Weekly Q&A

US citizens living outside the US (i.e. abroad) have an automatic 2-month extension of time to file the individual income tax return from April 15th to June 15th.   If a further extension is needed, Form 4868 must be filed on or before June 15th, to receive an automatic extension of time to file their US individual income tax return to October 15th.

Still not enough time to properly file your US individual tax return and related schedules? Treasury Regulation 1.6081-1(a) authorizes the Commissioner to grant an extension to US citizens abroad to December 15th.  A letter explaining why an additional 2-month extension is required must be sent to the Internal Revenue Service (“IRS”) on or before October 15th.

The authorization to grant an addition 2-month extension of time to file to December 15th applies to any return, declaration, statement or other document which relates to any tax imposed by subtitle A or F of the Internal Revenue Code (“IRC”).  For example, Form 3520 “Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts” may also be extended to December 15th as the return filing obligation is imposed by subtitle A, subchapter J of the IRC.  When writing the letter be sure to include the tax return, information return, statement or other document, including the tax year for which the extension is requested.  You must also include a reason for needing additional time to file the required tax and information returns.

The above refers to the extension of time to file a return, and not the extension of time to pay.  All tax payments must be made by April 15th to avoid interest and late payment penalty charges.

Weekly Q&A

Pursuant to Barry v Commissioner, the courts concluded that dividends paid out of a CFC (following a 962 election) in a country in which has no treaty with a US, is a dividend but taxed at ordinary rates. It has always been my understanding that if a CFC that is otherwise not a PFIC and is situated in country who is party to US treaty, such as Canada, distributes a dividend following a 962 election, would be eligible for qualified dividend rates. In Barry V Commissioner, the courts concluded that the dividend was not considered as paid out of a notional domestic corporation (as the petitioner contends) and neither is considered as paid out of qualified foreign corporation (i.e. non-PFIC in a country that has a treaty with the US) and is therefore subject to ordinary rates.

GILTI will have its own basket with or without a 962 election. However, the proposed regulations do not contain rules on the foreign tax credit as it relates to GILTI, much less the appropriate basket when a distribution is paid out of the notional corporation (under 962). Such guidance is still pending. Neither is it clear that assuming the 962 election is not made and a dividend is distributed concurrently (assuming all income is active business income) in the same year as the GILTI inclusion, that the Canadian tax would also fall into the GILTI basket (or in the general basket if there is no income inclusion (under pre-TCJA Sec. 904) in the US due to PTI or under the CFC look-through rules), or whether or not the Canadian tax would be subject to a grind. Therefore, I would reserve any conclusions with respect to foreign tax credits.

Under the 962 election, we are still waiting for guidance if the 50% deduction under Sec. 250(a)(1)(B) is available to an individual shareholder who makes the 962 election. There is speculation that it would be however, without the 50% deduction, my tentative calculation (again absent any further guidance) demonstrates that a 26.3% tax rate is required in Canada in order to eliminate the GILTI tax on a 962 election. If the 50% deduction is available to individuals on a 962 election, then a 13.125% tax in Canada would eliminate GILTI (again based my tentative calculations). There is also a possibility that Congress may consider extending the 50% deduction to individual shareholders but would require a legislative fix.

Weekly Q&A

Q: I am a US resident and I just inherited a Registered Retirement Savings Plan (“RRSP”) from a Canadian resident.  Do I have to pay tax in Canada or in the US on the RRSP distribution?

A: Yes and no. 

As a named beneficiary of the inherited RRSP account, who is not the spouse of the deceased annuitant, the value of the RRSP at the time of death is taxed as income in the terminal Canadian tax return of the deceased.

This means that the value on the date of death will be distributed as capital and will not be subject to Canadian non-resident withholding tax.  However, if the distribution from the inherited RRSP has increased from the date of death, the increase in value will be taxable in Canada.  The increased value will be subject non-resident tax, not the entire distribution.  The non-resident withholding tax of 25% will be deducted from the distribution paid.  Please not that the statutory non-resident tax rate of 25% may be reduced to 15% under the U.S-Canada Income Tax Convention (1980).

Furthermore, as you are a resident of the US and have received an inheritance from a non-resident alien, the distribution is not taxable in the US.  However, you will likely have an information return due to report the distribution from a foreign estate is the amount exceeds a reporting threshold (i.e. Form 3520 “Annual Return to Report Transactions and Receipt of Certain Foreign Gifts”).

Finally, any income earned after the death of the individual, will be taxable in the US. However, you will be allowed to claim a foreign tax credit for US federal tax purposes, on Form 1116, in respect of the Canadian tax paid.  A foreign tax credit may or may not be allowed stateside.

Weekly Q&A

Q: What if my Previous Streamline Submission was Incomplete?

A: A false “Streamline” procedures submission could lead to a serious of penalties.  They may include charges under Internal Revenue Code’s section 7206(1) for filing a false document signed under penalty of perjury, under section 7212(a) for tax obstruction, under section 7201 for tax evasion. Each of these penalties are imposed independently and range from fines of $1,000-$100,000 and imprisonment from 1 to 5 years. It’s worth noting that section 7206(1) is not just for false tax returns, but applies to any materially false document signed under penalty of perjury if the filer knew that the document was false when signing it.  False assertion of non-willfulness on documents filed under penalty of perjury is an example of “classic” tax obstruction.

Tax evasion charges could be based on the false assertion as a new act of evasion, renewing the statute of limitations and increasing the number of tax years available for additional charges, even if the statute had otherwise expired.  This applies to both income tax returns and FBARS.

Don’t underestimate the amount of information that the US government has.  Ensure that you select a reputable and experienced cross-border tax accountant who can lead you through the “streamline” process and who can compile your previously omitted returns in the most accurate and complete fashion.

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.