We have expertise in filing requirements, applying for waivers and filing corporate and personal income tax returns to recoup Regulation 105 withholdings.
Regulation 105 – Withholding Taxes Regulation 105 of the Canadian Income Tax Act imposes a 15% withholding tax on fees, commissions or other amounts earned from services rendered in Canada by non-resident individuals and corporations. If these services are rendered in the province of Quebec, they will be subject to an additional Quebec withholding of 9%. These amounts must be withheld by the Canadian payor even if the non-resident providing the services has no permanent establishment in Canada. However, even if the non-resident has no permanent establishment in Canada, these withholding taxes can be recouped. The non-resident entity must file a Canadian (and Quebec) tax return at the end of the non-resident’s fiscal year and claim a refund to the extent permitted on those tax returns. Purchasers of services from non-residents are relieved from the obligation to withhold taxes only if the non-resident obtains a waiver from the CRA and the MRQ, where applicable. The withholding tax on services is called Regulation 105 withholding. It applies to services only and NOT to the sale of goods (in bundled contracts) or the reimbursement of expenses where no profit is earned. Penalties for not withholding can be high – 10% of the tax (and 20% in cases of gross negligence). Non-residents have to apply to CRA for a business number (BN) and they should receive a tax slip (T4A NR) from each of their Canadian customers showing the gross amounts paid and the taxes withheld on a calendar year basis. The filing deadline for a T4A NR is February 28 of the year following the payment(s).
Regulation 105 – Waivers The 15% withholding is not the final tax of the non-resident. CRA considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts. Where a non-resident can demonstrate that the withholding is higher than their potential tax liability in Canada, either due to treaty protection or income and expenses, the CRA may reduce or waive the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit a waiver application to the CRA tax services office in the area where their services are to be provided. Waiver applications have to be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services. Waivers from withholding taxes can be applied for by the non-resident. These waivers can be one of two types:
The non-resident must provide a letter from the Canada Revenue Agency authorizing a waiver or reduction of the withholding amount. If you do not receive such a letter, you have to withhold the usual 15%. Form: Regulation 105 Waiver Application Form Use this form if you are a non-resident self-employed individual or corporation and want to apply for a reduced amount of Regulation 105 withholding tax from amounts paid to you for services provided in Canada.
Regulation 105 – Tax Filing Obligations of the Non-Resident Every non-resident providing services in Canada must file a Canadian tax return (and Quebec tax return where applicable) and report the income that it earned in Canada. This obligation is the same whether or not the non-resident has or is deemed to have a PE. If the non-resident is an individual and has or is deemed to have a PE in Canada, then they will pay income taxes based on graduated tax rates without entitlement to any personal exemptions. Corporations pay part I tax (29% to 35%, depending on the province in which they operate) as well as a branch tax (5% for US corporations), with an exemption on the first $500,000 of business profits. Individuals have filing deadlines of June 15 of the following calendar year. Corporations have to file within 6 months after their year-end. Regulation 105 withholding can be refunded by completing a Canadian tax return. The refunds could be received more than 18 months after the taxes are withheld. These taxes are not refundable if tax returns are filed more than 3 years after the relevant taxation year-end.
Regulation 105 – Goods and Services Tax (GST) GST and its provincial counterparts, HST & QST, have to be charged on supplies (goods and services) made in Canada. Non-residents have to register for GST if they have a PE in Canada. PE definition for GST purposes is broader than for income tax purposes – the only criterion which must be met for PE to exist for GST purposes is the existence of a fixed place of business like an office or a workshop. Note that non-residents can voluntarily register for GST if they don’t have a PE in Canada. Registration for GST will entitle the non-resident to claim a refund on GST it incurs in its commercial activities in Canada. In this case, CRA requires the non-resident to post-security. The security is waived if the non-resident’s taxable supplies in Canada do not exceed $100,000 annually and whose annual net tax is between $3,000 payable and $3,000 recoverable.
Regulation 105 – Permanent Establishment Non-residents who provide services through a permanent establishment in Canada must file Canadian income tax returns. They must report and pay Canadian income taxes on the income they generate from the services provided. Americans must refer to Article V of the US Canadian tax treaty for the definition of permanent establishment:
Note that an independent agent who is acting in the ordinary course of his business does not create a PE; PE specifically excludes a fixed place of business used solely for – storage, display or delivery of goods – Purchase of goods; and – Advertising or supply of information or scientific research.
Regulation 105 – The US-Canada Tax Treaty and the Fifth Protocol Changes to the rules on the taxation of services rendered by a US non-resident came into effect on January 1, 2010. Article XIV was eliminated and new deeming rules were introduced and inserted at the end of Article V of the Treaty (paragraphs V(9)(a) & (b)). The rules now state that if PE does not, in fact, exist based on the existing rules, then it will be deemed to exist if:
Services are performed by an individual who is present in the other Contracting State for more than 183 days in a 12-month period and, during this period, more than 50% of the gross active revenues of the enterprise are generated from these services; or
Services are provided in the other Contracting State for more than 183 days in a 12-month period with respect to the same or connected project for a customer’s PE in the other Contracting State. The collective presence of more than one individual providing services during one calendar day will only count for one day of physical presence by an enterprise in the other state.
Regulation 105- Tips for Non-Residents Providing Services in Canada Review any on-site installation and training activities in Canada to ensure that appropriate Canadian tax filings and payments are made. Review and complete the CRA’s checklist (T2 SCH 91 E) to determine PE status in Canada. If a PE is deemed to exist in Canada consider alternatives for recovering a portion of Regulation 105 withholding tax based on actual income earned on the contract in Canada. Ensure that contracts with Canadian customers clearly distinguish between services provided in Canada and elsewhere. If the distinction is not clear, the entire contract would be subject to Regulation 105 withholding tax. Review the obligation to register for GST/HST and QST where applicable. Given the delay in receiving a refund of Regulation 105 withholding and the fact that the IRS will not grant a foreign tax credit on foreign taxes which should be refunded, the US resident should consider creating a PE in Canada in order to expedite the recovery of its foreign taxes.
CRA Information Circular IC 75-6R2 “Required Withholding from Amounts Paid to Non-Residents Performing Services in Canada” Quebec TP-1016-V
Interpretation Revenu Quebec ADM. 7-, “Reduction in Source Deductions in Income Tax in Respect of a Payment for Services Rendered in Quebec by a Person Not Resident in Canada”.
Applications for a waiver or a reduction of withholding: The 15% withholding is not the final tax of the non-resident. Canada Revenue Agency considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts. Where a non-resident can demonstrate that the withholding is more than their potential tax liability in Canada, either due to treaty protection or income and expenses, the Canada Revenue Agency may waive or reduce the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit a waiver application to the Canada Revenue Agency tax services office in the area where their services are to be provided. Waiver applications have to be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services. The non-resident must provide a letter from the Canada Revenue Agency authorizing a waiver or reduction of the withholding amount. If you do not receive such a letter, you have to withhold the usual 15%.
Waiver application form: Regulation 105 Waiver Application Form
Use this form if you are a non-resident self-employed individual or corporation and want to apply for a reduced amount of Regulation 105 withholding tax from amounts paid to you for services provided in Canada.
What is an FBAR? An FBAR is the “Report of Foreign Bank and Financial Accounts” that must be filed with the US Department of Treasury. The FBAR is now filed on FinCen Report 114 (formerly form TD F 90-22.1)
Who Must File an FBAR? United States persons are required to file an FBAR if:
United States person means U.S. citizens; U.S. residents; Green Card Holders, entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.
Reporting and Filing Information: A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR. The FBAR is a calendar year report, which must be filed with the Department of Treasury on or before June 30 of the year following the calendar year reported. Generally, extensions of time to file an FBAR are not granted.
The FBAR is not filed with a federal tax return. Any filing extensions of time granted by the IRS to file a tax return does not extend the time to file an FBAR. Since July 1, 2013– Electronic filing of FBARs is mandatory.
UHY Victor LLP is authorized to file FBAR’S electronically on behalf of the person who has the obligation to file an FBAR. US taxpayers holding foreign financial assets may also need to file Form 8938 (Statement of Specified Foreign Financial Assets) with their 1040 US tax return.
The Canada Revenue Agency (CRA) and Quebec Minister of Revenue (Revenue Québec) have Voluntary Disclosure Programs (VDP) that allow taxpayers who have not fulfilled their tax obligations to voluntarily rectify their situation without facing penalties and potential legal prosecution. When a Voluntary Disclosure application is accepted, the taxpayer only pays the relevant taxes owed plus interest. These programs are not meant for all situations and have certain restrictions, and taxpayers should consult with a professional before initiating a Voluntary Disclosure. The main advantage of making a voluntary disclosure is that the taxpayer will not be liable for penalties which might otherwise be assessed in respect of unreported income. These penalties can be substantial – often in excess of 50% and even 100% of the taxes owing. In addition, partial interest relief may also be granted. A taxpayer can also obtain protection from criminal prosecution in certain cases through a Voluntary Disclosure.
Voluntary Disclosures – Conditions: Taxpayers are expected to remain compliant after their Voluntary Disclosure. In order for a Voluntary Disclosure to be valid, it must meet all of the following conditions:
The Voluntary Disclosure Program does not accept disclosures relating to:
Voluntary Disclosures – Assessment Methods (Note – these are only general guidelines) While the CRA and Revenue Québec programs have similar conditions to qualify, the respective agencies have very different approaches when processing Voluntary Disclosures.
Canada Revenue Agency: Generally, the CRA will tax the unreported income going back 10 years plus interest.
Revenue Québec: Normally, Revenue Québec will begin by taxing the taxpayer’s unreported opening capital (with the assumption that it was never reported when it was earned), and then tax any income going back 6 years. However, depending on the scenario other methods of calculating the taxes owing are accepted by Revenue Québec from time to time.
Voluntary Disclosures – Named versus Anonymous: When initiating a Voluntary Disclosure, the taxpayer can either:
There are pros and cons with both of the above options, which should be reviewed prior to initiating contact with the CRA and Revenue Québec. For more information about the Canada Revenue Agency (CRA) Voluntary Disclosure Program click here.
For more information about the Revenue Québec Voluntary Disclosure program, click here.
Our office has processed a large number of voluntary disclosures with both the Canada Revenue Agency (CRA) and the Quebec Minister of Revenue. We have developed systems to efficiently summarize financial information and create reports designed present information in a format acceptable to Voluntary Disclosure processing officers with both the Canada Revenue Agency (CRA) and the Quebec Minister of Revenue.
On a strictly confidential basis if you have questions regarding the VD program. Please contact:
Non-resident sale of Quebec real estate:
Note that this process describes the withholding taxes only. The actual income tax liability is determined by filing Canadian and Quebec tax returns by April 30 of the following year.
Contact us directly if you require assistance with the sale of real estate located in Quebec.
Transfer prices are prices that companies charge for goods, services, tangible and intangible assets they trade with subsidiaries and other controlled entities. Given that these transfer prices are set internally by management, they are frequently subject to scrutiny by both the IRS and the CRA. Tax authorities concur that the proper transfer price is one which two parties dealing at arm’s length would agree to. Consequently, the objective of transfer pricing experts is to determine what is the “arm’s length price” or “market price” is for any particular situation. In recent years both the CRA and the IRS have increased their emphasis on transfer pricing audits. Both these tax authorities require companies to have documentary evidence supporting their transfer prices. A proper analysis of many factors is required to determine a transfer price, including:
Regulations in Canada: In the absence of proper transfer pricing documentation, the tax auditor is required to assess a penalty of 10% of the net adjustment of the transfer price. In addition, companies are required to have transfer pricing documentation that is current, and it must be provided to the CRA within three months of a written request to do so.
Agreements: Companies start their transfer pricing analysis by identifying the transactions between related parties, which generally fall into the following areas:
Industry & Market analysis: The industry and market analysis provides a description of the general business environment, and includes:
Functional Analysis: Functional analysis is at the core of the transfer pricing study and includes analysis of:
Selection of a Transfer pricing method: The CRA provides the following hierarchy of the following five methods:
The CRA requires that the CUP method is used if possible. In cases where the CUP method is not feasible, one of the remaining four methods is to be used. In the rare case that it is not possible to use any of the above methods, other unspecified methods may be used. However, in general, it is not advisable to use unspecified methods. The selection of a method will depend on the functional analysis and availability of comparable transactions. If it is possible to use the internal CUP method, then the selection of a method can be relatively straight-forward.
Economic Analysis The economic analysis provides the following:
Recommendation The recommendation is a clear statement of the recommended transfer pricing policy.
Implementation & Monitoring This section details the most efficient method of implementing the selected transfer pricing policy. A transfer pricing study should be updated each year to reflect any material changes in the transactions under consideration. Provided that no material changes have occurred, an update is generally simple and straightforward. Since every study must be prepared by the filing due date (generally 6 months after the corporate year-end), it is advisable to monitor and document all the changes as they occur during the year. If circumstances change such that some or all transactions did not represent an arm’s length price, it is possible to record a compensating year-end adjustment. This adjustment should be fully documented.
Disclaimer: While every effort has been made to ensure that this site contains accurate information, it is possible that errors do exist in the materials presented. All of the information provided here is provided “as is”, with no guarantees of completeness, accuracy or timeliness, and without warranties of any kind, express or implied. The information presented on this site should not be considered to be or construed as legal, economic, tax, or accounting advice.
If you owe the IRS taxes on your 1040, there are several payment options available to you including electronic payments.
Payment options include:
More information is available at IRS Payment Options https://www.irs.gov/payments
Personal income tax instalments are due on:
For more information on Personal Income Tax Installments, click here.
Each year businesses face a choice – what report do they want on their year-end financial statements. There are several types of financial statements that we can prepare, including the following: audited financial statements (most costly), reviewed financial statements, compiled financial statements.
Audit Report: We give an opinion as to whether the financial statements, taken as a whole, are fairly presented. This opinion is given after extensive tests of the accounting records are made. The tests include confirmation with outside parties, analytical procedures, the inquiry of client personnel and a detailed study of the accounting records.
Review Engagement Report: We express limited assurance that we have not noted any items that would require adjustments that should be made to the statements in order for them to be in conformity with accepted standards. The accountant must conduct a review and be satisfied as to the reasonableness of the statements through inquiry and analytical procedures.
Compilation Report: We expresses no assurance on the correctness of the financial statements. We only disclose, in the form of financial statements, information that is the representation of the management of the business entity. The most common reason for obtaining the more costly audited financial statements include the requirements of outside parties (such as banks, bonding companies, creditors, absentee owners, or potential purchasers). Reviews are adequate for many businesses because they give us enough familiarity with our clients to provide tax planning advice and a consulting perspective where appropriate. Compilations are generally appropriate for simple situations where limited business and tax advice is required.
If you operate a sole proprietorship, a partnership, or a corporation that has gross sales over $30,000 in a fiscal year, you are required to register for and collect GST and QST. If your sales are less than $30,000, registration is optional.
Pros: Often businesses that are not yet required to register for the GST/QST do so anyway. One benefit of registering early is that you can claim back the GST/QST you paid for start-up purchases. For some businesses charging the GST/QST adds credibility, as customers won’t know that the company is earning less than $30,000 a year.
Cons: Being registered means that you have extra paperwork to do. And of course, you also have to charge and remit the tax.
One of the most popular year-end tax-planning strategies is tax-loss selling, which can help you reduce your capital gains tax. Particularly with the recent strong performance in the Canadian stock market, you may have significant taxable capital gains, triggered by selling stocks at a profit. Half of your net capital gain is taxable at your marginal rate. However, you can offset your capital gains with capital losses. While no one likes selling a stock at a loss, it can make sense when the stock no longer meets your investment objectives – and you can use the loss to reduce your taxes.
Your investment advisor can help you identify which stocks are suitable candidates for tax-loss selling.
Key dates: For Canadian tax purposes, a sale takes place on the “settlement date” – normally three days after you initiate the sale. If you are considering a tax-loss sale, make sure you allow enough time for the transaction to settle in 2018.
Initiate sale by:
Offsetting gains in past or future years: Capital losses have to be used to offset capital gains the current year first. If the losses exceed the gains, then you can apply the excess amount against capital gains in the three previous years (2016, 2017, or 2018) or you can carry it forward indefinitely.
Superficial losses: Simply selling stock to trigger a loss, and then buying it back within 30 days is considered a “superficial loss” by the Canada Revenue Agency, which means that the loss will be denied. The superficial loss rule also applies when your spouse or a corporation controlled by either you or your spouse acquires or reacquires the same security 30 days before or after the sale.
(Note-that the zoning of the listing is not a relevant factor in determining the answer to this question).
The key factor is how the building was used by the present owner (ie – the seller). If the building was used primarily as a place of residence then the sale is exempt from GST and QST. In the case of a split-use property (part residential and part non-residential) then GST and QST would apply to the value of the non-residential portion. If the buyer requests it, the seller must provide a statement when the sale occurs, as to whether all or any part of the property is exempt from GST and QST. This statement is generally found in the deed of sale, but should also be sought in a binding offer to purchase.
Note: that if the buyer is registered for the GST and QST, then GST and QST does not have to be charged on the transaction. It is the duty of the notary to ensure that the GST and QST are charged if required, and they will do this at or before the closing.
Under the US-Canada Treaty, and the US and OECD Model treaties, a Canadian corporation becomes taxable in the United States only where its activities in the United States give rise to a permanent establishment. A permanent establishment is generally defined to include either a fixed place of business (e.g., an office, branch, place of management, factory, etc.) or a dependent agent who habitually exercises the authority to conclude contracts on behalf of the corporation in the United States. The Fifth Protocol to the US-Canada Treaty which includes a clause that became effective January 1, 2010, provides that a Canadian corporation may be deemed to have a US permanent establishment if it either:
If a Canadian corporation has or is deemed to have a permanent establishment in the United States, the Canadian corporation will be subject to US tax return filing obligations and will be required to pay US tax on business profits attributable to that permanent establishment. If profits of a permanent establishment that are taxed by the United States are also taxed in Canada and foreign tax credits are unavailable to offset the full amount of the US tax payable, double taxation on the US source income of the Canadian resident may result. Moreover, if a Canadian corporation fails to file a US tax return because it believes its US activities do not constitute a permanent establishment, that Canadian corporation (if it is later found to have had a US permanent establishment during taxable periods for which a US return was not filed) may be denied the ability to subsequently claim any deductions against income attributed to its US permanent establishment.
For more information contact our Canada/U.S. Tax Team for issues:
There are many reasons why one might decide to use a holding company, which include:
Notice: While holding companies offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax advisor.
Contact us if you have questions or comments.
A family trust is established when legal title to the property is transferred by a person (the “settlor”) to a trust, that is created for a particular purpose. A wide variety of assets can be held by family trusts, including real estate, cash, a portfolio of securities such as shares, bonds and mutual funds, and the shares of privately held corporations. Once the assets are transferred to the trust, they are then administered by one or more trustees for the benefit of the beneficiaries, who have an interest in the trust’s property and/or income. The beneficiaries may be individually listed when the trust is formed or may be identified later as part of a specified group (such as “children” or “grandchildren”). The settlor and trustees execute a trust deed evidencing the settlor’s intention to create the trust, as well as setting out the rights, duties, and obligations of the trustees, and the principles governing the trust. Once the assets are transferred to a trust, they are legally separate and distinct from the assets of the settlor, trustees and beneficiaries.
Potential Benefits of using Family Trusts; Income Splitting:
Succession Planning: For an owner of a business with children who may or may not be interested in becoming active shareholders, Family Trusts can be a very useful succession-planning tool, providing a vehicle for ongoing management and control of the business. In this case, the trustees of the Family Trust could hold the shares of the corporation for the benefit of the entire family until the succession of the business has been determined.
Creditor Proofing: For someone who is concerned about possible financial difficulties in the future, a Family Trust can help to provide creditor proofing and financial security for his or her family. If all income and capital distributions are at the discretion of the trustees, the beneficiaries’ creditors generally cannot seize any of the Family Trust’s assets. In addition, under an appropriately established Family Trust, the Trust may help to provide some protection of assets from future marital property claims involving a beneficiary.
Tax Planning for the sale of a business: Beneficiaries may be eligible to claim the $750,000 enhanced capital gains exemption on the capital gain allocated to them from the disposition of the shares of Canadian business. As a result, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust.
Reduction of taxes on death: A Family Trust could be used as a means of transferring the growth in the value of a family business to the next generation on a tax-deferred basis.
Support for Elderly or Special Needs Individuals: A Family Trust can be an effective way to provide for their ongoing financial needs. By holding assets in a family trust the above benefits can be achieved while the trustees maintain full control (subject to their fiduciary duties as trustees) over the trust property. It is important to note that it is the trustees who control the trust property and not the settlor. The settlor, however, sets the terms of the trust in the trust deed and the trustees are bound to act according to the terms of the trust deed as well as general trust law. In addition, the settlor can be a trustee of the Family Trust.
Notice: While family trusts offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax advisor.
Contact us if you have questions or comments.
A trust is a legal entity which is separate from its settlor (the person transferring property to the trust), its beneficiary (the person who can benefit from the transferred property) and its trustee (the person who controls and administers the trust property).
Spousal Trusts: A trust that is set up through a will upon one’s death is called a testamentary trust. A spousal trust is a form of a testamentary trust whereby specific property is set aside from the estate to be used to provide for the maintenance and support of the deceased individual’s surviving spouse. Generally, the income earned on the assets is paid to the surviving spouse, who also has the right to encroach upon capital if required. Upon death, Canadian tax laws deem that disposition of one’s property occurs at its fair market value as at the date of death. As a result, the appreciation in the value of a deceased person’s assets can trigger income taxes payable on the deceased’s final return. However, if certain conditions are met, the assets transferred directly to a testamentary spousal trust are deemed to be disposed at their original cost, which defers the income taxes otherwise payable on their unrealized gains.
Creating a Testamentary Spousal Trust in a will can accomplish the following:
Notice: While spousal trusts can make sense in certain situations, the rules can be complex and this route should not be taken without first consulting with a qualified tax advisor.
Please contact Ken Shemie if you have any questions or comments.
For technical details refer to the CRA’s IT305R4 “Testamentary Spouse Trusts”.
There are many reasons why one might decide to incorporate a business, which includes: Limited liability: A corporation is a legally separate entity from the owners. Accordingly, the shareholders’ personal assets can be protected from claims made by creditors of the business.
Tax advantages: Income taxes advantages can often be realized because:
Income splitting: Family members can also own shares of a corporation, which can allow for the payment of dividends (directly or through a family trust) to other adult family members who are in lower tax brackets.
Estate planning: Incorporating a business enables the owner-manager to freeze the value of the assets of the company so that the taxes on future increases in the value of the business can be deferred.
Small business capital gains exemption: The tax authorities permit the first $750,000 of capital gains on the sale of Canadian business to be tax-free.
Succession planning: The use of a corporation can enhance the orderly transition of a business to family members or to acquirers of a business.
Continuity of existence: A corporation is a legally separate entity from the owners. Therefore the death of a shareholder does not bring about the end of a business. The businesses activities can continue uninterrupted, and the new owner will be the party that inherits the companies shares from the deceased individual’s estate.
Other considerations: The benefits of incorporation must be weighed against the additional costs and effort that are required to set-up and administer a corporation.
Notice: While the use of corporations offers excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax advisor.
Please contact Sylvie Plante if you have any questions or comments.
U.S. Citizens and U.S. Permanent Residents in Canada A U.S. citizen is subject to U.S. federal estate taxes no matter where s/he lives in the world. Upon death, US federal estate taxes are calculated based on the fair market value of worldwide taxable assets, which generally includes the value of all of one’s property interests at the time of death. Under current rules, estate taxes are calculated on an American’s taxable assets at rates of 18% up to 40%. However, the estate taxes payable amount is reduced by an exemption on the first USD $5.6 million of assets, which means that US taxpayers are only subject to estate taxes if their worldwide taxable assets exceed $11.2 million.
This USD $5.6 million exemption applies to:
Gifts are integrated into the estate tax regime, and the USD $5.6 million estate tax exemption is reduced by any gifts which exceed USD $15,000/year made during a US citizen’s lifetime. Note that the threshold for gifts to a non-resident alien spouse is USD $152,000/year. The gift tax is designed to prevent individuals from gifting assets during their lifetime to their heirs, thereby reducing the estate taxes due on their death. Relatively new rules (referred to as “portability”) permit any unused portion of an individual’s USD $5.6 million exemption to be transferred to a surviving American spouse, which then gets added to their own USD $5.6 million exemption.
Note that this provision applies to the exemption amount for estate taxes only. In addition, an individual who has been widowed more than once may only use the most recent spouse’s available exemption amount.
Canadians: Upon death, U.S. federal estate taxes can be due if you own “U.S. situs assets” Which include:
Excluded assets include:
Canadians who die holding U.S. situs assets in excess of USD $60,000 are subject to U.S. federal estate taxes, which are calculated on the total value of their U.S. situs assets at a rate of 18% up to 40%.
However, the estate will be reduced by an exemption of USD $5.6 million x the ratio of U.S. situs gross assets over worldwide assets. Therefore if a Canadian dies with US situs assets making up 50% of their USD $8 million of world assets, they will have an exemption of USD $5.6 million x $4 million/$8 million = USD $2.8 million. On death, a Canadian will generally pay taxes in Canada on any accrued gains on U.S. assets on their terminal Canadian income tax return. Depending on the specifics, the Canadian Revenue Agency (CRA) will permit a foreign tax credit to be claimed and applied in Canada for the U.S. estate taxes paid on those assets.
However the provinces generally do not allow a foreign tax credit for U.S. estate taxes paid and, as a result, the estate may be subject to some double taxation at the provincial level. The filing deadline for a U.S. estate tax return is generally nine months after the date of death. The 2018 exemption of US$11.2 million, you should be aware that the double exemption is only temporary and effective if you die between 2018 through 2025.
Planning for Estate Tax Liabilities: If your estate is potentially subject to US estate taxes, there may be planning strategies available to reduce your US estate tax exposure.
Notice: U.S. estate tax rules are complex and no planning actions should be taken without first consulting with a qualified tax advisor.
Contact us if you require assistance analyzing your exposure to U.S. estate taxes, and how this liability can be reduced.
For additional information from the IRS click here
This is a complicated and often challenging question!
We regularly assist Americans residing in Montreal and across Canada and other countries deal with late FBAR filings and their potentially expensive FBAR late-filing penalties. Usually, we start reviewing the details, such as:
FBAR – Streamlined Program: The IRS “Streamlined Program” commenced in September 2012. This program is designed to facilitate the process for non-compliant individuals who are considered to be “low-risk” to bring their US tax filings up-to-date and potentially avoiding late filing penalties. This program requires filing 6 years of FBAR’s and 3 years of tax returns and can resolve the FBAR issue at the same time as the unfilled US tax returns.
However the “Streamlined Program”:
Clearly, most Americans who are not compliant with their FBAR filings are concerned with the penalties that can be levied on late FBAR’s. While the Streamlined Program does not provide any guarantees, it can be an attractive option for those who are US tax returns meet the IRS criteria of “low risk”.
FBAR – Voluntary Disclosure: A voluntary disclosure is one method of rectifying deficient tax filings. Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process. Note FAQ 17 of the OVDI web page states:
“The purpose of the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters. Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process.”
However many US and Canadian tax attorneys still recommend using the OVDI program because this FAQ appears to be IRS “policy” only, and is not actual law. The OVDI is an option which should be considered, but keep in mind that the voluntary disclosure process can be expensive and arduous. Our experience is that the IRS OVDI program is backlogged with files, and processing a file can take several years.
FBAR – Quiet Disclosure: Another option is the “Quiet Disclosure”, which consists of quietly mailing in late filings with no special program or cover information. Quiet Disclosures were often successful in the past based on the experience that the IRS processed these tax filings and penalties were rare. We do not recommend this option because the IRS has been alerted to this issue, and we have been informed that their ability to identify late-filings has increased, and they are intending to assess been late-filing penalties.
FBAR – Noisy Disclosure: Some practitioners are still advocating the “Noisy Disclosure” approach, which involves bringing taxpayers through the normal filing process, but with a carefully worded legal letter and personal contact with the IRS. The “Noisy Disclosure” option has not been endorsed by the IRS, and therefore there is little comfort that it avoids late filing penalties.
FBAR – New Filing Procedures: Effective July 1, 2013, FBARs must be filed electronically using the E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This mandatory electronic filing requirement applies to all FBARs, and to amendments of previously filed FBARs, that are submitted by individuals or by entities on or after the effective date.
Final Comment: American residents in Canada and elsewhere are becoming increasingly aware of FBAR filing issues. Great care should be taken when the filing late FBAR’s because the penalties can be onerous. Note that in extreme cases individuals can be subject to criminal prosecution with jail sentences as well as high financial penalties.
|Violation||Civil Penalties||Criminal Penalties||Comments|
|Negligent Violation||Up to $500||N/A||31 U.S.C. § 5321(a)(6)(A) 31 C.F.R. 103.57(h)|
|Non-Willful Violation||Up to $10,000 for each negligent violation||N/A||31 U.S.C. § 5321(a)(5)(B)|
|The pattern of Negligent Activity||In addition to the penalty under § 5321(a)(6)(A) with respect to any such violation, not more than $50,000||N/A||31 U.S.C. 5321(a)(6)(B)|
|Willful – Failure to File FBAR or retain records of account||Up to the greater of $100,000, or 50 per cent of the amount in the account at the time of the violation.||Up to $250,000 or 5 years or both||31 U.S.C. § 5321(a)(5)(C) 31 U.S.C. § 5322(a) and 31 C.F.R. § 103.59(b) for criminal. The penalty applies to all U.S. persons.|
|Willful – Failure to File FBAR or retain records of the account while violating certain other laws||Up to the greater of $100,000, or 50 per cent of the amount in the account at the time of the violation.||Up to $500,000 or 10 years or both||31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal The penalty applies to all U.S. persons.|
|Knowingly and Willfully Filing False FBAR||Up to the greater of $100,000, or 50 per cent of the amount in the account at the time of the violation.||$10,000 or 5 years or both||18 U.S.C. § 1001, 31 C.F.R. § 103.59(d) for criminal. The penalty applies to all U.S. persons.|
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d). If you would like to discuss FBAR’s, contact :
Tax Cuts and Jobs Act: IRC Section 965 “Repatriation Tax” Newly enacted section 965 imposes a “Repatriation Tax” on certain previously untaxed earnings of specified foreign corporations (SFCs) of U.S. shareholders by deeming those earnings to be repatriated.
The repatriation tax generally may be paid in instalments over an 8 year period.
Controlled Foreign Corporations (CFC’s) subject to the “Repatriation Tax” Under the “Repatriation tax” rules, a US shareholder of an SFC must include in its/his/her income the pro-rata share of the accumulated post-1986 deferred foreign income of the corporation for the last taxable year beginning before Jan. 1, 2018. The guidance provided by the IRS (Notice 2018-07) and the Tax and Jobs Cuts Act indicates that the repatriation tax on deferred foreign income is applicable to all US shareholders (including individuals, LLC’s, partnerships and corporations) who own a 10% or more voting interest in SFC’s. SFC’s include controlled foreign corporations (CFCs) and 10/50 companies, but not passive foreign investment companies (PFIC’s) that are not CFC’s.
Controlled Foreign Corporations (CFC’s) subject to the “GLITI” The “global intangible low-taxed income” (GILTI) imposes a tax on the excess income of CFC’s over a 10% rate of routine return on tangible business assets. This restricts the benefits of the tax deferral that could exist in CFC’s.
Americans residing in Canada who owns Canadian Corporations The “Repatriation Tax” and GILTI applies to Americans residing in Canada who own Canadian corporations. These individuals must carefully consider the implications of the “Repatriation Tax”. Our Canada-US Tax Team has established a “Repatriation Tax Task Force’, which has identified a number of methods of reducing the “Repatriation Tax” amount payable.
Note: This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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The CRA 2020 automobile limits and rates are as follows:
The following limits from 2019 will remain in place for 2020:
The general prescribed rate that is used to determine the taxable benefit of employees relating to the personal portion of automobile operating expenses paid by their employers will remain at 28 cents per kilometre. For taxpayers who are employed principally in selling or leasing automobiles, the prescribed rate used to determine the employee’s taxable benefit will remain at 25 cents per kilometre.
For purchases after 2019, the ceiling on the capital cost of passenger vehicles for capital cost allowance (CCA) purposes will remain at $30,000 (plus applicable federal and provincial-territorial sales taxes) for non-zero-emission passenger vehicles, and at $55,000 (plus applicable federal and provincial-territorial sales taxes) for eligible zero-emission passenger vehicles. Eligible zero-emission passenger vehicles include plug-in hybrids with a battery capacity of at least 7 kWh and vehicles that are fully electric or fully powered by hydrogen. These ceilings restrict the cost of a vehicle on which CCA may be claimed for business purposes.
The CRA 2019 automobile limits and rates are as follows:
The CRA 2018 automobile limits and rates are as follows:
For more information about the 2019 Automobile Deduction Limits and Expense Benefit Rates, click here.
For more information about Automobile Deduction Limits and Expense Benefit Rates, click here.