presentation- cross border tax

7676 Woodbine Avenue, Markham, Ontario L3R 2N2 Tel (905) 477-5777 Fax (416) 628-2511 www.alpeshjoshi.ca www.ustaxsolutions.ca

PREPARED AND PRESENTED BY:PREPARED AND PRESENTED BY:

Alpesh Joshi, CA, CPA Alpesh Joshi, CA, CPA (New Jersey)(New Jersey)

Canada – U.S. Cross-Border Tax Canada – U.S. Cross-Border Tax UpdateUpdate

http://www.alpeshjoshi.ca/

Thinking About Tomorrow… Today

OVERVIEWOVERVIEW •What we do? Value Added Service of AJPCAWhat we do? Value Added Service of AJPCA•Relevancy of Cross Border issues in Banking Relevancy of Cross Border issues in Banking Industry.Industry.•Current U.S. and International Tax Issues.Current U.S. and International Tax Issues.•Business Development and Banking Service.Business Development and Banking Service.•Questions?Questions?


WHAT SERVICE WE PROVIDE…WHAT SERVICE WE PROVIDE… We offer corporate tax services to businesses and individuals opening We offer corporate tax services to businesses and individuals opening cross-border branches, subsidiaries or filling tax returns for expat cross-border branches, subsidiaries or filling tax returns for expat employees. We also provide consultation services for companies who employees. We also provide consultation services for companies who are considering doing business in the U.S. or Canada. These Services are considering doing business in the U.S. or Canada. These Services include:include:

US- Cross Border Tax Compliance;US- Cross Border Tax Compliance;

Canadian Tax Compliance and Planning;Canadian Tax Compliance and Planning;

International Tax;International Tax;

Transfer Pricing; Transfer Pricing;

Consulting and Advisory Services.Consulting and Advisory Services.


Circular 230 DisclaimerCircular 230 Disclaimer

Any U.S. tax advice contained herein was not intended or written to Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.or local tax law provisions.

These slides are for educational purposes only and are not intended, These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting or tax advice. and should not be relied upon, as accounting or tax advice.


WHY RELEVANT TO EVERYONEWHY RELEVANT TO EVERYONE

Cross Border Concerns, no longer problem of the wealthy or the Cross Border Concerns, no longer problem of the wealthy or the multinational companies;multinational companies;

COMMON INDIVIDUAL ISSUES:COMMON INDIVIDUAL ISSUES:

The Purchase of U.S. property, for Rental or Recreational Use;The Purchase of U.S. property, for Rental or Recreational Use;

To be non-resident withholding taxes in U.S. source income or To be non-resident withholding taxes in U.S. source income or

gambling winnings;gambling winnings;

To work in U.S. as an employee or contractor;To work in U.S. as an employee or contractor;

Snowbirds;Snowbirds;

Dual residents and citizens.Dual residents and citizens.


WHY RELEVANT TO EVERYONEWHY RELEVANT TO EVERYONE

Typical Canadian Corporation Cross Border Issues:Typical Canadian Corporation Cross Border Issues:

To sell Products and Services into the U.S.;To sell Products and Services into the U.S.;

To have an U.S. branch or subsidiary office;To have an U.S. branch or subsidiary office;

To own U.S. properties;To own U.S. properties;

To hire U.S. contractors or employees.To hire U.S. contractors or employees.


TREATY PROTOCOLTREATY PROTOCOL

(Guiding Document for Cross Border Taxation)(Guiding Document for Cross Border Taxation)

Canadian- based companies doing business directly in the U.S. must Canadian- based companies doing business directly in the U.S. must pay U.S. taxes, based in the U.S. amount of income earned from their pay U.S. taxes, based in the U.S. amount of income earned from their U.S. business. U.S. business.

The Canada-U.S. Tax Treaty makes it possible for Canadian The Canada-U.S. Tax Treaty makes it possible for Canadian companies doing business in the U.S. to prevent the double taxation companies doing business in the U.S. to prevent the double taxation that might otherwise arise due to their U.S. tax exposure. that might otherwise arise due to their U.S. tax exposure.

Some recent changes to the Tax Treaty, contained in a new 5Some recent changes to the Tax Treaty, contained in a new 5 thth Protocol, will help Canadian companies conduct cross-border Protocol, will help Canadian companies conduct cross-border business; others, however, have the potential to negatively impact this business; others, however, have the potential to negatively impact this business. business.


The potential impact of three of the Protocol The potential impact of three of the Protocol changeschanges

1.1. ““Permanent establishment” definition now includes Permanent establishment” definition now includes “providing services”“providing services”

Whether a Canadian resident is liable to tax in the U.S. is no longerWhether a Canadian resident is liable to tax in the U.S. is no longerlimited to such criteria as having a “fixed place of business”, permanentlimited to such criteria as having a “fixed place of business”, permanentestablishment in the U.S. now includes providing services in the U.S.establishment in the U.S. now includes providing services in the U.S.

If anyone from a company travels into U.S. for an aggregate of 183If anyone from a company travels into U.S. for an aggregate of 183days or more, in any 12-month period, the company is liable to tax indays or more, in any 12-month period, the company is liable to tax inU.S. U.S.



2.2. ““Hybrid entities” may be subject to higher taxesHybrid entities” may be subject to higher taxes

““Hybrids” are entities that are regarded one way by Canadian tax lawHybrids” are entities that are regarded one way by Canadian tax lawand another way by U. S. tax law.and another way by U. S. tax law.

The new Protocol, a hybrid entity utilized to make an investment in the The new Protocol, a hybrid entity utilized to make an investment in the U.S. that might previously of lower Tax Treaty rates, may now beU.S. that might previously of lower Tax Treaty rates, may now besubject to a 30 percent U.S. withholding tax rate. subject to a 30 percent U.S. withholding tax rate.



3.3. Eliminating withholding taxes on cross-border Eliminating withholding taxes on cross-border interest paymentsinterest payments

Under the new Protocol, withholding tax is generally being eliminatedUnder the new Protocol, withholding tax is generally being eliminatedfor payments between non- related parties. Guarantee fees generallyfor payments between non- related parties. Guarantee fees generallywill no longer be subject to withholding tax as well.will no longer be subject to withholding tax as well.

This new provisions should reduce borrowing costs and have a positiveThis new provisions should reduce borrowing costs and have a positive impact on cross- border investment. impact on cross- border investment.

Also, cross-border businesses have more flexibility in choosing and Also, cross-border businesses have more flexibility in choosing and working with their bankers. * Important for Bankersworking with their bankers. * Important for Bankers


Individual Taxpayer Identification Number Individual Taxpayer Identification Number (ITIN)(ITIN)

ITIN is a tax processing number issued by the Internal Revenue ITIN is a tax processing number issued by the Internal Revenue Service. IRS issues ITINs to individuals who are required to have aService. IRS issues ITINs to individuals who are required to have aU.S. taxpayer identification number but who do not have, and are notU.S. taxpayer identification number but who do not have, and are noteligible to obtain a Social Security Number (SSN) from the Socialeligible to obtain a Social Security Number (SSN) from the SocialSecurity Administration (SSA).Security Administration (SSA).

ITINs are issued regardless of immigration status because bothITINs are issued regardless of immigration status because bothresident and non-resident aliens may have a U.S. filing or reportingresident and non-resident aliens may have a U.S. filing or reportingrequirement under the Internal Revenue Code.requirement under the Internal Revenue Code.

AJPCA is a Certifying Acceptance Agent registered with the IRS toAJPCA is a Certifying Acceptance Agent registered with the IRS toprocess W-7 applications for getting an ITIN.process W-7 applications for getting an ITIN.

AJPCA also provides services to corporations including U.S. incorporation and obtaining AJPCA also provides services to corporations including U.S. incorporation and obtaining an Employer Identification Number (EIN) from IRS; an Employer Identification Number (EIN) from IRS;


Questions to ask your clients:Questions to ask your clients:

Are you a US Citizen or resident that spends more then 183 days in the Are you a US Citizen or resident that spends more then 183 days in the US?US?

Do you own US property for recreation or business use?Do you own US property for recreation or business use?

Do you earn any income or incur any expenses against that investment Do you earn any income or incur any expenses against that investment property.property.

Does your company sell products or services into the United States?Does your company sell products or services into the United States?

Do you plan to retire in the United States?Do you plan to retire in the United States?


Foreign Bank and Financial Accounts Reporting Foreign Bank and Financial Accounts Reporting (FBAR)(FBAR)

Would require taxpayers to file FBAR form with the taxpayer’s tax return, accordingly turning the FBAR into tax return information and making it easier for the IRS to enforce FBAR filing requirements.

Penalty: Equal to the lesser of $10,000 per reportable transfer or 10% of the cumulative amount or value of the unreported covered transfers.

Double 20% accuracy- related penalty when an understatement arises from a transaction involving a foreign account.

The statute of limitations relating to information returns for six years. Information sharing that IRS has with the CRA and with Canadian Banks

have got many people nervous. There are Offshore Voluntary Disclosure Initiatives out in the

Market. AJPCA has been successful at reducing or removing these

penalties.


Revisions to Foreign Bank Account Report Revisions to Foreign Bank Account Report (Form TDF90-22.1)(Form TDF90-22.1)

Who must file:: U.S. persons with an interest in foreign bank account, brokerage account and financial accounts (including mutual fund and RRSP) that have aggregate balance value of these accounts exceeds $10,000 at any time during the calendar year.

When to file:When to file:File by June 30 for the prior calendar year.

How it is file:How it is file: Information report;Consolidation basis;

Not filed with a taxpayer’s income tax return, must file TDF90-22.1

Penalty for not filing the form: $10,000 (could be higher), may result in potentially civil penalties, criminal penalties or both.


United States Income And Sales Tax Issues United States Income And Sales Tax Issues (NEXUS)(NEXUS)

NexusNexus in general means a connection or contact, different from Permanent Establishment.

The term nexus is used in tax law to describe a situation in which abusiness has a "nexus" or presence in a state and is thus subject tostate income taxes and to sales taxes for activity within that state.Nexus describes the amount and degree of business activity that mustbe present before a state can tax an entity's income. If a taxpayer hasnexus in a particular state, the taxpayer must pay and collect/remittaxes in that state. As Nexus is required for states to tax, it is oftenreferred to as “jurisdiction to tax”.

Nexus is determined differently for income taxes and for sales tax

purposes.


For Income Tax PurposesFor Income Tax Purposes

In general, nexus is created for income tax purposes if an entity

derives income from sources within the state, owns or leases property

in the state, employs personnel in the state in activities that exceed

"mere solicitation," or has capital or property in the state.

For Sales Tax PurposesFor Sales Tax PurposesNexus is determined for sales tax purposes more loosely. Here are

some cases in which a business might have a sales tax nexus in a

state:

If the business has a physical location in the state; If there are resident employees working in the state; If the business has property (including intangible property) in the state; If there are employees who regularly solicit business in the state.


NEXUS

Sales and Use tax is the most common US tax exposure for Canadian companies doing business in the United States. It is imposed by 45 states, 14,000 plus local jurisdictions. Rules vary from state to state; but rates range from 4 % to 10 % plus Generally applies to sales of tangible personal property to end used and may apply to certain services. Also applies to property brought into the state (Use tax), Use tax is the compliance of the purchaser. Non Compliance makes it your gross receipts tax.The terms Virtual Nexus, Attribution Nexus and Economic Nexus have also begun to develop; These are grey areas and as mentioned above, and they vary from State to State:


U.S. Estate Taxes- BriefU.S. Estate Taxes- Brief

U.S. estate tax applies to the fair market value of the world-wide

property of a U.S. citizen, a Green Card holder and an individual

resident in the U.S. at the time of their death. As well, U.S. estate tax

generally applies to property situated in the U.S. that is owned by

Nonresidents of the U.S. In calculating an individual’s taxable estate,

deductions for debts and certain expenses are permitted. However, for

Canadian residents, the permitted deductions are prorated based on

the value of their U.S. gross assets over their world-wide assets.


U.S. Estate Taxes- BriefU.S. Estate Taxes- Brief

A Canadian who dies in 2008 owns a Florida condominium worth $600,000 U.S. and

non-U.S. situs assets worth $2.4 million U.S.

In this case, the net U.S. estate tax will be calculated as follows:

Estate Tax on $600,000 U.S.:

Tax on the first $500,000 U.S. $155,800

Tax on balance at 37% 37,000

192,800

Less:

Prorated unified credit

$600,000/$3,000,000 x $780,800 156,160

Net U.S. Estate Tax in 2008 $ 36,640

As you can see from this example, the Canada-U.S. tax treaty only provides partial relief

where the value of a Canadian’s U.S. property is low in relation to the total value of their

estate.


U.S. Vacation and Rental HomesU.S. Vacation and Rental Homes

The decline in value of U.S. real estate and the relative strength of the

Canadian dollar compared to the U.S. dollar has recently increased the

amount of investment by Canadians in U.S. real estate.

Many techniques can be used to plan for potential purchase of property and limit the potential U.S. estate tax liabilities:

Being Non-resident alien in U.S.; Non-recourse Mortgage; Ownership Alternatives; Canadian Discretionary Trust.


Non-resident alien in U.S.Non-resident alien in U.S.

If a U.S. vacation property is held for personal use, a Canadian resident

who is also a resident or citizen of the U.S. needs not be concerned

about U.S. income taxes or the need to file U.S. income tax return,

unless the property is sold during the lifetime.

If the US property is used to generate rental income, the person paying

the rent is obliged to withhold and remit 30% of the gross rent to the

Internal Revenue service on behalf of the nonresident alien.

The non-resident alien should provide a particular withholding waiver to

its tenant prior to collecting any rent so as to avoid the 30% withholding

above. W-8BEN, W-8ECI and other election with the tax return.


Non-recourse MortgageNon-recourse Mortgage

Non-recourse Mortgage is a financing instrument where the lender’ssecurity and collection rights are limited to the collateral posted by theborrower, who is not personally liable for any debt in excess of thevalue of collateral.

Non-recourse Mortgage are effective Estate Tax avoidance methodsbecause any outstanding balance of such a mortgage is deducted fromthe fair market value of the US property for purposes of calculating the Estate Tax liability thereon. As the fair market value of the U.S. property serves as the base upon which Estate Tax and the availableUnified Credit are calculated, reducing the fair market value of the U.S.property directly reduces a decedent's Estate Tax liability.

For Canadian tax purposes, interest is generally deductible if theborrowed funds are used to generate income.


Ownership AlternativesOwnership AlternativesCorporation Corporation

In the past, many Canadians used a Canadian corporation (known as a “single-purpose corporation”) to hold personal-use U.S. real estate to avoid U.S. estate tax on the property. Shares of a Canadian companyare not U.S.-Situs property for U.S. estate tax purposes. As long as thesole purpose of the corporation was to own the U.S. property and allexpenses related to the property were paid personally by theshareholders, the Canada Revenue Agency (CRA) would not consider it

The shareholders to have received a taxable benefit for the personal use of the property. However, using a corporation to hold the property can increase the total tax on any capital gain realized on the dispositionof the property.

Note: Renting will disqualify the corporation.


Ownership AlternativesOwnership AlternativesPersonal OwnershipPersonal Ownership

Personal Ownership avoids the cost and inconvenience associated with

introducing new entities and reporting for them.

Also, it avoids the relatively high U.S. corporate tax rates on incomeand capital gains from U.S. property.


Canadian Discretionary TrustCanadian Discretionary Trust

A Canadian discretionary trust may be a useful way for a wealthyindividual or couple to mitigate their Estate Tax liability. Through thetrust, Estate Tax is deferred until the death of the beneficiaries of thetrust.

The trust uses the parent’s money to purchase the U.S. property. Theparents are generally excluded as beneficiaries of the trust; rather theparents’ child or children are named. They must conduct themselvesaround the trust.

It is generally desirable to avoid generating income and/or capital gainsin the trust because various U.S. and Canadian compliance

obligations,as well as potential taxable benefits.


SnowbirdsSnowbirds

A Canadian snowbird will be considered a resident alien if spent in

United States:

183 days or more in the current year;

between 31 and 182 days in the current year, he/she may meet the

substantial presence test, as well.

If a Canadian snowbird wants to be exempted from being considered a

non resident alien–there are two possible exemptions you can claim:

a) Exemption under the “Closer Connection Category” of the U.S. Internal Revenue Code;

b) Exemption under the Canada-U.S. Tax Treaty.


Transfer pricingTransfer pricing

Transfer prices are prices that companies charge for goods, services,

tangible and intangible assets they trade with subsidiaries and similar

controlled entities in foreign markets.

According to the tax law in Canada, United States, and other developed

countries, the proper transfer price is one which two parties dealing at

arm's length would agree to for a certain transaction.

The idea is to force the related companies to sell their goods, services,

tangible and intangible assets to one another at market prices for tax

purposes.

From a Banking perspective this can impact Financial Statements, Covenant

Requirements, have Tax Implications.


Regulation 105Regulation 105

It requires businesses to withhold 15 per cent of fees, commissions,

and any other amount paid to non-resident contractors for services

rendered in Canada.

The amount withheld is not a final tax, a non-resident can demonstrate

that the withholding is more than their potential tax liability in Canada,

either due to treaty protection or income and expenses, Canada

Revenue Agency may waive or reduce the withholding.

If the required amount is not withheld, the company must pay (on

behalf of the non-resident) the amount plus interest and applicable

penalties.


Thin Capitalization RulesThin Capitalization Rules

Under these rules, interest paid by Canadian corporation on loans

received from non-resident shareholders that own 25 per cent or more

of the shares of the corporation will not be deductible to the extent that

such loans exceed increasingly the equity of the corporation.

In order to be ensured the system remains effective in protecting

Canada’s tax base, the Panel recommended that the current thin

capitalization rules be retained, but that the maximum debt-to-equity

ratio be reduced from 2:1 to 1.5:1, and that scope of the thin

capitalization rules be extended to partnerships, trusts and Canadian

branches of non-resident corporation. For IRS there is no definite thin capital limitation but 2:1 and 3:1 have been guidelines used in past.


Benefits of Cross Border Taxation to BankersBenefits of Cross Border Taxation to Bankers

Being Aware of contemporary issues that concern your clients

Making a statement that you are aware of Global needs of clients; It is important that Canadian companies take time to plan how to

enter the US and global markets, tax implications will impact there bottom line.

Ensuring that client is compliant in all tax filings both personal and

corporation. Reduce exposure to unnecessary penalties, interest and tax costs

that would hurt working capital and covenants.


Benefits of Cross Border Taxation to BankersBenefits of Cross Border Taxation to Bankers

Ensure client has proper structure to reduce tax costs of international

business

Tax can be a large expenditure, why would a company do business planning on a pre-tax basis .

Understand cross bordering structuring when it comes to PPSA and

GSA, how to ensure your assets are protected.

Provide Cross Border Financing solution to meet client’s needs.

Provide Cross Border Banking solutions that meet client needs.


QUESTIONS?QUESTIONS?

Final WordsFinal Words

If any question or concern, contact:If any question or concern, contact:

ALPESH JOSHI, CA, CPAALPESH JOSHI, CA, CPA

[email protected]@alpeshjoshi.ca

905-477-5777 ext. 300905-477-5777 ext. 300

presentation- cross border tax

Economy & Finance