Form 1042-S

What is a 1042-S?

Form 1042-S, or Foreign Persons US Source Income Subject to Withholding, reports for non-US persons or entities interest payments, dividends and substitute payments in lieu and applicable US source tax withholding, thereon, from US securities paid to foreign investors.

This information is also reported to the IRS.

It is possible to receive multiple 1042-S forms reporting different types of income during a given tax year.

Box 1 contains a code indicating the type of income being reported, shown below:

Code Income Type
6 Dividends
24 Substitute payments in lieu – dividends
01 Interest
29 Deposit (credit balance) interest
30 Original issue discount
33 Substitute payments in lieu – interest
50 Referral fees

Box 2 contains the gross US source income of the type indicated in box 1. Box 5 contains the withholding tax rate applied as determined by statute or applicable US tax treaty.

Box 6 contains an exemption code if the reportable income is exempt from withholding, for example interest and original issue discount.

Box 7 is the total amount of US federal tax withheld.

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Garron Decision Upheld by Tax Court of Canada

December 2nd, 2010.

The Tax Court of Canada (TCC) decision in Garron, now known as St. Michael Trust Corp., was upheld in a recent Federal Court of Appeal (FCA) decision that serves as a warning that residency issues for trusts — and for corporations — should be taken seriously.

The decision concerned the residency of two trusts, and held that similar considerations should apply as are required to determine the residency of a corporation.

The FCA agreed with the TCC’s determination that the trusts at issue were resident in Canada and not Barbados since, among other reasons, the trusts’ real decision makers were their beneficiaries, who were Canadian residents. Therefore, the capital gains realized by the trusts were taxable and not treaty exempt. There is also a lengthy discussion in obiter of other issues in the event the trusts were resident in Barbados, including the application of section 94 of the Income Tax Act, the application of the Canada-Barbados Tax Treaty to exempt the gains and the application of the General Anti-Avoidance Rule (GAAR).

Had residency in Barbados been successfully established for the trusts, the tax planning would have been successful, i.e., the gains would have been exempt under the treaty and the GAAR would not have applied.

Thursday Thirteen – IRS Style. 13 Facts about W9’s.

This Thursday Thirteen covers 13 facts about the IRS W9 Form you may, or may not have known about:

13. Which payees are exempt from backup withholding?
* An organization exempt from tax under section 501(a), any IRA, or a custodial account under section 403(b)(7) if the account satisfies the requirements of section 401(f)(2),
* The United States or any of its agencies or instrumentalities,
* A state, the District of Columbia, a possession of the US or any of their political subdivisions or instrumentalities,
* A foreign government or any of its political subdivisions, agencies, or instrumentalities, or
* An international organization or any of its agencies or instrumentalities.

12. Which payees may be exempt from backup withholding?
* A futures commission merchant registered with the Commodity Futures Trading Commission,
* A foreign central bank of issue,
* A dealer in securities or commodities required to register in the US, the District of Columbia, or a possession of the US,
* A real estate investment trust,
* An entity registered at all times during the tax year under the Investment Company Act of 1940,
* A common trust fund operated by a bank under section 584(a),
* A financial institution,
* A middleman known in the investment community as a nominee or custodian, or
* A trust exempt from tax under section 664 or described in section 4947.

11. The IRS recommends that even if you are exempt from backup withholding, you should still complete a W9 to avoid possible erroneous backup withholding.

10. What is the purpose of the W9?
A person who is required to file an information return with the IRS must obtain your correct taxpayer identification number (TIN) to report, for example, income paid to you, real estate transactions, mortgage interest you paid, acquisition or abandonment of secured property, cancellation of debt, or contributions you made to an IRA

9. Who needs to complete a W9?
A US person (including a resident alien), to provide your correct TIN to the person requesting it (the requester).

8. Why do “they” need a W9 completed?
* To certify that the TIN you are giving is correct (or you are waiting for a number to be issued),
* To certify that you are not subject to backup withholding, or
* To claim exemption from backup withholding if you are a US exempt payee.
(You are also certifying that as a US person, your allocable share of any partnership income from a US trade or business is not subject to the withholding tax on foreign partners’ share of effectively connected income)

7. If a requester gives you a form other than Form W-9 to request your TIN, you must use the requester’s form if it is substantially similar to this Form W-9. The IRS cares about the information on the form, not the form itself.

6. Penalties? Yup!!!
* Civil penalty for false information with respect to withholding. If you make a false statement with no reasonable basis that results in no backup withholding, you are subject to a $500 penalty.
* Criminal penalty for falsifying information. Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment.
* Failure to furnish TIN. If you fail to furnish your correct TIN to a requester, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect.
* Misuse of TINs. If the requester discloses or uses TINs in violation of federal law, the requester may be subject to civil and criminal penalties.

5. What is backup withholding? Persons making certain payments to you must under certain conditions withhold and pay to the IRS 28% of such payments. This is called “backup withholding.” Payments that may be subject to backup withholding include interest, tax-exempt interest, dividends, broker and barter exchange transactions, rents, royalties, nonemployee pay, and certain payments from fishing boat operators. Real estate transactions are not subject to backup withholding.
You will not be subject to backup withholding on payments you receive if you give the requester your correct TIN, make the proper certifications, and report all your taxable interest and dividends on your tax return.

4. You will not be subject to backup withholding on payments you receive if you give the requester your correct TIN, make the proper certifications, and report all your taxable interest and dividends on your tax return.

3. If you are a US resident alien who is relying on an exception contained in the saving clause of a tax treaty to claim an exemption from US tax on certain types of income, you must attach a statement to Form W-9 that specifies the following five items:
1. The treaty country. Generally, this must be the same treaty under which you claimed exemption from tax as a nonresident alien.
2. The treaty article addressing the income.
3. The article number (or location) in the tax treaty that contains the saving clause and its exceptions.
4. The type and amount of income that qualifies for the exemption from tax.
5. Sufficient facts to justify the exemption from tax under the terms of the treaty article

2. To sign or not to sign…
To establish to the withholding agent that you are a US person, or resident alien, sign Form W-9. You may be requested to sign by the withholding agent even if items below indicate otherwise.
* Interest, dividend, and barter exchange accounts opened before 1984 and broker accounts considered active during 1983. You must give your correct TIN, but you do not have to sign the certification.
* Interest, dividend, broker, and barter exchange accounts opened after 1983 and broker accounts considered inactive during 1983. You must sign the certification or backup withholding will apply. If you are subject to backup withholding and you are merely providing your correct TIN to the requester, you must cross out item 2 in the certification before signing the form.
* Real estate transactions. You must sign the certification.
* Other payments. You must give your correct TIN, but you do not have to sign the certification unless you have been notified that you have previously given an incorrect TIN. “Other payments” include payments made in the course of the requester’s trade or business for rents, royalties, goods (other than bills for merchandise), medical and health care services (including payments to corporations), payments to a nonemployee for services, payments to certain fishing boat crew members and fishermen, and gross proceeds paid to attorneys (including payments to corporations).
* Mortgage interest paid by you, acquisition or abandonment of secured property, cancellation of debt, qualified tuition program payments (under section 529), IRA, Coverdell ESA, Archer MSA or HSA contributions or distributions, and pension distributions. You must give your correct TIN, but you do not have to sign the certification.

Bottom line… Sign it.

1. You will be subject to backup withholding on payments you receive if;
* The IRS tells the requester that you furnished an incorrect TIN,
* You do not certify your TIN when required,
* You do not furnish your TIN to the requester,
The IRS tells you that you are subject to backup withholding because you did not report all your interest and dividends on your tax return (for reportable interest and dividends only),
* You do not certify to the requester that you are not subject to backup withholding (for reportable interest and dividend accounts opened after 1983 only).

Québec sales tax (QST) increased to 8.5% as of January 1, 2011

Did you know that there was an increase in the rate of the Québec sales tax (QST) as of January 1, 2011?

The QST rate increased from 7.5% to 8.5%.

The taxable supply of movable property or a service will be subject to the 8.5% QST rate if all or a portion of its consideration becomes due after December 31, 2010, and is not paid before January 1, 2011.

The taxable supply of an immovable by way of sale will be subject to the 8.5% QST rate if it is made pursuant to a written agreement entered into after December 31, 2010, under which the ownership and possession of the immovable will be transferred to the recipient after this date.

The taxable supply of the construction, renovation, alteration or repair of an immovable will also be subject to the 8.5% QST rate if it is made pursuant to a written agreement entered into after December 31, 2010.

However, the rules described above regarding the taxable supply of movable property or a service will also apply to the taxable supply of an immovable other than by way of sale.

Special rules apply to the following supplies: continuous supplies, budget payment arrangements with reconciliation, exchanges of movable property, primacy rules, the bringing of movable property to Québec, etc.

For further information, see page A.55 in Additional Information on the Budgetary Measures, published by the Ministère des Finances.

http://www.revenu.gouv.qc.ca/en/ministere/centre_information/nf/2009/hausse_taux_taxe.aspx

Consequential adjustments
Rounded-off mathematical factors. The QST is calculated on a consideration that includes the goods and services tax (GST) at a rate of 5%. With the increase in the QST to 8.5%, the effective rate of the QST (currently 7.875%) and the combined effective rate of the GST and the QST (12.875%) will be raised to 8.925% and 13.925% respectively as of January 1, 2011. The mathematical factors rounded to 7.87% and 12.87% will be replaced by factors rounded to 8.92% and 13.92% respectively, as of the same date.

Taxable benefit related to the cost of operating an automobile. The amount of QST to be included in the calculation of a registrant’s net tax related to the cost of operating an automobile corresponds to 4.7% of the value of the benefit. As of January 1, 2011, the rate of 4.7% will be raised to 5.4%.

Quick accounting methods. The prescribed rate for small businesses set at 2.7% for vendors of corporeal movable property and at 5.3% for other businesses will be raised to 3% and 6%, respectively. The prescribed rate for municipalities set at 4.6% and for other bodies set at 5.9% will be raised to 5.2% and 6.6%, respectively. The new prescribed rates will apply to any reporting period that starts after December 31, 2010.

Simplified method for calculating rebates regarding an expense account. The changes to be made to the mathematical factors and to the simplified method for calculating rebates regarding an expense account will be clarified by Revenu Québec at a later date.

Corresponding increase in the tobacco tax.
To reflect the increase in the QST rate as of January 1, 2011, the rates of the tobacco tax will be changed as follows:

the rate of 10.3 cents per cigarette will be raised to 10.6 cents per cigarette;
the rate of 10.3 cents per gram of loose tobacco or leaf tobacco will be raised to 10.6 cents per gram;
the rate of 15.85 cents per gram of any tobacco other than cigarettes, loose tobacco, leaf tobacco and cigars will be raised to 16.31 cents per gram;
the minimum rate applicable to a tobacco stick will be raised from 10.3 to 10.6 cents per stick;
the rate of 80% of the taxable price of cigars will remain unchanged.
Persons not under an agreement with Revenu Québec who sell tobacco products regarding which the specific tax on tobacco was collected in advance (or should have been) must take an inventory of all such products they have in stock at midnight on December 31, 2010, and remit, before January 29, 2011, an amount corresponding to the difference between the tax applicable at the new rates and that applicable at the rates in effect before midnight on December 31, 2010.

The same applies to collection officers under an agreement with Revenu Québec who sell tobacco products regarding which the specific tax on tobacco is paid in advance or has not yet been paid.

IRS Kicks Off 2011 Tax Season with Deadline Extended to April 18

Taxpayers Impacted by Recent Tax Breaks Can File Starting in Mid- to Late February.

The following press release came out today, January 4th, 2011 from the IRS.

WASHINGTON — The IRS today opened the 2011 tax filing season by announcing that taxpayers have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15.

By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year.

Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

The IRS expects to receive more than 140 million individual tax returns this year, with most of those being filed by the April 18 deadline.

So who must wait to file their returns?

For most taxpayers, the 2011 tax filing season starts on schedule. However, tax law changes enacted by Congress and signed by President Obama in December mean some people need to wait until mid- to late February to file their tax returns in order to give the IRS time to reprogram its processing systems.

Some taxpayers – including those who itemize deductions on Form 1040 Schedule A – will need to wait to file. This includes taxpayers impacted by any of three tax provisions that expired at the end of 2009 and were renewed by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act Of 2010 enacted Dec. 17. Those who need to wait to file include:
• Taxpayers Claiming Itemized Deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses as well as state and local taxes. In addition, itemized deductions include the state and local general sales tax deduction that was also extended and which primarily benefits people living in areas without state and local income taxes. Because of late Congressional action to enact tax law changes, anyone who itemizes and files a Schedule A will need to wait to file until mid- to late February.
• Taxpayers Claiming the Higher Education Tuition and Fees Deduction. This deduction for parents and students – covering up to $4,000 of tuition and fees paid to a post-secondary institution – is claimed on Form 8917. However, the IRS emphasized that there will be no delays for millions of parents and students who claim other education credits, including the American Opportunity Tax Credit extended last month and the Lifetime Learning Credit.
• Taxpayers Claiming the Educator Expense Deduction. This deduction is for kindergarten through grade 12 educators with out-of-pocket classroom expenses of up to $250. The educator expense deduction is claimed on Form 1040, Line 23 and Form 1040A, Line 16.
In addition to extending those tax deductions for 2010, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act also extended those deductions for 2011 and a number of other tax deductions and credits for 2011 and 2012 such as the American Opportunity Tax Credit and the modified Child Tax Credit, which help families pay for college and other child-related expenses. The Act also provides various job creation and investment incentives including 100% expensing and a 2% payroll tax reduction for 2011. Those changes have no effect on the 2011 filing season.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by the recent tax law changes. In the interim, taxpayers affected by these tax law changes can start working on their tax returns, but they should NOT submit their returns until IRS systems are ready to process the new tax law changes.

Additional information will be available at http://www.IRS.gov.

For taxpayers who must wait before filing, the delay affects both paper filers AND electronic filers.

The IRS urges taxpayers to use e-file instead of paper tax forms to minimize confusion over the recent tax law changes and ensure accurate tax returns.

Except for those facing a delay, the IRS will begin accepting e-file and Free File returns on Jan. 14.