Revenue Agency (CRA) collecting Income Tax from US resident -

 

QUESTION:

Revenue Canada claims that my husband, who is a Canadian citizen living with me in the US for the past 5 years,
 owes $65,000 in income tax and they are not willing to work with us in any way; they are threatening to turn 
it over to the IRS.  
 
Can they do this?  
 
If so, what will the IRS do if we can't pay?
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david ingram replies:

The good news is that your husband can eliminate the tax bill by returning to Canada for a year and declaring bankruptcy if he owes the money and has no assets and no method of paying the money.  If he has a green card, he should fill out US Immigration form I-131 BEFORE he returns to Canada.  If he is living near Canada and has a job in the US, he can even do something like live in Canada and commute to his job in the USA while pursuing his Canadian Bankruptcy.

If he does decide to pursue Bankruptcy in Canada, he should consult a  Canadian bankruptcy lawyer (not a trustee) BEFORE he proceeds.  The reason is that a Bankruptcy lawyer works for YOU.  A bankruptcy trustee works for the creditors - that' s the CRA in this case.  (I have printed my own income tax bankruptcy story at the end of this.)

But, if the two of you own a house in joint tenancy and there is $130,000 worth of equity, he can expect that he will have to pay the CRA.

The good news is that if the assessment is in error, Your husband can still amend or correct his Canadian Income tax returns back 10 years under Canadian Law.  From your information, I can NOT comment upon the likelihood of this but I can say that it is not unusual for us to overturn $100,000 bills when arbitrary assessments were issued against individuals who have left the country.

However, if the tax is determined to be due and owing, the bad news is that the IRS WILL COLLECT for Revenue CANADA under Article XXVIA of the US / Canada Income Tax Convention (Treaty).  The IRS and CRA also have very efficient "Exchange of Information" rules under Article XXVII of the convention.

The following shows both of those sets of rules.

Article XXVI A

Assistance in Collection

1.  The Contracting States undertake to lend assistance to each other in the collection of taxes referred to in paragraph 9, together with interest, costs, additions to such taxes and civil penalties, referred to in this Article as a "revenue claim".

2.  An application for assistance in the collection of a revenue claim shall include a certification by the competent authority of the applicant State that, under the laws of that State, the revenue claim has been finally determined. For the purposes of this Article, a revenue claim is finally determined when the applicant State has the right under its internal law to collect the revenue claim and all administrative and judicial rights of the taxpayer to restrain collection in the applicant State have lapsed or been exhausted.

3.  A revenue claim of the applicant State that has been finally determined may be accepted for collection by the competent authority of the requested State and, subject to the provisions of paragraph 7, if accepted shall be collected by the requested State as though such revenue claim were the requested State's own revenue claim finally determined in accordance with the laws applicable to the collection of the requested State's own taxes.

4.  Where an application for collection of a revenue claim in respect of a taxpayer is accepted

    (a) by the United States, the revenue claim shall be treated by the United States as an assessment under United States laws against the taxpayer as of the time the application is received; and

    (b) by Canada, the revenue claim shall be treated by Canada as an amount payable under the Income Tax Act, the collection of which is not subject to any restriction.

5.  Nothing in this Article shall be construed as creating or providing any rights of administrative or judicial review of the applicant State's finally determined revenue claim by the requested State, based on any such rights that may be available under the laws of either Contracting State. If, at any time pending execution of a request for assistance under this Article, the applicant State loses the right under its internal law to collect the revenue claim, the competent authority of the applicant State shall promptly withdraw the request for assistance in collection.

6.  Subject to this paragraph, amounts collected by the requested State pursuant to this Article shall be forwarded to the competent authority of the applicant State. Unless the competent authorities of the Contracting States otherwise agree, the ordinary costs incurred in providing collection assistance shall be borne by the requested State and any extraordinary costs so incurred shall be borne by the applicant State.

7.  A revenue claim of an applicant State accepted for collection shall not have in the requested State any priority accorded to the revenue claims of the requested State.

8. No assistance shall be provided under this Article for a revenue claim in respect of a taxpayer to the extent that the taxpayer can demonstrate that

    (a) where the taxpayer is an individual, the revenue claim relates to a taxable period in which the taxpayer was a citizen of the requested State, and

    (b) where the taxpayer is an entity that is a company, estate or trust, the revenue claim relates to a taxable period in which the taxpayer derived its status as such an entity from the laws in force in the requested State.

9.  Notwithstanding the provisions of Article II (Taxes Covered), the provisions of this Article shall apply to all categories of taxes collected by or on behalf of the Government of a Contracting State.

10.  Nothing in this Article shall be construed as:

    (a) limiting the assistance provided for in paragraph 4 of Article XXVI (Mutual Agreement Procedure); or

    (b) imposing on either Contracting State the obligation to carry out administrative measures of a different nature from those used in the collection of its own taxes or that would be contrary to its public policy (ordre public).

11.  The competent authorities of the Contracting States shall agree upon the mode of application of this Article, including agreement to ensure comparable levels of assistance to each of the Contracting States.

Article XXVII

Exchange of Information

1.  The competent authorities of the Contracting States shall exchange such information as is relevant for carrying out the provisions of this Convention or of the domestic laws of the Contracting States concerning taxes to which the Convention applies insofar as the taxation thereunder is not contrary to the Convention. The exchange of information is not restricted by Article I (Personal Scope). Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the taxation laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the administration and enforcement in respect of, or the determination of appeals in relation to the taxes to which the Convention applies or, notwithstanding paragraph 4, in relation to taxes imposed by a political subdivision or local authority of a Contracting State that are substantially similar to the taxes covered by the Convention under Article II (Taxes Covered). Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions. The competent authorities may release to an arbitration board established pursuant to paragraph 6 of Article XXVI (Mutual Agreement Procedure) such information as is necessary for carrying out the arbitration procedure; the members of the arbitration board shall be subject to the limitations on disclosure described in this Article.

2.  If information is requested by a Contracting State in accordance with this Article, the other Contracting State shall endeavor to obtain the information to which the request relates in the same way as if its own taxation was involved notwithstanding the fact that the other State does not, at that time, need such information. If specifically requested by the competent authority of a Contracting State, the competent authority of the other Contracting State shall endeavor to provide information under this Article in the form requested, such as depositions of witnesses and copies of unedited original documents (including books, papers, statements, records, accounts or writings), to the same extent such depositions and documents can be obtained under the laws and administrative practices of that other State with respect to its own taxes.

3.  In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

    (a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State;

    (b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State; or

    (c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information the disclosure of which would be contrary to public policy (ordre public).

4.  For the purposes of this Article, the Convention shall apply, notwithstanding the provisions of Article II (Taxes Covered):

    (a) to all taxes imposed by a Contracting State; and

    (b) to other taxes to which any other provision of the Convention applies, but only to the extent that the information is relevant for the purposes of the application of that provision.

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david ingram's own Bankruptcy story


David

I have reached my wits end.  After a divorce, job downsizing loss ($200,000 down to $70,000) and remortgaging my house two times, I am tied into a 10% mortgage with payments that are as much as I am earning in my new job.  I have about $70,000 equity in the house and over $80,000 in credit card debt and $82,000 owing to the CRA from when I was doing well as a Realtor and then just lost it and had to get a salaried job.

Oh yes, my wife got fed up and has left with our one year old daughter and 5 year old son.  They are living at her parents.  She wants support for herself and our daughter and son.  She wants support for  herself until our daughter is in grade one.   AND, she wants me to pay for her tuition to go back to school and finish a degree she stopped when she became pregnant with our son.  She has never had a real job.  What do I do.

What do you suggest.
---------------------------------
david ingram replies:

Well, unless there is something you have not told me, you are likely a prime candidate for bankruptcy, but not necessarily.

Obviously, the house has to go and you all have to pull in your horns. However, if you move quickly and the marriage is already on the rocks, the house should be put up for sale right away.  Your wife should sue you for divorce and support 'right away'.

She should take the equity in the house as an advanced Lump sum payment in lieu of support for her the next five years.

You need to consult with a 'good' BANKRUPTCY LAWYER before much time has passed.  Because she has already left, there is nothing phony or untoward about her suing you for divorce, child support and a property settlement for her years as your wife.   Helping her get her degree so that she has the skill set  for a better job is the smartest thing you can do. 

One well known Vancouver client of mine paid his wife $800 a month support while she went back to University and got a PHd in Psychology.  She is now a Psych Professor at a major University.
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Speaking of  psychologists, you also owe it to yourself to go an see Dr Paul Swingle  who uses  neurobiofeedback and other amazing drug free techniques to  cure ADD, ADHD, Dyslexia closed Head Brain Injuries and DEPRESSION.  I interviewed him last Sunday on CFUN and he will be on again on April 13th. 

See more at www.drswingle.com -  his phone number is (604) 608-0444.  I personally consulted with him three times with great success.  1.    When shaw canceled my television program
2.    When the CRA put 'me' into bankruptcy and
3.    When my wife rode away on the back of a motorcycle with one of the fellows she had hired to repair the sun-deck.

-------------
I expect that your real estate career's decline was the result of an unhappy marriage and being demoralized by an unhappy wife when you came home at night.  It is impossible to go out and be a great or even a mediocre Realtor when living with a person who runs you down or demoralizes you every time you come home. (And ladies I had a lady Realtor here in the last week who had the same thing happen with her husband running her down and her income went  from $200,000 a year down to nothing)  You are working your tail end off and your spouse starts the nightly demoralizing as you walk in the door. 

So you need a good, nay a great divorce lawyer to represent you but you do not want a big fight.  David Bellamy looked after my divorce when I was in the middle of a bankruptcy, etc.  You can find him at http://www.bellamy.bc.ca/ or just call him at (604) 662-8900.

If your wife is a co-signer on all these debts, my next advice and the property settlement is not going to do a lot of good because your wife will owe her share as well, but i expect that they are all your debts because you said she never worked.  Hopefully the debts are for your credit cards and not on ones that she has signed for.

Now you need to think about bankruptcy.  You do NOT look in the Yellow Pages for a trustee and you do not even  talk to a trustee until you have talked to a  bankruptcy lawyer.  Why?  Because the trustee does NOT really work for you no matter how nice they are.  The bankruptcy trustee works for the creditors as soon as you sign that paper.  His or her job is to get the most for the creditors and only give you the amounts proscribed by the BC Bankruptcy ACT.

I have lectured on bankruptcy, written about bankruptcy and counseled bankrupts on their finances.  I 'thought' i understood it until i fell into the clutches of Deloitte And Company who behaved (in my opinion) in an unacceptable manner to me.  The trustees first words to me when he walked into the boardroom where I was sitting was 'Mr Ingram, aren't you ashamed to be here?'' I can only say that it got worse from there. 

And their work was not up to snuff.  They tried to take the whole house and then had to give half of it back to my wife.  In their initial report, they missed an $80,.000 mortgage on the house even though it was prominently displayed on my original statement. He actually accused me of lying about it at our first creditors meeting even though it was declared and registered against the house.

So, I know whereof  I speak.  I finally asked another bankruptcy trustee for the name of a bankruptcy lawyer and he sent me away out to Surrey (where i think you might be living) and I consulted with Murray Morrison, a marvelous lawyer who specializes in bankruptcy.  The situation changed almost immediately and even though I had originally offered $1,000 a month for ten years as a settlement  before the actual receivership (thankfully it was turned down by the Tax department) , Murray Morrison negotiated a settlement of $800  a month for 3 years and gave me my life back.

See Murray at http://morrocolaw.ca/, call him at (604) 930-9013 or write him at info@morrocolaw.ca.  Remember that anything you tell a bankruptcy trustee can and WILL be used against you for the benefit of your creditors.  Your lawyer has privileged communication and can give you an honest answer without it affecting the relationship you have with the receiver.

Even if you have a lawyer has worked with you over a dozen property transfers, DO NOT USE A LAWYER who specializes in anything but bankruptcy.

Above all, remember that 'nobody wins' in these matters.  Do your best to straighten up with Dr Swingle first.  If your debts are from when you were a Realtor, paying them off will be a tax deduction against other income and only cost you half as much. Get your psyche again and $200,000 or $300,000 again for three years and you can get out of it.

Good luck
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You can read an article I wrote about my own travails in the Western Investor at  -

 http://centapede.centa.com/Week-of-Mon-20041220/001489.html
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SUGGESTED PRICE GUIDELINES - Aug 5, 2008
 
david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
 
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

--
IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.--

-
Disclaimer:  This question has been answered without detailed information or consultation and is to be regarded only as general comment.   Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation  in connection with personal or business affairs such as at www.centa.com or www.garygauvin.com.  If you forward this message, this disclaimer must be included." -


 




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