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I am a Canadian citizen with a US green card. I moved back

to Canada in 2007 after...
I am a Canadian citizen with a US green card. I moved back to Canada in 2007 after working in the US for 2 years. I need advice on filing my taxes in both countries. My yearly income is in above $200, 000. I established a Family trust in Canada that allows me to pay dividends to my children over 18yrs who are then taxed at a low rate. How can this work on US returns. Also, how will RRSP savings help my US returns, and vice versa IRA/401 on my Canadian returns. Thanks.
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Answered in 12 hours by:
3/2/2009
Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10,760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
Verified

DearCustomer

 

WE need to establish first to what extent you might or might not have a continuing tax requirement to the U.S.

 

Are you intending to remain in Canada and abandon the green card?

 

How long were in a resident of the U.S.? (you say you worked for 2 years,but not including green card time, what is your total time in the U.S.)

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Customer reply replied 8 years ago

I intend to keep the green card including family members.

I already had the green card before I moved to the US in 2005, for a little over 2yr and few months.

Thanks.

FADD!

There are some new treaties between the U.S. and Canada regarding treatment of contributions and distributions from these accounts.

 

If there is no distribution or contribution there is no affect except on the country specfic action.

 

For example: If you are in Canada, and not taking a distribution from the 401(k) or not making a contribution, there is no issue.

 

So for my benefit, in crafting your answer, can you tell me what you contributions and distributions are (not in actual dollars), plan is.

 

For example: working in Canada for a U.S. company and making congtributiosn to a 401(k).

 

Or working in canada for a U.S.Compnay making contgributions to an RRSP?

 

Son is a U.S. Permanent Resident taking income from a canadian family trust.

 

What is the purpose of the family trust? paying medical bills for example?

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Customer reply replied 8 years ago

I moved to Canada and obtained a returning resident permit. Ultimately, I plan to have residences in both countries.

I incorporated a private business in Canada and a family trust. The family trust has shares in the corporation. Canadian tax law allows me to pay dividends from the corporation to the trust. It also allows me to pay dividends from the trust to my 18 and 19 year old daughters. I elected to pay each $30, 000 dollars which is then taxed at their low rate. I would have paid only the additional corporate tax. The first issue is if IRS will allow this or want to tax at my high bracket.

Will IRS also allow the tax free RRSP I make in Canada.

How can I contribute to IRA or any tax saving in US if I am currently resident in Canada with no income in the US.

 

Thanks.

 

Customer/p>

Dear FADD,

 

Thank you for getting back to me.

 

I appreciate your patiencde as I gather sufficient information to give you a taylored answer to your specific circumstances.

 

I understand that you are no working for a U.S.employer.

 

I also understand the nature of the distributions to your sons as beneficiaries of the trust.

 

What I need to make sure of is the status of your 18 and 19 year old. Are they also U.S. Legal Permanent Residents?

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Customer reply replied 8 years ago

My children and my wife have legal green card as well.

Thanks.

 

Customer/p>

Dear FADD,

 

I apologize that this is taking so long. But the newest Tax Treaty changes had to be concidered.

 

The following infomration is in regard to the RRSP:

 

RRSP distributions will be taxable to the U.S. on your resident U.S. tax return, less the cost basis. A U.S. citizen or resident alien who has received any distributions during the taxable year from an RRSP or RRIF must report the total amount of distributions received during the taxable year from all such RRSPs and RRIFs on line 16a of the Form 1040 and the taxable amount of all such distributions (as determined under section 72) on line 16b of the Form 1040.

 

Because of the U.S. Canadian Tax treaties, you can give contributions (payroll tax deductions) the same treatment on the U.S. return that they get on the Canadian return. (meaning pre-tax).

 

http://www.garygauvin.com/resources.htm

 

 

I am assuming the Company whose corporate earnings are being transfered to a trust for the benefit of your children is a Canadian company.

 

I need to know more about the company in order to determine how it is treated on your personal return in the U.S. In the U.S. we have what are called "pass through entites" which are the S-corp, LLC sole owner (single proprietorship), LLC partnerships.)

http://www.canadabusiness.ca/servlet/ContentServer?cid=1085667967282&pagename=CBSC_ON%2Fdisplay&lang=en&c=Supplements

 

Of the types of corporations and business types listed on this page, which are you?

 

 

 

 

 

 

 

 

 

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Customer reply replied 8 years ago

I still need clarification on the RRSP. I do not have any RRSP distributions. I have RRSP contributions which are actually after tax contributions which are then used as tax deductions on the Canadian tax return. Can I do that on my US returns?

 

The company is Canadian and I am the sole proprietor. How will the US return treat the payments to my children which in Canada are taxed on the children's low income level. However, a corporate tax would have been paid on all corporate earnings but overall ends up lower.

Thanks.

 

FADD!

With regard to the RRSP,

 

By tax treaty the U.S. gives them the same treatment as Canada. If they are tax deductible in Canada, they are tax deductible on your U.S. return.

 

I am still confused to your business type.

 

If you are a sole proprietorship, then by Canadian law you are not incorporated.

 

Are you this business form?

 

Business Corporation

A Business Corporation is a business entity incorporated under the Ontario Business Corporations Act. The purpose of a business corporation is to make a profit for its owners. A business corporation is distinguished by the use of the following legal endings within the corporate name: Incorporated, Inc., Corporation, Corp., Limited, Ltd.

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Customer reply replied 8 years ago

I am a physician and incorporated (professional corporation)

 

FADD!

DearCustomer

 

let's take care of the trust payments to your children.

 

The U.S. Canadian Tax treaty provides for that the trust income is taxable only in Canada. So as long as they are resident in Canada, they do not have to report the trust income.

 

But if they are resident in the U.S. and receiving Trust payments, they have to report any trust income to the U.S.

 

Any U.S. beneficiary of a foreign trust must file a form 3520 with his or her tax return in any year in which the beneficiary receives a distribution of any kind.

 

See this link for additional information. http://www.irs.gov/businesses/international/article/0,,id=185295,00.html

 

The tax treaty language is:

 

1. For the purposes of this Convention, the term "resident of a Contracting State" means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management, place of incorporation or any other criterion of a similar nature, but in the case of an estate or trust, only to the extent that income derived by such estate or trust is liable to tax in that State, either in its hands or in the hands of its beneficiaries.

AND if There is an issue where double taxation occurs then the following procedure is used to resolve the conflict.

4. Where by reason of the provisions of paragraph 1 an estate, trust or other person (other than an individual or a company) is a resident of both Contracting States, the competent authorities of the States shall by mutual agreement endeavor to settle the question and to determine the mode of application of the Convention to such person.

 

But the intention is that a trust it self attracts no tax when it is used to provide a benefit to someone else, except in teh state in which it was created, in this case Canada.

 

Further:

 

To the extent that income distributed by an estate or trust is subject to the provisions of

paragraph 1, then, notwithstanding such provisions, income distributed by an estate or trust which is a resident of a Contracting State to a resident of the other Contracting State who is a beneficiary of the estate or trust may be taxed in the first-mentioned State and according to the laws of that State, but the tax so charged shall not exceed 15 per cent of the gross amount of the income; provided, however, that such income shall be exempt from tax in the first-mentioned State to the extent of any amount distributed

out of income arising outside that State.

 

This means the U.S. can tax it at 15% if they are resident in the U.S. at the time of the distributions.

 

 

Corporate income:

 

Unless your corporation has a Nexus in the U.S. it is not libel to tax.

 

However, i need to know how you get paid by the corporation?

 

 

 

 

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Customer reply replied 8 years ago

The corporation has no nexus in the US.

 

I am paid directly by withdrawing from the corporation account as the signatory. I am not paid thro the trust.

 

Is "US resident" for tax purpose not based on US citizenship and permanent residency status rather than physical residency; in which case, is US tax not then based on world income even if from dividends of a trust?

I realise these are very complex issues and I appreciate your efforts to address them.

Thanks.

 

FADD!

Customer

 

I apologize but I am on my way out the door to a meeting in Manhattan, is it ok if I get back to this later this evening.

 

 

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Customer reply replied 8 years ago

Yes

Thanks

Customer/p>

Dear FADD,

 

Thank you for your patience. International estate and trusts are governed heavily by the tax treaties. AND, a lot depends on the charachter of the trust.

 

What happens is, that if this particular trust income is excluded form U.S. tax by tax treaty, then the treaty over-rides the U.S. tax treatment.

 

So let me modify this. I spent an hour on the phone yesterday with a collegue from Price Water House Coopers discussing canadian trusts and estates, taxable in the U.S

 

The difference here is that if the trust is a family income trust, or the trust is owned by a U.S. Citizens or Legal permanent resident, then the treaty exclusion does not apply.

 

So your children will be exposed to potential tax on the distributions from the trust.

 

If it holds true that the trust is owned by a U.S. person or is an income trust, which it appears to be.

 

You would make sure you followed the reporting requirements for yourself and your children in each of the incidence listed at this web page with respect to:

 

A U.S. person forming a trust, annd beneficiaries of a trust, etc.

 

http://www.irs.gov/businesses/international/article/0,,id=185295,00.html

 

Let me know if we are good on the trust before we move to how to treat your Income from the corporation.

 

 

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Customer reply replied 8 years ago

My only question on the trust is: will they be taxed at the low rate of 40,000 income or would they be taxed on my higher rate. They are full time students.

 

Customer/p>

DearCustomer

 

I apologize that this process is taking so long; but it is a highly complicated issue to coordinate income taxes between two countries especially on three levels, income reltaed to a majority interest in a foreign corporation, trust income, etc.

 

With regard to the Trust, they will be taxed based on thier individual adjusted gross income.

 

The problem we may find when doing the corporate taxes and applying the U.S. Rules is that this income may end up being double taxed, ,once for you as income from the corporation, and then again when it is distributed to the children.

 

Are you ready to move into the corporate part?

 

Ed

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Customer reply replied 8 years ago

I have a fairer understanding of the corporate taxes.

What I am really confused about in my research is how the dividends paid to my children from the trust will be trated.

In Canada, it is doubled taxed in the sense that you first pay corporate tax on all income (~15%); however it is taxed in the kid's hand at the low tax bracket of say $40,000.

However, I seem to have read that the US may tax them on my own high bracket as they are full time students. Any references to clarify this. Are dividends from trust account taken as investment dividend like dividends from say stocks/bonds etc.

 

Thanks for the help.

FADD!

DearCustomer

 

I am on my way to a NYC tax hearing to day as a witness for a client, so i have to leave for a few hours. I will get back to you on this, in the afternoon, if that is ok.

 

In the mean time, if you can give me child A and Child B expected adjusted gross income after receiving the distributions, I can give you some idea of how they will be taxed.

 

I assume they are filing single, not married.

 

 

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Customer reply replied 8 years ago

Each will receive $40,000 from the trust and $1,000 university scholarship (Total $41,000 and filing single.

 

Thanks,

FADD!

Dear FADD,

 

Ok so they will be taxed on their income marginally, in filing status single as follows:

 

  • 10% on income between $0 and $8,350
  • 15% on the income between $8,350 and $33,950; plus $835
  • 25% on the income between $33,950 and $82,250; plus $4,675
  •  

     

    These tax tables are the estimated tables for 2009. Obama changes may lower these rates. But these should serve you well for tax planning purposes.

     

    But remember, because of the tax treaty, the trust income is taxed first in Canada, AND then, they get to obtain a credit for paying taxes to Canada.

     

    http://www.irs.gov/pub/irs-pdf/f1116.pdf

     

    Use the taxable income. so each would actually pay taxes on 40,000 minus the standard deduction, and personal exemption. (about 3650 (personal exemption), and 5700 (stadard deduction).

     

    If the university scholorship is used for tuition and fees only, then that becomes non-taxable.

     

    Total taxable income in the U.S. would only approximate 30,650 dollars.

     

    Since they are Legal Permanent Residents they would still be filing a resident return and (1040) not the 1040-NR.(per change in tax laws in 2004).

     

    this means they would not be above the 15% level, and would get credit for taxes paid to Canada.,

     

     

     

     

     

    Ed Johnson
    Ed Johnson, Tax Preparer
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