Cross-Border travel
and transfers: immigration
and tax complications
EXPAND IN THE USA
June 17, 2015
Joel Guberman and Peter Megoudis
General Income
Tax Principles
US Federal Income Tax Status
• WORLDWIDE INCOME TAXATION
– US Citizen
– US Permanent Resident (Green Card Holder)
– US Resident
– Substantial Presence Test (SPT, 3 year/183 day test)
– 31 US days in current year, plus
– 100% of current year days + 1/3 of prior year days + 1/6 of second prior year days =>183
– Any part of the day counts (whether personal or work), unless in US for medical emergency
– Exception for individuals in the US on a student visa, or daily commuters
– SPT can be overriden by Filing Form 8840 Closer Connection Statement or by Filing 1040NR/Form 8833 Treaty Residency in Canada
– Election
– Residency can be overridden by tax treaty
TAXATION ONLY ON US SOURCE INCOME
– US Non-Resident
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US Federal Estate/Gift Tax Status
• Estate/Gift Tax
– TAX ON WORLDWIDE ASSETS
– US Citizen
– US Resident (i.e., Domicile)
– TAX ON US SITUS ASSETS
– US Nonresident
– Limited US Estate Tax Exemption
– No Gift Tax Exemption
– Gift tax on gifts of US Tangible Assets
– Vs. Estate tax also re US Intangible Assets (ex stocks/bonds)
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Citizens and Green Card Holders
• US citizenship
– Individuals born in the US
– Individuals born outside the US, where both parents are US citizens
– What if one parent is a US citizen?
• US green card holder (permanent resident status)
– Still have status until actual surrender/seizure of card
– Not automatically affected by:
– Moving to Canada
– Not filing or renewing returning resident permit
– Having card’s expiry date lapse
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(Federal) Taxation of US Citizens/Residents
• Employment, business, pension, rental, interest income, short term capital gains (i.e., <1
year): graduated rates
• US (qualified) dividends: 15% or 20% rate
• Long Term capital gains: 15% or 20% rate
• As of 2013: If total income >$250k, investment income subject to new 3.8% net investment
income tax (NIIT)
– Cannot be reduced by FTCs on US return
– Therefore, US tax even if all Canadian source income subject to higher Canadian taxes
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(Federal) Taxation of US NR – ECI income
• US source business or employment income: taxed at graduated rates (plus potentially state
taxation for services in State)
– Potential treaty exemption (Articles VII and XV)
• US source rental income: taxable at either:
– Graduated Rates on net income – with election, or
– Flat 30% tax on gross rents
– Plus, potentially, state taxation if real estate in State
• Capital gains on US real estate, US real estate corporations, US business assets: taxed at 15%
or 20% rate
– Plus potentially State taxation if real estate in State
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(Federal) Taxation of US NR – FDAP Income
• US source dividends: Subject to 30% (or 15% under Treaty) US withholding tax on “Fixed,
Determinable, Annual, Periodic” (FDAP) income
• US source interest: mostly exempt (portfolio interest, or Treaty)
• Pension income from US payor (ex 401k, IRA): Subject to 30% (or 15% under Treaty) US
withholding tax on FDAP income
– Can elect to report US source portion of pension (based on US workdays) on tax return, taxed at
graduated rated
• US social security income: Subject to 30% US withholding tax on FDAP income
– Exempt for Cdn residents, under Canada-US Treaty
• Can reduce withholdings to Treaty rate by filing Form W-8BEN with payor of income
• 3.8% NIIT does not apply to US NR
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Comparison: Highest tax rates
United States
2012 top tax rates
Employment, Business, Rental,
Pension income
Federal
FICA/Medicare:
Canada (Ontario)
2015 top tax rates
35.00%
1.45%
Federal:
FICA/
Medicare:
HI:
2014 top tax rates
39.60%
1.45%
49.53%
0.90%
Eligible (Canada)/ qualified (US)
dividends
Federal:
15.00%
Federal:
NIIT:
15/20.00%
3.80%
33.82%
Non-eligible (Canada)/ ordinary
(US) dividends
Federal:
35.00%
Federal:
NIIT:
39.60%
3.80%
40.13%
Federal:
35.00%
Federal:
NIIT:
39.60%
3.80%
24.77%
Federal:
15.00%
Federal:
NIIT:
15/20.0%
3.80%
24.77%
Federal:
35.00%
Federal:
NIIT:
39.60%
3.80%
49.53%
Short term capital gains
Long term capital gains
Other investment income
Estate/Gift Tax Rate
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Estate/Gift Tax Exemption
35%
$US 5,120,000
40%
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$US 5,430,000
Specific tax issues:
Canadian employees
working in the US
US Immigration Issues
• Individuals who do not have US citizenship, US green card, or US work visa are limited in # of
days they can spend in the US
• Generally, cannot spend more than 6 months a year in the US (on a tourist (B-2) visa)
• So far, US has been tracking entries to the US; Canada has not been tracking entries from the
US to Canada
• Starting in the summer 2014, Canada will be tracking entries from the US to Canada and
sharing the info with the US
• US will now be able to verify whether you exceed 6 months in the US
– Can deny you subsequent entry to the US
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(A) Corporate Tax Issues
• Activities of employee in the US can mean:
– Canadian employer has US ECI
– Has to file (at least) treaty based Form 1120F
– Canadian employer has PE in the US
– Subject to US federal corporate taxes
– Ex. Fixed base, signing authority, services PE
– Exception: secondment
– Canadian employer has nexus in a US State
– Subject to US State corporate taxes
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(B) Payroll Issues
• US source wages subject to US income tax withholdings and W2 reporting
– Federal and State
– Some states have no income taxes: Florida, Texas, Nevada, Washington…
– Treaty Based Withholdings Waiver: Form 8233
• US Social security taxes (FICA) vs Canadian (CPP/QPP)
• ITIN vs SSN for employee
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(C) Taxation of NR employee in the US
• Taxable on US source wages: 1040NR reporting
– But: Exempt from US federal (and maybe even State) tax on US wages if:
– US wages < $US 10,000, OR
– Present in the US < 184 days, AND compensation not borne by or paid by US PE or entity
– Ex secondment to US entity loses the exemption
– Caution: some states don’t following the treaty (ex. California, New Jersey)
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(D) Employee taxation in the US: specific considerations
• US deferred compensation rules (section 409A)
• Planning with incentive stock options and restricted stock grants
• Deductibility of pension contributions
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(E) Employee’s Residency Issues
• Ceasing to be a Canadian resident
– Canadian departure tax
– Loss of CCPC status
– Cdn trust ceases to be Cdn resident
• Becoming a US federal income tax resident
– For information return reporting purposes only
– For information return and tax liability purposes
• Becoming a US State income tax resident
• Become a US federal gift and estate tax resident
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Canadian Departure Tax and the US
• Generally, US cost base of asset = historical purchase price
• However, can elect under Treaty Article XIII(7) to have a deemed disposition (and reacquisition, at FMV) for US purposes as well
• If US taxpayer at date of Canadian departure:
– Deemed disposition is a taxable event in the US, and could be subject to US capital gains tax
– However, can thus match FTCs
• If not US taxpayer at date of Canadian departure:
– Deemed disposition not a taxable event in the US; just get a bump in basis
• Election must be filed by due date of US return for year of Canadian departure
• Election must apply to all assets that were deemed to have been disposed of in Canada
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5 US Federal Income Tax Status
• (1) US citizen or green card holder
– “US Person”. Taxable on worldwide income. Subject to special filings.
• (2) Individual does not meet the substantial presence test
– Not a “US Person”. Not taxable on worldwide income. Not subject to special filings.
• (3) Individual meets the SPT, but spends less than 183 days in US in current year
– Not a “US Person” and not taxable on worldwide income and not subject to special filings - as long as
files a timely Form 8840 Closer Connection Statement.
– If Form 8840 not timely filed, or not eligible, need to go to (4)
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5 US Federal Income Tax Status
• (4) Individual meets the SPT, spends more than 182 days in US in current year, but is a
Treaty Resident of Canada
– While not taxable on worldwide income (can file Form 1040NR):
– Still a “US Person” and still subject to special filings
• (5) Individual meets the SPT, spends more than 182 days in US in current year, and is not a
Treaty Resident of Canada
– “US Person”, taxable on worldwide income, subject to special filings
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(F) Filing Requirements
• FinCen 114 (“FBAR”): Total Foreign Deposit and Custodial (i.e., brokerage) accounts exceed
$10,000
– Also include accounts over which one only has signing authority
• Form 8938: If Total Foreign Financial Assets (deposit/custodial accounts, shares, bonds,
deferred compensation, pensions):
– (For individuals living outside the US) exceed $400,000 at end of year/$600,000 at any time in year
• Form 3520-A: owner of a foreign grantor trust (ex TFSA, RESP, revocable family trust,
RRSP/RRIF (if no Form 8891 filed))
• Form 3520:
– owner of a foreign grantor trust (annual filing);
– beneficiary receiving distribution from foreign trust; or
– gift/inheritance from foreign person, if > $100,000
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Filing Requirements (cont.)
• Form 8891 (pre-2015 filings): RRSP/RRIF accounts (exemption from filing 3520-A/3520)
– Filing requirement abolished as of January 1, 2015
• Form 5471: In year taxpayer acquires/disposes of 10% interest in foreign corporation, OR, for
each year controlling foreign corporation
– Category 3: Year you acquire 10%, or further 10%, of corp – need to file Form 5471 that year
– Category 4: You, directly, indirectly, or through attribution, control corp – need to file Form 5471
annually
– Category 5: You own =>10% of a CFC (foreign corp controlled by US persons who are each 10%
shareholders) – need to file Form 5471 annually
• Form 8621: Reporting interest in passive foreign investment corporation (PFIC) – ex. Canadian
mutual funds?
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US Informational Filings
Form
Required
926
Certain US transferors to foreign corporations
5471
Certain US transferors to owners and directors of
foreign corporations
$10,000 plus reduction of foreign tax
credits
8621
$10,000
8858
US owners of PFICs; also used to make PFIC related
elections
US owners of foreign disregarded entities
8865
US transferors to and owners of foreign partnerships
8886
US owners and beneficiaries of foreign trusts
participating in reportable transactions
FinCen 114
US owners of and signatories over foreign bank
accounts
8938
US owners of foreign financial asset
3520-A-
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US owners of foreign trusts and
US benefichiaries receiving distributions
Foreign trust with US owner (signed by trustee)
Civil Penalties for
Non-Compliance
Greater of $10,000, and 35% of
distributions or contributions
Greater of $10,000, and 5% of gross value
of trust assets
10% of transfer up to $100,000
3520
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Who Must File
(Direct, Indirect or Constructive Ownership)
$10,000 plus reduction of foreign tax
credits
$10,000 plus reduction of foreign tax
credits
$10,000 to $100,000, depending on
transaction
$10,000 per account, up to 50% of the
account value
$10,000, up to $60,000 per year
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(G) Caution: Investing in LLCs
• Income from LLC (reported on US K-1)
– In the US, LLC’s income taxable to member on a flow through basis
– Even for US NR – taxable on US ECI
– Distributions taxable in Canada as foreign investment income, even if flow through in the US
– Unless CFA and FAPI income
– Timing mismatch, FTC issue
– Even if distributions in same year - Subject to 15% FTC limit
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