Over the years, there have been a lot of articles written reminding
U.S. citizens living in Canada
to annually file a U.S. 1040 tax return in addition to the FinCEN Report 114,
Report of Foreign Bank and Financial Accounts (FBAR). While
the U.S. 1040 and FBAR are key documents most U.S. expats must complete, there
are other U.S. tax filings that unfortunately and all too often, are missed or
not filed properly. A lot of these
missed tax filings relate to U.S. citizens living in Canada who own/have an
interest in Canadian companies or unlimited liability corporations, Canadian
partnerships, Canadian trusts, RESPs and TFSAs or even owners of Canadian
traded mutual funds or ETFs held in a non-retirement account.
Here are seven key forms to be aware of that are often
missed by U.S. tax filers living in Canada:
Form 8858:
Information return of U.S. persons with respect to foreign disregarded entities
A U.S. person that directly, indirectly or constructively
owns a foreign disregarded entity (FDE) must file this form. An FDE is an
entity that is not created or organized in the United States and that is disregarded
as an entity separate from its owner for U.S. tax purposes. For example, a
single member Unlimited Liability Company in Canada owned by a U.S. person
would trigger filing this form.
Form 8865: Return of
U.S. persons with respect to certain foreign partnerships
This form must be filed by a U.S. person who owned more than
a 50% interest in a foreign partnership during the year or owned at least a 10%
interest if the partnership was controlled by U.S. persons owning a 10% or
greater interest. A U.S. person also has a filing requirement if he or she
contributed property in exchange for a partnership interest if that person
directly, indirectly or constructively owns at least a 10% interest, or the
value of the property contributed exceeds $100,000.
Form 5471:
Information return of U.S. persons with respect to certain foreign corporations
This form is filed by any U.S. person who is more than a 10%
direct or indirect shareholder in a foreign corporation or any U.S. shareholder
in a controlled foreign corporation (CFC), which broadly is a foreign
corporation, more than 50% of which is owned by U.S. persons. A U.S. citizen or
resident who is an officer or director of a foreign corporation may also have a
filing requirement if a U.S. person acquired stock in a foreign corporation.
So, for example, if you or your business owns a corporation in Canada, then you
will want to file this form otherwise the penalty for not filing can be as high
as $50,000.
Form 926: Filing
requirement for U.S. transferors of property to a foreign corporation
Any U.S. person who transfers property to a foreign
corporation and owns more than 10% of the stock, or any amount of stock if cash
transferred is more than $100,000, must file this form with his or her U.S. tax
return. This form would apply, for example, if a U.S. person simply was to
contribute cash in exchange for stock to form a wholly owned foreign
corporation.
Form 3520-A/3520:
Annual information return of foreign trust with a U.S. owner
A foreign trust with a U.S. owner, which can sometimes
include foreign pension plans, Registered Education Savings Plans (RESPs) and
depending on how you might interpret the IRS Regulations, Tax Free Savings Accounts (TFSAs), must file
this form independently with the IRS by March 15 following the year to which it
relates. Additionally, if a distribution or other payment is received from the
trust, Form 3520 may be required (and should be filed with the taxpayer’s tax
return). Failure to file these forms subjects the U.S. owner to an initial
penalty equal to the greater of $10,000 or 5% of the gross value of the trust
assets considered owned by the U.S. person at the close of the tax year.
Form 8621:
Information return by a shareholder of a passive foreign investment company
orqualified electing fund.
Any interest in an overseas “passive” corporation (50% or
more of its assets produce passive income or 75% of its income is passive) must
be reported on this form. This type of investment comes with other issues such
as whether to make a mark-to-market or qualified electing fund election, and
subsequently how income and gains are taxed. As we discussed in a previous
article, even owning shares in a Canadian mutual fund or Exchange Traded Fund
(ETF) could trigger filing this form.
Form 8938: Statement
of foreign financial assets
A U.S. person must file Form 8938 if he or she is a
specified individual who has an interest in specified foreign financial assets
and the value of those assets is more than the applicable reporting threshold.
Some assets are not required to be separately listed if they have already been
reported on one of the forms listed previously, such as the 8891, 3520 or 5471.
Starting with 2013, U.S. entities will be required to file this form as well as
individuals.
As a U.S. tax filer, it is very important that you fully
disclose all of your worldwide financial interests to your U.S. tax preparer,
so that they have a complete understanding of your financial affairs and can
properly address all of your U.S. tax filing obligations. Failure to file the above mentioned U.S. tax
forms can lead to substantial non-compliance penalties. Further, make sure you always
work with a qualified preparer such as a U.S. Certified Public Accountant (CPA)
or an Enrolled Agent with the IRS who has a complete understanding of Canadian
and U.S. tax laws and has experience servicing U.S. citizens living in Canada. At Cardinal Point, we specialize in assisting
U.S. citizens living in Canada with their complicated cross-border
tax filings and financial planning challenges.
