The IRS, Partnerships, Altruistic High Schoolers and Happy Holidays

A few housekeeping matters before we begin. This is my last blog for 2011, so I would like to wish my readers a Merry Christmas and/or Happy Holidays and a Happy New Year.

Last week I had a bit of a moral dilemma in relation to the Bloggers for Charity contest when I received a bid of over $1,000 from Sarah a grade 11 student and Founder of the Me to We club at Oakridge Secondary School in London. Sarah bid on behalf of the club, to be a Blogger for a Day, to blog about the schools charity of choice. The club has raised $1,076 to date to go towards building a school in Kenya through Free the Children. Although I appreciated the bid, I felt it was not in the spirit of the contest; that being the donation should be a donation that was only made because of the opportunity afforded by being a guest blogger and not a pre-ordained donation. I thus decided against accepting the bid. However, since the Bloggers for Charity contest mission was to raise awareness for charitable giving and I was so impressed by what the students at Oakridge have done, I decided post an excellent mini-blog by Sarah. The blog politely admonishes us adults and discusses the clubs charitable efforts. Sarah's blog post follows below.

Thus, after all that, Tim Penner hangs on with a bid of $250 and will be my Guest Blogger on January 17, 2012. I have decided to match Tim's winning bid and will donate $250 to the Make-A-Wish Foundation of Canada.

Finally, I have recently experimented with some technical income tax posts, however, I will return to less technical posts in 2012. That is not to say I will not have any income tax blog posts, but the discussion will just be little less technical in nature. I have some great tax and non-tax topics on my agenda for 2012.

Corporate Partner Alignment Election

The 2011 Federal budget proposed rules to eliminate the income tax deferral for corporate partners. Many partnerships were unaware they had a time constraint to make an "alignment election" so that the partnership would have the same year-end as the corporate partners. Last Friday, the Minister of Finance Jim Flaherty announced the government will consider late alignment elections as filed on time if filed on or before January 31, 2012.

IRS Relief for Canadians- Far from absolute Relief

As noted in a prior blog the Globe and Mail was reporting the IRS was considering waiving filing penalties for US Citizens who live in Canada and had not filed the required U.S. income tax returns. Last week the IRS posted this Information for U.S. Citizens or Dual Citizens Residing Outside the United States. 

Assuming there will not be further specific special relief for Canadians; penalties will only be waived where the IRS feels there was "reasonable cause" for the initial non-filing. Reasonable cause is discussed in the link above and appears very subjective.

If you are a U.S. citizen or dual resident living in Canada and have not filed prior U.S. income tax returns, I urge you to engage a U.S. tax specialist to advise you moving forward. If you filed previously and were subject to penalties, you will want to touch base with your tax preparer to see if the reasonable cause provision can be used retroactively to obtain a refund of penalties already paid.

Oakridge Secondary School-High Schoolers Engaged in their Community

A guest post by Sarah, On behalf of the Me to We Club, Oakridge Secondary School, London, Ontario

The Blunt Bean Counter initiated bloggers for charity as a means of promoting charitable giving. Although my school club’s fundraiser did not fit the qualifications for the bid, Mr. Goodfield has generously offered space for this guest posting.

Today’s youth are often criticized for being apathetic and disengaged, but I am writing today to demonstrate that this stereotype is not true. This year, a group of students at Oakridge Secondary School founded a Me to We club. We were inspired by the Me to We organization, an international movement of socially aware and involved youth. As a club we didn’t just want to meet at lunch, we wanted to make a real difference! We set achievable goals for both local and global initiatives.

Our first event was Halloween for Hunger. Most adults roll their eyes when they see teenagers on their doorstep on Halloween, but we weren’t asking for candy for ourselves; we were collecting food. Our club collected 2741 pounds of generously donated food for the local food bank!

As students we are particularly motivated by the plight of less fortunate children around the world. Recently we participated in the Vow of Silence. We had two goals, the first being to raise awareness of children who are silenced by poverty, exploitation, and the denial of their basic rights. Our second goal was to kick off our year long campaign to raise money to build a school in Kenya, to help give youth an opportunity to receive an education and create a better future for themselves and the world.

Our Me to We club was formed out of our passion to be the change and make a positive difference in the world. Remember this success next time you are approached by your son, daughter, or neighbour, and be generous with your support. We are not just the leaders of tomorrow; we are the leaders of today!

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

The IRS may have a true Amnesty for Americans living in Canada

As discussed several times in my blog, citizens of the United States must file yearly income tax returns and numerous forms even though they live in Canada. A recent quiet amnesty program (quiet since no one really heard about it until the newspapers started reporting it) stirred up a hornet’s nest, into which Finance Minister Jim Flaherty jumped saying that “U.S. authorities are spreading unnecessary stress and fear among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.” 

Many U.S. citizens living in Canada filed U.S. income tax returns for prior years under the recent amnesty program, paying thousands of dollars in penalties, while often paying as much to income tax preparers.

However, there may be good news on the horizon. Barrie McKenna reports in today’s Globe and Mail that it appears that the IRS may have a final well publicized amnesty program where they may waive penalties for U.S. citizens who come clean and don't owe any U.S. taxes. Mr. McKenna reports the new rules will be announced within weeks.

Finally, Mr. McKenna reports that Americans who took part in the earlier amnesty program this year or one in 2009, may be able to reapply and get back penalties they paid.

The devil will be in the details, but stay tuned; U.S. citizens living in Canada may now have one last shot to come clean without any punitive financial cost.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

The Outrageous Penalties that can be assessed for not filing IRS Information Forms

The recent U.S. tax amnesty program that concluded in September was controversial to say the least. Even Finance Minister Jim Flaherty weighed in saying that “U.S. authorities are spreading unnecessary stress and fear among law-abiding Canadians in their aggressive pursuit of offshore tax cheats.”

In the last week or so there have been a couple articles stating that the IRS may be softening its position in regard to Canadians, however, in the meantime, the filing requirements remain unchanged.

There has been much written about the requirement to file U.S. returns. However, in this blog I want to discuss other U.S. forms that may be required for Canadians who have to file U.S. tax returns whether as U.S. citizens or deemed U.S. residents.

As I noted in prior blogs, I used to file U.S. tax returns, but have not done so for almost two years. Thus, this blog is just for information purposes; please see your U.S. advisor to ensure compliance with your filing requirements and confirm any penalty provisions applicable to you.

Form TD F 90-22.1

This form was front and centre in regard to the amnesty filing program. This form is required to be filed by any U.S. citizen or resident who has a financial interest in, or signature authority on, a foreign bank account (i.e. any account in Canada, whether a bank account or investment brokerage account).

Failure to file this form could result in penalties ranging from $500 for a negligent violation, to $10,000 for a non-willful violation to a maximum of $100,000 or 50% of the value of the account for a willful violation. The potential penalties seem absurd for not filing an information form. Some think the hidden agenda of this form is to provide the IRS full disclosure should you die and be subject to U.S. estate tax.

Form 8891

This form is used to report any Registered Retirement Savings Plan (“RRSP”) or Registered Retirement Income Plan (“RRIF”) you hold in Canada and the related income from your RRSP or RRIF. Before you have a heart attack, the income does not need to be reported if you elect to defer recognition of the income on your RRSP or RRIF until the time you receive it. By making this election you should be able to offset any U.S. tax by claiming a foreign tax credit for the Canadian income tax you pay upon the withdrawal of funds from your RRSP or RRIF. This form must be filed each year for each RRSP or RRIF you hold.

There is interestingly no penalty set out on Form 8891. I have been told by some that the penalty for not filing this form is up to 35% of the value of the RRSP or RRIF, however, I have seen others speculate that since no penalty is specified, the penalty could be as low as $135. In either event, I would file the form and not chance the higher penalty.

Form 5471

This form must be filed by Canadians filing U.S. returns who own at least 10% of the stock in a Canadian corporation. There are different filer requirements, so speak to your advisor as to which category you fall into. Under some filer requirements, you are basically required to translate your corporation’s Canadian financial statements into U.S. financial statements. This is a lengthy and very expensive exercise.

The penalty for non-compliance is $10,000 per missed filing and a reduction of foreign tax credits.

Form 3520

This form is required to be filed by any U.S. person who received a distribution from a foreign trust. For estate planning purposes many Canadians create family trusts that include themselves or children who are U.S. citizens or residents and thus fall under this filing requirement.

In addition, and more relevant for most Canadians, some U.S. tax specialists think that this form must be filed to report both Registered Educations Savings Plans (“RESPs”) and the Tax-Free Savings Accounts (“TFSAs”).

The penalty for not filing this form is equal to the greater of: (1) $10,000, (2) 35% of the property transferred to the trust, (3) 35% of the gross distributions from the trust, and (4) 5% of the gross value of the trust assets.

The above discusses some of the U.S. information forms U.S. citizens and residents may be required to file. The penalties do not seem proportional to the importance of the forms, so for the sake of Canadians required to file U.S. returns, let’s hope the IRS truly does soften its position on penalties for at least past transgressors.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.