Individual tax returns otherwise due April 30 were previously extended to June 1 with the deferral of the payment of tax payable to September 1^st. Filing due dates for personal returns due June 15th (for self-employed persons) were not previously extended  but still had the deferral of tax payable due  September 1^st.  Filing beyond these two dates still attracted the late-filing tax penalty.

CRA has announced on May 22^nd that for individual filers including self-employed individuals, may file up to September 1^st and tax payable at that time without the incurrence of a late-filing tax penalty.

On a similar note, corporate tax returns (T2) otherwise due in June, July or August may be filed up to September 1^st without any late-filing penalty.

Trust returns (T3) otherwise due in June, July or August are extended to September 1^st.

Information returns such as CRA Form T1135 that are due at the due date of the tax return filer have also been extended to September 1^st.

Tax installments for the 2020 taxation year that would otherwise be due after March 18 are still due by September 1^st will not attract interest penalties. Tax instalments due after September 1^st are presently still payable on their otherwise due dates. This would for example be September 15 and December 15^th for individuals.

HST/GST withholdings and remittances due after March 18 are due June 30th. Related filings are still due at their otherwise due dates with no extensions. Presently, there has been no announcement to defer payments that are otherwise due after June 30^th.

CRA is extending businesses a temporary wage subsidiary for another 12- week period to August 29, 2020.

Information on this program may be examined at https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy.html.

Information and updates on all programs may be examined on the home page at https://www.canada.ca/en/revenue-agency.html.

Canada

1. Individual tax returns otherwise due April 30 are due June 1 unless further extended. You may defer payment of the tax payable including tax instalments that may have been otherwise due after March 18^th   to August 31^st. No penalties or interest will be levied during this extended period for tax payable that was due after March 18, 2019 including tax instalments.
2. If installments were due prior to March 18 and are currently unpaid they will likely attract instalment interest charges where applicable.
3. Self- employed individuals still must file their T1s by June 15^th.
4. CRA Form T1135 and other foreign information returns that attract penalties for late filing, appear to be due to coincide with extended filing date of your personal tax return.
5. Trust T3 filings with a December 31, 2019 taxation year have extended due date of May 1 from March 31^st. Any tax payable and installments are deferred to August 31^st.
6. Corporations that file T2 returns have the same extended due date for tax payable and tax instalment to August 31^st but still have their 6-month filing due date for filing the T2.
7. HST/GST withholdings and remittances and related filings are still due with no extensions.
8. CRA is offering businesses a temporary wage subsidiary permitting eligible employers to reduce the amount of payroll remittances during the period March 18, 2018 and June 20,2020. Information on this program may be examined at https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/frequently-asked-questions-wage-subsidy-small-businesses.html.
9. The Charities Directorate is extending the filing deadline to December 31, 2020, for all charities with a Form T3010, Registered Charity Information Return due between March 18, 2020 and December 31, 2020.

United States

1. The IRS has extended the due date and tax payable date for individuals from April 15^th to July 15^th without interest and penalties for tax payable and instalments.  There is no need to file IRS Form 4868 extension form for extending the filing due date.  The cap on this tax deferral is $1M.
2. This payment relief applies to individual tax returns including self-employed individuals and is extended to trusts and estates.
3. For corporations (C corporations) income tax payment deadlines up to $10M are automatically extended until July 15^th for their 2019 tax due. This also included estimated tax payments for 2020 that are due on April 15, 2020.
4. For U.S. persons residing outside the United States, the normal due date or automatic extension is June 15^th or 2 months after the April 15^th due date. It appears that this automatic extended due date will become September 15^th however that is not clear.
5. It is advisable for those individuals residing outside the U.S, still should if needed, file the 4868 by June 15^th that will give them an extended date of October 15^th, however tax payable currently may be deferred till July 15^th.

The IRS recently released certain relief procedures for U.S. citizens who relinquished U.S. citizenship (‘an expatriation event”) after March 18, 2010 who are delinquent in their U.S. tax filings.

The purpose of  this relief is to allow eligible  individuals to escape the potential income tax implications of IRS Code 877A upon expatriation as well as interest/penalties and tax  payable for unfiled tax and information returns.  

Readers may refer to my 2017 blog on the expatriation rules at https://lnsca.com/u-s-expatriation/  for  further clarification.

Per the IRS announcement,

“Under the Relief Procedures for Certain Former Citizens (“these procedures”), the IRS is providing an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010. These procedures are only available to U.S. citizens with a net worth of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures), and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the five prior years.  If these individuals submit the information set forth below and meet the requirements of these procedures, they will not be “covered expatriates” under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years.

These procedures may only be used by taxpayers whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report of Foreign Bank and Financial Accounts (FinCEN Form 114, formerly Form TD F 90-22.1)) and pay taxes and penalties for the years at issue was due to non-willful conduct. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.”

Is this a viable program?

For  those who are currently delinquent filers and have relinquished citizenship, it appears a good deal for  them where their cumulative tax liability for the 5 years plus the 6^th year is no more than $25K.

Under the streamlined foreign offshore procedure where one files 3 years of  past  due returns or goes back another 2 years or waits another 2 years to expatriate (to get to the 5 years of filings), income tax payable is not forgiven.

Under the IRC 877A provisions, the “covered expatriate” definition would include one whose average tax liability exceeded an average of $168,000 (2019 threshold) for the  prior 5 years.

IRS Form 8854 must be filed with the tax return for the year of expatriation. Late- filing this form carries a $2,500 penalty if one cannot demonstrate a “reasonable cause argument”. With this proposed relief procedure, this penalty is waived. It appears that by not  all filing the 8854, one could be deemed  a covered expatriate (regardless of being below the $2M net worth or 5 -year average tax liability thresholds) because one has not filed or met their IRS FILING OBLIGATIONS.

This relief program is not available to long-term residents, namely prior  green card holders who gave up (“an expatriation event”) their cards who held them for 8 out of the last 15 years (or part years). Those individuals should consider filing under the streamlined procedures,  at least  to eliminate penalties and interest costs.

Several enquiries have been received by companies wishing to do business in the United States, some have already incorporated, and some are just in the investigative stage(s).

Annual professional fees can very much be a function of your annual or ongoing compliance costs such as corporate federal and state filings. The latter can increase fees significantly if one is doing business in various states, and whether income tax, franchise tax or sales tax, etc., are applicable or unforeseen state nexus issues.

Intercorporate cross border transactions may include management fees, interest & financing costs, loans/ advances and  receivables/payables from the sale of goods or services. The latter may create a transfer pricing issue which both Canada & the U.S. have their own specific legislation.Both countries also have certain foreign information returns or forms that carry significant penalties  for failure to file. Some reporting is looking for disclosure of  related party transactions by name, description and/or dollar amount. Other foreign information returns look to ownership such as “(controlled) foreign affiliate” or “controlled foreign corporation (“CFC”).

Both countries also have certain deemed income provisions such as imputed interest on intercompany loans or even deemed dividend income inclusions. There could be certain exceptions, exclusions or safe harbor provisions within the legislation. Both countries have withholding taxes on repatriation of profit to the other country in the form of dividends or branch profits, however the Canada/U.S. tax treaty may alleviate or reduce exposure.

Planning or investigating should be done before anyone ventures into a cross border business to avoid  unexpected surprises, say a year later when most  filings are due, and to ensure the plan or organizational structure will be tax effective from a corporate and personal perspective.

Commencing in 2017, the December 2017 Tax Cuts and Jobs Act required  U.S. persons to be taxed on accumulated profits, generally derived from active business income of controlled-foreign corporations (“CFC”s) under section 965 of the IRS Code. This was also known as the transition or repatriation tax. Currently and prior to 2017, specific types of income earned by the CFC, primarily investment income, had to be accrued annually and taxable to the CFC shareholder if certain exclusions and exemptions were not available.

For subsequent taxation years, annual active business income as defined as global intangible low-tax income (“GILTI”) under section 951A of the IRS Code must be included in income. This is the continuation of the repatriation tax but in a different form.

U.S. corporate investors of CFC

Where the U.S. person is a U.S. C corporation, the GILTI provisions provided for a flat 50% deduction of the GILTI under  Section 250 of the IRS Code bringing the tax rate to 10.5% from  the 21% U.S. corporate rate.

An election is available under section 960  of   the IRS Code for the C corporation to take an indirect foreign tax credit up to 80% of  the foreign tax incurred by the CFC. Where the effective CFC tax rate was at least 13.12%, this election resulted in no tax to the C corporation on GILTI.

U.S. individual investors of CFC

For individual U.S. investors, GILTI is included in  their reported adjusted gross income reported on the U.S. 1040  tax return, taxed at their marginal tax rate that could be as high as 37%. However, a similar indirect foreign tax credit as outlined in section 960 available to the C corporation investor is available under section 962 of the IRS Code to the individual.

With an annual section 962 election, the IRS Code pretends that the individual is  a corporation and in lieu of including GILTI in adjusted gross income taxed at the marginal tax rate of the individual,  one could compute separately the tax on GILTI by applying the 21% corporate rate  with a foreign tax credit up to 80% of the foreign corporate tax. This section 962 tax payable is reported on a separate  line of the U.S. 1040.

Prior to the recent released proposed regulations, it was perceived that in computing the section 962 tax, this “notional” corporation could not take the 50% section 250 deduction. Therefore, only where the CFC’s effective  tax rate was at least 26.25%, the section 962 election resulted in no tax on GILTI to the U.S. individual. When the effective rate to the Canadian corporation was lower than 26.25%, the section 962 election still resulted in tax payable.

For 2018,  the annual tax rate on active business income on the first $500K could be in the 13% range (depending on the province) due to the  federal & provincial Canadian  small business deduction. Income above this $500K threshold is a taxed at around 26.5%.

With a low effective Canadian corporate rate, the section 962 election without an available section 250 deduction could result in about a 10.6% incidence of U.S. tax on GILTI, still better than 37%  without the election, but not as generous as with a C corporation shareholder of the CFC. 

This is the double tax issue for U.S. individual investors of the CFC,- U.S. taxation on undistributed profits in one year and Canadian individual taxation in a subsequent year when the distribution occurs

New rules for U.S. individual investors

Recently issued  proposed regulations to sections 250 and 962 of the IRS Code clarify to allow U.S. individuals to claim this section 250 50% deduction. This means with an effective  CFC tax rate of at least 13.12%, there would be no tax on GILTI, same as if the actual owner of  the CFC was a C corporation.

Payment of dividends by the CFC

It is generally understood that under Subpart F of  the IRS Code, any inclusion of corporate earnings prior to a distribution thereof would increase the basis of the CFC’s shares for U.S. tax purposes. Likewise, receipt of previous taxed income (“PTI”) would not be taxable and would reduce basis. These rules are complex with specific ordering provisions and accounting.

When a section 962 election is made, its related regulations have defined taxable S962 earnings and profits (“E&P”) and excludable S962 E&P for the purpose of determining what portion of the actual distribution relating to S962 E&P is taxable.

Excludable S962 E&P is the amount of tax paid by the taxpayer with respect to the S962 election in the prior year. Taxable S962 E&P is the excess of S962 E&P over excludable S962 E&P.

The  portion of  the distribution that is considered a taxable dividend may be classified as a “qualified dividend” attracting a maximum federal tax rate of 20%,  eligible for a full foreign tax credit for the higher Canadian tax rate levied on the dividend. If the CFC operates in a non-treaty country, the taxable dividend is not a qualified dividend, subject to the taxpayer’s individual marginal tax U.S. tax rate.

With the  proposed regulations, a valid timely-filed  section 962 election and a low effective Canadian tax rate, the U.S. individual shareholder of the CFC residing in Canada should not be presented with a double tax issue where undistributed earnings of the CFC are taxable in a year prior to the year of distribution

IRS Reporting requirements

As one can perceive, the annual compliance costs for U.S. investors of a CFC will rise as a result of the changes in the tax law. Where there are a series of foreign corporations such as investment holding corporations and/or sister corporations, the foregoing computations, ordering provisions and accounting are more complex and time consuming. This complexity under Subpart F of the IRS Code was present before the passing of sections 965 and  951A. Now it is more complex!

IRS Form 5471 (the annually filed U.S. information return by a U.S. shareholder of the CFC)  has been significantly revised, requiring additional schedules and revisions to earlier schedules. New IRS  Form 8992 reporting the computation of GILTI and IRS Form 8993 for the computation of the section 250 deduction  must be completed and filed with the timely-filed (including allowable extensions) U.S. person’s income tax return. The 5471 information return for each CFC carries a minimum $10KU.S. penalty for failure to timely file or failure to file a complete information return.

Currently there is no prescribed form for the section 962 election. Per its regulations, the election has certain information that must be presented and attached to the  timely-filed income tax return for the election to be considered valid.

U.S. filing extensions should be filed if  the  June 15^th  automatic due date for U.S. individual filers residing outside of  the United States cannot be met. Any tax payable by  the individual U.S. investor is due still due by April 15^th