2. 2
Topic summary
US tax update:
PFIC update – reporting
Foreign Bank Account reporting
Tax rate changes
Voluntary Declaration process update
CFC update
Miscellaneous legislation
Canadian tax update:
Foreign tax credit generators
Taxable Cdn property rule changes
Tax avoidance transactions
Stock option changes
Quebec - model for Feds?
3. PFIC
Passive Foreign Investment Company
(PFIC) Update
PFIC shareholder must file annual return
Previously only when taxable event occurred or election
made
Statute of limitations suspended INDEFINITELY
for failure to file annual return
Further, the statute of limitations is suspended
INDEFINITELY for failure to file ANY informational
return (recently clarified)
4. PFIC
What is a PFIC?
Canadian mutual funds – trusts v. corporation
If trust for U.S. purposes, not subject to PFIC
However U.S. person likely has U.S. trust reporting (subject to penalties)
If corporation for U.S. purposes, generally subject to PFIC
determinations
Limited purpose trust, open ended, unincorporated, created for investment
purposes
Management of trust has powers to “vary the investments”
Certain Canadian corporations
Junior investment stock likely PFICs
IPOs
Certain REITs
Likely not subject to PFIC if active property management by REIT
itself
Most CEFs
Includes privately owned companies!
Information circulars (and other fund documents) are starting to
5. PFIC
Sample PFIC Calc – Non-QEF or Mark-To
Market
U.S. Citizen Buys Canadian Junior Mining Stock in 2007 for
$ 1,000 US
Sells all of the stock in 2010 for $ 10,000 US
The $ 9,000 US gain will be taxed at an effective rate of
37% in the United States*
The longer the hold of the stock, the higher the effective
rate
Annual distributions can create “excess distributions” as
well
*(assuming the underpayment interest rate in 2010 is the same as 2009)
6. FBAR redux
Additional Disclosure Required: new form
“Specified Foreign Financial Asset” disclosure
Includes:
Deposits (or custodial accounts) at foreign financial institutions
To the extent not held at a financial institution:
Stocks or securities issued by foreign persons
Any other financial instrument or contract held for investment that is issued
or has a counterparty that is not a U.S. person
Any interest in a foreign entity.
Aggregate value of the assets must exceed $ 50,000 US
If you can’t prove aggregate value, IRS will assume you met the
threshold
Congress does not believe this to be a duplicative reporting to
FBAR (which is still in effect)
Failure to disclose is $ 10,000 US for every tax year
Statute of limitations is suspended INDEFINITELY if never filed
7. US tax rate changes
Changes to U.S. Individual FTCs -As of 2009
Foreign Dividends in excess of $ 20,000 US are subject to FTC
stripping
Changes to U.S. Individual Tax Rates -As of 2011
Top marginal rate goes to 39.6%
Long-term capital gains rate to 20%
Qualified dividends ordinary rates - no longer 15%
Foreign tax credits – un-pooling, again
Impact for planning:
• foreign exchange rate implications
• Dividend tax credit issues
8. US tax rate changes
Personal Income tax rates:
MFS:
Over $70,000 but not over $125,000. $17,964.25, plus 36% of the
excess over $70,000.
Over $125,000....... $37,764.25, plus 39.6% of the excess over
$125,000.
MFJ:
Over $140,000 but not over $250,000. $35,928.50, plus 36% of the
excess over $140,000.
Over $250,000....... $75,528.50, plus 39.6% of the excess over
$250,000.
9. US tax rate changes
US Healthcare bill: requires US persons to have
healthcare coverage that meets US standard. Penalties for
insufficient coverage – no exemption for U.S. persons living outside
US.
Q:How does this impact US Persons living
in Canada? Private insurance required?
2012: 3.8% healthcare surtax on investment
income where AGI over $250,000 MFJ
Planning: analysis for high net-worth
individuals
11. US tax rate changes
Estate taxes Exemption $1M – 3.5M?
• Retro-active?
• The estate tax exemption will drop to $1 million.
• The GST exemption will drop to an inflation-adjusted $1
million (it is likely this amount will be at least
$1,340,000).
• The top estate, gift, and GST tax rate will increase to
55% (60% for estate and gift tax transfers between
$10 million and $17,184,000).
• The estate and gift tax system will again be unified.
• The state death tax credit will be restored.
12. Vol Dec update
Voluntary Disclosure Update
• Mitigation of Penalties
Up to Audit Manager assigned to file
If “offer” rejected, proceed to audit
• Additional Requests
Account statements for 2003 through 2008
Not all agents request this
Some won’t discuss mitigation unless we
provide this first
Copies of Canadian tax returns filed
Includes corporate returns of CFCs
13. Vol Dec update
Non-Compliance Going Forward
• No “quiet disclosure”
IRS is setting up programs to trigger inspections of
multiple/previous year’s filings
Is considered a willful failure to file and will be subject to no relief of
penalties
• All non-compliance must be sent to Voluntary
Disclosure department
No guidance on what the procedures and likeliness of
penalty mitigation at this time
14. CFC refresher IRC 951-957
What is a Controlled Foreign Corp?
• 5 or fewer US persons with at least 10%
interest (combined filing allowed)
• Attribution rules (family, psps, trusts,corps IRC
318)
• Subpart F income = FAPI – dividend at
ordinary rates (results in double taxation)
• Failure to file penalty: $10,000 per corp
• Complex form – requires USD and US gaap
Recent case: CCA 200645023 – complexity not
reasonable cause
15. CFC – IRC 954
IRC 954 Subpart F Income
What comprises PHC income?
1. Dividends, interest, rents, royalties, and annuities;
2. Income equivalent to interest (without regard to the
exceptions for amounts apportioned like interest);
3. Foreign currency gains or loss (without regard to the
exception for gain or loss directly related to business
needs);
4. Gain or loss from commodities transactions (without
regard to the exclusions for qualified active sales and
qualified hedging transactions); and
5. Gain or loss from certain property transactions
(without regard to the exceptions for sales of
inventory and dealer property).
16. CFC – IRC 954
Limitation:
• The subpart F income of a controlled
foreign corporation for a taxable year
cannot exceed the earnings and profits of
the corporation for that year
• Claw-back rule for subsequent profits
17. CFC – IRC 954
IRC 954 fix for CFCs with Subpart F income:
ULC
Pros & Cons:
• Income retains character in hands of US
person (capital gains, dividends)
• Requires maintenance of portfolio in CAD
and USD
• issue with US investments? Treaty? Code?
18. Miscellaneous legislative changes
Codification of economic substance:
IRC 7701(o)
Substantial penalties for transactions lacking economic
substance (20% - 40%)
economic substance is a conjunctive test—that is, a
transaction (or series of transactions) to which the
economic substance doctrine applies is treated as
having economic substance only if (1) it changes in a
meaningful way (apart from any U.S. federal income
tax effects) the taxpayer's economic position; and (2)
the taxpayer has a substantial purpose (apart from
U.S. federal income tax effects) for entering into the
transaction
19. Miscellaneous
Purpose of legislation:
• sham transactions - sole purpose of obtaining tax
benefits and the transaction is devoid of any reasonable opportunity
for economic profit
• sales leasebacks
Result: potentially wide-ranging – could
impact typical reorganization planning
eg. Sale of US stocks to spouse
20. Miscellaneous
Adequate Disclosure (Rev Proc 2010-15)
a.k.a. why the cost of compliance just went up
Applies to all tax filers and preparers
Substantial understatement of tax: IRC 6662(1)
Individuals: understatement exceeds greater of
10% or $5,000
Corporations: understatement exceeds lesser of
10% or (or if greater $10,000) $10M
21. Miscellaneous
Inadequate disclosure includes:
• Unclear descriptives
• Compensation of officers (Sch E)
• Repairs
• Combining unlike items
• Schedule A Itemized deduction details
• Trade or business
Consider Form 8275 or 8275-R disclosure?
22. Miscellaneous
Restructuring at IRS
• High net worth individuals (>$10M) now
part of “corp” audit group
Washington B&O tax
• Sweeping changes to nexus rules – any
activity directed at WA
residents/businesses
• If activity stopped “trailing nexus” for
current + next year
23. Miscellaneous
Canadian trust – vacation property
US person or non-compliant snowbird meeting substantial
presence who is grantor or beneficiary of trust occupies
US ppty – fair market value of use of
residence as distribution (taxable amt
limited to net income but may have
deemed rental income)
24. Canadian tax potpourri
Foreign tax credit generators
Proposed amendments: restrict entitlement
to deductions & credits for foreign taxes in
respect of foreign-source income
Target: hybrid instrument structures
Unintended result? – partnership structures
Denial of % of FTCs if income under other
country rules is less than Cdn equivalent
25. Canadian tax potpourri
Taxable Canadian property
Non-public company shares excluded unless
anytime in last 60 months more than 50% of
FMV (direct or indirect) combo of:
1) Real or immovable property
2) Resource
3) Timber
4) Options or interests in above
Similar rules apply to NR corps, psp interests,
mutual fund trusts
Exchange taint under section 85
• Shares received by transferor deemed TCP for
60 months following transfer
26. Canadian tax potpourri
Tax avoidance transactions:
Following US and QC models?
Meets two of three “hallmark” tests:
1. Promoter/tax advisor fees (a) attributable to
benefit; (b) contingent on tax benefit; or (c) # of
participants;
2. Promoter requires “confidential protection”;
3. Taxpayer receives “contractual protection”;
Result: any tax benefit sought not available until
reported and, if applicable, penalty for failure is
paid.
27. Canadian tax potpourri
Employee stock options:
• Elimination of deferral for pubco stock options
Result: better matching of Cdn & US tax
consequences
• Remittance obligations – amounts must be
remitted for stock option benefit as if cash
payment (with reduction for 50%)
Applies: 2011 exercises
Exemption: a) stock options granted prior to
2011; b) entered to prior to March 4, 2010; and
c) restrictions on disposition.
28. Canadian tax potpourri
TD Securities (USA) LLC v. Queen 2008-
2314(IT)G, April 8, 2010
Held: US LLC was resident entitled to treaty
benefits under former convention
Fact pattern: Two tier US C corporation blocker
with LLC
