US TAX SPECIAL

US VISA OPTIONS

Many Canadians looking to work in the US assume the best option for them is to acquire a green card. Many US immigration lawyers also advise this but often without considering the adverse tax consequences. For someone intent on remaining in the US permanently a green card may be the best alternative. However many Canadians go to work in the US on a temporary basis and, for them, a green card contains nasty surprises.

Although a green card does not ensure permanent status or citizenship (it can be withdrawn by US Immigration at any time), for purposes of the Internal Revenue Code a green card deems you to be a US citizen subject to the full gamut of US income tax, gift and estate tax and can also impact on non-US corporations owned or controlled by the green card holder.

The US, in conjunction with the North America Free Trade Agreement (NAFTA), offers a number of options for Canadians. Generally speaking a Canadian does not need a visa to visit the US. However, if you are intending on staying in the US for a long period of time the following is a breakdown of some of the options available:

• TN Visa – available to Canadians with a professional designation or university degree. You must be sponsored by an employer located in the US but could also establish your own company that can then sponsor you. There is no maximum time limit for this visa. It can be applied for at a border crossing or international airport and processing usually takes about 2 hours.

• H-1 Visa – used by Canadians wishing to work in the US and meet certain educational parameters. It must be renewed annually for a maximum stay of 6 years. Applications take about 3 months to process.

• L-1 Visa – used by multi-national employers to transfer employees between operations within and outside the US. This visa has a 7 year limit and has the same process as the TN visa above.

• E-1 and E-2 Visas – the E-1 is used by people or employers who are involved in substantial trade with the US and E-2 is for substantial investments made in the US. There is no maximum time limit to these visas. Processing takes about 4 months but can be expedited if the employer has previously obtained these visas for other employees.

• O-1 Visa – used by athletes, entertainers and others with extraordinary abilities. This visa has no maximum limit and can take up to 3 months for processing.

• F-1 and F-2 Visas – the F-1 is for full-time students attending US schools. This visa also permits limited work in the US while attending school. The F-2 is for spouses and dependants of F-1 visa holders. The processing is the same as for TN visas.

• J-1 and J-2 Visas – similar to F-1 but also includes professors and scholars and has less restrictions concerning employment in the US. J-2 visas have the same application as F-2 and the process is the same.

GREEN CARD OPTIONS

As stated above, the acquisition of a green card is often ill-advised and not the appropriate choice if working or attending school in the US. For those who have already taken the plunge and obtained a green card there are still some choices that can be made. If the green card has been held for 8 years then the holder must surrender the card and pay the new US exit tax in order to affect a complete abandonment of the green card.

Those who have held their green card for less than 8 years can make one of three choices:

• Retain the card which leaves you subject to the complete US tax regime. Many Green card holders have continued to live in Canada although this is against the regulations that apply to green card holders. A green card deems you to be a resident of the US and therefore must file a resident US tax return. Filing a return claiming residency in Canada is contrary to the green card regulations. If a green card holder leaves the US for an extended period of time they must return every 4 months to maintain the status of the card. Failure to file a resident US return can result in cancellation of the card.

• The holder can surrender the card on leaving the US and should obtain a copy of the surrender documents for their records. If surrender is before the beginning of the 8th year as a green card holder than there is not tax implication.

• The holder can voluntarily surrender the card and immediately apply for one of the visa options mentioned in the previous article. This exchange is not available while present in the US so the holder would be required to leave the US first. H, L and O visas can be pre- approved before surrendering the green card.

US BENEFICIARIES OF CANADIAN TRUSTS

When a beneficiary of a Canadian trust decides to move to the US as a permanent resident it is imperative that the trustees consider the tax consequences to the trust as a result of the move. US law considers that beneficiaries of a foreign trust living in the US have earned income from the trust regardless of whether or not they have received any amount of distribution. The US also does not consider a discretionary trust, which is quite common in Canada, to be discretionary and will require the US resident to take into income a share of the income of the trust even if no amount has ever been allocated to that individual.

Another interesting concept adopted by the IRS is the process of accounting for trusts. As a result of these rules trusts will be required to maintain two sets of books, one for Canadian purposes and one for US.

There are solutions to avoid these problems including transferring the US beneficiary’s interest to a Canadian corporation before emigrating or purchasing their interest in the trust.

EXPATRIATION

Although most US citizens do not consider expatriation (surrendering their US citizenship) as a viable option, it has become of more interest as the result of the growing tax burden of US citizens and since the US taxes citizenship, leaving the country does not ease the burden.

The newest expatriation bill to be passed by Congress, interestingly enough officially called the Heroes Earnings Assistance and Relief Tax Act, introduces an exit tax regime, not unlike Canada’s. It affects any US citizen or green card holder of 8 years or more. The new tax will impose a capital gain tax on the appreciated value of the worldwide assets of the taxpayer as of the date of expatriation.

The rules apply to anyone meeting any of the following three tests:

• If the taxpayer had an average income tax liability for the prior five years exceeding $147,000 (indexed for inflation);

• If the taxpayer has a net worth of $2 million on the date of expatriation; or,

• Fail to certify they have been fully compliant and paid all outstanding taxes for the previous 5 years.

Two new areas of concern are the previously unused Reed Amendment which deems any individual who expatriated in order to avoid tax is deemed inadmissible to the US for life. This has been on the books since 1996 but was actually exercised for the first time in 2011. The second new concern is that under the tighter regulations in order to require US citizens to file and pay US taxes, anyone failing to file and/or pay can have their US passport seized by US immigration. If they carry another country’s passport it would only mean they could not enter the US but if they do not have a second passport it will bar travel to virtually any country.