In this article, Cardinal Point’s Terry Ritchie looks at new tax changes that took effect on October 31. The IRS released inflation adjustments for more than 40 tax provisions, including the 2014 tax rate schedules and other rates, exemptions and changes. In particular, advisors with U.S. citizens as clients, or those who help Canadian clients who own U.S. property/shares, should look at the U.S. estate tax exemption for 2014.
Articles
The First Canadian in the White House?
Our very own, Terry Ritchie, recently wrote an article for the website, Advisor.CA. He touches on the latest news surrounding Ted Cruz. Cruz, a U.S. senator, has decided to renounce his dual Canadian citizenship to prevent confusion regarding his political loyalties, experts suspect, because the Republican Party has shortlisted him as a candidate for the presidential election in 2016. Ted Cruz, a U.S. senator from Texas, may be attempting to avoid the same election complications that plagued President Barack Obama when his citizenship came under fire prior to becoming the 44th U.S. president due to living abroad during his childhood and having a father from Africa. Cruz was born in Calgary and his American mother and naturalized American father relocated to the U.S. when he was four years old.
Technically Cruz is both a Canadian and American citizen, and according to the U.S. Constitution is eligible to run for president, but when a candidate’s birth origin is ambiguous, a phenomenon called “birtherism” sometimes develops that involves political opponents publicly disparaging and questioning a politician’s patriotism.
The tax and financial implications are minimal but could have been serious had Cruz lived in and reported income taxes to Canada as a dual U.S. citizen. The U.S. Internal Revenue Service requires all American citizens, regardless of residence to report income taxes as U.S. income. Conversely, Canada collects income taxes from only those Canadians living within the country’s border. The American law has become more enforced since the Foreign Account Tax Compliance Act was implemented in 2010, compelling many ex-patriot Americans to renounce U.S. citizenship to avoid paying higher taxes.
In a single fiscal quarter, according to the U.S. Treasury Department, 1,130 Americans renounced American citizenship, whose names are recorded in the Federal Register. The public record can be viewed by anyone, and accounting professionals can search for their clientele.
In a statement by Cruz, he claimed to have no awareness of his dual citizenship and said, “I have never taken affirmative steps to claim Canadian citizenship, I assumed that was the end of the matter… Nothing against Canada, but I’m an American by birth and as a US senator, I believe I should be only an American,” Cruz said.
There has been no confirmation that Cruz will indeed run for presidential election, but as a Hispanic former presidential legal adviser and Tea Party backed policy maker, some experts consider him a strong contender and his inner circle of advisors have indicated a bid.
How to Handle Cross-Border Divorce
Recently, Jeff Sheldon and Terry Ritchie were featured in Advisor.CA to discuss the topic of divorce. Divorce can disrupt even the most solid financial plan, especially when cross-border considerations are involved. We’ve seen many planning cases where one person moves from Canada to the U.S. or vice versa for marriage. For those clients, the tax impact can be significant. Identifying the type of assets for distribution, their locations and the cost basis of non-retirement plan assets are all critical.
Property transfer due to divorce could have differing Canadian/U.S. tax results. Per U.S. transfer rules, unintended gift taxes could be imposed based on the spouses’ tax residency and citizenship. To find out what will happen if clients transfer property to each other, first determine if one spouse is a non-resident alien (NRA).
U.S. citizens are considered U.S. residents for a range of tax purposes, no matter where they generate/receive investment income, hold/transfer assets, or die. An NRA is generally subject to tax on U.S. source income and some types of U.S. investment or pension income. However, under the Canada-U.S. Tax Treaty, one may withhold taxes at source to address this obligation.
Canadian income tax doesn’t apply upon the sale of real estate as part of a divorce settlement. However, if one/both spouses are U.S. citizens, U.S. income tax could apply upon the sale/transfer. A U.S. tax resident can exclude up to US$250K of his share of the gain from U.S. income tax if certain qualifications are met.
It may be difficult to collect spousal and child support between both countries. Using Maintenance Enforcement may sometimes help. If paying alimony to a previous spouse who now lives in Canada, the U.S. citizen payor can deduct this amount under U.S. tax rules with documentation.
Tax Implications for Americans Living in Canada
In this video clip, Terry Ritchie updates Rob Carrick on the IRS crackdown on Americans who live and work in Canada but haven’t been filing their annual tax returns. There is serious documentation required by U.S. tax authorities regarding financial holdings. Last September, a new program was introduced for Americans living and working abroad: the Offshore Volunteer Disclosure program. Of the 5 to 7 million Americans who live/work abroad, only 740,000 actually filed a Financial Bank Account Report (FBAR) in 2011.
While only 18 parties have been criminally prosecuted for hiding assets, clearly there is a large percentage that doesn’t know what to do or where to go for advice. Every situation is different, but it’s important to talk to a specialist who understands these issues. Next year, when the IRS imposes the Foreign Account Tax Compliance Act (FATCA), traditional banks in Canada must comply and provide information. Following this, it will be harder to fight reasonable cause. For most Americans working in Canada, there is a Foreigner Income Exclusion imposed on employment income. This, plus the use of foreign tax credits, generally means there are no taxes owed, but the proper documentation must be filed with the IRS to be in compliance.
How U.S. Estate Tax Applies to Canadians with U.S. Stocks, ETFs
Cardinal Point’s Terry Ritchie continues his talk with Rob Carrick about U.S. estate taxes; this segment focuses on what they mean to Canadians who own U.S. stocks and ETFs. U.S. shares owned by Canadians are considered U.S. cited, and there could be U.S. estate tax filing requirements if they are valued at more than $60K (USD) upon death. If that’s the case, a U.S. estate tax return, IRS Form 706 NA, should be filed. The problem is that the full value of the worldwide estate must be disclosed, even though the Canadian is responsible to the CRA, not the IRS. Otherwise, some transfer agents may not distribute those U.S. shares through probate.
Ritchie then discusses how much money Canadians would need in estate to worry about estate taxes. If the Canadian has less then the $5.25M exemption ($10.5 for married couples), then there is no U.S. estate tax exposure. It’s a matter of filling paperwork, but not owing taxes.
What if a Canadian owns American stock indexes listed on the TSX? It’s not an issue, but if you buy the comparable version from a U.S. provider traded on a U.S. exchange, those are considered U.S.-cited and would be part of a U.S. estate tax valuation.
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