What Offshore Delinquent U.S. Individual Filers Need To Know! – Part 3

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I understand that if my income is all from Canada I will have no U.S. tax payable, then why is the cost of the U.S. tax preparation so expensive relative to my simple Canadian T1 return?


For most U.S. persons residing in Canada, there may be no tax payable if substantially all of your income is from Canadian sources because of the foreign tax credit mechanism. The annual inflation-adjusted foreign earned income exclusion ($97,600-2013) which is a deduction in arriving at adjusted gross income on the U.S. 1040 tax return, may exclude your T4 or self-employment income from taxation. However leakage may result if income determination for U.S. tax purposes under the IRS Code and Regulations is different from Canada.

Where applicable, relief may be available from the treaty but that position may require filing IRS Form 8833 to disclose a Treaty-Based Return Position Disclosure. There may be an opportunity to reduce your Canadian tax previously paid if there is U.S. tax payable on U.S. source income. If you provided personal services in the U.S., regardless of who paid the remuneration, that income may be resourced to Canada if you qualify for an exemption under the treaty.

Outside of the program, the omission of an international information return generally attracts a minimum $10K penalty for non-compliance unless in certain circumstances, a reasonable cause defense is available and accepted.

Compliance hurdles

For the most part, the preparation of the basic U.S. return may not be overly complicated. However information gathering including the completion of required IRS international information returns increases time on the file and the professional cost of compliance for any taxation year where they may apply.

For example:

1. For RRSPs and RRIFs, the reporting is generally simple on IRS Form 8891 and on the FBARs. Basically, the 8891 indicated to the IRS that you were claiming benefits of Article XVIII, par. 7 of the treaty to defer tax on accumulating income in your RRSP/RRIF until a distribution is made. For pension or other retirement plans that are under the scope of Article XVIII, similar plain-paper disclosure was required under previously issued Revenue Procedures or possibly could be made by filing a protective 8833 although the latter was not required for Article XVIII per Regulation 301.6614.

2. On October 27, 2014, the IRS eliminated the requirements to disclose the foregoing and the requirement to file the 8891 for “eligible individuals” by issuing Rev. Proc. 2014-55 applicable to retirement plans that fall under the scope of Article XVIII. It appears that an “eligible individual” will not include a taxpayer who has not filed a tax return. Hence the foregoing disclosures and 8891 should still be made for taxation years filed under the SFOP. As the 8891 is repealed for 2014, it appears that for taxation years subsequent to 2014 that may be part of a SFOP filing, the IRS will announce what they require for the retirement plan. Likely, a simple Treaty disclosure will suffice.

3. U.S. persons with TFSAs or who are contributors to their children’s RESPs will create additional reporting issues if those investment vehicles are classified as a foreign grantor trusts, requiring IRS Forms 3520-A/3520 for each TFSA and RESP. If the TFSA is not regarded as a retirement plan, income credited annually including the CESG and gains (losses) on the sale of securities is included in income. The receipt of foreign gifts in excess of $100K have a 3520 reporting requirement. Canadian family trusts created as part of an estate freeze with U.S. persons as contributors or beneficiaries will also present issues.

4. If you hold at least 10% interest in a Canadian corporation or partnership, you may have to file IRS Form 5471 or 8865 respectively, or possibly IRS Form 8621 if the corporation is a PFIC (“passive foreign investment company”). The latter may hold true for investments in Canadian mutual funds that may be classified under U.S. rules as a corporation and taxed under the punitive excess distribution regime unless certain elections are made. Form 5471 becomes more complicated if the corporation is a CFC (controlled foreign corporation) requiring balance sheet/income statement information and the computation of an accrual on the U.S. 1040 of Subpart F income (generally passive income) for your share of that income if certain minimum thresholds are exceeded. Under a 10% interest in a foreign partnership may require 8865 reporting for contributions to the partnership that are in excess of $100k.

5. Also IRS Form 926 for asset transfers to a foreign corporation such as the incorporation of your proprietorship or simply for just cash transfers in excess of $100K.

6. Commencing in 2011, IRS Form 8938- Statement of Foreign Financial Assets may also have to be filed. And of course we have six years of FBARs (FINCEN114) required by FINCEN.

Basically any foreign entity you have an interest in may require additional disclosure, an information return or a different manner in computing income for U.S. tax purposes. Each of these forms and instructions are available on the IRS website.

Contact your professional advisor prior to implementing any of the outlined strategies

Next: What Offshore Delinquent U.S. Individual Filers Need To Know! – Part 4

Larry Stolberg, CPA, CA, CPA (South Carolina), has been practicing as a full-time tax specialist for over 30 years, in the Toronto, Ontario Canada and surrounding GTA area with primary emphasis on:

•Corporate restructuring for business owners
•Estate/succession planning
•U.S. expatriate and cross border issues
•Tax efficient planning that will achieve both your short and long term objectives

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