Insights Vol. 2 No. 6: F.A.T.C.A. 24/7

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F.A.T.C.A.’S FIRST ANNIVERSARY: AN ASSESSMENT

On July 1, the Foreign Account Tax Compliance Act (“F.A.T.C.A.”) celebrated the first anniversary of its implementation. F.A.T.C.A. was created to improve international tax compliance and combat offshore tax evasion. Notwithstanding dire predictions about its impact on the financial community when F.A.T.C.A. was first enacted in 2010, the sky has not yet fallen as of its first anniversary.

New I.R.S. Procedures for Canadian Retirement Plans

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On October 7, 2014, the I.R.S. released Revenue Procedure 2014-55, which provides guidance for U.S. citizens or residents who own a Canadian Registered Retirement Savings Plan (“R.R.S.P.”). In short, U.S. citizens/Canadian residents, Canadian citizens/U.S. residents, and dual citizens will no longer need to file Form 8891 to defer the accrued R.R.S.P./R.R.I.F income for U.S. tax purposes. The deferral will now occur automatically, assuming the individual is “eligible.” These new procedures will apply even if the contributions to the R.R.S.P./R.R.I.F. were made as a resident of Canada.

However, practitioners should note that this does not alleviate the need to file Form 8938 or FinCen Form 114 upon receiving a distribution from an R.R.R.P.

Original Treatment

An individual who is both a U.S. citizen/resident and a beneficiary of a R.R.S.P will be subject to current U.S. income taxation on income accrued in the plan even though the income is not currently distributed to the beneficiary. In Canada, the individual is not subject to Canadian income taxation until the accrued income is actually distributed from the plan. This leads to a mismatch in the timing of the U.S. tax and the Canadian tax, resulting in possible double taxation.

Article XVIII, Paragraph 7 of the U.S.-Canada Income Tax Convention (the “Treaty”) provides that an individual may defer U.S. taxation on income accumulated in an R.R.S.P., but only if the individual makes an annual election to defer the taxation of income.

Canadian Immigration Trust Exemption Withdrawn

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INTRODUCTION

For over 40 years, Canada offered a unique tax benefit to individuals not previously Canadian resident or who had been resident in Canada for less than 60 months. Such persons were allowed to establish a nonresident trust, which would not be taxable by Canada and from which a Canadian resident beneficiary could receive tax-free capital distributions. In addition, and in comparison to U.S. tax rules, income accumulated in the trust at the end of the calendar year automatically became capital, following typical provisions in discretionary trusts. Once converted into capital, the rules for tax-free distributions of capital became applicable.

This made Canada an attractive jurisdiction for global elite. Wealthy immigrants to Canada could shelter foreign investment income and capital gains from Canadian tax for a period of up to 60 months after becoming resident. Needless to say, these structures became quite popular.

In a surprise move announced in February 2014, the tax benefit was withdrawn from 2015 onwards. However, if the trust received a contribution after February 22, 2014, it would become taxable from 2014 onwards. Importantly, no grandfathering was provided for existing trust arrangements, which is both unfortunate and unfair. The change impacts a large number of individuals, as many people have structured their tax planning on the basis of having this exemption for 60 months.

CANADIAN TAX SYSTEM

Canada has a common law definition of residence, which is basically a facts and circumstances test. When an individual establishes sufficient ties to Canada, that person will become resident. While Canada also has a substantial presence rule (183 days in the calendar year), this rule is only applicable to persons who spend time in Canada without becoming resident under common law principles. Citizenship and immigration status are not a basis for levying tax.

The McKesson Transfer Pricing Case

volume 1 no 7   |   Read article

By Sherif Assef

In this month’s lead article, Sherif Assef of Duff & Phelps weighs the consequences of a recent Tax Court of Canada case involving risk shifting and function shifting within a multinational group when neither risks nor functions are actually shifted. Nonetheless, profits were shifted and this annoyed the C.R.A.  See more →

Cross-Border Estate Planning: Canadian Parents of U.S. Children

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U.S. transfer taxes (U.S. gift, estate and generation skipping taxes) should be a concern to any practitioner creating an estate plan with U.S. links. The following article addresses U.S. estate tax consequences of a family comprised of Canadian citizen/resident parents with American children.

IN GENERAL

Transfer tax is imposed on the fair market value of the property transferred, reduced by any consideration received.

U.S. citizens, and non-U.S. citizen individuals that are domiciled in the U.S., are subject to the U.S. transfer tax system on global assets.

A person acquires a domicile in a place by living there, for even a brief period of time, without the presence of a definite intention to leave.

A facts and circumstances test is used to determine domicile. Factors include, e.g.:

1. Statements of intent (as reflected, e.g., on tax returns filed, visa application, and similar evidence);
2. Time spent in U.S. versus time spent abroad;
3. Visa status (e.g., green card holder);
4. Ties to the U.S. versus abroad;
5. Country of citizenship;
6. Location of employment, business, and assets;
7. Other indicators such as voting, affiliations, membership, driver license, and similar items.

Residence without the intention to remain indefinitely will not constitute a domicile, and the intention to change domicile will not effect such a change unless accompanied by actual relocation.

Understanding Your Neighbour→

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As with most international tax planning, the key to cross-border Canada/US tax and estate tax planning is to synchronize the timing of the tax events and the taxpayer in order to minimize, and even eliminate, double taxation. Avoidance of tax in one jurisdiction may not be a satisfactory solution if it is merely a deferral or a shifting of a tax burden to a different taxpayer who or which may be subject ot tax at a lower rate (as well as a later time).

Canadian personal tax overview

Federal income tax is imposed on resident individuals, estates, trusts and companies based upon residency or domicile in Canada. Canada has an extensive array of dual tax treaties, so in many cases tax residency may be overidden by a treaty. If a resident, tax may be imposed on one's worldwide income, which, of course, is determined under specific definitions.