Tax and Legal Issues for Canadian Snowbirds: What you need to know

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1 Tax and Legal Issues for Canadian Snowbirds: What you need to know Steven Sitcoff T: October, 2014

2 Disclaimer What follows is for general informational purposes only. It is not intended to be Canadian or US legal or tax advice nor a substitute for consulting a qualified attorney. 2

3 Topics (1) Surprise! You may be a US taxpayer (2) US Estate Taxes (3) Ownership of a US Vacation Home (4) Canadian Tax Issues (5) So, you re a US citizen, eh? (6) I m not an American, but my kids are (7) Not without my Medicare! 3

4 Surprise! You may be a US taxpayer 4

5 Basis for Taxation in Canada & US Differences: Canada: residency US: citizenship or substantial presence Consequences for both: taxation based on worldwide income 5

6 Tax Consequences of Being Considered a US Tax Resident 1. US tax applies based on your worldwide income notwithstanding that you are also subject to Canadian taxes US tax filings (tax returns, FBAR form, etc.) must be prepared and filed, subject to potential nonfiling penalties even for inadvertent failures 2. Potential application of US estate taxes 3. Potential Canadian tax issues 6

7 Uncle Sam is counting and so should you! Disconnect between immigration and tax laws Beginning June 30, 2014, border officials in Canada and the US began to share certain information on individuals crossing the border You can now access your file on US Customs Nonimmigrant Information System to view entry and exit days ( ) This information can be shared with tax, immigration and even provincial health-care insurance authorities Significant, potentially adverse consequences 7

8 Don t Overstay Your Welcome You are considered to be resident in the US for tax purposes based on either: (a) Spending 183 or more days in the calendar year, or (b) Meeting the substantial presence test Counting of days physically present in US Part-days in the US count as full days Day of arrival/departure count as full day each regardless of time of day Limited exceptions include days in transit via the US to another country and health-related delays 8

9 Substantial Presence Test Even if you did not spend more than 183 days in the US in the calendar year, you may still be considered a US resident if a two-part test applies: 1. Total number of days spent in US in the current calendar year is greater than 30, and 2. Total number of days under the following formula is at least 183: Number of days in US in current calendar year + 1/3 of days in prior calendar year + 1/6 of days in calendar year before that Effective 121 day annual threshold in calendar year for substantial presence test to apply 9

10 Substantial Presence Test (continued) Example: 2014 days (182) / days (130) / days (150) While no single year exceeds 182 days the total does, so you will be deemed to be a US resident based on the substantial presence test 10

11 How to Disclaim US Residency (1) If up to 182 days in calendar year: Claim Closer connection exception OR > No tax or reporting due (2) If 183+ days in calendar year: Claim exception under Canada-US Tax Treaty > No tax but filing requirements still apply 11

12 Closer Connection Exception What: if you meet the substantial presence test, you can avoid being considered a US resident by claiming that you have a closer connection with Canada The form lists several relevant factors in making this determination, including the location of your permanent home, family, personal belongings, where your driver s license was issued, and where you are registered to vote How: File Form 8840 with the IRS When: June 15 due date each year But: not available if You spend more than 182 days in US in the calendar year, You have, or have applied for, a Green Card, or Form not filed by due date 12

13 Tax Treaty Exception What: If the closer connection exception does not apply (i.e. because you have exceeded 182 day threshold in the calendar year), you will need to rely on the tie-breaker rules under the Canada-US Tax Treaty by demonstrating that your centre of vital interests remains in Canada How: File IRS Form 8833 and Form 1040NR tax return When: file by April 15 (or June 15 depending on circumstances) But: this exception is only relevant for purposes of determining taxable income in US, so US reporting requirements still apply, subject to significant penalties for failure to file 13

14 Summary: Counting of Days Days in the US Recommended Action in calendar year nothing to be done file Closer Connection form 183+ tie-breaker under Tax Treaty 14

15 US Estate Tax 15

16 The US, unlike Canada, levies an estate tax where you are either domiciled at death or have assets in the US What is the Estate Tax? Tax based on value of US assets held at death, including US real estate Death and Taxes Shares of US corporations, even where held with Canadian broker When does it apply? Your worldwide estate exceeds US$5.34 million (2014) Potential element of double tax if US estate tax applies at top rates Even if estate tax N/A, US filing requirements may still apply 16

17 US Estate Tax Amount of federal estate tax Graduated rates to maximum 40% on taxable assets with value exceeding US$1 million (2014) Basic exclusion Indexed amount: US$5.34 million for individual or US$10.68 million for joint estate of couple (2014) Expected to rise to US$5.43 million/us$10.86 million in 2015 Canadian will issues Exposure of surviving spouse that is US citizen to estate tax if left property by Canadian resident spouse US beneficiary with general power of appointment can be subject to estate tax on trust assets 17

18 US Estate Tax (continued) Example of federal estate tax Non-US citizen resident in Canada with global estate of US$10 million including US stocks of US$1.25 million Tax on first US$1,000,000 $345,800 Tax on excess at 40% 100,000 Subtotal 445,800 Less: prorated unified credit (260,225) Net US estate tax (subject to marital credit) 185,575 18

19 US Estate Tax: Planning Opportunities (1) Alternative structures to own US real estate (2) Hold US portfolio investments via Canadian corporation 19

20 Planning for US Portfolio Securities Transfer non-real estate US investments to Canadian holding corporation so no longer own US investments directly Canadian corporation not subject to US estate tax Transfer can be effected as tax-deferred rollover so as not to trigger immediate Canadian tax Canada-US Tax Treaty exempts capital gains of Canadian residents from US tax (except for real estate) 20

21 Ownership of a US Vacation Home 21

22 Alternatives for Ownership of US Vacation Home 1. Direct ownership Lowest tax rate on sale Potential estate tax exposure 2. Canadian corporation Higher tax on sale No estate tax exposure Potential shareholder benefit and other Canadian tax issues 3. Canadian trust 4. Hybrid structures Canadian partnership elected to treat as corporation (i.e. check the box ) Hybrid trust 22

23 Sale of Individually-Owned US Vacation Property Get a US Individual Tax Identification Number ( ITIN ) File Form W-7 with IRS or consular office US FIRPTA withholding obligations US tax filings due: forms 8288 and 1040NR Capital gains taxes US (federal and state) Canada (federal and provincial)

24 Canadian Tax Issues

25 Canadian Reporting of US Assets Canadian taxpayer: required to report tax on your worldwide income File CRA form T1135 to report foreign assets where aggregate cost exceeds $100,000 Applies in respect of foreign rental property, bank and investment accounts, and foreign securities (even if held in Canadian personal portfolio) Does not apply for personal-use property such as foreign vacation home Potentially severe penalties for non-compliance

26 Voluntary Disclosures in Canada Permit correction of incomplete or delinquent filings, unreported income, omissions, and payment of outstanding taxes, all without penalties Can be made to Federal and Quebec tax authorities where certain conditions met

27 So, you re a US citizen, eh?

28 So, you re a US citizen, eh? US citizens resident in Canada still subject to: US Tax reporting obligations on worldwide income irrespective of location of physical residence, subject to severe non-filing penalties FATCA US Gift tax Disconnect between US and Canadian tax laws Issues with Canadian entities such as certain corporations (including some professional corporations) and trusts

29 US Gift Tax Gift tax applies to US citizen (or to non-citizen domiciled in US) for any gift given during lifetime Top rate of 40%, gift tax return must be filed Annual exclusion: US$145,000 for gift to non- US citizen spouse or US$14,000 to anyone else Lifetime cumulative exemption for amounts in excess of annual exclusion: US$5.34 million (2014) 29

30 Voluntary Disclosures in US (1) OVDP: formal procedure (2) Streamlined program recent changes Pro: far more accessible than previously lower tax cost than OVDP US$1500 tax threshold no longer applies Con: Difficult for snowbird to qualify since must have been physically present outside US for at least 330 days for one out of last three taxation years no protection from criminal prosecution, no formal confirmation 30

31 Renouncing US Citizenship Individual must voluntarily and with intent decide to renounce citizenship Active steps must be taken 1. Provide proof of valid non-us passport 2. Complete form DS-4079 and book renunciation appointment with US embassy or consulate 3. Attend renunciation interview 4. File final US tax return 31

32 Renouncing US Citizenship (continued) Implications Pro: No continued tax reporting, limited scope of exposure to US gift & estate tax Con: Irrevocable, potential issues on re-entry to US Former citizen deemed to have renounced for tax avoidance purposes may be barred from entry State Department fee of US$2,350 Potential exit tax resulting in taxable gain Exemption for first US$680,000 of gain US recipient of any gift or bequest from this person may be subject to special tax on receipt 32

33 I m not an American, but my kids are 33

34 Your Kids Live in the US Canadian will/us executor Central management and control test determines whether estate is subject to tax in Canada or the US Also important that a majority of your executors (and replacement executors) not be resident elsewhere than in Canada e.g. if two executors, no more than one is resident outside Canada 34

35 Not without my Medicare! 35

36 Provincial Health Care Coverage Absence from the province beyond certain thresholds could risk loss of coverage Thresholds calculated on cumulative basis (not consecutive days) Counting of days at border crossings could make this especially important In most cases, if you are already keeping within the limits for days spent in the US for tax purposes you should be ok for health care coverage 36

37 Provincial health care Quebec: coverage (continued) Maximum 182 days absence per year (absences of 21 days or less do not count) Must notify Regie for absences of 183 days or more Other exceptions may apply Ontario: Eligibility based on Canadian citizenship or permanent residency days residency in Ontario in the year Maximum cumulative absence from Canada of 212 days in any rolling 12 month period (not simply calendar year) Other exceptions may apply if meet certain tests for specific number of consecutive years preceding absence Remember: for tax purposes generally need to be under 183 days 37

38 Thank You. 38

39 Questions? 39

40 Appendix: Closer Connection Form 40

41

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