CANADA/U.S. TAX PRE-IMMIGRATION PLANNING

Transcription

1 GRSH, LLLP Attorneys at Law & Solicitors U.S. England & Wales BVI Colombia Admitted to Practice in: Florida, U.S. England & Wales BVI (British Virgin Islands) Colombia, S.A. L.L.M. International & Financial Services

2 PART I CAN. U.S. INCOME TAX ISSUES 2

3 Conversion of 2528 to Can. ULC: Fiducie Famille Canadian Taxpayer 100% ord ACB/PUC $0 100% preferred shares ACB/PUC $x ULC Hybrid Quebec Holding Rollover 3

4 Resulting Structure: Taxpayer Fiducie Famille 100% preferred shares ACB/PUC $x 100% ord ACB/PUC $0 ULC Holdco Opco Real Estate Operating Business 4

5 U.S.- Canada Treaty Fifth Protocol: Anti-Art. IV, Par. 6,7(a)/(b) Planning/PUC Increase Technique U.S. CONSOLIDATED REPORTING US Holdco, or Ind. Usco S Blocker Deemed Dividend US Subco UNITED STATES/ CANADA ULC Interest 5

6 Slide 3 Notes: Canadian internal, estate freeze, rough equivalent to U.S. IRC 2701 partnership freeze (except Can. preferred use of corp. vehicle, as per Krauss v. The Queen); pre-2701 rules, U.S. preferred recapitalization was via corp. vehicles; Purpose of Can. estate freeze to avoid deemed capital gains tax at death, income-splitting (subject to Can. kiddie tax provisions); Canco rollover to ULC freeze, rough equivalent to U.S. IRC 368 (a)(i)(e), recapitalization (i.e., reshuffling of capital structure within the framework of an existing corporation ; see Southwest Consol. Corp. (S. Ct. 1942)), but subject to 306 stock restrictions ; no U.S. federal income tax impact while non-u.s. resident, but potential issues if non-qualified preferred stock (NQPS) used in rollover ; see also IRC 351(g) (planning available under plan of reorganization ); ITA ss. 85(1) and/or ss. 86 estate freeze by transfer to ULC Holdco; no U.S. or Can. income tax impact; ULC treated by default as DRE for U.S. federal income tax purposes under Regs (b), and specifically excluded as to NSULCs, under Treas. Reg (b)(8)(ii); Transactions with ULC non-event for U.S. tax purposes but targeted as hybrid (i.e., a corporation for Can. tax purposes), under Treaty Protocol Art. IV, Par. 7(b); but ULC should be owned by U.S. corp. directly; IRC 901(a), direct FTC available and no CFC status applicable; also Opco-Canco, IRC 902 deemed paid FTC available; Opco-Canco considered a CFC (i.e., if more than 10% of preferred shares are voting in the hands of Remi, as a U.S. taxpayer), but no Sub-Part F Income likely under active business or high-taxed exemptions. Slide 4 Notes: Common shares transferred to trustee of Family Trust who holds title on behalf of the children and beneficiaries; Trust is deemed to have disposed of its capital property for its fair market value every 21 years, causing any accrued capital gains to be realized, under s.s. 104(4) of the ITA; Transfer assets to the beneficiaries of Family Trust on a tax-deferred rollover basis prior to the expiration of the 21- year period; use of ULC as beneficiary might work (if allowed under X Family Trust; see Art. XIV, decantation to another trust allowed; not clear whether direct transfer to ULC allowed; consider transfer to another trust whose beneficiary would be a ULC); no U.S. tax impact as long as ULC FTE. 6

7 Slide 5 Notes: Accepted Workarounds : CRA Doc No R3 (Dec.15, 2009) et al/dividend Deemed Paid Under s. 84 Dividend Alternative: ULC wants to pay dividend to Usco but underart. IV: 7(b) of the U.S.-Canada Fifth Protocol would be subject to withholding tax at 25%; As an aiternative, ULC capitalizes its surplus to create paid-up capital ( PUCˮ), which triggers deemed dividend under Setion 84 Art. IV:7 (b) does not apply as no U.S. tax consequences on capitalization (regardless of whether ULC is FTE); Treaty applies to deemed dividend ; 5% WHT; ULC then returns PUC to Usco, tax-free; should also address back-to-back dividends issue; query whether ULC Holdco (not engaged directly in Canadian trade or business) makes a difference, given CRA published views? Interest: ULC paying interest to U.S. subsidiary of USco; eliminated in U.S. consolidated return; Art. IV: 7(b) N/A to interest - included in U.S. Subco income regardless of whether ULC is FTE. GAAR: N/A, but CRA reserves right to look at facts and circumstances. 7

8 PART II U.S./CANADIAN TRUST AND ESTATE ISSUES 8

9 Trust & Estate Planning Design: Taxpayer Fiducie Famille Canadian and U.S. Beneficiaries 100% preferred shares ACB/PUC $x 100% ord ACB/PUC $0 ULC Holdco Opco Real Estate Operating Business 9

10 Slide 9 Notes: U.S Beneficiaries Tax Issues U.S. Beneficiaries of Can. Family Trustx. Estate & Gift Taxes (IRC 2036 et seq., 2701) Trustee can Taxpayer control decision-making; thus, assets includible in gross estate for U.S. estate tax purposes; both Benef. and Trustee of Family Trust not advisable for U.S. estate tax purposes, as assets would be deemed owned via retained interest and taxed at his death under IRC 2036(a); FMV of frozen, preferred shares includible in gross estate of taxpayer for U.S. estate tax purposes; should review life insurance policy and consider ILIT; Estate freeze while Taxpayer a U.S. resident could trigger U.S. gift tax if frozen shares not qualified payment under IRC 2701(c)(3)(i.e., preferred, fixed, cumulative return). U.S. Income Taxation of Family Trust Family Trust a foreign non-grantor trust (FNGT) and complex trust under IRC 661, subject to throwback rules, defined below; also a conduit as in Canada, if current distributions; Distributions from FNGT of prior year accumulated income (includes capital gains) subject to accumulation distribution rules; taxed at ordinary income rates plus interest imposed to reflect deferral under U.S. throwback rules ; Canadian capital distributions can be accumulation distributions in U.S; Complex U.S reporting requirements with penalties for failure to comply Form 3520 and FNGT beneficiary statement from Trustee. Canadian Income Taxation ITA s. 107(5): no rollout of trust property to non-resident beneficiary; deemed disposition ; distribution to Canco (or ULC) or Canadian resident trust should avoid; distributions to X while Canadian nonresident subject to ITA Part XIII WHT (but Treaty benefits-eligible); Article XXII(2) addresses distributions of income to U.S. beneficiaries of Canadian trusts and estates; Section 212 withholding tax rate lowered from 25% to 15%; also TCP and s. 116 issues and Treaty relief; Family Trust typically not clear on to or for benefit of and corporate beneficiaries and trust beneficiaries language; consider impact of Garron case. 10