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Why Canadian mutual funds can cause U.S. tax headaches – Repost

Why Canadian mutual funds can cause U.S. tax headaches

Written by: Max Reed

Common Canadian investments can inadvertently cause U.S. tax problems for U.S. citizens in Canada.

Let’s take a really common example that we see frequently. Jack is a U.S. citizen in his 50s who married Jill (a Canadian citizen) many years ago. They have both lived in Canada for a long time. Jack was vaguely aware that he was supposed to be filing U.S. taxes every year. But he didn’t. Then Jack started reading about a recent U.S. law, the Foreign Account Tax Compliance Act (FATCA) under which his financial institutions would soon be sending his financial information to the IRS by way of the Canada Revenue Agency.

Jack started to comply with his U.S. tax obligations and in the process discovered that his retirement portfolio, which is comprised of Canadian mutual funds and ETFs that are held outside of an RRSP, might cause him problems.

There are strategies that can be used to help someone in Jack’s situation. For instance, Jack can swap his Canadian mutual funds and Canadian-listed ETFs into his RRSP for other investments that may be less problematic. Jack may also be able to gift some of these problematic investments to his wife Jill who is not a U.S. citizen.

Jack’s situation is avoidable with some foresight and planning. Canadian mutual funds and Canadian listed ETFs held outside of an RRSP/RRIF may cause U.S. tax problems. They may (the IRS has not taken a clear position on this and there may be some exceptions to the rule for older funds) be classified as a passive foreign investment company (PFIC) under U.S. tax law. If the investments are classified as PFICs and are held outside of an RRSP/RRIF, they must be reported on a complicated form.

There are punitive tax consequences for owning such an investment. For instance, when the investment is sold, the gain on the investment is subject to tax at up to 35% or 39.6% (depending on the year) and compound interest is charged on the tax owed stretching back to when the investment was purchased. There are strategies available to manage, but not eliminate, this headache but the strategies themselves are quite complicated and likely require the services of a tax professional. The simplest way to avoid this headache is to not own Canadian mutual funds and Canadian listed ETFs outside of an RRSP if you are U.S. citizen.

If Canadian mutual funds and ETFs are owned inside of an RRSP, there is much less of a U.S. tax problem. Recent IRS rule changes have eliminated the annual reporting requirement for Canadian mutual funds and Canadian ETFs held inside of an RRSP. Similarly, the Canada-U.S. Tax Treaty (an agreement between Canada and the United States that helps sort out some of the thorny cross-border tax issues) allows U.S. citizens in Canada to defer any tax owed on income accrued inside the RRSP until the income is withdrawn from the RRSP. Many advisors agree that this tax deferral provision likely negates any of the punitive taxes related to the classification of Canadian mutual funds and Canadian ETFs as PFICs as long as the investments are sold before they are taken out of the RRSP. Importantly, the same is not true for other Canadian registered plans such as a TFSA, an RESP, or an RDSP (these plans generally do not work as designed for US tax purposes).

To avoid Jack’s situation, U.S. citizens in Canada should exercise care in making their investment choices. Tax advice should be obtained as necessary.

Original Posting: http://business.financialpost.com/personal-finance/taxes/holiday-series-max-reed-canadian-mutual-funds-cause-u-s-tax-problems

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How The U.S. May Tax a Canadian Tax Free Savings Account – Repost

How The U.S. May Tax a Canadian Tax Free Savings Account

Written by: Terry Ritchie

 

Qualified individuals in Canada can start a Tax Free Savings Account (TFSA) and earn income in a tax-free manner. The TFSA account provides tax benefits for savings where investment income earnings, including capital gains and dividends, are not taxed when withdrawn. However, unlike the Registered Retirement Savings Plans (RRSP), contributions to a TFSA are not tax deductible for the annual income tax purpose.

tfsaThe TFSA offers a lucrative and general-purpose savings  vehicle for Canadians, who are living in Canada. However, it may not turn out to be as good as it seems for anyone who is subject to tax codes by the US Internal Revenue Service (IRS). This is because, unlike the RRSP, the Internal Revenue Service does not grant tax-deferred status to the Canadian TFSA. Since any income generated in the TSFA is taxed under US law, this taxable status usually takes away any fringe benefits of having a TFSA account for most Canadians residing in the U.S.

Moreover, most Canadians will be required to report the TFSA to the US Department of Treasury on an annual basis, as it is mandatory to submit the Report of Foreign Bank and Financial Account Form TD F 90-22.1. If you are a Canadian, living in the US as a resident, you may have to pay penalties for failing to disclose the TFSA account, which is termed as a foreign bank account.

Again, there are additional concerns regarding whether or not the TFSA will be considered as a foreign trust  under the US tax law. There is considerable confusion regarding this, as the Internal Revenue Service (IRS) has not revealed their official position on this issue yet. In the circumstance that the IRS decides to consider the TFSA as a foreign trust, the Canadian, who is a U.S. taxpayer, will be termed as an owner of a non-resident trust. As a consequence, the Form 3520-A, titled “Annual Information Return of Foreign Trust With a U.S. Owner,” will be required to be filed within two and half months once the trust’s year ends. Any failure to submit the Form 3520-A with the IRS will be subjected to a penalty greater than $10,000 or 5-percent of the gross value of the trust, which is the total amount left in the TFSA at the end of the tax year.

Then, under the Form 3520, titled “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” it may be required to disclose contributions to and withdrawals from the TFSA to the IRS. Any failure to submit this additional form may result in a penalty equal to 35- percent of the contribution or withdrawal amount.

In conclusion, Cardinal Point Wealth Management recommends that U.S. taxpayers, regardless of their current residency status in the U.S. or abroad, consider not contributing to an existing TFSA, withdrawing all remaining TFSA funds, and stopping the use of the account. Following these steps, avoids taxation in both Canada and the United States. For further advice on navigating the complications of cross-border wealth management and taxations, contact us today.

Original Posting: http://cardinalpointwealth.com/how-the-u-s-may-tax-a-canadian-tax-free-savings-account/

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Foreign Transaction Fee’s – Repost

How to get a U.S. dollar credit card

By Aaron Broverman

If you do a lot of spending in the States, you may be considering getting a U.S. dollar credit card, which will allow you to spend in American currency and avoid foreign transaction fees.

“If you’re a Canadian snowbird vacationing in Florida for five or six months [with a Canadian dollar credit card], those foreign transaction fees can definitely add up … about two and a half per cent on all your spending,” says Patrick Sojka, founder and CEO of Rewards Canada, a travel rewards information website.

While the process of getting a U.S. dollar credit card might be difficult through an American bank, you can apply for a U.S. dollar credit card at any of the major Canadian banks. us-credit-card

Getting a U.S. dollar credit card in Canada
Janette Boleantu, a wealth advisor for The Expatriate Group Inc., a Calgary-based organization providing financial advice to Canadian expats living abroad, says getting a U.S. dollar credit card from a U.S. bank can be a fairly complex and individualized process.

“Obtaining a U.S. dollar credit card is largely case-specific,” says Boleantu. “Just like … in any country, the issuer will look at your
credit history, and if you don’t have an American credit history or an American bank account, getting a credit card in the U.S. is going to
be extremely difficult for you.”

However, it’s a different story if you apply for your U.S. dollar credit
card from a Canadian bank. “You can get a U.S. dollar card issued by a Canadian bank, so it’s based on your Canadian credit rating,” says Sojka. Everything happens through the Canadian bank, he says, but you’ll spend in U.S. dollars.

Currently, all five of Canada’s major banks offer a U.S. dollar credit card. They all carry a 19.99 per cent interest rate on purchases and a 22.99 per cent interest rate on cash advances, with annual fees ranging from $35 to $65.

The application process is no different than applying for a Canadian credit card. You do not need a U.S. dollar bank account or a U.S. address, as you likely would if you applied through an American bank.

However, having a U.S. dollar bank account with the same Canadian bank that issues your U.S. dollar credit card may make things a little less costly for you, even if it isn’t necessary. With a U.S. dollar bank account, you’ll be able to pay your bill in U.S. dollars without worrying about the exchange rate or currency conversion fees (most banks charge about a 4 per cent conversion fee).

You can supplement the account in a couple of ways. First, if you have any income coming in from the U.S., you can simply deposit your U.S. dollars into the account. If not, Sojka recommends waiting until the exchange rate is favourable to Canadians, then funding your U.S. dollar account on the cheap.

A U.S. dollar bank account might be worth having if you do a lot of spending in the States — say, if you’re a snowbird who spends several months there out of the year. However, if you only use your U.S. dollar credit card occasionally, you might not worry too much about exchange rates when you pay off your purchases from a Canadian dollar bank account.

U.S. department store credit cards
Of course, you may only shop in the U.S. to access stores with no Canada location, or to get better deals than those found in Canada branches. In that case, you may want to get a U.S. store credit card instead. It’s easier than getting a general purpose U.S. dollar credit card from an American bank, according to Sojka, and it might be optimal for those who don’t spend anywhere else.

“Those department store credit cards are pretty interesting because they’ll issue them to Canadians without a U.S. tax number or credit rating,” he says. According to credit services at Bloomingdales, all you need is a Canadian passport and your Canadian social insurance number and you’re eligible for their department store card.

However, it may be a little more difficult to pay the balance from Canada. “You might be able to pay the balance online, but chances are better you’ll need a U.S. money order from your bank that you can send in,” says Sojka.

Best option for AmEx cardholders
If you are moving to the U.S. and you would like a U.S. dollar credit card from an American bank, one of the easiest cards to obtain without much hassle is American Express, as long as you already have a Canadian AmEx.

“Visa and MasterCard are accepted globally, but their brands are issued by banks in different countries,” says Sojka. “American Express is truly global, thanks to what’s called their Global Card Transfer, [which allows you to] transfer all of your Canadian American Express credit history to a new American Express card in the U.S. or other country.”

So if you know you’re moving to the U.S., Sojka recommends getting an AmEx card about six months before your move. Then, you’ll already have a head start toward a credit history in America.

Original Posting- http://canada.creditcards.com/credit-card-news/how-get-US_dollar-credit_card-1267.php

Updated: December 17, 2015

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Non-Resident RRSP Redemption: Withholding Tax Explained

  • June 08, 2015 by Jeanette Boleantu

    The Expatriate Group strongly recommends that appropriate tax advice be sought prior to the withdrawal of any RRSP balances. There are two tax consequences that exist for withdrawing registered products before you retire –regardless of your tax residency status.

    1. The amount you redeem is taxable income: You have to report the amount you take out as part of your worldwide income. At that time, you may have to pay more tax on the money — on top of the withholding tax. It depends on your total income and tax situation.
    2. You pay a withholding tax: As a non-resident when you redeem RSP there is a 25% withholding tax that is due to CRA. This withholding tax is the NON-RESIDENT TAX LIABILITY on the income received. If a lower amount than 25% is withheld at source or a T3 slip is issued you need to file and pay the difference.

    The financial institution will issue an NR4 notifying tax withheld at source in order to avoid filing a tax return as a non-resident. The Section 217 election allows a non-resident to voluntarily file a tax return so that they will have the same tax obligation as if they were a resident of Canada. This is a hassle and we do not recommend doing this. The only time a non-resident should file with CRA is if they received a T3 slip as a result of not changing their residency status on the address maintained with their financial institution.

    Before you decide to withdraw your RRSPs, make sure that you consider all of your options. Consult with a 2knowledgeable financial professional who can help you figure out the best way to go about making your withdrawals, and who can help you plan for your tax payments. Canadian tax regulations may provide relief from tax and penalties provided that the appropriate tax forms are filed with the CRA. For this reason

    The following illustrates the standard amount withheld for Canadian tax residents.

     

    Non-Resident Tax Calculator – Results

    Country of residence: Malaysia

    Calculation date: 2015-06-05

    Income type 1 from Canadian sources: RRSP/RRIF – Lump Sum Payment

    Income amount: CAD $ 14,000.00

    Tax rate: 25.0 %

    Amount payable: CAD $ 3,500.00

    Minus tax amount already deducted: CAD $ 0.00

    Balance owing: CAD $ 3,500.00

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Non-Resident Return to Canada: Canadian Repatriation

What you need to do when moving back home

The Expatriate Group strongly recommends that appropriate tax advice be sought prior to returning to Canada. As a Canadian citizen returning from abroad there is a lot to consider before you re-enter please consult a cross-border tax specialist. We can advise.

Step One: Determine Your Residency Date

Residency is based on establishing ties. You will still be a non-resident visitor for 1-2 months if until ties are established. In the year that you establish Canadian tax residency, you will be treated as a part-year tax resident. For the period of time you are a tax resident of Canada, you are subject to Canadian tax on your worldwide income. As a non-resident of Canada, you are only subject to Canadian tax on Canadian source income. Make sure that you receive foreign payments (bonus, severance package, final pay check, international savings transfer) prior to becoming a tax resident of Canada. If money is received after residency this will be included as taxable income.

You will file a tax return on April 30th deadline of the year that you arrive back in Canada (most likely a partial year return). On this return your re-entry date will reflect the day that you became a tax resident of Canada. Caution: Please ensure that all your financial affairs are in order prior to establishing any major ties back in Canada. It is important to keep a clear picture of you as a non-resident. Remember that your cash should arrive before you to avoid CRA viewing this money as taxable income. It is essential that you carefully plan the date when your Canadian residency starts. Seek professional advice on ties to Canada to establish residency date for tax filing purposes.

Please let me know your experience and provide feedback that other Expatriates returning home will find useful.