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Relief procedures for former U.S. citizens

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 6th year is no more than $25K. Under the streamlined foreign offshore procedure where one files 3 years of ...

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Cross Border Intercorporate Transactions

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...

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IRS Form 8233

This form is used for a non-U.S. person to have the U.S. payor (considered a withholding agent) to reduce the amount of U.S. tax to be withheld on personal services provided in the United States. The individual providing the service could be an employee or an independent contractor, sole proprietor. It is possible for a Canadian corporation to hire Canadian employees that travel to the U.S. to render personal services on its behalf. In this regard, the income derive therefrom would be subject to IRS Form 8233. A non-U.S. person would be a Canadian not considered resident of the U.S. for U.S. income tax purposes, either under the Internal Revenue Code or under a tax treaty ( between the U.S. and country of residence of the income recipient). Depending on the days present in the U.S., the income from U.S. source may be entirely exempt from federal U.S. taxation. For state income taxation, some states follow the treaty and some do not. Personal services provided must be in the U.S., services provided from your home-office in Canada is considered Canadian source or foreign source from a U.S. perspective, and is not subject to the application of this form. Usually individuals paid by a U.S. payor would receive a W-2 ( as an employee), or a 1099 information slip, as independent contractor. If the U.S. payor also pays for services provided in Canada, they may request IRS Form W8- BEN or IRS Forms W8-Ben-E. The latter form is for non-individual income recipients. This form is usually requested by the payor to ensure there is no withholding requirement with respect to the cross- border payment for services provided outside the United States. The form is signed by the withholding agent and by the recipient of the income. One copy is sent to the Internal Revenue Service. The form requires the individual recipient to have an ITIN or what is called, individual taxpayer identification number. In this regard, the individual would note ‘applied for” on the form in this box and attach a signed copy of the form with his/her IRS Form W-7 (application for an ITIN). The payor should understand that...

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Revised GILTI provisions offer reprieve to U.S. individual investors

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...

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Revised U.S. Estate/Gift Tax Exclusions

The December 2017 Tax Cuts and Jobs Act doubled the lifetime exclusion to $11.18M effective for 2018 to 2025, subject to inflation adjustments for subsequent years. The unified tax credit relating to the 2018 exclusion is $4,417,800. For 2019, the exclusion amount is expected to be $11.4M with a unified credit of $4,505,800. After 2025, the foregoing may or may not be approved by Congress to be of a permanent nature. If it is not approved, the thresholds will revert to the pre-existing inflation-adjusted amount.  Taxable gifts made during one’s lifetime are subject to the same graduated tax rates as estate tax. The 2018 $11.18M (2019-$11.4M) lifetime gift tax exclusion/estate tax exclusion is available to U.S. citizens, U.S. domiciliaries and green card holders. Post-1976 taxable gifts are included in the gross estate and credit is given for gift tax previously paid. For years 2015 to 2017, the first $14,000 of gifts of a present interest annually made by a donor to each non-spouse donee, are not included as taxable gifts. For 2018 and 2019, this annual exclusion rises to $15,000. If the recipient spouse is not a U.S. citizen, the annual exclusion is $152,000 for 2018, expected to rise to $155,000  for 2019. Where the recipient spouse is a U.S. citizen, the entire gift is non-taxable. If the value of the gift is above for foregoing noted annual exclusion, then one has to compute the gift tax using the estate/gift tax rate table, that rises to a 40% tax rate at the $1M mark. As the unified tax credit is for both the incidence of estate and gift tax,  the present $11.18M (2018) lifetime exclusion may apply to  U.S. citizen donors. Although for U.S. purposes, this lifetime exclusion, say to gift significant amounts is very attractive, at least to 2025, for those U.S. citizen donors  that reside in Canada, the gifting of appreciable assets will create immediate  income taxation here if the transfer is not to their spouse because a gift in Canada is a disposition for income tax purposes. In Canada, proceeds of disposition for spousal gifts are deemed to be the donor’s tax basis in the asset transferred, unless an election...

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