Contents

U.S. Tax on Canadian Investments (2019) – IRS Investment Guide FAQ

U.S. Tax on Canadian Investments (2019) - IRS Investment Guide FAQ - Golding & Golding

U.S. Tax on Canadian Investments (2019) – IRS Investment Guide FAQ – Golding & Golding

When it comes to Canada, the U.S. and IRS taxes, the issue can get very complicated — especially when it involves investment income, such as interest, dividends, and capital gains.

There is a bilateral tax treaty with Canada (which impacts the U.S. tax of Registered retirement plans), along with a Totalization Agreement, and FATCA Agreement.

Typical Canadian Investments that may be subject to IRS Tax or Reporting include:

  • RRSP
  • RRIF
  • TFSA
  • PC deferrals
  • Canadian Mutual Funds
  • Canadian Investment Funds

U.S. Tax on Canadian Investments

The U.S. follows a worldwide income model. That means that if you are a U.S. person, the U.S. requires that all if your income (foreign and domestic) be considered at tax-time.

Common misconceptions we come across with Canada and the U.S.:

  • There is a tax treaty, so my income is not taxable in the U.S.
  • Canadian taxes are high, so I do not need to file in the U.S.
  • RRSP and RRIF escape tax liability at the state level as well.
  • Deferred earnings in a PC are automatically safe from GILTI

Canadian Investments

The following is a list (non-comprehensive) of common investments a person may have in Canada.

With Canada, each investment should be analyzed according to general tax law, along with the three main U.S./Canadian Tax agreements, which include:

1. RRSP (Registered Retirement Savings Plan)

This plan is recognized by the U.S. Therefore, until a person takes any distributions, they do not have to report any income on the accrued growth within the fund (States may tax the growth).

An individual taxpayer used to have to make an annual election, but that was eliminated a few years back and applied retroactively.

If a person enters the Streamlined Program (and previous OVDP), the penalty associated with the RRSP was waived.

2. RRIF (Registered Retirement Income Fund)

Like an RRSP, this plan is recognized by the U.S. Therefore, until a person takes any distributions, they do not have to report any income on the accrued growth within the fund (States may tax the growth).

An individual taxpayer used to have to make an annual election, but that was eliminated a few years back and applied retroactively.

If a person enters the Streamlined Program (and previous OVDP), the penalty associated with the RRSP was waived.

3. RESP (Registered Educational Savings Plan)

Similar to an 529A, this plan is used as a Savings Plan in Canada. It receives the same benefits as indicated above, BUT when it comes to the Streamlined Program or prior OVDP, the RESP was not specifically excluded from the penalty base – although the taxpayer can take the position that it too should be waived.

4. Bank and Investment Interest

Bank interest is taxable. This is the general rule, even if you have a common TD Canada investment account or similar bank account, and even if the money is not being withdrawn.

5. Mutual Funds

Canadian Mutual Funds (aka Foreign Mutual Funds) are very complicated. Generally, Foreign Mutual Funds are considered PFIC (Passive Foreign Investment Company). If you do not receive any distributions, the analysis may be more simplified.

But, if you did receive distributions (even if they were re-invested)  there may be some significant tax analysis and reconciliations required to determine if you have any excess distributions.

Foreign mutual funds are disclosed and calculated using IRS Form 8621.

6. Dividends and Capital Gains

Dividends and Capital Gains are generally taxable (aside from non-distributed gains from RRSP and RRIF). Depending on the type of investment, you may be able to receive preferred qualified dividend treatment, or long-term capital gain.

Generally, the $250K/$500K primary home exclusion and depreciation rules (40 years S/L) also apply.

7. Professional Corporations

Many of our clients in Canada have a Professional Corporation – they are very common due to the tax deferred treatment of (usually) a large portion of income. That income is deferred into various investments, and only taxed at distribution, similar to a 401K.

With the introduction of GILTI, the IRS may no longer treat the deferred portion of the income as non-taxable – even though technically they are “retained earnings” deferred into approved Canadian Investments.

8. Foreign Rental Income

This is a common misconception. Let’s say you earned $10,000 in rental income, but had $11,000 in expenses and taxes – no income to report, right?

Yes and No. Yes, you earned gross rent income, but no, you will have no net income. Nevertheless, the income and expenses have to be parsed out, and reported annually on a 1040 Schedule E.

9. Interest Earned on Future Property Development

This is very common in many developing countries. A client will have paid an up-front fee to a developer for a property(s) abroad. During the time the property is being constructed, the investor (you) receive interest on the money you invested.

This ROI interest income must be included with your taxes.

10. Retirement Contributions

This will be impacted. Oftentimes, if there is a treaty (Canada you may receive tax deferred treatment on the growth, but not necessarily on the contributions, vs. a non-tax treaty county (such as Singapore) — where a CPF retirement fund does not receive U.S. tax deferred treatment.

10 Tax Tips (and Misconceptions) to be aware of:

1. Foreign Tax Credit

If you already paid tax on foreign income, you may be able to receive a Foreign Tax Credit in the U.S.

2. Foreign Tax Credit Refund

If the tax money you paid overseas was refunded to you, it may not be worth the headache to claim the credit, since you will have to adjust your tax returns in the future.

3. Income/Gifts

If your parents are managing your accounts, and you let them keep the income (what a nice son/daughter you are), that does not default to income assignment. Rather, it generally means you report the income and you gave them a gift.

4. Employment Provident Funds

EPFs are through employment, and you may be able to defer tax on the growth, per the a U.S. Tax Treaty (if applicable)

5. FATCA

Just because the FATCA Agreement may exempt certain foreign institutions from having to report accounts, does not mean you (as the individual investor) are exempt.

6. FBAR

If you have to file an FBAR you may also have to file a Form 8938 (or vice versa) – in other words, just because you file, does not mean you can avoid filing the other, if you meet the requirements for having to file both.

7. Foreign Earned Income Exclusion

You may be able to exclude certain earned (not investment) income if you meet either the Physical Presence Test or Bona-Fide Residence Test.

8. Transferring Account Ownership

Once you learn about reporting, the knee-jerk reaction is to consider transferring the accounts to another person. This only makes matters worse, because not only will you be out-of-compliance – but it will look bad to the IRS.

9. Calling the IRS Before Getting Into Compliance (Place Holder)

If you are considering getting into compliance, another knee-jerk reaction is to call the IRS to let them know you plan on getting into compliance. The problem is you may not even be on their radar. By calling them, you have now put yourself on their radar.

10. Be Cautions of Inexperienced Counsel

This has become an epidemic. Inexperienced attorneys tout experience they do not have, and puff their prior experience to make it seem like they have experience in this area of law, when they really do not.

Be sure to vet your attorney properly before retaining a firm.

What if You Have Unreported Income or Assets?

If you are out of compliance, the penalties can be severe. Therefore, you may consider entering IRS offshore voluntary disclosure/tax amnesty, before it is too late.

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.)
  • EA (Enrolled Agent) or CPA (Certified Public Accountant)
  • 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

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.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.

A Penalty for failing to file Form 8938

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 3520

The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

A Penalty for failing to file Form 3520-A

The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.

A Penalty for failing to file Form 5471

The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

Contact Us Today; Let us Help You.

International Tax Lawyers - Golding & Golding, A PLC

International Tax Lawyers - Golding & Golding, A PLC

Golding & Golding: Our International Tax Lawyers practice exclusively in the area of IRS Offshore & Voluntary Disclosure. We represent clients in 70 different countries. Managing Partner, Sean M. Golding, JD, LL.M., EA and his team have represented thousands of clients in all aspects of IRS offshore disclosure and compliance during his 20-year career as an Attorney. Mr. Golding's articles have been referenced in such publications as the Washington Post, Forbes, Nolo and various Law Journals nationwide.

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, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)
International Tax Lawyers - Golding & Golding, A PLC