Weekly Q&A

Q:   My father, who was a Canadian citizen and resident, passed away personally owning a US real property and shares in US publicly traded companies all of which were bequeathed to me.  The US title company advised that I need to get a closing letter from the IRS before they switch the title of the real property to my name.  How can I obtain a tax ID for my father’s US non-resident estate tax return when I file one.

A:   Since the estate return relates to a deceased individual (not entity), it is not eligible for a US Employer Identification number (“EIN”), the US tax ID which is still relatively easy to obtain.  Further, since the estate return is not an income tax return, you won’t be able to obtain an Individual Taxpayer Identification number (“ITIN”) either.  You will have to complete a Form 706-NA and type “Applied For” in the identification box.  IRS examiners will assign a temporary nine-digit number with the letter “W” at the end to keep track of your US estate tax compliance.  This number will also appear in the Estate Tax Closing Letter issued as a confirmation that the estate has met its US tax compliance and tax cost obligations.  If the paperwork is properly executed, the whole process of obtaining the letter will take 6 to 8 months.  Ensure that within 30 days after filing a 706-NA, you also file the new Form 8971.  This is a brand new filing requirement which took effect on June 30, 2016 for deaths occurring after July 31, 2015.  Considering that a 8971 is not eligible for an ITIN either, you may need to provide an attachment referencing to IRC 6109 and Treas. Reg. 301.6109-1(b)(2)(iv) as a reason for a missing US tax ID.

Starting this month we will be issuing a weekly Q&A notes by bringing to your attention the most interesting (common? but not too boring) in our opinion question raised during the previous week.  If you have a burning question, please send it to us via email and perhaps it will make it the next week’s list.

Weekly Q&A

Starting this month we will be issuing a weekly Q&A notes by bringing to your attention the most interesting (common? but not too boring) in our opinion question raised during the previous week.  If you have a burning question, please send it to us via email and perhaps it will make it the next week’s list.

Q:   I am considering investing into a US publicly traded partnership through my RRSP.  Do you think it is a good idea?

A:   No, I don’t find it being a good tax strategy.  US interest and dividend income (both known as periodic income or “FDAP”) earned in an RRSP is exempt from US tax under the US – Canada income tax convention (the “Treaty”).  The Treaty exemption does not however extend to partnership’s business income, known as effectively connected income with US trade or business (“ECI”). The partnership will be required to withhold tax at source at the rate of 39.6% on ECI income paid to a US non-resident investor.  In addition, a withholding agent often errs by applying the ECI rate of withholding to FDAP income thus even further increasing the burden of US tax cost.  Considering that RRSP income is tax deferred under the Canadian domestic tax law, there is no mechanism to recover US withheld tax. The tax ends up to be a pure cost to the RRSP owner and deteriorates the current year’s distributive partnership income by up to 40%.  The same income will be subject to another level of taxation in Canada, when it is distributed out from the RRSP and reported on the Canadian income tax return.  If you wish to invest in US publicly traded partnerships, do so through your non-registered portfolio.