# Complicated US Tax Situation



## Polaroid

I have some close friends who are stuck in a very unique and tricky position. Looking for advice about what to do!

1) She is a dual citizen of Canada and the US
2) She has been a resident of Canada for tax purposes for over thirty years.
3) Her husband is only Canadian--not American.
4) Every year they file Canadian taxes as "Married filing separately."
5) She does not work, and as a result only her husband has income to report.

Technically, she should not be required to file taxes in the United States.

Unfortunately, because they share a joint bank account, they will have to file FBARS back for the last six years. They also have RRSPs that his employer contributes to regularly, and in the last few years they have cashed some of them to pay for expenses.

In addition, they set up an RESP for their thirteen-year old son back in 2007. Last year they cashed it (for a measly $4000) gave it to their son to pay for school.


She qualifies for the Streamlined Compliance procedure. However, because of the RESPs and RRSPs, they are unsure of how to proceed. How far back will they have to file 8891s and 3520s?

Their nineteen year old son is also a dual citizen, and will have to report on his worldwide income this year. Will he also have to backfile 3520s because he was the beneficiary? He has never filed US taxes either.


----------



## Bevdeforges

Well, strictly speaking, your friend is not in a unique situation at all - it's pretty much dead common for dual nationals in Canada these days.

Two things to consider - if your friend does NOT have income in her own name, then she probably doesn't have any tax filing obligation, which means she probably does not have to file the 8891 or the 3520's. (Those forms are only filed as part of your 1040 and cannot be filed separately.) 

The FBARs are another story - those are supposed to be filed even if you didn't have to file income taxes. But the FBAR is just a disclosure form.

The son will have to start filing US tax returns, but only for those years where he exceeds the threshold for worldwide income. Take a look at this page on the IRS website: http://www.irs.gov/uac/Do-I-have-to-File-a-Tax-Return? for guidance in how to determine if someone even has to file.

Read through the instructions for form 8891 carefully, because there is this:


> Pursuant to section 6048(d)(4), annuitants and beneficiaries
> who are required to file Form 8891 *will not be required to file
> Form 3520* and will not be subject to the associated penalties
> described in section 6677 on such RRSPs or RRIFs.


Cheers,
Bev


----------



## Polaroid

Thanks for the advice!

To clarify further: the wife has signature authority over the RRSPs--i.e. she is a beneficiary. Thus, it seems to me she should file regardless of whether she has income in her name or not. The streamlined procedure asks for three years of tax returns, but when back-filing 8891s, do you have to go back all the way to the date they were created? I am aware that 3520s are not required if you are filing an 8891. 


She also has signature authority over the RESP, which the IRS considers a "foreign trust." As far as I can glean from the instructions for 3520, there is no minimum reporting threshold for foreign trusts, so even if she has no other income, it seems she might have to file the 3520 just for this one account.

The son was named the beneficiary of the RESP, so even if it was his only income that year, wouldn't he have to file a 3520 also, despite being under the normal filing threshold? Please correct me if I'm wrong. This is all pretty confusing.


----------



## Bevdeforges

No, those forms - 8891 and 3520 - are supplementary forms to a 1040 filing for income tax. If your wife and son have no 1040 obligation (normally due to little or no income) then they can't (and actually shouldn't) file a the supplementary forms.

What they may have to file is the FBAR form (TD 90-22.1) which simply declares the existence of the accounts, their high balance and the nature of the account (I'd just check box c Other and fill in "retirement account" or even "RRSP" or "RESP" as appropriate). 

I really wouldn't bother to back file the FBAR forms, though if it makes you feel better, then do so for 6 years in arrears. (You risk filing 6 copies of the same information with nothing but the date changed.)
Cheers,
Bev


----------



## MAMertz

I disagree I would file the back FBAR forms. You need to do that.


----------



## Polaroid

Thanks again for the advice. Neither the wife or son have a 1040 filing obligation, so they shouldn't have to report. I talked with my friends further and found that the wife's name is not even on the accounts, so she should be fine in that regard.

Still, I remain concerned about the RESP, because the son received a distribution from it in 2011. It was less than $900, but the IRS website seems to indicate the 3520 should be filed for ANY distributions from a so-called "foreign trust."

*File Form 3520 if any one or more of the following applies:

You are the responsible party for reporting a reportable event that occurred during the current tax year, or you held an outstanding obligation of a related foreign trust (or an obligation of a person related to the trust) that you treated as a qualified obligation during the current tax year. Responsible party, reportable event, and qualified obligation are defined later.

Complete the identifying information on page 1 of the form and the relevant portions of Part I. See the instructions for Part I.

You are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.

Complete the identifying information on page 1 of the form and Part II. See the instructions for Part II.

Note.

You are required to complete Part II even if there have been no transactions involving the trust during the tax year.

You are a U.S. person who received (directly or indirectly) a distribution from a foreign trust (including the uncompensated use of trust property) during the current tax year or a related foreign trust held an outstanding obligation issued by you (or an obligation of a person related to you) that you treated as a qualified obligation (defined later) during the current tax year.

Complete the identifying information on page 1 of the form and Part III. See the instructions for Part III.

You are a U.S. person who, during the current tax year, received either:

More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests; or

More than $14,723 from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.

Complete the identifying information on page 1 of the form and Part IV. See the instructions for Part IV.*

Can anyone find me a statement from the IRS that specifically exempts persons with no 1040 filing requirement from reporting their foreign trust?

For example, the instructions for form 8938 specifically state that someone with no 1040 obligation does not have to file 8938. I can find no such provisio for 3520 anywhere!


----------

