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In the 2013 federal budget the federal government announced its intention to amend the tax provisions with respect to testamentary trusts (i.e., trusts created as a result of death). These were followed by specific proposals in the 2014 budget. On December 17, 2014, Bill C-43 received Royal Assent and brought into force many new income tax provisions.

One of the most widely discussed changes is that graduated tax rates will generally no longer be available to testamentary trusts. Beginning in 2016, income earned and retained by a testamentary trust will be subject to tax at the top flat tax rate, with the exception of a graduated rate estate and a qualified disability trust (QDT).

The graduated rate estate (GRE) is a completely new type of trust that comes into effect for income tax purposes beginning January 1, 2016. In general terms, a GRE is an estate that arises as a consequence of a death and can exist for up to 36 months following death provided the trust remains a testamentary trust. A GRE will be subject to the “old” graduated tax rate treatment. In simple terms, an estate will be treated as a GRE for up to 36 months immediately following the testator’s death and during that time it will be eligible to utilize graduated tax rates. If the estate exists beyond the 36 month point following the deceased’s death, the estate will no longer be a GRE and becomes subject to the top flat tax rate regime.
The estate representative can select any year end for the GRE; however, if the trust continues to exist beyond the 36 month point, the trust year end will convert to a December 31 year end from that year forward.

An estate typically remains open for the time needed by the estate representative to complete the work required to administer the estate, including activities such as identifying the assets, locating beneficiaries, and completing the estate distributions. The federal government suggests 36 months is a reasonable period for an estate to be treated favourably through GRE status because the majority of estates are typically wound up within this window of time.

EXAMPLE

Let’s look at an example that highlights the year end for a new estate under the new regime.
Ted passes away on September 30, 2016 with a fairly complex estate which will likely remain open for an extended period of time. Ted’s estate taxation year begins at the moment of death and will be treated as a GRE for up to 36 months from his date of death.

First tax return April 30, 2017 (Selected by Ted’s estate representative)
Second tax return April 30, 2018 (12 months)
Third tax return April 30, 2019 (12 months)
Fourth tax return September 30, 2019 (36 months following Ted’s death) – GRE period ends.
Fifth tax return December 31, 2019 – Top flat tax rate
Sixth tax return December 31, 2020 (12 months)

Any testamentary trust arising because of a death, other than a GRE or QDT, will now be immediately taxed at the top flat tax rate. For example, if Ted decides to establish a testamentary trust for each of his three children and their respective children, the three testamentary trusts will be taxed at the top flat tax rate if Ted dies after December 31, 2015. Using trusts to achieve specific testamentary wishes such as passing assets on to successive generations remains a valid estate planning tool, but the income tax consequences have changed somewhat dramatically.

A second significant change to the taxation of trusts was not addressed in the government’s 2013 announcement or the 2014 budget but appeared in the final legislation. A spousal trust, alter ego trust and joint partner trust are all subject to a deemed disposition of their capital assets upon the death of the income beneficiary (second death in the case of a joint partner trust). This deemed disposition triggers the realization of any accrued capital gain in the assets held by the trust and is currently reported as income to the trust. For deaths after 2015, these capital gains will be taxed in the deceased beneficiary’s terminal tax return and not the trust.

While the change seems simple because all it does is shift the income tax liability from the trust to the deceased, the implications may be significant, particularly in situations that cannot be changed.

EXAMPLE

Consider Mark and Mary, a married couple. This was a second marriage for each and both have children from a first marriage. At the time of Mark’s death several years ago, Mark left the preferred shares of a family business to a spousal trust, with Mary as the beneficiary of the income earned in the trust. Mark’s children were named the “capital” beneficiaries who would ultimately receive the shares at the time of Mary’s passing. The business purchased a last-to-die life insurance policy on the lives of Mark and Mary. The intention was to use insurance proceeds to redeem a portion of the preferred shares held by the spousal trust in order for it to meet its cash flow needs relative to the income tax liability arising in the trust upon Mary’s death. Mark and Mary’s plan was designed with the current income tax rules in mind; insurance was going to provide the liquidity to fund the income tax liability.

Under the new regime, the tax liability resulting from the deemed disposition of the trust’s assets will now arise in Mary’s estate. This means that Mark’s children, as capital beneficiaries of the trust, will inherit the remaining preferred shares from the spousal trust, plus the cash that the trust will receive from the redemption of shares from the business. Mary’s estate will bear the income tax liability arising from the trust’s deemed disposition of the shares, and only the residue of her estate will be available for distribution to her own beneficiaries. This is not what Mark and Mary would have intended based upon their planning objectives and the tax rules in effect when they undertook their estate planning.

Mark and Mary’s situation involves a testamentary spousal trust; however, a similar situation arises with an inter vivos spousal trust as well as alter ego and joint partner trusts. In each of these scenarios, the tax liability is shifted from the trust to the deceased. Unless the deceased’s estate has the same beneficiaries as the trust, an unanticipated inequity will arise. To the extent the deceased spouse’s estate does not have sufficient funds to pay the resulting tax liability, the trust is jointly and severally liable.

Beyond the shift of the income tax liability, planning will also be significantly impacted because post mortem plans that depended on netting capital losses against capital gains will all need to be revised. The capital gain triggered by the deemed disposition will be reported by the deceased, but the capital loss created by a redemption will be realized in the trust.
Planners and clients will want to review the impact of these changes. Some clients will need to revise plans, and others may need to develop additional plans to deal with those situations that cannot be changed.

(Reprinted from Comment, edition 290, with permission of the Institute of Advanced Financial Education, Queens Quay West, Toronto, Ontario)

The IRS estimates that there are millions of U.S. taxpayers with unreported offshore accounts. Americans with accounts in Switzerland. Dual nationals with accounts in their home country. American expats living and banking in Israel. Although every situation is different there is a common thread – millions of taxpayers are not reporting their foreign bank accounts.

The United States Department of Justice secured a conviction against a St. Louis man accused of not reporting foreign bank accounts in Switzerland and Singapore. Raju Mukhi, age 67, was indicted last year on charges of willful failure to file an FBAR and filing false tax returns. Offshore accounts with an aggregate value of more than $10,000 must be reported annually on one’s tax return and on a separate Report of Foreign Bank and Financial Accounts or FBAR.

After pleading guilty in October 2014 to single counts of filing a false return and failure to file an FBAR, a federal judge sentenced Mukhi last week to three years probation. He remains subject to hundreds of thousands of dollars in civil penalties to the IRS.

According to the indictment, Mukhi opened an account at Swiss bank Clariden Leu. The account was originally opened in the name Sukhmani Partners II. Later he changed the name on the account to Safekeep. The government said notwithstanding the names on the accounts, Mukhi was the beneficial owner. They also say that he simultaneously opened another offshore account in nominee name at Goldman Sachs Bank – Singapore.

When completing his returns, he checked the “No” box to the question “Do you have interest or signature authority over an account in a foreign country?” Making a false statement on a tax return can be a felony as is the willful failure to file an FBAR form. Mukhi is lucky that he wasn’t also charged with tax evasion as the government often considers nominee accounts – accounts opened in another name – to be an affirmative act of tax evasion.

In announcing the convictions, the IRS issued a statement saying, ”Hiding income and assets offshore is not tax planning, it’s tax fraud. We are continuing our work to crack down on offshore tax evasion.”

We don’t know how Mukhi was caught since much of the court record has been sealed. We do know, however, that the government said Mukhi never disclosed his accounts to his tax preparer and signed returns indicating he had no offshore accounts.

The sealing orders from the court coupled with the probation sentence may signal that Mukhi is cooperating with the Justice Department and IRS. The government has been rumored to be investigating Clariden Leu bank in Switzerland.

Having an offshore account in Switzerland or Singapore isn’t illegal. Not telling the government, however, may be a felony. In addition, failure to file FBAR forms can carry civil penalties up to the greater of $100,000 or 50% of the historical high balance of the account.

http://www.natlawreview.com/article/unfiled-fbar-conviction-against-st-louis-man-report-foreign-bank-and-financial-accou

Laguna Beach Resident is the Latest in a Series of Defendants Charged with Concealing Bank Accounts at Israeli Banks

Washington, DC—(ENEWSPF)—February 2, 2015. Dr. Baruch Fogel of Laguna Beach, California, pleaded guilty today in the U.S. District Court for the Central District of California to willfully failing to file a Report of Foreign Bank and Financial Accounts (FBAR) for tax year 2009, announced the Justice Department’s Tax Division, the U.S. Attorney’s Office for the Central District of California and Internal Revenue Service-Criminal Investigation (IRS-CI).

According to court documents, Fogel, a U.S. citizen, maintained an undeclared bank account held in the name of a foreign corporation at the Luxembourg branch of Bank Leumi.  The undeclared foreign bank account and foreign corporation were set up with the assistance of David Kalai, a tax return preparer who owned United Revenue Service (URS).  In December 2014, David Kalai and his son, Nadav Kalai, were convicted in the Central District of California of conspiracy to defraud the United States for helping certain URS clients set up foreign corporations and undeclared bank accounts to evade U.S. income taxes and for willfully failing to file FBARS for an undeclared foreign account that they controlled.

According to court documents and evidence introduced at the trial of David and Nadav Kalai, Fogel was a doctor who operated several managed health care businesses.  David Kalai suggested to Fogel that he could reduce his taxes by transferring money to a foreign bank account held in the name of a foreign corporation.  David Kalai advised Fogel to open up the bank account that was set up in the name of a British Virgin Islands corporation.  At a meeting facilitated and attended by David Kalai at the Beverly Hills branch of Bank Leumi, Fogel executed documents to open his Luxembourg bank account at Bank Leumi.  According to court documents, Fogel diverted at least $8 million to his undeclared bank account at Bank Leumi’s branch in Luxembourg.

U.S. citizens and residents who have an interest in, or signature or other authority over, a financial account in a foreign country with assets in excess of $10,000 are required to disclose the existence of such account on Schedule B, Part III, of their individual income tax returns.  Additionally, U.S. citizens and residents must file a FBAR with the U.S. Treasury disclosing any financial account in a foreign country with assets in excess of $10,000 in which they have a financial interest, or over which they have signature or other authority.

Fogel has agreed to pay a civil penalty in the amount of approximately $4.2 million to resolve his civil liability with the IRS for failing to file FBARs.  Fogel faces a statutory maximum sentence of five years in prison and a maximum fine of $250,000 or twice the gross gain or loss to any person, whichever is greater.

Principal Deputy Assistant Attorney General for the Tax Division Caroline D. Ciraolo and Acting U.S. Attorney Stephanie Yonekura of the Central District of California thanked special agents of IRS-CI, who investigated the case, Tax Division Trial Attorneys Christopher S. Strauss and Ellen M. Quattrucci who prosecuted the case, and Assistant U.S. Attorney Sandra R. Brown of the Central District of California, who assisted with the prosecution.

http://www.enewspf.com/latest-news/law-and-order/federal-and-international/58792-california-doctor-pleads-guilty-to-failing-to-report-foreign-account-at-bank-leumi-in-luxembourg.html

Multinational corporations are opposing new international proposals that would lower the threshold for finding that a company has a permanent establishment in a particular jurisdiction.

The proposals are part of the Organization for Economic Development and Cooperation’s Base Erosion and Profit Shifting (BEPS) project, aimed at preventing arbitrage-based tax-planning schemes used by multinational companies. Many such schemes attempt to avoid having a permanent establishment (PE) in countries where the company generates significant revenues, thus avoiding corporation taxes in those jurisdictions.

The proposed new PE rules comprise Action 7 of the OECD’s BEPS plan. This sets out 14 options for modifying the internationally accepted criteria to decide whether a permanent establishment exists. They would also eliminate some of the existing customary exemptions from PE status.

The level of disagreement on PE is probably greater than in any of the other BEPS actions, with the OECD having received more than 800 pages of comments on its PE proposals. These were discussed at a meeting last week, at which representatives of business expressed their concerns. They noted that the current PE rules have worked well for the past 50 years, providing certainty and stability for cross-border trade and investment.

Three main observations were made at the meeting. First, any rule which would make it easier for governments to establish the presence of a PE would almost certainly increase the substantive and administrative costs for cross-border transactions – for example creating PEs for marginal activities.

Second, some of the proposed changes use subjective language that could produce ambiguities, and would inevitably create disputes between countries and increase the risk of double taxation, particularly for so-called commissionaire arrangements.

Third, the proposed options affect the balance of taxing rights between the source and residence country. That balance is not part of the BEPS project and it should be discussed directly rather than by adjusting the PE rules.
Business commentators noted that changes to the PE threshold would impact on other articles in the OECD Model Tax Convention and would have implications beyond corporate income tax – for example on value-added tax. They also suggested that some of the perceived profit-shifting issues could be dealt with by proper application of transfer pricing principles, rather than the proposed changes to the PE standard.

The OECD working group will meet in March to further consider the proposals and the comments received. A revised draft will be issued in the spring.

– See more at: http://www.step.org/controversy-over-oecd-changes-permanent-establishment-rules?j=1225408&e=hcc31@hallmarkcc.com&l=346_HTML&u=21609061&mid=1062735&jb=0#sthash.ZEPjZpsp.dpuf

At one point in time, Switzerland was considered by many as the safest and most confidential place to deposit assets.

Times have changed.

Globes Israel has recently reported that major Swiss banks are now demanding that their Israeli clients present confirmation that the property on deposit has been properly reported to the Israeli tax authorities.

Failing to comply with the request from the Swiss bankers could lead to freezing the assets in the account.

And transferring funds to another bank will not be an easy task.   Before most reputable banks will open a new account, detailed information regarding to the source of funds must be provided.

The change in banking policies is connected to the penalties that the US government imposed on and collected from Swiss banks in the fight against tax evasion.   The new American FATCA rules require banks to report assets they hold belonging to US Persons directly to the US tax authority.

This new disclosure environment is now spilling over to other countries.

Furthermore, the OECD is formulating global standards for the sharing of banking information between countries.

Using the various voluntary disclosure programs is a much safer and usually much less costly means of setting yourself right with the tax authorities.

If the tax authorities find you first, you will not only have to face the civil charges and penalties, but you may also be exposed to criminal penalties.

2015 sees a number of impeding developments regarding FATCA compliance as the US presses on with its quest to target tax non-compliance by U.S. taxpayers with foreign accounts. Foreign Financial Institutions (FFIs) need to maintain focus on upcoming requirements, deadlines and impending developments with regards to FATCA. By 31 December 2014, firms that need to be compliant with FATCA or a US intergovernmental agreement (IGA) should have registered with the US Internal Revenue Service (IRS0).

Now that we have moved into 2015, there are three key dates that firms need to be aware of: 31 March 2015 is the first FATCA reporting deadline for FFIs in non-IGA jurisdictions and FFIs in Model 2 IGA jurisdictions. Firms will need to report the US account information to the IRS or relevant tax authorities.

It is important to note that the reporting obligations will increase in 2016 and 2017. 31 May 2015 or 30 June 2015 are typically the dates of the first FATCA reporting for FFIs in Model 1 IGA jurisdictions. Firms will need to report the US account information to the relevant tax authorities. Again, it is important to note that the reporting obligations will increase in 2016 and 2017. 30 June 2015 is when the review of pre-existing (30 June 2014) high-value individual accounts (over US$1m) must be completed.

The US Treasury estimated that it will cost foreign banks and financial institutions $8 billion to comply with Fatca. This amount does not take into account the amount of time and cost that US citizens will need to take to comply with the demands of foreign banks and financial where they have accounts.

Those who have not filed an FBAR in prior years and who choose to file on their own should familiarise themselves with the Internal Revenue Service Streamlined Filing Procedures that can be found at the IRS website, http://www.irs.gov . If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, exceeding $10,000, the Bank Secrecy Act requires you to report the account yearly to the Department of Treasury by electronically filing a Financial Crimes Enforcement Network (FinCEN) 114, Report of Foreign Bank and Financial Accounts (FBAR).

Who Must File an FBAR? United States persons are required to file an FBAR if: 1. The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and 2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year reported. United States person includes US citizens; US residents; entities, including but not limited to, corporations, partnerships, or limited liability companies, created or organised in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

Exceptions to the FBAR reporting requirements can be found in the FBAR instructions.

Signature Authority

Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account Reporting and Filing Information A person who holds a foreign financial account may have a reporting obligation even when the account produces no taxable income. The reporting obligation is met by answering questions on a tax return about foreign accounts (for example, the questions about foreign accounts on Form 1040 Schedule B) and by filing an FBAR.

The FBAR is a calendar year report and must be filed on or before June 30 of the year following the calendar year being reported. Effective July 1, 2013, the FBAR must be filed electronically through FinCEN’s BSA E-Filing System. The FBAR is not filed with a federal tax return.

When the IRS grants a filing extension for a taxpayer’s income tax return, it does not extend the time to file an FBAR. There is no provision for requesting an extension of time to file an FBAR. Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50 percent of the balance in the account at the time of the violation, for each violation.

Printed in part from an article at the Royal Gazette online 11/12/14