Top Five U.S. Tax Issues for Canadian Residents

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1 Top Five U.S. Tax Issues for Canadian Residents John Hollinrake Walter Impert Dorsey & Whitney LLP, Seattle, WA Jerry Mahnger PricewaterhouseCoopers LLP Vancouver, BC Vancouver 2014 Agenda > Accidental Inversions > U.S. and Canadian Tax Traps involving LLCs > Notable FIRPTA Considerations > Cross-border U.S. Tax Reporting > U.S. Tax Residency for Individuals 2

2 Accidental Inversions John Hollinrake Dorsey & Whitney LLP Vancouver Inversion Rules: Inverted Company > Under Section 7874(a)(2)(B), a foreign corporation ( Canada Corp") is treated as a surrogate foreign corporation if: > Canada Corp completes after March 4, 2003, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation ( US Corp ), or substantially all the properties constituting a trade or business of a domestic partnership, > After the acquisition, at least 60% (by vote or value) of the equity interests in Canada Corp is held: > In the case of a corporation, by former owners of US Corp by reason of holding stock in US Corp (the "ownership fraction ), > In the case of a partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership, and > After the acquisition, the expanded affiliated group (the EAG ) that includes Canada Corp does not have substantial business activities in Canada

3 Inversion Consequences > 60% Inversion: If certain requirements are met, including an ownership fraction greater than 60%, the use of corporate attributes to offset inversion gain will be limited > 80% Inversion: Canada Corp will be treated as a US corporation if the ownership fraction is at least 80% 5 Substantial Business Activity Exception > 25% or more of the total number of EAG employees must be based in Canada > 25% or more of the total EAG payroll must be in Canada > 25% or more of the total value of EAG assets must be located in Canada > 25% or more of the total EAG income must be derived in Canada > Special anti-abuse rules 6

4 Shares Issued in Related Public Offerings and Private Placements are Disregarded > If related to the acquisition, Canadian acquiror shares issued for cash, cash equivalents, or marketable securities are disregarded > There is an exception which allows US target shareholders to receive less than 5% (by vote and value) of the Canadian acquiror > Intended to permit US target management to rollover some equity ownership 7 Expanded Affiliated Group Rules > Allows internal corporate restructuring 8

5 Accidental Inversions: Examples John Hollinrake Dorsey & Whitney LLP Vancouver 2014 Private Placements Existing US Co Shareholders 100% US Co Shares for 59% Can Co Shares 59% Can Co US Co New Investor 41% Cash for 41% Can Co Shares Basic Rule > Stock issued for non-qualified property, including cash, is disregarded Facts > Pursuant to a plan: > US Co Shareholders transfer 100% of their US Co Shares to newly formed Can Co in exchange for 59% Can Co Shares > New Investor receives 41% Can Co Shares in exchange for cash Result > Can Co Shares held by New Investor are disregarded in calculating the ownership fraction as shares were issued in exchange for non-qualified property > Existing US Co Shareholders treated as holding 100% of Can Co > 80% Inversion results in Can Co being treated as US Corp for US federal income tax purposes 10

6 Sale of Disregarded Canadian Subsidiary of US Partnership Basic Rule A B C > The direct or indirect acquisition of substantially all the properties constituting a trade or business of a domestic partnership constitutes an inversion USP Can ULC 100% Can Co Shares 100% Can ULC Shares Can Co Facts > USP, a US partnership, conducts a trade or business in Canada through its holdings in Can ULC, its wholly owned subsidiary that is disregarded for US tax purposes > USP exchanges 100% of its Can ULC Shares for 100% of Can Co Shares 11 Sale of Disregarded Foreign Subsidiary of US Partnership (continued) Result A B USP Can Co Can ULC C > A, B and C are each treated as holding his/her proportionate share of Can Co by reason of his/her holdings in USP > Inversion rules triggered: > Can Co has received a trade or business of USP > Can Co is treated as a domestic corporation 12

7 Subsequent Transfers of Foreign Stock 100 Can Co Shares US Co Shareholders US Co US Sub 100% US Sub Shares 100 Can Co Shares Can Co Basic Rule > In determining the ownership fraction, subsequent transfers are taken into account Facts > US Co owns all the stock of US Sub. The US Sub stock does not represent substantially all the property of US Co for section 7874 purposes > US Co transfers all the US Sub stock to a newly formed Can Co in exchange for 100 Can Co Shares. US Co distributes all the Can Co Shares to its shareholders 13 Subsequent Transfers of Foreign Stock (continued) US Co Existing US Co Shareholders Can Co US Sub Result > After the transactions, the shareholders of US Co and Can Co are not members of the USparented group. Accordingly, the ownership fraction is 100/100 > 80% Inversion results, and Can Co is treated as a US Corp for US federal income tax purposes 14

8 36-Month Look Back Rule for Distributions Basic Rules > Non-ordinary course distributions made by a US Corp (including a predecessor) during the 36-month period ending on the acquisition date will be treated as having a principal purpose of avoiding section 7874 and so will be disregarded > Non-ordinary course distributions mean the excess of all distributions made during a taxable year of 110% of the average of such distributions during the 36-month period immediately preceding the taxable year Month Look Back Rule for Distributions (continued) US Co Shareholders US Co 55x Can Co Shares 100% US Co stock Merger Can Co Shareholders Can Co US Merger Sub Facts > 110% of US Co s average annual distributions within the last 36 months is $1x. Two years ago, US Co declared and paid a special dividend worth $16x > US Co has a market cap of $55x and Can Co has a market cap of $45x > Prior to the acquisition, Can Co shareholders hold all 45x issued and outstanding Can Co Shares > Merger Sub merges into US Co. The US Co shareholders exchange their US Co stock for 55 shares of Can Sub stock making US Co a wholly owned subsidiary of Can Sub 16

9 36-Month Look Back Rule for Distributions (continued) US Co Shareholders 55% 45% Can Co US Co Can Co Shareholders Result > $15 of the $16x special dividend declared and paid by US Co two years before the acquisition is a non-ordinary course acquisition and is disregarded ($16x reduced by $1x) > As a result of disregarding the special dividend, US Co shareholders are treated as having received more than 60% of Can Co stock (70/115) and a 60% inversion is deemed to have occurred 17 Cash Box Inversions Basic Rule > If more than 50% of the gross value of all property of Can Co and its subsidiaries constitutes cash, cash equivalents, and marketable securities, a portion of the stock of Can Co will excluded from the ownership fraction computation 18

10 Cash Box Inversions (continued) ($150x) Marketable Securities Shareholder A (30 Can Co Shs.) Can Co Cash ($50x) 100% US Co Shares 70 Can Co Shares ($100x) Operating Assets US Co Shareholders US Co Facts > Shareholder A owns 30 shares of Can Co s only class of stock. Can Co acquires all stock of US Corp in exchange for 70 newly issued Can Co Shares. > After the acquisition, Can Co holds the US Co stock, $50x cash, marketable securities (gross value $150x), and operating assets (gross value $100x) 19 Cash Box Inversions (continued) Shareholder A (30 Can Co Shs.) ($150x) Marketable Securities Can Co Cash Former US Co Shareholders (70 Can Co Shs.) ($50x) ($100x) Operating Assets US Co Result > Can Co has foreign group property with a gross value of $300x, $200x of which is foreign group nonqualified property > 66.67% ($200x/$300x) of the gross value of all foreign group property constitutes foreign group nonqualified property > Because Can Co has one class of stock outstanding, the computation is 30 shares (100 less 70 held by reason of ), multiplied by the foreign group disqualified property fraction > Numerator of fraction is $200x > Denominator of fraction is $300x > Foreign Group disqualified property fraction is $200x/$300x, or 66.67% > 66.67% of 30 shares are excluded from the denominator of the ownership fraction, or 20 shares > Ownership fraction is thus 70 shares divided by 80 shares (100 less 20 excluded shares), or 87.5% 20

11 U.S. and Canadian Tax Traps involving LLCs John Hollinrake Dorsey & Whitney LLP & Jerry Mahnger PricewaterhouseCoopers LLP Vancouver 2014 US and Canada Treat LLCs Differently > In the US: > Single Owner LLCs: Treated as Disregarded > Multiple Owner LLCs: Treated as a Partnership > Assumes election not made to treat the LLC as a corporation > In Canada: > Treated as a company not eligible for treaty benefits 22

12 U.S. Tax Traps 23 Loan to US Operating Company through LLC > In the US: Can Co Contribution Distribution > LLC is disregarded > Interest is subject to full 30% withholding under Section 894(c) US Co Loan Interest LLC 24

13 Canadian Resident Invests in US LLC with US Operating Business > In the US: > LLC is treated as a Canadian Resident Individual LLC U.S. Individual partnership > Section 1446 withholding tax of 39% on income allocable to Canadian resident owner US Operating Business 25 US Resident Carries on Business in Canada through LLC > In the US: > LLC is disregarded U.S. Individual LLC > Foreign tax credit for Canadian taxes will be subject to limitations Canadian Operating Business 26

14 Canadian Corporation Operates US Business through LLC > In the US: > LLC is disregarded Can Co LLC US Operating Business > Can Co subject to US corporate tax (35%) and branch tax (30%) > Treaty branch rate reductions not available > Can Co must file US tax returns 27 Canadian Tax Traps 28

15 FAPI Earned by LLC Canada U.S. Canco LLC FAPI Facts: > Canco wholly-owns LLC > LLC is a disregarded entity for U.S. tax purposes and a corporation for Canadian tax purposes > LLC is a CFA of Canco > LLC earns FAPI and Canco is subject to U.S. corporate income tax in respect of the FAPI 29 FAPI Earned by LLC (cont d) Canada U.S. Canco LLC FAPI Canadian Tax Trap: > U.S. tax is paid on the income of the LLC by the owner of the LLC and not by the LLC itself > Tax must be paid by the particular affiliate to be FAT > Therefore, Canco has FAPI without a FAT deduction > Canco cannot claim a credit under 126(1) and no deduction under 20(12) since LLC is a foreign affiliate 30

16 FAPI Earned by LLC (cont d) Canada U.S. Canco LLC Potential Solution: > LLC can elect to be treated as a corporation for U.S. tax purposes > Canco can transfer its interest in LLC to a U.S. C-corp FAPI 31 Mind and Management of LLC A B 50% 50% Canco Canada 100% U.S. USco LLC 100% Facts: > A and B are Canadian resident individuals > LLC is a disregarded entity for U.S. tax purposes but a corporation for Canadian tax purposes > A and B are the only directors of Canco and USco > LLC is managed by a board of managers and A and B are the only managers of LLC 32

17 Mind and Management of LLC (cont d) A B 50% 50% Canco Canada 100% U.S. USco 100% Canadian Tax Trap: > LLC may be considered a Canadian resident corporation if central management and control is in Canada and LLC is not eligible for the treaty tie-breaker rule in Article IV(3) > USco should be eligible for treaty tie-breaker rule and deemed resident in the U.S. LLC 33 Mind and Management of LLC (cont d) A B 50% 50% Canco Canada 100% Potential Solution: > Carefully monitor central management and control of LLC > Majority of the board of managers of LLC should be U.S. resident individuals U.S. USco LLC 100% 34

18 LLC Owning a ULC U.S. Canada A LLC ULC 100% 100% Facts: > A is a U.S. citizen and resident > LLC is a disregarded entity for U.S. tax purposes but a corporation for Canadian tax purposes > ULC is a disregarded entity for U.S. tax purposes but a corporation for Canadian tax purposes > A desires flow-through treatment for U.S. tax purposes in respect of income earned by ULC 35 LLC Owning a ULC (cont d) U.S. Canada A LLC ULC 100% 100% Canadian Tax Trap: > CRA has stated that the two-step planning (i.e., PUC increase followed by a return of capital) on distributions from ULC is not available when LLC owns ULC > Dividends paid by ULC to LLC are not eligible for a reduced rate under the treaty 36

19 LLC Owning a ULC (cont d) A 100% Potential Solution: > Use an S-corp to own ULC shares, rather than an LLC U.S. Canada LLC ULC 100% 37 LLC Loan via Sister Company U.S. Canada USco LLC ULC 100% Loan 100% US Sub Loan Facts: > USco and US Sub are U.S. resident corporations and qualifying persons under the treaty > LLC and ULC are disregarded entities for U.S. tax purposes > To mitigate Article IV(7)(b) issues on a direct loan from LLC to ULC, LLC loans funds to US Sub and US Sub loans funds to ULC 38

20 LLC Loan via Sister Company (cont d) U.S. USco LLC 100% Loan US Sub Canadian Tax Trap: > Application of the proposed backto-back loan arrangement rules deems ULC to pay interest to LLC > Therefore, interest payments should be subject to withholding tax Canada 100% ULC Loan 39 LLC Loan via Sister Company (cont d) USco Potential Solution: > LLC distributes funds to USco which makes loan to US Sub U.S. Canada LLC ULC 100% Loan 100% US Sub Loan 40

21 LLC with Canadian Business U.S. Canada USco 50% LLC Canadian business 50% A Facts: > USco is a U.S. resident corporation and A is a U.S. citizen and resident > USco and A are members of LLC, which is a partnership for U.S. tax purposes and corporation for Canadian tax purposes > LLC carries on a business in Canada through a permanent establishment 41 LLC with Canadian Business (cont d) U.S. Canada USco 50% LLC Canadian business A 50% Canadian Tax Trap: > Since LLC is a corporation for Canadian tax purposes, LLC is viewed as the taxpayer and subject to Canadian income tax and branch tax. > CRA has stated that there is no provision in the treaty that is the equivalent of Article X(6) which would reduce the branch tax imposed on the portion of LLC s branch profits that are considered, by virtue of Article IV(6), to be derived by individual members. 42

22 LLC with Canadian Business (cont d) U.S. USco 50% LLC 50% A Potential Solution: > Use a limited partnership rather than an LLC > Consider having A hold its interest via an S-corp Canada Canadian business 43 Notable FIRPTA Considerations Jerry Mahnger PricewaterhouseCoopers LLP Vancouver 2014

23 Key Elements of FIRPTA > There are two key elements: 1. U.S. real property interest ( USRPI ); 2. Foreign person disposes of USRPI > FIRPTA applies to a disposition of USRPI and not income earned from USRPI. > Disposition can be taxable or tax deferred 45 Treatment of FIRPTA Disposition > FIRPTA treats a gain or loss of a foreign person from the disposition of USRPI as though: 1. the foreign person was engaged in a trade or business within the United States, and 2. the gain or loss was effectively connected with the conduct of that United States trade or business. > Differences between the charging provision (IRC 897) and the withholding provision (IRC 1445) Withholding may arise even if there is no taxation under IRC

24 USRPI 47 > USRPI includes an interest in the following: Real property located in the U.S. o Land, improvements on land, and buildings o Mines, crop, and timber o Personal property associated with use of real property o U.S. real property holding company ( USRPHC ) o Interest in a partnership that owns USRPI USRPHC o Any corporation if the FMV of its USRPIs equals or exceeds 50% of the FMV of (i) its USRPIs; (ii) its real property located outside the United States; and (iii) any other assets which are used or held for use in a trade or business o Presumption that any U.S. domestic corporation is a USRPHC Excludes interest solely as a creditor Participating Loan Canco Canada U.S. 48 Loan USco USRPI Facts: > Canco makes a $1 million loan to USco, secured by a mortgage on residential real property purchased with the loan proceeds. > Canco is entitled to receive fixed monthly payments from USco, constituting repayment of principal plus interest at a fixed rate. > In addition, Canco is entitled to receive a percentage of the appreciation value of the USRPI as of the time that the loan is retired. > The obligation in its entirety is considered debt for Federal income tax purposes.

25 49 Participating Loan (cont d) Canco Canada U.S. Loan USco USRPI FIRPTA Considerations: > Because of Canco s right to share in the appreciation in value of the USRPI, the debt obligation gives Canco an interest in the USRPI other than solely as a creditor > However, principal and interest payments do not constitute gain, and both the monthly and final payments received by Canco should consist solely of principal and interest for U.S. income tax purposes section 897(a) shall not apply to Canco s receipt of such payments. > However, Canco s sale of the debt obligation would give rise to gain that is subject to section 897(a). Foreign Corp as USRPHC Non-US real estate A USco 40% 60% Canco B Facts: > A and B are Canadian resident individuals and Canadian citizens. > A owns all of the stock of USco and USco owns 40% of the stock of Canco > B owns 60% of the stock of Canco > Canco s only asset is USRPI > The value of Canco stock owned by USco is $50 and the value of non-us real estate is $40 (USco does not own any other assets) USRPI 50

26 Foreign Corp as USRPHC (cont d) Non-US real estate A USco 40% 60% Canco B FIRPTA Considerations: > Section 897 treats the stock of Canco as a USRPHC to assess whether USco is a USRPHC > Since Canco stock is over half the value of USco s assets, USco is a USRPHC > Therefore, gain on disposition of USco stock by A should be subject to U.S. tax but gain on disposition of Canco stock by B should not be subject to U.S. tax USRPI 51 USRPI Presumption Canco Transferee Facts: > Canco is a Canadian resident corporation and is selling its shares of USco to Transferee > Canco has reviewed USco statements and is comfortable that it is not a USRPHC. USco 52

27 (2) 53 USRPI Presumption Canco USco (1) (3) (4) Transferee IRS FIRPTA Considerations: Interest in USco is presumed to be USRPI unless Canco follows procedures to establish it is not. 1) Request Letter Letter from Canco to USco requesting a non- USRPI statement 2) Non-USRPI Statement Statement from USco to Canco that USco is not a USRPHC 3) Notice to Transferee Letter from Canco to Transferee transmitting #2 from USco 4) Notice to IRS Letter to IRS transmitting Notice of Non- USRPI to IRS and copy of #2. Must be provided no later than 30 days after it is provided to the foreign interest holder. Distributions from USRPHC Canco USco Facts: > Canco is a Canadian resident corporation and wholly-owns Usco > USco is a USRPHC > Canco s tax basis in respect of its USco shares is $100 and USco has no current or accumulated E&P > USco will make a $40 distribution to Canco 54

28 55 Distributions from USRPHC Canco USco FIRPTA Considerations: > Since USco does not have current or accumulated E&P, the distribution to Canco should be a return of tax basis and not a dividend for U.S. tax purposes > Although Canco should not realize a gain on the distribution since it has sufficient tax basis, USco is required to withhold and remit 10% of the distribution under section 1445 withholding is based on the FMV of the distribution without regard to whether there is gain on the transaction > Canco can apply for a withholding certificate from the IRS to eliminate the FIRPTA withholding Transfer of URSPI to Canco Canada A 100% Canco Facts: > A is a Canadian citizen and resident > A directly owns U.S. real estate and for estate tax planning purposes, A would like to transfer its USRPI to Canco in exchange for Canco shares U.S. USRPI 56

29 Transfer of URSPI to Canco U.S. Canada A USRPI 100% Canco FIRPTA Considerations: > General rule is that a foreign transferor must receive a USRPI in exchange for the transferred USRPI in order to effect a tax deferred transfer > Transfers by foreign persons of a USRPI in exchange for stock of a foreign corporation may be eligible for nonrecognition even though the USRPI for USRPI requirement is not met. > However, deferral is only available to a transferor that is a foreign corporation and not a foreign individual in this case 57 Cross-border U.S. Tax Reporting Walter Impert Dorsey & Whitney LLP Vancouver 2014

30 Background > U.S. citizens, resident aliens and certain non-resident aliens are required to report: > Worldwide income > Statement of Specified Foreign Financial Assets (Form 8938) > Report of Foreign Bank and Financial Accounts (FinCen Report 114) 59 Foreign Bank and Financial Accounts (FBAR) > Who must report? > U.S. persons holding any financial interest in a bank, securities, or other financial account in a foreign country > U.S. persons with signatory authority over a bank, securities, or other financial account in a foreign country > Value Thresholds > Aggregate value of foreign accounts must exceed $10,000 at any time during the tax year before reporting obligation is triggered 60

31 Foreign Bank and Financial Accounts (FBAR) > What must be filed? > Financial Crimes Enforcement Network (FinCEN) Form 114 > When must the filing occur? > By June 30 of the following year > Where must the filing occur? > FinCEN s e-filing system 61 Foreign Bank and Financial Accounts (FBAR) > What are the covered Foreign Financial Accounts? > Deposit and custodial accounts at foreign institutions > Accounts held at a foreign branch of a U.S. financial institution > Foreign stock or securities held in a foreign account > Indirect interests in foreign financial assets through an entity if the person has sufficient ownership (greater than 50%) > Foreign mutual funds > Foreign-issued life insurance or annuity 62

32 Foreign Bank and Financial Accounts (FBAR) > Failure to File > If a taxpayer > Does not need the Offshore Voluntary Disclosure Procedures or the Streamline Filing Compliance Procedures; and > Has not filed a required FBAR; and > Is not under civil audit or criminal investigation by the IRS; and > Has not already been contacted by the IRS concerning delinquent FBARs > Then the taxpayer should simply file their delinquent FBARs along with a statement of why the FBARs are filed late > No penalty will be imposed so long as certain criteria are met 63 Foreign Account Tax Compliance Act (FATCA) > Who must report? > U.S. persons, even those who live outside the U.S., who own specified foreign financial assets > Foreign financial institutions must report to the IRS information related to the ownership by U.S. persons of assets held overseas > Value Thresholds > Depends on whether the individual lives within or without the U.S. > Thresholds vary, but generally begin with foreign assets that exceed $50,000 on the last day of the tax year or $75,000 at any time during the tax year 64

33 Foreign Account Tax Compliance Act (FATCA) > Value Thresholds > Residing Inside U.S. > Unmarried or Married Filing Separately: $50,000 or more on last day of the tax year; or $75,000 or more at any time during the tax year > Married Filings Jointly: $100,000 or more on last day of the tax year; or $150,000 or more at any time during the tax year > Residing Outside U.S. > Unmarried or Married Filings Separately: $200,000 or more on last day of the tax year; or $300,000 or more at any time during the tax year > Married Filing Jointly: $400,000 or more on last day of the tax year; or $600,000 or more at any time during the tax year 65 Foreign Account Tax Compliance Act (FATCA) > What must be filed? > Statement of Specified Foreign Financial Assets, Form 8938 > When must the filing occur? > By April 15 th the following year > Where must the filing occur? > Along with an individual s U.S. federal income tax return 66

34 67 Foreign Account Tax Compliance Act (FATCA) > What are the covered Foreign Financial Accounts? > Deposit and brokerage accounts maintained by a foreign financial institution > Foreign pension plans > Foreign stock held for investment > Interests in a foreign entity, such as a foreign corporation, partnership, trust, or estate > What are not covered Foreign Financial Accounts? > Direct ownership of real estate > Artwork > Cars > Collectibles Foreign Account Tax Compliance Act (FATCA) > Failure to file > Initial penalty as high as $10,000 with maximum additional penalty of $50,000 > Loss of the 3 year statute of limitations 68

35 Foreign Account Tax Compliance Act (FATCA) > Reporting Requirements for Foreign Financial Institutions > Designed to help identify U.S. citizens and residents who may not be complying > Those individuals who fail to report deemed recalcitrant U.S. account holders and will be subject to withholding by the foreign institution of 30% of any income earned by the foreign account > U.S. and several countries entered into information reporting agreements > Increased global transparency 69 Compliance Procedures > Streamlined Filing Compliance Procedures > Streamlined Domestic Offshore Procedures > Streamlined Foreign Offshore Procedures > Delinquent FBAR Submission Procedures > Offshore Voluntary Disclosure Program (OVDP) 70

36 Streamline Filing Compliance Procedures > New IRS Approach > Announced June 18, 2014 > The 2012 Streamline Filing Compliance Procedures expanded and modified to accommodate a broader group of U.S. taxpayers > Major changes to the 2012 Streamline Filing Compliance Procedures include: > Extension of eligibility to U.S. taxpayers residing in the U.S., effectively creating two programs: Domestic and Foreign Compliance Procedures > Elimination of the risk assessment process > Elimination of the $1,500 tax ceiling 71 Streamlined Domestic Offshore Procedures > Requirements to Qualify > Fail to meet applicable non-residency requirements; > Have previously filed a U.S. tax return for each of the most recent three years for which the U.S. tax return due date has passed; > Have failed to report gross income from a foreign financial asset and pay tax as required by U.S. law (and may have failed to file an FBAR or other international information returns); and > Such failures resulted from non-willful conduct. 72

37 Streamlined Domestic Offshore Procedures > Non-Willful Conduct > Conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law 73 Streamlined Domestic Offshore Procedures > If a taxpayer meets the requirements, then: > Amend prior 3 years of tax returns > File prior 6 years of FBARs > Pay the full amount of tax and interest due in connection with the filings > Pay 5% of miscellaneous offshore penalty (asset based) > No IRS closing letter. Return is subject to audit like any other return 74

38 Streamlined Foreign Offshore Procedures > Requirements to Qualify > Meet the applicable non-residency requirement; > Have failed to report the income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR; and > Such failures resulted from non-willful conduct (as defined previously) 75 Streamlined Foreign Offshore Procedures > Non-Residency Requirements > U.S. Citizens or Permanent Residents > If, in any one or more of the most recent three years for which the U.S. tax return due date has passed, the individual did not have a U.S. abode and physically outside the U.S. for at least 330 full days > Non-U.S. Citizens or Non-Permanent Residents > If, in any one or more of the last three years for which the U.S. tax return due date has passed, the individual did not meet the substantial presence test of IRC 7701(b)(3) 76

39 Streamlined Foreign Offshore Procedures > If a taxpayer meets the requirements, then: > Amend or file prior 3 years of tax returns > File prior 6 years of FBARs > Pay the full amount of tax and interest due in connection with the filings. > No penalties unless the non-compliance determined to be fraudulent or willful > No IRS closing letter. Return is subject to audit like any other return 77 Streamlined Foreign Offshore Procedures > Penalty Avoidance > Eligible taxpayers who comply will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties > If returns are subsequently selected for audit, taxpayer will not be subject to the above mentioned penalties, unless the examination results in a determination that the original tax noncompliance was fraudulent and/or willful 78

40 Delinquent FBAR Submission Procedures > Who is eligible: > Has not yet filed FBAR > Not under civil audit or criminal investigation > Has not been contacted by the IRS regarding delinquent FBARs > Properly reported income on U.S. tax returns > Penalties > None 79 Offshore Voluntary Disclosure Program > Purpose > For taxpayers with potential criminal liability and/or substantial civil penalties: > Protection from criminal liability; and > Terms for resolving their civil tax and penalty obligations > Procedure > Must file 8 years of income tax returns (or amended returns) > Must file 8 years of FBARs 80

41 Offshore Voluntary Disclosure Program > 2014 Changes to OVDP > 50% offshore penalty applies (rather than the 27.5% offshore penalty): > If either (1) a foreign financial institution at which the taxpayer has or had an account or (2) a facilitator who helped the taxpayer establish or maintain an offshore account has been publicly identified as being under investigation. > Requires additional information for pre-clearance by Criminal Investigation > Offshore penalty has to be paid at the time of OVDP submission > Upon acceptance, all account statements for all foreign financial accounts have to be overturned, regardless of balance 81 U.S. Tax Residency for Individuals Walter Impert Dorsey & Whitney LLP Vancouver 2014

42 U.S. Income Tax Residency > Green Card Test > Substantial Presence Test > Closer Connection Exception 83 Green Card Test > U.S. resident for income tax purposes if: > Lawful permanent resident (i.e. green card holder) of the U.S. at any time during the calendar year; and > Status as lawful permanent resident has not been rescinded or administratively or judicially determined to have been abandoned 84

43 Substantial Presence Test > U.S. resident for income tax purposes if: > Physically present in the U.S. on at least: > 31 days during the current year; and > 183 days during the 3 year period (current year plus two years immediately preceding) 85 Substantial Presence Test > To compute the number of days present, count: > All the days present in the U.S. the current year; > One-third of the days present in the U.S. the first preceding year; and > One-sixth of the days present in the U.S. the second preceding year. 86 > The following days should not be counted: > Days you commute to work in the U.S. from a residence in Canada if you commute from Canada regularly (75% of your workdays); > Days present in the U.S. less than 24 hours when in transit between two places outside the U.S.; > Days you intended to leave, but could not for medical reasons; or > Days you are an exempt individual

44 Substantial Presence Test > For purposes of this test, the term United States includes: > All 50 states and the District of Columbia; > The territorial waters of the United States; > The seabed and subsoil of those submarine areas that are adjacent to the U.S. > The term United States does not include: > U.S. possessions and territories > U.S. airspace 87 Closer Connection Exception > Exception to the Substantial Presence Test > This exception does not apply if the individual is a lawful permanent resident of the U.S. > May be treated as a non-resident alien if: > Present in the U.S. for fewer than 183 days during the current year; > Maintains a tax home in a foreign country during that year; and > Has a closer connection to that country than to the U.S. 88

45 U.S. Canada Tax Treaty > Resident means any person under the laws of either the U.S. or Canada who is liable for tax because of domicile or residence > If a resident of both, treaty provides tie-breaker rules 89 U.S. Gift and Estate Tax Residency > Domicile Test > Expatriation to Avoid Tax: 877A 90

46 Domicile Test > A person is domiciled in the U.S. for estate and gift tax purposes if: > Live in the United States (even for a brief period) > With no definite, present intention of moving > Intent to remain based on facts-and-circumstances > Factors Include: > Statements of intent > Location of family and close friends > Length of U.S. residence > Possession of green card > Ties to former country 91 U.S. Canada Tax Treaty > Absent the treaty, non-resident aliens have a $60,000 estate tax exemption for U.S. situs assets > The maximum U.S. federal estate tax rate is 40% of the value of U.S. situs assets above the exemption > Canadian citizens are provided some relief from U.S. estate tax > Provides at least a portion of the exemption that is available to U.S. citizens and residents > Exemption is prorated based on the ratio of the value of U.S. situs assets compared to value of the estate as a whole > A second spousal exemption is available in some cases 92

47 Expatriation to Avoid Tax: 877A > Enacted in 2008 to prevent U.S. citizens and long-term residents from relinquishing U.S. citizenship or ceasing to be lawful permanent residents to avoid tax > Individuals who expatriate after June 17, 2008 and who meet specific average tax or net worth thresholds are covered expatriates 93 Expatriation to Avoid Tax: 877A > Covered Expatriates > Average annual net income for five years ending before the date of expatriation or termination of residency is more than a specified amount adjusted for inflation ($157,000 for 2014); > Taxpayer s net worth is $2 million or more on the date of expatriation or termination of residency; or > Taxpayer fails to certify on Form 8854 that he or she has complied with all U.S. federal tax obligations for the 5 years preceding the date of expatriation or termination of residency 94

48 Expatriation to Avoid Tax: 877A > Mark-to-Market Tax Regime > All property of covered expatriate deemed sold for its fair market value the day before the expatriation date > Any gain arising from deemed sale taken into account for the tax year of the deemed sale > Amount included in gross income due to deemed sale reduced (but not below zero) by exclusion amount adjusted for inflation ($680,000 in 2014) > U.S. citizens and residents receiving gifts or bequests from covered expatriates may be subject to a transfer or inheritance tax under IRC This document is not written tax advice directed at the particular facts and circumstances of any person. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. 96