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“Fall” Back for Daylight Savings, “Spring” Ahead for Tax Reform

By InternationalNo Comments

The Holiday season has arrived! It’s that time of year where the air is crisp, families are gathering together, and tax professionals are gearing up for a new tax season influenced by tax reform. As we “fall” back for daylight savings, let’s “spring” ahead to the 2018 tax season by discussing six ways the Tax Cuts and Jobs Act of 2017 (“TCJA”) will impact international taxation.

  1. Global Intangible Low-Taxed Income (GILTI)

New to the tax code this year is Global Intangible Low-Taxed Income (GILTI). Prior to the TCJA, U.S. shareholders were required to report the earnings of a controlled foreign corporation (“CFC”) only when they received a cash dividend. However, this new rule now requires U.S. shareholders to include GILTI (if any) in their income. A CFC is defined as any foreign corporation in which more than 50% of the total combined voting power of all classes of stock is owned by U.S. shareholders. The main idea of this new income inclusion is to transfer the tax on CFC income to U.S. shareholders who own more than 10% of a CFC. In addition, a brand-new deduction is allowed for U.S. corporations that own a CFC. An individual can make an election to be taxed as a corporation on CFC earnings in order to claim this deduction, as well.

  1. Transition Tax

The transition tax is the Pumpkin Spice Latte of tax reform, well-known and relevant. It was enacted in 2017 and was considered a one-time repatriation at reduced rates. Section 965 enforces this new transition tax on post-1986 accumulated foreign earnings of a U.S. taxpayer’s foreign corporation or subsidiary. All accumulated foreign earnings are considered repatriated, the act of physically sending money back to one’s own country, whether or not they actually are. In prior years, the earnings remained offshore and were, therefore, not included in U.S. taxable income. A tax is applied on these repatriated earnings based on the source of the earnings (cash, cash equivalents, etc.) that are held by the company.

  1. Territorial Taxation

As the temperature begins to change and the air becomes crisp, several tax laws have also changed in regards to how foreign income of individual and business taxpayers are taxed. C-corporations have been moved to a territorial system where they are not taxed by the U.S. on their foreign profits, though they will still be taxed by the foreign country where the income is sourced. It allows corporations a 100% dividends-received deduction (“DRD”) if the C-corporation owns 10% or more of a foreign corporation that pays out dividends. This deduction is solely based on the foreign-source portion of the qualifying dividend.

  1. Foreign-Derived Intangible Income

Thanks to the new tax reform bill, domestic corporations can now receive a 37.5% deduction on their intangible income resulting from serving foreign markets. This deduction can reduce the effective tax rate on the income from 21% to 13.125% for the 2018 to 2025 tax years. To take the deduction, the corporation must be able to provide proof that the foreign-derived income came from the sale of property for foreign use or from the provision of services to a person located outside the United States.  In addition, a foreign tax credit can be applied to the tax generated under this newly calculated tax, with limits. Those providing services to foreign persons should be aware that there are potential limitations to this deduction.

  1. Base Erosion and Anti-Abuse Tax (BEAT)

While the eggs are beating in preparation for the pumpkin pie, the tax code has added their own kind of beat. The BEAT tax is intended to discourage using deductible related-party payments to shift profits from the U.S to a foreign country and distributing profits tax-free. To be subject to the tax, the taxpayer must:

  1. Be a C-corporation that is not a regulated investment company or a real estate investment trust,
  2. Have average annual gross receipts of at least $500 million over the prior three-year period, and
  3. Have a base erosion percentage of at least 3%. The base erosion percentage is roughly the amount of deductible payments made to foreign related parties divided by total deductible payments excluding cost of goods sold.

The BEAT rate is 5% for 2018, 10% for 2019 through 2025, and 12.5% for years after 2025. Since BEAT is in addition to the regular federal corporate income tax, it is important to carefully consider whether payments made to foreign related parties may subject your corporation to the tax.

As the time changes and the leaves begin to fall, giving thanks for changing tax codes may not be what we had in mind. However, tax professionals are here to help guide and assist you in all of your international tax reform needs. If you have any questions on how these provisions or others of the new tax law might affect you, please do not hesitate to contact your L&B professional at (858) 558-9200.

Trick or Treat(ies): Navigating Taxation Between Various Countries

By InternationalNo Comments

In a globalized society, it might make sense to diversify investment portfolios with foreign holdings. Traveling and communicating across countries has never been easier, making it natural to also invest globally. As with all things, the taxation of these types of investments complicates the situation. Do you pay taxes to your resident country or to the country where your investment is held? The answer to this question: tax treaties.

A tax treaty is a bilateral agreement between two countries that outlines the taxation for different types of income. The goal is to mitigate double taxation by the taxpayer’s resident country and the country where the investment is held. Generally, tax treaties utilize one of two types of models for taxation: the UN Model Convention or the OECD Model.

The UN Model Convention, or the United Nations Model Double Taxation Convention between Developed and Developing Countries, advocates taxation by the country where the investment is held. This generally grants taxing rights to developing countries, where the investment is held.

The OECD Model, or the Organization for Economic Co-operation and Development Model, is organized by a union of 34 prosperous countries that promotes economic globalization. The model favors the country that exports versus the country that imports. The source country is encouraged to give up its tax on certain income earned by residents of the opposite country. This increases trade flow between the involved parties for overall economic growth.

Under these treaties, residents of foreign countries are often taxed in the U.S. at a reduced rate or have reduced withholding requirements on interest, dividends, and royalties. The same concept applies to U.S. residents or citizens who have income sourced from foreign countries. A tax treaty defines the specific income and taxes that apply, where residency is derived, and who is eligible for the reduced rates or withholding benefits. For instance, if a U.S. taxpayer owns a company that generates revenue in Canada, the income is not subject to taxation in Canada due to the tax treaty between these two countries. Instead, the taxpayer only pays U.S. tax on the Canadian income. Income such as salaries, self-employment income, pensions and other income might also have reduced tax rates or withholding according to the relevant tax treaty. If a tax treaty between the U.S. and another country offers a reduced withholding rate or an exemption from withholding, the taxpayer should immediately inform their employer of their foreign status to claim the benefits of the tax treaty.

Because each tax treaty can vary between countries, it is crucial that proper tax treatment is applied to the specific foreign investments. Please contact our office for more information at (858) 558-9200.

Earning Income Without Paying Taxes. What?

By Closely Held Businesses, Individuals, InternationalNo Comments

Ever heard of the foreign earned income exclusion? If you work abroad, or are planning to make that move to live in a foreign country, this article might be of interest to you. Here we will talk about how you might qualify for an exclusion that can decrease your U.S. federal taxes.

Do you work abroad? You might qualify for the foreign earned income exclusion. This exclusion is an election to exclude a designated amount of foreign earned income from U.S. federal tax. The exclusion is $102,100 in 2017 and is adjusted annually for inflation. However, the maximum amount you can exclude or deduct is your foreign earned income for the year.

Foreign earned income includes wages, salaries, professional fees and other compensation received for personal services performed in a foreign country. Non-cash income such as a car, allowances and reimbursements received for services performed in a foreign country also are considered foreign earned income.

To qualify for the exclusion, the taxpayer must meet the tax home test, and either the bona fide residence test or the physical presence test.

  • To meet the tax home test, your tax home (which is your regular place of business or employment) must be in a foreign country.
  • To meet the bona fide residence test, you must reside in a foreign country for an uninterrupted period that includes a full tax year. For U.S. taxpayers, this would be a calendar year, beginning January 1 and ending December 31.
  • To meet the physical presence test, 330 full days out of any 12-consecutive month period must be spent in a foreign country or countries. For example, the period can begin on June 6, 2016 and end on June 5, 2017, and the 330 days within this period need not be consecutive and need only to add up to 330 days.

You might also have housing costs while living and working abroad. U.S. citizens can make a separate election to exclude or deduct excess housing costs from foreign earned income. The deduction is claimed when you pay for your housing expenses while the exclusion is claimed when housing is provided for you by your employer.

Once you choose to claim both or either exclusion, your choice remains in effect for that year and all future years unless it is revoked. Revocation is made by filing a statement with an original, amended, or late-filed return. The revocation is then effective for that return’s tax year and the years after that. A taxpayer can also revoke an election if he or she takes an action that is inconsistent with the election. If you choose to revoke the election in favor of taking foreign tax credits, you may not elect to exclude your foreign earned income or your housing costs for five years without permission from the IRS.

Although these exclusions bring down the amount of income that is taxed, they do not reduce the tax rates for the non-excluded income. You must use the tax rates that would have applied had you not claimed the exclusions. The excluded foreign income is added back to gross income to figure the tax rate. This tax rate is then used on the non-excluded income to calculate federal tax.

Considering the complexity of issues regarding foreign earned income, it is important that your eligibility for the foreign earned income and housing exclusions is reviewed by a tax professional. If you have any questions regarding this or any other tax matters, please do not hesitate to contact your L&B professional at (858) 558-9200.

Tax Profile: Australia

By InternationalNo Comments

Individual Tax

Australian residents are taxed on their worldwide income from all sources.  Foreign residents, however, are generally only taxed on their Australian-sourced income (i.e. money they earn while working in Australia).

The rates of tax applicable to Australian resident individuals in AUD are as follows:

Taxable income Tax on this income
0 – $18,200 $0
$18,201 – $37,000 19% for each $1 over $18,200
$37,001 – $80,000 $3,572 plus 32.5% for each $1 over $37,000
$80,001 – $180,000 $17,547 plus 37% for each $1 over $80,000
$180,001 and over $54,547 plus 45% for each $1 over $180,000

*The above rates do not include the Medicare levy of 2%

Corporate Tax

  • The four main business structures used by businesses in Australia are sole traders, partnerships, companies, and trusts.
  • A company that is limited by and capitalized with shares is the most commonly formed type of company in Australia. It is a separate legal entity with the legal capacity of a natural person. Businesses may be managed through either a private (proprietary) company or a public company (one with over 50 shareholders)
  • Companies registered in a foreign jurisdiction can also register with the ASIC to conduct business in Australia, either using an Australian branch office or subsidiary company. Foreign companies must establish a registered office in Australia and appoint at least one Australian director.
  •  The corporate tax rate in Australia is currently a flat rate of 30%, which will be reduced to 28.5% beginning on July 1, 2015.

Withholding Tax

If you pay interest, dividends or royalties to a foreign resident (someone who is not an Australian resident), the gross amount of each of those payments is generally subject to a withholding rate of:

Default Withholding Tax Rate Reduced Treaty Rates between Australia & the US
Interest 10% 10%
Dividends 30% 15%
Royalties 30% 5%

Other Taxes

  • The Australian Goods and Services Tax (GST) is similar to the European Union’s VAT system.  It executes a tax of 10% on the price of most goods and services that are consumed or supplied in Australia.
  • GST is payable on the majority of goods that are imported to Australia.  However, goods and services that are exported from Australia are generally GST-free.
  • Any entity that runs a business can voluntarily register for GST, but if a business has an annual turnover that exceeds AUD 75,000, it is then required to register for GST.

Owning Property in Australia

  • Your home is generally exempt from tax, unless you own investment property, renovate or build a property for profit, or use a property for running a business. In these events, there may be possible implications for capital gains tax, income tax, and goods and services tax (GST).
  • Vacant land is generally considered a capital asset that is subject to capital gains tax.
  • One large difference between Australia and the U.S. is that you can deduct your home mortgage interest in the U.S., but you cannot deduct your home mortgage interest in Australia.

Tax Profile: France

By InternationalNo Comments

Introduction

France is an attractive place for investors, it ranks among the top countries in Europe and worldwide for patent production. France is also home to a number of research and development centers. At the head of this research are exceptionally innovative systems operating in a variety of sectors such as software design, biotechnology, renewable energy, nanotechnology, energy, agribusiness, and the film industry.

Individual Tax

  • Resident individuals are taxed on their global income, and non-resident individuals are taxed on their individual French-sourced income.
Income Share Tax Rate
Up to €6,011 0%
Between €6,012 – €11,991 5.5%
Between €11,992 – €26,631 14%
Between €26,632 – €71,397 30%
Between €71,398 – €151,200 41%
Above €151,200 45%

 

Corporate Tax

  • The standard corporate tax rate is 33.33%.
  • An additional social security levy of 3.3%, based on the reference amount of corporate tax less EUR 763,000, is applied to companies where income taxable at the standard rate exceeds EUR 2,289,000.
  • For small businesses (defined by certain conditions) the corporate tax rate is 15% on the first EUR 38,120 profit and 33.33% thereafter.
  • For non-resident individuals, capital gains on the sale of shareholdings representing more than 25% of the capital issued by a company, the registered office is located in France, are taxed at a rate of 45%.

 

Withholding Tax

  Default Withholding Rate Exceptions
Dividends A French corporation that pays dividends to a shareholder who is a non-resident is subject to a 30%withholding tax calculated on gross dividends. Article 10 of the tax treaty between France and the

U.S. says that dividends paid by a French company to

an individual resident of the U.S. are subject to only a

15% withholding tax in France.

Interest Interest paid is generally not subject to withholding tax.  
Royalties Royalties that are paid to a non-resident entity have a 33.33% withholding tax rate. According to Article 12 of the U.S. tax treaty,

royalties are taxable in the country of residence of the

beneficiary.

 

Other Taxes

  • Value-added Tax:
    • Value-added tax (VAT) is a tax levied at every stage of production, distribution and delivery of goods and services. The tax burden is generally taken on by the final consumer.
    • The normal VAT rate in France as of January 1, 2014 is 20%.
    • The intermediate rate is 10%
    • This rate applies to the food service industry, domestic passenger transport, hotel industry, work performed on residential properties, and drugs authorized for marketing but not covered by social security, admission to cultural sporting, and entertainment events
    • The reduced rate is 5.5%.
    • This rate applies to foodstuffs, medical, and books.
    • The “super-reduced rate” is 2.1%.
    • This rate applies to pharmaceuticals, newspapers, and periodicals.

 

  • Wealth Tax:
    • A wealth tax is payable by resident individuals if the total net value of their worldwide assets (subject to tax treaty provisions) is more than EUR 1,300,000, and by non-resident individuals if the total net value of their assets located in France – with the exception of their financial investments – is more than EUR 1,300,000. The applicable date for determining net assets is January 1 of each year. Wealth tax is assessed per household. Rates vary from 0% to 1.5%.

Société Civile Immobilière

  • The most popular way to purchase a home in France is though A Société Civile Immobilière (commonly referred to as an “SCI”), which can be loosely translated as a Private Limited Company for property purposes.  The entity is fairly similar to a corporation, because it is under shareholder ownership; however, it is treated like a partnership for U.S. tax purposes.
  • An SCI can usually own one or more properties with the purpose of either making them available for free to its shareholders (i.e. personal use) or renting them out.
  • An SCI is not intended to be a commercial trading company.
  • Advantages of Creating an SCI when purchasing and owning real estate in France:
    • Non-resident shareholders in an SCI are not taxed in France because the shares are considered to be movable assets. Thus, they are only taxed in the country of residence.
    • Money may be borrowed to make the purchase of property, and in many cases the loan will be set up as a mortgage with respect to the property. In addition to providing liquidity, borrowing can enable the owners of the property to minimize the wealth tax assessed on the property. The debt must be long-term in nature if the debt is to be a long-term solution to the wealth tax.

 

Tax Profile: Mexico

By InternationalNo Comments

Introduction

Mexico passed a tax reform law that took effect on January 1, 2014. There are many broad changes, including new income tax brackets, new taxes on certain dividends and gains, and changes to the maquiladora regime. Attached is a summary of the current tax environment.

Individual Tax

  • Residents are taxed on their worldwide income.
  • Tax rates are progressive up to 35%.
  • No tax on estates or inheritances.
  • All residents must file an annual income tax return by April 30th of the following year.
  • Non-residents are subject to withholding taxes on their Mexican-sourced income.

Corporate Tax

  • Flat tax rate of 17.5% on income from sales, services rendered and rentals has been repealed.
  • The corporate income tax rate is 30%. The corporate tax rate applies to both resident and non-resident companies.
  • Accelerated depreciation deductions are no longer allowed.

Types of Entities

  • Sociedad de Responsabilidad Limitada (S.R.L.) – Offers limited liability to investors. Pays taxes as a Mexican corporation, but may be considered a partnership for U.S. tax purposes.
  • Sociedad Anonima (S.A.) – Similar to the U.S. Corporation. Incorporated under the law for Mercantile Societies. Pays tax as a Mexican corporation and is considered a corporation for U.S. tax purposes. Requires investment by at least two stockholders.

Value Added Tax

  • Standard rate of value added tax is 16%.
  • Similar to U.S. sales tax. This is a tax on sales, rendering of independent services, imports of goods or services and leasing.
  • Non-Mexican entities that have permanent establishment in Mexico must comply with value added tax obligations.

Withholding Tax

  • Dividends: 10%
  • Interest:
    • 4.9% on interest paid to: foreign banks registered as banks in Mexico and non-resident financing institutions in which the federal government owns a percentage of capital.
    • 15% on interest paid to reinsurance companies and on finance leases.
    • 21% on interest paid to non-resident suppliers financing the acquisition of machinery and equipment that is included in the fixed assets of the acquirer.
    • 40% on interest paid to a related party in a tax haven.
    • 35% in all other cases.
  • Royalties:
    • 25% on payments made for the use of industrial, commercial or scientific information, technical assistance or the transfer of technology.
    • 35% on payments derived from the right to use patents, inventions, trademarks, advertising or names.
    • 40% on royalties paid to a related party in a tax haven.

Maquiladora

  • A Maquiladora is a Mexican company that processes imported raw materials into finished goods which are then exported back to the raw materials’ country of origin.
  • Designed to promote foreign investment.
  • Materials and equipment can be imported on a duty-free and tariff-free basis.
  • Investor can avoid permanent establishment while conducting operations in Mexico if they meet certain criteria:
    • Must be residents of a country that has a tax treaty with Mexico.
    • Must be in compliance with all terms of the treaty.

Owning Property in Mexico

  • Inside of the restricted border/coastal zones, non-Mexican citizens may only own land through a fideicomiso (“a Mexican trust”). There are several tax disclosures for a U.S. person owning a foreign trust.
  • Non-residents are generally liable to pay a 25% withholding tax on gross rental income. Can elect to have rental income taxed as business income, which taxes net rental income at progressive rates.
  • Non-residents selling Mexican property are liable to pay a 25% withholding tax on the gross sales price. However, non-residents with appointed local representatives may be taxed on their net capital gains at 30%.

Tax Profile: Puerto Rico

By InternationalNo Comments

Introduction

2012 brought about numerous tax incentives for foreign and U.S. investors and individuals who become residents of Puerto Rico. Additionally, there are tax incentives for Puerto Rico businesses that perform certain services for clients outside of Puerto Rico.

Individual Tax

  • Residents of Puerto Rico are subject to tax on their worldwide income.
  • Progressive rates are imposed up to 33% and an additional 5% surtax is imposed on the tax liability if net taxable income exceeds $500,000.
  • Self-employed individuals with income over $200,000 may be required to pay an additional special tax of 2%.
  • Capital gains are taxed at 10%.
  • No estate or inheritance tax if the property is located in Puerto Rico and the deceased was born in Puerto Rico.
  • Non-residents are taxed on their income from Puerto Rican sources.

Corporate Tax

  • Domestic corporations are taxed on their worldwide income, while non-resident corporations are taxed of their Puerto Rico source income and income that is effectively connected with a Puerto Rico trade of business.
  • Net income is taxed at a base 20% tax, plus a graduated surcharge of 5-19%.
  • Dividends paid to shareholders are taxed at 10%.
  • Capital gains are taxed at 15%.
  • Corporations are subject to alternative minimum tax.

Types of Entities

  • Special Partnerships (Sociedad Especial): After meeting certain requirements, this entity can qualify for pass through income and loss treatment, eliminating the double taxation that occurs with regular partnerships and corporations.
    • To qualify, 70% or more of the gross income must be from Puerto Rico sources AND 70% must be from one of the following qualifying activities:
  • Land development, tourism, building/structure leases, agriculture or film production.
  • Corporation of Individuals (N Corporation): Allows for the flow through of income or losses, similar to the Special Partnerships. Must meet the following criteria:
    • Owned by 75 or less individuals
    • 90% of gross income is from active trade or business in Puerto Rico
  • Limited Liability Company: will be taxed similar to corporations, but they may elect to be treated as a partnership.
    • If it is treated as a flow through or disregarded entity for tax purposes by any other country, it must be treated the same in Puerto Rico.

Withholding Tax

  • Dividends paid to foreign corporations are subject to 10% tax.
  • Interest paid to related parties outside of Puerto Rico are taxed at 29%.
  • Royalties paid to non-residents are taxed at 29%.
  • A resident foreign corporation that derives less than 80% of its income from Puerto Rico activities is subject to branch profits tax at a rate of 10%, in lieu of the 10% withholding tax on dividends.
  • Puerto Rico sourced rental payments made to U.S. citizens are taxed at 20%.
  • Puerto Rico sourced rental payments made to nonresident aliens or foreign corporations are taxed at 29%.
  • Puerto Rico does not have a tax treaty with any country. Therefore, there are no reduced rates of withholding.

Other Taxes

  • The transfer of real property is subject to a stamp tax depending on the value of the property.
  • Social Security taxes are comprised of 6.2% from both the employer and employee.
  • Medicare tax rate is 2.9% (1.45% from both the employer and employee).
  • Sales and use tax is set at a standard rate of 7%.

Puerto Rico Act 22-2012 and 138-2012

  • Under these legislative provisions, there is a tax exemption for U.S. citizens who become Puerto Rico residents before December 31, 2035 (Exemption Period).
    •  Interest and dividends received during the exemption period will be exempt from Puerto Rico taxation.
    • Long term capital gains may qualify for a full exemption or a reduced rate of 5%.
  • Any increase in value of securities after the citizen establishes residency in Puerto Rico will be exempt if the securities are disposed of before January 1, 2036.
  • Any increase in value of securities before establishing residency will be subject to 10% tax rate, a reduced 5% rate will apply if the gain is recognized during the exemption period AND after 10 years from the date of residency.
  • Any capital gains recognized after the exemption period will be subject to normal Puerto Rico personal income tax rates.
    • In order to be a resident of Puerto Rico, you must satisfy the following conditions:
  • Present for at least 183 days during the year.
  • Do not have a tax home outside Puerto Rico during the year.
  • Do not have a closer connection to the U.S. or another foreign country than Puerto Rico.
    • Must request a tax exemption decree from the Secretary of Economic Development and Commerce.

Tax Profile: Canada

By InternationalNo Comments

Introduction

  • In general, Canada recognizes four types of entities for income tax purposes: individuals, corporations, partnerships and trusts.

Individual Tax

  • Canadian citizens/residents are subject to tax on their worldwide income.
  • The Canadian federal government uses a marginal income tax system and each province/territory imposes income taxes based on the table below (shown at the highest marginal rate).
Province/Territory Salary, Interest, Pension, etc. Eligible Dividends Dividends Other than Eligible Dividends Capital Gains
British Columbia 43.70% 26.11% 33.71% 21.85%
Alberta 39.00% 19.29% 27.71% 19.50%
Saskatchewan 44.00% 24.81% 33.33% 22.00%
Manitoba 46.40% 32.27% 39.15% 23.20%
Ontario 49.53% 33.85% 36.47% 24.77%
Quebec 49.97% 35.22% 38.54% 24.99%
New Brunswick 43.30% 22.47% 30.83% 21.65%
Nova Scotia 50.00% 36.06% 36.2% 25.00%
Prince Edward Island 43.37% 28.70% 41.17% 21.69%
Newfoundland/Labrador 42.30% 22.47% 29.96% 21.15%
Yukon 42.40% 19.29% 30.41% 21.20%
NW Territories 43.05% 22.81% 29.65% 21.53%
Nunavut 40.50% 27.56% 28.96% 20.25%

 

Withholding Tax

  • Non-residents are subject to withholding tax on income received from Canadian sources.
  • The default withholding rate is 25%.The U.S.-Canada tax treaty allows for reduced withholding rates as follows:
    • Interest – 0%.
    • Dividends – 15%
    • Royalties – 0%
    • Pensions and Annuities – 15%
  • U.S citizens/residents who intend to rent property in Canada are subject to a non-resident withholding tax of 25% on gross rental income. However, when the rental income is considered investment income as opposed to business income, the 25% withholding tax is applied to net rental income. In addition, if there is a rental loss no withholding is required.

Corporate Tax

  • If a corporation operates in Canada and has a permanent establishment in Canada, it is subject to
  • Canadian corporate tax.Corporate tax rates depend on the location (province/territory) in which the business operates as well as the nature of the income received.
    • The two types of income to be considered are active business income (“ABI”) and investment income (“non-ABI”).
    • There is a third factor to be considered which is based on the ownership of the corporation: Canadian-controlled private corporation (“CCPC”) vs. a private corporation vs. a public corporation.
    • Businesses with income less than 500,000 Canadian dollars annually are subject to reduced rates.
  • Corporations can also be subject to value-added taxes based on the value of goods and services supplied or imported into Canada.
  • The following table lists the highest corporate marginal tax rates based on the source of income received:
Province/Territory CCPC – ABI (Small business limit) CCPC – ABI in Excess of Small Business Limit Non-CCPC with ABI
British Columbia 13.50% 25.75% 25.75%
Alberta 14.00% 25.00% 25.00%
Saskatchewan 13.00% 27.00% 27.00%
Manitoba 11.00% 27.00% 27.00%
Ontario 15.50% 26.50% 26.50%
Quebec 19.00% 26.90% 26.90%
New Brunswick 15.50% 25.00% 25.00%
Nova Scotia 14.50% 31.00% 31.00%
Prince Edward Island 14.64% 31.00% 31.00%
Newfoundland/Labrador 15.00% 29.00% 29.00%
Yukon 15.00% 30.00% 30.00%
NW Territories 15.00% 26.50% 26.50%
Nunavut 15.00% 27.00% 27.00%

 

Canadian Retirement Plans

  • On October 7, 2014, the IRS announced that certain U.S. citizens and residents with interests in two types of Canadian registered retirement plans are no longer required to annually file Form 8891, reporting theirinterests in such plans and the contributions made to them.
  • Eligible U.S. citizens and residents holding interests in a Canadian registered retirement savings plan (“RRSP”) or a registered retirement income fund (“RRIF”) will be treated as having made an election under the U.S-Canada Income Tax Treaty to defer U.S. income tax on income accruing in the retirement plans until a distribution is made.

Owning Canadian Property

  • There are no restrictions for non-residents purchasing real estate in Canada, though they may become subject to Canadian income tax as discussed below. If you are considering purchasing or selling Canadian property, please do not hesitate to call us regarding the potential tax implications.
    • Property Taxes – A transfer tax that varies from province to province can be around 1% on the first $200,000 and 2% in excess.
    • Goods and Services Tax (GST) – New home purchases are subject to GST. The GST doesn’t apply to resale homes.
    • Taxes on Rental Property – The Canadian Income Tax Act requires that 25% of the gross property rental income is remitted each year. However, non-residents can elect to pay 25% of the net rental income.
    • Selling Canadian Property – When a non-resident sells Canadian property, there is a 50%withholding tax. U.S. citizens/residents must report the capital gain to the IRS; however, if the gain has been taxed in Canada, it can be can be claimed as a foreign tax credit.

 

 

Foreign Taxation of Individuals

By InternationalNo Comments

The following information relates to foreign filing requirements for individuals, trusts, estates, and entities.  This information is pertinent as failing to file any of the Forms could lead to severe penalties.

Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts

Any U.S. person with financial interest or authority over foreign financial accounts that exceeds $10,000 must file a Form TD F 90-22.1 Report of Foreign Bank and Financial Accounts (“FBAR”). These are required to be filed electronically by June 30th of the following year.  The persons who are required to file this form include U.S. citizens, resident aliens, and entities created, organized, or formed under U.S. laws.

The following types of financial accounts would need to be reported on the FBAR if you meet the filing requirement threshold:

  • Bank accounts (checking and savings)
  • Investment accounts
  • Mutual funds
  • Retirement and pension accounts
  • Securities and other brokerage accounts
  • Debit card and prepaid credit card accounts
  • Life insurance and annuities having cash value

The penalty for failing to file an FBAR can be as high as the greater of $100,000 or 50% of the maximum balance of the account per violation. For example, if you fail to file for two consecutive years, the total penalty could be as high as 100% of the account balance.

For those who did not realize this information was required to be filed, the IRS has enacted an Offshore Voluntary Disclosure Program to reduce the penalty.  The penalty assessed in the Program is calculated at 27.5% of the highest year’s aggregate value during the period covered by the voluntary disclosure (the highest balance over an eight-year period).  If you have multiple accounts, the penalty is assessed on the highest combined total year.

Form 8938 Statement of Specified Foreign Financial Assets

Under the Foreign Account Tax Compliance Act (FATCA), any individual with interest in specified foreign financial assets must attach Form 8938 with their tax return if they meet certain filing thresholds. The thresholds for filing this form are listed below:

  •  $50,000 on last day of tax year, or $75,000 at any time throughout the year for single or married filing separate if living inside the U.S.
  • $100,000 on last day of tax year, or $150,000 at any time throughout the year for married filing joint if living inside the U.S.
  • $200,000 on last day of tax year, or $300,000 at any time throughout the year for single or married filing separate if living outside the U.S.
  • $400,000 on last day of tax year, or $600,000 at any time throughout the year for married filing joint if living outside the U.S.

Form 8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships

This Form must be filed if the taxpayer meets any of the following requirements:

  • The taxpayer owned 50% or more of a foreign partnership at any time during the year.
  • The taxpayer owned 10% or more of a foreign partnership at any time during the year, while the partnership was controlled (50% or more) by other U.S. persons. For example, if the foreign partnership is owned by five U.S. taxpayers that each holds a 10% interest, then all five taxpayers must file Form 8865.
  • The taxpayer contributed cash or other property to a foreign partnership in exchange for an interest in the partnership and one of the following two conditions is met.

a. Immediately following the contribution, the taxpayer owned at least 10% of the interest in the foreign partnership, or

b. The value of the property contributed exceeds $100,000.
Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation

The taxpayer must file this Form if it has certain transfers of property to a foreign corporation. The following are considered reportable transfers:

  • The taxpayer transfers cash to a foreign corporation and immediately after the transfer, (a) the taxpayer holds directly or indirectly at least 10% of the total voting power or the total value of the foreign corporation or (b) the amount of the cash transferred by the taxpayer exceeds $100,000.
  • The taxpayer transfers other property to a foreign corporation and immediately after the transfer, (a) the entity holds directly or indirectly at least 5% of the total voting power or the total value of the foreign corporation or (b) the amount of the other property transferred by the entity exceeds $100,000, unless the taxpayer owns less than 5% and is a tax-exempt entity with no unrelated business income from the partnership.
    Form 2555 Foreign Earned Income

Lastly, Form 2555 is used to claim the foreign earned income exclusions and foreign housing exclusion. A U.S. person who meets either the bona fide residence test or physical presence test may exclude up $97,600 of foreign earnings in 2013 from the U.S. taxable income (this limit changes yearly based on inflation).

Reporting by U.S. Taxpayers Holding Foreign Financial Assets

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Taxpayers have long been required by the Bank Secrecy Act to report certain foreign accounts. Now, there is a new reporting requirement in the Foreign Account Tax Compliance Act of 2010. U.S. taxpayers holding foreign financial assets may be required to report certain information about those assets on new Form 8938.

A specified foreign financial asset is:

  1.  Any financial account maintained by a foreign financial institution. This does not include a U.S.
    payer (such as a U.S. domestic financial institution), the foreign branch of a U.S. financial
    institution, or the U.S. branch of a foreign financial institution.
  2.  Other foreign financial assets held for investment that are not in an account maintained by a
    US or foreign financial institution, namely:
  3. Stock or securities issued by someone other than a U.S. person,
  4. Any interest in a foreign entity, and
  5. Any financial instrument or contract that has as an issuer or counterparty that is
    other than a U.S. person.

Form 8938 is required when the total value of specified foreign assets exceeds certain thresholds. The thresholds vary depending on the taxpayer’s status.

  1.  Unmarried taxpayers living in the U.S.: The total value of the taxpayer’s specified foreign
    financial assets is more than $50,000 on the last day of the tax year or more than $75,000 at
    any time during the tax year.
  2.  Married taxpayers filing a joint income tax return and living in the U.S.: The total value of the
    couple’s specified foreign financial assets is more than $100,000 on the last day of the tax
    year or more than $150,000 at any time during the tax year.
  3.  Married taxpayers filing separate income tax returns and living in the U.S.: The total value of
    the taxpayer’s specified foreign financial assets is more than $50,000 on the last day of the tax
    year or more than $75,000 at any time during the tax year.
  4. Taxpayers living abroad: an individual is a taxpayer living abroad if (1) the individual is a U.S.
    citizen whose tax home is in a foreign country and the individual is either a bona fide resident
    of a foreign country or countries for an uninterrupted period that includes the entire tax year; (2)
    or the individual is a U.S. citizen or resident who, during a period of 12 consecutive months
    ending in the tax year, is physically present in a foreign country or countries for at least 330
    days.

The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s obligation to file a Form TD F 90-22.1 Report of Foreign Bank and Financial Authority. U.S. taxpayers who own a foreign bank account, brokerage account, mutual fund, unit trust, or other financial account may also be required to file Form TD F 90-22.1 if:

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

The IRS understands that some individuals have not reported their offshore accounts as of yet, and have offered incentive programs to help individuals come forward. The IRS has recently launched a third Offshore Voluntary Disclosure Program (OVDP). The OVDP offers taxpayers a reduced penalty framework in exchange for full disclosure of unreported foreign accounts. The OVDP is a complex and lengthy process. Please contact our office with any questions or for more information.

Other International Compliance Requirements

The international compliance requirements are more complex and stringent than ever. Below is a list of who must file.

Trusts
U.S. persons who receive distributions from foreign trusts are required to report them on Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, if they know or have reason to know that the trust is a foreign trust.

Corporations
Each U.S. citizen or resident who is an officer, director, or 10 percent shareholder of a foreign company is required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

Domestic corporations with non U.S. shareholders, who own 25 percent or more of the stock of the U.S. Corporation, must file a Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

Partnerships
Any U.S. person that is a controlling 50 percent partner at any time during the tax year must also complete and file Form 8865 with his income tax return. Additionally, a controlling 10 percent partner must complete and file Form 8865. A controlling 10 percent partner is a U.S. person owning a 10 percent or greater interest in a partnership and together with other 10 percent or greater partners they own more than 50 percent of the foreign partnership.

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