Canadian Professional Corporation & the IRS (U.S. Tax Implications)
In Canada, beyond RRSP, RRIF, TFSA and other investment/retirement funds, there is another typical investment that some Canadians may have the opportunity to make – Professional Corporation retained earning deferrals into mutual funds.
A Canadian Professional Corporation may be a great retirement planning tool for Canadians, but if a person is a dual Canadian and U.S. Citizen or Resident, there may be other issues the individual has to be cautious of.
Canadian Professional Corporation
For many professionals in Canada, there is a major tax benefit to forming a Professional Corporation — this is because Canada has very high tax rates.
Specifically, a person (especially small businesses) can defer a relatively large portion of their active income, receive a reduced tax rate on the non-deferred portion, and defer income into various investments for use later, when you are retired – and receive a reduced tax rate.
It is similar (in part) to a 401K plan, in which pre-tax dollars are tax deferred into retirement.
The fund grows, and then when you retire, you take distributions – with the idea that the investment grew tax-free, but you are in a lower tax rate when you retire, and the income is taxed at a lower rate once retirement hits (congratulations) and you begin taking distributions.
The U.S. follows a worldwide income model.
Therefore, for example, if Deana is a U.S. person who earns income both within the U.S., and abroad – she has to report all of her income on here U.S. taxes.
She may receive a Foreign Tax Credit, and she may qualify for the Foreign Earned Income Exclusion – but she has to include all sources of income in her U.S. Tax Return.
When a person is a dual citizen or resident, and the United States gets involved, it can get infinitely more complicated. That is because the U.S. Tax rules do not always match well with other country’s tax rules – since most other counties use a Residence based tax model, which tends to avoid taxation on worldwide income.
A Few IRS Pitfalls to be Aware of
When a person has interest/ownership in a professional corporation (despite whether or not it is a Controlled Foreign Corporation), the investor may have various U.S. reporting requirements – including the separate reporting of the investments held by the corporation, such as mutual funds, which may be reported on Form 8621 and require a complex, detailed analysis when the “Excess Distribution” rules apply.
Unfortunately, the IRS has made enforcement of offshore/foreign compliance a key priority, and the penalties can be rough.
Some of the more common reporting requirements may include:
- Form 3520-A (Foreign Trust)
- Form 5471 (Foreign Corporation)
- Form 8621
- Form 8865 (Foreign Partnership)
- Form 8938 (Specified Foreign Financial Assets)
In addition to the reporting, there are also complex tax issues, especially with the new GILTI tax.
Some of the more common tax requirements may include:
- U.S. Tax on distributed earned Income
- U.S. Tax on Subpart F Income
- U.S. Tax on GILTI
Out of IRS Offshore Compliance?
If you are out of IRS compliance, you may want to consider getting into compliance using one of the approved IRS Offshore Tax Amnesty Programs.
What Type of Attorney Should I Hire?
IRS Voluntary Disclosure is a specialized area of law. An IRS Voluntary Disclosure is a complex undertaking. It requires the coordination of several moving parts, including strategy development, Tax Preparation, Legal Analysis, Negotiation and more.
You should hire a Tax Attorney who has the following credentials:
- ~20 Years of Private Practice experience representing his/her own clients
- Experienced in Criminal and Civil Tax Litigation
- Experienced representing clients in Eggshell and Reverse Eggshell Audits.
- Advanced Tax Degree (LL.M.)
- Preferably a Board-Certified Tax Law Specialist
We Specialize in Safely Disclosing Foreign Money
We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)
Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.
Examples of areas of tax we handle
- Unfiled Tax Returns
- Unreported Income Penalties
- International Tax Investigations (FATCA and more)
- FBAR Investigations
- International Tax Evasion
- Structuring Investigations
- Eggshell and Reverse Eggshell Audits
- Divorce and Offshore Accounts
- Foreign Mutual Funds
- Foreign Life Insurance
- Fixing Quiet Disclosure
- Foreign Real Estate Income
- Foreign Real Estate Sales
- Foreign Earned Income Exclusion
- Subpart F Income
- Foreign Inheritance
- Foreign Pension
- Form 3520
- Form 5471
- Form 8621
- Form 8865
- Form 8938 (FATCA)
Who Decides to Disclose Unreported Money?
What Types of Clients Do we Represent?
We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.
You are not alone, and you are not the only one to find himself or herself in this situation.
Contact us today; let us help you.
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver. He has also earned the prestigious IRS Enrolled Agent credential. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo, and various Law Journals nationwide.