201511.02
Off
0

When Do You Need To Speak to a U.S. Tax Advisor?

U.S. Tax Advisor | U.S. Tax IQ

When Do You Need To Speak to a U.S. Tax Advisor?

Have you ever faced a client who may have a cross-border tax issue? If you have, you probably know that when you deal with clients domestically (say, within Canada), you may not necessarily guess that they may be citizens of another country or be otherwise exposed to another country’s tax regime. This is not uncommon in Canada.

In Canada, many people have dual citizenship – Canadian and the United States – and may have a Green card or otherwise be considered a resident of the United States for U.S. federal income tax purposes. With increased enforcement of the U.S. tax laws and U.S. Department of Treasury / U.S. Internal Revenue Service (“IRS”) reporting and filing obligations, many financial and investment advisors, as well as banks, are under a lot of pressure to identify U.S. persons who reside in Canada or other countries outside the United States.

The Foreign Account Tax Compliance Act (“FATCA”) made big splashes in Canada and around the world. FATCA requires Canadian banks and certain financial institutions, with limited exceptions, to identify U.S. account holders. Failure to do so may lead to severe penalties. As such, it is important to have at least a minimum understanding of what transactions or facts may indicate that a client may be exposed to U.S. tax. Furthermore, the connection to U.S. taxation is not solely limited to a person’s residency or their citizenship status. Many Canadian-based businesses may be exposed to U.S. tax, even though they may not necessarily appreciate the complexity of the issues and potentially adverse U.S. tax consequences that they may face (it is common for Canadian business owners to assume that the U.S. tax rules operate similar to the Canadian tax rules, but it is a mistake, as there are critical differences between the two countries’ tax regimes).

The list below addresses a dozen of red flags that should assist a financial or investment advisor in understanding when their client may have U.S. tax issues. Once identified, the client can take a pro-active approach in resolving such U.S. tax issues by retaining a qualified U.S. tax advisor (see our other article on how to choose a qualified U.S. tax advisor, which may not be as straightforward as one may think).

The list is non-exhaustive and only represents the tip of the iceberg. However, it should still be helpful in identifying the most common U.S. tax issues that can be easily avoided or effectively managed before certain events or transactions occur and thus may assist in avoiding penalties, which may be quite substantial. Identifying U.S. tax issues prior to entering into a transaction may mean the difference between no U.S. tax owed and significant U.S. tax liability, potentially including hefty penalties and interest.

 

The Dirty Dozen – Common Red Flags to Spot a U.S. Tax Issue and Consult with U.S. Tax Advisor

 

  1. U.S. citizenship or green card holders (current and recently renounced).
        a) Passive investments trap (Passive Foreign Investment Company (“PFIC”) implications));
        b) Anti-deferral of income through a foreign corporation (Subpart F regime, Controlled Foreign Corporation (“CFC”) rules);
        c) Business restructurings (including amalgamations);
        e) Trust considerations (settlement of a foreign trust, funding of a trust, designation of trustees and beneficiaries);
        f) Estate and gift tax considerations (applicable exemptions and exclusion amounts, compliance and reporting).
  2. Physical presence in the United States.
  3. Employment or work in the United States.
  4. Investment in U.S. real property (residential, rental, commercial), including sale of U.S. real property.
  5. Acquisition or sale of U.S. businesses or business assets.
  6. Ownership of U.S. business entities.
  7. Cross-border transactions between commonly controlled businesses (related parties).
  8. Gifts by Canadians to U.S. persons or gifts of certain U.S. assets.
  9. Soliciting business in the United States, expanding business operations into the United States (permanent establishment issues, qualification for treaty benefits).
  10. Withholding on U.S. source income.
  11. IRS notice.
  12. Death and taxes – prior to and on death planning and compliance (U.S. citizens or Canadians who may be treated as U.S. residents for U.S. estate and gift tax purposes; may not necessarily be limited to the ownership of U.S. assets).