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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?
Thinking About Tomorrow… Today



              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.
Thinking About Tomorrow… Today


                     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.
Thinking About Tomorrow… Today


              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.
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              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.
Thinking About Tomorrow… Today


                       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.
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        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.
Thinking About Tomorrow… Today

        The potential impact of three of the Protocol
                         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.
Thinking About Tomorrow… Today

        The potential impact of three of the Protocol
                         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
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          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;
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   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?
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     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.
Thinking About Tomorrow… Today

        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.
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        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.
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                       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.
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                                             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:
Thinking About Tomorrow… Today


                      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.
Thinking About Tomorrow… Today


                           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.
Thinking About Tomorrow… Today


                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.
Thinking About Tomorrow… Today


                      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.
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                       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.
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                        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.
Thinking About Tomorrow… Today

                       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.
Thinking About Tomorrow… Today


                   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.
Thinking About Tomorrow… Today


                               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.
Thinking About Tomorrow… Today


                                   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.
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                             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.
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                        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.
Thinking About Tomorrow… Today



         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.
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         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.
Thinking About Tomorrow… Today




                       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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Presentation

  • 1. 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
  • 2. 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?
  • 3. Thinking About Tomorrow… Today 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.
  • 4. Thinking About Tomorrow… Today 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.
  • 5. Thinking About Tomorrow… Today 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.
  • 6. Thinking About Tomorrow… Today 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.
  • 7. Thinking About Tomorrow… Today 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.
  • 8. Thinking About Tomorrow… Today 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.
  • 9. Thinking About Tomorrow… Today The potential impact of three of the Protocol 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.
  • 10. Thinking About Tomorrow… Today The potential impact of three of the Protocol 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
  • 11. Thinking About Tomorrow… Today 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;
  • 12. Thinking About Tomorrow… Today 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?
  • 13. Thinking About Tomorrow… Today 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.
  • 14. Thinking About Tomorrow… Today 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.
  • 15. Thinking About Tomorrow… Today 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.
  • 16. Thinking About Tomorrow… Today 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.
  • 17. Thinking About Tomorrow… Today 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:
  • 18. Thinking About Tomorrow… Today 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.
  • 19. Thinking About Tomorrow… Today 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.
  • 20. Thinking About Tomorrow… Today 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.
  • 21. Thinking About Tomorrow… Today 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.
  • 22. Thinking About Tomorrow… Today 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.
  • 23. Thinking About Tomorrow… Today 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.
  • 24. Thinking About Tomorrow… Today 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.
  • 25. Thinking About Tomorrow… Today 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.
  • 26. Thinking About Tomorrow… Today 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.
  • 27. Thinking About Tomorrow… Today 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.
  • 28. Thinking About Tomorrow… Today 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.
  • 29. Thinking About Tomorrow… Today 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.
  • 30. Thinking About Tomorrow… Today 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.
  • 31. Thinking About Tomorrow… Today 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.
  • 32. Thinking About Tomorrow… Today QUESTIONS?
  • 33. Final Words If any question or concern, contact: ALPESH JOSHI, CA, CPA ajoshi@alpeshjoshi.ca 905-477-5777 ext. 300