U.S. Income Taxes
- U.S. INCOME TAXES
- THE IRS AND CANADIANS LIVING IN CANADA
- REGULATION 105 – WITHHOLDING TAX RULES FOR AMERICAN AND OTHER FOREIGN RESIDENTS PROVIDING SERVICES IN CANADA
- SPECIAL ISSUES – KEEPING INFORMED
- BEYOND THE 1040
- HISTORY OF INCOME TAXES IN THE U.S.
U.S. INCOME TAXES
We prepare U.S. income tax returns primarily for Americans who live outside of the U.S., all of whom are still required by U.S. tax laws to file U.S. income tax returns. U.S. citizens residing abroad are generally subject to the same rules for filing U.S. income tax returns as if they were resident in the United States. We also prepare U.S. income tax returns for Canadians who, by virtue of their investments, are required to file tax returns with the IRS.
We work with agents of non-resident artists and other performers. In an effort to deal with the requirements of withholdings on Regulation 105 waivers and subsequent Canadian tax filings and compliance matters.
Both Michael Litwin and Robert Allnutt hold the PTIN designation and have extensive experience with both individual and trust tax returns.
Usually an American, living and working in Canada is allowed a foreign tax credit for taxes paid to Canada on their U.S. tax return which has the effect of eliminating the U.S. tax cost. However, in many cases there can be a serious inequality between the two tax systems and it is here where problems arise and professional advice comes into play.
We have compiled a short list of the most popular problem areas from the American point of view:
- U.S. source income of all sorts
- Canadian financial and other non-U.S. accounts (F-Bar reporting)
- Canadian tax free savings accounts (TFSA) and Canadian registered education savings plans (RESP)
- Owning Canadian mutual funds
- Ownership of Canadian corporations (Form 5471)
- Signing authority for bank and investment accounts (F-Bar disclosures)
- Special capital gain advantages that are accorded to Canadians that do not fit American taxing concepts
- Americans marrying Canadians
- Children moving to the USA, initially to study
- US gifting issues
- US Estate taxes
- Trust and Estate planning
- Holding of Canadian or U.S. real estate (rental income)
- Mismatching of filing dates
- Giving up of US citizenship
A serious area of concern for us is Americans who have filed Canadian income taxes but who have not filed American income taxes, not realizing their full obligations to the IRS and the United States Treasury. We help individuals remedy this by using the current IRS program for non-compliant taxpayers who want to catch up and regularize their US tax filing obligations.
We have prepared a short list of websites that will help inform and advise concerned taxpayers:
- Embassy of the United States Ottawa, Canada
- Information for U.S. Citizens or Dual Citizens Residing Outside the U.S.
- Information on the United States–Canada Income Tax Treaty
- Department of Finance Canada – Agreement on Foreign Account Tax Compliance Act
- Canadian Bankers Association – Intergovernmental Agreement
- Comparison of Form 8938 and FBAR Requirements
- Information Return of U.S. Persons With Respect to Certain Foreign Corporations – Instructions for Form 5471
- Offshore Voluntary Disclosure Program – Frequently Asked Questions
- IRS Final Repair Regulations – New for 2014
THE IRS AND CANADIANS LIVING IN CANADA
Canadian residents may also have obligations to the IRS. Below is a brief listing of important matters that affect Canadian residents.
- Snowbirds – Form 8840 (Closer Connection Exception Statement for Aliens)
- Owning U.S. real estate
- Renting your U.S. real property
- Selling your U.S. real property
- U.S. estate tax for Canadians
- U.S. investment portfolio and U.S. investment income
REGULATION 105 – WITHHOLDING TAX RULES FOR AMERICAN AND OTHER FOREIGN RESIDENTS PROVIDING SERVICES IN CANADA
- For any fees, commissions or other amounts paid to a non-resident (an individual or a corporation) for services rendered in Canada, a withholding of 15% of the amount paid must be made by the payor even if the non-resident providing the services has no permanent establishment in Canada.
- If these services are rendered in the province of Quebec, they will be subject to an additional Quebec withholding tax of 9%.
- Withholdings are to be remitted by the 15th day of the month following the month in which payment is made. The purpose of Regulation 105 is to provide security for tax that may later be assessed against the non-resident person.
- The withholding tax is not the final payment. It is only a deposit against the ultimate tax liability.
- Regulation 105 withholdings must be made, regardless of whether the entity paying for the services is a resident or non-resident corporation.
- This regulation applies to only to services and not to the sale of goods or the reimbursement of expenses.
- Relief from Regulation 105 Withholding
- If the payor (usually an agent) can demonstrate that there is little likelihood of Canadian income taxes owing, a waiver of the Regulation 105 withholding tax can, in some cases, be obtained.
- For information and details concerning the Regulation 105 waiver application, please refer to the CRA information below:
- Reimbursement of Regulation 105 Withholdings
- When the non-resident files his Canadian Income Tax Return (either an individual or a corporate return), a refund may be claimed.
- Such a non-resident must apply to CRA for a business number (BN)
- At the end of a calendar year, the non-resident will receive a T4A NR tax slip from each of their Canadian payors showing the gross amounts paid and the taxes withheld on a calendar year basis in Canadian funds. The deadline for the issuing of the T4A NR slip is February 28 of the year following the payment(s).
- Canada views the Regulation 105 withholding to be a payment on account of the final tax liability of a non-resident. When the non-resident files his tax return, withholding amounts in excess of the calculated tax liability are refunded.
- Tax filing deadlines for non residents:
- Individuals – June 15 of the following year
- Corporations – Six months following their year-end
- It should be noted that refunds are a result of filing tax returns. Tax payers should file on a timely basis.
- Americans and Permanent Establishment
- Americans are advised to become familiar with Article V of the Canada/U.S. Tax Treaty for the definition of permanent establishment. Non-residents who have a permanent establishment in Canada must file and pay Canadian Income Taxes.
- Taxpayers are advised to understand the rules for deeming a permanent establishment, which may be found in Article V, Paragraph 9(A) and 9(B):
- 9(A) The Single Individual Test (for Individuals)
- Services are performed by an individual who is present in the other Contracting State for more than 183 days in a 12-month period and, during this period, more than 50% of the gross active revenues of the enterprise are generated from these services.
- 9(B) The Enterprise Test (for Corporations)
- Services are provided in the other Contracting State for more than 183 days in a 12-month period with respect to the same or connected project for a customer’s PE in the other Contracting State.
- 9(A) The Single Individual Test (for Individuals)
- We advise taxpayers to review the following links for additional information:
- Rendering Services in Canada
- Actors – Election to file a return
- Canada – U.S. Income Tax Convention, article V, article VII(1), article XV(2)
- Fifth Protocol to the Canada – U.S. Tax Convention, article V
- Interpretation Revenu Quebec ADM.7-, “Reduction in Source Deductions in Income Tax in Respect of a Payment for Services Rendered in Quebec by a Person Not Resident in Canada”
SPECIAL ISSUES – KEEPING INFORMED
It is our experience that our clients are smart and have lots of questions which arise from previous research or social conversations.
We would like to spend our time with our clients finding solutions to already identified problems.
We have prepared a list of special issues that concern Americans living in Canada. We urge our clients and prospective clients to read about tax matters that may concern them and then compile their questions for us, so that each meeting will be about finding solutions and not devoted to identifying problem areas.
Here are some of our suggestions:
- For information about unfiled past years tax returns
- Enter “American tax returns unfiled” in your browser. Make sure that what you read is up to date.
- For information about how FATCA might affect you,
- Search for “Foreign account compliance act” and again make sure that what you read is up to date
- As of February 5, 2014, Canadian financial institutionshave been obligated to institute due diligence procedures to establish when a new account is opened by a U.S. citizen. From 2015, relevant U.S. account information will be reported to the Canada Revenue Agency, who will then relay it to the IRS. In other words, the IRS will know which U.S. citizens have accounts overseas and whether or not they have filed U.S. tax returns and FBAR’s.
- For information about Americans holding RESP and TFSA accounts,
- Search for “US citizens holding TFSA’s”
- For information about US citizens owning all or part of a foreign corporation (an offshore corporation including a Canadian corporation),
- Search for “IRS form 5471 filing instructions”
- For information on American citizens owning Canadian mutual funds,
- Search for “US taxpayers owning Canadian mutual funds”
BEYOND THE 1040
There are serious penalties for failure to file the required forms.
- Report of Foreign Bank and Financial Accounts (FBAR)
- This form is to disclose non-American financial assets to the U.S. treasury.
- Statement of Specified Foreign Financial Assets
- This form is to disclose non-American specified assets to the IRS.
- Form 8938
- Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
- This form is to report income earned in your TFSA or family trust.
- Form 3520
- Information Return by a Shareholder of a Passive Foreign Investment Company
- This form is to defer taxes on unrealized capital gains in a mutual fund.
- Form 8621
- Information Return of U.S. Persons with Respect to Certain Foreign Corporations
- This form is to disclose your holdings of non-American private companies.
- Form 5471
HISTORY OF INCOME TAXES IN THE U.S.
Below, you will find links of interest for history buffs regarding the imposition of income tax in the United States:
- Income Tax Records of the Civil War Years
- 16th amendment to the U.S. Constitution
- First U.S. Income Tax Return and the beginning of the IRS