Welcome to the New Year and our first Cadesky U.S. Tax Tip for 2021.  Everyone here at Cadesky U.S. Tax hopes that you, and your loved ones, managed to keep safe (as much as possible!). It has certainly been an interesting start for 2021!

On January 5, 2021 the State of Georgia held runoff elections for their two Senate seats.  Republican David Purdue and Democrat Raphael Warnock, led the respective popular vote held on November 5, 2020.

There are a couple of developments on the GILTI front that readers may find interesting.  First, last month the IRS issued final and proposed regulations involving GILTI and the high-tax exclusion.  Second, one of Democratic U.S. Presidential nominee Joe Biden’s tax proposals is the doubling of the effective GILTI corporate tax rate from 10.5% to 21%.

To understand the potential impact of these, you first need to have a general understanding of what the GILTI provisions are meant to do and their current impact.

It is a fairly common estate planning technique in the United States to utilize a revocable living trust (“RLT”) as part of a “United States person’s” estate planning. For U.S. estate tax purposes, a United States person would include a U.S. citizen and a U.S. domiciliary. What is not so common though, is the potential foreign impact when the underlying U.S. grantor moves to a foreign jurisdiction.

In prior U.S. Tax Tips we discussed the requirements for qualified U.S. taxpayers to receive the Economic Impact Payment. The Economic Impact Payment (“EIP”) is part of the CARES Act and represents a pre-payment of a 2020 tax credit of US $1,200 per “eligible individual” and an addition US $500 per “eligible child.” Technically this credit will be claimed as part of their U.S. personal income tax return (if one is required to be filed). The payment is not limited to U.S. residents but includes “eligible individuals” who live outside the United States. Many of our clients have received their payments.

In prior U.S. Tax Tips we looked at who is… Read more »

As we have discussed in prior U.S. Tax Tips, the determination of residency in the United States is a question of fact.  If you are not a U.S. citizen nor a lawful permanent resident (i.e. a green card holder) you will be a U.S. tax resident under U.S. domestic law if you satisfy the substantial presence test.   Under this test, a nonresident alien will become a U.S. resident if they are physically present, and those days are not statutorily excluded, in the United States (i) over 182 days in the current year or (ii) over 182 days under the three year rolling average test. 

On April 7, 2020 the United States Treasury and the Internal Revenue Service released final and proposed regulations aimed at curbing hybrid mismatch arrangements.  A hybrid mismatch occurs when a transaction is treated differently between countries and one of the main reasons of the transaction was to avoid taxes both in the foreign country and in the United States.

In previous U.S. Tax Tips we have reported that the U.S. Congress has extended the tax payment and filing deadline for those with an April 15, 2020 due date to July 15, 2020.  Relief is automatic; affected taxpayers do not have to call the IRS or file any extension forms, or send letters or other documents to receive this relief. However, not all taxpayers (i.e., June 15th filers) were accorded this automatic extension.

On March 27th, 2020 President Trump, signed into law, the largest stimulus package in U.S. history, estimated at some US $2.2 trillion. The CARES Act is the U.S. federal government’s response to the COVID-19 pandemic and its impact on the U.S. economy. The CARES Act passed the United States Senate on March 25th, 2020, by a vote of 96-0 and passed the House by a voice vote on March 27th, 2020. It is estimated that out of those funds, in addition to individual rebates, that some $510 billion will go towards loans and grants to large companies, $377 billion towards smaller businesses, and $260 billion for expanded and extended unemployment benefits.

In our last U.S. Tax Tip we advised that the United States Treasury Secretary Steven Mnuchin had announced that the United States would defer the 2019 tax payment date, April 15th, 2020, by 90 days to July 15th, 2020.  On March 18th, 2020 the IRS issued IRS Notice 2020-17 providing guidance on the deferral.  The IRS will not charge any late payment penalties nor interest on payments which were originally due on April 15th, 2020.  Consolidated groups could defer up to US $10,000,000 of tax payments while all other taxpayers, including individuals, could defer up to US $1,000,000 of tax payments.

On March 17, 2020, U.S. Secretary of the Treasury Steven Mnuchin announced that the Department of the Treasury will be deferring the April 15th deadline to pay taxes owed. Individuals and many businesses will have an additional 90 days to make their payments to the IRS. Individual taxpayers will be able to defer up to $1 million of tax liability. Corporations will receive an extension on up to $10 million of tax liability.

On March 2, 2020, the IRS released an advanced version of Revenue Procedure (Rec. Proc.) 2020-17. It is expected that the final regulations will be issued on March 16, 2020 and will be effective as of the date of publication in the Internal Revenue Bulletin. Rev. To summarize, Proc. 2020-17 states that the U.S. Treasury and the IRS intend to issue proposed regulations that will impact the U.S. information reporting requirements with respect to the reporting of certain “foreign trusts”.

In general, under IRC §865(a)(2), when a non-resident sold shares of a U.S. corporation (which are considered as personal property), the gain was sourced “outside the United States”.  As such, the U.S. did not tax the gain.  There are exceptions, however, where the underlying value is attributable to U.S. real property.   In the case of a sale of redemption of a U.S. partnership interest (whose value was not related to U.S. real property), the case was not clear.

As discussed in Part 1, a partner is deemed to be doing business in the U.S. via their interest in the partnership.  Partnerships, in general, do not pay tax, the partners do.   As such, with respect to a foreign partner the U.S. Congress was (and still is) concerned that once funds leave the United States that the U.S. Internal Revenue Service (IRS) may be unable to enforce payment of the non-resident’s U.S. tax liability.  As such, the Internal Revenue Code imposes a withholding obligation on the partnership itself.  IRC §1446 states

Here at Cadesky U.S. Tax Ltd., we receive a lot of inquiries in regards to how to structure a non-resident’s investment into the United States. Many of these investments involve U.S. real property or marketable securities. In addition, we also receive a lot of questions from Canadian advisors and new clients who have held these investments for a number of years but who have never filed any U.S. tax returns, primarily because these investments have not generated any revenue until the underlying investments are being sold.

On December 20, 2019 President Trump signed into law The Setting Every Community Up for Retirement Enhancement Act (aka the “Secure Act”). A number of authors have described The Secure Act as one of the most dynamic changes to retirement legislation since the Pension Protection Act of 2006. All changes are effective as of January 1, 2020. In particular there are 4 main changes (with respect to pension items)…

As part of the 2017 Tax Cuts and Jobs Act (TCJA), P.L. 115-97, Congress almost doubled the basic exclusion amount (BEA) from US $5,600,000 to $11,180,000 as of January 1, 2018.  The BEA is indexed for inflation and will be US $11,580,000 for 2020 (see paragraph 41 of Rev. Proc. 2019-44). 

We continue to receive queries from advisors and clients who do not understand how the U.S. Global Intangible Low Taxed Income (GILTI) rules will impact them. They read generic promotional pieces from financial advisory firms and banks, on various U.S. tax issues, and become worried over what they read. The intent of this U.S. Tax Tip is to provide an example of how the GILTI provisions may impact a U.S. citizen Canadian resident who owns a Canadian corporation that is carrying on an active business in Canada. Each client situation, however, is different and an appropriate analysis of a taxpayer’s specific facts need to be considered in determining how GILTI will impact them. The example below is meant to be for illustrative purposes only

The IRS estimates that almost 2 million individual taxpayer identification numbers (ITINs) will expire as of December 31, 2019.  These ITINs have the middle digits of 83, 84, 85, 86 and 87 (XXX-83-XXXX for example).    In addition, any ITIN that has not been used on a U.S. tax return for the past 3 years will also expire.

In prior U.S. Tax Tips we have discussed the increased complexity in the United States’ Controlled Foreign Corporation (“CFC”) rules and the corresponding increase in the complexity of meeting the filing requirements.  There are significant penalties for failure to timely and accurately file Form 5471, “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”.

The requirement to file the U.S. Report of Foreign Bank and Financial Accounts (better known as an FBAR) is not new, and yet many U.S. persons are still unaware of the need to file this form. The requirement to file an FBAR is not pursuant to the U.S. Internal Revenue Service (IRS) but instead pursuant to the U.S. Bank Secrecy Act (BSA). The BSA was originally passed by the U.S. Congress in 1970 and signed into law by President Richard Nixon on October 26, 1970.

As was discussed in our last U.S. Tax Tip, the IRS had announced a number of new compliance programs emanating from their Large Business and International (LB&I) unit.  We also had previously reported that one of the IRS compliance programs, the Offshore Voluntary Disclosure Program terminated on September 28, 2018.  The Streamlined Compliance Filings Procedures Program (both foreign and domestic), however, is still in effect.  It would appear that as time goes on and more taxpayers have become compliant that the value of these programs to the IRS diminishes. At some point in time, the Streamlined Compliance Filings Procedures will also come to an end.

In a prior U.S. Tax Tip, (July 2018), we had outlined 5 new, at the time, compliance programs that the IRS Large Business and International division (LB&I) introduced.   On July 19, 2019 the IRS announced 6 new compliance programs, bring the total to 59.  These new programs are S Corporations Built in Gains Tax,
Post OVDP Compliance,
Expatriation,
High Income Non-filer,
S. Territories – Erroneous Refundable Credits,
Section 457A Deferred Compensation Attributable to Services Performed Before January 1, 2009. Two of these programs should be of interest to U.S. taxpayers who live outside of the United States.  Those two, being Post OVDP Compliance and Expatriation

Here at Cadesky U.S. Tax, we routinely receiving enquiries from clients who are either considering moving to the U.S. or who are spending a significant amount of time in the U.S.  They want to know on what basis they will be taxed.  One significant issue that must first be to determine their residency status for U.S. tax purposes.  It is common knowledge that a U.S. citizen is subject to U.S. taxation and filing requirements regardless of where they live in the world.  The question then becomes, for a non-U.S. citizen – when do they become a U.S. resident?

The enactment of the 2017 Tax Cuts and Jobs Act (TCJA)) brought significant changes to the international tax world for U.S. taxpayer including, among other provisions, an expanded definition of a “United States shareholder”, the repatriation tax of IRC §965 and the global low tax intangible income (GILTI) under IRC §951A. We have discussed these provisions in earlier Tax Tips.

We have described in past US Tax Tips the recently enacted, Global Intangible Low Taxed Income (GILTI) provisions and the potential impacts on United States persons in Canada who own enough shares in Canadian corporations such that those Canadian corporations would be a controlled foreign corporations (CFC) for U.S. tax purposes.

One distinct aspect of the U.S. tax system is the ability for a taxpayer to extend the due date of a tax return. This allows the taxpayer additional time to complete and file an income tax return without being assessed a late filing penalty. Late filing penalties are assessed at the rate of 5% per month up to a maximum of 25%. In most cases a tax return due date can be automatically extended by up to six months. All that is required is the filing of the proper extension form. No explanation from the taxpayer is required and the IRS cannot deny a properly filed extension. However, the timely filing of the form is crucial in order for the extension to be valid.

For most individuals, their principal residence is their single most important asset. In Canada, when an individual sells their principal residence the gain on the sale is exempt from capital gains tax in most instances. A taxpayer must designate the property as their principal residence when they file their Canadian personal income tax return. This is one of the biggest gifts to individuals in the Income Tax Act…

The passing of the 2017 Tax Cuts and Jobs Act (TCJA) introduced many changes for taxpayers. Of significant importance for U.S. taxpayers abroad were the repatriation provisions under IRC §965 and the introduction of the new Global Intangible Low Taxed Income (GILTI) regime under IRC §951A. We have discussed and will continue to discuss these provisions as necessary…

There has been much in the news lately about the… Read more »

On November 15, 2018 the IRS issued Revenue Procedure 2018-57. … Read more »

On December 20, 2018, just before the Congressional holiday recess,… Read more »

The Tax Cuts and Jobs Act of 2017 (“TCJA” P.L…. Read more »

All United States persons (citizens and green card holders) are… Read more »

Individual Taxpayer Identification Numbers (ITINs) are tax processing numbers, issued… Read more »

On August 3, 2018 the IRS issued “final” proposed regulations… Read more »

The Internal Revenue Service was handed a defeat with respect… Read more »

U.S. citizens abroad are burdened with the same federal tax… Read more »

In light of the United States Supreme Court South Dakota… Read more »

On July 2nd, the IRS Large Business and International division… Read more »

As Canadian companies grow their business into the United States… Read more »

On June 4, 2018 the IRS issued News Release IR-2018-131. … Read more »

The recently enacted U.S. Tax Cuts and Jobs Act introduced… Read more »

Yesterday, April 2, 2018, the IRS released Notice 2018-26, the… Read more »

The due date for a U.S. personal income tax return… Read more »

In most countries an individual’s tax residency is determined by… Read more »

On March 13, 2018 the Internal Revenue Service announced (IR-2018-52)… Read more »

An accurate determination of “earnings and profits” (E&P) of a… Read more »

Recent media coverage, as it relates to U.S. tax in… Read more »

The Tax Cut and Jobs Act (TCJA) has significant implications… Read more »

With both the increases in Canadian personal tax rates, over… Read more »

If you are a U.S. citizen and you have a… Read more »

“An Act to provide for reconciliation pursuant to titles II… Read more »

On December 22, 2017 President Trump signed into law, “An… Read more »

This U.S. Tax Tip follows up on the US Tax… Read more »

Both the U.S Republican House and Senate tax plans (The… Read more »

If you are a US nonresident alien and have filed… Read more »

Ever since President Trump announced his candidacy for President, both… Read more »

Since 2009, the U.S. Internal Revenue Service (“IRS”) has had… Read more »

A United States person is required to file FinCEN Form… Read more »

Although this topic has been extensively covered in the Canadian… Read more »

On December 18, 2015, President Obama signed into law the… Read more »

“Employer-Provided Health Insurance Offer and Coverage” In general, absent any… Read more »

The 2014-15 New York State Budget, enacted on March 31,… Read more »