Often taxpayers, weather Canadian or U.S. tax filers are self-preparing their own returns with tax preparation software packages purchased in the market place. Problems arise numerous times in that the taxpayer not being aware of tax law, has omitted to file various required annual foreign information returns. This is likely due to the fact the software is not a professional version and/or the taxpayer-preparer is not reading any of the software return’s diagnostics.

From the U.S. perspective, foreign financial accounts requiring the FBARs (FINCEN114) or IRS Form 8938 are often overlooked. Other IRS forms such as 5471,8865,3520-A/3520 and 8621 for interests in non-U.S. corporations, partnerships, trusts, and passive foreign investment companies are the most critical as they generally carry a minimum $US10K penalty and the statute of limitation for the taxation year is not closed until the information returns are filed.

Canadian foreign reporting forms have specific due dates with no filing extensions as are available in the United States. CRA Forms T1135, T1134, T1141 and T1142 are the current Canadian foreign reporting forms that are often missed and carry penalties for not filing. In some cases, our statute of limitations is extended.

If there is omitted income, say derived from undisclosed foreign investment accounts, additional  penalties and interest would arise. I have seen this occur where one who is resident in one country believes that income received form the other country is not subject to tax  in the resident country.

If you are delinquent on these filings, there are programs in the United States and Canada that allow you to remedy the delinquent filings to avoid the related  penalties . In the United States, the streamlined domestic or  foreign offshore program or the limited procedure for omitted international reporting forms are available. The OVDP is also available but is more onerous and is generally reserved for high risk files. In Canada, the voluntary disclosure program is available to file delinquent returns or correct filings including omitted forms that carry a penalty, that are more than one year past due.

A new treaty was signed on September 21,2016. When it comes into force, it will allow a reduced rate of non-resident withholding tax levied by the source country, on dividends, interest and royalties that is different from the 1975 convention. Source countries may require a waiver form or some certification of residency from the income recipient.

Taxpayer’s who do not agree with their notice of assessments or reassessments can file a notice of objection, appealing the Minister’s decision. Generally, one would first to go the appeals division as opposed immediately to Tax Court. Sometimes we file a T1 adjustment form where the Ministers’ adjustments are simply based on incorrect information. However, where there is a misinterpretation of the facts or it is a grey area, the appeals process is the best route. The appeal process also stops the tax collection process but still with arrears interest accruing on the account until the matter is resolved.

It is very important to file the notice of objection (CRA Form 400A) on a timely basis. You need to be cognizant of the dates imprinted on the notices of assessment or reassessment.

For individuals, the due date for filing a notice of objection under subsection 165(1) of the Income Tax Act (“ITA”) is the later of (i) the day that is one year after the filing due date of the return for the year in which the objection relates to, and, (ii) the day that is 90 days after the date of the notice of (re)assessment. You may appeal to Tax Court under section 169 of the ITA if you are unsuccessful with the objection, but you have 90 days to do so.

A late-filed notice of objection may be filed within one year after the otherwise due date under subsection 165(1) of the ITA if the taxpayer, pursuant to section 166.1 of the ITA if the taxpayer, (i) can demonstrate to the Minister that he was unable to act, or instruct another to act in the taxpayer’s name, or (ii) had a bona fide intention to object to the assessment, and, give reasons that it would be just and equitable to grant the application, and the application was made as soon as circumstances permitted. Most applications are generally accepted; however, the facts and circumstances will determine if they are. There have been court cases confirming the rejection of a late-filed objection.

Under section 166.2, the taxpayer may appeal to Tax Court within 90 days of receiving a rejection from the Minister on a section 166.1 application, or after 90 days of not receiving a reply from the Minister on section 166.1 application.

It is my understanding that CRA has not changed it’s position on the deductibility on interest incurred on borrowing to fund the redemption of shares or the payment of dividends.

Subparagraph 20(1)(c) (i) of the Income Tax Act (“ACT”) requires that the borrowed funds be used for earning income from business or property. The exception to the direct use of borrowed funds, is premised on the basis that the replacement of capital would quality if that capital was the borrowed money.

Basically, the replacement capital is the paid-up capital of the shares and accumulated profits or retained earnings. This makes sense in that if one used the original paid-in capital for the shares as opposed to borrowed money at the time the shares were issued or used accumulated profits in lieu of borrowed money to pay for the annual expenses that are inherent in the computation of the accumulated profits, that interest incurred on replacement thereof would be deductible.

For the redemption of shares, the deduction is limited to the portion of the borrowing that is equivalent to the paid-up capital and accumulated profits (retained earnings). For the payment of dividends, we would be looking at the accumulated profits at the time of the borrowing.

One should note that with regards to special shares that have high redemption value and low paid-up capital, say those issued as part of an estate freeze, it is the PUC that is used in determining the allowable interest deduction and not the redemption value.

Further guidance may be obtained by reading CRA Folio S3-F6-C1 which replaced ITB #533.

Renunciation of U.S. citizenship is an expatriation event requiring the filing of IRS Form 8854 with your tax return for year of expatriation. Renunciation has a fee of US$2,350.

Renunciation is voluntary and requires an appointment for receiving a certificate of loss of nationality. In March 2016, all renunciation applications go to the American Citizen Services Unit in Vancouver for screening and review before an appointment is set at one of the U.S. consulates. It is my understanding that the initial screening may take more than 60 days with an interview at one of the consulates months later. You need identification, proof of second citizenship and residence outside of the United States.

If you are a green-holder, for 8 of the last 15 years, otherwise classified as a long-term permanent resident and wish to return it, that is also an expatriation event requiring IRS Form 8854.

Presently the exit regime in place is IRC Section 877A. There are exemptions to the exit regime for dual citizens and for those wishing to renounce prior to attaining age 18.5.

If you don’t meet the foregoing exemptions, you need to meet the following:

1. Net worth at the date of expatriation not exceeding US$2M
2. Average annual income tax liability for 5 years prior to expatriation not exceeding $162,000 (2017 threshold)
3. You filed complete and accurate tax return including information returns and met your tax obligations for 5 years prior to expatriation and sign under penalties of perjury that you have met this condition.

If you don’t meet exceptions 1 or 2, you are considered a covered expatriate (‘CE”). If you meet exceptions 1 or 2 but not 3, then you are again a CE.

If you enter the Streamlined Foreign Offshore Procedure to become compliant, you may file 5 years as opposed to 3 years of delinquent/late-filed returns to speed up the process.

The exit tax or market-to market regime is represented as the following:

1. Income tax on unrealized capital gains exceeding US$699,000 (2017 threshold) for the year of expatriation.
2. U.S. non-resident withholding tax at the domestic rate per the IRC of 30% as opposed to a lower Treaty rate for deferred compensation items such as your 401K payments paid to you when you are not a resident of the United States. Exclusion from the higher withholding tax are plans to the extent the compensation is attributable to services performed outside the United States while you as a CE were not a U.S. citizen or a resident of the United States.
3. Immediate taxation of the present value of “specified” deferred or ineligible deferred compensation items such as your IRA.
4. Imposition of estate or gift tax on the recipient of certain gifts or bequests from a CE who after June 16, 2008 expatriated (IRC Section 2801)

Reference may be made to IRS Notice 2009-85 for extensive details and computations as well as the IRS Code and Regulations.