CEN-TA Cross Border Services - Tax, Visas, Immigration: CANADA Dual

I was born in the U.S. but lived and worked all my life in Canada and still reside in Canada.

I now have a U.S. passport and was told to fill

U.S.

income tax which I have done now going back 3 years.

If I sell my principal residence in Canada, am I required to pay any tax in the U.S. or to file on my U.S. tax firm this sale?

I was born in the U.S. but lived and worked all my life in Canada and still reside in Canada.

I now have a U.S. passport and was told to fill

U.S.

income tax which I have done now going back 3 years.

If I sell my principal residence in Canada, am I required to pay any tax in the U.S. or to file on my U.S. tax firm this sale?

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david ingram replies:

When you claimed your US citizenship, you agreed to pay US estate tax (on death) and US capital Gains tax if the profit on the sale of your Candaina house exceeds $250,000 US.

In two similar situations, we have two clinets paying

A $44,603 on a $565,000 US profit on the sale of her Kitsilan, Vancouver house

B $492,245 tax on a $3,565,998 profit on her Tsawasswn Home.

B would also be subject to over $2,000,000 in US estate tax if she were to die at this time.

In addition, if you have a Canadian RRSP or other Canadian (foreign to the US) acounts, you must file forms 8891 and TDF 90-22.1 ($10,000 to $500,000 fine plus up to 5 years in jail for failure to file)

If you have 10% or more ownership of a Canadian Corporation, You must file form 5471 on an annual basis. ($50,000 a year fine for failure to file.).

Goto www.centa.com and read the Oct 1995 newsletter in the top left hand box for a list of what you have to file as a US citizen living outside of the US.

Also Check out the US/Canada Taxation section in the second hand box down on the right hand side.

For information on how to make Caandian mortgage interest deductible, check out the November 2001 newsletter.

This older question should help. Watch for the TDF 90-22.1 and 8891 parts!

QUESTION:

We have watched the Cdn$ rise against the US$ and now wonder what the impact is if we cash in the RRSP's and bring the cash back to the USA. It seems that the exchange rate would offset the tax impacts 9presuming of course that the exchange rate is temporarily high).

Logically there is Cdn penalty withholding and then the cash would be taxed at non resident rates. Can we cash in smaller amounts to get reduced rates?

In the US what would happen?

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david ingram replies:

I am one of the people that thinks the Canadian Dollar will be worth $1.20 US. However, I have been wrong before and will be wrong again. However, you might want to hedge yiuor bets and just transfer 50% and be happy you did not do it three years ago.

A non-resident of Canada owes the Canadian governemnt 25% withholding tax when he or she withdraws an RRSP as a non-resident.

The principal part of the RRSP is not taxable in the US.

The total withdrawal (including the tax deducted) goes on line 15a and the taxable portion goes on line 15b on put zero on 15b and put the actual growth on schedules B and D if you know what the interest, dividends and capital gains portions of the increase are. The increase in exchange will go on Schedule D for instance.

The taxable portion is the increase in value since the day you crossed the border to the US and will be the part you have been reporting and exempting every year on form 8891 and the previous reporitng you did under 89-45 and 2003-57, etc., etc.

Any tax paid to Canada will be deductible as a foreign tax credit on US form 1116 on a pro-rata basis.

You have also, of course been reporting the existence of the RRSP on form TDF 90-22.1 - the hint about these two forms are the two questions at the bottom of schedule B. The 8891 is a new simpler form for the last three years and takes the place of the draconian 3520 mentioned in the bottom question.

This older Q & A will help you I hope.

I am a Canadian citizen and legal US resident. I've lived in Florida for 25 years and now, at 65, I'm considering taking distributions from a spousal RRSP with Royal Bank.

Unfortunately, income tax information I've received from different sources is terribly conflicting and, at worst, indicates that my nest egg will be gobbled up by governments. Is this something you can steer me straight on?

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david ingram replies:

If you roll the RRSP into an RRIF (Registered retirement investment Fund), The payer will have to deduct 15% non resident withholding tax under the terms of Article XVIII of the US . Canada Income Tax Convention (Treaty).

You will then report it again on form 8891 of your 1040 and there may or may not be US tax to pay. If your income is high enough that youare in a federal 28% tax rate, there 'will' be tax to pay on the RRIF.

You will claim the 15% tax paid to Canada on US form 1116.
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Now, you have been supposed to report the existence of that account to the Department of the Treasury in Detroit on form TDF 90-22.1 since 1989 when that law was passed and shown in bulletin 89-45. Failure to report can be a penalty of a minimum of $10,000 to a maximum of $500,000 PLUS up to 5 years in jail for each year you did not report it. See the bottom question on schedule B of your 1040 where your foreign trust requires the preparing and filing of a 3520.

Thankfully, you do NOT have to do a 3520. the 8891 takes it place and is much easier.

The penalty for not also reporting the RRSP and its internal earnings to the IRS (it was the Dept of Treasury above) is 35% of the principal plus 5% for each year it was not reported since 1989 when the reporting rules started. The form 8891 is an exemption for paying the tax on those internal earnings.

See form 8891 at: http://www.irs.gov/pub/irs-pdf/f8891.pdf

RELIEF

Although I know of over 1,000 people who have paid $10,000 fines for not filing form TDF 90-22.1, I (at this time) do not know personally of a single individual who has been fined under the 8891 / 3520 rules. I also have NEVER seen a person fined for filing the TDF 90-22.1 forms late and voluntarily.

In my opinion, you should file the TDF 90-22.1 forms retroactively for six years.to the Department of the Treasury.

See Form TDF 90-22.1 at http://www.irs.gov/pub/irs-pdf/f90221.pdf Note the penalty of up to $500,000 plus five years in jail for failure to file. The minimum fine is now $10,000.

You should file retroactive 8891 forms with a 1040X to the IRS for the same years. Note that you are the BENEFICIARY so follow the Beneficiary rules. The 8891 form is actually only 3 years old. Before that, you just wrote out the information on a free form page but it is a convenient form to use retroactively.

Hope this helps and we would be glad to assist if needed.