Answer

U.S. persons including U.S. citizens or green card holders residing in Canada who are not up to date with their U.S. filing obligations should consider the available programs in an effort to become tax-compliant.

The updated streamlined procedures announced on June 18, 2014 modified changes to the 2012 streamlined program, now known as the Streamlined Foreign Offshore Program (“SFOP”) requiring the filing of 3 years of past-due returns (with required disclosures and international information returns) plus 6 years of FBARs.

There were also modifications to the 2012 Offshore Voluntary Disclosure Program (“OVDP”) and a new streamlined procedure called Streamlined Domestic Offshore Program for U.S. persons residing in the United States.

The advantage of utilizing SFOP is that civil penalties including tax related penalties or information return penalties will be waived unless examination results in a determination that the original non-compliance was fraudulent and/or the FBAR violation was willful. Only tax payable, if any, and interest is due with the SFOP submission including all required international reporting forms. Upon filing under the SFOP, if there is a tax deficiency, tax related penalties could apply to the tax deficiency.

You may refer to www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures for detailed information.

Alternative to the SFOP is filing under normal assessment procedures or applying under the 2014 OVDP (“Offshore Voluntary Disclosure Program”).

The OVDP is generally reserved for taxpayers who may possess higher risk such as those who may have difficulty in determining or be concerned that their conduct may not be non-willful. If one’s conduct was willful then all bets are off causing civil and potential criminal penalties to apply.

The OVDP applies to those who have been non-tax compliant with regards to one’s offshore assets. Non-compliance may include having not reported an element of gross income or filing international information returns. The procedures for filing an OVDP application are more detailed. The disclosure period for the OVDP is 8 years of past due filings. There is now a 50% miscellaneous offshore or OVDP penalty (previously 27.5%) on the highest value of undisclosed foreign assets during the 8-year disclosure period. The OVDP penalty is in lieu of levying the otherwise civil penalties noted above (excluding the accuracy related penalty) and criminal penalties.

The asset base may exclude assets that were purchased with after-tax funds or from funds that were not subject to U.S. taxation if the assets have not yet produced any gross income or there has been no U.S. taxable event or reporting obligation to disclose. RRSPs/RRIFs and pension/retirement plans whose accumulated income is exempt under the treaty or where there is no other reporting requirement may be excluded from the asset base.

The 2015 Federal Budget proposals to section 55 may cause otherwise tax free inter-corporate dividends to be subject to taxation as proceeds of disposition (ie., capital gains) that previously were exempt from the ambeit of section 55. Computation of safe income or post-1971 tax retained earnings may now be required in every instance to ensure one is not caught. Timely section 55(5)(f) designations filed by the recipient corporation may also have to be made The proposal was to be effective for dividends paid after April 20, 2015. Hopefully there will be further consultation on the matter and the final legislation will only affect those circumstances to which the proposal was intended.

Caution should be made to companies currently paying dividends or wishing to implement various purification techniques, capital gains crystallization and other restructuring that may involve section 55 of the Income Tax Act before the legislation if finalized and passed into law. Likely nothing will be known for sure until Christmas after the October 2015 federal election and generally when legislation is passed into law.

The applicant was seeking an order to extend the time within which to appeal his assessments for the 2007 and 2008 taxation years. The applicant filed paperwork to appeal six months after notices of reassessment were issued, in the belief that he had eighteen months to appeal. In fact, appeals must be filed within ninety days.

The application for an order to extend the time to appeal was granted. An order extending the time within which to appeal may be granted subject to the conditions set out in the legislation. The applicant must show an intent to appeal within ninety days of receiving the assessment, the application must be made as soon as circumstances permitted, it is just and equitable to grant the application and there must be reasonable grounds for appeal. The respondent argued that the applicant failed to demonstrate an intent to appeal and did not make the application as soon as circumstances permitted. Those grounds concern appeal procedure and while the legislation must be followed, unless non-compliance is clear, the application should not be dismissed on procedural grounds. The applicant’s bookkeeper testified that the intent to appeal was formed as soon as reassessments were received following notices of objections being filed. While her testimony was not fully credible, there was enough evidence to support the applicant’s belief that he acted as promptly as possible. On viewing all the evidence, it is reasonable to infer that the applicant formed the intent to appeal when he saw the large amounts owing in the notices of reassessment. Filing six months later was reasonable given the time it takes to prepare an appeal and that the applicant was travelling and moving offices. It is not easy for a taxpayer to navigate the appeals procedure. The applicant reasonably relied on the Court’s website when filing his appeal. Neither the Court’s website nor the forms for extension applications mention the conditions necessary for a successful extension application. The respondent conceded that the grounds in the notice of appeal were not frivolous. It was just and equitable to grant the application.

Reference case: Apic v. The Queen, 2015 DTC 1174

US citizens residing in Canada are not taxable on their US social security for US tax purposes in accordance with Article XVIII of the Canada/U.S. tax treaty. The country of residence taxes the other countries social security payments to 85%. Likewise CPP or OAS from Canada is excluded on the US 1040 if you reside in the US. If the particular social security payment is included in a country’s tax return, generally the maximum income inclusion is 85% to the taxable income computation.

The foregoing also applies to part-year residents which would require using these concepts.

Many returns are incorrectly prepared not recognizing this treaty provision generally resulting is additional tax paid more so for those in higher marginal tax bracket due to significant other sources of income subject to tax.

Such errors can be amended by preparing a US1040X return or in the case of Canada a T1 adjustment. Supporting schedules need to be prepared to support an adjustment.