Certainty of Intention and Immigration Trusts

The Federal Court and Federal Court of Appeal decisions in Antle v. Canada suggest that such professionals should make sure that their clients understand the nature of what a trust is before establishing an immigration trust.
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FBAR – Implication for Canadian Permanent Residents and Citizens

The Internal Revenue Service (IRS) is increasing its focus on reporting of foreign financial accounts by U.S. persons. Despite recent protests by Finance Minister Jim Flaherty on the matter, the changes seem like they are going to go ahead. There are potentially significant implications that representatives should advise their US clients about. Put simply, just because your US clients are becoming Canadian permanent residents or citizens does not mean that they are absolved from reporting their taxes to the United States.

The Report of Foreign Bank and Financial Accounts (FBAR) is an IRS form. Any United States person who has a financial interest in any financial account in a foreign country where the aggregate value of the accounts exceeds $10,000 is required to file the form. Accounts that require reporting include Canadian bank accounts, investments, mutual funds, life insurance, RRSPs, RESPs, TFSA’s, etc. With such a low threshold, the FBAR reporting requirements likely apply to many of your American clients.

The IRS website states that failure to file an FBAR when required to do so may result in civil penalties, criminal penalties or both. If your clients have not been filing an FBAR when they were required to do so, then they can file the delinquent FBAR reports and attach a statement explaining why the reports were filed late. The IRS website states that no penalty will be asserted if the IRS determines that the late filings were due to reasonable cause.

Clients who knowingly fail to file the FBAR report could be subject to civil penalties equal to the greater of USD $100,000 or 50% of the total value of the foreign assets per year, assuming the client is non-compliant for multiple years. In addition, clients could be subject to criminal charges as well.

Margaret Wente in the Globe and Mail recently wrote a piece about this that is worth reading. One particular paragraph of note stated that:

As many as a million U.S.-born residents of Canada are caught in this Kafkaesque nightmare. Finance Minister Jim Flaherty has written an indignant letter to leading U.S. newspapers. All of us are getting wildly conflicting professional advice. At first, Brian and his wife, who are by no means wealthy, decided to come clean. But when they were told they’d be on the hook for $250,000, they changed their minds.

The issue has received the attention of Finance Minister Jim Flaherty.  In a letter published in several US publications, he wrote that:

Another issue, this one affecting more directly the large numbers of dual U.S.- Canadian citizens and their relatives living in Canada, is the IRS’s Foreign Bank Account Report (FBAR) filing requirements.
Most of these Canadian citizens, many with only distant links to the United States, have a very limited knowledge of their tax reporting obligations to the United States. These are honest and law-abiding people, including many senior citizens now caught in a nerve-wracking situation. Moreover, because they work and pay taxes in Canada, they generally do not owe any taxes in the United States in any event. Their only transgression is failing to file the IRS paperwork they were never aware they were required to file.
These people are not the targets of a crackdown on tax evasion. These are not high rollers with offshore bank accounts. These are people who have made innocent errors of omission that deserve to be looked upon with leniency
Rather, these people are typically hard-working citizens of our two great countries.
Faced with the knowledge that they do have an obligation to file U.S. tax returns (even if they most often do not actually owe any taxes) they want to do the right thing.
But the threat of prohibitive fines for simply failing to file a return they were unaware they had to file, is a frightening prospect that is causing unnecessary stress and fear among law abiding hardworking dual citizens.
We support efforts to crack down on legitimate tax evasion. These measures, however, do not achieve that goal.

I will post updates on this issue as they arise.  However, as it currently stands, you will be doing your American clients an immense favor if you explain this issue to them, and refer them to an experience tax lawyer or accountant.

Residence Under the Canada-Russia Tax Treaty

We often have clients approach us asking how they can immigrate to Canada without become tax residents. There are a variety of ways to do this, and the recent Tax Court of Canada decision in Denisov v. The Queen highlights one issue that those interested in not being tax-resident need to be prepared to address.
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Immigrant Investor Fined For Tax Evasion

On July 15, 2010, the Tax Court of Canada declared that S Korki, an Immigrant Investor from Iran, would have to pay gross negligence penalties for failure to fully disclose income.

In the 2002 and 2003 taxation years, Mr. Korki declared a net income of $19,100 and $22,312 respectively. After carrying out a Net Worth Analysis during an audit, the CRA reassessed this amount to $287,340 and $177,380.

Over the court of the whole affair, the Canada Revenue Agency pounced on inconsistencies in testimony, statements from officers and friends, obtained evidence of wire transfers, discovered undeclared offshore accounts, and real property sales.

They found that the applicant had not met the burden of showing that the reassessment was wrong. They further found that gross negligence penalties were appropriate. These penalties add 50% to the amount of tax owing.

The case stresses how important it is for immigrant investors to obtain proper tax advice prior to immigrating.