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Canadians that relocate to the US for career purposes – Post 1

american citizens in canada

Our website and letterhead uses “HCBT” as an abbreviation for Hanson Crossborder Tax Inc.  After the next few posts HCBT could also mean Hanson Cross Border Tragedies.  These are real life sanitized client stories to illustrate the financial and emotional burden created if cross border tax situations receive inadequate care and attention. The first in the series involves a typical Canadian family in which the main breadwinner gets the chance of a lifetime to relocate to the USA at a substantially higher salary.   Canadian Expat Post #1 will summarize the facts, common to many Canadians that relocate to the US for career purposes.

Post #1 Background 

  • Family of two Canadian spouses plus 2 young children lives Ontario [S1; S2; C1; C2];
  • Family home is owned jointly by S1 & S2. Purchased in 2008 for $450,000; Estimated value in December 2013 $600,000;  Expected value increases $50,000 in each subsequent year;
  • S2 employed in previous years. Primary responsibility now is care of C1 & C2;
  • S2 owns 1,000 shares from a previous employer stock option program. Shares cost basis is $5,000.  Estimated value in December 2013 is $60,000;
  • S1 employed by Canadian employer for $150,000 CDN per year;
  • S1 has self-directed RRSP with $100,000 in mutual funds / ETF’s. Maximum contribution has already been made earlier in 2013;
  • S1 purchased a recreational vehicle for $75,000 in August 2013;
  • In early December 2013, S1 is offered a position with Texas company with an annual base compensation of $225,000 USD;
  • Family relocates to Texas in December 2013; rents apartment so S1 can start a new job on January 2nd, 2014;
  • S1 & S2 decide to rent the Ontario family home rather than sell it. S2-B, brother of S2, lives near the family home.  S2-B will obtain tenants, repair and maintain property, collect / deposit rents for fee of $200 per month.  S2-B has no previous experience in rental property management.
  • Tenants move in on January 2, 2014 and pay rent $1,800 per month. S1 & S2 expect that they will breakeven costs versus rent.  Tenant rent is deposited into joint bank account of S1 and S2 at an existing Canadian bank account.
  • S1 & S2 did not seek legal or financial advice about selling or renting the family home;
  • S1 prepared and filed a 2013 T1 return reporting employment income, RRSP deduction, spousal credit;
  • S2 had no income and therefore did not file a 2013 T1 return;
  • S1 & S2 prepared and filed joint US returns for each 2014 & 2015, reporting only US income, i.e. Texas employment earnings;
  • On August 30, 2016, S1 and S2 receive an offer to sell the Family home for $900,000 with closing date on September 30, 2016.

Unfortunately, tax planning was not considered by the family described above. Next week please come back to read post #2 of this series and let’s see what happened.

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Canadian Offshore Tax Informant Program Gives Incentives to Whistleblowing

Whistle Blower

Offshore Tax Evasion

For the past 6 years or so we have been exposed to plenty of news in the media on how the US government through its Internal Revenue Service (IRS) and the Treasury has been fighting offshore tax evasion.  One of the important administration tools in this war on tax cheats has been the Whistleblower Program, the program designed to encourage taxpayers to report on tax violations by others.

Strangely enough, despite of spending over $30 million on fighting international tax evasion, the Canada Revenue Agency (CRA) with its outreach and communication has not been as active or loud, as if such problem hardly exists here.

Canadian residents have a duty to report their income and pay taxes to the CRA. Some may have outright financial holdings abroad or possess structures with multiple offshore investments. It is not illegal to hold money or assets offshore for as long as their ownership is adequately disclosed and the tax is paid on related income.

And yes, it may be tempting to cheat the system to avoid paying extra tax.  It may even seem easy to do so by leaving out certain details on a tax return in hopes that they are outside of the Canadian borders.

Canadian Whistleblower Program: OTIP

If these thoughts ever crossed your mind, we are here to remind you that the Canadian system does too have mechanisms in place for catching and penalizing tax cheats, including through its own Whistleblower Program.

In 2014, the CRA adopted a mechanism known as the Offshore Tax Informant Program (OTIP). It was Canada’s response to an effort to fight global tax non-compliance along with all other developed nations in the G-20.  OTIP provides mechanisms to allocate rewards to anyone that can give information on those that aren’t reporting offshore wealth or paying taxes.  OTIP is focused on serious offenders that have over $100,000 CAD outstanding on their federal taxes. The program allows the informant to set up a contract with the CRA that will reward them between 5% and 15% of what is collected.

As of the end of January 2016, there has been 600 calls and 120 cases that came out of OTIP. Calls are offered in both French and English and anyone from around the world can participate in this program. Informants are advised to call OTIP if they feel they can benefit from this program. Calls are confidential as the program is meant to protect the identity of informants.

Sometime mistakes are made; you may have been misinformed of your reporting obligations, information on offshore investments may have been missed, income may have not been freely available by the reporting due date…  Next thing you know, you are an offshore tax delinquent.  Irrespective of the reasons, you are breaking the law and risk significant penalties if you are not taking action to resolve your tax obligations.  By coming forward voluntarily and paying taxes under the CRA voluntary disclosure program you may be able to get away with reduced penalties instead of facing much harsher consequences that could come from programs like OTIP.

Have More Questions

If you have questions about the above post, please let us know and we would be happy to help you. get-a-free-consultation

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Watch Out for the New CRA Audit Letter Campaign

CRA Audit Letter

 

Letter Writing Campaign

The new CRA Audit Letter Writing Campaign is designed to facilitate behavioral changes among a selected taxpayer population by providing the selected population with relevant information in order to improve their understanding of their current or past reporting requirements and guidance on how to correct any common errors.

Correct Tax Affairs

In January 2016, the CRA will send approximately 30,000 “intent-to-audit” letters to selected groups of individual taxpayers and business owners who claim consecutive business or rental losses or who are employees claiming employment expenses on line 229 of their tax return. The objective of the campaign is to encourage letter recipients to review and where applicable correct their tax affairs by accessing their account on-line through My Account, submitting in paper format any required changes using Form T1-ADJ – T1 Adjustment Request, or through the Voluntary Disclosures Program.

Understand Tax Obligation

CRA’s emphasis is on helping individuals and small businesses better understand their tax obligations, which in turn increases future voluntary compliance, protects the government’s tax base, and utilizes resources within the CRA more effectively.

Contact

If you have questions about the CRA’s Office Audit Letter Campaign or need help making changes to previously filed returns, please let us know and we would be happy to help you. You can contact us here.

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Sneaky snowbirds could have financial wings clipped by new border tracking system

border tracking system

Enough freeloading, the CRA has said to the Canadian population at large; they will find you and they will take away your benefits regardless of who you are. The tracking system – be it a land border or by air – is in the works to catch Canadians whose insufficient presence in the country disqualifies them from certain benefits.  Once the tracking system is in place, it should allow Canada to save between $194 million and $319 million over five years.

The CRA is instating a planned border tracking system which will alert them of Canadians who are residing outside of Canada and are therefore ineligible for social benefits. The benefits at issue include Old Age Security, Unemployment Insurance, Child Tax benefits and others.

In order to be cleared by the CRA to receive your child tax benefits, you must be present in the country for at least 183 in a calendar year. To be eligible for Old Age Security benefits, you need to be a resident of Canada for as little as 10 years and as long as 20 years depending on the country of residency at the time the benefits are collected.

The tracking system has already been instituted for foreign nationals and permanent residents of Canada and the U.S. but this next phase will be sharing information about both country’s citizens. Canada is also expanding its sources of gathering information to include travellers leaving by air and ground.

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Australia Shares FATCA Information, Canada Set to Follow

FATCA

By J.P Finet  Sept 24, 2015 Posted on Taxnotes.com
Australia announced September 23 that it has shared bank information with the IRS for the first time in compliance with the intergovernmental agreement   it signed to implement the Foreign Account Tax Compliance Act (FATCA).

According to a release issued by the Australian Taxation Office (ATO), the details of more than 30,000 financial accounts valued at more than $5 billion were provided to the United States.

“The information provided on U.S. citizens and tax residents with Australian bank accounts is the first step in a wave of transparency measures being implemented globally by Governments and tax administrations,” the ATO release said. “Beginning in 2017, close to 100 countries will be sharing non-resident data under the OECD Common Reporting Standard (CRS).”

The release said the automatic exchange of financial account information was “the new international standard to eliminate tax evasion.” The ATO added that it is committed to ensuring that taxpayers are disclosing their offshore income and that in 2017 it will implement the CRS, under which it will exchange financial account information with almost 100 countries.

Canada’s government had previously stated that it would share its bank information on September 23 in compliance with the Canada-U.S. IGA  , but it was not clear that it had done so. Requests for information from the Canada Revenue Agency were not returned by press time.

Canada made no official announcement of its exchange, but a docket entry in a Canadian federal lawsuit that sought to block the transmission of financial data on reportable accounts to the United States said Canada would begin transmitting data September 23. The lawsuit, Hillis and Deegan v. the Attorney General of Canada [2015 FC 1082   ], was dismissed September 16. (Prior coverage  .)

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Changes to CRA Review Policy on Foreign Tax Credit

Foreign Tax Credit

It has recently come to our attention that the CRA changed its policy on review of foreign tax credits claimed by individual taxpayers.  The policy was internally revised on June 1, 2015 but has not yet been rolled out to the general public or practitioners.  It is expected that the communication will be available on the CRA website shortly.  Unfortunately this delay in communication caused a lot of headaches to our clients and has doubled up our time and effort in a relatively routine examination process.

The enforcement primarily relates to a tax accrued or paid to a foreign jurisdiction and reported on a foreign jurisdiction’s tax return.  In the past, a copy of the foreign tax return was sufficient to substantiate the validity of the claim.  This is no longer the case; providing just a copy of the return will result in denial of the related claim.  The CRA now requires a copy of a notice of assessment or a transcript from a foreign tax agency.  This includes federal, state and/or municipal notices of assessments or transcripts.

The US as you may know does not typically issue any assessments unless there is a suggested revision to the return.  Thereby an alternative option would be a transcript of a processed return.  I am attaching two links to the IRS web-site that outline timing and the requirements on requesting a transcript by mail which may take several weeks to receive.  If your US tax practitioner is subscribed to the IRS e-Services (typically available only to US citizen tax practitioners; Hanson Cross-border Tax Inc. has a full access to the IRS e-Service), the transcript can be obtained immediately as long as the Power of Attorney has been previously granted to the practitioner and is in the IRS records.  It gets much more complicated at a state or municipal level since each of them is different.  It may require a practitioner’s judgement on whether to pursue the hurdles of obtaining a transcript or to forgo the claim for the state/municipal portion of the tax.

Another revision applies to tax returns which were issued in income-source-country language other than English or French.  Circling around a relevant number and translating only an appropriate sentence or a section of the return is no longer an acceptable option.  Such returns are now required to be provided with certified English or French translation.

These two developments are just another unfortunate addition to the already increased burden and cost of tax compliance to taxpayers.  If our company assists your clients with US tax work and your client is in need of a US tax transcript, please do not hesitate to contact us and we will provide you with a copy of the federal transcript immediately.

https://www.irs.gov/Individuals/Transcript-Availability

https://www.irs.gov/Individuals/Get-Transcript

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American Citizens and Green Card Holders in Canada and Other Countries

american citizens in canada

As a result of the US income tax provisions imposing residency and citizenship-based taxation on individual taxpayers, American citizen and Green card holders are required to file their US income tax returns and certain disclosures irrespective of the country in which they reside. This requirement exists even if there no additional US tax due after a foreign tax credit or earned income tax exclusion has been claimed. When completing the returns for Americans residing outside the US, we not only take into consideration the US and residency country domestic tax provisions but also account for a bi-lateral income tax treaty which may override or mitigate certain domestic tax legislation.

The complexity of US tax filings for Americans abroad directly correlates to the number and the type of accounts and holdings they may have in their country of residency. Operating through a non-US partnership or corporation, holding investments in non-US bank accounts or trusts, and deferring employment income through non-US pensions may significantly increase the filing burden and the related tax return preparation cost.

There is a presumption that if Americans reside in the country with a higher rate of tax, such as Canada, they should not owe any additional tax to the IRS. Unfortunately, this is not always the case and takes many by surprise. Investments or holdings deemed tax efficient in the country of residency may not have an identical treatment under the US tax law which leads to an overall greater tax cost either on a temporary or permanent basis.

Keeping clients US and Canadian personal income tax compliance in order, optimizing their overall income tax cost, educating about risks and penalties for failure to accurately disclose foreign accounts and assets, and providing an assistance on any tax challenges from CRA or IRS are types of services in which our company’s advisors have an extensive knowledge and experience in helping our clients.

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