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Subject: Registered A/c transfers
David, I'm curious to know your take on this:
A friend is a US citizen, and has spent his whole career in Canada working
for a Canadian institution. He has never filed a US tax return. He has
massed a sizeable registered pension, that he is transferring to a self
directed RRIF upon retirement. He has been told that he should file with
the US as this is a non-resident trust in the eyes of the IRS, and therefore
he is liable for taxes on the earnings in the plan over the years, and
possibly for even the employer contributions over the years. What is your
take on this? It is a surprise to him.
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david ingram replies:
The United States is the only country in the world that "ALWAYS" or Continuously taxes its citizens wherever the citizen is living and regardless of the amount of income earned.
As such, a US citizen is usually more at risk by not filing their US return than they are for not filing a Canadian Return.
Let me explain: Let's assume that your friend is single and earning $100,000 a year exactly as an employee.
His or her employer deducted $30,000 for Income tax, $1,6784 for CPP and $858.00 for Employment Insurance. When your friend prepared their Canadian Income tax, they will get a refund of $858.96 and in Reality, there is no requirement to file a Canadian Income tax return for any reason except to get their refund, OR if the CCRA sends a "Request to File a Return".
On the other hand, without filing a US return to claim an exemption of "up to" $80,000 US, And assuming (with our flexible exchange rate) that the $100,000 Canadian converts to $70,000 US, your friend at this point owes the US government $13,.174.00 US at the 2002 tax rates for a US citizen living in Canada (or France or Germany or Australia or Saudi Arabia or the US).
The US can "RIGHT NOW" ask your friend for tax returns back to 1967 if he or she should come to their attention.The US can ask the CCRA to collect for them.
On the other hand, if your friend files their tax return, they can exempt the $70,000 by filing form 2555 and owe no tax. However, failing to file on time, can result in large retroactive penalties and if he or she does not come forward, will end up with a killer tax bill if caught. By the way, there is a 10% reward from the IRS for turning them in.
Now, let's pretend that your friend has been putting $10,000 a year into an RRSP.
Their RRSP is now $400,000 (because of your astute investment advice) and earned another $30,000 internally in the year 2002.
Their Canadian refund is now $4,926.00 with more reason to file a Canadian return.
Without filing a US return to claim an exemption for the RRSP internal earnings, the US tax is now $19,313.00 (assuming a 70 cent Canadian dollar and the internal earnings of $30,000 CDN are $21,000 US.
In addition, by not filing US form TDF-90 to "just report the existence" of foreign financial accounts, they are liable for a fine of up to $500,000 PLUS 5 years in Jail. They are also liable (under a different set of rules for an RRSP fine of $35% of the amount put into the RRSP plus 5% of the balance for every year that it isn't reported PLUS regular tax when it comes out.
You can find out all these rules by going to www.centa.com click on newsletters; click on 2003; click on the August 2003 edition and give a copy to your friend.
Your friend is right - big problems for a US citizen in Canada with an RRSP, RRIF OR a Company pension to which they have made contributions. These rules do NOT apply to a company pension where the employee does not make contributions.
I, of course, would be glad to help your friend bring his or her reporting up to date.
.David Ingram's US/Canada Services
US / Canada / Mexico tax and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321
New email to [email protected]
www.centa.com www.david-ingram.com
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 in connection with personal or business affairs such as at www.centa.com. If you forward this message, this disclaimer must be included."
Be ALERT, the world needs more "lerts"
This from "ask an income tax and immigration expert" from www.centa.com or www.jurock.com or www.featureweb.com. Canadian David Ingram deals daily with tax returns dealing with expatriate:
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