m ouellette presentation- us citizens residing in canada

Presentation to RBC Canada May 31st, 2012

Presented by: Mathieu Ouellette, CA, LL.M. Fisc.

U.S. CITIZENS RESIDING IN CANADA

1- U.S. CITIZENSHIP

• THERE ARE TWO PRIMARY SOURCES OF CITIZENSHIP:

• BIRTHRIGHT CITIZENSHIP - IN WHICH A PERSON IS PRESUMED TO BE A CITIZEN, PROVIDED THAT HE OR SHE IS BORN WITHIN THE TERRITORIAL LIMITS OF THE UNITED STATES, AND;

• NATURALIZATION - A PROCESS IN WHICH AN IMMIGRANT APPLIES FOR CITIZENSHIP AND IS ACCEPTED.

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2 - U.S. INCOME TAX RETURN FILING REQUIREMENTS

• U.S. CITIZENS ARE REQUIRED TO REPORT WORLDWIDE INCOME ON THE FEDERAL INCOME TAX RETURN. ALL INCOME MUST BE REPORTED REGARDLESS OF WHICH COUNTRY IS THE SOURCE OF THE INCOME.

• FAILURE TO FILE AN INCOME TAX RETURN RESULTS IN PENALTIES IF THERE ARE TAXES DUE. THE PENALTY IS 5% OF THE TAXES OWING. AN ADDITIONAL 5% PENALTY MAY BE IMPOSED FOR EACH MONTH DURING WHICH THE FAILURE CONTINUES.

• OTHER PENALTIES AND INTEREST MAY ALSO APPLY.

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3 – FBAR FILING REQUIREMENTS

• U.S. CITIZENS ARE REQUIRED TO REPORT THEIR INTEREST IN CERTAIN FOREIGN FINANCIAL ACCOUNTS (FBAR).

• A U.S. PERSON THAT HAS A FINANCIAL INTEREST IN OR SIGNATURE AUTHORITY OVER FOREIGN BANK ACCOUNTS MUST FILE AN FBAR IF THE AGGREGATE VALUE OF THE FOREIGN FINANCIAL ACCOUNTS EXCEEDS $10,000 AT ANY TIME DURING THE CALENDAR YEAR.

• CIVIL PENALTIES FOR WILLFULLY FAILING TO FILE AN FBAR CAN BE UP TO THE GREATER OF $100,000 OR 50% OF THE TOTAL BALANCE OF THE FOREIGN ACCOUNT AT THE TIME OF VIOLATION.

• NON-WILLFUL VIOLATIONS THAT THE IRS DETERMINES ARE NOT DUE TO REASONABLE CAUSE ARE SUBJECT TO A PENALTY OF UP TO $10,000 PER VIOLATION.

• THERE IS NO PENALTY IN THE CASE OF A VIOLATION THAT IRS DETERMINES WAS DUE TO REASONABLE CAUSE.

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4 – OTHER FOREIGN REPORTING REQUIREMENTS

• OTHER TAX FILINGS TO DISCLOSE FOREIGN ASSETS MAY APPLY SUCH AS FORM 3520 “ANNUAL RETURN TO REPORT TRANSACTIONS WITH FOREIGN TRUSTS” AND FORM 8938 “STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS”.

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5 – CONCEPT OF RESIDENCE IN CANADA

• THE RESIDENTIAL TIES AN INDIVIDUAL HAS ESTABLISHED IN CANADA ARE A MAJOR FACTOR IN DETERMINING RESIDENCE STATUS.

• RESIDENTIAL TIES TO CANADA INCLUDE:

PRIMARY TIES

A HOME IN CANADA;

A SPOUSE OR COMMON-LAW PARTNER OR DEPENDANTS IN CANADA;

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5 – CONCEPT OF RESIDENCE IN CANADA (CONT’D)

SECONDARY TIES

PERSONAL PROPERTY IN CANADA, SUCH AS A CAR OR FURNITURE;

SOCIAL TIES IN CANADA;

ECONOMIC TIES IN CANADA;

A CANADIAN DRIVER’S LICENCE;

CANADIAN BANK ACCOUNTS OR CREDIT CARDS; AND

HEALTH INSURANCE WITH A CANADIAN PROVINCE OR TERRITORY.

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5 – CONCEPT OF RESIDENCE IN CANADA (CONT’D)

SOJOURNING RULES

• AN INDIVIDUAL WILL BE CONSIDERED A DEEMED RESIDENT OF CANADA IF HE STAYED IN CANADA FOR 183 DAYS OR MORE IN A CALENDAR YEAR.

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6 – CONCEPT OF RESIDENCE AND THE CANADA-U.S. TAX TREATY

• GENERALLY, THE “TIE-BREAKER” RULES SET FORTH IN ARTICLE IV(2) OF THE CANADA-U.S. TAX TREATY APPLY TO DETERMINE THE STATE OF RESIDENCE OF A PERSON WHO WOULD OTHERWISE BE CONSIDERED RESIDENT OF CANADA AND THE UNITED STATES.

• THE “TIE-BREAKER” RULES GENERALLY PREVENT AN INDIVIDUAL FROM BEING SUBJECT TO TAX ON WORLDWIDE INCOME IN BOTH COUNTRIES.



• THE “TIE BREAKER RULES” – ARTICLE IV(2) WHERE BY REASON OF THE PROVISIONS OF PARAGRAPH 1 AN INDIVIDUAL IS A

RESIDENT OF BOTH CONTRACTING STATES, THEN HIS STATUS SHALL BE DETERMINED AS FOLLOWS:

A. HE SHALL BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE IN WHICH

HE HAS A PERMANENT HOME AVAILABLE TO HIM; IF HE HAS A PERMANENT HOME AVAILABLE TO HIM IN BOTH STATES OR IN NEITHER STATE, HE SHALL BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE WITH WHICH HIS PERSONAL AND ECONOMIC RELATIONS ARE CLOSER (CENTRE OF VITAL INTERESTS);

B. IF THE CONTRACTING STATE IN WHICH HE HAS HIS CENTRE OF VITAL INTERESTS CANNOT BE DETERMINED, HE SHALL BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE IN WHICH HE HAS AN HABITUAL ABODE;

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6 – CONCEPT OF RESIDENCE AND THE CANADA-U.S. TAX TREATY (CONT’D)

C. IF HE HAS AN HABITUAL ABODE IN BOTH STATES OR IN NEITHER STATE, HE SHALL

BE DEEMED TO BE A RESIDENT OF THE CONTRACTING STATE OF WHICH HE IS A CITIZEN; AND

D. IF HE IS A CITIZEN OF BOTH STATES OR OF NEITHER OF THEM, THE COMPETENT AUTHORITIES OF THE CONTRACTING STATES SHALL SETTLE THE QUESTION BY MUTUAL AGREEMENT.

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• THE “TIE-BREAKER” RULES GENERALLY PREVENT AN INDIVIDUAL FROM BEING SUBJECT TO TAX ON WORLDWIDE INCOME IN BOTH COUNTRIES.

• HOWEVER, THE “TIES BREAKER” RULES DO NOT APPLY TO U.S. CITIZENS BY VIRTUE OF THE “SAVING CLAUSE” UNDER ARTICLE XXIX(2)(a) OF THE TREATY.

• THIS LEADS TO THE SITUATION WHERE A U.S. CITIZEN WHO IS CONSIDERED TO BE A RESIDENT OF CANADA FOR TAX PURPOSES MUST REPORT WORLWIDE INCOME IN BOTH COUNTRIES.

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7 – FOREIGN TAX CREDIT TO PREVENT DOUBLE TAXATION

• TO PROVIDE RELIEF FROM DOUBLE TAXATION, ONE OF THE TWO COUNTRIES WILL GENERALLY GRANT A FOREIGN TAX CREDIT FOR THE TAXES PAID IN THE OTHER COUNTRY ON A SPECIFIC TYPE OF INCOME.

• WHICH ONE OF THE TWO COUNTRIES WILL GRANT THE FOREIGN TAX CREDIT DEPENDS ON THE “SOURCE” OF THE INCOME.

• CANADA WILL GRANT A FOREIGN TAX CREDIT FOR U.S. TAXES PAID ON U.S. SOURCE INCOME PURSUANT TO ARTICLE XXIV(4)(a) OF THE TREATY.

• U.S. WILL GRANT A FOREIGN TAX CREDIT FOR THE CANADIAN TAXES PAID ON CANADIAN SOURCE INCOME PURSUANT TO ARTICLE XXIV(4)(b) OF THE TREATY.

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8 – SOURCING AND RE-SOURCING OF INCOME

• DETERMINING THE SOURCE OF AN INCOME STREAM IS NOT ALWAYS INTUITIVE. CERTAIN TYPES OF INCOME SUCH AS DIVIDENDS AND PENSION INCOME ARE INITIALLY SOURCED AS ARISING IN A COUNTRY AND THEN RE-SOURCED TO THE OTHER COUNTRY.

EXAMPLES:

• INTEREST ARISING IN THE U.S. (TREASURY BILLS, U.S. BONDS ETC.)

SOURCED AS CANADIAN INCOME – U.S. WILL GRANT THE FTC – PURSUANT TO ARTICLES XI(1), XXIV(3)(a), XXIV(4)(a) AND XXIV(5)(b) OF THE TREATY.

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8 – SOURCING AND RE-SOURCING OF INCOME (CONT’D)

• DIVIDENDS ARISING IN THE U.S. (DIVIDENDS PAID BY U.S. CORPORATIONS)

SOURCED AS ARISING IN THE U.S. TO ALLOW CANADA TO GRANT A FTC OF UP TO 15% IN RESPECT OF TAXES PAID IN THE U.S. PURSUANT TO ARTICLE X(2)(b), XXIV(3)(a), XXIV(4)(a) AND XXIV(5)(b) OF THE TREATY.

EXCESS OVER 15% IS RE-SOURCED AS INCOME ARISING IN CANADA TO THE EXTENT NECESSARY TO AVOID DOUBLE TAXATION. THIS ALLOWS THE U.S. TO GRANT A FTC FOR A PORTION OF THE TAXES PAID IN CANADA ON THE DIVIDENDS PURSUANT TO ARTICLE XXIV(4)(b) AND XXIV(6) OF THE TREATY.

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8 – SOURCING AND RE-SOURCING OF INCOME (CONT’D)

• CAPITAL GAIN ARISING ON THE SALE OF U.S. PORTFOLIO SECURITIES

SOURCED AS CANADIAN INCOME – U.S. WILL GRANT THE FTC PURSUANT TO ARTICLES XIII, XXIV(3)(a), XXIV(4)(a) AND XXIV(5)(b) OF THE TREATY.

• PENSION INCOME ARISING IN THE U.S.

SOURCED AS ARISING IN THE U.S. TO ALLOW CANADA TO GRANT A FTC OF UP TO 15% IN RESPECT OF TAXES PAID IN THE U.S. PURSUANT TO ARTICLE XVIII(2), XXIV(3)(a) AND XXIV(4)(a) OF THE TREATY.

EXCESS OVER 15% IS RE-SOURCED AS INCOME ARISING IN CANADA TO THE EXTENT NECESSARY TO AVOID DOUBLE TAXATION. THIS ALLOWS THE U.S. TO GRANT A FTC FOR A PORTION OF THE TAXES PAID IN CANADA ON THE PENSION INCOME PURSUANT TO ARTICLE XXIV(4)(b) OF THE TREATY.

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9 – PARTICULAR SITUATIONS

• TFSA

A TFSA HAS NO SPECIAL STATUS UNDER THE INTERNAL REVENUE CODE AND THERE ARE NO RELIEVING PROVISIONS CONTAINED IN THE TREATY TO SHELTER TFSA EARNINGS FROM TAXATION IN THE U.S. AS SUCH, U.S. TAXPAYERS ARE TAXABLE ON ANY INCOME EARNED IN A TFSA ON A CURRENT YEAR BASIS.

THE IRS MAY CONSIDER TFSAs TO BE FOREIGN TRUSTS. IF A TAXPAYER IS AN OWNER OF A NON-RESIDENT TRUST, FORM 3520-A “ANNUAL INFORMATION RETURN OF FOREIGN TRUST WITH A U.S. OWNER” IS REQUIRED TO BE FILED. TO DATE THERE HAS BEEN NO OFFICIAL IRS POSITION ON WHETHER THESE FORMS ARE REQUIRED FOR TFSA HOLDERS.

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9 – PARTICULAR SITUATIONS

• RESP

AN RESP HAS NO SPECIAL STATUS UNDER THE INTERNAL REVENUE CODE AND THERE ARE NO RELIEVING PROVISIONS CONTAINED IN THE TREATY TO SHELTER RESP EARNINGS (INCLUDING CANADIAN EDUCATION SAVINGS GRANTS) FINANCIAL ASSISTANCE) FROM TAXATION IN THE U.S. AS SUCH, INCOME EARNED WITHIN THE PLAN IS TAXABLE ON A CURRENT YEAR BASIS.

WITHDAWAL OF EARNINGS AND GOVERNMENT ASSISTANCE BY THE STUDENT MAY RESULT IN DOUBLE-TAXATION.

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m ouellette presentation- us citizens residing in canada

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