US Citizens in Canada

1. US Citizens in Canada April 2015 Presented by JPS Financial and Accounting Services

2. Agenda • Who should be aware of US tax compliance • Common scenarios & forms • Offshore Voluntary Disclosure Initiatives • US tax bits • FATCA (foreign account tax compliance act)

3. Canada / US comparison • Canada taxes people based on residency • US taxes people based on citizenship or residency • Treaty has rules designed to eliminate double taxation • In general an individual will pay taxes that equal the higher of the two countries • US will give you credit for taxes that you paid to Canada • Canada will give you credit for taxes paid to US • Unused Credit can be used 1 year back & forward 10 years • US offers “extensions” to file tax, Canada has no extensions

4. Who should file US tax return • US citizens • Resident aliens who lived or worked in US • Green card holders • Anyone who does business in the US • Anyone who has rental properties in the US

5. Common Scenarios & forms

6. Forms to file Form 1040 – US Individual Income Tax Return This is the US Individual Income Tax return comparable to the Canadian T1 • automatic 2 month extension if living outside US on April 15th therefore due date = June 15th • Extension available up to Oct 15th • Even if you have zero income, file to establish statue of limitations on return • Penalties • Late filing – 5% of tax due each month up to 25% of tax • 60 days or more late = lessor of a) $135 or b) tax due • Interest charged on unpaid tax from due date to date paid • Compare to Cdn T1 (Cdn tax return) due April 30 & no extensions

7. Forms to File 1040 ES – Estimated Tax Payments • If after all the tax calculations you are left with taxes due of $1000 or more you are expected to make estimated payments going forward. • Instalment dates: April 15th, June 15, Sept 15th, Jan 15th • Penalty may be applied if you don’t pay enough for the year or you underpay one or more of the instalment dates

8. Forms to file Form 2555 – Foreign Earned Income US allows a set amount of foreign earned income to be excluded from income tax • 2014 exclusion limit is $99,200 • Form 2555 is used to elect the use of an excluded amount • Earned income includes salary, wages, professional fees, home or car allowances paid to you • Foreign earned income does not include: pension or social security, dividends, capital gains, or alimony • Also used for the housing deduction and exclusion calculation • Due Date - submit this with your 1040 return

9. Forms to file Form 2555 – Foreign Earned Income To Qualify to use this form one of two tests must be met: • Bonafide residence (part II of form 2555) • Resident for one full tax year • Physical Presence (part III of form 2555) • Resident for 330 days within 12 month period

10. Forms to file Form 1116 – Foreign Tax Credit This form will calculate the foreign tax credit available for use against US taxes. • Taxes paid on excluded income are not included here • Each category of income and taxes paid on that income are reported separately • Catagories included are: • Passive – dividends, interest, rents, royalties, • General – wages, salary, business income • 901(j) income – from certain sanctioned countries (no credit for tax) • Income re-sourced by Treaty • Lump sum distributions from pension

11. Forms that are sometimes overlooked Some forms are commonly missed probably because they are informational and don’t calculate tax BUT they still need to be completed and filed. • FinCEN 114 FBAR Report of Foreign Bank Accounts (FBAR) • Form 8938 Statement of Specified Foreign Financial Assets • Form 5471 Information return of US persons with respect to certain foreign corporations • Form 8833 Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) • Form 3520 A & Form 3520 Foreign Trusts with US owner • Form 8891 U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans (IR-2014-97 this form to be eliminated) • Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

12. Forms to file FinCEN 114 FBAR Report of Foreign Bank and Financial Accounts (FBAR) This is an informational form listing out the details of all non-US financial accounts and their highest balances during the year Some accounts included are: • Bank accounts (incl GICs), brokerage, TFSA, RESP, RRSP, life insurance with cash value Complete form and file if: • Total value of non-US accounts equal or > $10K any time during the year

13. Forms to file FinCEN 114 FBAR Report of Foreign Bank and Financial Accounts (FBAR) • Due Date – to be received by June 30th • Online filing required using BSA (Bank Secrecy Act) e-filing system – paper forms rejected • Online help phone number – 1 866 346 9478 • This form is not sent to IRS • Penalties • Up to $10K per violation • Possibly nothing if a good reason is given • Wilfully not filing can be larger of a)$100K or b) 50% of balance at time of violation plus criminal penalties

14. Forms to file FinCEN 114 FBAR Report of Foreign Bank and Financial Accounts (FBAR) Information to have when filing FBARs • Bank name & address • Account # & whether it is jointly held or separate • Type of account – chq, brokerage, other (RRSP) • Highest balance in account during tax year (US $)

15. Forms to file Form 8938 Statement of Specified Foreign Financial Assets This is an informational form listing out the details of all non-US financial assets and their highest balances during the year • Form started in 2011 • Due Date : Form is due with tax return Who files: • US citizens, resident aliens of US & non resident who makes election to be treated as resident • Various reporting thresholds based on value of assets compared to filing status

16. Forms to file Form 8938 Statement of Specified Foreign Financial Assets Assets to be reported include: • All financial accounts FBAR items – (Part I & V) • All other assets, such as notes, bonds, trust interests, stock of foreign companies, partnership interests (Part II & VI) Assets not included are : • CPP & OAS • Direct interest in real estate

17. Forms to file Form 8938 Statement of Specified Foreign Financial Assets • no need to report assets already recorded on forms • 8621, 3520, 5471, or form 8865 • Fill out Part IV of form 8938 to indicate where the assets are recorded • Value assets at FMV using year end exchange rate • Financial management services has 1$ US = 1.158 Can as at Dec 31, 2014 • Anything with a negative value, report as zero • Compare to Cdn T1135 which is based on “cost” not FMV • Compare to Cdn T1135 which includes real property • Penalties • $10K + $10K for each month past 90 days after notification (to $50K max)

18. Forms to file Canadian version of US Form 8938 • Canada has its’ own similar form requesting information on foreign assets: Form T1135 – Foreign Income Verification Statement Fill out form if • you owned assets outside of Canada at any time during the year, that cost more than $100K (total of assets) Some assets included • Non-Cdn bank accounts, shares of corporations, mortgages, interest in trust or partnership, foreign rental property (check list on form for more) Some assets not included • IRAs, vacation property, property used to carry on active business (check list for more) • Due date – same as Canadian tax return • New for 2014 tax year – this form can be e-filed (versus mailing out paper) • Penalties - $25 per day (minimum $100 and maximum $2,500).

19. Forms to file Form 5471 Information return of US persons with respect to certain foreign corporations This is an informational form that will report the details of your ownership interests in foreign corporations (one form for each corp). Your ownership or amount of control will dictate the amount of information you need to provide. Who files: • US person or resident who owns or acquires 10% or more of foreign corporation (& US officers & directors of said corporation) • US person that has control of foreign corporation

20. Forms to file Form 5471 Information return of US persons with respect to certain foreign corporations • Self employed that are incorporated complete this form • Dormant corps still need to file • “Filed pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporation “ (type in top margin of first page) • Due Date - due with income tax return • Penalties • $10K + $10K for each month past 90 days after notification (to $50K max) • 10% (plus) reduction in foreign taxes used for foreign tax credits

21. Forms to file Form 3520 A & 3520 Foreign trusts annual return and transaction reporting • Form 3520 A is an informational annual return filed by the trust / trustee giving details (non US trust with US owner / beneficiary) • Form 3520 is used to report transactions that occurred in the trust during the year – filed by the individual • Form 3520 is also used to report receipt of foreign gifts: • Gifts or bequests valued at more than $100 K from a nonresident alien individual or foreign estate or • Gifts valued at more than $15,358 ( 2014) from foreign corporations or foreign partnerships

22. Forms to file Form 3520 A & 3520 Foreign trusts annual return and transaction reporting • TFSAs and RESPs are reported using these forms • Due Date • 3520 – same as income tax return but do not mail with your return. • 3520 A – 15th day of 3rd month after year end • Mailed to a separate address, do not attach to tax return • Penalties • Form 3520 – greater of $10K or b) 35% of gross distributions / contributions • Form 3520A – greater of a) $10K or b) 5% of gross value of assets owned by US person

23. Forms to file Form 8891 U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans • Discontinued for this coming year – still need the information • Used to report RRSPs and RRIFs – one form per plan • Line 6 is where you tick the box to defer income • If line 6 ticked, do only lines 1-8 • Keep records to support reported values • Canada gives deduction for contributions (and taxes later), US does not give deduction so that contribution is tax paid in US • Due date – attach and file with income tax return

24. Forms to file Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund • PFICs are defined by test • Non US corporation > 75% of income is passive or > 50% of assets are passive • This captures Canadian Mutual funds • One form per PFIC per year • Higher tax rates on included income amounts • Accuracy penalty is doubled when associated with understatement of PFIC tax

25. Newer Tax Net Investment Income Tax - as of Jan 2013 • 3.8% surtax on net investment income in excess of thresholds • eg. Single person threshold - $200,000 MAGI • Net Investment Income includes • mainly passive type income, interest, dividends, capital gains rental maybe, • some exceptions – excludable portion of primary residence gain, IRA distribution,

26. Forms to file Form 1040NR U.S. NonresidentAlien Income Tax Return Who would file: • Non US citizen, not resident in the States would file this return if they were engaged in a business or trade within the US • Canadians with rental property in the US • Form also completed to get refund of over withheld amounts on payments received. Due Date • If US wages received – April 15, • If no US wages received – June 15,

27. Streamlined Programfor those who haven’t been filing US returns This option is aimed directly at those that are outside of the US, haven’t been filing their US returns or FBARs and want to become compliant. New “Streamlined” option available as of Sept 1, 2012 & updated July 2014 • This option allows you to get caught up (in compliance) by filing • 3 years worth of tax returns • 6 years worth of FBARs • No penalties or other enforcement • Taxes and interest will apply • No protection from criminal prosecution

28. Streamlined Programfor those who haven’t been filing US returns New Streamlined Option To qualify: • have lived outside US for 330 days (in 1 or more of last 3 years) • Failure to file is due to non-willful conduct

29. Streamlined Program for those who haven’t been filing US returns New Streamlined Option • A SSN or ITIN is needed to use this option • Amended returns are accepted (different from past) • Once you submit under this new option, OVDP is no longer available

30. Streamlined Programfor those who haven’t been filing US returns New Streamlined Option Procedure to use this option • Submit last 3 years of returns including informational & type “Streamlined Foreign Offshore” in red on top of page 1 of each return • Pay all tax due and interest • Submit FBARs online and in print for last 6 years (not to FBAR address) • Submit a completed certification statement • Submission is paper filed

31. Offshore Voluntary Disclosure Program OVDP The whole point of the program is to get taxpayers that have undisclosed foreign accounts or entities back into compliance with the IRS and US law by reporting these accounts knowing ahead of time the penalties that will be imposed • Unlike prior programs there is no deadline for disclosure • 2012 program updated July 2014 • Submission requirements is far greater than streamline option • Penalty is 27 ½ % of highest balance of foreign entities / accounts or asset value during the disclosure period • All undisclosed accounts are added together & the highest balance found throughout the 8 year period will have penalty of 27 ½ % applied • This is in addition to tax, interest and accuracy penalties

32. US tax bits • Individual States are not party to the US/CAN tax treaty • IRS does not mail out Notice of Assessments or letters indicating return has been received or processed • Some scenarios require the US return be paper filed • Extensions are available for most returns (federal) • Depreciation on buildings is not the option it is in Canada • A quick word on gifting - $14,000 or less to any one person • Exceeding threshold is taxable and must be reported

33. FATCA Foreign Account Tax Compliance Act FATCA US law aimed at requiring Foreign Financial Institutions to provide to the US information on the financial institutions US account holders accounts • takes effect Jan 1, 2014 • Foreign Financial Institutions (FFI) are required to enter into agreements with the IRS to provide this information or face a 30% withholding tax on payments going out of the US to the institution • The FFI will need to get a waiver signed by the account holders • Form 8938 is part of FATCA – the part that the individual is most familiar as this is where foreign assets are to be reported

34. For those doing their own returns Some notable items • Taxpayers with AGI< $60K can e-file for free • Use IRS link to “freefile” • IRS site has free fillable forms available to everyone • Software is available to help you prepare & e-file • Make sure it accommodates a foreign address • If your living in Canada, Soc Security should be taxed in Canada – not the US and • 15% of SSN is not taxable at all

35. US Citizens in Canada Were Done!