avoid $10, 000 fine for Foreign Corporation reporting on US form 5471 - david ingram expert US CANADA cross border non-resident

Hi David
I am a Dual US Canadian citizen living in Chicago.  I also own 20% of my family's business (with 4 siblings) in Yorkton, Saskatchewan.  I am told that I have to file a US corporate return for that business.  Is that true? It doesn't make sense to me.  I have been reporting the dividends on my 1040..
david ingram replies:
I once had a crush on Bunny, the daughter of the owner of the bus station in Yorkton but that was in 1962/63 which was 45 years ago and likley before you were born.  And then there was the summer at Madge Lake and the young lady from Kamsack and my 1954 Nash Ambassador Country Club Le Mans two dour coupe with the continental tire kit.  You bring back memories.
Unfortunately, you do need to report the Canadian Corporation's internal affairs (not just the earnings) on your 1040 if you own 10% or more
Form 5471 is required to be filed by all U.S. taxpayers who have equity or controlling interests in a Controlled Foreign Corporation ("CFC") as defined by the IRS.
AND, although there have always been very significant fines, they were not automatic. BUT

Beginning January 1, 2009, the IRS will assess an AUTOMATIC penalty of $10,000 for each missed CFC filing, meaning that the $10,000 penalty will be assessed per year, and per entity.

For example, Sarah is a resident of Alaska and a citizen or green card holder of the United States. Sarah is also a Canadian citizen and her husband Steve is a US citizen.  Her Canadian citizenship is handy because they have a Snowmobile dealership in Anchorage and a sub branch incorporated company in Whitehorse.  Because Sarah is also a Canadian, she can do anything at the Whitehorse facility without the need to get a visa.  Sarah and Ben's company is required to file a form 5471 with their 1120 each and every year.  Failure to file the Form 5471 will trigger an automatic $10,000 penalty to thier Anchorage corporation for each year they do not file the form 5471.
If they were in California, the state requires it as well with their copy of the 1120 and the California  FTB (Franchise Tax Board) has additional penalties.  (off hand, I do not know if Illinois has extra penalties)
If Sarah and Steve owned the Whitehorse company in their owns names instead of as a sub of their US company, they would need to file the 5471 each with their 1040 as you will have to do.
The following is taken from an IRS letter to a corporate taxpayer.

IRC Section 6038(b)(1) provides for a monetary penalty of $10,000 for "each 5471 that is filed after the due date of the income tax return (including extensions) or does not include the complete and accurate information described in Section 6038(a).

Beginning January 1, 2009, the Internal Revenue Service Center will automatically assert appropriate penalties on late filed Forms 1120 with froms 5471 attached.

Note that the $10,000 is a minimum penalty - the penalty increases by $10,000 for each 30 day period it is late but relax.  The Maximum penalty is only $50,000 per shareholder per year.
You can find the actual form at:   http://www.irs.gov/pub/irs-pdf/f5471.pdf
You can find associated schedules J, M and O at: http://www.irs.gov/formspubs/lists/0,,id=97817,00.html
You can find the instructions at:  http://www.irs.gov/pub/irs-pdf/i5471.pdf
Note the penalties on the bottom left hand corner of page 3 of the instructions.
Good luck
We can help you with the situation form anywhere in the world./
If you happen to live in Dallas, Halifax, Victoria, Toronto or Kelowna, y0u couold also try someone from the following reply:


Hello--I'm looking for some tax advice for a US/Canada tax solution. Do you know of any good folks in Vernon or Kelowna. Do you make such recommendations?
Many thanks for your time--
david ingram replies

I was born in Vernon but that and a quarter will let you use a Telus Pay Phone 'IF' you can find one.

I recommend the following people including Len Vandenberg in Kelowna

The following people are skilled at US Canadian tax returns

Some hints to get them done. Who could look after you?

Gary Gauvin is absolutely qualified to deal with you.  He is an old business partner of mine from Ottawa.  He now practices outside of Dallas Texas as a one or 1 1/2 person office.  If you deal with Gary, you will deal with Gary.  He is a US enrolled agent.  You can find his website easily.  Type - income Tax Expert -  into google.  Gary will come up as number one or two.  Why, because he is.  If I am looking for a first or second opinion, I call Gary. Disadvantage -

Gary is a one and a half  person office.  Advantage - You will always get to talk to Gary.

Gary likes corporations.  I  and my four associates do not like them. I like dealing with individuals who deal cross-border withOUT corporations.

OR   KPMG in Vancouver. The last time  I checked they had 22 people in their US/Canada department.  call (604) 691-3025.  Advantage - Lots of Backup.  Disadvantage - It will be hard to get the same person to deal with you three times in a row.

OR   Steve Peters with KPMG in Halifax (902) 492-6011

OR    Kevin Nightingale in Toronto (416) 733-9595

OR     Len Vandenberg with BDO Dunwoody in Kelowna, BC.  (250) 763-7600

OR     Steve Katz in Vancouver at (604) 732-1515

OR    Brad Howland in Victoria at (250) 598-6258

Whoever you choose, you would likely do well to consult with me for one or two hours a year.  If I have a suggestion, it will be worth it.  If I can't come up with anything, you will know that what you are doing is likely the best track.  I will compare it to my dentist.  When I went in the fall of 2005, I ended  up with $16,000 to $18,000 of dental bills, a root canal, a bunch of pain, and a lot of nice new caps, etc. 

When I went for an inspection on Jan 29, 2008,   he could not find anything wrong except that I was not flossing.  Which one did i appreciate more?

Well both - the first time was expensive but dealt with years of neglect.  The second said I am on the right track.

Good luck.

Looking at the California Non-resident Adjustment Form CA(NR) will give you an idea of how this leaving the country stuff works.  http://www.ftb.ca.gov/forms/07_forms/07_540nrca.pdf



david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
$1,200 would be the same with one rental
$1,300 would be the same with one business no rental
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
This is just a guideline for US / Canadian returns
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
A Business for $400 - Rental and business likely $550 to $700
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
8891 forms are generally $50.00 to $100.00 each.
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.


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