Form 3520 is a tax form that the IRS requires U.S. taxpayers to file if they receive certain types of foreign gifts, inheritances, or distributions from a foreign trust. This form is used to report information about these transactions to the IRS and ensure that taxpayers are paying the correct amount of taxes on them.
To file Form 3520, you’ll need to provide detailed information about the gift, inheritance, or distribution, including the name and address of the foreign person or entity, the type and amount of the gift, and the fair market value of the gift at the time it was received. The form also requires information about the foreign trust, including its name and address, and details about any distributions you’ve received from it.
Now, you might be wondering why a Canadian citizen or resident would need to file Form 3520. Here’s a few common scenarios:
- You received a foreign gift, inheritance, or distribution from a U.S. person: If you’re a Canadian citizen or resident and you receive a gift, inheritance, or distribution from a U.S. person, you may need to file Form 3520. This is because the IRS considers U.S. persons to be subject to U.S. gift and estate tax rules, even if they are not U.S. citizens or residents.
- You received a foreign gift, inheritance, or distribution from a foreign trust that has U.S. beneficiaries: If you receive a gift, inheritance, or distribution from a foreign trust that has U.S. beneficiaries, you may need to file Form 3520. This is because the IRS requires U.S. taxpayers to report any distributions they receive from foreign trusts.
- You are a U.S. citizen or resident living in Canada: If you’re a U.S. citizen or resident living in Canada, you are still subject to U.S. tax rules, including those related to foreign gifts, inheritances, and distributions from foreign trusts. As such, you may need to file Form 3520 if you receive any of these types of transactions.
Sorry Team, but filing Form 3520 can be complex and time-consuming, especially if you’re not familiar with US filing rules. You can always try tackling these things yourself (It personally bothers me that the US and Canadian governments have made tax filings so hard that you need to pay someone else to do them) but this one is a bear of a filing. You’ve been warned.
Oh, and did I mentioned that if you fail to file Form 3520 when required, the penalties can be significant. The IRS can impose penalties of up to 25% of the value of the gift, inheritance, or distribution for each year you fail to file, with a minimum penalty of $10,000.
Very generally, if you’re a Canadian and you received a large lump of cash from a US-based person or US-trust, OR you’re a US Citizen receiving money from a Canadian trust (Or other foreign country trust) you likely need to think about filing one of these.
This is not formal tax advice. I’m not your CPA. It’s possible, or dare I say even probable, that the comments and opinions expressed here contain material errors, or that important stuff has been left out. Don’t use this info to make important decisions. Hire a pro to help you.