Tax + Estate Planning Blog
Our Tax + Estate Planning blog will help you make sense of changes to regulations, give you a fresh perspective on complex issues and bring your attention to important developments. If we find it interesting and relevant, you’re likely to find us blogging about it.
Yesterday, the U.S. Department of Justice announced in a press release that a federal court in San Francisco entered an order authorizing the IRS to serve a John Doe summons seeking information about U.S. taxpayers who may hold offshore accounts at CIBC First Caribbean International Bank (FCIB).
In its 2013 Budget, the Canadian Government indicated that it is in negotiations with the United States for an agreement in support of The Foreign Account Tax Compliance Act (FATCA). So how will this effect U.S. taxpayers residing in Canada?
On March 21, 2013, Canadian Finance Minister Jim Flaherty announced the 2013 Budget. The budget focused on closing perceived loopholes in the tax system. So what does this mean? What are tax loopholes? How does this affect the government, citizens, and entities?
If you provide services through a corporation, or employ such persons, you should be aware that recent legislative changes have dramatically increased the tax risks of such arrangements. According to these legislative changes, the tax payable by Personal Services Businesses (PSB) has been significantly increased. In addition to losing the ability to deduct most business expenses, if a worker’s corporation is considered to be a PSB, then the corporate tax rate will increase from 14% to 38%.
Last week, I was having a meeting with a client when she asked me what is a licensed foreign legal consultant (FLC)? As I am asked this question frequently, I decided to write a blog on what is an FLC and why it is important.
If you are a U.S. citizen living in Canada and apply to renew your U.S. passport, make sure you are fully compliant with your U.S. income tax filing requirements. Section 6039E of the Internal Revenue Code requires you to provide your Social Security Number (SSN), if you have one, when you apply for a U.S. passport or renewal of a U.S. passport. If you live abroad, you must also provide the name of the foreign country (i.e. Canada) in which you are residing. The Department of State must provide your SSN and foreign residence information to the Department of Treasury.
If you are a U.S. person (U.S. citizen or resident) who has contributed money to an RESP or a TFSA, you may or may not be aware that these plans are treated as foreign grantor trusts for U.S. federal income tax purposes. In short, the treatment as foreign grantor trusts is based on your control over the plan assets and the relationship between you and the financial institution maintaining the plan. As a U.S. person with ownership of a foreign grantor trust, certain U.S. tax filings must be made annually.
A discretionary family trust is a common estate and tax planning tool, particularly for shareholders of private companies. A business owner can utilize a trust to split income among his or her family members. Subject to the attribution rules in the Income Tax Act and certain other rules, including “kiddie tax”, distributions made via a trust can create tax efficiencies by using the lower marginal tax rates of lower-income family members.
I recently attended the 1st annual International Tax Enforcement Conference in New York, NY where a variety of topics where discussed. Below is a summary from my discussions with high ranking IRS officials:
1. The new streamlined filing procedure was designed for US citizens living in Canada to come into compliance with their US tax obligations.
2. You can opt-out of OVDI and enter into the new streamlined procedure.
3. Furthermore, if you do not meet the requirements of the new streamlined filing procedure you can opt-out and submit reasonable cause arguments under FS 2011-13.
4. The 2012 OVDP FAQs questions 51.1 and 52 provide examples of favorable opt-out situations under FS 2011-13 and the ability to enter the streamlined procedure.
The IRS recently released a series of taxpayer friendly FAQ’s for U.S. citizens who are residents of Canada that are either already participating in or considering enrolling in the 2011 OVDI/2012 OVDP. Specifically, FAQ 54 provides a process whereby a participating taxpayer can elect to defer income accruing within his or her RRSP/RRIF. If the election to defer income is granted, the RRSP/RRIF balance will not be included in the taxpayer’s offshore penalty base.
Much has been written about U.S. taxpayers residing in Canada who have, for various reasons, failed to file necessary U.S. income tax and information returns. The principle explanations offered by these taxpayers are (1) “I was unaware of my obligation to file” or (2) “I was unaware I was a U.S. citizen.” Although these persons haven’t knowingly violated the law, they could be subjected to tens of thousands of dollars in penalties for not complying with them. In order to correct their oversight, these taxpayers have basically had to choose between (1) filing returns without notifying the IRS (“quiet disclosure”), (2) enrolling in the Offshore Voluntary Disclosure Program (“OVDP”), or (3) filing 6 years of returns along with a request for reasonable cause relief (“noisy disclosure”). As discussed below, each option has its costs, in terms of time gathering information and money paying professional fees, risks of civil and criminal penalties, as well as benefits. However, recent guidance from the IRS, called by some an “amnesty,” may provide a simplified and streamlined process whereby these taxpayers can become compliant.
On January 9, 2012 the United States Internal Revenue Service (“IRS”) announced the indefinite extension of the 2011 Offshore Voluntary Disclosure Initiative (“OVDI”). Because Canada is the great neighbour to the north and home to many U.S. taxpayers, many residents here find themselves with unmet U.S. tax filing obligations. The good news is that the extension of the 2011 OVDI may afford these individuals the opportunity to file delinquent U.S. returns pay reduced penalties.
Trusts are often utilized in tax minimization planning. A Canadian trust may provide some benefit to a Canadian resident; however, the trust will remain subject to Canadian income tax on its worldwide income much the same as the individual. Offshore trusts, on the other hand, are advantageous for tax planning purposes as they are able take advantage of lower tax rates found in other jurisdictions as well as benefits afforded by applicable tax treaties.
The Tax Court of Canada decision in Velcro Canada Inc v The Queen, 2012 TCC 57 (“Velcro Canada”), is the first case to further the reasoning laid down by the Federal Court of Appeal in the case of Prévost Car Inc. v The Queen (“Prévost”). The Velcro Canada decision is important for two reasons. Firstly, the decision expands and clarifies the circumstances under which taxpayers may structure payments to a company resident in a tax treaty jurisdiction so to preserve treaty relief. Secondly, the decision advances the legal understanding of “beneficial ownership” in relation to the receipt of payments through a holding company.
Copthorne Holdings Ltd. v Canada, 2011 SCC 63, is a decision of the Supreme Court of Canada which provides additional clarification on the applicability of the General Anti-Avoidance Rule (“GAAR”). In this case the Court was asked to decide whether the actions of the taxpayer, in directing a “series of transactions” to occur which ultimately resulted in substantial tax savings, amounted to abusive tax avoidance to which the GAAR should apply. The Court, in arriving at its decision, explored the “series of transactions” concept discussed previously in the ruling in Canada Trust Co Mortgages Co. v Canada, 2005 SCC 54 (“Canada Trust Co”), and articulated the framework to be utilized in order to determine whether the GAAR applies to a “series of transactions”.