April
1996
the
CEN-TAPEDE
david ingram's
US/Canadian Newsletter Page 163-166
$218,000 U.S. Tax Bill Cancelled Page 163
$19,000 U.S. F I C A Bill Not Cancelled Page 163
$2,700,000 Tax (My own) bill still there Page 164
HAVE YOU LOST YOUR GREEN CARD? Page 165
BRITISH COLUMBIA REAL ESTATE DISASTERS 1996 Page 165
$218,000 U.S. TAX BILL CANCELLED
The October and November 95
issues of the CEN-TAPEDE both contained copies of assessments issued
by the U.S. government against U.S. citizens who were Canadian Residents and
had not prepared their U.S. income tax returns because their incomes were
being earned in CANADA. Yes, as I am fond of reminding people, the U.S. has
the right to tax its citizens wherever they live in the world.
In M L's case, the first
bill he received was for $194,000 U.S. and the charges went back to 1986,
1987 and 1988. The U.S. had received information that he had made several
stock market sales in those years and taxed him on the gross receipts which
they could prove because of information the IRS had received from Merrill
Lynch. The "Arbitrary Assessment" issued eventually reached
$218,000 with interest and penalties and although we started working on it
in February, 1995, M L did not receive his answer until March, 1995. The
final bill was reduced to $144 U.S. from $218,000.
It was extremely difficult
to recreate. Numerous phone calls and three specific letters to Merrill
Lynch to try and get details of his PURCHASES, did not get the courtesy of a
single reply. In 31 years in this business, I have never seen such disdain
for a client who once had $250,000 U.S. in their account, than was evidenced
by Merrill Lynch's offices' complete failure to respond at all.
M L had destroyed all his
records. After all, he had been told by a Canadian accountant that he did
not have to file a U.S. return because he was living in Canada. And a U.S.
accountant told him there was no sense paying to have those tax returns done
because he had lost $30,000 and "now that he had moved to Canada",
he couldn't use the losses against anything.
Both the Canadian and the
American accountants failed to recognize the fact that he could have carried
the losses forward in Canada by filing the losses on his Canadian return and
that the IRS might come along with a GROSS INCOME ASSESSMENT
NINE YEARS later "because they can".
$18,000 U.S.
F I C A (social security) Bill Cancelled
The second client received
a bill for $18,000 U.S. for FICA (social security) payments on CANADIAN
earnings on which he had paid Canada Pension Plan premiums. Article V of the
CANADA / US Social Security agreement exempts the CANADIAN Earnings from
U.S. social security when CPP has been paid on CANADIAN Earnings. In
addition Article XXIX.4 of the U.S. / Canada Tax Convention exempts the
Canadian Earnings when the earnings have been exempted from U.S. income tax
under the $70,000 "out of country" earned income exemption
provided under Revenue Code 911.
This bill which was
received in March 1995 was for the income tax years 1988 and 1989, (six and
seven years previous). In this case, a close perusal of the clients' tax
returns (only prompted by the $18,000 bill) resulted in my making amendments
to 1987, 88, 89, 90 and 91 because of a legislative change which had taken
place on June 30th, 1993.
The result? Not only did
the client NOT OWE the $18,000, he and his wife received a refund of over
$8,000 U.S. for the years 1987, 99, 89, 90 and 91.
In another case, because of
a change to the U.S. / Canadian Tax Convention, we are getting an 84 year
old client $42,000 U.S. Estate Tax back. This tax was paid on his deceased
wife's U.S. estate when she died in 1994. The change to the Tax Convention
which came into effect on January 1, 1996 was RETROACTIVE TO NOV 10, 1988.
Interestingly enough, the American Accountant who originally prepared the
return has not contacted our client with "the good news".
$2,700,000
(MY OWN) NOT SO GOOD STORY
My own tale of woe is not
likely to have such a happy ending. Some of you will remember when my hobby
was running up to 105 income tax and real estate offices operating across
Canada and down into California.
I assure you and the rest
of the world that I did no day to day accounting and at that time, did not
actively work in tax preparation. I certainly had no knowledge of corporate
tax situations and was completely unaware of "shareholder's
appropriation" and other technical shareholder type tax penalties. In
fact we paid out some $400,000 those years to Chartered Accountants and
Lawyers to look after all these details. In the trial, the tax department
auditors admitted that David Ingram had not written a cheque and had not
actually received any money. (It was sort of like when all the Directors of
Canadian Airlines resigned in August 1994 because they could be held liable
for two months wages for all the employees if Canadian Airlines went down. Those
directors had better advice than I did.)
At that time, I was the
world's living expert on child tax credits, baby sitting expenses, and other
"family" type tax return problems. I was the "Colonel
Saunders" of income tax preparation in Canada and used to live on talk
shows talking about income tax for the family.
By contrast, I now have to
ask someone how much can be claimed for baby sitting, but can warn you of
potential shareholder problems in 43 states and three or four countries.
This is the only advantage I have received from the "tax case".
The long and short of it is
that I received a bill for some $3,000,000 for all sorts of Shareholder type
appropriations for 1979, 1980 and 1981. When trying to arrive at their
figure, (which I did and still consider predatory, rather than logical), the
Revenue Canada auditors sent me no less than three different versions of
assessments and were still arguing among themselves during the Tax Court of
Canada trial which took place in 1990.
Judge Mogen
took 2 years to render a judgment. His judgment gave me approximately 1/3 of
the bill (which meant that Revenue Canada was wrong at least that much) but
left me with a $2,000,000 + bill.
Rather than face me in
another court case, Elizabeth Junkin of the Justice Department chose to try
and have the case dismissed on a technicality and a Prothonotary Judge has
ruled in her favour for the second time.
I really don't think I want
to continue and would be interested in any feed back you might have. i.e.
Should I appeal again and spend another ten years fighting a 1979, 1980 and
1981 tax bill, or should I quietly go bankrupt for the tax bill (which I do
not believe for a minute that I technically owe and couldn't pay anyway) and
get on with my life. It is too debilitating.
To put it into perspective,
this all happened before I met my wife with whom I have an "almost
thirteen year old bagpipe player, a nine year old paper folder and a 4 year
old who can run a computer as well as I can."
However, my challenge to Ms
Junkin is: "instead of hiding behind your court order to set the case
aside, stand up like a man and set a court date as I have been asking for
the last 10 months while you tried (and did) to win on your technical
argument."
YOUR GREEN CARD! - HAVE YOU LOST IT?
March 20, 1996 was the
deadline for an easy renewal of your "Green Card" if you are a
resident alien of the United States and have a card which is a real
"green card" and does not have your picture on it (likely issued
prior to 1979). All cards issued after 1978 have a back which is machine
readable. Older cards do not and had to be renewed prior to March 20, 1996.
If your card was not
renewed on time, "YOU CAN STILL DO IT". You have to present
yourself at a Port of Entry which could be at the Vancouver Airport (second
floor), Point Roberts, Douglas, Huntington, Sumas, Niagara Falls or Pembina,
North Dakota.
The INS Officer will snip
off the right hand corner of your "old" green card and issue an
I-90 form. You can then proceed to the U.S. and wait for a new Resident
Alien card to arrive. That is the last time that your old card can be used
to enter the U.S. The next trip through, the entire card will be taken away.
.
The bad part is that if you
do leave the U.S. and have to re-enter and have not yet received your new
card, it will cost you $95.00 per entry "each and every time".
Warning!
When you do this, be sure
and have "proof of residence" documentation. Phone bills, car
registration, rent receipts, property tax notices, and "NO B.C. or
Ontario, or New Brunswick or any other province's" health card.
COMING VANCOUVER REAL ESTATE DISASTERS
Nothing scares me more than
seeing people lining up to buy "spaces in the air" as just
happened in downtown Vancouver. NOBODY SHOULD BUY "PIE IN THE
SKY". The "ELECTRA" condominiums are as good an example as
any. Sold out in a couple of days three years ago, resale units are going at
distress prices. A typical example had my client pay $167,120.45 (including
GST and legal) to buy one of these "special" downtown units built
in the old B C Hydro building at Nelson and Burrard. When it was finally
finished in 1995, he sold it for a net of $143,735.25 and recorded a loss of
$23,385 when he expected to "flip it" for significant profits.
Other quick sale buildings
such as 1188 Quebec sold out quickly and some apartments like #1302 sold for
$353,000 in 1992 and $266,355 (before costs of sale) in 1994. #1404 sold for
$289,000 plus costs in 1992 and sold for $205,000 in 1994. My December, 92
prediction of price drops of 20 to 30% was not out by much. In MY
opinion, there is no logical reason to think that any other new building
will do any better! WATCH YOUR STEP IF YOU ARE INTENDING TO "FLIP
IT!"
You see, I have been on
both sides of the fence. Back in 1987, Royal Trust (remember them?) could
not give my partner and I $4,000,000 fast enough. Why? We were going to
build a 22 suite (with offices downstairs) luxury condominium project in
Ottawa. They were expected to sell for $260,000 each and were going to
satisfy a "pent-up" desire for this type of accommodation eight
blocks from Parliament Hill because no new construction had taken place for
five years and there was no product available and we were only building 22
suites.
Well, we had a
construction strike and interest rates fooled around a bit but when the
Mulroney Conservatives were elected with their massive majority in 1988, we
"really had it made".
But it didn't work that
way. Ontario where the streets had liquid gold running in the gutters in the
fall of 1988, had the taps turned off on April 15th, 1989, seven years ago
as I write this. On that day, we had four floors of steel up and could see
the handwriting on the wall as the price of real estate plunged 40% in one
day in Ontario.
Ontario went from people
camping out in 20 degree below zero weather so that they could buy a lot at
an auction, to 40 to 50% of the properties in the province worth less than
the mortgage on them. That is why Olympia and York, Royal Trust, Cadillac
Fairview, Bramalea and another two dozen major companies ended up in
financial distress or did not survive.
The same factors are
present here. There is
no reason whatsoever for people to line up to buy a piece of air on Georgia
when there are some 6,000 equivalent condominiums for sale within blocks.
However, $700,000 worth of advertising does create a lot of interest.
I spend a lot of time
talking to people about their finances. There are a lot of worried people
out there. One of the smartest men I know, Sam Allman, who wrote the book
"Buy it By the Acre, Sell it by the Foot", watched his project on
Vancouver Island go down the tube overnight when a promised mortgage from a
mortgage broker failed to materialize.
And Sam is not alone.
Developers are going broke all over the province. They are going broke in
Whistler. They are going broke in Prince George. They are going broke in
Nanaimo. They are going broke in Victoria. They are jumping out of apple
trees in the Okanagan.
When developers can't
get money from the lenders, it is because the lenders have perceived
something. We have had foreclosures go from 5 to 8 a week last year to as
many as forty a week today.
We have a massive number
of people who took their money out of an RRSP and put 5% down on something
because interest rates were low and they had two jobs and no kids, etc. Now
they have one job, two kids and the interest rate has gone up 1%. 1%
interest increase means that they have to pay $2,000 more interest on a
$200,000 mortgage. To pay $2,000 more on the mortgage, the family has to
make $4,000 more, and pay $2,000 tax, UIC and CPP to have $2,000 left. In
addition, they need $200 a month more to pay back their own RRSP from which
they borrowed their money or have the amount added to their income which
increases their tax bill which they can't pay either.
I estimate that there
are perhaps 5,000 families ready to walk from their properties because when
they call up their Realtor to sell the place, they find out that the place
they paid $225,000 for is now selling for $200,000 and after a $10,165 (with
GST) real estate commission, they will only be $15,000 in the hole.
And it is a myth that
Vancouver has "gold plated balls" as it were. San Francisco is
every bit a great place to live on the world stage. Their prices are 20%
less than 5 years ago. Honolulu is 40% less than 5 years ago. Beverly Hills
is 40% less than 5 years ago. Telecommuting means that a Province Newspaper
Columnist lives in Lunenburg, Nova Scotia and I have clients living in the
Chilcotin who work by computer for a company in Florida. I have clients
living in California and Hawaii who work in Vancouver and clients in Florida
who work in Toronto. In the last few hours, I have received email messages
from Kuwait, the United Arab Emirate, Toronto, Edmonton, Florida, Hawaii and
another dozen places. Who needs Vancouver?
This
does not mean that you should sell your house and go to cash. If I am wrong
and the values do go up again, it will cost you far more to get back in than
your potential savings. However, if you are pressed to the max and
everything is suffering because of your house, consider buying yourself a
much cheaper "retirement condominium" for when the kids are gone,
rent it out in the meantime and find yourself a cheaper place to rent while
you need more room.
