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
CEN-TA Cross Border Services - Tax, Visas, Immigration
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