CH 6 - U.S. Taxation for Canadian Residents Flashcards
What are non us citizens who reside in the U.S. referred to as ?
Individuals who are not U.S. citizens are referred to as either resident aliens (i.e., lawful permanent residents) or non-resident aliens.
What are either of the two conditions that can result in a snowbird being treated as a US resident for tax purposes ?
Lawful permanent resident or substantial presence
What is the lawful permanent residents?
Also known, as the green card test.
Canadian snowbirds can become
U.S. residents for tax purposes if they spend a substantial portion of time in the United States, which is currently
183 days.
A simple calculation is used to determine if a Canadian snowbird meets the requirement:
* Number of days present in the United States in the current year
* Plus, one-third of the days present in the United States in the first preceding year
* Plus, one-sixth of the days present in the United States in the second preceding year
What are the two exceptions that may allow a client who is bound by the substantial presence test -to be taxed as a non residents?
- Closer connection exception
- Tax treaty tie-breaker provisions
What is the closer connection exception?
Canadians who meet the substantial presence test will not be considered resident aliens for the current year if all of
the following circumstances apply:
* They were present in the United States fewer than 183 days during the current year.
* They maintain a tax home in Canada during the current year.
* They have a closer connection during the current year to Canada than their connection to the United States.
If your client moves half way through the taxable year, permanently to the U.S. does the closer exception rule still apply ?
The tax home must be in place for the entire taxable year and must be in a country e where the client claims a closer
connection. Therefore, the closer connection exception generally does not apply to clients in the year they might
physically move to the United States, when their principal place is no longer located in Canada
What are the various client contacts that are considered to determine if your client has a closer connection to Canada ?
*Permanent home
* Family
* Personal belongings, such as cars, furniture, clothing, and jewellery
* Current social, political, cultural, or religious affiliations
* Entitlement to government health care services
* Banking
* Business activities
* Jurisdiction in which the client holds a driver’s license
* Jurisdiction in which the client votes
* Charitable organizations to which the client contributes
What is the IRS form that snowbirds need to file to claim the closer connection rule ?
must file Internal Revenue Service (IRS) Form 8840: Closer Connection Exception Statement on or before June 15 of the following year. If the form is not filed on time, the right to claim the exception for the tax year may be lost
What are the Tax Treaty Tie Breaker provisions ?
- An individual is considered a resident of the country where the person has a permanent home.
- A person with a permanent home in both countries, or in neither country, is considered a resident of the country
where personal and economic relations are the closer (i.e., in the centre of vital interests). - If the centre of vital interests cannot be determined, the person is considered resident of the country with a
usual residence. - If a usual residence is available in both countries, or in neither country, the person is considered a resident of the
country of citizenship. - If the person is a citizen of both countries, or of neither country, the relevant authorities of the countries will
settle the question by mutual agreement.
What is considered a US Persons in relation to taxes ?
The definition of “U.S. person” includes a citizen, resident, corporation, partnership, limited liability company, trust, and estate of the United States.
When might a US person be required to file a report of Foreign Bank and Financial accounts ?
- They hold a financial interest in at least one financial accountlocated outside the Unites States.
- The total value of all these accounts in aggregate exceeded $10,000 at any time during the calendar year
reported.
[Financial interest includes having signing authority on an account. Executors and trustees have to also
report accounts on which they have signing authority.]
What is a domestic corporation ?
is a company created or organized in the United States or under the laws of the
United states, and of any of its states, or the District of Columbia.
How many types of foreign corps are there ?
There are two categories of foreign corporations: controlled foreign corporation (CFC) and passive
foreign investment company (PFIC).
Controlled Foreign Corporation
A CFC is a corporate entity registered and conducting business somewhere else—in a different jurisdiction or
country—than where its controlling owners reside.
When do you have report income from a corp on your US Tax return ?
This is required when the U.S. taxpayer owns at least 10% of the shares of a CFC to add income to their personal U.S. tax return.
What is a PFIC ?
It is a passive foreign investment company. which is primarily invested in passive assets or generally earns passive income.
PFICs include
non-U.S. corporations such as non-U.S. mutual funds and non-U.S. pooled fund trusts. e.g. Canadian Mutual Funds, Canadian pooled funds, Canadian ETS…e.tc
Is income from RESP TFSA..e.t.c taxed for US residents?
Yes, RESP or TFSA, must be reported. Income from these sources received by
a U.S. person is taxed at regular U.S. income rates for tax purposes.
A non-U.S. corporation is considered a PFIC if it meets one of the following requirements ?
- It derives at least 75% of its income from passive sources such as dividends, interest, royalties, rent, or
annuities. - The average value of more than 50% of its total assets is derived from passive assets.
U.S. persons should be aware of two exceptions from reporting PFIC income, even if they own assets that meet the
PFIC definition ?
- There are no distributions from the investment during the year.
- PFICs are held in tax-deferred retirement savings accounts such as RRSPs, RRIFs, or a registered pension plan.
The tax implications on a U.S. tax return for holding PFIC investments increase costs from two perspectives ?
*PFIC reporting is a generally onerous task that takes a considerable amount of time, thereby increasing the cost
of preparing the U.S. tax return.
* Higher taxes, at the highest marginal tax rate, are imposed on this income.
One way that certain Canadian funds try to mitigate this exposure for their U.S. investors ?
by providing
information to allow U.S. investors to treat the investment funds as qualified electing funds. Many of the larger fund
companies issue the necessary information as part of their annual tax reporting.
Your clients should consider the following factors, among others, before choosing to renounce their U.S. citizenship
- Cost of legal and accounting fees
- Reduced access to the United States
- Loss of right to work in the United States
- Loss of right to stay in the United States indefinitely
- Loss of right to vote in U.S. elections
- Benefit of no longer having to file U.S. tax returns and pay U.S. taxes (including potential U.S. estate taxes)
What are the U.S. situs assets for a canadian snowbird that are subject to tax?
- Real property located in the United States, including vacation properties
- Certain tangible personal property located in the United States (e.g., jewellery, art, boats, vehicles)
- U.S. securities held in a brokerage account in Canada or elsewhere, including certain U.S. securities held in a
Canadian registered account - U.S. issued exchange-traded funds
- U.S. mutual funds acquired directly from the United States
- U.S. bank deposits in a U.S. brokerage account
- Certain debts with a U.S. connection
- Interests in business related assets owned by a sole proprietor and used in a U.S. business activity
- U.S. golf club memberships (if equity interest)
- U.S. retirement plans, such as individual retirement accounts and 401(k) plans
What was the U.S. estate tax exemption?
The estate tax exemption for 2019 is
US$11.4 million
Which assets are exempt from U.S. estate tax?
- Shares of a non-U.S. corporation (regardless of where the corporation’s assets are located)
- U.S. bank deposits (excluding those held in a U.S. brokerage account)
- Canadian mutual funds that hold shares of U.S. corporations
- Certain debt obligations that qualify for the portfolio interest exemption from U.S. tax (generally applies to
bonds issued after July 18, 1984 that are not subject to U.S. non-resident withholding tax) - American depository receipts
- Tangible personal property that is merely in transit in the United States
- Life insurance proceeds payable upon the death of a non-resident alien
