Tax Implications for US Citizens/Residents Moving to & Living in Canada

Transcription

1 Tax Implications for US Citizens/Residents Moving to & Living in Canada TAX Julia Klann & Domeny Wu March 20, 2014

2 Topics to Discuss Moving to Canada & Overview of Canadian & US Tax Systems US Filing Requirements for US Citizens Additional Reporting Requirements Other Issues Facing US Citizens in Canada

3 Moving to Canada: Overview of the US Tax System The United States taxes the following individuals on their worldwide income: US Citizens US Permanent Residents (Greencard holders) US Residents Citizens are taxed on their worldwide income even if not physically present or resident in the US Entitled to foreign tax credits for non-us source income File a 1040 Tax Return Non-citizens who change residency during the year must file part year returns in both jurisdictions

4 Moving to Canada: Overview of the Canadian Tax System Canada s tax system is based on residency alone Resident of Canada Taxed on worldwide income from all sources Entitled to foreign tax credits for non-canadian source income Files a T1 Individual Tax Return Non-Resident of Canada Taxed on Canadian source income Entitled to utilize provisions of Canada United States Income Tax Convention (1980) to determine Canadian income tax liability Files a T1 NR Individual Tax Return

5 Moving to Canada: Residency 1. Deemed full-time residency sojourned in Canada for 183 or more days 2. Full-time residency continuing relationship with Canada based on facts 3. Part-time residency severing or creating ties to Canada in departure or arrival 4. Non-resident Not resident under 1 3 above 5

6 Moving to Canada: Overview of Income Types Employment income Taxed upon receipt, therefore potential timing issues could arise If an individual earns employment income outside of Canada while a nonresident, but the income is not paid until the individual becomes a Canadian resident, then that income will be taxable in Canada Dividend Income Two types of dividend income: eligible and ineligible Eligible dividends are only from Canadian corporations and taxed at preferential rates (29.5% vs. 32.6% on non-eligible dividends) Interest Income & Foreign Investment Income Taxed at regular rates Capital Gains 50% inclusion rate 6

7 Moving to Canada: Other Considerations Moving expenses Moving expenses are not deductible for moves between Canada and the US (or another country) Deemed acquisition rules Canada only taxes a resident on appreciation/depreciation on property held during the period of residency All immigrants are deemed to dispose property and reacquire it at fair market value immediately before arrival

8 Americans in Canada: General Filing Requirements All US citizens/greencard holders are required to file Form 1040 annually Form 1040 is due on April 15 th but an automatic extension is granted to June 15 th for Americans who live abroad Extension does not extend the time to pay but late payment penalties are not imposed until after June 15 th US citizens/greencard holders are taxed on worldwide income, regardless of their country of residence Therefore US citizens living in Canada must file a Canadian return reporting their worldwide income and a US return reporting their worldwide income Potential for double tax exists, but several provisions of the Act/Code/Treaty help mitigate this exposure

9 Relief from Double Taxation: Foreign Earned Income Exclusion Qualified individuals may elect to exclude up to $97,600 US of foreign earned income from taxable income Reported on Form 2555 Income is reported on the return and then the exclusion is reported as a subtraction from gross income Business income can also qualify for the foreign earned income exclusion Foreign taxes paid on excluded income do not qualify for the foreign tax credit Therefore proration of taxes required 9

10 Relief from Double Taxation: Foreign Earned Income Exclusion An individual generally qualifies for the exclusion if his tax home is in a foreign country and one of the following tests are met: Bona Fide Residence Test must be a resident of the foreign country for an uninterrupted period that includes an entire tax year Physical Presence Test must be physically present in a foreign country for 330 full days during a period of 12 consecutive months If an individual qualifies under either test for only part of the year, exclusion is reduced on a daily basis 10

11 Relief from Double Taxation: Foreign Tax Credit Foreign tax credit may be claimed for foreign taxes paid on foreign source income Separate baskets for sources of income Passive Basket: generally includes interest, dividends, rents, royalties and capital gains General Limitation Basket: all other types of income Foreign taxes eligible for credit include Canadian income taxes, EI premiums and Canadian/other foreign withholding taxes paid Note that the top Canadian tax rate is 49.53% vs. top US federal rate of 39.6% therefore the FTC usually eliminates all US tax on Canadian source income Note that Canada also allows a FTC for US taxes paid on US source income taxable in Canada 11

12 Americans in Canada: Other Filing Requirements Registered Retirement Savings Plans (RRSP) IRS treats RRSPs the same as regular investment accounts therefore there is no deferral of income tax Income earned in RRSPs is not taxed in Canada until withdrawn from plan Canada-US Tax Treaty allows for a resident of the US to defer inclusion of income currently earned in an RRSP until such time that the income is taxed in Canada Must disclose Treaty election on Form 8891 Separate Form 8891 required for each RRSP This election cannot be made on a late filed return Must also disclose RRSP account on Form FinCEN 114 (FBAR) and Form 8938

13 Americans in Canada: Other Filing Requirements Registered Education Savings Plans (RESP) Plan allows for individuals to make contributions for the future post-secondary education of beneficiaries Contributions cannot exceed $50,000 per beneficiary Earnings are not taxable in Canada until received by the beneficiaries US treats RESP account as a grantor trust Income in the account must be included on the taxpayer s US return annually Must be reported to the US on Form 3520/3520A

14 Americans in Canada: Other Filing Requirements Tax Free Savings Account (TFSA) Plan allows for individuals to earn investment income in Canada tax-free Contributions cannot exceed $5,500 per year US treats TFSA account as a grantor trust Income in the account must be included on the taxpayer s US return annually Must be reported to the US on Form 3520/3520A 14

15 Americans in Canada: Other Filing Requirements Reporting may be required for investments in non-us entities: 5471 Information Return of US Persons with Respect to Certain Foreign Corporation Disclosure form for all US persons who have investments in certain foreign corporations (includes investments in Canadian corporations) Special reporting rules when foreign corporation is a considered a controlled foreign corporation (CFC) Potential for deemed income inclusions in the US which could result in a timing difference in income/taxes between Canada and the US Most common deemed income inclusions are for passive income and shareholder loans, as well as personal services income Form 8865 Required to report investments in certain foreign partnerships Form 8858 Required to report investments in foreign disregarded entities

16 Americans in Canada: Other Filing Requirements Form FinCEN 114, Report of Foreign Bank and Financial Accounts (FBAR) Separate filing from the tax return US persons who have a financial interest in or signature authority over foreign bank, securities, or other financial accounts, both business and personal, whose total value exceeds $10,000 are required to file annually Must disclose details of each account held, including the highest monthly balance of the account in the year Due date is June 30 th of each year Significant penalties for failure to file can be imposed Now must be electronically filed

17 Form 8938: Statement of Foreign Financial Assets Any individual that holds in aggregate more than $400K (MFJ residents of Canada) in reportable financial assets must report information about these interests on their return Does not replace FBAR requirement Specified foreign assets that must be disclosed on the return include: Foreign financial accounts Foreign brokerage accounts Interests in foreign entities Foreign pensions, retirement plans, etc 17

18 New for 2013: Net Investment Income Tax (NIIT) NIIT applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts Applicable to taxpayers who exceed certain modified adjusted gross income threshold $250,000 for MFJ, $200,000 for single NIIT is 3.8% times the lesser of Net investment income; or Modified adjusted gross income less threshold NIIT paid on the US return is not eligible for FTC on the Canadian return 18

19 Americans Should Avoid Canadian Mutual Funds US considers foreign mutual fund to be a passive foreign investment company ( PFIC ) Highest tax rate on excess distribution and gains Interest charged on deemed deferred tax amount No problem if held by RRSP if election made Also be cautious if investing in Canadian Income Funds Distributions may not qualify for reduced US tax rate on dividends Return of capital for US purposes is likely different from Canadian return of capital 19

20 New for 2013: PFIC Reporting Rules New stringent reporting requirements for Americans who hold PFICs on Form 8621 A U.S. person that is a direct or indirect shareholder of a PFIC or qualified electing fund (QEF) files this form: When they receive certain direct or indirect distributions from a PFIC, Recognize a gain on a direct or indirect disposition of PFIC stock, or Are making an election (mark to market, QEF election) 20

21 Consulting/Business Income Tax treatment the same if treated as business income earned personally Taxable on both the Canadian and US return Eligible for FTC Corporations Can be a CFC if a Canadian corporation or a controlled foreign affiliate if a US corporation Therefore additional filing requirements exist LLC or S-Corps are not recommended since the tax treatment differs in Canada and the US Canada does not provide for the flow through of income to the shareholder Results in mismatch of income inclusion/foreign tax credits

22 Expatriation Provisions Imposed on certain individuals who renounce US citizenship or relinquish a greencard New rules involve a deemed disposition of all property held by the taxpayer at expatriation The covered expatriate is deemed to have sold nearly all his worldwide assets at FMV on the day before the expatriation and is taxed on the accrued gains above the threshold amount ($663,000 for 2013). The exclusion amount must be allocated pro-rata to each gain asset Gain is taxed as ordinary income Covered Expatriates are those taxpayers who meet any one of the following: Average net income tax for the previous 5 years exceeds $155,000 Net worth exceeds $2M at the time of expatriation Fails to certify under penalty of perjury that he/she has met the requirements of the US tax code for the 5 preceding tax years 22

23 Canadian Tax Treatment of US Pension Plans ITA 56(1)(a)(i) requires a taxpayer to include in income amounts received from a foreign retirement arrangement (FRA) Payments out of a FRA are not taxable in Canada to the extent that they would not be taxable in the other country to a resident of that country FRA definition includes an IRA Intention of FRA designation is to provide matching for Canadian residents with IRA plans No Canadian tax if no US tax Allows payments to be transferred from one IRA to another without triggering Canadian tax 23

24 Canadian Tax Treatment: Roth IRA A Roth IRA is not a FRA Therefore a Roth IRA is not treated the same way as a traditional IRA Treaty discusses the treatment of Roth IRA plans and includes Roth IRA in the definition of pension Under 3(b) of Article XVIII a Roth IRA will be treated as a pension as long as no contributions are made to the Roth IRA after December 31, 2008 while the taxpayer is resident of Canada Therefore income can accrue in the plan without being subject to US tax. Distributions are not taxable in the US; therefore they should not be taxable in Canada Contributions do not include rollover contributions from a different Roth IRA or Roth 401(k) but do include a conversion from an employer plan or traditional IRA into a Roth IRA

25 Roth IRA as Pension If a contribution is not made into the Roth IRA the taxpayer can elect to defer Canadian taxation with respect to the income accrued in the Roth IRA Under paragraph 1, pension income arising in one country and paid to a resident of the other country may be taxable in the other country but if the pension income would be excluded from income in the first country, income cannot be taxed in the other country Roth IRA distributions are not taxable in the US, therefore should also not be taxable in Canada

26 Transfer of Plans to Canada Lump-sum payments out of a IRA would be taxable in Canada (because it would be taxable in the US) Therefore US tax applies to transfers of IRA plans to Canada Eligible for contribution to a RPP or RRSP plan if derived from contributions made to the IRA by the Canadian taxpayer The transfer must be made within 60 days following the end of the year in which the payment from the IRA is received The lump sum payment is treated as income and then the taxpayer claims a deduction for the contribution of the lump sum into the RRSP

27 FATCA: Foreign Account Tax Compliance Act Effective July 1, 2014 IRS concerned over non-compliance of US persons with respect to foreign financial assets and associated income Intent of FATCA is to prevent US persons from hiding income and assets overseas CRA responsible for collecting data and information about US reportable accounts from Canadian institutions and will submit the info to the IRS Canadian financial institutions may be required to do background searches of account holders to determine if they are US persons Some accounts are exempt from FATCA reporting (RRSP, RRIF, RPP, TFSA, RESP) 27

28 Questions? 28

29 Contact Information Julia Klann, CPA, CA CPA (Illinois) (519) Domeny Wu, MAcc (519)