March
1994
the
CEN-TA PEDE
david ingram's US/Canadian Newsletter
R E T R O A C T I V E C
H A N G E S
or "Something else I
didn't know"
Today is
March 15, 1994 and I have just received a four page fax from the IRS
Attache's office in Ottawa. This 4 page fax was sent as a result of a
request I submitted after a West Vancouver US citizen had phoned the IRS
Attache at my suggestion. This Fax changes the rules RETROACTIVELY for those
people who thought they had lost their US citizenship and have now "got
it back".
This
gentleman became a Canadian several years ago and at that time, becoming a
Canadian was considered an "expatriating act" and he lost his US
citizenship (see my October Newsletter). The US laws and interpretations of
the old laws have made it possible for persons in this position to get back
their US citizenship. He now wanted to know how many years of back taxes he
had to file. Well, up until December, 1992, he had to file them all. In
December, 1992 the rules changed retroactively.
There are
three kinds of situations here. In the first, the US government found out
about the expatriating act (i.e. taking out Canadian citizenship) and
actually issued a "Certificate of Loss of Nationality" which was
actually served on the ex US citizen. In the second situation, the US
government did not learn of the expatriating act, and the person was never
issued a Certificate of Loss of Nationality.
In the third
case, someone has found out that they are a US citizen because of birth.
i.e. They were always a US citizen, but did not really "know it".
All have now
applied for a US passport and the subject of Income Tax has come up.
In
case one,
to quote,
"Individuals who lost their United States citizenship and had it
retroactively restored will not be held liable for federal income taxes as
United States citizens between the date they lost their United States
citizenship and the beginning of the taxable year when their citizenship was
(or is) restored, and will not be held liable for federal gift taxes as
United States citizens between the dates they lost their United States
citizenship and January 1 of the calendar year when their citizenship was
(or is) restored.
In
cases two and three, the person is and always was a US citizen and
is liable for US federal income tax returns and gift tax returns "all
the way back" to 1967 although for administrative purposes, the IRS is
accepting the returns from 1987 forward. To make this easier, they have also
extended the $70,000 earned income exemption back to 1987.
But All US
citizens out there, get your past tax returns in BEFORE the IRS catches up.
It is my opinion that along with making it easier to comply, there will come
heavier and darker penalties for those who are "caught"
retroactively.
MORE PROFESSIONAL ERRORS AND OMISSIONS
In the February CEN-TAPEDE,
I told the story of how I had personally put $9,200 too much interest on one
client's return and how I had left another client's plumber's pension off
another return.
The omissions seemed to be
enjoyed by all who read them. Perhaps it does help to be humble once in a
while.
However, we have now had
two months of the 93/94 tax season and enough other errors and omissions
have shown up that I think that they should be pointed out. After all, if I
OR MY ASSOCIATES CAN MAKE THESE SILLY ERRORS, so can you.
A new error has surfaced
with regard to Workers Compensation and welfare payments.
Up until 1992, these items
were not prominently featured on the tax return and had to be plugged in on
schedules like the Federal Sales Tax Credit, the Child tax Credit, or the
Goods and Services Tax Credit, or transferable amounts from your spouse.
In 1992 and again in 1993,
these items are being put onto the return on lines 144 to 146. In this
manner, the non-taxable income increases the Net Income of the taxpayer. The
income for these items is now reported from these sources on a T5007 slip.
What happened with the
change from 1991 to 1992 was that otherwise competent preparers seemed to
stumble with the concept. I kept on seeing people who had their returns
prepared "elsewhere", coming to the office with the same problem.
They had put their "spouse's" T5007 in on line 144 or 145 and then
managed to claim the spouse as a full dependent.
Using this scenario, one
gets back an extra $1,400 or so which one is not entitled to. It is tough
explaining to someone that they should report this error and pay back the
$1,400. I thought we were immune until Max Weston of our Capilano Mall
office came in with an example of the same thing in our own office. One of
our consultants with five year's experience did the same thing last year and
Max had to tell the client that they were not going to get the same benefit
this year and would owe back the tax for 1992.
What surprises me about
this is that "to this date", I have not seen Revenue Canada catch
a single example. "What is their computer system doing?" The
reason for the T5007 was so that these figures would be in the computer and
it would stop people from claiming others who were receiving welfare or
worker's compensation. It isn't working.
1994
Winner as "most changed" tax returns - The Prize: a $4,400 refund.
NATIVE INDIANS
At the same time, a change
in the Indian Act snuck through "retroactively" on April 7, 1993.
In 1991, Tax Free income paid to a Status Indian on a reserve was added to
the tax returns. The instructions in the E-FILE manual stated that the
income was to go in on line 101 for wages or line 119 for unemployment
insurance. The wages were then to be deducted on line 256 leaving the person
with a net income so that they could not be deducted as someone else's
dependent. UIC was still taxable under this scenario.
In the meantime, Glenn
Williams 92DTC6320 won his case for non taxability of UIC if it was paid
because of earnings on the reserve. This was a SUPREME COURT Decision
involving 1984 earnings. The INDIAN INCOME TAX REMISSION ORDER on April 7,
1993 then allowed for retroactive changing of returns for Status Indians
back to 1985 to remove UIC which had been taxed because it could now be
removed (along with the wages) on line 232 meaning that net income is now
being reduced to zero in most cases. In addition, Bulletin IT 62 allows for
tax free interest from a reservation source. Therefore, if a Status Indian
keeps their money in the Bank of Montreal at Park Royal, it is free of
income tax because Park Royal South is on the Squamish nation Reserve, but
if they keep their money in the Royal Bank of Canada in Park Royal North, it
is taxable.
At the same time, at
least one Status Indian is setting up a small business in Park Royal South.
That's right, no income tax. It does get a little silly, but like Monopoly,
Income Tax has rules.
These retroactive changes
are a killer. You will remember from the November CEN-TAPEDE, that on June
30th, 1993 the US government came out with penalty free filing for US
citizens living in Canada who had failed to file their past tax returns.
(Remember, a US citizen living in Canada must continue to file US returns on
their Canadian income but can claim an exemption for the first $70,000 of
"earned" income).
I have a US Citizen who
came in to backtrack his US returns for 1987 to 1992. He owed tax and
interest because when he came in, the $70,000 exemption could only be
claimed back one year.
So as I suggested in that
November newsletter, he was one of the ones that had to be looked at to see
if it was worth refiling to get the tax and interest back. However, he was
also (I assure you that this is true) married to a Status Indian who had got
back her status after losing it by marrying a non-status man.
She got her status back in
1987 so we could not go back to 1985 but she has had UIC and earnings and
interest from (you guessed it), the Bank of Montreal in Park Royal.
So, I now find myself
refiling the wife's Canadian returns to remove UIC and interest from her net
income for 1987, 88, 89, 90, 91 and 92. I am refiling his Canadian return to
claim her as a full exemption for 87, 88, 89, 90, 91 and 92. I am refiling
his 1987, 88, 89, and 90 US returns to claim the $70,000 exemption
retroactively.
Then, when 1993 is almost
finished, he shows me a letter from Worker's Compensation which meant that
everything had to be changed again for 93. Instead of paying the Worker's
Compensation directly to him and issuing a T5007, WCB had paid it to his
employer who had paid him his full wages and issued a standard T4 slip with
no footnotes. Now we had to break the amount out to put on line 144 so it
would be deducted on line 250.
But what a guy my client
is. He fell into almost every retroactive tax change possible except the
following:
CARS OVER $24,000
The only good part is that
he has not bought a class 10.1 car (worth more than $20,000 87, 88, 89 and
$24,000 after Sept 89). If he had sold such a car in 87, 88, 89, 90, 91, we
would be refiling for the sale of the car to claim the half/year rule which
Revenue Canada has just changed retroactively.
The new application of the
half/year rule to a Class 10.1 vehicle is that you are allowed to claim one
half of the normal depreciation (CCA) in the year you sold it and you may
change your old return retroactively back to 1987.
COMMON-LAW MARRIAGE - OR FOOTLOOSE AND FANCY FREE
THE
1993/94 TAX SEASON QUESTION IS!!:
Are you living common-law?
Page 10 of the 1993 T1
General Income Guide defines SPOUSE as follows:
"The term spouse used
throughout this guide applies to a legally married spouse and a common-law
spouse. A common-law spouse is a person of the opposite sex who, at that
particular time:
* was living with you in a
common-law relationship and is the natural or adoptive parent (legal or
otherwise) of your child; or
* was living with you in a
common-law relationship and had been living with you for at least 12
continuous months (when you calculate the 12 continuous months, include any
period of separation of less than 90 days).
Once either of these two
situations applies, we consider you to have a common-law spouse, except for
any period that you were separated for 90 days or more due to a breakdown in
the relationship.
WHAT DOES THIS MEAN?
THE GOOD NEWS is that
couples who have been living together for 20 years and have no children and
only have one spouse with income are now able to get the tax exemption
amount for the spouse. This means that this couple will get an extra $1,400
of tax refund this year. Of course the spouse who is being claimed as a
dependent can now not claim a GST credit based upon his or her income only,
but must include the income of their common-law spouse.
THE BAD NEWS is that
common-law couples with children where both spouses have income will be
paying much more tax. Because they must now count each other as a spouse,
they lose the ability to claim one child (and sometimes one each) as a
single or married exemption.
So if a common-law couple
with a child each got together at Xmas, 92, they would have filed 1992's
return as single parents and depending on their income could have received
major tax breaks.
Assuming they both made
$25,000 each and had one child each, they would have received about a $1,400
tax refund for their child as a married equivalent exemption and likely
another $600.00 in GST credits. The total amounts to $4,000 in refunds.
Now, even if they have not
"married" formally, Revenue Canada says that they must consider
themselves married and they will now each lose the GST credit each and lose
the married equivalent exemption. That's right, the couple owe $2,800 more
income tax and receive $1,200 less in GST credits if they have lived
together for 12 continuous months and are together at Dec 31, 1993.
I am beginning to feel like
"God" (himself or herself) as I inform couples "VABOOM",
you are married.
Note that this does not
happen to same sex couples where both are working and there are children
involved. Another part of the act says that the married or equivalent
exemption can only be claimed once per housing unit. However, since a
housing unit can be a rented room, this last regulation is almost
unenforceable and most common law couples likely have been claiming two
exemptions.
WATCH OUT for T4A slips.
On T4 slips, Box 14 is a
total of all other figures on the T4 slip. It is easy to fall into this trap
and ignore the other boxes on a T4A slip (I have done it once this year
already with a favourite client). Please note that in particular, the amount
in box 28 (usually extended medical benefits) should be reported on line 130
and is in "addition" to the pension income in box 16 which goes on
line 115 of the return. On the other hand, sometimes Box 28 includes DPSP
payments which also go on line 115 OR it could be a Wage loss replacement
which goes on line 104. Some companies (like the longshoremen) send two
slips.
the CEN-TA
GROUP
david ingram
