Do I need to file Form 8865 for a small partnership share?
It depends which category of filer you fall into, and the categories turn on different things: how much of the partnership you control, how much you merely own, whether you acquired or disposed of an interest during the year, and whether you contributed property to it. A small holding can still be reportable because of something that happened during the year rather than because of its size. Work out the category first, because it decides how much of the partnership's own information you have to produce. A controlling interest brings the full financial picture; a passive interest acquired part-way through the year may bring far less.
What counts as a foreign partnership for Form 8865?
Classification is a US question, and the answer does not follow the name the entity has at home. An arrangement registered abroad as a company can be a partnership for US purposes, and one that looks like a partnership locally can be something else. Where an election has been made about the entity's treatment, the election governs and the file needs to show it was made and when. This is worth settling before the year's bookkeeping is prepared, because the classification decides which information return applies and therefore which statements the local accountant needs to give you.
I put property into a foreign partnership, is that reported?
A contribution is one of the events this form is designed to capture, and it is reportable in the year it happens whether or not the partnership earned anything. What the filing needs is a description of what went in, what it cost you, what it was worth when contributed and what interest you received in exchange. Contributions of appreciated property carry consequences beyond the reporting itself, so the schedule is worth preparing at the time rather than years afterwards. In practice the hardest part is valuation evidence, because the contribution is usually made between people who trust each other and document very little.
Does Form 8865 apply if the partnership made no money?
Yes. The obligation attaches to your interest and to what happened to it, not to profit. A dormant venture with a bank account and no trading still has a balance sheet, and a controlling partner still has to produce it. This is the pattern that catches careful people: the income return is correct, there was no tax to pay, and the missing item is a form nobody mentioned, with a penalty charged per form and per year that takes no account of any of that. If the venture is genuinely finished, closing it properly is usually cheaper than carrying the reporting indefinitely.
What if I filed Form 8865 late or not at all?
Each year stands on its own, so the first step is to establish which years carried a filing obligation and under which category. From there it is a documentation exercise: the partnership's accounts restated into the format the form wants, the ownership history, and the events of each year. Where there is a real explanation for the delay, it is submitted in writing with the evidence that supports it rather than as a bare request. Penalties here are charged by form and by year and do not depend on tax being owed, so the cost of leaving it alone grows on its own.
Do I report the year I sold my partnership interest?
Yes, and usually twice over. The disposition is itself an event the form reports, and the income allocated to you up to the date you left still has to be picked up. Partial disposals need the same treatment as complete ones. The practical difficulty is that the partnership's local accounts are rarely cut at the date of your exit, so the allocation has to be built from the accounts that do exist plus the sharing rules in the partnership agreement. Settle the exit paperwork while the other partners still have a reason to help you with it.
Are foreign trusts taxable in Canada?
They can be. Canada's deemed-resident-trust rules can pull a non-resident trust into the Canadian tax system where there is a resident contributor or, in some cases, a resident beneficiary — taxing it as though it were resident here. Separate reporting applies to transfers or loans to a non-resident trust and to distributions and debts from one. The planning point is that contributing to an offshore trust from Canada rarely achieves what the brochure suggests. See non-resident trusts.
I have not filed for several years while living abroad — what are my options?
Both countries have routes back, and using one before they contact you is what preserves the relief. On the US side there are procedures aimed at taxpayers whose failure was not wilful, including one designed for people living outside the country, and separate procedures for late account reports and information returns alone. Canada has its voluntary disclosures programme and taxpayer relief for penalties and interest. Filing quietly and hoping is the one approach with no protection attached to it. See catch-up filing.
