are aware of Global needs of clients;
 It is important that Canadian companies take time to plan how to
enter the US and global markets, tax implications will impact there
bottom line.

Ensuring that client is compliant in all tax filings both personal and
corporation.
 Reduce exposure to unnecessary penalties, interest and tax costs
that would hurt working capital and covenants.


Benefits of Cross Border Taxation to Bankers

Ensure client has proper structure to reduce tax costs of international
business
 Tax can be a large expenditure, why would a company do
business planning on a pre-tax basis .

Understand cross bordering structuring when it comes to PPSA and
GSA, how to ensure your assets are protected.

Provide Cross Border Financing solution to meet client’s needs.

Provide Cross Border Banking solutions that meet client needs.


QUESTIONS?

Final Words

If any question or concern, contact:
ALPESH JOSHI, CA, CPA
ajoshi@alpeshjoshi.ca
905-477-5777 ext. 300

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