Representing Canadian Businesses and Professionals for over 15 years
Representing
Canadian Businesses and Professionals for over 15 years
COVERING U.S. TAX, IMMIGRATION, AND FINANCIAL MATTERS AFFECTING
CANADIAN NON-RESIDENT ALIENS OF THE UNITED STATES*
SPRING-SUMMER
1996/VOL.12, No. 2
CONTENTS-BRUNTON
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The first non-immigration question your Canadian employee may ask is "how will my taxes change when I work in the U.S.?"
Tax considerations can often make or break a transfer to the U.S. These tax equalization issues can come squarely within the responsibility of the HR Manager. (See a complete checklist of all HR issues relating to Canada to U.S. employee transfers.)
Richard Brunton has answered these tax questions for over twenty years. His newsletter is the best source of current information for your relocating employees.
We are pleased (and honored) to share our Web site with Mr. Brunton.
We urge you to take out a regular subscription to the newsletter for yourself. Consider securing a subscription for each of your transferring employees. Large tax savings can result.
Richard Brunton holds a Masters degree in Taxation/Accounting, in which his primary interest has been international taxation. He has been a resident of Florida for the past 22 years.
Mr. Brunton assists Canadians who:
His firm also assists U.S. citizens or U.S. Green Card holders, living in Canada.
Brunton's U.S. Taxletter for Canadians is published three times per year by Tax Reports Inc. It is available for US $30 per year. Please contact Mr. Brunton's office if you wish to subscribe:
"Advise him you were sent by Mr. Grasmick's Website"
Richard Brunton, CPA
4710
NW Boca Raton Blvd. Suite 101
Boca Raton, Florida
Voice: 561.241.9991
FAX:
561.241.6332
E-mail
rb@taxintl.com
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The IRS has issued important new rules for U.S. bank interest paid to Canadians. Interestingly, the rules only affect Canadians. They do not affect interest paid to residents of other countries. If you receive U.S. bank interest, your bank will be required to advise the IRS of your name and address and the amount of interest paid to you. This will be required even if you use a U.S. address on your account. The bank will be able to identify you as a Canadian from IRS Form W-8 which you must file with the bank. Normally, you must file IRS Form W-8 at the bank when the account is opened, and every three years thereafter. If you do not do so, the bank is required to deduct U.S. withholding tax on your interest.
It is apparent the purpose of this reporting is to enable the IRS to forward the information to Revenue Canada, thus indicating a new, higher level of cooperation against tax avoidance between the two countries. What will be next?
This new rule will be phased in over a three year period commencing January 1, 1997. The U.S. banks will be required to identify Canadian account holders as new Forms W-8 are filed with the banks after that date. Since existing Forms W-8 are valid for 3 years it will take up to 3 years to re-cycle all existing account holders.
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Before the implementation of the 1995 tax treaty Protocol, Canadians became familiar with the concept that they had a "standard exemption" of $60,000 for U.S. federal estate tax. This "standard exemption" of $60,000 actually resulted from the fact that Canadians were entitled to a $13,000 tax credit against U.S. estate tax. This $13,000 tax credit was equal to the tax on the first $60,000 of U.S. property and thus it was commonly said that Canadians had an "exemption" of $60,000. However, now that the 1995 Protocol has changed the rules, what generalizations can we make about a new "standard exemption"?
First of all, the $60,000 "exemption" still exists. Your estate can now choose between two alternatives -
Second, provided all the U.S. property that is subject to U.S. estate tax passes to your surviving spouse, and certain requirements and timely elections are complied with, your estate receives a minimum of an additional $13,000 "marital" tax credit. Thus, all such estates receive a minimum total amount of $26,000 in tax credits. This is equivalent to the amount of U.S. federal estate tax on the first $107,333 of U.S. property in most cases. Thus you could say the new federal "standard exemption" is $107,333, provided all taxable U.S. property goes to the surviving spouse, and all other requirements are met.
For further (larger) potential exemptions, please refer to the Winter, 1996, Taxletter article describing circumstances where amounts of $600,000 and $1,097,073 are potentially exempt from U.S. federal estate tax. U.S.
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The IRS has issued regulations which will require a nonresident alien to obtain a U.S. Individual Taxpayer Identification Number (an "ITIN") if he/she is required (after 1996) to file a U.S. income tax return, estate tax return, or gift tax return. Penalties may apply for noncompliance. A new IRS Form W-7 must used to apply for your ITIN.
Actually, up to now it has often been difficult for a nonresident alien to receive a U.S. taxpayer number "on demand". Therefore the new rules will, in fact, be a relief to many Canadians who have rented out their U.S. real estate and been subjected to demands by real estate agents to either supply a U.S. taxpayer number or suffer a 30% withholding tax on rental income. Although a draft of Form W-7 was issued earlier, the IRS has indicated the final Form W-7 may be available by early July, i.e. by the time you receive this Taxletter. More in the next Taxletter.
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People often give a "power of attorney" to another individual. A power of attorney is a legal document which generally gives the person you designate in the document the power to take certain action on your behalf, without your approval.
But what happens in cases where the individual giving the power of attorney becomes incapacitated. For example, an individual gives a power of attorney to his/her lawyer but subsequently suffers a medical condition which results in a court judging the individual giving the power to be incompetent. Is the power of attorney in favor of the lawyer still valid?
The applicable law may vary from jurisdiction to jurisdiction. In Florida a general power of attorney expires when the individual giving the power is no longer capable of extending authority to act on his/her behalf. Ironically, it is at this moment that the need for the power of attorney is often greatest.
However a power of attorney will not expire if it is a "Durable Power of Attorney". In Florida, a Durable Power of Attorney must be in writing, it must include language stating that it is your intent for the power to continue in effect if you become incapacitated, and it must be executed under the same rules applicable to the sale of real estate. Please consult your lawyer for the exact requirements in your jurisdiction.
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If you sell U.S. real estate you are generally subject to U.S. "capital gains" tax on your profit. (A special tax treaty rule applies to certain property acquired before September 27, 1980). The capital gain is normally determined by subtracting your "cost" of the property from the net sale price. But what is your "cost" of the property if you inherited it, or if it was owned jointly by you and your now-deceased spouse.
Normally if you inherit U.S. real estate your "cost" is the fair market value of the property at the date the owner died (or exactly six months later in certain cases). Therefore your U.S. capital gains tax generally applies only to the increase in value since the prior owner died.
If the property was owned jointly (with right of survivorship) by you and your now-deceased spouse, in many cases your "cost" is a combination of the original purchase price (for your portion) and the fair market value at your spouse's death (for his/her portion).
More interesting results may apply for some couples who purchased their property jointly (with right of survivorship) before 1977. According to a recent court case, if one spouse dies (the spouse who provided all the original purchase funds), the other spouse's "cost" may be the full value of the property at the date of death of the first spouse.
Example: Michael and Joan purchased a Florida residence in 1976 for $60,000 (jointly with right of survivorship). Michael provided all the purchase funds. Michael died in 1995 at which time the property was worth $185,000. If Joan sells the property in 1998 for a net amount of $200,000, assuming there are no other tax factors involved, her taxable "capital gain" for U.S. purposes may be determined as follows in many cases, according to certain court decisions:
Sales proceeds $200,000
Joan's "cost":
(Value of the property in1995) 185,000
Taxable gain
per certain court decisions 15,000
The rules for "cost" are very complex. The above rules may not apply in your circumstances. Also, they do not necessarily apply in "community property" States. Florida is not a community property state. Again, separate tax treaty benefits also apply to certain property acquired before September 27, 1980.
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Individuals who normally have the right make decisions about their health, including the right to choose or reject medical treatment, may not be capable of making these decisions in certain circumstances. Mental incapacity, or even physical incapacity may prevent you from expressing your own desires. For example, people are occasionally kept alive only by machines, perhaps against their wishes.
In jurisdictions where the law provides, including Florida, a "living will" gives you the right to express your wishes and have the security of knowing they will be respected.
Your "living will" is a separate document from your regular Will. The living will should be very clear about the type of medical treatment you do (or do not) want, if you become terminally ill, including your wishes about life-prolonging procedures such as artificial respiration or medication that would delay death. Although not always mandatory, your living will should designate the individual responsible for carrying out your wishes to ensure they are honored. In most jurisdictions these individuals are called "health care surrogates".
Different jurisdictions have different rules applicable to these documents. Please consult your lawyer.
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The U.S. proposal to levy its version of a "departure tax" continues to remain in the spotlight. The proposal received new impetus when it was re-introduced in the President's new budget plan released earlier this year, and then included in U.S. Senate proposals as recently as June 19, 1996.
Under current proposals the expatriation tax would generally apply to U.S. citizens who relinquish U.S. citizenship and certain long-time "green card" holders who cease being taxed as U.S. residents if:
Such individuals would generally be treated as if they sold all their property at fair market value immediately before losing their U.S. citizenship or terminating U.S. residency. The resulting gain would be subject to U.S. tax at that time, subject to a $600,000 per person exemption. Certain deferrals would apply.
As an astonishing additional feature, the Administration's proposal would levy U.S. income tax on U.S. taxpayers receiving a gift or inheritance from a person who was subject to the expatriation tax. In other words, if you are a U.S. citizen or U.S. resident and you receive a gift or inheritance from a person who was previously a U.S. citizen or resident, you may be required to pay U.S. income tax on the money or other property you receive if the other person had been subject to the expatriation tax. (But - how would you know if the person had been subject to the expatriation tax - especially if it occurred many years earlier?).
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With litigation increasingly commonplace, some individuals seek ways to protect their assets from potential nuisance lawsuits. By transferring your assets to an asset protection trust (or an entity owned by such a trust) you may be able to retain control over your assets without them being readily exposed to frivolous claims.
Often, an important element of such trusts is the use of an independent offshore trustee that is domiciled in a country which does not recognize the judgments of Canadian or U.S. courts. Hence the assets in the trust may be beyond the jurisdiction of Canadian and U.S. courts (and thus beyond the attack of your potential creditors), even though the assets themselves may actually be located in Canada or the United States.
The asset protection trust may generally be intended as an asset protection vehicle, not a tax planning vehicle. Normal income tax rules may continue to apply.
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When U.S. real estate is subject to a valid "nonrecourse" mortgage, only the net equity in the property is generally subject to U.S. estate tax. In prior years some Canadians placed nonrecourse mortgages on their U.S. property by arranging mortgages from family members or family companies. In some cases it may now be advisable to dismantle this structure.
The new proportionate and marital estate tax credits implemented under the 1995 tax treaty Protocol provide important estate tax reductions and/or numerous planning alternatives for many Canadians. However these tax credits are based on the proportion of your property located in the United States. The higher the proportion in the U.S., the higher the potential tax credits. But if your U.S. property is subject to a nonrecourse mortgage you can use only the net equity in the U.S. when figuring the U.S. proportion. Hence you could receive lower tax credits than you would receive if there were no mortgage on the property.
Each case requires its own analysis to determine the best course of action. However, considering the nuisance value of a mortgage fabricated amongst family members or entities (e.g. the possible requirement for the borrower to pay interest to the lender), it could be advantageous for many mortgages to now be liquidated. Please contact your tax advisor before proceeding.
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Some Canadians who are subject to U.S. estate tax have made arrangements in their Wills to donate Canadian property to a Canadian charity upon their death. As a result, U.S. estate tax may be payable on the full amount of the U.S. property.
However, a change included in the 1995 tax treaty Protocol may now induce such individuals to consider donating U.S. property, rather than Canadian property, to the Canadian charity. Under the new rule, generally, if you donate U.S. property subject to U.S. estate tax to a qualified Canadian charity you can obtain a U.S. estate tax deduction for the contribution to the Canadian charity (and pay less estate tax) without reducing the amount going to the Canadian charity.
For example, if you own both U.S. and Canadian stocks, it may be preferable (from a U.S. estate tax perspective) to donate the U.S. stocks to your Canadian charity, rather than donating Canadian stocks (or cash) to the Canadian charity. (But you must keep in mind the special exemptions available for certain estates not exceeding US $1.2 million). The rules are complex - please consult your tax advisor before proceeding.
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By Michael Rosenberg, Esq., and
Dennis Ginsburg, Esq., Attorneys,
Tel: 305-665-3311
(The following is an excerpt from a recent article).
Importantly, an alien individual who meets the Closer Connection Tax Home (CCTH) Exception must file a statement with the Internal Revenue Service on a timely basis to claim that he or she satisfies this test. That statement is now made on Form 8840 ("Closer Connection Exception Statement for Aliens") which must be filed on or before the date prescribed by law (including extensions) for making an income tax return as a nonresident alien of the calendar year to which the statement applies. If you do not file the statement, you will not be eligible to claim the benefit of the CCTH exception unless you can show by clear and convincing evidence that you took reasonable actions to become aware of the filing requirements and significant affirmative steps to comply with those requirements.
To illustrate the seriousness of this matter, an individual who spends as few as 122 days in the United States each year (i.e., slightly more than 4 months), but does not file this CCTH Statement, will be classified as a resident alien. Recently, the Internal Revenue Service was asked to rule that a nonresident alien husband and wife who had been in frequent contact with their U.S. attorney with regard to the application of the Substantial Presence Test but who only belatedly collected the necessary information to apply the test could file the CCTH Statement late. Permission was granted. However, it is critical to remember that such rulings are granted only on the specific facts presented and the stakes are possible worldwide income taxation. Our advice: See your U.S. tax advisor often and on a timely basis.
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Form 1040NR (U.S. Nonresident Alien Income Tax Return) can be filed electronically by submitting a magnetic tape or diskette to the IRS, or by modem to modem transmission. However, because of the on-site computer programming required, electronic filing of Form 1040NR may not be practical for most people. For information you can write to: IRS, Magnetic Media, DP 115, Attn: 1040NR, 11601 Roosevelt Blvd., Philadelphia PA 19154.
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Can Revenue Canada collect from you if you emigrate from Canada to the United States? Can the IRS collect from you if you emigrate from the U.S. to Canada (or, say, to France)? Perhaps they can.
Some tax treaties between countries contain "collection assistance provisions" as well as information exchange provisions. For example, the United States has a tax collection agreement with Revenue Canada, and also with the tax authorities of France, Sweden, Denmark and the Netherlands. The U.S. Treasury is also continually attempting to negotiate additional agreements with other countries. At the request of, say, Revenue Canada, the IRS will issue assessments of a Canadian tax liability against a U.S. resident and take enforcement action including lien and seizure if the tax is not paid. The treaties generally do not require a country to collect tax from its own citizens in certain cases. Of course this protection may not be relevant for a Canadian in the U.S. or a U.S. citizen in Canada.
Another tool at the IRS disposal is the "Treasury Enforcement Communications System (TECS). This is a computer database of information operated by the U.S. Customs Service but filled with information received from various U.S. Government agencies, including the IRS. Persons arriving in the U.S. can be checked against this database at the time of entering the United States. If the individual is listed in the database, the Customs Service will immediately advise the relevant government agency (e.g. the IRS) that the individual has entered the country. If the IRS is involved it will then notify the local IRS district to take appropriate enforcement action. For more information on TECS or other overseas collection procedures you can contact the IRS at 202-874-1390.
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When filing a U.S. individual or corporate income tax return you have at least two filing dates to keep in mind. First, each return has a due date, and secondly, each has a deadline date.
The due date is, of course, the date by which the return should be filed. Late filing will usually result in penalties if there is tax due. (For individual State returns, penalties may apply to late returns even if no tax is due).
Also, if applicable, corporate Form 5472 (corporations disclosing related party transactions) must generally be filed on a timely basis or a $10,000 penalty applies regardless of whether tax is due.
However other significant non-financial penalties may also apply for late filing. For example, certain elections must be made on a "timely" return, otherwise the election cannot be made. An example is the election by Canadians who are U.S. residents (or U.S. citizens in Canada) to defer current U.S. taxation on income accruing within an RRSP. In addition, readers are aware a "closer connection statement" generally cannot be filed at all, if the due date has passed. Many other examples apply.
The deadline date for a tax return is an entirely separate matter. In order to penalize nonresident aliens (and non-U.S. corporations) who ignore their requirement to file a U.S. tax return the IRS generally disallows your business deductions if your return is filed after the deadline date. In other words, you will owe U.S. tax on your total income, not just your net profit.
For example, if you are carrying on business in the U.S. and the business is subject to U.S. income tax you may not be able to deduct expenses for salaries, travel, office expense, etc., if your U.S. tax return is filed after the deadline date. Similarly, if you rent out your U.S. real estate you may not be able to deduct expenses for commission, repairs and maintenance, property taxes, interest, etc., if your return is filed after the deadline date.
The deadline date is based on the due date for the return. The deadline dates are generally 16 months and 18 months after the due date for individuals and corporations, respectively, however in some circumstances the deadlines are earlier.
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By: Joseph Grasmick, Esq., Attorney
Tel: 716-842-3100
In the Fall, 1995, issue of the Taxletter I listed the three routes to U.S. citizenship, namely:
To become a naturalized U.S. citizen an individual must have:
Certain people are deemed to be undesirable and will not qualify. In the next Taxletter I will describe the procedure for obtaining naturalization.
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By: Norman B. Kluger, Mortgage Broker,
Tel: 941-263-3061
While the 1995 tax treaty protocol's estate tax changes have recently made it easier for many Canadians to invest in real estate in the U.S., mortgage lenders have always given our neighbors to the north special consideration. Most "Portfolio Mortgage Lenders" (those who keep the loans they originate in their own portfolios) underwrite mortgage loans for Canadians purchasing second homes and/or investment properties on the same basis as they underwrite for U.S. citizens and resident aliens.
Foreign nationals from anywhere else in the world seeking residential mortgage financing in the U.S. often face higher interest rates and lower loan to value ratios.
The reasons for Canadians' special consideration relates to the quality of the documentation which can be provided on the borrower's income and credit standing. Canadian tax returns are relatively easy for our lenders to analyze and Canada is one of the few places in the world where a resident's bill payment history is computerized and easily available to those authorized to inquire.
Typically, documentation for most foreign nationals is based upon letters from the borrower's accountant and credit references from one or two banks from their country of origin. Credit reports on citizens of countries other than the U.S. or Canada may be less accurate and at times only indicate information available in the public records, (i.e. judgments etc.).
Canadians can borrow up to 80% of the lesser of the appraised value or purchase price. Most of the loans are at the same rates available to U.S. citizens. For this consideration Canadian borrowers must provide the lender with their two most recent tax returns and evidence that they have sufficient cash on hand to go to settlement. With some lenders, Canadians have the option of documenting their income with either tax returns or an accountant's letter.
Applying for a loan is quite simple. All that is required are copies of the following: (a) two most recent tax returns or an accountant's letter indicating taxable income for each of the last two years, (b) contract to purchase the property and, (c) two month's bank statements where the funds needed to settle are deposited. A myriad of consumer protection notices are signed and an application fee is paid to cover the costs of the appraisal and credit report. A mortgage loan commitment can be issued in two weeks or less. Closing on the loan and settling generally takes an additional two weeks, but can be completed in a day or two if needed.
There is no requirement that you be present in the U.S. to close. The deed and loan documents can be sent to you in Canada and executed in the presence of an appropriate notary and then returned to the U.S. for funding and recording.
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By: Wallace Weylie, Esq. Attorney
Tel: 813-596-9078
The U.S. Senate has passed legislation that would bar an individual from entry into the United States for 10 years if the individual has overstayed his/her permitted time in the U.S. by an accumulation of 12 months in a 10 year period. A similar provision has been passed by the Congress. The two versions must be reconciled by a joint committee of the Senate and House of Representatives, a new bill created and passed by both houses, and signed by the President before it becomes law. We will keep you posted.
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If you inherit U.S. property subject to U.S. estate tax, and the estate of the deceased person does not pay the tax, are you personally liable for the tax? As a general rule the answer is "yes". The U.S. Courts are in agreement on this answer.
However, suppose many years have elapsed since the estate tax was first due. As the heir, are you also required to pay annual interest for all the years the tax remained unpaid, even if the total amount of the interest exceeds the value of the property you inherited?
The answer again may be "yes".
In two separate Court cases, two brothers each inherited property from their father. In each case the estate did not pay the estate tax due on the property the sons inherited. More than eight years had passed since the death of the father and therefore the IRS claimed interest, as well as the estate taxes, from each son. The sons refused to pay the interest and the cases went to Court. However the cases went to Court in a different "Circuit" for each son. (The U.S. Federal Court system is divided into "Circuits". Each circuit represents a geographical area of the United States.)
In both Circuits the Courts decided the sons were liable for both taxes and interest. However in one Circuit the Court decided the total liability (interest and taxes) could not exceed the value of the property inherited. But the other Circuit decided there was no limit. In other words, the son was personally liable for taxes and interest even though they exceeded the value of the property he inherited.
The parties can ask the Supreme Court to resolve the issue, however the Supreme Court is not obligated to hear the cases.
In the meantime, you may wish to ensure any unpaid U.S. estate tax in your family is now paid.
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The IRS is hiring private tax collectors in selected U.S. States. The program is expected to last up to three years. The project will permit certain law firms and debt collection agencies to work on overdue tax liabilities on behalf of the IRS. The IRS expects to turn over approximately 125,000 cases of overdue taxes to the firms chosen as collectors. The collectors will locate the taxpayers and secure arrangements for payment of overdue taxes.
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The IRS has adopted several provisions of the "Taxpayer Bill of Rights 2" (proposed legislation which was not enacted). The IRS has delegated increased authority to the Taxpayer Ombudsman to issue Taxpayer Assistance Orders and to "take positive steps to relieve taxpayer hardship". In certain cases the Ombudsman can issue an Order directing the IRS to pay a refund or stay an IRS tax collection action.
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United States tax forms can be obtained by telephoning 1-800-829-3676. Alternatively you can fax your request (using the voice unit) to 1-703-487-4160.
Computer oriented individuals can obtain Forms on CD-ROM by telephoning 1-202-512-1800 (cost $46), or you can obtain them from the IRS "home page" on the World Wide Web at http://www.ustreas.gov/treasury/bureau/irs.
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Although "green cards" (lawful permanent residence in the U.S.) are often difficult to obtain, occasionally people with green cards decide they no longer want them. For example the individual may no longer wish to reside in the U.S. and he/she may find the ongoing U.S. tax requirements or implications associated with the green card are too burdensome. Hence he/she may wish to relinquish the green card.
There are several ways a green card can be relinquished (or revoked). If you wish to voluntarily relinquish the green card, you can simply mail the card back to the U.S. Immigration & Naturalization Service (or a consular officer) with an application for abandonment (INS Form I-407) or with a letter stating your intent to abandon your residency status. You should mail it by certified mail, return receipt requested.
Alternatively you could have your green card revoked by U.S. government action. This could happen, for example, if you leave the United States and attempt to re-enter more than one year later. Although your card could be seized you have the right to appeal.
A green card can also be revoked if an individual is involuntarily deported from the United States (through a judicial or administrative proceeding).
There has recently been increased interest in the voluntary relinquishment of green cards since the U.S. Government has proposed to implement an "exit tax" on long-time green card holders. (Please see the article "EXPATRIATION TAX REMAINS ALIVE!").
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©Brunton's U.S. Taxletter for Canadians
The information herein is provided for your general information. Action should not be taken on the basis of this letter. Action should only be taken on the advice of your professional advisor applying these rules to your specific situation.
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