Some time ago you may have decided to leave Canada and settle in another country. Your intention was to leave Canada permanently and not return. Since Canada taxes Canadian residents on their worldwide income you did not want to be in a tax situation where you were required to pay income taxes to two different countries. You notified the Canada Revenue Agency that you were permanently giving up your Canadian residency. You severed all your ties to Canada to the satisfaction of the CRA and filed all the required documents. You diligently settled your departure taxes before you left and you have since paid Canadian income taxes on any Canadian source income that you may have had according to the rules applicable to nonresidents.

You wish to Return to Canada

But circumstances change over time. Perhaps the dream job that you emigrated to take didn’t work out or maybe the political situation in your new country is so unstable that you fear for your family’s safety. The reason doesn’t particularly matter; the fact is that you wish to return to Canada. Unlike the United States that requires you to renounce your citizenship to escape US taxes on your worldwide income, Canada requires only that you sever your Canadian residency and become a tax resident of another country. Unlike the United States where once you have renounced your citizenship for tax reasons you can never permanently re-enter the US (although you may apply for a visitor’s visa), Canada welcomes back her citizens with open arms.

Seek Legal Advise

If you have given up your Canadian residency and now wish to return to Canada you should consult an experienced immigration lawyer. We recommend that you contact the bar association in the province or territory where you intend to locate for a list of recommended immigration lawyers.

However, if you were not a Canadian citizen but a were a legal resident when you left Canada you may not be able to re-establish your Canadian residency. Remember that you intended to permanently give up your Canadian residency when you left. Also there is a difference in the Canada Revenue Agency definition of a tax resident and Citizenship and Immigration Canada’s definition of a legal resident. Non-citizens who have severed their Canadian residency but now wish to return to Canada should consult an experienced immigration attorney.

Unwinding a Deemed Disposition

In any case, as a Canadian citizen you have decided to return to Canada. Well, you’re in luck – you get to unwind the departure tax that you were assessed at the time you emigrated. You could even end up with a tax refund – or maybe not. When you immigrate to Canada, you are generally deemed to have disposed of and to have immediately reacquired at fair market value the worldwide properties that you own on the date you re-entered Canada. If you had previously elected to defer payment of the tax owing on the income from the deemed disposition of property at the time you emigrated, you may now have to pay the deferred tax.

If you emigrated after October 1, 1996, and you have re-established Canadian residency you can elect to adjust the deemed dispositions of property that you still own that was deemed sold when you emigrated. This is referred to as an election to “unwind” a previous deemed disposition. If you make this election, the amount of the gain from the deemed disposition that you reported on your return for the year you emigrated can be reduced by the least of:

• The amount of the gain reported on your return for the year you departed;
• The fair market value (FMV) of the property on the date you immigrated;
• Any other amount to a maximum of the least of the above-noted amounts.

The election to unwind may result in the reduction or elimination of the tax owing on the deemed disposition of property at the time of emigration. If you make this election and had previously elected to defer payment of the tax owing on the income from the deemed disposition, some or all of the security you may have furnished may be returned to you.

You must submit the request to unwind in writing on or before your filing-due date for the year you immigrate and become resident. You must include a copy of this written request with your income tax return for the year you returned to Canada along with a list of all the properties you own and the fair market value of each property to which this election applies. This will establish the base that the Canada Revenue Agency will use for any future calculation of gains or losses from the disposition of property owned at the time you re-entered Canada.  Valuable property such as jewelry and artworks should be properly appraised to avoid future problems. Your income will be prorated in the year of re-entry but you may be entitled to full benefits from other programs.

Precautionary Notice

To the best of our knowledge and ability the information in this article was current and accurate at the time it was published. However, laws, regulations, and administrative rulings issued by governments are constantly evolving and being revised. Readers are cautioned that it is incumbent upon them to check with the competent authorities to ensure that they have acted upon the latest available information.

Many US citizens or US residents living or working in Canada and many Canadians living in the US have invested in Canadian Mutual Funds. A significant number of these investors may not realize that foreign mutual funds are classified as Passive Foreign Investment Companies. If they were not aware that they unwittingly held an interest in a PFIC they probably were not aware that the IRS has established a strict tax and reporting regime governing taxation of their Canadian (or other foreign) mutual funds.  As a consequence many US taxpayers holding Canadian have failed to meet the required US tax and reporting obligations.

US taxpayers holding an interest in a PFIC must file a Schedule B with their US income tax returns and a Form 8621 to report certain elections and transactions within their Canadian or other foreign mutual funds. If the total value of foreign accounts, including mutual funds, held and controlled by a US taxpayer exceeds $10,000 at any time during a taxation year, a Form 90-22-1 (FBAR) must be separately filed with the US Treasury Department.

Definition of a Passive Foreign Investment Company

Under the United States Internal Revenue Code a foreign company that meets either of the following tests is considered to be a Passive Foreign Investment Company:

1. 75% or more of its gross income for a taxable year is passive income (the income test); or
2. 50% or more of assets held during the taxable year produce passive income, or are held for the production of passive income (the asset test).

Passive income includes interest, dividends, royalties, annuities, rents, income equivalent to interest, net gains from commodity transactions, net foreign currency gains, payments in lieu of dividends, income from notional contracts, and income earned from certain personal service contracts.  Generally the fair market value of a foreign company’s assets (based on the value of the corporation’s assets at the end of each quarter) is used to apply the Asset Test.

In applying these tests to a foreign corporation it is necessary to look-through subsidiary corporations that the tested corporation holds an interest in. If a foreign corporation owns, directly or indirectly, 25% or more of a subsidiary, the corporation’s share of the earnings and assets of the subsidiary must be included when determining if the corporation is a Passive Foreign Investment Company.

The IRS does not classify as Passive Foreign Investment Companies foreign corporations such as bona fide banks, financial institutions, insurance companies, and security traders that can establish that passive income was earned in the conduct of an active business by the corporation. PFIC status applies separately for each US person owning shares, and also separately with respect to shares acquired at different times. PFIC status does not, in and of itself, have any impact on the foreign corporation or foreign shareholders.

A Passive Foreign Investment Company is a corporation by definition and in most cases a trust or partnership would not be a Passive Foreign Investment Company (notwithstanding that the IRS might argue that a foreign trust or foreign partnership had the characteristics of a corporation).  A partnership that does not own shares in a PFIC is not a Passive Foreign Investment Company even if all of its income is from passive investments. The same is true with respect to any trust or estate that does not own any shares of a Passive Foreign Investment Company. Partnerships and trusts, however, are taxed under other sections of the Internal Revenue Code that require earned income to flow through to individual taxpayers regardless of whether or not such earnings are distributed.

What Happens if a Corporation is Classified as a Passive Foreign Investment Company

In 1986 Congress added PFIC rules to the Internal Revenue Code due to concerns that U.S. taxpayers investing in passive assets indirectly through a foreign investment company had an inappropriate tax advantages when compared to direct investments in those same assets. The purpose of the PFIC rules was to eliminate this advantage. PFICs include foreign-based mutual funds and pooled investment vehicles that have at least one U.S. shareholder. Most US investors in PFICs must pay income tax on all distributions and appreciated share values, regardless of whether capital gains tax rates would normally apply. PFICs are subject to the complicated and strict tax guidelines set out in Sections 1291 through 1297 of the Internal Revenue Code. These strict guidelines are set up to discourage ownership of PFICs and particularly foreign mutual funds by U.S. investors. In fact, the rules are clearly intended to deter US investors from using a foreign corporation as an investment fund.

When assessing the severity of the tax regime established by Congress for PFIC holdings it is important to compare the tax treatment of for shareholders of ordinary corporations. Corporate shareholders are normally taxed on the corporation’s income when dividends are declared and only taxed at the taxpayer’s ordinary rate. Furthermore, shareholders are normally only taxed on accumulated value gains when the shares are sold or otherwise deemed disposed by the IRS. It is important to note that gains in the value of shares in an ordinary corporation are generally taxed at significantly reduced capital gains rates. It is also important to note that Congress has addressed other areas where US taxpayers have obtained inappropriate tax advantages through the utilization of foreign corporations in offshore tax havens. Two specific areas are Controlled Foreign Corporation and Foreign Personal Holding Company legislation. In essence Congress has re-characterized the income from such corporations as flow-through income to the individual shareholders subject to US taxes in the current year.

The Tax and Interest Regime (Excess Revenue Regime) for Taxing PFICs

A US taxpayer holding an interest in a PFIC is subject to taxation under tax and interest regime set out in Section 1291 of the Internal Revenue Code. This tax and interest regime includes a look-back procedure to allocate distributed income by a PFIC in excess of 125% of the three year moving average to the taxpayer’s entire holding period. Income allocated to the current year is reported on the taxpayer’s tax return as other income and taxed at the taxpayer’s ordinary rate. The portion of the distribution that is allocated to each prior year, however, is taxed at the taxpayer’s highest possible rate and the amount calculated is deemed to have been payable in the year of allocation. The statutory interest rate for unpaid taxes is then applied to the to each prior year that the taxpayer has held the PFIC.

The sum of the tax and interest payable for each year that the taxpayer has held the PFIC is added to the taxpayer’s current tax liability without setoff for an otherwise reported loss or loss carry forward. If the taxpayer has held the PFIC for an extended period of time it is possible for the PFIC tax liability to exceed the amount distributed. The legislation passed by Congress, however, limits the tax payable to 100% of the distribution received. For more detailed information on this subject please refer to our article entitled “Excess Distribution Tax Regime for Taxing Passive Foreign Investment Companies”.

For a Child Under Twelve Years Old

 In Previous articles entitles “Obtaining a United States Social Security Number for an Adult Citizen” and “Obtaining a United States Social Security Number for an Adult Non-citizen” we provided a brief history of the Social Security Administration and outlined the process for applying for a Social Security Number for an adult age twelve and over. We explained the fairly straightforward procedures for applying for an original Social Security Card for both adult citizens born in the United States and adult naturalized citizens. In this article we will detail the procedure that must be followed to obtain an original Social Security Numbers for children under twelve years of age.

Importance of Social Security Number

Prior to 1986 few children under fifteen years of age bothered to obtain a Social Security Number because they rarely earned any significant amount of income and the number was only required for income tracking purposes. In 1986 Congress, in an antifraud measure, passed the Tax Reform Act that required parents claiming tax deductions for children over 5 years old to provide Social Security Numbers. The following tax year over 7 million fewer dependent children were claimed as deductions by US taxpayers, nearly all of them believed to have involved children that never existed or falsely claimed by non-custodial parents. In 1990 this threshold was lowered to include one-year-old children and Social Security Numbers are now required to claim a tax deduction for a dependent child regardless of age. Parents now usually apply for a newborn child’s Social Security Numbers with the application for the child’s birth certificate along with registration of the child’s birth usually handled by the hospital or medical practitioners attending the child’s birth. The US Constitution automatically bestows US citizenship on all children born in the United States proper. Parents of children born in US protectorates, possessions, or overseas territories and military bases should consult the Social Security Administration to determine if their child is automatically entitled to US citizenship.

Applying for a Social Security Number for a Dependent Child

Applications for a Social Security Card are made using Form SS-5 (Application for a Social Security Card). All supporting documents that are required must be original documents or documents certified by the custodian of the original record. Photocopies or notarized copies of documents will not be accepted. The Social Security Administration may accept the same document for two purposes (for instance a US passport may be accepted as both proof of age and proof of identity) but, in all cases, at least two separate documents must be included with the application. If an applicant is unable to obtain the necessary documents or obtain replacement documents within 10 days the Social Security Administration may consider other documents. All documents submitted must be current (not expired) and show the applicant’s name and identifying information such as date of birth, physical identification features, place of birth, parents name, current address etc. as the case may be. Preferred documents include a current photograph.

A parent may sign an application on behalf of a child under 18 years old (or the child may sign for himself if he is able to do so). A parent or guardian applying for a Social Security Number on behalf of a child must include both the mother and father’s Social Security Numbers if they are available. Anyone completing an application on behalf of someone else must provide evidence that they have the authority to sign on behalf of that person. They must also provide documents to prove their own identity as well as the identity of the person to receive the Social Security Number. It is important to note that any person age twelve and over applying for an original Social Security Card must present themselves at a Social Security Administration office for an interview before the card can be issued.

Application for an Original Card for a US Born Dependent Child under Twelve

As explained above a parent or guardian may make an application for a Social Security Number on behalf of a child age 12 to 17. They would, however, almost always initiate the application for a child under 12.  Social Security must verify the birth record for all U.S.- born applicants who apply for an original Social Security Number. An exception is made for a parent applying for a baby’s Social Security number at the hospital when the baby is born. To verify a birth record, Social Security will contact the office that issued it.

In addition to the requirements explained above an applicant for an original card for a US born dependent child under twelve must present proof of identity. The accepted documents that can be included with a completed Form SS-5 (Application for a Social Security Card) are listed below:

Applicant’s Proof of identity:

• US State-Issued driver’s licence.
• State-Issued non-driver identification card.
• US passport

Alternate documents that might be considered

• Employee ID card.
• School ID card.
• Health insurance card (not a Medicare card)
• US military ID card.

The Social Security Administration may use a birth certificate to prove age or citizenship but cannot use it as proof of identity. Additionally, they require evidence that proves the child continues to exist beyond the date of birth.

The Social Security Administration will accept only certain documents as proof of a child’s identity. An acceptable document must show the child’s name, identifying information, and preferably a recent photograph. The child must be present (at a Social Security Administration office) unless the picture ID also shows the child’s biographical information (i.e., age, date of birth, or parents’ names). The Social Security Administration generally can accept a non-photo identity document if it has sufficient information to identify the child (such as the child’s name and age, date of birth or parents’ names). If the child has been issued a US passport it will be accepted as preferred proof of identity, however, if one is not available, the Social Security Administration may accept other documents.

Childs Proof of Citizenship

• US state-issued birth certificate
• US passport

Childs Proof of Age

• If the child has a US state-issued birth certificate that was issued before the child was five years old it must be submitted
• US passport

Childs Proof of identity:

• US passport

Alternate Proof of Child’s identity

• Adoption decree.
• Doctor, clinic or hospital record.
• Religious record (e.g., baptismal record).
• Daycare center or school record.
• School identification card.

The Social Security Administration can assign an adopted child a number before the adoption is complete, but parents may want to wait. They can then apply for the number using the child’s new name. If a parent wishes to claim the child for tax purposes while the adoption is still pending, they should contact the Internal Revenue Service for Form W-7A, (Application for Taxpayer Identification Number for Pending U.S. Adoptions).

Application for an Original Card for a Foreign Born Child Adopted by a US Citizen

In addition to the previously mentioned general requirements a parent applying for a Social Security Number for a foreign born adopted child must present proof of the child’s citizenship, age and identity. The required documents to be included with a completed Form SS-5 (Application for a Social Security Card) are listed below:

Foreign-born adopted children residing permanently in the United States automatically acquire U.S. citizenship when they meet certain requirements. However, since documentation of the child’s United States citizenship is not automatically issued parents must apply for proof.

Proof of US Citizenship

• Certificate of Citizenship from the Department of Homeland Security.
• U.S. passport issued by the Department of State.

If you do not yet have proof of your child’s citizenship, the Social Security Administration can still assign a Social Security number based on the documentation issued to your child upon arrival in the US by the Department of Homeland Security such as the I-94 (Arrival/Departure Record). When you receive the required documentation of your child’s citizenship the Social Security Administration will update your child’s record without changing the assigned Social Security Number.

Proof of Age:

• You must present your child’s foreign birth certificate if you have it or can get it within 10 days.
• If not, the Social Security Administration will consider other documents such as your child’s passport or a document issued by DHS as evidence of your age.

The Social Security Administration only accepts certain documents as proof of a child’s identity. An acceptable document must show the child’s name, identifying information and preferably a recent photograph. The child must be present (at a Social Security Administration office) unless the picture ID also shows the child’s biographical information (i.e., age, date of birth, or parents’ names). A non-photo identity document may be accepted if it has enough information to identify the child (such as the child’s name and age, date of birth or parents’ names).

Proof of identity:

• The preferred document is the child’s U.S. passport.
• If that document is not available, the Social Security Administration may accept the child’s:
  • Adoption decree.
  • Doctor, clinic or hospital record.
  • Religious record (e.g., baptismal record).
  • Daycare center or school record.
  • School identification card.

In addition to the requirements for the child explained above a parent applying for an original card for a foreign born adopted child under twelve years old must provide proof of identity. The accepted documents that can be included with a completed Form SS-5 (Application for a Social Security Card) are listed below:

Applicant’s Proof of identity:

• US State-Issued driver’s licence.
• State-Issued non-driver identification card.
• US passport

Alternate documents that might be considered

• Employee ID card.
• School ID card.
• Health insurance card (not a Medicare card)
• US military ID card.

Original Card for a Non-citizen Child

In general, only non-citizens who have permission to work from the Department of Homeland Security can apply for a Social Security number. If your child does not have permission to work but needs a Social Security number for another valid purposes you should contact the local Social Security Administration office for further information. If a non-citizen requires a number in order to claim the child as a dependent for tax purposes the Internal Revenue Service will issue an Individual Taxpayer Identity Number for that purpose.

Submitting a Social Security Application

You may either mail your application or deliver it to your local Social Security office. If you live in the United States and you may receive information and directions to the office that serves your area at the following website:

https://secure.ssa.gov/apps6z/FOLO/fo001.jsp

Enter your U.S. Postal Service five-digit ZIP code and select Locate to obtain information about your local Social Security Administration office and other agencies in your area that may be able to help you. Remember that you may be required to present your child at a Social Security office before a card can be issued. You should select the one that is the most convenient.

For an Adult Non-citizen

 In a previous article entitled “Obtaining a United States Social Security Number for an Adult Citizen” we outlined a brief history of the Social Security Administration and detailed the process for applying for a Social Security Number. We covered the process for applying for an original Social Security Card for an adult US citizen born in the United States and an adult naturalized citizen. The process for adult citizens is fairly straightforward. In this article we will explain the procedure that a non-citizen that is legally in the United States must follow in order to obtain a US Social Security Number.

Importance of Social Security Number

The nine-digit Social Security Number is issued to citizens, permanent residents, temporary working residents and foreign citizens in the United States. It is generally needed for employment purposes. If you plan to work, have an assistantship, or get a driver’s license, you must have a Social Security Number. The Internal Revenue Service and the Social Security Administration uses Social Security Numbers to:

• Track working individuals for taxation purposes & yearly wages.
• Check eligibility for Social Security benefits.
• Report wages to the government.
• Payroll deductions for old age, survivors, and disability insurance
• For the administration of benefits.

Additionally:

• All US Armed Forces use Social Security Numbers instead of the previous Service Identification or Serial Numbers.
• Many educational institutions also use Social Security Numbers as the student ID number.
• Many banks and financial institutions use Social Security Numbers to trace the credit history of clients.

Applying for a US Social Security Number

The Social Security Administration issues two restricted Social Security Cards to non-citizens that read either “Not Valid for Employment.” or “Valid for Work Only With DHS Authorization.” Applications for a Social Security Card must be made using Form SS-5 (Application for a Social Security Card). It is important to note that all documents submitted must be either original documents or certified by the agency that issued them. The Social Security Administration will not accept photocopies or notarized copies of documents. The Social Security Administration may accept the same document for two purposes (for instance a US passport may be accepted as both proof of age and proof of identity) but, in all cases, at least two separate documents must be presented. If an applicant is unable to obtain the necessary documents or obtain replacement documents within 10 days the Social Security Administration may consider other documents. All documents submitted must be current (not expired) and show your name and identifying information such as date of birth, physical identification features, place of birth, parents name, current address etc. as the case may be. Preferred documents include a current photograph.

There is no charge for an application for an original Social Security Card. Any person age 12 and over applying for a Social Security Number must present himself at a Social Security Administration office for an interview before a card will be issued.

The “Not Valid for Employment” Social Security Card

The “not valid for employment card” is issued to foreigners who have been lawfully admitted to the United States without work authorization from the Department of Homeland Security that have a valid non-work reason for needing a Social Security Number. In general, only non-citizens that have permission to work from Department of Homeland Security can apply for a Social Security Number. Lawfully admitted non-citizens can get many benefits and services without a Social Security number. A number is not necessary to conduct business with a bank, register for school, apply for educational tests, obtain private health insurance, apply for school lunch programs or apply for subsidized housing. Foreigners cannot get a Social Security Number for the sole purpose of obtaining a driver’s license. If you do not have permission to work, you may apply for a Social Security number only if:

• A federal law requires you to provide your Social Security number to get a particular benefit or service; or
• A state or local law requires you to provide your Social Security number to get general assistance benefits that you already have qualified for.

If you need a number to meet these state or local requirements, you must bring an original letter from the government agency to the local Social Security Administration office. It must be on letterhead stationery (no form letters or photocopies) and:

• Specifically identify you as the applicant;
• Cite the law requiring you to have a Social Security number;
• Indicate that you meet all the agency’s requirements, except having the number; and
• Contain an agency contact name and telephone number.

If you need a number for tax purposes and you are not authorized to work in the United States, you can obtain an Individual Taxpayer Identification Number from the Internal Revenue Service.

Application for an Original Card for a Non-citizen Adult Without Work Authorization

In addition to the requirements set out above an applicant in the above category must present proof of immigration status, proof of age, and proof of identity. The accepted documents that can be included with a completed Form SS-5 (Application for a Social Security Card) are listed below:

Proof of Immigration Status – You must show current immigration documents:

• Form I-551 (Lawful Permanent Resident Card, Machine Readable Immigrant Visa).
• I-94 (Arrival/Departure Record).
• If you are an F-1 or M-1 student, you also must show your I-20, (Certificate of Eligibility for Nonimmigrant Student Status).
• If you are a J-1 or J-2 exchange visitor, you must show your DS-2019, (Certificate of Eligibility for Exchange Visitor Status).

Proof of Age:

• Birth certificate.
• Foreign passport.

Proof of identity:

• Form I-551 (Lawful Permanent Resident Card, Machine Readable Immigrant Visa).
• I-94 (Arrival/Departure Record).
• Foreign passport

The “Valid for Work” Social Security Card

The “valid for work card” is issued to foreign individuals who have been lawfully admitted to the US that have temporary work authorization from the Department of Homeland Security. This card can be used to satisfy the US Citizenship and Immigration Service Form I-9 requirement (used by employers to verify an employee’s identity and to establish that the worker is eligible for employment) if accompanied by a work authorization card issued by the Department of Homeland Security. As a general rule, only a non-citizen that has work authorization from the Department of Homeland Security can apply for a Social Security card despite the provisions outlined above. It is extremely difficult for a non-citizen without work authorization to obtain a Social Security Number.

Application for an Original Card for a Non-citizen Adult With Work Authorization

In addition to the general requirements set out above an applicant applying for an original Social Security Card who is a non-citizen with work authorization from the Department of Homeland Security must present proof of immigration status, proof of work eligibility, proof of age, and proof of identity. The accepted documents that can be included with a completed Form SS-5 (Application for a Social Security Card) are listed below:

Proof of Immigration Status:

You must show current immigration documents:

• Form I-94 (Arrival/Departure Record).
• Form I-551 (Lawful Permanent Resident Card, Machine Readable Immigrant Visa).
• Form I-766 (Department of Homeland Security Work Permit)).
• If you are an F-1 or M-1 student, you also must show Form I-20 (Certificate of Eligibility for Nonimmigrant Student). An F-1 student authorized to work in curricular practical training, must provide the Form I-20 with the employment page (page 3) completed and signed by a designated school official. Evidence of the employment, such as a recent pay slip or a letter from your employer will also be necessary. Your supervisor must sign and date the letter and it must describe the following:

• Your job;
• Your employment start date;
• The number of hours you are, or will be, working;
• Your supervisor’s name and telephone number.

An F-1 or M-1 student authorized to work off campus, must provide the Social Security Administration with the Employment Authorization Document received from Department of Homeland Security.

• A J-1 student will be required to provide a letter from his/her sponsor. The letter should be on sponsor letterhead with an original signature that authorizes the employment. If you are a J-1 or J-2 exchange visitor, you must show us your Form DS-2019, Certificate of Eligibility for Exchange Visitor Status.

Proof of Age:

• You must present your foreign birth certificate if you can get it within 10 days.
• Foreign passport.
• A document issued by Department of Homeland Security showing your age.

Proof of identity:

• Form I-551 (Lawful Permanent Resident Card, Machine Readable Immigrant Visa).
• I-94 (Arrival/Departure Record).
• Foreign passport
• Department of Homeland Security Work Permit Card (I-766 or I-688B)

Once you have collected all the required documents, take your completed application and documents to your nearest local Social Security Administration office. Persons age 12 or older applying for an original Social Security card must appear for an interview at a Social Security Administration office. Remember, all documents must be either originals or copies certified by the issuing agency. Photocopies or notarized copies of documents are not accepted.

The Social Security Administration needs to verify your documents with the Department of Homeland Security before they can assign your Social Security Number. If your documents cannot be verified online it may take several weeks to approve your application.

The Social Security Administration does not require that you to have a Social Security Number before you start work. However, the Internal Revenue Service requires employers to report wages using a Social Security Number. While you wait for your Social Security Number, your employer can use a letter from the Social Security Administration stating that you have applied for a number. Your employer may use your immigration documents as proof of your authorization to work in the United States.

For an Adult United States Citizen

The US Social Security Number (SIN) is a nine-digit number issued to US citizens, permanent residents, and temporary working residents by the Social Security Administration. The Social Security Administration is an independent government agency set up in 1935 as part of the New Deal to track individuals’ accounts within Social Security Program and bring everyone under the Interstate Commerce Clause of the US Constitution. The Social Security Administration is now the US government agency that tracks individuals for tax purposes.

The United States issues three different Social Security Cards. The most common type is issued to citizens and permanent residents that include the cardholder’s name and Social Security Number. Additionally, The Social Security Administration issues two restricted Social Security Cards that read either “Not Valid for Employment.” or “Valid for Work Only With DHS Authorization.” The “valid for work card” is issued to individuals that have temporary work authorization in the US and can be used to satisfy the US Citizenship and immigration Service Form I-9 requirement (used by employers to verify an employee’s identity and to establish that the worker is eligible for employment) if accompanied by a work authorization card issued by the Department of Homeland Security.

Initially, the first 3 digits of the 3-2-4 structure of the Social Security Number was the code number of the area office where the card was issued, generally identifying the geographical region of the cardholder. In 1973 the Social Security Administration began assigning numbers and issuing cards from a centralized office in Baltimore continuing to identify geographical areas based on the applicant’s zip code. On June 25, 2011, however, the Social Security Administration introduced “SSN randomization” and future numbers will no longer identify geographical areas or be issued in sequential order.

Brief History of the Social Security Administration

The first Social Security Number was issued on December 1, 1936. Since that time over 450 million Social Security Numbers have been issued with an additional 5.5 million currently being issued each year. The Social Security Administration never reissues the same number and claims that there are enough un-issued numbers to last for several generations before they need to increase the number of digits or re-issue numbers.

Originally Social Security Numbers were not intended to be used as identification numbers – in fact cards issued prior to mid 1980 included a “not for identification” message across the bottom of the card. However, since most people were issued Social Security Cards it became a preferred identification despite the message. The message has subsequently been removed and many government agencies, banks, and private corporations use Social Security Numbers to index databases. The Social Security Number is now the de facto national identification number and without one it is increasingly difficult to open a bank account, obtain a bank loan, or even seek employment. In 1969 the US Army and the US Airforce began using Social Security Numbers as identification numbers replacing the previous more complicated service or serial number system. The US Navy and the US Marine Corps adopted Social Security Numbers in 1972 and the US Coast Guard followed in 1974. All the US armed services now use an individual’s Social Security Number in place of service numbers.

Social Security was originally a universal tax but when Congress passed Medicare in 1965 religious groups were allowed to opt out. As a consequence not every US citizen has a SSN. Prior to 1986 most children under working age did not obtain a Social Security Number since it was only required for income tracking purposes and children rarely had any significant income. In 1986, however, Congress passed the Tax Reform Act that required parents claiming tax deductions for children over 5 years old to provide SSNs. In 1990 this threshold was lowered to include one-year-old children and SSNs are now required to claim a tax deduction for a dependent child regardless of age. However, it is now possible to apply for a newborn child’s Social Security Numbers with an application for a birth certificate and registration of the child’s birth.

Social Security Card Security Issues

Criminals involved in security theft often use a Social Security Number because it is so frequently requested and widely accepted as an authentic identification even thought the card itself contains no biometric information or other specific identifiers of any sort whatsoever making it almost impossible to authenticate the person presenting it. Furthermore, Social Security Numbers are so intrinsically liked to other forms of identification and documentation that are easier to obtain using a fraudulent or stolen card. Social Security Numbers are the hub of the false identity wheel, so to speak, with everything else radiating outwards from the center. In 2007 the Social Security Card was redesigned to include both overt and covert security features and Congress is presently considering restricting their use for certain commercial identification purposes. In the meantime the Social Security Administration advises people not to carry their cards with them but to put them in a safe place and only use them when required.

Social Security Number is required for Tax Purposes

Section 6109 of the Internal Revenue Code requires that an individual’s Social Security Number be used as the identifying number for tax purposes. According to Treasury Regulations in force since 1962, any person who works as an employee subject to Social Security taxes, Medicare taxes, or has US income tax withholdings must apply for an account number using Form SS-5 (Application for a Social Security Card). A taxpayer not eligible for a SSN must obtain an alternative Individual Tax Identification Number.

Applying for a Social Security Number

All applications for a Social Security Card, a replacement card, or an amendment to existing Social Security records must be made using Form SS-5 (Application for a Social Security Card). The Social Security Administration, however, has divided applications for original Social Security Cards into the following seven categories:

1. Original Card for US Born Adult (Age 12 or Over)
2. Original Card for a Foreign Born Citizen Adult (Age 12 or Over)
3. Original Card for Noncitizen Adult
4. Original Card for US Born Child (Under Age 12)
5. Original Card for a Foreign Born US Citizen Child (Under Age 12)
6. Original Card for a Foreign Born US Citizen Child Adopted Child
7. Original Card for a Noncitizen Child

Applications for replacement cards also use these same categories, as do applications to amend existing records.

It is important to note that anyone age 12 or over applying for an original US Social Security Card must appear for an interview at a Social Security office.

The documents that are required vary with the category that an applicant is considered under, but all documents submitted must be either original documents or certified by the agency that issued them. The Social Security Administration may accept the same document for two purposes (for instance a US passport may be accepted as both proof of age and proof of identity) but, in any case, two separate documents must be presented. The Social Security Administration will not accept photocopies or notarized copies of documents, however, they will consider other documents if an applicant is unable to obtain the necessary documents or obtain replacement documents within 10 days. All documents submitted must be current (not expired) and show your name and identifying information such as date of birth, physical identification features, place of birth, parents name, current address etc. as the case may be and include where possible a current photograph.

There is no charge for an application for an original card or for a replacement. However, the Social Security Administration limits number of replacement cards to a maximum of three in any given year and ten in an individual’s lifetime.

This article will explain how a US citizen can obtain a US Social Security Number. Later articles will detail what a non-citizen must do and how to obtain a Social Security Number for a dependent child.

Application for an Original Card for a US Born Adult

In addition to the above-mentioned requirements an applicant in the above category must present proof of age and proof of identity. The accepted documents that can be included with a completed Form SS-5 (Application for a Social Security Card) include:

Proof of Age:

• If an applicant can obtain a US State-Issued birth certificate that recorded his birth before age 5 it must be presented.
• If not other documents such as a US passport can be considered.

Proof of identity:

• US State-Issued driver’s licence.
• State-Issued non-driver identification card.
• US passport.

Alternate documents that might be considered

• Employee ID card.
• School ID card.
• Health insurance card (not a Medicare card)
• US military ID card.

Application for an Original Card for a Foreign Born Citizen Adult

In addition to the previously mentioned general requirements an applicant in the above category must present proof of citizenship, proof of age and proof of identity. The accepted documents that can be included with a completed Form SS-5 (Application for a Social Security Card) are listed below:

Proof of US Citizenship

• US passport.
• Certificate of Naturalization.
• Certificate of Citizenship.

Proof of Age:

• The applicant’s birth certificate must be presented.

Proof of identity:

• US State-Issued driver’s licence.
• State-Issued non-driver identification card.
• US passport

Alternate documents that might be considered

• Employee ID card.
• School ID card.
• Health insurance card (not a Medicare card)
• US military ID card.

Submitting a Social Security Application

You may either mail your application or deliver it to your local Social Security office. If you live in the United States and you want information and directions to the office that serves your area go to the following website:  https://secure.ssa.gov/apps6z/FOLO/fo001.jsp and enter your U.S. Postal Service five-digit ZIP code and select Locate. You will get information about your local Social Security office and other agencies in your area that may be able to help you.

Remember that you will be required to present yourself for an interview at a Social Security office before your Social Security Number and card can be issued. You should select the one that is the most convenient.

Unfortunately many Canadians who are US taxpayers by way of residency and many US citizens and residents of the United States that have a beneficial interest in a Canadian RRSP or RRIF have wrongly assumed that since they had no US income tax payable by way of offset under the Canada – US Tax Treaty that they were not required to file US 1040 Income Tax Returns.

In fact, the IRS requires that US taxpayers report their worldwide earnings on Form 1040 even if no tax is owed. Since penalties are based on the amount of taxes owed no penalties are applied if no taxes are actually owed – but the requirement to report income still stands.

Due to the fact that many taxpayers did not file US Income Tax Returns they also failed to file Schedule Bs and may not have filed any required Form TD 90-22-1 (Report of Foreign Bank and Financial Accounts). If these individuals failed to file FBARs they probably didn’t file Form 8891 (US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans). Since these taxpayers did not file 1040s they are not eligible for preferred treatment for filing delinquent FBARs under the 2011 Offshore Voluntary Disclosure Initiative.

Taxpayers that have failed to file required FBARs and 8891s for Canadian RRSPs and RRIFs should consult a cross border tax specialist without delay.

Obligation to File Required FBARs for Foreign Accounts and Form 8891 for Canadian RRSPs and RRIFs

A US taxpayer that has an interest in a foreign financial or trust account must disclose the fact on Schedule E to Form 1040. Additionally, if a US taxpayer has interest in or control over certain foreign financial accounts and foreign trust accounts including Canadian RRSPs and RRIFs that have an aggregate value of $10,000 or more at any time during a tax year, he or she must file Form TD 90-22-1 (FBAR). Regardless of the value of a foreign trust account Forms 3520 and 3520A must be filed to report both the existence of a foreign trust account and any transactions within the account. In the case of Canadian RRSPs and RRIFs Form 8891 is substituted for Forms 3520 and 3520A for the 2003 and subsequent taxation years. Any taxpayer, for whatever reason, that has failed to file the required Schedule E and Forms 8891 and TD 90-22-1 (if applicable) for Canadian RRSPs and RRIFs is not in compliance with US tax requirements.

Obligation to be Compliant with US Tax Requirements

Unfortunately, the first inclination of many non-compliant taxpayers is to do nothing and hope that the IRS does not discover them in the ever-widening Criminal Investigation Division net. These taxpayers believe that they simply can’t afford the costs involved in becoming compliant or mistakenly assume that the savings are worth the risks involved.

The fact is that the costs of becoming compliant, and there is no argument that they can be substantial, pale in comparison to the life-altering costs that can be imposed if a non-compliant taxpayer is discovered by the IRS.

Assuming that a taxpayer suddenly realizes that he or she should have filed FBARs and takes sincere steps to become compliant the best thing to do is to file the delinquent FBARs with a covering letter explaining the reason why you were unaware of your filing requirement or the reasons why you failed to file required FBARs. It wouldn’t hurt to vow that now you are aware of your filing obligations it will never happen again. The IRS can do one of two things – they can send you a letter saying OK but don’t let it happen again or they can impose a penalty for each delinquent year. But at least it will be an unwillful penalty limited to a maximum of $10,000 per year and the IRS can not go back more than six years to apply the penalty. It is unlikely that the IRS would impose the maximum penalty on a taxpayer stepping forward in this situation. If you can convince the IRS that there were extenuating circumstances causing your failure to file (for instance faulty advice from a tax specialist or an IRS agent) no penalty will be imposed.

On the other hand, if you fail to act to become compliant after you become aware of your filing obligations at some point the failure to file becomes willful. If the IRS discovers your failure to file FBARs and concludes that such failure was willful they could decide that it was appropriate to impose willful penalties. The maximum willful penalty that can be imposed is the greater of 50% of the total value of unreported financial accounts or $100,000 for each year up to six years. If the failure involved other criminal activity the IRS could go back even longer. Additionally, the IRS could recommend criminal prosecution to the Department of Justice. The maximum criminal penalty is a $500,000 fine and up to 10 years in jail.

Failure to File Form 8891 (US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans)

Under US law United States citizens and US residents are taxed on their worldwide income in the year that it is earned no matter where they live. Earnings accrued within financial and trust accounts are deemed by the IRS to be earned in the year that they accrued even though they are not distributed. Qualified US pension plans are specifically exempt from being taxed in the year that earnings accrued within such plans. Taxes on qualified plans are deferred until the earnings are distributed. However, the IRS considers Canadian RRSPs and RRIFs be foreign trusts subject to taxes on earnings within the plans under Section 70 of the Internal Revenue Code. Canadian RRSPs and similar employee benefit plans cannot qualify as approved pension plans under US law for various reasons but the single best reason is that qualified US retirement benefit plans must be created in the US.

Since the US taxes earnings within Canadian RRSPs and RRIFs in the current taxation year and Canada defers taxes until the year of distribution a double taxation situation is created with no corresponding offsets. The United States – Canada Income Tax Protocol (Canada – US tax Treaty in Canada) addresses this double taxation situation under Article XVIII (7) in a simple and direct manner. Simple and Direct provided that a taxpayer is fully knowledgeable of IRS regulations and is filed in the taxation year that the RRSP or RRIF was first opened or first year it was subject to US taxes (in the case of A Canadian becoming a resident of the US). If you file Form 8891 (US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans) in a timely manner with your US Income Tax Return Form 1040 including Schedule E and specifically make an election under Article XVIII (7) the IRS will defer Taxes on your Canadian retirement plans until the proceeds are distributed. Unfortunately, few ordinary taxpayers are experts in US tax laws and, in fact, proper treatment of Canadian RRSPs has slipped through the fingers, so to speak, of some US tax preparers. As a consequence many US taxpayers holding Canadian RRSPs and RRIFs find themselves not only in the position of failing to file Forms 8891 and TD 90-22-1 but also in the position of failing to declare income earned within their Canadian retirement plans and failing to pay the required taxes.

What is the Process To Become Compliant with the Requirement to File Form 8891

This is one of the strangest and most peculiar regulatory environments surrounding any US tax or information reporting requirement. The fact is, if you have failed to file Form 8891 there is no way that you can file an amended or file a delinquent Form 8891. As a consequence you will be responsible for taxes on accrued earning within your Canadian RRSPs and RRIFs until you file a valid Form 8891 and make an election Under Article XVIII(7) of the Canada-US Tax Treaty. Form 8891 to be valid must be included with a timely filed (including extensions) 1040 and Schedule E – it cannot be filed as a stand-alone document. Since an amended 1040 is not timely filed it is not possible to file Form 8891 with amended 1040s (although you will have to file amended 1040s to report revised earned income and amended taxes owing). But it gets worse – Canada is going to tax you again on these same earnings when your RRSPs and RRIFs are distributed.

Technical Provision to Late-File Form 8891

If you have not filed Form 8891 and made a declaration under Article XVIII (7) for the 2010 tax year you can still file what is basically a stand-alone 8891 due to another peculiarity in the rules affecting Form 8891 provided that you do it by October 15, 2011. Treasury Regulations Section 301.9100-2 grants a 6-month extension to taxpayers that wish “to make a regulatory or statutory declaration”. A regulatory regulation is one where the due date for action is set by a “regulation, a revenue ruling, a revenue procedure, notice or announcement”. In the case of an election concerning your Canadian RRSPs the due date for such election is set by Revenue Procedure 2002-23 and is therefore a “regulatory election” for the purposes of Section 301.9100-2.

In addition to the technical requirement set out above, under Treasury Regulation 301.9100-2 a six-month extension is only permitted if the due date for the election is tied to the due date of a tax return (or the due date of a tax return plus extensions). Revenue Procedures 2002-23 and 2002-15 require Form 8891 to be submitted with a timely filed with extensions income tax return for the current year thus meeting the second technical requirement of 301.9100-2.  Since an automatic filing extension is applied to US taxpayers living outside the US, if you are living in Canada you have until December 15, 2011 to file a Form 8891 for taxation year 2010. You will need to include Form 1040X and a revised Schedule B with Form 8891. If all goes well the IRS will send you a letter saying, “thanks everything looks ok”. But then this is the IRS and it is beyond our ability to guarantee that this is the treatment you will receive.

Penalty for Failing to File Form 8891

This might be the only good news in the IRS treatment of Canadian RRSPs saga. There doesn’t appear to be a bank-busting penalty that the IRS can apply if you have failed to file the required yearly Form 8891 (although the potential for double taxation might qualify as a penalty). A quick explanation lies in the new reporting regime for Canadian RRSPs set out in Notice 2003-75, 2003-50 IRB 1204 authorizing a new reporting form (Form 8891) under the authority of Section 6001 of the Internal Revenue Code. Form 8891 replaced Forms 3520 and 3520A that were authorized under Section 6048. Section 6677 sets out the penalties that can be applied for failing to file forms required by the IRS under section 6048. Notice 2003-75 specifically states that penalties under Section 6677 do not apply but vaguely states “A beneficiary or an annuitant of an RRSP or an RRIF may, however, be subject to other penalties” without specifying what such other penalties might be.  Since there are no penalties set out in the instructions for submitting Form 8891it appears that the IRS uncharacteristically cancelled one penalty regime and failed to specify another. It might be that the worst penalty that can be applied for failing to file Form 8891 is the $135 flat minimum under Section 6651(a).

Penalty for Failing to File Forms 3520 and 3520A

If your Canadian RRSP holdings predate the new reporting regime established effective the 2003 taxation year you were required to file Form 3520 as a beneficiary of a foreign trust and Form 3520A as the grantor of a foreign trust.  If you failed to file these two forms you are subject to penalties set out in Section 6677 – up to $10,000 per year. The three-year Statute of Limitations clock does not start to tick until Forms 3520 and 3520A are filed. Taxpayers that were required to file these two forms in taxation years 2002 and earlier should be aware of the fact that the IRS can examine all years for which the taxpayer failed to file Forms 3520 and 3520A. If these taxpayers failed to file FBARS there could be no limit on how far back the IRS can go. The best thing that a taxpayer can do at this point is file amended and delinquent reports with an explanatory letter and hope for the best.

How to Become Compliant with Reporting and Tax Requirements for Canadian RRSPs and RRIFs

There are only two ways to become compliant with the reporting and tax requirements for Canadian RRSPs and RRIFs:

• File Form 8891 and make an election under Article XVIII (7) of the Canada-US Tax Treaty going forward, and:
• File amended and delinquent reports as required and pay US taxes on accrued earnings within the RRSPs or RRIFs, or:
• Request a Private Letter Ruling from the IRS to file delinquent 8891s in which case no additional income taxes would be payable.

A Private Letter Ruling is a one-off legal ruling that concerns the application of a tax law specifically to you and only you. In this case you will be requesting that the IRS give you permission to make an election under Article XVIII (7) of the Canada-US Tax treaty even though the deadline for doing so has passed. We recommend that you read our article on Private Letter Rulings for further information.

If you are a Canadian resident who is planning to spend an extended period of time in the United States you should be aware of the IRS tax regulations that may effect you. Perhaps you have just purchased a US residence in the Sun Belt and plan to become a snowbird or perhaps you plan to enjoy a long vacation in the US or an extended visit with a relative.

Non-residents who spend extended periods of time in the US can be deemed to have a substantial presence in the US and may be taxed by the IRS as US residents, subject to US taxes on their worldwide earnings. Basically, it is felt that anyone enjoying the comforts and benefits provided by the United States for an extended period of time has an obligation to contribute to the support of those amenities.

 The Substantial Presence Test

The IRS considers non-residents to be U.S. residents for tax purposes if they meet the substantial presence test. A non-resident who was physically present in the United States for a total of 183 days during a calendar year clearly meets this test and will be taxed as a US resident.

A non-resident who has spent more than thirty days in the United States during a calendar year will be deemed to have a substantial presence in the US if the sum of the following calculation of the cumulative number of days spent in the US over a three-year period equals 183 or more:

• The number of days spent in the US during the current year, plus
• One third the number of days spent in the US during the previous year, plus
• One sixth of the number of days spent in the US the year before that

The IRS considers you to be present in the United States on any day that you are physically present in the country at any time during the day.

For purposes of the substantial presence test the IRS does not include the following:

1. Days a non-resident regularly commuted to work in the United States from a residence in Canada or Mexico.
2. Days a non-resident was in the United States for less than 24 hours while traveling between two places outside the United States.
3. Days a non resident was temporarily in the United States as a crew member of a foreign vessel engaged in transportation between the United States and a foreign country.
4. Days a non-resident was unable to leave the United States due to a medical condition or medical problem that arose while in the United States.
5. Days a non-resident was an exempt individual.

Non-residents who may otherwise be entitled to exclude days present in the United States for purposes of the substantial presence test must include any days when they engaged in trade or business.

The following individuals are considered to be exempt individuals by the IRS:

• Foreign government-related individuals
• Teachers or trainees
• Students
• Professional athletes competing in charitable sports events.

Non-residents, who are not foreign government-related individuals, qualifying as exempt individuals to exclude days of presence in the United States from the substantial presence test must file Form 8843, (Statement for Exempt Individuals and Individuals With a Medical Condition).

The IRS also requires non-residents who qualify to exclude days of presence in the United States due to a medical condition problem to file Form 8843

Closer Connection Exception

Non-residents that otherwise meet the substantial presence test may be exempt from being taxed as a U.S. resident if they are granted an exemption by reason of having a closer connection to another country. This subject will be covered in more detail in a separate section.

If you intend to remain in the United States for an extended period of time the cross border tax specialists at Aylett Grant can help ensure that you avoid potential tax problems that may arise from not fully understanding tax implication prolonged stays in the US. Our international tax experts will assist you to file the necessary forms to obtain any exemptions you may be entitled to prior to your departure from Canada.

Canadian RRSPs and RRIFs Taxed as Foreign Trusts

In fact, the IRS treats Canadian RRSPs and RRIFs as foreign trusts subject to US taxes on accrued earnings within the trust in the year earned. Since the IRS taxes United States citizens and US residents on worldwide income even if they live in another country, US taxpayers must include the earnings on their Canadian retirement plans as gross income on their US income tax returns. The IRS deems that the taxpayer has received such accrued earnings even though these earnings are undistributed. Pension and retirement plans must be “created in the United States” to qualify for tax deferment. Canadian RRSPs and RRIFs don’t qualify because they are not created in the US.

Failure to File Forms TD 90-22-1 and 8891

As a result of these misunderstandings many US taxpayers that are resident in both countries who hold beneficial interests in Canadian RRSPs or RRIFs are not in compliance with US tax requirements. US resident taxpayers have almost certainly filed annual 1040s but may not have filed Schedule E because they didn’t realize that they held a foreign trust. Canadian resident US taxpayers may not have filed US 1040s because they had no US income tax payable. In both cases US taxpayers unwittingly have failed to file Schedule Es. As a consequence they may not have filed Form TD 90-22-1 (FBAR) and they have not filed Form 8891 for their Canadian RRSPs and RRIFs.

The Case of Form TD 90-22-1 (Report of Foreign Bank and Financial Accounts)

In the case of Form 90-22-1 the US resident taxpayers outlined above do not qualify for special treatment under OVDI even though they may have filed 1040’s. They are technically in the identical situation as their Canadian resident brethren – both have failed to report income and both have failed to pay tax on that unreported income. Neither, therefore, qualifies for special treatment for filing delinquent FBARS. One way of dealing with a failure to file Form TD 90-22-1 is to file the delinquent forms with a covering letter explaining why you unwittingly failed to file, cross your fingers, and hope the IRS doesn’t impose penalties. If they do at least such penalties will not be deemed to be “willful” and not subject to the greater amount of 50% of the value of the account or $100,000 penalty. Since Form TD 90-22-1 is a stand-alone form you do not need to include amended 1040s although you will have to address that particular problem some time soon.

The Peculiar Case of Form 8891 (US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans)

As we have explained above a failure to file Form TD 90-22-1 can be rectified but the IRS may impose a penalty. If you have failed to file Form 8891, however, there is no filing procedure to enable a taxpayer to file an amended or a delinquent 8891. Under the procedure set out in Notice 2003-75, 2003-50 IRB 1204 authorizing a new reporting form (Form 8891) under the authority of Section 6001 of the Internal Revenue Code, Form 8891 must be included with a timely filed (including extensions) 1040 income tax return to be valid.

Since an amended income tax return is not timely filed, and Form 8891 cannot be filed as a stand-alone document, and Notice 2003-75 specifically states that the IRS will not accept an invalid 8891, there is no filing procedure available rectify the problem. To further confuse bewildered taxpayers there is no apparent penalty that the IRS can impose if you have failed to file Form 8891. Notice 2003-75 specifically exempts Form 8891 from penalties under Section 6677 of the Internal Revenue Code vaguely stating, “A beneficiary or an annuitant of an RRSP or an RRIF may, however, be subject to other penalties”.

Nobody seems to know what an “other penalties” penalty might be let alone how a court might interpret it. So we have the strange case of a taxpayer being required to report the existence of a Canadian RRSP foreign trust account and the earnings and transactions within that trust account on Form 8891. But if the taxpayer has failed to file Form 8891 or discovers that a mistake has been made that needs to be amended there is no way to do it – and there seemingly is no penalty that can be applied.

The Importance of Form 8891

The IRS requires US taxpayers to report income earned within Canadian RRSPs and RRIFs that they hold and pay taxes on these earnings. Since the US would ordinarily tax such earnings in the year that they accrue and Canada would ordinarily tax these same earnings in the year that they are distributed, there would be no offsetting tax credits available in either instance. Canadian RRSPs, therefore, would be subject to double taxation. Article XVIII (7) of the Canada – US Tax Treaty addresses the problem by basically agreeing that each country will defer taxes on the other’s qualified retirement plans until the funds are distributed. However, the IRS requires that US taxpayers specifically claim relief under Article XVIII (7) of the Canada – US Tax Treaty or pay the taxes that would otherwise be due. The only vehicle to make an election for such relief is a checkbox at line 6 (c) of Form 8891. Once an election is made under Article XVIII (7) it can only be revoked with the consent of the Commissioner. In short, a tax payer must pay US income taxes on Canadian RRSPs and RRIFs until he or she includes a Form 8891 with a properly checked line 6(c) with a timely filed 1040 including Schedule E.

Since there is no apparent procedure to fix the problem of failing to file Form 8891 one solution might be to file a completed Form 8891 with your current timely filed tax return and amend previously filed 1040 income tax returns declaring the income within your RRSPs and RRIFs, and pay any delinquent taxes and penalties due. Since you cannot file delinquent 8891s you might include a separate spreadsheet accounting for yearly earnings and transactions detailing how the revised taxable income was calculated. It never hurts a taxpayer to include an explanation letter, which in effect, is a taxpayer’s plea for mercy. If the Value within the Canadian RRSPs is fairly modest this might be the most economical way to become compliant at least going forward. It might be argued that absent filing delinquent Form 8891s you can never be fully compliant but that might be as much of a problem to the IRS as to you.

A final word of warning – if your RRSP holdings predate 2003 and you were a US taxpayer at that time you were required to file Forms 3520 as a beneficiary of a foreign trust and 3520A as the grantor of a foreign trust. The IRS can penalize you as much as $10,000 per year for each year for each form that you have failed to file and the Statute of Limitations doesn’t start until the delinquent forms are filed. The IRS has the right to examine you tax returns as far back as you have held these RRSPs if they get around to it in the next three year after you file – or forever if you don’t.

Private Letter Ruling to Avoid Taxes and Penalties and become Compliant.

There is a method under US tax procedures to avoid taxes and penalties on earnings within your Canadian RRSPs and RRIFs – obtain a Private Letter Ruling. A Private Letter Ruling is like you own personal law that applies only to you and is binding on both you and the IRS. In this case the ruling that you seek is essentially a personal ruling by the IRS that you will be allowed to file all amended and delinquent forms and the IRS will treat these filings as if they were done correctly and were filed on time. In this case you will be allowed to file missing 8891s and the IRS will accept your exemption claim under the Canada – US Tax Treaty as far back as you have held your RRSPs (under Article XVIII from 1996 and former Article XXIX (5) prior to that time).

An application for a Private Letter Ruling is a complicated and exacting process that requires legal, accounting, and taxation expertise. The professional services required to complete an application could involve substantial fees and an applicant should prepare a cost benefit analysis before making any decision. If you have substantial RRSPs that you have held for a length of time you need to weigh the cost of paying the taxes required and all applicable penalties including FBARs and 3520s against the cost of obtaining a Private Letter Ruling.

It is very important that your application exactly detail what relief you seek, the amendments you wish to file, and the delinquent forms you intend to submit. Do not assume that it will cover any document that is not specifically listed in your application. The good news is that if you have elected to obtain a Private Letter Ruling there is an excellent chance that you will receive a favorable ruling. The fact that previous applicants in a similar situation have received favorable rulings gives a reliable indication that the IRS is disposed to granting relief in matters involving failure to file Form 8891 with respect to Canadian RRSPs and RRIFs.

For clarity the following outline explains why this application qualifies under IRS rules for issuing Private Letter Rulings.

1. Section 301-9100.3 of the Regulations on Procedures and Administration permits a taxpayer to apply for an extension of time to make an election required by the IRS in a tax matter. Since the relief sought is essentially an extension of time to file form 8891 (if an 8891 had been filed originally there would not be a tax problem) the application meets a legal requirement.
2. The tax matter under consideration is not listed on the “Areas in which rulings will not be issued” in the current Revenue Procedure (2011-1)
3. The relief sought involves an election. The election sought is to apply Article XVIII (7) of the Canada – US Tax Treaty to defer taxes on earnings inside a Canadian RRSP until the funds are distributed
4. The conditions that must be met to qualify for relief are set out as follows:
   • I. The applicant acted reasonably and in good faith. Any one of the following could be viewed as constituting reasonable and good faith status.
     • The applicant requested permission to late file Form 8891 before the IRS discovered the error: or
     • The applicant’s failure to request relief was beyond his or her control: or
     • The applicant was unaware of US tax requirements governing RRSPs even after exercising reasonable diligence (taking into account the applicant’s experience and the complexity of the issues): or
     • The applicant relied on the advice of a tax professional who failed to make the election or advise the applicant to make the election: or
     • The applicant relied upon written advice from the IRS.
   • II. The applicant will not be deemed to have acted reasonably and in good faith if any one of the following conditions apply:
     • The applicant is attempting to change a position on a tax return for which the IRS has already imposed or could impose an accuracy related penalty: or
     • The applicant was informed in all material respects of the required election but chose not to file the election: or
     • The applicants is attempting to use hindsight in which specific facts have changed since the original election date that now make the election more advantageous.
   • III. Granting the relief sought will not harm the government.
     • The argument that granting the relief sought will cause the government to loose tax revenue is defeated by the argument that the government was not entitled to tax the investment earnings of a Canadian RRSP under the terms of the Canada – US Tax Treaty, therefore, the government cannot be hurt by not receiving tax revenue it is not entitled to.
     • The government’s interests are not prejudiced because the amount of tax to be collected on Canadian RRSPs over an aggregate number of years is not be less than the tax that would have been collected had the election been made on time.
     • The government’s interest would be prejudiced by the general three year limitation to collect penalties unless the applicant waives his or her rights under the tax Statute of Limitations.

The IRS attempts to issue Private Letter Rulings within 120 days of receiving the application. It should be mentioned, however, that US Treasury Department Inspector General has issued a report that criticized the IRS Office of Chief Counsel for missing this target 77% of the time. For greater certainty, an applicant can request a closing agreement to be included with a letter agreement. Requests that include closing agreements are certain to take longer, probably cost more, and since the IRS is unalterably bound by a Private Letter Ruling it would appear to add little to what, in this case, is a routine time extension.

This article will attempt to explain the reasons why RRSP holdings may have unwittingly put many unsuspecting US taxpayers into a non-compliant situation.

 US Tax Policy

In simple terms US tax policy is predicated on the basic premise that if you are a US taxpayer the IRS will tax you on your worldwide earnings in the year that they are received no matter where in the world you might live. Accrued earnings are deemed to be received unless there is a specific exemption provided by law, regulation, administrative decision, or ruling by a competent US court. US taxpayers, therefore, must pay taxes on both income and investment earnings that are received as well as accrued earnings within trusts and investment or similar accounts even though such earnings are undistributed. Pension and retirement plans, however, are exempt from this “taxes due now” policy and earnings within approved plans are not subject to US taxation until they are distributed. To qualify for tax relief such plans must be “created in the United States”. Obviously RRSPs and RRIFs don’t qualify because they were created in Canada.

RRSPs are Not the Same as US Retirement Programs

Many Canadian residents in the United States and Americans resident or working in Canada consider that RRSPs are the equivalent of the US 401(k) accounts or that Canadian Registered Pension Plans are similar to American Pension Plans.

Due to this misconception many taxpayers have erroneously assumed that there is similar tax treatment for both plans and many have been lax in submitting information forms required by the IRS.

Application of US Tax Policy to RRSPs and RRIFs

For clarity, the IRS considers Canadian RRSPs and RRIFs to be foreign trusts subject to US taxes on accrued earnings within the plan even though such earnings are not distributed. This interpretation also applies to Canadian Registered Pension Plans and Deferred Profit Sharing Plans.

Under US domestic law an individual who is a US citizen or a resident of the US that is the beneficiary of a Canadian retirement plan must pay US income tax on earnings accrued within the plan. This also applies to Canadians who have stayed too long in the US and are deemed to be US residents by way of the Substantial Presence Test.

Any person that was present in the US for at least 31 days in a calendar year triggers a calculation formula of presence in the US for the previous two years. If the result of this calculation is 183 or more the IRS considers you to be a US resident subject to US taxes on your total worldwide income. We encourage you to read our article on the Substantial Presence Test for further information.

Application of Canada – US Tax Treaty to US Tax Policy Effecting RRSPs and RRIFs

Unfortunately, application of this policy by the IRS results in the dreaded double taxation scenario – a taxpayer is taxed in the US in the year earnings are accrued and taxed in Canada in the year earnings are distributed. Since the US and Canadian tax obligations occur in different years there is no tax set-off available in either country.

To alleviate this double taxation situation a taxpayer must turn to the 1980 United States – Canada Income Tax Convention (Canada US Tax Treaty) and the subsequent amending protocols. This treaty provides that a “natural person” who is a citizen or resident of either country and a beneficiary of a trust, company, organization, or other arrangement (a plan) operated exclusively to provide pension, retirement or employee benefits that is generally exempt from taxation in the country of origin may elect to defer taxes in the country of citizenship or residence under rules established by the competent authority of that country. In simple terms if earnings accrued within a plan are tax deferred in one country, a citizen or resident of the other country that is a beneficiary of such a plan may also elect to defer taxation until the earnings of such plan are distributed.

The applicable section is Article XVIII(7). This favorable tax treatment does not extend to contributions to a plan. For instance, contributions to an approved RRSP are deductible from income in Canada but not in the United States.

The operative words, however, is “may elect”. US taxpayers that have failed to specifically elect tax relief under Article XVIII(7) are required to pay US income tax on the accrued earning within the plan. The IRS considers those taxpayers that have failed to make the election and have not paid the taxes on earnings within Canadian RRSPs and RRIFs to be non-compliant.

How RRSPs and RRIFs Must be Handled to Meet IRS Requirements

In this article we will only deal with the filing requirements to be compliant with IRS requirements. We will discuss procedures to correct non-compliance in another article. For simplicity sake we will assume that a US tax payer has become the beneficiary of a Canadian RRSP during the current year.  No later than April 15 of the following year, barring extensions, the taxpayer must file a US Income Tax Return (Form 1040) including Schedule B. Many taxpayers believe that they are only required to file Schedule B if they have earned over $1500 dollars in interest or dividends during the taxation year. However two other events trigger the Schedule B requirement even if you have zero interest and zero dividend income:

• If you are the beneficiary of a foreign trust
• If the aggregate balance of all your foreign financial accounts exceeded US$10,000 at any time during the year.

Canadian RRSPs and RRIFs are foreign trust accounts and must be included in your financial accounts. If you report that you have interests in foreign accounts exceeding $10,000 on Schedule B you are required to file Form TD 90-22-1 (FBAR). The low threshold for triggering the requirement to file a FBAR means that you probably will be required to file one. Form TD 90-22-1 is a stand-alone form that must be received by the IRS June 30 of the following year. It is important to ensure that the IRS actually receives the FBAR by June 30 since under the peculiar US laws governing Form TD 90-22-1 there is no penalty distinction between filing an FBAR 1 day late or not filing it at all. Of course one would hope that the IRS might exercise discretion in applying penalties in such situations but the point is – they don’t have to if they don’t want to.

Requirement to File Form 8891

You have also indicated on Schedule B that you have a beneficial or grantor interest in a foreign trust (your RRSP or RRIF) and they would ordinarily be looking for Forms 3520 and 3520A. In actual fact you have both a beneficial and a grantor interest in an RRSP. However you are specifically exempt from the requirement to file forms 3520 and 3520A starting with the 2003 taxation year. You are required to file Form 8891 instead. On form 8891 you may elect to defer tax on you Canadian RRSP under the provision of Article XVIII(7) of the Canada – US Tax Treaty but you must specifically make the election. Once made this election is irrevocable except with the consent of the Commissioner.

Form 8891 must be included with a timely filed Form 1040 including extensions to be valid. Absent a validly filed 8891 you will be responsible for paying US income tax on accrued earnings within your RRSP or RRIF. A late-filed 1040 or an amended 1040 is not timely filed and therefore any included 8891 will not be valid. You must file Form 8891 even if you are not required to file form TD 90-22-1 (FBAR).

Summary

To sum up, the following is the correct procedure to account for your RRSPs and RRIFs

• File Form 1040 by April 15 of the following year or by approved extension date
• Include Schedule B
• Include Form 8891
• File Form TD 90-22-1 if required and ensure the IRS receives it by June 30 of the following year.

The 2011 Overseas Voluntary Disclosure Initiative

The 2011 OVDI announced by the IRS is intended to bring non-compliant US taxpayers into compliance with US tax laws and regulations on the understanding that once in compliance the tax payer will continue to comply with US tax requirements in future years. This may be a non-compliant taxpayer’s last best chance to come forward and voluntarily disclose previously undisclosed offshore income and holdings at a cost that can be predetermined without further administrative penalties or fear of criminal prosecution.

United States citizens and residents of the US are taxed on their worldwide income no matter where in the world they might live. US taxpayers are required to file US tax and information returns if their income and offshore assets exceed certain limits even if they do not owe US taxes by way of provision of a tax treaty. The IRS is pursuing taxpayers that have avoided tax on offshore income and holdings with unprecedented vigor. The US has concluded treaties with countries that previously had bank secrecy laws that now require the banks in these countries to provide information requested by the IRS. Offshore banks can no longer guarantee client confidentiality.

Information provided to the IRS under the 2009 offshore initiative provided IRS agents with a deeper understanding of how funds were transferred and how tax avoidance facilitators operated. The Foreign Account Tax Compliance Act, signed into law by President Obama in March 2010, will require foreign financial institutions to either collect and turn over data on U.S. clients with accounts of at least $50,000, or withhold 30 percent of the interest, dividend and investment payments due those clients and forward the money to the Internal Revenue Service.

It has never been more risky to be a non-compliant US taxpayer. With further information gleaned from the 2011 Initiative along with the increased investigative resources that the Administration has requested Congress to provide to the IRS it will become even riskier.  The decision that a non-compliant taxpayer makes under the 2011 OVDI can have far reaching and potentially life changing consequences. It is imperative that taxpayers who are contemplating a voluntary disclosure be fully informed about all aspects of the decision that they may make. With these factors paramount Aylett Grant has developed the following program to fully inform and assist their clients.

Initial Consultation

We will arrange an initial consultation with each new client to determine what services the client requires and the best path to come into compliance with US tax requirements. In order to efficiently proceed with the OVDI process we request that potential clients bring with them as much information regarding their tax history as they have available.

Canadian Tax Returns

If the client agrees that Aylett Grant can provide the services that he or she requires we will review the clients Canadian tax returns for the years covered by the OVDI (2003 to 2009) affecting the client. At this point we will be able to determine the most appropriate process for the client to proceed. Our recommendation will be predicated on the least cost and risk to the client. At this point there are several different options available to the client:

• Proceed with the 2011 OVDI.
• Proceed with a voluntary disclosure under the Longstanding IRS Disclosure Policy.
• Proceed with a so-called “Quiet Disclosure”.
• Proceed to file delinquent returns.

Aylett Grant Tax LLP Scope Letter

After reviewing the clients tax history and disclosure requirements Aylett Grant will prepare a detailed letter outlining our recommendations as to how the client should proceed along with the processes involved. We will generally outline the scope of our services and give details of the forms and information returns that the client must file. We will further outline details of any required information that we will be seeking. The more information that can be provided directly by the client the more efficient we can be and the less it will cost. We will also provide the estimated cost of our services based on the provisions outlined in the scope letter and the amount of the retainer required.

Retainer Required

If the client agrees that Aylett Grant should proceed with the services outlined we will request that the client provide the specified retainer.

Follow-up Consultation

Upon receipt of the required retainer Aylett Grant will arrange a second consultation where the client can request further details concerning his disclosure and ask any questions that he or she may have.  We will discuss the reasons for our recommendations and the alternatives that may still be available if the client so decides. At this meeting we will receive instructions regarding information that the client intends to provide or what information we might be required to pursue. Our policy dictates that our clients have a clear and complete understanding of our services and the way we can best assist them. Our goal is to so impress those seeking tax and accounting advice with our accurate, timely, and efficient services that they become our permanent clients.

We will also request that the client sign certain forms required by the IRS in order that we may act on his or her behalf and also sign any authorizations that we may require in order to obtain required information from third parties.

Prepare US Tax and Information Returns

Following this second meeting Aylett Grant will immediately set out to obtain missing information and prepare any required tax returns and calculate US taxes owing and tax offsets by way of tax treaties. We will prepare any required FBARs and other information reports required by the IRS and calculate potential penalties under the different scenarios. At this point it ought to be clear as to what outstanding tax obligations the client has and the potential costs.

Consultation with a US Tax Attorney

After the required tax and information returns have been prepared, but before they are actually filed with the IRS, Aylett Grant will arrange an interview with an experienced US tax attorney. It is our aim to make certain that every possible advantage is provided to our clients to ensure that they fully understand what is required and any possible consequences involved. It is also important that the attorney fully understand the client’s complete situation including any details that the client might not wish to reveal to anyone outside the attorney-client privilege.

Final Determination

Following the meeting with the tax attorney a final recommendation on the most appropriate method to proceed will be made to the client based on a thorough analysis of the client’s individual case. This recommendation will be based upon the least costly and least risky or the most convenient process for the client.  The client, however, must make the final decision after he or she has been fully apprised of the benefits or consequences of each alternative process. The required returns will be filed in accordance with the instructions of the client.

Follow-up With the IRS

Aylett Grant in conjunction with the attorney will, so far as possible, guide and assist clients throughout the disclosure process until the IRS closes the file. We are not able to predetermine the filing position or attitude that the IRS may take with regard to a particular file. Consequently, we cannot provide absolute assurance that the IRS will accept the information that we have provided on a client’s behalf or that the IRS will not further review a file. Since we have no knowledge or control over what actions the IRS may take in regard to a particular case, the follow up costs and services will be negotiated with the client on a case-by-case basis.

OVDI Protocols

The protocols that Aylett Grant Tax LLP has specified may appear excessive at first blush. We can only stress the importance of becoming compliant with US tax requirements before your name appears on the IRS radar screen through whistleblowers, conspirators, or filings by foreign banks under new tax evasion treaties. Our Website has several articles dealing with disclosure and consequences that we encourage you to read. Non-compliant US taxpayers can be financially devastated if they are detected and the IRS chooses to apply the full provisions of the available administrative penalties. If the IRS succeeds in a criminal prosecution the costs can be financially crippling with a likelihood of incarceration.

It is because of the severity of the consequences that Aylett Grant is so concerned for their clients. We believe that no avenue should be left unexplored regarding becoming compliant with US tax requirements. This may be the last opportunity to come forward without additional administrative penalties or fear of criminal prosecution. This may be the last “kick at goal” so to speak and it must be done on the right way based on each client’s individual circumstances.