Baker Tilly Victoria

Tax Accounting Advisory

U.S. Tax

Update from IRS regarding federal tax returns/payments due to COVID-19

On March 18, 2020, the IRS issued Notice 2020-17 deferring federal income tax payments due on April 15, 2020 to July 15, 2020. This notice was superseded on March 20, 2020 by Notice 2020-18 which expanded the relief measures. The expanded relief measures include an extension to the filing due date of U.S. federal tax returns as well as removing restrictions on the amount of income tax that could be postponed. The information below contains the updated relief measures announced in Notice 2020-18.

Postponement from paying U.S. federal taxes

Any person1 affected by COVID-19 can access the postponement of federal tax relief measures.

This deferral applies to the following federal income tax payments (including payments of tax on self-employment income) due on April 15, 20202:

  • Federal income tax payments due for the 2019 tax year; and
  • Federal estimated income tax for the 2020 tax year (the first of four estimated tax payments for the 2020 tax year).

This deferral was initially subject to restrictions on the amount of tax payable, but these restrictions have been eliminated.

With regards to the deferral of the federal income tax payment date, the period between April 15, 2020 and July 15, 2020 will be disregarded in the calculation of any interest, penalty or addition to tax.

Extension to U.S. federal personal tax return filing deadlines

The original Notice 2020-17 did not extend the filing due date of any U.S. tax returns or information returns. Notice 2020-18 supersedes this notice affording taxpayers3 affected by COVID-19 with an automatic filing extension from April 15, 2020 to July 15, 2020. Affected taxpayers do not have to file any forms to request this automatic extension.

U.S. Citizens or U.S. Permanent Residents residing in Canada

If you are a U.S. citizen or a U.S. Permanent Resident (Green Card holder) residing in Canada4, you are already afforded an automatic two-month extension to file your return. The normal due date for filing your U.S. tax return would be June 15, 2020.

This normal due date is also extended to July 15, 2020 based on Notice 2020-18.

If you are still unable to file your return by July 15, 2020, you can request a further extension to October 15, 2020 by filing Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return.

State tax filings

The notice did not provide any information related to measures being undertaken by individual U.S. states. The American Institute of Certified Public Accountants (AICPA) has been monitoring updates provided by each state and has provided a document on their website outlining current measures for each state: AICPA COVID-19 U.S. State information.

  1. The Secretary of the Treasury has determined that any person with a Federal income tax payment due April 15, 2020, is affected by the COVID-19 emergency for purposes of the relief described in Notice 2020-18. The term “person” includes an individual, a trust, estate, partnership, association, company or corporation as provided in section 7701(a)(1) of the Code.
  2. The Notice does not extend due date for the payment or deposit of any other type of Federal tax (e.g., estate, gift, and payroll taxes).
  3. The Secretary of the Treasury has determined that any person with a Federal income tax return due April 15, 2020, is affected by the COVID-19 emergency for purposes of the relief described in Notice 2020-18. The term “person” includes an individual, a trust, estate, partnership, association, company or corporation as provided in section 7701(a)(1) of the Code.
  4. The automatic two-month extension is not limited to U.S. citizens or U.S. Permanent Residents (U.S. Green Card holders) residing in Canada, but for purposes of this article we are only referring to those U.S. Persons residing in Canada.

2019 Tax Deadlines Extended

On March 18, 2020, the federal government made an announcement to postpone the due date of certain 2019 tax filings as part of their COVID-19 economic response plan.

Tax filing deadlines for federal returns:

Category Normal due date Extended due date
Trusts March 30, 2020 May 1, 2020
Individuals April 30, 2020 June 1, 2020
Individuals (self-employed or spouse of self-employed) June 15, 2020 June 15, 2020 (no change)
Corporations Six months from year-end date Six months after end of taxation year (no change)

There are various other federally required returns and forms with specific due dates that have currently not been extended; such as: T5013 Partnership information return, GST34 GST/HST return, etc. If you have a return or form that is filed late and the due date has not been extended under the COVID-19 economic response plan, penalties may still apply.

All taxpayers (individuals, trusts and corporations) will be able to defer the payment of any income tax amounts that become due on or after March 18, 2020 and before September 1, 2020. This relief would apply to tax balances due as well as installments, under Part I of the Income Tax Act. No interest or penalties will accumulate on these amounts during this period. This relief from interest or penalties does not currently apply to tax balances or installments, such as: GST or HST balance or installments, payroll deductions, Part IV tax, etc.

For situations not covered under the COVID-19 economic response plan where interest and penalties are assessed, you can complete form RC4288 “Request for Taxpayer Relief – cancel or Waive Penalties or Interest”.

Another important measure announced today relates to the ability to electronically sign CRA required e-file authorization forms. In order to reduce the necessity for taxpayers and tax preparers to meet in person during this difficult time, and to reduce administrative burden, effective immediately the Canada Revenue Agency will recognize electronic signatures. This will be a temporary administrative measure to allow the authorization forms T183 or T183CORP to be signed electronically. This will allow taxpayers the ability to authorize the filing of a tax return without the need to physically sign the authorization form.

Tax deadlines in the U.S.:

Note the deadline extensions are for payments, not filing tax returns. The filing deadline remains April 15, 2020. Non-residents of the U.S. have until June 15 to file, October 15, if an extension request is filed.

Individuals: Income tax payment deadlines for individual returns, with a due date of April 15, 2020, are being automatically extended until July 15, 2020, for up to $1 million of their 2019 tax due. This payment relief applies to all individual returns, including self-employed individuals, and all entities other than C-Corporations, such as trusts or estates. IRS will automatically provide this relief to taxpayers. Taxpayers do not need to file any additional forms or call the IRS to qualify for this relief.

Corporations: For C Corporations, income tax payment deadlines are being automatically extended until July 15, 2020, for up to $10 million of their 2019 tax due.

This relief also includes estimated tax payments for tax year 2020 that are due on April 15, 2020.

Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020. If you file your tax return or request an extension of time to file by April 15, 2020, you will automatically avoid interest and penalties on the taxes paid by July 15.

This relief only applies to federal income tax (including tax on self-employment income) payments otherwise due April 15, 2020, not state tax payments or deposits or payments of any other type of federal tax. If you file in a state, similar relief may be available. Check with your state tax agency for details.

IRS provides relief for U.S. citizens & residents with certain Canadian registered savings accounts

U.S. citizens and residents who own foreign trusts are often caught by the rules of the Internal Revenue Code section 6048, which requires those individuals to report transactions with, or ownership of, foreign trusts. This information is reported on Forms 3520 and 3520-A. Non-compliance with these laws comes with steep penalties starting at $10,000 per missed filing.

Often, U.S. citizens residing in Canada do not think of registered accounts as foreign trusts, but rather as savings accounts. U.S. reporting requirements for these registered accounts catch many off guard as they can be complicated and do not fit the typical mold for the types of trusts the IRS had in mind when drafting the forms. Registered Retirement Savings Plans (RRSPs) have been exempted from this foreign trust reporting for years. However, Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs) have not been exempted.

In response to this problem, the IRS issued Revenue Procedure 2020-17 detailing the relief provided from those provisions for tax-favored foreign retirement trusts and non-retirement trusts. The relief comes in two parts: exemption from filing and abatement of formerly paid penalties.

Who gets relief?

Relief is provided to eligible individuals who own any tax-favored foreign trusts. An eligible individual is defined in Section 5.02 of the Revenue Procedure as an individual who:

  • is a U.S. citizen or resident;1
  • is compliant2 (or comes into compliance), for any period during which an amount of tax may be assessed, with all requirements for filing a U.S. federal income tax return(s) covering the period of U.S. citizenship or residency; and
  • to the extent required under U.S. tax law, has reported as income any contributions to, earnings of, or distributions from an applicable tax-favored foreign trust.

For clarity, an individual is not required to file Form 3520 or Form 3520-A (related to the foreign trust) to be considered compliant.

If you are an eligible individual, you must determine if your trust qualifies as either a Tax-Favored Foreign Retirement Trust, or a Tax-Favored Foreign Non-Retirement Savings Trust. Sections 5.03 and 5.04 define which trusts qualify for these rules.

A Tax-Favored Foreign Retirement Trust3 qualifies if it meets all the following conditions:

  • It is either exempt from income tax or otherwise meets tax-favored qualifications under Canadian law. Tax-favored qualifications under Canadian law means either:
  • contributions to the trust are tax deductible or excluded from income, are taxed at a reduced rate, give rise to a tax credit, or are otherwise eligible for another tax benefit; or
  • taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
  • The tax authority receives annual information reporting.
  • Only contributions with respect to income earned from the performance of personal services are permitted.
  • Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 USD or less to the trust, or are subject to a lifetime limit of $1,000,000 USD or less to the trust.
  • There are penalties for withdrawals or distributions before you reach a certain age, are disabled or die. However, withdrawals for hardship, educational purposes, or the purchase of a primary residence are permitted.
  • If the trust is employer-maintained, it must be non-discriminatory under special terms laid out by the IRS.

A Tax-Favored Foreign Non-Retirement Trust4 qualifies if it meets all the following conditions:

  • It meets the same tax-favored qualifications as a Retirement Trust above.
  • The tax authority receives annual information reporting.
  • Contributions are limited to $10,000 or less annually or $200,000 or less on a lifetime basis.
  • Withdrawals or distributions, without penalties, are only allowed for medical, disability, or educational purposes.

Notably, a trust would still qualify under the above rules if it received contributions on a rollover basis from another qualifying trust.

 

RESPs and RDSPs, in most cases, meet the criteria above and fall under the Tax-Favored Foreign Non-Retirement Savings Trust definition. Unfortunately, since a Tax-Free Savings Account has no retirement requirements and is not solely for the purpose of education or disability, it would not qualify for relief if considered a trust for purposes of reporting on Forms 3520 or 3520-A. We are still waiting for the IRS to comment on how it would like to see Tax-Free Savings Accounts treated under the U.S. tax system.

What relief is provided?

Relief is provided from the necessity of preparing and filing both Form 3520 and Form 3520-A. Though you may already have prepared and filed the Form 3520-A that would otherwise be due on March 16, 2020, this news is still welcome as you should not be required to file the forms in the future.

Relief is also provided from the risk of penalties associated with these forms. If you have filed these forms late in the past and were subject to late-filing penalties, and your plan qualified as a Tax-Favored Foreign Retirement Trust or a Tax-Favored Non-Retirement Savings Trust at the time of filing, you could receive abatement or refund of these penalties from the IRS. For penalty relief, the IRS requires Form 8435 to be filed. When preparing this form, write “Relief Pursuant to Revenue Procedure 2020-17” on line 7 of the form and mail to:

Internal Revenue Service
Ogden UT 84201-0027

What relief is not provided?

Relief from information reporting under Revenue Procedure 2020-17 is not extended to reporting on Form 8938, Statement of Specified Foreign Financial Assets6 or Form 114, Foreign Bank Account Report.7 These forms are still required to report the ownership of or access to these foreign accounts.

Further, this information reporting exemption under Revenue Procedure 2020-17 does not provide any relief for possible taxation of income earned by the foreign trust. It is possible that the tax-deferred or tax-free status of the trust in Canada is not tax free in the U.S.

If you have any questions related to this or other U.S. topics, please contact your Baker Tilly advisor.

  1. Within the meaning of section 7701(a)(30)(A).
  2. In relation to tax under IRC section 6501 (without regard to section 6501(c)(8)).
  3. Section 5.03 of Rev. Proc. 2020-17.
  4. Section 5.04 of Rev. Proc. 2020-17.
  5. Used for relief from penalties under IRC 6677.
  6. IRC 6038D.
  7. Required by 31 U.S.C. section 5314 and the regulations thereunder.