Author Archives: Avner Polatsek

apple iMac

The Lowdown on Apple’s Tax Controversy

Arguably the biggest financial headlines, this week, all have to do with Apple. CEO Tim Cook has been forced to defend Apple’s tax practices and prove that they have been working strategically, but not illegally, to pay the least amount of taxes possible.

As tax specialists who work with cross-border tax situations, we will be following this story closely to see how Cook weathers this storm. Each news source seems to be focusing on different parts of the story, so we thought that it would be helpful to put together a little summary of why Apple was targeted, what they are claiming, and which tax laws are being called into question.

The Situation: Using offshore entities

“Today’s hearing was called to air accusations the iPhone maker has created a web of offshore entities to avoid paying billions of dollars in U.S. taxes.

Apple, in written testimony, denied any wrongdoing and said the company was one of the largest taxpayers in the U.S., having paid $6 billion last year.

Cook and two other executives — including Chief Financial Officer Peter Oppenheimer — were to appear before the Permanent Subcommittee on Investigations. The panel, led by Levin, in a report yesterday said Apple’s subsidiaries include three entities that have no home country for tax purposes.” – (Bloomberg)

The Specifics: Ireland’s involvement

“The U.S. investigation showed that Apple had paid just 2% tax on US$74 billion in overseas income, largely helped by Irish tax law, which allows companies to be incorporated in the country without being tax resident. Britain had a similar rule but changed it over 20 years ago to stop tax avoidance.

Unlike Britain, however, Ireland is heavily dependent on foreign companies such as Google, Pfizer and Intel for employment – 150,000 of a labour force of around 2 million – and for its much-vaunted economic model of export-led growth.

While Ireland has successfully repelled attacks on its corporate tax rate from European neighbours, U.S. pressure is more difficult to ignore.

By closing its own loopholes, Washington could threaten Ireland’s status as European hub for multinationals, and economists said it would be better for Ireland to act first.

‘In the long run, the U.S. Congress, if they wanted to, could wipe out those 150,000 real jobs, and we don’t want to provoke people by over-egging it, by doing things that are clearly upsetting the U.S.,’ said John FitzGerald, a professor at the Economic and Social Research Institute (ESRI), an Irish think-tank.” – (Financial Post)

The Future: What people are saying about the future of corporate tax strategy

Littered throughout all of the Apple tax controversy coverage are a few opinions about potential changes to American tax laws. Christopher Matthews of TIME Business writes:

“One idea that’s been bandied about for many years, but which hasn’t made a lot of headway, goes by the not-so-glamorous name “formulary apportionment.” Under this system, the U.S. could tax companies based on what percentage of sales occur here. For instance, if Apple sold 30% of its products in America, then the U.S. government would tax 30% of Apple’s income at the statutory corporate tax rate of 35%.

This sort of system would work best if it were implemented internationally, but as the Brookings Institute points out in its analysis of formulary apportionment, the U.S. could move to this sort of system unilaterally because the move would actually incentivize companies to report their profits in America. This is because we’d be taxing only a fraction of profits regardless of where they’re reported, and this dynamic would motivate other countries to jump aboard a formulary apportionment system as well.” (TIME)

If you’re dealing with US taxes while living in Canada or have any questions about doing business in other countries, talk to us! As I said before, we are tax specialists focusing on US and Canadian taxes.

 

tax audit

What do I do if I’m being audited?

Tax time is over! Now, along with the relief you feel after filing your taxes, you might be experiencing nervousness that you’ll be audited.

Don’t worry! People and businesses are audited all the time. If you have filed an accurate and honest tax return, you have nothing to be concerned about.

We know that telling someone not to worry doesn’t exactly help the situation, so we have prepared some practical tips if you do happen to find yourself in the middle of a tax audit. In this case, we’re talking about personal tax audits.

 

5 Tips For A Painless Personal Tax Audit

1. Let them start the conversation.

If you’re being audited, it could be for a plethora of reasons. Resist the urge to jump to conclusions and allow your CRA Representative to give you all of the details about why you are being contacted. You might be a part of a computer-generated audit and aren’t even suspected of a major offence.

2. Stay on topic.

Now that you know the details of your audit, only provide information the CRA is asking for. This isn’t because we are concerned that you’re going to spill the beans on something, but unnecessary information can make an audit go slower.

3. Be a pleasant person to deal with.

Auditors are people and spend a good chunk of their time with individuals who aren’t happy to see them. The entire auditing process will be a lot less painful if you are patient and cooperative with your auditor.

4. Show them your organizational prowess.

If you have well-kept and accurate financial records, a tax audit will be a breeze.

Now’s the perfect time for us to remind you that it is important to keep your tax paperwork organized and easily accessible for 6 years. There are some exceptions to this 6-year rule, so check with us if you are unsure.

If they ask you for a receipt from that charity you gave to last year, you can pull it out of your labeled folder and feel good about your amazing bookkeeping skills.

5. Get help.

It’s never a bad idea to contact a tax professional if you are concerned that you don’t have the knowledge to weather a tax audit storm. Accountants are trained in tax law and will be able to assist you with an audit. If you already have an accountant and have filed your tax return with them, make sure to call them before you even contact the CRA.

If you’re a US citizen living in Canada and either the IRS or the CRA audits you, make sure to choose an accountant who has knowledge of both country’s taxes.

Please get in touch with us if you have any questions about your taxes or would like us to guide you through an audit.

foreign currency

A Beginner’s Guide to Foreign Tax Credit

If you’re new to living in Canada and are a US citizen, you might not know the details of the Canada – US Tax Treaty. This doesn’t seem like a subject the average person needs to be well versed in, but if you’re a US citizen living in Canada, you should get familiar with the way these neighbours have worked out their relationship.

The main benefit to knowing about the treaty is so that you don’t pay double the taxes you owe and also that you don’t unintentionally neglect to file certain forms and have to pay fines. No one wants that!

The Canada – US Tax Treaty was signed in 1980 and can be used as guideline for how to make sure that your taxes are correct in both countries. (Note: You do need to file in both Canada and the US.)

The Big General Rule

If you’re a US citizen living and working in Canada, you will be paying Canadian taxes for the money you earn in Canada. The Canada – US Treaty allows the taxes you pay in Canada to be deducted from the taxes you would pay in the US, lowering the possibility of you being taxed twice on the same earnings. This is known as the Foreign Tax Credit.

Qualify for the Foreign Tax Credit:

According to the IRS, You can only claim income tax you’ve paid to Canada as a Foreign Tax Credit if:

  1. The tax was imposed on you.
  2. You paid or accrued the tax.
  3. The tax is the legal and actual foreign tax liability.
  4. The tax is an income tax (or a tax in lieu of an income tax).

What do I need to do?

If you would like to claim a foreign tax credit (which shows that you paid taxes in Canada and don’t want to pay them again in the US), you’ll need to complete Form 1116 and attach it to your US tax return. You could also claim Canadian taxes as an itemized deduction.

It’s always best to talk to a tax professional before completing and sending these forms, as there might be exceptions or other rules to consider.

There is a limit!

When you file a foreign income tax credit, there is a limit to how much foreign tax you can receive a credit for. Fortunately, you can carry forward unused foreign income tax for 10 years.

Documents to hold onto:

If you plan on claiming a foreign tax credit, you’ll want to keep copies of:

  1. Your foreign tax payment receipt
  2. Your foreign tax return
  3. Any payee statements showing that you had foreign taxes reported to you.

Other items of interest from the US – Canada Tax Treaty

US Social Security

US social security paid while you’re a Canadian resident is taxed in Canada as if they are a part of a Canada Pension Plan. US citizens will have 15% of this benefit exempt from Canadian tax.

Alimony

Alimony or child support payments made by a Canadian source to a US citizen are tax-exempt, just as they would be in Canada.

The US – Canada Tax Treaty and the Foreign Income Tax Credit can save US citizens living in Canada significant money and should be taken advantage of. That being said, when you’re claiming any credit, you should make sure that you are following all of the laws. The best way to ensure that you’re filing any tax return correctly is through the guidance of a tax professional.

Contact us if you would like any help claiming your Foreign Tax Credit!

time clock

Extend your tax time and extend your deductions

Our American friends living in the US are generally used to dreading April 15. Yes, this is the tax deadline in the US, but we are happy to inform you that if you are a US citizen living abroad (like in Canada, for example), you have extra time!

A Canadian resident filing US taxes has an automatic extension, pushing back their tax deadline to June 17. We can hear you let out a sigh of relief from here. It is important to mention that if you owe any taxes, you still need to pay by April 15.

If you’re not a US citizen living in Canada, you can still request a little more time to file. The process is surprisingly straightforward. All you need to do is fill out a Form 4868 and request an extension. You can even do it online. The automatic extension date moves to October 15 and you breathe that sigh of relief we mentioned earlier. As with the handy living abroad extension, this one still requires you to pay what you owe on April 15.

Now, instead of running around, gathering receipts and panicking to fill in those tax forms, you can get yourself truly organized.

One of the biggest reasons that people miss out on tax refunds is that they are rushed and don’t take advantage of all of their deductions. With a few extra months to hunt around the house and gather information, you’ll be well on your way to filing the best and most accurate tax return you possibly can.

If you do owe money and are concerned that you won’t be able to pay the full amount by April 15, you can take advantage of the Online Payment Agreement. Citizens owing $50,000 or less (this can include penalties and interest) can apply to pay their taxes in installments.

Tax deadline extensions and payment schedules? We are full of good news, today!

AP Tax Group is an accounting firm specializing in US and Canadian tax. We are located in Toronto, Ontario. Please contact us for information about our services or to schedule an appointment.

3520 tax form picture

Being proactive could save you thousands in taxes

Many of our clients are US citizens living in Canada, looking for help with their taxes and the complications that can come from living internationally. The most common situation that we run into is one where a US citizen living abroad is unaware of the extra forms they need to file to disclose certain information.

A few forgotten forms don’t seem like a big deal, right? Unfortunately, failing to understand your tax obligations and neglecting to file these forms could result in major fines.

We write posts like this because we want to help you avoid these penalties. The way to do that is by being proactive!

Here are a few examples of these extra forms (and the fines you could receive if you don’t file):

Form 5471: You need to file this to report if you’re a 10% or more shareholder in a foreign corporation. (Fine: $10,000 per year you don’t file, per person)

Form 8865: You need to file this to report if you’re a 10% or more partner in a foreign partnership. (Fine: $10,000 per year you don’t file, per person)

Form 926: You need to file this to report any property transfers to a foreign corporation including undistributed earnings. (Fine: 10% of the property transfer, up to $100,000 or without limit if you intentionally withheld the information)

Form 3520: You need to file this if you are a US citizen and have a foreign trust. (Fine: $10,000, a percentage of your property’s gross value, distributions you’ve received, or your trust’s assets). We did a full blog about this form!

Living internationally and filing taxes the same way you did when you were living in the US isn’t enough. There are additional forms that you need to file. We’re happy to sound like a broken record when it comes to saving you from fines and a backlog of paperwork!

Speaking of paperwork, at AP Tax, we will gladly walk you through the process of catching up on your tax forms and putting you in good standing with the IRS. Again, the sooner you correct this neglect, the better.

The IRS started a Streamline Filing Procedure to help those who were simply unaware that they had extra forms to file and there’s a possibility that your fines will be forgiven. Head to our Streamlined Filing Procedure blog post for more information and contact us if you would like to take advantage of this program.

tax scams

Part 2 – Tax Scams: Protecting Yourself Against The Dirty Dozen

As continued from our last post, we’re summarizing the IRS’s Dirty Dozen list of 2013 tax scams and providing you with ways to defend yourself against these cons. Please feel free to comment below if you have any questions about these scams or if you have a story to share.

Part 2 of this list focuses on people trying to pull one over on the IRS. Many people might not know that these items are considered to be criminal acts, but filing a false tax return has serious repercussions.

7. False/Inflated Income and Expenses

While everyone wants to receive a nice sizeable tax refund falsely claiming that you have made income you haven’t or expenses you didn’t pay in order to get a larger refund is against the law. A popular example of this is filing false information to receive the fuel tax credit or child tax credit.

8. False Form 1099 Refund Claims

This scam involves filing a fake information return (like a Form 1099 Original Issue Discount) in order gain access to funds in a “secret account” that the US government keeps for citizens. This is the most conspiracy theory-style scam we’ve come across, but our answer to this one is the same as the other scams in Part 2: don’t submit false information in order to receive money you’re not entitled to.

9. Frivolous Arguments

Anyone suggesting that you make “unreasonable and outlandish claims to avoid paying taxes” is encouraging a frivolous scheme. Claims like the ones the IRS lists on their website will likely be thrown out of court. For example, someone might claim that paying taxes is voluntary and that the law doesn’t require them to pay.

10. Falsely Claiming Zero Wages

There are a few ways that people try to claim zero wages, but all of them are considered to be scams by the IRS. Someone might file a statement saying that the wages reported on their return are incorrect or might dispute what qualifies as a wage. Schemes like this could end up with a $5,000 penalty.

11. Disguised Corporate Ownership

Disguising corporate ownership involves creating false entities in order to participate in everything from money laundering to underreporting income.

12. Misuse of Trusts

While trusts can be used correctly for tax and estate planning, many people fall into the belief that trusts can dramatically reduce their taxable income and give other extreme benefits. As with many schemes like this, a taxpayer has been mislead and promised unrealistic deliverables. I know that we have said this many times through these blog posts about tax scams, but you should always use a trusted professional to give you tax advice or help you file your taxes.

Almost all of the items on this year’s Dirty Dozen list have appeared in past years. As tax professionals, this tells us that the scam artists involved are still preying on taxpayers and more awareness is needed. We specialize in taxes and are always happy to answer any of your questions. Get in touch!

Did you read Part 1, where we discuss more predatory tax scams? Read the post here.

tax scams

Part 1 – Tax Scams: Protecting Yourself Against The Dirty Dozen

As always, around tax time, the IRS posts their “Dirty Dozen”, which is a list of scams they have become aware of for 2013. The list lets us know what cons we should all be watching out for and is posted around this season because there is an increase in scams around tax time. While we’re all thinking about our finances as we do our taxes, it’s a good opportunity to be reminded that we need to protect ourselves and our information.

Whether you’re an American citizen living in Canada or not, you could be the target of scams and should know how to defend yourself. The Dirty Dozen is quite intensive, so we’ve simplified each item and included ways to protect yourself against tax time scams.

1. Identity Theft

Many people have heard of identity theft, but don’t always know what the scam entails. Most commonly, criminals will steal your personal information (often your Social Security Number) and then commit crimes usually relating to fraud. An example of identity theft would be filing a fraudulent tax return with stolen information in order to collect a refund.

Protect yourself against identity theft by guarding your personal information and reporting any stolen cards immediately.

2. Phishing

If you’ve ever received an email directing you to another website and asking you to provide personal information, you may have experienced a phishing attempt. Phishing scams usually disguise themselves as legitimate businesses or organizations, giving you a false trust that they actually need this information.

Protect yourself against phishing by never providing your personal information to someone who has requested it electronically. Most businesses will never ask for your information out of the blue and if they do, call and confirm that it is necessary before doing anything else.

3. Return Preparer Fraud

A legitimate tax professional should always sign the tax return they prepare for you and include their Preparer Tax Identification Number (PTIN). One of the scams, this year, is people pretending to be qualified to prepare taxes and then sending false tax returns.

Protect yourself against return preparer fraud by only hiring tax professionals with a PTIN and with a good reputation in your community. Remember, you’re responsible for the information on your return, regardless of who has filed for you.

4. Hiding Income Offshore

The fact that the IRS is posting this as a part of their Dirty Dozen shows just how serious they are about people neglecting to disclose information about accounts outside of the US. Obviously, they are talking about large sums of money kept in foreign accounts, but if you are a US citizen living in Canada and using Canadian bank accounts, you still need to file certain forms to disclose this information. Read our full post about that here.

Protect yourself from paying penalties because you failed to disclose your foreign accounts by filing correct tax forms. Contact us if you would like help!

5. “Free Money” from the IRS

This scam advertises, often in print, to help you file your taxes and receive all kinds of returns you didn’t even know you were entitled to. After you’ve paid for the help and filed your return, you find out that you weren’t eligible for these returns. Common “Free Money” scams center around the American Opportunity Tax Credit or Social Security refunds.

Protect yourself from “Free Money” scams by researching the information you receive about tax returns. Lots of these scams are only effective if you don’t do your own research.

6. Impersonation of Charitable Organizations

Unfortunately, scam artists use natural disasters to take advantage of both victims of the disaster and those who wish to help. Usually, the scammer will contact a disaster victim and say that the IRS wants to help them file their taxes and receive returns. They will then use the information they receive for identity theft. Alternatively, fake charities also pop up, claiming to work in disaster relief and asking for your financial help.

Protect yourself from impersonation of charitable organizations by never releasing your personal information over the phone and by only giving to recognized charities. Use the Select Check to find information about charities before you participate with, or give to, them.

Part 2 coming soon. Tax Scams: Protecting Yourself Against The Dirty Dozen.

Information for this post comes from the IRS website.

health care tax

Hurry! The Healthcare tax could hurt your Streamlined Filing Procedure

Americans living in Canada who haven’t been filing taxes might have an added incentive to file in the near future thanks to Obamacare. As The Globe and Mail reported, earlier this year, US citizens living in Canada need to file their income tax in both countries, but usually don’t need to pay anything in the US because the taxes they’ve paid in Canada offset any tax owing in the US.

Now, there’s a potential wild card. As Barrie McKenna reports, the new US health care tax will not be offset by the usual foreign tax credits.

This means that some US citizens living in Canada will now need to pay taxes to the IRS. If you’ve been reading our blog and are familiar with the Streamlined Filing Procedure, you’ll know that the IRS is giving Americans living abroad the chance to settle up their unfiled tax returns without penalties as long as they owe less than $1,500 a year. This meant that US citizens who had been living in Canada and had no idea that they were supposed to file taxes in the US could find themselves off the hook for neglecting to file.

If you would like to learn more about your legal obligation to file in both the US and Canada, read our post about filing in both countries.

The Globe and Mail’s Barrie McKenna expands on the topic of what the healthcare tax could mean for US citizens taking advantage of the Streamlined Filing Procedure:

 “The new tax could put some individuals over that [$1,500] threshold, making them ineligible for the amnesty from 2013 onward, said Ian Macdonald, a U.S. tax expert with PricewaterhouseCoopers in Toronto.

‘That [amnesty] may be in jeopardy now. People may not be able to use it,’ he said. ‘I would hope that most people would [choose to] get through this streamlined process now.’

The situation is further complicated by new, higher U.S. income tax rates that also kick in this year, pointed out Jim McConnery of Welsh LLP in Ottawa.

That could mean some expatriates owe U.S. taxes for the first time.”

Read the entire article in the Globe and Mail article here.

If you’re a US citizen living in Canada and you haven’t been filing US taxes, now is a good time to visit your tax professional and get help to start the Streamlined Filing Procedure. The new health care tax is an added bonus incentive, but we think that the IRS forgiving late penalties is a good enough reason to take advantage of the Streamlined Filing Procedure, don’t you?

If you would like to speak with a tax professional in Toronto, please get in touch with us!

foreign currencies

Tax Dictionary: Form 3520

A 3520 form lets the IRS know what money is moving between the US and other countries. If you are a US citizen and are transferring money to or from a foreign trust, you should be filing Form 3520.

While transferring money between US and international trusts isn’t necessarily taxable, the IRS still requires you to file the form so that they can track what is coming in and going out of the US.

When do I need to file a 3520?

Generally, grantors or beneficiaries of a foreign trust need to file a Form 3520 if they’ve have had a reportable event. The form is due on the same date as their tax return.

Reportable Events

Reportable events refer to major changes in a foreign trust. Of course, we all have different yardsticks for how we measure major changes, so here is a list of what the IRS considers to be a reportable event:

  • forming a foreign trust
  • transferring cash or assets to a foreign trust
  • receiving distributions from a foreign trust
  • receiving a bequest from a foreign person of more than $100,000
  • receiving a gift of more than $14,723 from a foreign person, partnership, or corporation
  • making any loan transactions between a foreign trust and a beneficiary

There are some exceptions to filing certain events on a 3520, but we highly recommend that you consult with your accountant before omitting anything from this form.

Failing to file in a timely manner or providing incorrect or incomplete information could set you back $10,000 or a percentage of your property’s gross value, distributions you’ve received, or your trust’s assets.

In other words, file on time and file correctly! As always, we are happy to help with Form 3520 or any other tax information for US citizens living abroad.

Note:

If you have foreign accounts, you may need to file a Report of Foreign Bank and Financial Accounts (FBAR). Take a look at our post “If I am a US citizen living in Canada, do I need to file a US tax return?” for more information.

 

Canadian Flag

If I am an American living in Canada, do I need to file a US tax return?

Ask an accountant:

Question:

If I am a US citizen living in Canada, do I need to file a US tax return?

Answer:

The short answer to this question is a simple, “Yes.” Americans living in Canada are required, by law, to file complete tax returns along with a report about their foreign bank and financial accounts (FBAR).

This subject has been a popular one, lately, as many Americans are just learning about these obligations and the consequences of not filing. Because US citizens living in Canada usually file their Canadian tax returns, most think that they are covered and don’t need to worry about anything south of the border.

Unfortunately, this is not the case. The IRS requires any US citizen to complete their tax returns and pay anything that they owe. Fortunately, what you’ve paid in your Canadian taxes works against what you would have paid in the US.

The process is really quite simple. The problem is that no one seems to know that, simple or not, they still have to file. In fact, neglecting to file tax returns can make you subject to sizeable fines, even if you owe very little or nothing at all.

Why do you have to file in both places?

So many people are confused because Canadian tax law requires you to file taxes where you live and American tax law requires you to file where you have citizenship. This doesn’t mean that you have to pay twice as much, but does mean that you need to do your due diligence and get your paperwork to the correct places.

I haven’t been filing! What do I do?

I have wonderful news for you! The IRS recently launched a process to forgive US citizens living abroad for unintentionally neglecting to file US tax returns and is waiving fines to qualifying Americans. In other words, if you act now, you can start fresh and not have to pay any overdue fees. The program is called the Streamlined Filing Compliance Procedure.

The best thing you can do is contact an accountant who deals directly with US citizens living in Canada. There is a fair amount of paperwork to go through, but the process has been made more efficient because of the sheer volume of people recently informed of the law.

Check out our full blog post on the Streamlined Filing Compliance Procedure, here.

Additional Information:

– Because you’re living abroad, you have an extra two months to file your US tax return, making the deadline: June 15.

– Check with your accountant to see if you can qualify for form 2555. This form attaches to your US tax return and can exclude up to $92,900 of income earned in Canada from your report if you have been living in Canada for 330 days of the last 12 months.

As always, we are happy to help with any questions you may have! Please contact us to set up an appointment with an accountant who specializes in US citizens living in Canada.