The first issue to cover is the US residency rules for tax purposes. There are 2 types of residency that can trap Canadians and put them in the IRS line of fire.

1. Residency through the Substantial Presence Test:

The IRS has a formula to calculate residency for US tax purposes. It is composed of a 3 year rolling average, giving different weights to the number of days in each year. If according to the test, the result is 182 days or less, the individual is not a resident, however, if the result shows 183 days or more, then the individual is considered a US resident for tax purposes and is obligated to file a return.  To see where you wind up, see the substantial presence test calculator on our website (http://www.ustaxesincanada.com/substantial-presence-calculator/).  If someone is considered a resident under this test, which is pretty easy as it requires only 122 days annually in the US, there is a get-out-of-jail-cheap card available to you. This is the closer connection exemption. This exemption requires the filing of form 8840 annually. It is a simple form that essentially asks you to show the Americans that you can’t be considered a resident of the USA because you are really a resident somewhere else. File this form annually by June 15^th and you can avoid any further US filing requirements. Failure to timely file this form can result in your being deemed a US resident for tax purposes for the year in question. Late filed exemption requests are not automatically accepted and can be costly to file.  This isn’t pleasant but it’s a simple form and will result in the elimination of the requirement to file a US tax return other than this specific form. This option is available only to those who spent less than 182 days in the US in that calendar year.

2. Residency through the Canada-US income tax treaty:

This method of avoiding US tax is available to those people who spend 183 days or more in the US in a calendar year. It too will result in the substantial elimination of US tax liability. However, this comes with a huge IRS gotcha. In order to claim this benefit, you are required to file a complete US resident return and claim a treaty exemption. To do this, you will need to prove that you are genuinely a resident of Canada and not a resident of the USA. This might be difficult if you are spending 240 days annually in the USA. However, this will eliminate the tax on income earned outside the USA.

However, income taxes are usually not the problem facing Americans living abroad. The major problem is the myriad information returns that one must file and the treaty does not eliminate this. You will be required to file a complete US tax return for the year with all required attachments and schedules. This will result in needing an FBAR, 3520/3520A for your TFSA, 8891 for your RRSP, 8621 for mutual funds and whatever other forms that may apply to you. The cost of preparing this return can be substantial, plus the penalties for not filing in a timely manner can be terrifying as well.

So how does all this affect you specifically? If you are a snowbird, don’t leave your tax situation to chance. Your winter in Florida might cost you more than you can possibly imagine. The good news is that most of these problems can be avoided with proper planning. Don’t wait until it’s too late. Call us at 1-800-905-0380 or contact us through the website (www.ustaxesincanada.com) and schedule a free consultation with our tax professionals who will advise you as to what the optimal strategies are for you and how to avoid problems in the future.

To summarize the issues at question, the court was asked to determine the rules regarding practicing before the IRS. Under the law as it is written, the IRS is permitted to determine who is permitted to practice before the IRS, meaning representing clients in audits & appeals. The IRS implemented the practice of requiring registration by stating that tax return preparation was considered practicing before the IRS. The plaintiffs in the case argued otherwise. The judge sided with the plaintiffs.

With the court ruling, the PTIN requirement is still permitted. However, the change here is that there are no requirements to get a PTIN number. Any individual who wants to prepare returns can now get a PTIN number if they are willing to pay the $63 US application fee.

With this change allowing anyone to get a PTIN number, what can people do to ensure they are using a competent tax preparer as opposed to anyone who can pay the fee? Note that we are not arguing the merits of tax preparer licensing. That is a political matter and anyone can have their own opinion on the subject.

The following are some suggestions to ensure that your tax preparer is competent and capable of preparing your returns. (These factors are geared toward the US expats in Canada)

1)     Hire our firm to prepare your return:

a) Our firm is experienced in dealing with Expat US tax and our people are experts on the subject.

2)     Hire an attorney, United States CPA or Enrolled Agent (EA) that has experience in Expat taxes: These 3 categories of preparers have already completed a difficult licensing exam; therefore, they would be more likely to be competent than someone with no licensing.

3)     Other factors that should be considered red flags. If you see these things, hire someone else:

a) You pay someone to prepare the return and the paid preparer sectionshows one of the following 4 descriptions:

i.     Is blank.

ii.     Says self prepared.

iii.     Says the return was prepared by an unpaid preparer.

iv.     Does not show a PTIN number.

b) Has your accountant ever told you the following? If so, run to someone else:

i.     “You don’t owe anything so you don’t have to file.”

ii.     “You only pay tax in the USA on income earned in the USA.”

iii.     “You can’t receive a refund, you didn’t pay anything.”

iv.     “I prepare your US return solely from your Canadian return, I don’t need anything else.”

c) Has your accountant ever asked you any of the following questions? If the answer is no, they may not be competent to prepare an expat tax return for an American citizen in Canada. (If your Canadian accountant prepares the return he may know some answers but will still need many more. These are some important questions, there can be others not listed here that are relevant)

i.     Did your accountant ask you about bank or investment accounts outside the USA.

ii.     Do you know anything about FBAR or FATCA?

iii.     Do you have an RRSP?

iv.     Do you own your own business?

v.     Are you a partner in a partnership or other non-incorporated entities?

vi.     Do you have an RESP for your children?

vii.     Do you have a TFSA for yourself?

viii.     Do you invest in Mutual Funds/REIT’s/ETF’s?

ix.     Do you have a holding company in Canada?

x.     Do you have any connection to an estate or trust in Canada?

xi.     Are your spouse/children US citizens?

1. If yes, did he mention anything about child tax credits or refunds available?

d) Please examine your most recent tax return or ask your accountant about the following forms to ensure they were properly reported in the prior year.

i.     Bank accounts with more than $10,000 in total – FINCEN Form 114

ii.     Total net worth greater than $200,000 – Form 8938 (Sometimes not needed)

iii.     RRSP/RRIF/LIRA – Form 8891 for each account

iv.     TFSA – Forms 3520 & 3520A for each TFSA account

v.     RESP – Forms 3520 & 3520A for each TFSA account

vi.     Ownership of greater than 10% of a Canadian corporation – Form 5471

vii.     Ownership of greater than 10% of a Canadian partnership – Form 8865

viii.     Ownership of Mutual funds/REIT’s/ETF’s – Form 8621

ix.     Transfer of property to a foreign company – Form 926

4)     Some general things to look for:

a) Is the company recommended by the Better Business Bureau or Chamber of Commerce in the region?

b) Are the accountants guaranteeing low prices or large refunds that seem outlandish?

c) Does the person seem too good to be true?

d) Can the accountant provide any references, either directly or from their website?

The above are things that we would advise you to look for in choosing your US tax provider. None of the factors are conclusive by themselves but should provide an indication as to whether the company is capable of looking after your needs.

Tax Rates:

Prior to this law being passed, the Bush tax cuts were set to expire at the end of 2012. All rates would have gone up for all taxpayers. As part of the ATRA, the 2012 tax rates were made permanent with one additional bracket. This new bracket will begin at $400,000 for single filers, $425,000 for head of household and $450,000 for those filing jointly. With these rates now being permanent and being indexed annually for inflation, individuals will be able to plan their affairs without worrying about rates expiring. The following tables will show the expiring rates, what the rates would have been without the ATRA and what the rates will be going forward.

Note that rates for those married filing separately are always 50% of the married filing joint.

Impact on Canadians

This new law will be beneficial to Canadians. With the lower rates being made permanent, most working Canadians will be able to continue not owing very much each year to Uncle Sam. However, those wealthy individuals who have large deductions in Canada might find themselves in a situation where they are unsure from year to year as to whether they owe money.

Extension of Capital gains and dividend rates:

Prior to this law, the reduced rates on Dividends and capital gains would have been eliminated. This would have resulted in dividends and long term capital gains being taxes as ordinary income. Under the Bush cuts, qualified dividends and long term capital gains were taxes at 15% flat. In addition, those people in the 10% bracket paid no tax on dividends or long term capital gains. The new law extends the 0 and 15% rates across the board and establishes a 20% tax on those in the highest income tax bracket.

Impact on Canadians:

The extension of these tax rates is beneficial. Had this law gone into effect, these items would be taxed as ordinary income and that would have resulted in much higher taxes on these items in the USA than in Canada. This could have left many average Canadians with taxes payable in the USA each year. This would have especially hit retirees hard with much of their incomes being investment based, rather than employment based. With these new rates in effect, the current system where Canadian taxes should cover the American taxes due will continue. The only people who are likely to have taxes due are the wealthier Canadians with long term gains as Canada generally taxes these at lower rates.

Alternative Minimum Tax (AMT)

Prior to this law being passed, AMT was expected to hit in 2013 at $33,750 for individuals, $45,000 for couples & $22,500 for those married but filing separate returns. This would have meant many Americans being caught by AMT. Even more so, those living abroad and filing separately as their spouse has no obligation, would almost certainly be caught by AMT. With this law, the AMT hits now at $50,600 for individuals, $78,750 for those married filing jointly and half of that for those filing apart from their spouse.

Another benefit to this law is that now AMT is to be indexed annually for inflation. It used to be that congress needed to pass a patch for AMT annually in order for it not to keep capturing more and more people. With this indexation, fewer people will be trapped annually.

Impact on Canadians:

Once again, this law brings positive news to Americans in Canada. With the higher exemption amounts, fewer Canadians will be caught. In addition, with the rates being fully indexed for inflation, there will be no annual worries as to whether someone will be caught by AMT.

Estate tax:

Prior to this law passing, it was expected that the estate tax rate for 2013 and subsequent years would be 55% for estates valued at above $1M. For those dying in 2012, the tax rate was 35% on estates larger than $5.12M.  With this new law, the 2012 limits are now permanent and will be indexed for inflation. The expected exemption for 2013 is approximately $5.2M. The tax rate on these estates will be 40%. In addition, the exemption amount can now be transferred between spouses, allowing for a much larger exemption for a family.

Impact on Canadians:

This law will impact all Canadians who have US estate tax liability. However, those families with estates between 1M and 5.2M will now not be required to pay anything. This will greatly reduce the number of Canadians with exposure to US estate tax.

Another group who may benefit from this are those who own real estate in the US. As estate tax is charged on all US property, Canadians owning property can be subject to estate tax. The increased threshold and reduced rate from what were the expected rates is a welcome change as it will exempt many Canadians from these taxes. The same formulas as before will be in place to calculate non-resident exemptions so this will just increase the exemption amount from what was expected.

Child tax credit/Additional child tax credit:

This is one of the few refundable credits available to Americans living abroad. In 2012, this credit was worth $1,000/child and it was scheduled to become $500 in 2013. However, with the passage of this law, the credit is permanently restored at $1000/child going forward. The refundable portion is set at $1000/child through 2017.

Impact on Canadians:

The extension of these credits is good news for Americans in Canada who are raising children. Through proper tax planning, they will now be able to get a refund of $1000/child without paying anything into the system up front.

These are some of the key features in the fiscal cliff law that will impact Americans in Canada. There are some other general clauses or businesses laws in place as well. For a summary of the law and other attributes, check out the following website. http://www.parkertaxpublishing.com/public/ATRA_2012_Analysis.html?goback=.gde_1884032_member_201223333

If you have any questions regarding how the fiscal cliff impacts you, your family or your business, make an appointment with our tax experts to guide you through and to help you plan for dealing with the American tax code.

There are 2 components to the Obamacare taxes:

1)     Medicare payroll tax increase on earned income

2)     Unearned Income Medicare Contribution Tax

1)   Medicare payroll tax increase on earned income:

Currently, the Medicare tax is 2.9%. It is imposed on wages, salaries, business and farming income.  This tax is paid 50% by the employee and 50% by the employer. Self employed individuals pay both components directly. This tax is part of the social security deductions taken directly from an individual’s salary. The new tax is to be .9% on earned income above $200,000 for single individuals, $250,000 for joint filers or $125,000 for those married filing separately. This .9% is in addition to the 2.9% currently charged.

WHAT is the IMPACT of THIS on AMERICANS in CANADA ?

The good news regarding this tax is that it will have a minimal impact on Americans living in Canada. This is because the medicare tax is considered a payroll deduction and those are covered in a separate totalization agreement between the USA and Canada. For those working in Canada, this tax can be avoided by ensuring that they are properly paying and reporting CPP/QPP, EI and any other required payroll deductions. Once these taxes are paid, individuals will not be required to pay US deductions as well.

2)   Unearned Income Medicare Contribution Tax

This is a new tax of 3.8% on the investment income. This tax is imposed on the investment income component of Modified Adjusted Gross Income (MAGI) at the following levels. The levels are as follows:  $200,000 for single individuals, $250,000 for joint filers or $125,000 for those married filing separately. MAGI is composed of investment income, (interest, dividends), earned income, (wages, commissions), or withdrawals from a qualified retirement plan. Earned income that was excluded in the foreign earned income exclusion is to be added back in calculating MAGI. The tax is imposed on the lesser of investment income, or MAGI above the threshold. To demonstrate how this will play out, see the following examples. For simplicity sake, these examples will be used for single people only.

A)     Jim has MAGI of $250,000. This is composed of $175,000 in wages and $75,000 in investment income. His MAGI is 50,000 above the threshold. Jim will owe the new 3.8% tax on the 50,000 because it is the lesser of investment income or income above the threshold.

B)     Jill has MAGI of $300,000. This is composed of $225,000 in wages and $75,000 in investment income. His MAGI is $100,000 above the threshold. Jim will owe the new 3.8% tax on the $75,000 as it is the lesser of investment income or income above the threshold.

WHAT is the IMPACT of THIS on AMERICANS in CANADA ?

This tax can impact Americans living in Canada; those married to Canadians are most vulnerable. This is due to the reduced MAGI limit of $125,000 for those who are married and file separately. For those who have income in or around the threshold, proper planning is necessary.

If you or anyone you know are an American citizen living in Canada and are concerned as to how these new taxes may impact you or your family, please make an appointment with our US tax advisors today. Don’t let these new taxes catch you off guard.

1)     Tax Free Savings Accounts (TFSA):

For ordinary Canadians these are great vehicles for saving money and avoiding taxes. Unfortunately, the USA doesn’t view them in the same manner. For American purposes these investment vehicles come with 2 problems.

1. All income earned in the TFSA is taxable in the USA. This may result in taxes payable in the USA on the income as there may not be sufficient tax credits available to avoid American taxes.
2. TFSA accounts are considered by the IRS to be a foreign trust. This results in a significant amount of additional paperwork to be attached to a tax return.

These problems make these investment vehicles unfavorable for an American residing in Canada. However, if the account is closed before December 31, we can file a final return for the trust in 2012 and there will be no hassles subsequently.

2)     Registered Education Savings Plan (RESP):

Similar to a TFSA described above, these vehicles are a great tool for saving for a child’s college education. Unfortunately, this vehicle has similar constraints to the TFSA.

1. In Canada, income earned in the RESP is taxable in the hands of the beneficiary when the money is withdrawn to pay for college. In the USA, the income, including government grants, is taxable annually when it is earned. This can result in double tax with the child paying tax on the income in Canada, and the parent paying tax in the USA.
2. RESP accounts are considered by the IRS to be a foreign trust. This results in a significant amount of additional paperwork to be attached to a tax return.

These problems make an RESP unfavourable for Americans in Canada. One solution would be to have a non-American spouse or grandparent open the account for the benefit of the child.

3)     Mutual Funds/ETF/REIT

Mutual funds are a standard form of investment. However, if you are an American in Canada, they are taxed in a highly punitive manner. In order to avoid the punitive taxes, a timely election must be made to reduce the penalties. The elections available are:

1. to record the income attributable to oneself in the current year; or,
2. to mark the investment to market which results in the reporting of the unrealized gain on the fund in the current year.

This can easily result in paying taxes on this income in both Canada & the USA as the credits may not be available on a timely basis. However, failure to make any election places you in a situation where the taxes will be punitive. The best solution to the mutual fund problem would be to sell off all Canadian mutual funds by the end of the year and replace them with ordinary stocks and bonds.

These are some key investment vehicles and how they impact Americans in Canada. For further information or specific questions regarding your situation, please send us an email (http://www.ustaxesincanada.com/contact/ ) or make an appointment with our US tax specialists (1-888-877-2505).