From: AlanBaggett@volcanomail.com   
      
   Canada: Tax In Canada And The US: The Differences That Really Matter : CRA   
   SOTW    
      
   30 August 2012 Article by Kim G. C Moody and Roy Berg    
      
      
   Many people assume that the US and Canadian tax systems for individuals are   
   similar. Not true. There are some important differences. Accordingly, the   
   purpose of this article is to point out some of these important differences   
   that can cause problems for    
   the uninformed. By no means is this article intended to be exhaustive...   
   simply informative.   
      
   1. How individuals are taxed   
   The US is one of the only countries in the world that taxes on a citizenship   
   basis. If you are a US citizen or a US "green card" holder, your income is   
   taxed on a worldwide basis pursuant to US law no matter where you reside. Many   
   people are not even    
   aware that they are a US citizen. This issue is a complex immigration matter   
   and often will require a US immigration lawyer's assistance.   
      
   Canada, does not tax on a citizenship basis. Instead, like most countries   
   around the world, Canada taxes on a residency basis. To the extent that you   
   are a "resident" of Canada, you are taxed on your worldwide income. There is   
   no statutory definition of    
   residency in the Canadian Income Tax Act and therefore the common law on such   
   a subject is relevant. The Canada Revenue Agency's administrative views are   
   published in Interpretation Bulletin IT-221R3. Simply put, Canada's system of   
   residency is very much    
   a "facts and circumstance" test. In other words, an individual's facts and   
   circumstances will determine whether or not they are resident in Canada for   
   income tax purposes. The US also taxes residents but the determination of   
   residency is a statutory test    
   and is dependent upon the number of days that the individual was physically in   
   the US during the current year and the previous two years. This test, the   
   so-called "substantial presence" test, is formulaic and objective (we briefly   
   discuss the substantial    
   presence test in our January 5, 2009 blog). Accordingly, a US citizen who is   
   resident in Canada would be subject to double taxation (both from the US and   
   from Canada) were it not for the Canada-US Income Tax Treaty (the "Treaty").   
   Such a Treaty (one of    
   many that those countries have in place with other countries around the world)   
   does an admirable job of eliminating double taxation for such a person.   
   However, the Treaty is not perfect and in some cases the US citizen who is   
   resident in Canada can be    
   subject to adverse tax consequences if their affairs are not planned carefully.   
      
   2. The US has an estate tax... Canada does not   
      
   The US has an estate tax that applies on the value (as opposed to gains) of a   
   decedent's estate. The US estate tax applies to its citizens and to people who   
   are "domiciled" in the US. Domiciliary is a facts and circumstances test and   
   therefore people who    
   are not US citizens have to be cognizant of whether or not they are domiciled   
   in the US so as to try and avoid the US estate tax upon death. The US estate   
   tax also applies to non-citizens and non-domicillaries to the extent that such   
   people hold US situs    
   property (such as US stocks and US real property). At present, US citizens are   
   exempt from the US estate tax on the first US $5.12 million of value of the   
   estate. This eliminates most, but not all, of US estates from the application   
   of the estate tax. At    
   its highest marginal rate, the US estate tax is presently at 35 percent.   
      
   Prior to 1972, Canada also had an estate tax. However, the Canadian estate tax   
   was abolished effective January 1, 1972 and instead replaced with a system   
   that forces the recognition of any unrealized gains immediately prior to   
   death. Such gain    
   recognition is subject to many exemptions and deferrals. Canada also taxes   
   certain registered pension assets (such as Registered Retirement Savings Plans   
   or Registered Retirement Income Funds) upon the death of the Canadian resident   
   but, again, the    
   taxation of such amounts are subject to certain exemptions and deferrals.   
      
   Accordingly, the US estate tax and the Canadian "deemed disposition" tax can   
   cause significant issues for a US citizen who is resident in Canada upon   
   death. Similarly, it can cause significant problems for a Canadian resident   
   (who is a non-US person or    
   not domiciled in the US) who owns US situs property on death. The Treaty has   
   limited provisions that attempt to reduce the negative exposure of the   
   application of the two "death tax" systems but such provisions usually result   
   in minimal relief and    
   therefore it is crucial for affected persons to plan carefully.   
      
   3. How corporations are taxed   
      
   The US has certain corporate entities that enable income to be earned by such   
   entities but taxed at the "shareholder" level (this is often referred to as a   
   "flow-through" vehicle). This can be very beneficial for US persons since it   
   can often eliminate    
   double taxation which can sometimes arise with the use of corporations. Canada   
   does not have a similar regime. All income realized by a Canadian corporation   
   is taxed at the corporate level. Any after-tax corporate amounts paid to a   
   shareholder will    
   normally be taxed as a dividend. This can lead to double taxation for the   
   shareholder of Canadian corporations if not properly planned.   
      
   The US also has unique flow-through entity called a Limited Liability Company   
   ("LLC"). Accordingly, it is very common for a US tax advisor to recommend the   
   use of a LLC to a Canadian resident person when they are considering investing   
   in the US.    
   However, the use of a LLC for a Canadian resident investor is most often not a   
   recommended entity since the LLC will not be a "flow-through" vehicle for   
   Canadian tax purposes (but it may be for US purposes). This can cause   
   significant tax problems that    
   could result in double taxation.   
      
   Accordingly, it is critical for Canadians who wish to invest in the US to get   
   proper tax and legal advice to ensure that double taxation will not result   
   from the realization and repatriation of profits back to Canada. Similarly, it   
   is crucial for US    
   persons to get proper tax and legal advice to ensure that the ultimate tax   
   burden is acceptable to the extent that they are investing in Canada.   
      
   4. Foreign reporting regime   
      
      
   [continued in next message]   
      
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