Today we are briefly covering a US tax “gotcha.”
For a US citizen with a non-resident spouse (Read: American married to a Canadian, living in Canada) there are all sorts of filing complexities. One issue (And one that has become even more important with the 2017 “Disregarded Entity” changes) is the Form 5472 reporting requirements. Consider the following scenario:
- Justin is a US citizen, and Sophie is a Canadian citizen;
- Justin and Sophie are married, living in Canada;
- Justin is a 100% owner of a US corporation;
- The US corporation paid management fees to Sophie during the year;
Given the above, readers will want to know if you need to file a Form 5472. Remember, a Form 5472 is filed when there is a 25% Foreign-Owned corporation. In our scenario, Justin (US citizen) owns 100% of the US corporation, so this would lead a person to think that you could ignore this transaction.
Unfortunately, you can’t. And this could be a $10,000 mistake given the IRS’s current penalty regime.
The US Internal Revenue Code (IRC §318) has some nifty rules called “Attribution Rules”. Long story short, in our scenario above these rules kick in (§318(a)(1)), and Justin’s ownership gets attributed to Sophie. And because Sophie is now deemed a non-resident owner of a US corporation, you now have a Reporting Corporation situation.
Next comes the management fees paid to Sophie. Management fees are a reportable transaction as far as the Form 5472 is concerned. And because the fees were paid to a related party, you now hit all the boxes that are required for filing Form 5472:
- A Reportable Transaction between:
- A Reporting Corporation, and
- A Foreign or US related party
This type of situation becomes even more important now with the Disregarded Entity reporting changes: US LLC’s and S-Corps also now have Form 5472 reporting requirements, and because of the §318 Attribution Rules, many US citizen owners of LLC’s and S-Corps who also have non-resident spouses could now have to file Form 5472’s as well. With fines running $10,000 for late-filing/failure to file, this is certainly something US citizens with non-resident spouses need to stay on top of.
Usual Disclaimer: This isn’t tax advice. Tax is complicated. Don’t rely on this info to make tax decisions – Hire someone to help you.