February
1994
the
CEN-TA PEDE
US/Canadian
Newsletter
Estate
Tax Items are about to be amended. See September 94 edition.
PROFESSIONAL MISTAKES, ERRORS AND OMISSIONS
I am always
quick to point to the errors of others and the insidious ways that we might
get "taken to the cleaners". I have to tell you how easy it is
here at CEN-TA. A client just left George Hatton's office after
coming in to buy his RRSP and calculate his CNIL (cumulative net investment
loss). After he left, George informed me that I had reported $9,000 too much
interest on our client's 1992 tax return.
Sure enough,
I had recorded $9,636.00 of interest when it was supposed to be $96.36. What
is interesting is that neither I, nor the client noticed it, and because it
was private money and not marked by a T5 slip, it was not even detectable by
a checking department, because it was read to me out of the client's ledger.
It was only spotted now when getting ready for next year's return. We will
correct at no cost.
With
the massive drop in interest rates over the last few years, it is difficult
to compare amounts of interest from one year to another. It is quite
possible for persons with debt instruments to have been receiving $45,000 on
$300,000 in 1990 and $18,000, $10,000 or even less in 1992 / 1993.
In another omission on my own part,
I put the amount of a pension in the wrong spot in my computer tax
preparation program. The amount was not recorded as income on the return and
when the client went to a free consultation at a credit union, the planner
pointed out in writing that David Ingram & Associates had left off the
plumber's pension. He then went on to tell the lady in writing that she did
not have to pay tax on the $1,200 of interest earned on a GIC she had bought
for her grandchild who was still under 18. While it is true that as a matter
of policy, Revenue Canada does not tax a mother on the interest from an
account set up with the Family Allowance cheques, they sure do tax
grandparents on accounts set up for the grandkids. He also suggested
that I had not reported enough series 39 Canada Savings Bond Interest (she
had a T600 showing $4,636.75 received in 1991 and I had only reported
$935.25 of the $4,636.75). Again, his basic theory was wrong. If the
interest had not been reported in the past, page 12 of the 1990 T1 guide
shows that you had to amend the 1987 and 1990 returns to show the three year
accruals. However, this lady had been reporting her interest on an annual
accrual basis and only had to report the $935 left. Score Ingram 2 <->
planner 1.
I
would have spotted the missing pension amount the next year. The planner did
not know what he was doing with his basic theory errors.
In
another situation this week, an American lady brought me her returns to look
at. She still has US source income and has been filing her own US returns.
However, her husband's accountant who knows about the US income, has not
taken it into account on either his or her Canadian returns. The husband's
accountant's firm has one of the best US / Canadian tax departments. He
isn't part of it. This specific accountant has claimed the wife as an
exemption for two out of three years and claimed child tax credits
completely disregarding the substantial US income. A lot of professional
accountants still think that you can pay tax in the states on your American
income and to Canada on Canadian income. This is just not so! You
must report all your world income to both countries if you are an American
in Canada.
RRSP HOME
PURCHASE PLAN
I
am trying not to comment on such mundane items as RRSP's and IRA's with this
newsletter, leaving that to the mainstream press. However, bank, trust
company and credit union managers who read this, pay attention.
To
take money out of your RRSP for the purchase of a new house, the deadline is
March 1, 1994. Each individual can take out up to $20,000 making up to
$40,000 for a couple - significant sums. The money does not have to be used
for the down payment. It can be used to improve the house or even for
furniture.
I
am commenting on this because I heard two experts give out the wrong
information on an investment show in the first week of February and it could
mislead many people in their decisions. The statement made and reiterated by
both participants was that you had to take your money out of the RRSP by
March 1. 1994 but had until Sept 30, to find the house. The implication was
that as long as you had the money out by March 1, you could take your time
about finding a house and THIS IS INCORRECT.
Each
person may take up to $20,000 out of their existing RRSP to buy a new
house. It does not have to be a NEW "NEW" house. It can be a used
"NEW" house but it must be "NEW" to the purchaser. You
can do this even if you already have a house.
BUT!
You must have at least a signed and accepted INTERIM AGREEMENT on a
specific house by March 1, 1994. You then have until Sept 30 to
CLOSE the deal. You have up to one year from the date of closing to occupy
the house. I faxed the correct rules to the speakers and they were going to
correct it, but I was told that the one speaker who brought it up had taken
it from a Financial Post article. That was an April 23, 93 FP Bruce Cohen
article and it does imply that you have the extra time. It is incorrect!
However, I can just see it on March 1rst, when 200 people show up at
"your financial institution" wanting to take their $20,000 out
because of the article or what they heard on the radio.
Correct
details were given in Ted Ohashi's column in the PROVINCE on Page A31, Wed,
Feb 2, 1994. I include it with the newsletter with the permission of Ted
Ohashi. Having a copy of this newsletter or Ohashi's column might help out
when we are all busy writing last minute RRSP's on March 1.
CANADIAN
CITIZENS / US PROPERTY OWNERS
This
is either coincidence or a sign of things to come. In the last week I have
had the same situation twice, both with dire consequences for the Canadian.
One took place in Michigan and the other in California. I have the job of
cleaning up both messes.
Both
involved elderly men with significant US property and both were worried
about US estate tax. One took place shortly before a major surgery from
which the patient might not have recovered and the other was just done
"in case".
Let
me explain. The US has an estate tax. The US also has a gift tax. Yes, they
do allow one to deduct mortgage interest and property taxes but on the other
hand, they tax the family house for capital gains and they estate tax
everything (all assets).
US
citizens or resident aliens are allowed to die and leave their loved ones up
to $600,000 US tax free. But a non-citizen, i.e. a Canadian with
property in the U.S., can only leave $60,000 free of estate tax.
Gift
tax starts at $10,000 for anyone other than a spouse.
If the spouse is a Canadian, gift tax applies to anything over $100,000 for
a spouse who is not a US citizen or a resident alien of the United States.
There is no gift tax between spouses if both are U S citizens or U S
resident aliens.
Case
1. My client thought he was going to die. He gave his wife (by quit claim)
with the help of a US lawyer, the other half of $450,000 US worth of
property they were holding. He did not die. He had given her $225,000 US. He
can exclude $100,000. He owes tax on the other $125,000 as follows:
Tax
on the first $100,000 of taxable $125,000 - 100,000 23,800
plus
30% on the remainder 25,000 7,500
For
a total gift tax of: 31,300
Gift
Tax rates (form 709) and Estate Tax (form 706) rates are the same (I wonder
why). Any gifts made for up to three years before death are added back into
the estate for the purposes of Estate Tax. Therefore, you could have given
(this is extreme) something away and paid 20% Gift Tax only to have it added
back in and owe up to 60% Estate Tax. Of course, they give you credit for
the Gift Tax paid. (The technical term is "unified credit" but
let's just use the simple terms of Gift and Estate Tax.)
Table for
Computing Gift & Estate Tax (from 709 US Gift Tax Return)
Column
A Column B Column C Column D
Rates
of tax
Taxable
Taxable Tax on on excess
amount
amount amount in over amount
over
>> not over -- Column A in Column A
..........
10,000 ........... 18%
10,000
20,000 1,800 20%
20,000
40,000 3,800 22%
40,000
60,000 8,200 24%
60,000
80,000 13,000 26%
80,000
100,000 18,200 28%
100,000
150,000 23,800 30%
150,000
250,000 38,800 32%
250,000
500,000 70,800 34%
500,000
750,000 155,800 37%
750,000
1,000,000 248,300 39%
1,000,000
1,250,000 345,800 41%
1,250,000
1,500,000 448,300 43%
1,500,000
2,000,000 555,800 45%
2,000,000
2,500,000 780,800 49%
2,500,000
3,000,000 1,025,800 53%
3,000,000
10,000,000 1,290,800 55%
10,000,000
21,040,000 5,140,800 60%
21,040,000
--------------- 11,764,800 55%
The
following paragraph is going to change. See the September, 94 Newsletter.
Note: The US has Gift Tax conventions in effect with
Australia, France, Germany, Japan and the United Kingdom. However, there are
no Gift Tax or Estate Tax credits available between Canada and the US. It is
quite possible to be in a situation where upon death, a Canadian would owe
50% Estate Tax in the U.S. and Canada wants another 37.5% (approximate)
Capital Gains Tax. Canada does not recognize the estate tax and the US does
not recognize the Capital Gains Tax because Canada does not have an Estate
Tax on death and the U S does not have a deemed disposition and Capital
Gains Tax on death even though both taxes accomplish much the same thing
individually "WITHIN" that country's borders and only cause a
problem when they cross international boundaries and there is no treaty in
place to prevent double taxation.
Case
2: US citizen taxpayer transferred a small $50,000 house through a lawyer to
his daughter in Canada. The lawyer thought it was to a wife and did not even
consider gift tax. At the same time, the father put his daughter's name on
another $200,000 of mutual funds because they were still in his and his
wife's name on her death so he transferred the mother's share to the
daughter.
Mother
did not leave them to the daughter. She specifically left them to the
father. The net result was that father owes gift tax because "HE"
inherited them and gave them to his daughter. He has since died. If he had
not made the gift, there would be no estate tax as the estate is under
$600,000. He could have sold them and forgiven $10,000 a year or he could
have given $10,000 each to his daughter, her husband and her three children
for 4 years. As it is, he owed gift tax of: $250,000 (house and mutual funds
) - $10,000 exemption = $240,000 taxable. He did save $5,000 of probate fees.
Tax
on first $150,000 38,800
plus 32% of 90,000 28,800
For
a total gift tax of: 67,600
B C Medical
With
our ongoing saga with BC Medical and US involvement, I am pleased to say
that they do listen to reason occasionally. We just had another situation of
a 67 year old man who had lived in Canada since he was 2 months old but
never taken out Canadian Citizenship. After inheriting some money, he was
able to go off the subsidized medical through veterans affairs (yes, he
served in the Canadian Armed Forces.). This meant that he had to apply
directly for BC Medical. They turned him down because he was not a citizen.
Thankfully, his coverage was restored with a phone call.
However,
we still have four families who pay full (and large) taxes to Canada (and
none to the US) who have been turned down for BC Medical because they sleep
in the US.
We
have already been before John Mochrie, Chair of the Medical Services
Commission. When we started the "fight", that was the last
official level as I understood it. However, there is now to be a new MEDICAL
AND HEALTH CARE SERVICES APPEAL BOARD. This board has not yet been picked,
but we are in line for that appeal and maybe, just maybe, reason and thought
will prevail to correct this injustice.
the
CEN-TA GROUP
david
ingram
