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Www irs gov 4. Www irs gov   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Www irs gov Payments from checking accounts. Www irs gov Amounts paid within 30 days. Www irs gov Optional method for determining date of reallocation. Www irs gov Interest on a segregated account. Www irs gov How to report. Www irs gov Interest You Can DeductStatement. Www irs gov Expenses paid to obtain a mortgage. Www irs gov Prepayment penalty. Www irs gov De minimis OID. Www irs gov Constant-yield method. Www irs gov Loan or mortgage ends. Www irs gov Interest You Cannot DeductPenalties. Www irs gov Who is a key person? Exceptions for pre-June 1997 contracts. Www irs gov Interest allocated to unborrowed policy cash value. Www irs gov Capitalization of Interest When To Deduct InterestPrepaid interest. Www irs gov Discounted loan. Www irs gov Refunds of interest. Www irs gov Prepaid interest. Www irs gov Discounted loan. Www irs gov Tax deficiency. Www irs gov Related person. Www irs gov Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Www irs gov Introduction This chapter discusses the tax treatment of business interest expense. Www irs gov Business interest expense is an amount charged for the use of money you borrowed for business activities. Www irs gov Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Www irs gov Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Www irs gov 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Www irs gov Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Www irs gov If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Www irs gov Allocate your interest expense to the following categories. Www irs gov Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Www irs gov You allocate loan proceeds by tracing disbursements to specific uses. Www irs gov The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Www irs gov Secured loan. Www irs gov   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Www irs gov Example. Www irs gov You secure a loan with property used in your business. Www irs gov You use the loan proceeds to buy an automobile for personal use. Www irs gov You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Www irs gov    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Www irs gov The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Www irs gov For more information, see Publication 936. Www irs gov Allocation period. Www irs gov   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Www irs gov The date the loan is repaid. Www irs gov The date the loan is reallocated to another use. Www irs gov Proceeds not disbursed to borrower. Www irs gov   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Www irs gov This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Www irs gov Proceeds deposited in borrower's account. Www irs gov   Treat loan proceeds deposited in an account as property held for investment. Www irs gov It does not matter whether the account pays interest. Www irs gov Any interest you pay on the loan is investment interest expense. Www irs gov If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Www irs gov Example. Www irs gov Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Www irs gov No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Www irs gov On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Www irs gov On September 4, Celina uses an additional $40,000 from the account for personal purposes. Www irs gov Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Www irs gov From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Www irs gov From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Www irs gov Order of funds spent. Www irs gov   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Www irs gov Any unborrowed amounts held in the same account. Www irs gov Any amounts deposited after these loan proceeds. Www irs gov Example. Www irs gov On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Www irs gov The following table shows the transactions in her account during the tax year. Www irs gov Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Www irs gov She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Www irs gov She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Www irs gov She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Www irs gov For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Www irs gov Payments from checking accounts. Www irs gov   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Www irs gov You can treat checks written on the same day as written in any order. Www irs gov Amounts paid within 30 days. Www irs gov   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Www irs gov This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Www irs gov   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Www irs gov If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Www irs gov   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Www irs gov Example. Www irs gov Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Www irs gov Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Www irs gov Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Www irs gov Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Www irs gov In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Www irs gov Optional method for determining date of reallocation. Www irs gov   You can use the following method to determine the date loan proceeds are reallocated to another use. Www irs gov You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Www irs gov The first day of that month. Www irs gov The date the loan proceeds are deposited in the account. Www irs gov However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Www irs gov Interest on a segregated account. Www irs gov   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Www irs gov When the interest earned is used up, any remaining payments are from loan proceeds. Www irs gov Example. Www irs gov You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Www irs gov When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Www irs gov You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Www irs gov All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Www irs gov The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Www irs gov The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Www irs gov Loan repayment. Www irs gov   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Www irs gov Personal use. Www irs gov Investments and passive activities (other than those included in (3)). Www irs gov Passive activities in connection with a rental real estate activity in which you actively participate. Www irs gov Former passive activities. Www irs gov Trade or business use and expenses for certain low-income housing projects. Www irs gov Line of credit (continuous borrowings). Www irs gov   The following rules apply if you have a line of credit or similar arrangement. Www irs gov Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Www irs gov Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Www irs gov Treat these loans as repaid in the order shown on the loan agreement. Www irs gov Loan refinancing. Www irs gov   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Www irs gov Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Www irs gov Debt-financed distribution. Www irs gov   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Www irs gov The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Www irs gov How to report. Www irs gov   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Www irs gov If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Www irs gov If the proceeds were used in an investment activity, enter the interest on Form 4952. Www irs gov If the proceeds are used for personal purposes, the interest is generally not deductible. Www irs gov Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Www irs gov Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Www irs gov It does not matter what type of property secures the loan. Www irs gov You can deduct interest on a debt only if you meet all the following requirements. Www irs gov You are legally liable for that debt. Www irs gov Both you and the lender intend that the debt be repaid. Www irs gov You and the lender have a true debtor-creditor relationship. Www irs gov Partial liability. Www irs gov   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Www irs gov Example. Www irs gov You and your brother borrow money. Www irs gov You are liable for 50% of the note. Www irs gov You use your half of the loan in your business, and you make one-half of the loan payments. Www irs gov You can deduct your half of the total interest payments as a business deduction. Www irs gov Mortgage. Www irs gov   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Www irs gov However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Www irs gov Statement. Www irs gov   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Www irs gov You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Www irs gov A governmental unit is a person for purposes of furnishing the statement. Www irs gov   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Www irs gov You cannot deduct this amount. Www irs gov For information on how to report this refund, see Refunds of interest, later in this chapter. Www irs gov Expenses paid to obtain a mortgage. Www irs gov   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Www irs gov These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Www irs gov If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Www irs gov Prepayment penalty. Www irs gov   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Www irs gov Interest on employment tax deficiency. Www irs gov   Interest charged on employment taxes assessed on your business is deductible. Www irs gov Original issue discount (OID). Www irs gov   OID is a form of interest. Www irs gov A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Www irs gov The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Www irs gov   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Www irs gov Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Www irs gov You generally deduct OID over the term of the loan. Www irs gov Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Www irs gov De minimis OID. Www irs gov   The OID is de minimis if it is less than one-fourth of 1% (. Www irs gov 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Www irs gov   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Www irs gov On a constant-yield basis over the term of the loan. Www irs gov On a straight-line basis over the term of the loan. Www irs gov In proportion to stated interest payments. Www irs gov In its entirety at maturity of the loan. Www irs gov You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Www irs gov Example. Www irs gov On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Www irs gov The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Www irs gov Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Www irs gov The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Www irs gov 0025 × 10). Www irs gov You choose to deduct the OID on a straight-line basis over the term of the loan. Www irs gov Beginning in 2013, you can deduct $150 each year for 10 years. Www irs gov Constant-yield method. Www irs gov   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Www irs gov You figure your deduction for the first year using the following steps. Www irs gov Determine the issue price of the loan. Www irs gov Generally, this equals the proceeds of the loan. Www irs gov If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Www irs gov Multiply the result in (1) by the yield to maturity. Www irs gov Subtract any qualified stated interest payments from the result in (2). Www irs gov This is the OID you can deduct in the first year. Www irs gov   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Www irs gov To get the adjusted issue price, add to the issue price any OID previously deducted. Www irs gov Then follow steps (2) and (3) above. Www irs gov   The yield to maturity is generally shown in the literature you receive from your lender. Www irs gov If you do not have this information, consult your lender or tax advisor. Www irs gov In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Www irs gov Example. Www irs gov The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Www irs gov The yield to maturity on your loan is 10. Www irs gov 2467%, compounded annually. Www irs gov For 2013, you can deduct $93 [($98,500 × . Www irs gov 102467) − $10,000]. Www irs gov For 2014, you can deduct $103 [($98,593 × . Www irs gov 102467) − $10,000]. Www irs gov Loan or mortgage ends. Www irs gov   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Www irs gov A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Www irs gov If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Www irs gov See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Www irs gov Points. Www irs gov   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Www irs gov These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Www irs gov If any of these charges (points) are solely for the use of money, they are interest. Www irs gov   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Www irs gov However, you can choose to fully deduct points in the year paid if you meet certain tests. Www irs gov For exceptions to the general rule, see Publication 936. Www irs gov The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Www irs gov Partial payments on a nontax debt. Www irs gov   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Www irs gov You can deduct only the interest. Www irs gov This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Www irs gov Installment purchase. Www irs gov   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Www irs gov If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Www irs gov The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Www irs gov For more information on installment sales and unstated interest, see Publication 537. Www irs gov Interest You Cannot Deduct Certain interest payments cannot be deducted. Www irs gov In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Www irs gov You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Www irs gov Interest paid with funds borrowed from original lender. Www irs gov   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Www irs gov You can deduct the interest expense once you start making payments on the new loan. Www irs gov   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Www irs gov All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Www irs gov Capitalized interest. Www irs gov   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Www irs gov See Capitalization of Interest, later. Www irs gov In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Www irs gov Add this interest to the basis of the property. Www irs gov Commitment fees or standby charges. Www irs gov   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Www irs gov You may be able to deduct them as business expenses. Www irs gov   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Www irs gov See Capitalization of Interest, later. Www irs gov Interest on income tax. Www irs gov   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Www irs gov Treat this interest as a business deduction only in figuring a net operating loss deduction. Www irs gov Penalties. Www irs gov   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Www irs gov You cannot deduct them. Www irs gov Generally, you cannot deduct any fines or penalties. Www irs gov Interest on loans with respect to life insurance policies. Www irs gov   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Www irs gov   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Www irs gov However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Www irs gov Who is a key person?   A key person is an officer or 20% owner. Www irs gov However, the number of individuals you can treat as key persons is limited to the greater of the following. Www irs gov Five individuals. Www irs gov The lesser of 5% of the total officers and employees of the company or 20 individuals. Www irs gov Exceptions for pre-June 1997 contracts. Www irs gov   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Www irs gov If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Www irs gov Interest allocated to unborrowed policy cash value. Www irs gov   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Www irs gov This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Www irs gov For more information, see section 264(f) of the Internal Revenue Code. Www irs gov Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Www irs gov The property must be produced by you for use in your trade or business or for sale to customers. Www irs gov You cannot capitalize interest related to property that you acquire in any other manner. Www irs gov Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Www irs gov Designated property is any of the following. Www irs gov Real property. Www irs gov Tangible personal property with a class life of 20 years or more. Www irs gov Tangible personal property with an estimated production period of more than 2 years. Www irs gov Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Www irs gov Property you produce. Www irs gov   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Www irs gov Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Www irs gov Carrying charges. Www irs gov   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Www irs gov You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Www irs gov For more information, see chapter 7. Www irs gov Capitalized interest. Www irs gov   Treat capitalized interest as a cost of the property produced. Www irs gov You recover your interest when you sell or use the property. Www irs gov If the property is inventory, recover capitalized interest through cost of goods sold. Www irs gov If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Www irs gov Partnerships and S corporations. Www irs gov   The interest capitalization rules are applied first at the partnership or S corporation level. Www irs gov The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Www irs gov   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Www irs gov You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Www irs gov To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Www irs gov Additional information. Www irs gov   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Www irs gov For more information, see sections 1. Www irs gov 263A-8 through 1. Www irs gov 263A-15 of the regulations and Notice 88-99. Www irs gov Notice 88-99 is in Cumulative Bulletin 1988-2. Www irs gov When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Www irs gov Cash method. Www irs gov   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Www irs gov You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Www irs gov Prepaid interest. Www irs gov   You generally cannot deduct any interest paid before the year it is due. Www irs gov Interest paid in advance can be deducted only in the tax year in which it is due. Www irs gov Discounted loan. Www irs gov   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Www irs gov For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Www irs gov Refunds of interest. Www irs gov   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Www irs gov If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Www irs gov Accrual method. Www irs gov   Under an accrual method, you can deduct only interest that has accrued during the tax year. Www irs gov Prepaid interest. Www irs gov   See Prepaid interest, earlier. Www irs gov Discounted loan. Www irs gov   See Discounted loan, earlier. Www irs gov Tax deficiency. Www irs gov   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Www irs gov If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Www irs gov   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Www irs gov Related person. Www irs gov   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Www irs gov The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Www irs gov See section 267 of the Internal Revenue Code for more information. Www irs gov Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Www irs gov See Treatment of gift and demand loans, later, in this discussion. Www irs gov A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Www irs gov A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Www irs gov A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Www irs gov An additional payment in an amount equal to the forgone interest. Www irs gov The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Www irs gov Forgone interest. Www irs gov   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Www irs gov Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Www irs gov Internal Revenue Bulletins are available on the IRS web site at www. Www irs gov irs. Www irs gov gov/irb. Www irs gov You can also contact an IRS office to get these rates. Www irs gov Loans subject to the rules. Www irs gov   The rules for below-market loans apply to the following. Www irs gov Gift loans (below-market loans where the forgone interest is in the nature of a gift). Www irs gov Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Www irs gov Corporation-shareholder loans. Www irs gov Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Www irs gov Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Www irs gov   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Www irs gov Treatment of gift and demand loans. Www irs gov   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Www irs gov ) equal to the forgone interest on the loan. Www irs gov You are then treated as transferring this amount back to the lender as interest. Www irs gov These transfers are considered to occur annually, generally on December 31. Www irs gov If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Www irs gov The lender must report it as interest income. Www irs gov Limit on forgone interest for gift loans of $100,000 or less. Www irs gov   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Www irs gov This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Www irs gov If the borrower's net investment income is $1,000 or less, it is treated as zero. Www irs gov This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Www irs gov Treatment of term loans. Www irs gov   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Www irs gov ) on the date the loan is made. Www irs gov This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Www irs gov The same amount is treated as original issue discount on the loan. Www irs gov See Original issue discount (OID) under Interest You Can Deduct, earlier. Www irs gov Exceptions for loans of $10,000 or less. Www irs gov   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Www irs gov This exception applies only to the following. Www irs gov Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Www irs gov Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Www irs gov This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Www irs gov Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Www irs gov Exceptions for loans without significant tax effect. Www irs gov   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Www irs gov Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Www irs gov Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Www irs gov Certain employee-relocation loans. Www irs gov Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Www irs gov S. Www irs gov trade or business and not exempt from U. Www irs gov S. Www irs gov tax under an income tax treaty. Www irs gov Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Www irs gov Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Www irs gov Consider all the following factors. Www irs gov Whether items of income and deduction generated by the loan offset each other. Www irs gov The amount of the items. Www irs gov The cost of complying with the below-market loan provisions if they were to apply. Www irs gov Any reasons, other than taxes, for structuring the transaction as a below-market loan. Www irs gov Exception for loans to qualified continuing care facilities. Www irs gov   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Www irs gov A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Www irs gov Designed to provide services under continuing care contracts (defined below). Www irs gov Includes an independent living unit, and either an assisted living or nursing facility, or both. Www irs gov Substantially all of the independent living unit residents are covered by continuing care contracts. Www irs gov A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Www irs gov The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Www irs gov The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Www irs gov The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Www irs gov For more information, see section 7872(h) of the Internal Revenue Code. Www irs gov Sale or exchange of property. Www irs gov   Different rules generally apply to a loan connected with the sale or exchange of property. Www irs gov If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Www irs gov However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Www irs gov See Unstated Interest and Original Issue Discount (OID) in Publication 537. Www irs gov More information. Www irs gov   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Www irs gov 7872-5 of the regulations. Www irs gov Prev  Up  Next   Home   More Online Publications
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Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau ensures that financial products and services work for consumers. The Bureau helps consumers by providing educational materials and accepts complaints. They supervise banks, lenders, as well as large non bank entities, such as credit reporting agencies and debt collection companies. the Bureau also works to make credit card, mortgage, and other loan disclosures clearer so consumers can understand their rights and responsibilities.

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Address: 1700 G Street, NW
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Phone Number: 202-435-7000

TTY: 855-729-2372

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Www irs gov Publication 597 - Main Content Table of Contents Application of Treaty Personal Services Pensions, Annuities, Social Security, and AlimonyRoth IRAs. Www irs gov Tax-deferred plans. Www irs gov Investment Income From Canadian Sources Other Income Charitable ContributionsQualified charities. Www irs gov Income Tax Credits Competent Authority Assistance How To Get Tax HelpText of Treaty U. Www irs gov S. Www irs gov Taxation Canadian Taxation Application of Treaty The benefits of the income tax treaty are generally provided on the basis of residence for income tax purposes. Www irs gov That is, a person who is recognized as a resident of the United States who has income from Canada, will often pay less income tax to Canada on that income than if no treaty was in effect. Www irs gov Article IV provides definitions of residents of Canada and the United States, and provides specific criteria for applying the treaty in cases where a taxpayer is considered by both countries to be a resident. Www irs gov Saving clause. Www irs gov   In most instances, a treaty does not affect the right of a country to tax its own residents (including those who are U. Www irs gov S. Www irs gov citizens) or of the United States to tax its residents or citizens (including U. Www irs gov S. Www irs gov citizens who are residents of the foreign country). Www irs gov This provision is known as the “saving clause. Www irs gov ”   For example, an individual who is a U. Www irs gov S. Www irs gov citizen and a resident of Canada may have dividend income from a U. Www irs gov S. Www irs gov corporation. Www irs gov The treaty provides a maximum rate of 15% on dividends received by a resident of Canada from sources in the United States. Www irs gov Even though a resident of Canada, the individual is a U. Www irs gov S. Www irs gov citizen and the saving clause overrides the treaty article that limits the U. Www irs gov S. Www irs gov tax to 15%. Www irs gov    Exceptions to the saving clause can be found in Article XXIX, paragraph 3. Www irs gov Treaty-based position. Www irs gov   If you take the position that any U. Www irs gov S. Www irs gov tax is overruled or otherwise reduced by a U. Www irs gov S. Www irs gov treaty (a treaty-based position), you generally must disclose that position on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attach it to your return. Www irs gov Personal Services A U. Www irs gov S. Www irs gov citizen or resident who is temporarily present in Canada during the tax year is exempt from Canadian income taxes on pay for services performed, or remittances received from the United States, if the citizen or resident qualifies under one of the treaty exemption provisions set out below. Www irs gov Income from employment (Article XV). Www irs gov   Income U. Www irs gov S. Www irs gov residents receive for the performance of dependent personal services in Canada (except as public entertainers) is exempt from Canadian tax if it is not more than $10,000 in Canadian currency for the year. Www irs gov If it is more than $10,000 for the year, it is exempt only if: The residents are present in Canada for no more than 183 days in any 12-month period beginning or ending in the year concerned, and The income is not paid by, or on behalf of, a Canadian resident and is not borne by a permanent establishment in Canada. Www irs gov    Whether there is a permanent establishment in Canada is determined by the rules set forth in Article V. Www irs gov Example. Www irs gov You are a U. Www irs gov S. Www irs gov resident employed under an 8-month contract with a Canadian firm to install equipment in their Montreal plant. Www irs gov During the calendar year you were physically present in Canada for 179 days and were paid $16,500 (Canadian) for your services. Www irs gov Although you were in Canada for not more than 183 days during the year, your income is not exempt from Canadian income tax because it was paid by a Canadian resident and was more than $10,000 (Canadian) for the year. Www irs gov Pay received by a U. Www irs gov S. Www irs gov resident for work regularly done in more than one country as an employee on a ship, aircraft, motor vehicle, or train operated by a U. Www irs gov S. Www irs gov resident is exempt from Canadian tax. Www irs gov Income from self-employment (Article VII). Www irs gov   Income from services performed (other than those performed as an employee) are taxed in Canada if they are attributable to a permanent establishment in Canada. Www irs gov This income is treated as business profits, and deductions similar to those allowed under U. Www irs gov S. Www irs gov law are allowable. Www irs gov   If you carry on (or have carried on) business in both Canada and the United States, the business profits are attributable to each country based on the profits that the permanent establishment might be expected to make if it were a distinct and separate person engaged in the same or similar activities. Www irs gov The business profits attributable to the permanent establishment include only those profits derived from assets used, risks assumed, and activities performed by the permanent establishment. Www irs gov   You may be considered to have a permanent establishment if you meet certain conditions. Www irs gov For more information, see Article V (Permanent Establishment) and Article VII (Business Profits). Www irs gov Public entertainers (Article XVI). Www irs gov   The provisions under income from employment or income from self-employment do not apply to public entertainers (such as theater, motion picture, radio, or television artistes, musicians, or athletes) from the United States who receive more than $15,000 in gross receipts in Canadian currency, including reimbursed expenses, from their entertainment activities in Canada during the calendar year. Www irs gov However, this provision for public entertainers does not apply (and the other provisions will apply) to athletes participating in team sports in leagues with regularly scheduled games in both the United States and Canada. Www irs gov Compensation paid by the U. Www irs gov S. Www irs gov Government (Article XIX). Www irs gov   Wages, salaries, and similar income (other than pensions) paid to a U. Www irs gov S. Www irs gov citizen by the United States or any of its agencies, instrumentalities, or political subdivisions for discharging governmental functions are exempt from Canadian income tax. Www irs gov   The exemption does not apply to pay for services performed in connection with any trade or business carried on for profit by the United States, or any of its agencies, instrumentalities, or political subdivisions. Www irs gov Students and apprentices (Article XX). Www irs gov   A full-time student, apprentice, or business trainee who is in Canada to study or acquire business experience is exempt from Canadian income tax on remittances received from any source outside Canada for maintenance, education, or training. Www irs gov The recipient must be or must have been a U. Www irs gov S. Www irs gov resident immediately before visiting Canada. Www irs gov   An apprentice or business trainee can claim this exemption only for a period of one year from the date the individual first arrived in Canada for the purpose of training. Www irs gov Pensions, Annuities, Social Security, and Alimony Under Article XVIII, pensions and annuities from Canadian sources paid to U. Www irs gov S. Www irs gov residents are subject to tax by Canada, but the tax is limited to 15% of the gross amount (if a periodic pension payment) or of the taxable amount (if an annuity). Www irs gov Canadian pensions and annuities paid to U. Www irs gov S. Www irs gov residents may be taxed by the United States, but the amount of any pension included in income for U. Www irs gov S. Www irs gov tax purposes may not be more than the amount that would be included in income in Canada if the recipient were a Canadian resident. Www irs gov Pensions. Www irs gov   A pension includes any payment under a pension or other retirement arrangement, Armed Forces retirement pay, war veterans pensions and allowances, and payments under a sickness, accident, or disability plan. Www irs gov It includes pensions paid by private employers and the government for services rendered. Www irs gov   Pensions also include payments from individual retirement arrangements (IRAs) in the United States, registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs) in Canada. Www irs gov   Pensions do not include social security benefits. Www irs gov Roth IRAs. Www irs gov   A distribution from a Roth IRA is exempt from Canadian tax to the extent it would be exempt from U. Www irs gov S. Www irs gov tax if paid to a U. Www irs gov S. Www irs gov resident. Www irs gov In addition, you may elect to defer any tax in Canada on income accrued within the Roth IRA but not distributed by the Roth IRA. Www irs gov However, you cannot defer tax on any accruals due to contributions made after you become a Canadian resident. Www irs gov Tax-deferred plans. Www irs gov   Generally, income that accrues in a Canadian RRSP or RRIF is subject to U. Www irs gov S. Www irs gov tax, even if it is not distributed. Www irs gov However, a U. Www irs gov S. Www irs gov citizen or resident can elect to defer U. Www irs gov S. Www irs gov tax on income from the plan until the income is distributed. Www irs gov Form 8891 is used to make the election. Www irs gov Annuities. Www irs gov    An annuity is a stated sum payable periodically at stated times, during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered). Www irs gov Annuities do not include: Non-periodic payments, or An annuity the cost of which was deductible for tax purposes. Www irs gov Special rules. Www irs gov    Special rules apply to pensions and annuities with respect to: Short-term assignments, Cross-border commuters, and Individuals who participate in a Canadian qualifying plan. Www irs gov Generally, distributions in such cases are deemed to be earned in the country in which the plan is established, without regard to where the services were rendered. Www irs gov Social security benefits. Www irs gov   U. Www irs gov S. Www irs gov social security benefits paid to a resident of Canada are taxed in Canada as if they were benefits under the Canada Pension Plan, except that 15% of the amount of the benefit is exempt from Canadian tax. Www irs gov Alimony. Www irs gov   Alimony and similar amounts (including child support payments) from Canadian sources paid to U. Www irs gov S. Www irs gov residents are exempt from Canadian tax. Www irs gov For purposes of U. Www irs gov S. Www irs gov tax, these amounts are excluded from income to the same extent they would be excluded from income in Canada if the recipient was a Canadian resident. Www irs gov Investment Income From Canadian Sources The treaty provides beneficial treatment for certain items of Canadian source income that result from an investment of capital. Www irs gov Dividends (Article X). Www irs gov   For Canadian source dividends received by U. Www irs gov S. Www irs gov residents, the Canadian income tax generally may not be more than 15%. Www irs gov   A 5% rate applies to intercorporate dividends paid from a subsidiary to a parent corporation owning at least 10% of the subsidiary's voting stock. Www irs gov However, a 10% rate applies if the payer of the dividend is a nonresident-owned Canadian investment corporation. Www irs gov   These rates do not apply if the owner of the dividends carries on, or has carried on, a business in Canada through a permanent establishment and the holding on which the income is paid is effectively connected with that permanent establishment. Www irs gov Interest (Article XI). Www irs gov   Generally, Canadian source interest received by U. Www irs gov S. Www irs gov residents is exempt from Canadian income tax. Www irs gov   The exemption does not apply if the owner of the interest carries on, or has carried on, a business in Canada through a permanent establishment and the debt on which the income is paid is effectively connected with that permanent establishment. Www irs gov Gains from the sale of property (Article XIII). Www irs gov   Generally, gains from the sale of personal property by a U. Www irs gov S. Www irs gov resident having no permanent establishment in Canada are exempt from Canadian income tax. Www irs gov However, the exemption from Canadian tax does not apply to gains realized by U. Www irs gov S. Www irs gov residents on Canadian real property, and on personal property belonging to a permanent establishment in Canada. Www irs gov   If the property subject to Canadian tax is a capital asset and was owned by the U. Www irs gov S. Www irs gov resident on September 26, 1980, not as part of the business property of a permanent establishment in Canada, generally the taxable gain is limited to the appreciation after 1984. Www irs gov Royalties (Article XII). Www irs gov   The following are exempt from Canadian tax: Copyright royalties and other like payments for the production or reproduction of any literary, dramatic, musical, or artistic work (other than payments for motion pictures and works on film, videotape, or other means of reproduction for use in connection with television, which may be taxed at 10%), Payments for the use of, or the right to use, computer software, Payments for the use of, or the right to use, any patent or any information concerning industrial, commercial, or scientific experience (but not within a rental or franchise agreement), and Payments for broadcasting as agreed to in an exchange of notes between the countries. Www irs gov   This rate or exemption does not apply if the owner of the royalties carries on, or has carried on, a business in Canada through a permanent establishment and the right or property on which the income is paid is effectively connected with that permanent establishment. Www irs gov   This exemption (or lower rate) does not apply to royalties to explore for or to exploit mineral deposits, timber, and other natural resources. Www irs gov Other Income Generally, Canadian source income that is not specifically mentioned in the treaty, may be taxed by Canada. Www irs gov Gambling losses. Www irs gov   Canadian residents may deduct gambling losses in the U. Www irs gov S. Www irs gov against gambling winnings in the U. Www irs gov S. Www irs gov in the same manner as a U. Www irs gov S. Www irs gov resident. Www irs gov Charitable Contributions United States income tax return. Www irs gov   Under Article XXI, you may deduct contributions to certain qualified Canadian charitable organizations on your United States income tax return. Www irs gov Besides being subject to the overall limits applicable to all your charitable contributions under U. Www irs gov S. Www irs gov tax law, your charitable contributions to Canadian organizations (other than contributions to a college or university at which you or a member of your family is or was enrolled) are subject to the U. Www irs gov S. Www irs gov percentage limits on charitable contributions, applied to your Canadian source income. Www irs gov If your return does not include gross income from Canadian sources, charitable contributions to Canadian organizations are generally not deductible. Www irs gov Example. Www irs gov You are a U. Www irs gov S. Www irs gov citizen living in Canada. Www irs gov You have both U. Www irs gov S. Www irs gov and Canadian source income. Www irs gov During your tax year, you contribute to Canadian organizations that would qualify as charitable organizations under U. Www irs gov S. Www irs gov tax law if they were U. Www irs gov S. Www irs gov organizations. Www irs gov To figure the maximum amount of the contribution to Canadian organizations that you can deduct on your U. Www irs gov S. Www irs gov income tax return, multiply your adjusted gross income from Canadian sources by the percentage limit that applies to contributions under U. Www irs gov S. Www irs gov income tax law. Www irs gov Then include this amount on your return along with all your domestic charitable contributions, subject to the appropriate percentage limit required for contributions under U. Www irs gov S. Www irs gov income tax law. Www irs gov The appropriate percentage limit for U. Www irs gov S. Www irs gov tax purposes is applied to your total adjusted gross income from all sources. Www irs gov Qualified charities. Www irs gov   These Canadian organizations must meet the qualifications that a U. Www irs gov S. Www irs gov charitable organization must meet under U. Www irs gov S. Www irs gov tax law. Www irs gov Usually an organization will notify you if it qualifies. Www irs gov For further information on charitable contributions and the U. Www irs gov S. Www irs gov percentage limits, see Publication 526, Charitable Contributions. Www irs gov Canadian income tax return. Www irs gov   Under certain conditions, contributions to qualified U. Www irs gov S. Www irs gov charitable organizations may also be claimed on your Canadian income tax return if you are a Canadian resident. Www irs gov Income Tax Credits The treaty contains a credit provision (Article XXIV) for the elimination of double taxation. Www irs gov In general, the United States and Canada both allow a credit against their income tax for the income tax paid to the other country on income from sources in that other country. Www irs gov For detailed discussions of the U. Www irs gov S. Www irs gov income tax treatment of tax paid to foreign countries, see Publication 514, Foreign Tax Credit for Individuals. Www irs gov See paragraphs (4) and (5) of Article XXIV for certain provisions that affect the computation of the credit allowed by the United States for Canadian income taxes paid by U. Www irs gov S. Www irs gov citizens residing in Canada. Www irs gov Competent Authority Assistance Under Article XXVI, a U. Www irs gov S. Www irs gov citizen or resident may request assistance from the U. Www irs gov S. Www irs gov competent authority when the actions of Canada, the United States, or both, potentially result in double taxation or taxation contrary to the treaty. Www irs gov The U. Www irs gov S. Www irs gov competent authority may then consult with the Canadian competent authority to determine if the double taxation or denial of treaty benefits in question can be avoided. Www irs gov If the competent authorities are not able to reach agreement in a case, binding arbitration proceedings may apply. Www irs gov It is important that your request for competent authority assistance be made as soon as you have been notified by either Canada or the United States of proposed adjustments that would result in denial of treaty benefits or in double taxation. Www irs gov This is so that implementation of any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Www irs gov For information that you should include with your request for competent authority assistance, see Revenue Procedure 2006-54, 2006-49 IRB 1035, available at www. Www irs gov irs. Www irs gov gov/irb/2006-49_IRB/ar13. Www irs gov html. Www irs gov The request should be addressed to:  Deputy Commissioner (International) Large Business and International Division Attn: Office of Tax Treaty  Internal Revenue Service 1111 Constitution Ave. Www irs gov , NW Routing: MA3-322A Washington, D. Www irs gov C. Www irs gov 20024 In addition to a timely request for assistance, you should take the following measures: File a timely protective claim for credit or refund of U. Www irs gov S. Www irs gov taxes on Form 1040X, Form 1120X, or amended Form 1041, whichever is appropriate. Www irs gov This will, among other things, give you the benefit of a foreign tax credit in case you do not qualify for the treaty benefit in question. Www irs gov For figuring this credit, attach either Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or Form 1118, Foreign Tax Credit — Corporations, as appropriate. Www irs gov Attach your protective claim to your request for competent authority assistance. Www irs gov Take appropriate action under Canadian procedures to avoid the lapse or termination of your right of appeal under Canadian income tax law. Www irs gov How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS and the Canada Revenue Agency in several ways. Www irs gov Text of Treaty You can get the text of the U. Www irs gov S. Www irs gov —Canada income tax treaty from: Superintendent of Documents U. Www irs gov S. Www irs gov Government Printing Office P. Www irs gov O. Www irs gov Box 371954 Pittsburgh, PA 15250-7954 The treaty can also be found on the Internet at IRS. Www irs gov gov. Www irs gov U. Www irs gov S. Www irs gov Taxation During the filing season, the IRS conducts a taxpayer assistance program in Canada. Www irs gov To find out if IRS personnel will be in your area, you should contact the consular office at the nearest U. Www irs gov S. Www irs gov Embassy or consulate. Www irs gov Mail. Www irs gov For answers to technical or account questions, you can write to:   Internal Revenue Service International Section Philadelphia, PA 19255-0525 Phone. Www irs gov You can call the IRS for help at (267) 941-1000 (not a toll-free call). Www irs gov Canadian Taxation You can get information on Canadian taxation from the Canada Revenue Agency. Www irs gov The International Tax Services Office can be contacted on 1-800-267-5177 (from anywhere in Canada and the U. Www irs gov S. Www irs gov ) or on the Internet at www. Www irs gov cra-arc. Www irs gov gc. Www irs gov ca. Www irs gov Prev  Up  Next   Home   More Online Publications