Tag Archives: U.S.-CANADIAN TAX TREATY

When International Cross Border Management Consulting Fees Can Send You to Prision

The IRS is hunting for non-U.S. citizens paying management fees or consulting fees to their foreign business.   The United States is the only country that puts you in jail for ignoring the economic substance of a transaction.

Mr. Albert S.N. Hee was sentenced to 46 months in prison.  He was a successful businessman in Hawaii.    To get money out of his U.S. corporation, he paid his wife and children about $750,000.  He deducted the expense on his corporate tax return claiming that they were providing services to his business.

When the IRS found out the truth, he was arrested on various criminal charges.  The easiest one for the IRS to prove was filing a false tax return.  All the IRS has to prove is the Mr. Hee placed an item on his return (the expense) that was not true.  The IRS does not need to prove that taxes were avoided.

Take Mike as an example.  He is Canadian and lives in Vancouver.  He has invested in a U.S. business.  He has provided the startup money to an e-commerce business and owns 25% of the business (operating as a limited liability company).  Mike does not want the complexity (and therefore accounting fees) of filing a U.S and state tax return.

Mike is taking his share of the profits as a management fee. He spends time getting an update report from the other owners but he is not managing the business. 

He is paying Canadian taxes on the income but no American taxes.   The criminals are the LLC, its managing members, and Mike.   Often the IRS will add the criminal charge of “conspiracy to defraud” and mail fraud. 

What should have Mike have done?

For a Canadian, an American LLC is not the best choice.  Since Mike is not involved with management, a limited partnership is a good option.  Under the Canadian-United States Tax Treaty, Canada will offset his Canadian income taxes by the U.S. income tax.

The limited partnership will make the estimated tax payments for Mike.  Mike will get one or two-page report (call a Form K-1) from the partnership telling Mike the amount of his taxable income and the amount of estimated taxes.  Mike will file a U.S. and state income tax returns.

Yes, it is a hassle.  But other international businesses see this a part of the cost of being an international business.  Usually the CPA fees for the returns are less than $5,000.  By the way, the fees are a tax deduction. 

Judges are harsh on non-U.S. citizens saying to the defendant that they came to America to make money.  Unlike citizens who have no choice but to pay taxes, the nonresident alien came here by their own choosing.

U.S. International Tax Planning for the Canadian and U.K. Investor in U.S. Real Estate

Canadian and the United Kingdom citizens are caught in a double tax issue.  On one side, there is income tax.  On the other hand, there is inheritance tax (for the U.K. citizen), estate tax in the U.S. (which will be repealed but only for a few years) and the Canadian deemed sale at death tax.

We all want the American 20% long-term capital gain tax rate.  However, this means the foreign investor can’t own the U.S. real estate in a corporation.    Both a domestic corporation and a foreign corporation incur two U.S. income taxes.    For the domestic corporation, the second tax is called “the accumulated earnings and profits tax”.

For the foreign corporation, the tax is called the “branch profits tax”.   Foreign shareholders of a corporation owning U.S.  real estate are subject to the U.S. estate tax (but not the gift tax).

Wealthy Americans have the same tax problem.  They solve the problem by using a special type of a trust.  Here is a short video on reducing U.S. taxes with the use of a trust.   If you want to learn more about a Nevada Self-directed trust for your tax planning, then please call me, Brian Dooley, CPA, at 949-939-3414.