Happy Halloween!

Happy Halloween from Intaxicating Tax Services.

Is there anything scarier than taxes?!?

Possibly the taxing authorities and some of the people that work there…

Death and Taxes
Death and Taxes (Photo credit: Thomas Hawk)

Boo!

We’re not afraid of Halloween, taxes OR the government!

#IntaxicatingTaxServices

Tax Strategy: Rental income from US must be reported

Logo of the Internal Revenue Service
Logo of the Internal Revenue Service (Photo credit: Wikipedia)

I came across an interesting article from the Montreal Gazette which covers a couple of interesting issues, and one of keen interest to Canadians as to whether to declare a vacation home in Florida, and if not, what the consequences are.

Did you know that you are required to report it to the IRS on a form 1040 and as well to the CRA, and that it is a credit on the Canadian side?

Read on!

Tax Strategy: Rental income from U.S. must be reported.

Intaxicating and the 2012 Canadian Weblog Awards

My blog, Intaxicating has been nominated for the 2012 Ninjamatics Canadian Weblog Awards.  What a great way to end up 2012.

I have always felt that as Canadians we need to speak up more and promote our own blogging talents.  We live in the best country in the world and as Canadians we pride ourselves on being a little on the shy side, a lot on the polite side and not as “in your face” as some other countries in the world, which makes the kind folks at Ninjamatics so awesome for doing all of us Canadian bloggers a favour by creating and hosting these awards.

It is an honour to be nominated.  I went through the categories and there are some incredibly talented bloggers writing on the web who deserve much more attention than they have received to date.

Intaxicating has been nominated in two categories;

Business & Career; and

Topical

2010 Canadian Weblog Awards

The Ninjamatics’ 2012 Canadian Weblog Awards are a juried competition which means — no voting – so I don’t have to ask (or beg) people to vote for me.  Yay.

The nominees shortlist will be announced on January 15, 2013, and the winners will be announced on January 31, 2013.

A running blogroll of the nominees is kept on the Ninjamatics website throughout the year so that they can continue to highlight Canada’s blogging talent.

Intaxicating is the tax blog for Intaxicating Tax Services, a firm specializing in assisting people and corporations who have tax problems with the Canada Revenue Agency (CRA), the IRS, the MRQ or with WSIB.  With 17-years taxation experience, 11 years with the CRA, there is no better firm to represent you than the one who taught CRA collectors how to collect.

2012 Canadian Weblog Awards nominee

Ramping up for FATCA: Americans living in Canada

In case you have just starting to catch wind of FATCA and you are wondering if you are going to get caught up in its web, you might find this post very useful.  I have gone to the Internal Revenue service (IRS) website and pulled out their passages on American’s living in Canada and the expectations on how they will be handled under FATCA – coming globally January 1st, 2013.

The IRS has clearly stated that “All persons born in the United States are US citizens.  This is the case regardless of the tax or immigration status of a persons parents.  Furthermore, a person born outside the United States may also be a US citizen at birth if at least one parent is a US citizen and has lived in the United States for a period of time.”

This is the link to that information from the IRS website; http://www.irs.gov/businesses/small/international/article/0,,id=244868,00.html

If you are of the belief that as an American living in Canada that you do not need to file a US tax return because you do not generate any US source income in any way, that is also incorrect;  “The IRS reminds you to report your worldwide income on your US tax return and lists the possible consequences of hiding income overseas.”

More information on consequences of hiding income overseas (including Canada) in this link.  I have broken out some key facts below; http://www.irs.gov/businesses/article/0,,id=180946,00.html

As a US citizen living in Canada, the rules for filing income, estate and gift tax returns and for paying estimated tax are generally the same whether you are living in the US or not.

Not reporting income from foreign (including Canadian) sources may be a crime.  The IRS and its international partners (including the CRA) are pursuing those who hide income or assets offshore to evade taxes.  Specially trained IRS examiners focus on aggressive international tax planning, including the abusive use of entities and structures established in foreign jurisdictions.  The goal is to ensure US citizens and residents are accurately reporting their income and paying the correct tax. 

In addition to reporting your worldwide income, you must also report on your US tax return whether you have any foreign (Canadian or international) bank or investment accounts.  The Bank Secrecy Act requires you to file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if:

  • You have financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and
  • The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

More information on foreign financial account reporting requirements is in News Release FS-2007-15, Foreign Financial Accounts Reporting Requirements and Publication 4261, Do You have a Foreign Financial Account?

This link below outlines the filing expectations for US Citizens and resident aliens abroad.  You have until June 15th to file your US tax returns each year:

http://www.irs.gov/businesses/small/international/article/0,,id=97324,00.html

Most common question I have been asked:

“I am a U.S. citizen who moved to Canada to live and work there as a Canadian permanent resident, do I pay both U.S. and Canadian Taxes?

Answer: As a U. S. citizen living in Canada you:

Are required to file annual U.S. income tax returns and may be required to file certain information returns if applicable (e.g. Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans; Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)).

You must report your worldwide income on your US income tax return if you meet the minimum income filing requirements for your filing status and age.

You must contact the Canadian Government to determine whether you must file a Canadian tax return and pay Canadian taxes – unless you are already filing tax returns here in Canada, then this step is obvious.

You may be able to elect to exclude some or all of your foreign earned income, if certain requirements are met, or to claim a foreign tax credit if Canadian income taxes are paid.

Behind on your filing to the IRS, are you?

The IRS began an open-ended offshore voluntary disclosure program (OVDP) in January 2012, on the heels of strong interest in the 2011 and 2009 programs, which may end at any time.  The intent of this program is to offer people with undisclosed income from offshore accounts another opportunity to get current with their US tax returns.  The 2012 OVDP has a higher penalty rate than the previous program but offers clear benefits to encourage taxpayers to disclose foreign accounts now rather than risk detection by the IRS and possible criminal prosecution.

Rumour has it that in September, the IRS will be releasing some new documents (besides the final regulations) aimed at helping Canadians file their US tax returns up to date – the IRS wants the most recent 3 years and 6 years of FBAR information from Canadians.

My thoughts here are that the IRS thinks all Americans living in Canada are not paying taxes so that anyone with over $1500 owing will still be penalized.  Once these US persons provide proof of their filing of Canadian tax returns at a higher rate, then the best the IRS can get from these residents if valid certifications and by adding them to the database, another potential income source to track.

FAQ Offshore voluntary disclosure program:

http://www.irs.gov/businesses/small/international/article/0,,id=256774,00.html

So if after all this you are unsure if you need to file you might want to seek out an accountant or lawyer which a strong US presence to advise you.  Remember if you are a US person and you let your bank know, they are required under FATCA to notify the IRS.

At the very least you should preapare your US tax returns for the previous 3 years and include the Canadian taxes paid under “foreign tax paid” to see where you fall under FATCA.  Then take them to an accountant with a strong knowledge of US tax in order for them to ensure the US return is correct and have them advise you on where they feel you fall under FATCA.  From there… It’s up to you.

There is no hiding from FATCA, so prepare for now and prepare for the future before the IRS gets to you first.

New Draft FATCA Forms: W8BEN, W8BEN-E and FFI Agreement details

The much anticipated new FATCA compliant W-8BEN forms have been released in draft version by the IRS:

http://www.irs.gov/pub/irs-utl/formw8benindividualexecirculation2.pdf.   The form W-8BEN, the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding (Individual) and http://www.irs.gov/pub/irs-utl/formw8benentityexeccirculation2.pdf, The Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding (Entities).

With a new W9 and W-8IMY on the way and these forms still in draft form in it’s consultation stage, the IRS asks that the existing forms be used and not the new ones yet. 

The new withholding certificates effectively divide the information reporting requirements between two classes of payees: nonresident alien individuals and all foreign entities other than individuals.

New W-8BEN will simplify the declarations required to be made by foreign individuals. It will only require basic identifying information, declarations with respect to treaty status (as relevant), and a general certification as to foreign status.

New W-8BEN-E will require each foreign entity to make two distinct declarations:
The foreign entity’s status for purposes of the US outbound withholding tax regime (e.g., the 30 percent withholding tax generally imposed on US-source dividends paid to non-US persons unless reduced by an applicable income tax treaty). This will be the same as the declaration required in the current IRS Form W-8BEN, as last revised in 2006.
The FATCA-related declaration, which will require an entity to provide substantial detail by declaring its overall status for FATCA purposes from among twenty-four different categories (all described in detail in the Proposed Regulations).

In addition, new W-8BEN-E will require a foreign entity to provide its Foreign Financial Institution Employer Identification Number and FATCA ID, as applicable (both are discussed in the Proposed Regulations).

To learn more about the withholding of tax on nonresident aliens and foreign entities, see IRS Publication 515 (2012).

FFI Agreement details:

http://www.irs.gov/businesses/small/international/article/0,,id=258313,00.html

Details on the FATCA Registration Process for Foreign Financial Institutions (FFIs)*

 
In building an online system for foreign financial institutions (FFIs) to register as participating FFIs, the IRS has developed a flexible system that has the ability for the FFI  to create accounts, chose login and passwords, create challenge questions and maintain the account once formed. The automated system aims to make the registration process as quick and easy as possible, facilitates communication electronically and provides e-mail alerts to keep the registration process moving forward.

Key Points:

  • FFIs will register and enter an agreement (a certification, if a Registering Deemed-Compliant FFI) through an online registration system.
  • Each FFI must select a FATCA Responsible Officer (RO).
    • This individual will be identified in the FATCA registration system.
    • In a typical case, the RO will be the individual who will sign the FFI agreement.
  • The RO may select Points of Contact (POCs) to help complete all aspects of the registration process except signing.
    • Up to five POCs may be selected.
    • There must be at least one in-house POC (may be the RO).
    • It is anticipated POCs may include certain third-party individuals, both local and US (e.g., service provider).
  • It is anticipated that there will be power of attorney procedures allowing the RO to delegate full FATCA registration duties (including signing) to another in-house individual.
    • This in-house individual with the power of attorney from the RO will be identified in the registration system as the FFI’s Authorized Third Party (ATP).
  • If it proves unworkable for the Responsible Officer (RO) or another in-house individual to register the FFI, it is anticipated there will be power of attorney procedures allowing the RO to delegate full FATCA registration duties (including signing) to certain U.S.-licensed tax professionals that are subject to our regulatory jurisdiction.
    • The U.S.-licensed tax professional with the power of attorney from the RO l will be identified in the registration system as the FFI’s Authorized Third Party (ATP).
  • FATCA registration is a user maintained account – it can be edited or modified by the user.
  • The person signing the FFI agreement (or certification) must make an affirmative statement during the registration process that he or she has the authority to act for the FFI.
  • Positive ID verification will be required for the individual who signs the agreement/certification on behalf of the FFI.
  • Person who signs the agreement/certification will be issued a FATCA Individual identification Number (FIIN) following ID verification.
    • If this individual already has an SSN or ITIN, he/she may choose to use it to obtain his/her FIIN electronically through the registration system If this individual does not have an SSN or ITIN, or does not want to provide his/her SSN or ITIN electronically to obtain a FIIN, he/she must obtain his/her FIIN by filing a short paper form along with a copy of specified ID documentation.
    • The FIIN is the only identification number necessary for the individual to complete the registration process.
  • IRS will closely monitor the account creation and FATCA registration process

1099 Reporting: Explained so a Canadian could understand it.

I often get asked about 1099 reporting in emails and comments and most of it comes from Canadians looking to figure out what gets reporting on which IRS Form 1099 and why there are so many. 

Hopefully this will shed some light on the number of forms and what they report.  I think we all kow why they are in use, right?  When a business entity or individual receives any kind of income, the IRS usually wants to know about it.  Funny how that works, eh?

Besides who received the income, the IRS also wants to know the amount of income, the entity that made the payment, and the purpose.

I feel it is important to understand that there are also other types of IRS forms that are used to report income or payments, such as employee compensation which is generally reported on a Form W2.  

Below is a list of individual 1099 Forms for specific payment reporting; 
• 1099-A – Reports Acquisition or Abandonment of Secured Property
• 1099-B  – Reports Proceeds From Broker and Barter Exchange Transactions
• 1099-C  – Reports Cancellation of Debt
• 1099-CAP – Reports Changes in Corporate Control and Capital Structure
• 1099-DIV  – Reports Dividends and Distributions
• 1099-G  – Reports Certain Government Payments
• 1099-H  – Reports Health Coverage Tax Credit Advance Payments
• 1099-INT – Reports Interest Income
• 1099-LTC – Reports Long-Term Care and Accelerate Death Benefits
• 1099-MISC  – Reports Miscellaneous Income *
• 1099-OID – Reports Original Issue Discount
• 1099-PATR – Reports Taxable Distributions Received From Cooperatives
• 1099-Q  – Reports Payments From Qualified Education Programs
• 1099-R  – Reports Distributions From Pensions, Annuities, and Retirement
• 1099-S – Reports Proceeds From Real Estate Transactions
• 1099-SA – Reports Distributions From an HAS, or Medicare Advantage MSA

Second most popular questions: Is there a minimum reporting threshold?  Answer: The minimum dollar amount that must be reported varies depending on specific types of payments. 

*Many different types of payments are also reported on Form 1099-MISC.  The requirements for reporting payments on 1099-MISC can be complicated and the IRS Instructions for 1099-MISC IRS http://www.irs.gov/pub/irs-pdf/i1099msc.pdf should be consulted.

Third most popular questions: Who gets a copy?  Answer: When a 1099 is issued, one copy is retained by the payee for their records, one copy is send to the recipient of the payments, and a copy is sent to the IRS for reporting.
Is there an electronic filing requirement?  Any filers who have over 250 or more to report are required to file with the IRS electronically.

What is the deadline?  The reporting deadline to the IRS is February 28th, however, if the filer is reporting electronically, the deadline is March 31st.

In most cases the payment recipient should receive their copy of the 1099 by January 31st.

There are some exceptions to the recipient due date. Form 1099-B, 1099-S, and payments reported on 1099-MISC for proceeds paid by attorneys and certain payments reported by brokers have until February 15th for the payment recipient copy.

Individuals that receive payment as reported on a 1099 are generally required to report those payments on Form 1040 as income. Business entities may have to report payments as part of their income.

Hope this helped!

FATCA Fallout: This was NOT what the IRS intended with the upcoming FATCA Regulations

This image depicts the total tax revenue (not ...
This image depicts the total tax revenue (not adjusted for inflation) for the U.S. federal government from 1980 to 2009 compared to the amount of revenue coming from individual income taxes. The data comes from the Office of Management and Budget’s record of the ‘Budget of the US Government FY 2011’, specifically the ‘Historical Tables, Table 2.1.’ The information is also here. (Photo credit: Wikipedia)

I have been all over FATCA since March 18th, 2010 when President Obama passed the Hires Act through Congress, aimed at getting Americans working and taxing the wealthy (isn’t that what all socialist and democratic governments do?)  Out of this Act comes FATCA, the Foreign Account Tax Compliance Act which is set to become law January 1st, 2013 and unlike most new taxes, FATCA changes the way taxation is administered globally.I’m going to outline why FATCA was brought in, what the US government is trying to do, and why there have been a couple of events in the past 2 weeks which have come to light which leads me to believe that this was not what the US government was thinking when they pushed the Hires Act through Congress.

So FATCA, in case you are unaware, is on its way to becoming the world’s first global tax on Americans, administered by financials institutions and non-financial entities around the world… OR else.  Can the IRS do this, you ask?  Apparently yes they can.  Why do they need to do this you are wondering?  Because US investors have been evading taxes by hiding their identities from the IRS or they have created offshore companies to hold their investments out of sight and out of reach of the IRS.  The net result here is that the IRS needed to find a way to track down all these US persons who should be filing US tax returns disclosing all their worldwide income but are either not filing, nor including these items.

The estimated lost tax revenues from these US taxpayers using offshore schemes to evade US income taxes is in excess of $100 billion dollars per year.  Think the US could use these funds?  Yeah, I thought so too.  Say hello to FATCA.
So how can the US crack down on these US persons who are hiding their funds?  Well first they tried asking some foreign banks for a list of Americans who they had on their registry.  That did not go over well at all.  The banks said, you have a specific person you want information on, we will give you details, however the IRS didn’t know, they wanted everyone and the foreign banks we not going to give us their revenue sources.  So the US government sued beginning with  Switzerland.  Not the best way to win friends, globally, by suing them, so the US government and the IRS them began pushing FATCA on everyone.
In a nutshell, it requires all foreign banks and foreign institutions to provide information to the IRS as soon as they find a US person on their system / in their bank.  The IRS intends on using this information to locate, audit and potentially prosecute US persons who are evading the paying of their fair share of taxes.  The scope of FATCA is global.  The complexity of FATCA is massive.
The IRS figures through FATCA that every organization globally will opt in to FATCA and will become agents of the IRS and within 5 years will have flushed out every US person to the IRS – both those who are complying and those and those who are not (those who are not have a catchy new name: recalcitrant).
The IRS even offers a way out of FATCA if you are an US person… Just give the IRS 1/3rd of your worldwide income and renounce your US citizenship and you’re out.  For good.
Recently, however, I came across two fantastic articles through my FATCA research which clearly shows me that the IRS and the US government may not have thought through the full implications of FATCA.
So here is problem number 1, in a great article from Bloomberg;

http://www.bloomberg.com/news/2012-05-08/u-s-millionaires-told-go-away-as-tax-evasion-rule-looms.html.  This article outlines the international response to FATCA as the deadline to sign up with the IRS gets closer and closer.  Instead of gearing up systems to flush out these US investors who have been hiding millions and millions of dollars (the FATCATs), these foreign financial institutions (FFI’s) and non-financial foreign entities (NFFE’s) are going through their foreign policies to find ways to instead remove Americans from their business.  The costs associated with complying with FATCA outweighs the benefit of US monies.  Oh oh.

Does the IRS and US government really want to prohibit US persons from investing outside of the US?

Problem number 2 came recently when Brazilian-born Eduardo Saverin, the billionaire Facebook co-founder, renounced his US citizenship he gained as a teenager in advance of the company’s impending IPO and moved to Singapore to avoid paying capital gains taxes on his approximately $3 billion stake in Facebook.

This is FATCA response #2.  Renounce your citizenship and you’re out.  So instead of staying in the US and paying taxes, the very rich do not appreciate carrying the taxation burden for a tax and spend government and they take their wealth to another country where it will be appreciated.

Caught red-faced the US government needed to respond so they looked to do to Saverin what they did to the foreign banks who had US persons on their registry.  They threatened to sue.  Then they changed the law.  The US senate introduced a bill under which any expatriate with either a net worth of $2 million, or an average income tax liability of at least $148,000, will be automatically presumed to be leaving the country for tax purposes — enabling the IRS to impose a tax on any investment gains that person makes in the future.  Crazy.  Greedy.

Apparently Saverin filed to give up his US citizenship in January of 2011, but the news didn’t surface until the federal government released the information in a routine report. Saverin may be barred from re-entering the US if authorities decide he left the country for tax reasons because you don’t want a super-rich guy coming into your country and buying things!  That will show him.

Singapore doesn’t have a capital gains tax. It does tax income earned in that nation, as well as “certain foreign- sourced income.”  Saverin won’t escape all US taxes because Americans who give up their citizenship owe what is effectively an exit tax on the capital gains from stock holdings.

Saverin maintains that his renunciation of American citizenship, which actually took place last September, wasn’t a ploy to skip out on American taxes, but rather an attempt to free himself from FATCA, which he described as a burdensome restrictions on American investors abroad. US citizens are severely restricted as to what they can invest in and where they can maintain accounts.  Many foreign funds and banks won’t accept Americans so it was for financial reasons and not tax related.

It’s true that FATCA is making life more difficult for US persons, including the IRS’ global reach (many countries tax based on residency); foreign bank account reporting rules; and FATCA.  As a result of all the regulations, some foreign banks are dumping more U.S. customers.

Saverin is hardly the only one taking this particular route to big tax savings. The number of those renouncing US citizenship stands at around 1,800 last year.

While I cannot see the US government pulling back on FATCA I think they need to look again at what they are trying to accomplish and how they plan on getting there before all their high-income earners not in the US disappear from the radar within 5-10 years of FATCA being in force.  So the tax pool will grow, then diminish and the IRS will be looking for newer ways to increase tax revenues.