November 1996 CEN-TAPEDE - Paying RRSP Service Fees for Self-administered Plans, Offshore Trusts, US Resident working in Canada,

November 1996


david ingram's US/Canadian Newsletter   Pages 191-203

If this doesn't apply to you, it applies to your brother, your co-worker, your son, daughter, spouse or friend. Don't throw it away and waste the paper, pass it on.


Paying RRSP Service Fees for self-administered plans Page 191



Letter from Canadian working in the U.S. Page 198

Letter from Canadian wanting to travel in U.S. with no home in Canada Page 199

Copy of new questions about Offshore Holdings on page 2 of 1996 return Page 201

AUDIT REQUEST for Canadian Company doing business in USA (Wash) Page 202


Make a note of 9 PM, Wednesday, Jan 29, 1997 on ROGERS CABLE NETWORK (channel 4) through the lower mainland. At that time, I will be hosting an open-line television program dealing with the specific problems of US / CANADIAN INCOME TAXATION.




Just about now, individuals with self-administered RRSP plans will be receiving a bill for $100 to $150 for the administration fee for their RRSP. Some people will have two or three of these fees because they have a "locked in RRSP" from a pension rollover, and one or two other plans.


Up until 1996, this fee was a deduction under carrying charges on line 232 of your return if paid "outside" the plan so most people were paying the fee outside the plan to keep as much money as possible growing in a tax deferred manner.


The BIG questions now are:






The problem revolves around your tax rate today and how long you are going to leave the money untouched in the RRSP and what your marginal tax rate will be upon withdrawal.


If you are paying in the maximum and going to leave the money in for 20 years, pay the fee out of your pocket so that you get the longest tax deferred growth in the plan.


If you are not paying in the maximum or are intending to withdraw in the next ten years, pay the fee out of the plan. It just means that you have paid the tax a couple of years earlier. If you are not paying the maximum and going to leave the money for thirty years, pay a little more in and pay the fee within the plan to get the tax deduction.


In between, it likely does not matter. The mathematics are astounding but the cold, hard fact is that the amount of maximum tax refund (i.e. 54% of a $125 fee) that is involved does not justify an individual spending much time on the subject if the time can be used more profitably.

If you want up to date advice, call our MUTUAL FUND / RRSP REPRESENTATIVE, GEORGE HATTON of REGAL CAPITAL PLANNERS at 649-4759 or fax your question to 649-4759.




All offshore holdings have to be reported on your 1996 Canadian Tax return if the cost of the assets is $100,000 or more. (For instance, a $300,000 condo would NOT have to be reported if you only paid $75,000 unless your combined cost of offshore assets is over $100,000). We still do not have a copy of what the actual reporting forms will look like. However, if you look at the bottom of the sample page 2 (see page 201 of this newsletter), you will see the questions being asked on the new lines 266, 267, 268. Each question must be answered with a "yes" or "no". Please note that our 1996 tax program is working if you are looking for pro-forma amounts for your 96 tax bill.








If you read the March 1996 CEN-TAPEDE, you will know that I can go to a seminar and like it. In March, I paid for and attended a seminar put on by Jerome Schneider of Premier Corporate Services. People were there from most (if not all 50) states in the U.S., Germany, France, and another 16 countries including Canada. There were even about 60 individuals from Vancouver. The information was accurate and timely.


The best part of the seminar was that individuals were answered truthfully when their situation was such that did not lend itself to offshore or out of country investments, the participant (who had paid $1,000 U.S. for the seminar) was told that there was no legal method of saving tax, etc.


I contrast that with a seminar I attended at the Harbourside Hotel on November 19, 1996. This seminar was put on by Pacific International Corporate Services Inc of North Vancouver or by Fortress International Ltd of Nassau in the Bahamas. The paperwork said IPG, the people said "you" would be dealing with Fortress International.


I was a little late but heard the featured speaker, Richard Czerlau. His information seemed to be accurate and it should be because after all, he is the author a book called the TAX HAVEN ROADMAP. He seemed to be a paid speaker because after being sure to state how competent the sponsors of the seminar were, later on he seemed to forget who they were and where he was. This could be understood as well as he has apparently been flitting around the world investigating Tax Haven countries.


I have not read the book and have not seen it which I find interesting because at least 20 clients have brought copies of "Take Your Money and Run" to the office when they come for an appointment. No one has brought TAX HAVEN ROADMAP. (By the way, in my opinion, "Take Your Money and Run" is full of incorrect advice and errors.)


A question from one man who was likely a life insurance agent was not treated with the respect the question deserved. The questioner made the point that most people could cover the costs of future taxes with a legitimate life insurance policy for less cost than an offshore shelter (Again, in my opinion, he was right). For instance, the price quoted in their brochure for a "discreet" Mail forwarding service ran from a low of $7,660 in the Bahamas to USD $9,010 in the Cayman Islands.


To be sure, this was for a "discreet" service. Maintaining a simple Corporate Identification with a business and mailing address, mail forwarding, telephone/fax answering AND a receptionist to greet visitors is only USD $2,400 per year.


My problems with the seminar came from a couple of other statements.


A speaker stated that an offshore business needed six full time employees to be recognized by Revenue Canada as a "legitimate" offshore company.


A questioner stated that he had a business that could operate offshore but he didn't have 6 employees and didn't need six employees. The answer given was that he did not have to worry because, "we (the royal `we') have six employees. The implication being that they will set up an operation which appears to have six employees. This sounds like a fraudulent action to me.


A speaker spoke about secrecy of communications when dealing with the firms lawyers.


Later, when another questioner asked about the ability of Revenue Canada to find out about their dealings with the seminar presenters, the answer was that they do not keep any written records in Canada. However, the same person had previously given the answer that neither he nor their members had "privileged" communication but implied that a lawyer would have privileged communication.


Well, this leaves two items for consideration:


a) If they have no privileged communication, the person you deal with can be compelled to tell the authorities (whomever the authorities are) any information that they have about your business dealings. Therefore, it does not really matter if there is a paper record, the individual you deal with can be compelled to tell Revenue Canada everything the individual knows about your dealings. In some cases, because the individual is mad at you, mad at the company, envious, or even wanting to collect a reward, the individual might be overjoyed to tell the authorities and there would be no retribution upon that person.


b) My understanding is that a lawyer does not have privileged communication if the lawyer is helping you plan an "illegal" enterprise. I believe (but am willing to be corrected) that it goes something like this.


If you were to murder someone and went to your lawyer and said, "I just killed David and his body is buried under my garage", you have privileged communication and your lawyer cannot tell anyone what you said and in no case would he or she be able to tell the widow or anyone else where the body was. In fact, I understand he or she could be disbarred for disclosing the whereabouts of the body.


However, If you go to your lawyer and say, "I am going to kill George and bury his body under my garage", the lawyer has no privileged communication and is bound to tell the authorities what you have told him because he has a greater degree of responsibility as an "officer of the court" than the average individual.


Therefore, if you are planning something that is a "secret" and maybe illegal in Canada, the last thing you wish to do is go to a lawyer in advance of the deed.


However, the whole thing became a moot point when another questioner asked the same man what the procedure was and he described a situation where the individual would meet with one of the consultants who was stationed around the room and a detailed information package would be created. This package of information about "you" would then be presented to their committee of specialists who would come up with a detailed plan. This sounded to me like a written record in Canada.


Another question asked was, "How long have you been in business?" The answer was a year and a half. However, they are not listed in last year's or this year's phone book under any of the three names on document (Fortress International Ltd., International Planning Group [IPG], or Pacific International Corporate Services Inc which was supposedly the company that I was dealing with when I booked the seminar in the first place.


One speaker talked about taking your money offshore after paying the "departure tax". His implication was that they were not really concerned with whether you, the client paid the capital gains tax to Canada first. And again, because of the ambience of the presentation, there was a strong implication that one could take their money offshore "legally" without paying the tax if you dealt with their "in house" specialists.


After 31 years in this business, I felt pretty stupid for not knowing how to do it.


In the October, 96 CEN-TAPEDE, I mention a lady who knows that her husband had at least $10,000 in an offshore account in the British Virgin Islands. However, he has now died and she can't get at it. No one will answer her letters or her lawyer's enquiries. This was a great tax shelter with a 100% loss for his heirs.


When I went to see the IPG office the next morning I found it unidentified but located in a suite of Executive Offices known as Waterfront Place at 119-255 West 2nd in North Vancouver. Wandering around the building, none of the other tenants seemed to know of their existence and as I said, there is no listing with BC Tel, etc.


Before you go "offshore" watch out who you deal with. Personally, I would like to know who I am dealing with. I would be very leery of this company. In my opinion, their representatives' statements indicate that they are skating too close to the edge.


-------------------------- Letter 1 --------------------------




From: J-B L, Point Roberts, WA, USA, 98281, Oct 31, 96




* I have subscribed to your newsletter and have found it to be very helpful to my unique situation as a U.S. resident & a "green card" holder whose sole source of employment income is from Canada.


* Many Canadians are discouraged from buying truly affordable homes south of the border due to the loss of Canadian Medicare Benefits, but its not a big deal!


* Ottawa's International Taxation Office has officially classified me as a "Non-resident taxpayer" and advised me in writing that my U.S. Health Care (private) expenses can be deducted from my Canadian salary. I estimate a reduction in taxable income of nearly USD $4,000 before I spend a single Canadian Dollar on RRSP's.


* Even with the new U.S. medicare tax of 2.9%, I consider my family and I to be ahead of the game with access to a health care system in U.S. miles ahead of the B.C. socialist variety, indirectly subsidized by Revenue Canada.


My Answer follows:


Dear J-B L


Thank you for your letter of Oct 31, 96. I like the letter enough that I am making my comments about it a newsletter.


I am enclosing a copy of some front page publicity around B.C. Medical and 4 of my clients. As you will notice, no one "won". However, everyone wins when definitive rules are established, particularly when B.C. Medical can cancel medical coverage "retroactively" for up to ten years if they decide you were not qualified. (if you do not have this, ask for the Jan 1994 CEN-TAPEDE). As you obviously know, the mere possession of a B C Medical card does not mean you are really covered.


I will try and answer your points "one at a time". Please note that I exceed the boundaries of your question or point sometimes. This is because I am afraid that just answering your point will leave someone else in slightly different circumstances with an incorrect opinion of what they have read.




For the most part, the U.S. INS (Immigration and Naturalization Service) (not B.C. Medical) is the one concerned with your type of house when they are trying to prove you are "living" in the US. illegally.


B C Medical is really only concerned with "where you are making your home" and whether you are in Canada legally. I have not had a single person turned down for B.C. Medical when they have a home and "live" in B.C. However, all sorts of people have lost their B.C. medical plan benefits when they "sleep" in the U.S. most of the time. B.C. Medical pays more attention to phone bills, etc. in this case. Paying tax does not affect B.C. Medical's position. I have lost appeals to B.C. Medical where people had places in Canada that were more expensive than those in the U.S. and paid full tax to Canada because their income was all Canadian source.


This means that some of the U.S. customs agents who are stationed at Vancouver Airport have diplomatic immunity, pay no tax to Canada and still qualify for full B.C. Medical benefits because they are "LIVING IN CANADA".


You are likely paying full taxes to Canada, are a Canadian, and do not qualify for B.C. medical because you do not "sleep" in Canada even if you work in Canada 260 days a year.


It does not really matter what kind of home you have in the U.S. for B.C. medical purposes. Even if you have a $2,000,000 waterfront cabin in Canada and rent a $300 a month basement suite in Ferndale, Birch Bay, Bellingham, Sumas or Point Roberts, if you have a "Green Card" and live in the basement suite, you are not entitled to B.C. Medical.


If you are sleeping 184 nights in Canada to qualify for B.C. medical, the INS will take away your green card. If you spent 184 nights in the U.S. to keep your green card, even if you worked in Canada 225 days and slept here 181 days, you do not qualify for B.C. Medical. "CATCH 22"


I fought too many of these a while ago. The Medical Board will rule against you every time.




A person in your position has always been able to deduct his payments to a U.S. medical plan subject to a limitation of 3% of your net income. This means that the medical becomes worth about 25% as a tax credit, not the 50% your letter would imply.


This assumes that 90% or more of your income is coming from Canada.


If 90% or more of your income is from Canada you are allowed to file a Canadian tax return and claim the same full exemptions and tax credits that a resident of Canada can claim.


The advantage, of course, is that as a U.S. resident, you do not need to pay tax to Canada on income from the U.S. as long as it is less than 10% of your income.


This is a calculation which has to be made on an annual basis, and should be declared when you file your Canadian Tax Return.


In this case, you can claim your medical premiums and a host of other medical expenses (subject, of course, to the 3% limitation which is part of the line 332 calculation).


Please note though, that to claim the medical on your Canadian return, you are supposed to have 90% of your world income sourced in CANADA.


If you had $80,000 from Canada and $20,000 from the U.S., you would NOT be eligible to claim either the full medical or the full personal exemption amounts.




I was also concerned about your reference to the 2.9% MEDICARE PAYMENT as a "new" tax. You have since told me that this came from my September, 1994 newsletter and its reference to the removal of the "cap" on paying the 2.9% The subject here was not to talk about a "new" tax but to talk about the removal of the ceiling on an old tax.


This has been in effect as a separate amount since at least 1991 but is included in the general Social security amount up to a different amount for each year. You cannot pay the 2.9% without paying the whole 15.3% on the first $50,000 or so.


The amount subject to the 15.3% combined MEDICARE and FICA was $53,400 in 1991 and increased to $61,200 by 1995 for instance. The overall rate has been consistent at 15.3.% (it was less than 7% when I started in this business) over those years but the amount you had to pay it on has increased.


As I said, your specific reference to the 2.9% makes me think you are ignoring F I C A and this could be a problem. (See page 128 of the October, 95 newsletter for an example of "retroactive collection techniques" for instance.)


As a resident of the U.S. you must pay F I C A (social security) on your Canadian earned income if you are self-employed or deemed a statutory employee which I expect you are because of your professional position.


There are two exceptions which are alluded to on page 125 of the same newsletter. These exceptions are:


1. Article XXIX.4 of the U.S. / Canadian Income Tax Treaty which exempts F I C A on income which is exempt from U.S. tax under terms of the treaty or presumably under 1.911-7(a)(2)(i) or,


2. Article V of the Canada / US Social Security Agreement.


You are not exempt from FICA under either of these agreements as I see it, because under 1, you are not exempt under any tax treaty Article or 1.911 and under 2, you would have to be expecting to be in the U.S. for less than 5 years and I have never seen this used by someone with a "Green Card". It usually only applies to those with TN or L1 or H2B type visas.


The practical fact though is that I have never seen an employee assessed FICA by the IRS and that is after 31 years in the business. I checked with three other consultants as well and none of us (with a combined 70 years of U.S. tax consulting) have seen an employee assessed FICA or MEDICARE when they are receiving "employee type" income.




You seem to indicate that you are paying into a Canadian RRSP. I hope that you are aware of the reporting requirements regarding RRSP's when you are either a U.S. citizen or green card holder living in Canada (or any other country) or you are a U.S. resident for income tax purposes.


It used to be that U.S. RESIDENTS who continue to put money into a CANADIAN RRSP are NOT EXEMPT from U.S. income taxation on any earnings "within" the Canadian RRSP of the money contributed after moving to the U.S. This has been changed and "I missed it" originally. Thanks to Steve Katz and Sonja Clark for pointing out my error in the first rough copy of this newsletter.


The rule now is that any earnings within a Canadian RRSP can be exempted from U.S. income tax (until withdrawal) by filing an election. See page 126 of Oct, 1996 CEN-TAPEDE.



HOWEVER, please note that the total annual earnings on the RRSP must be reported each year to the IRS although you can delay tax on this money until withdrawal by filing an election under section 6114 of the US Internal Revenue Code. Again, you can find my own "home-made" exemption form on page 126 of the October 1995 CEN-TAPEDE.


TO AVOID an up to $500,000 fine plus up to 5 years in jail, you must also report the details of your RRSP, Security, Bank and other financial accounts in CANADA to the U.S. Department of the Treasury in Detroit, Michigan. You can see this form on page 124 of the October 1995 CEN-TAPEDE).


The tone of your letter indicates to me that you might have missed some of these "delicate" matters. For instance, it is rare for anyone to bring a "correct" return to our office when prepared by other accountants. Heck, we even miss the odd thing (see the January 1994 and Feb 1994 issues of the CEN-TAPEDE.




You didn't mention whether you are married or living with a member of the female persuasion. If you are, it would be interesting to have her opinion about the relative merits of the US versus the Canadian medical system.


With regard to the relative merits of the US versus Canadian medical service, I have very specific and real opinions. My Irish brother-in-law is a doctor in Wheeling, West Virginia who has worked under the British System, The Canadian System in Winnipeg (where he kidnapped my sister), Bismarck, North Dakota, Montgomery, Alabama and now, Wheeling, West Virginia.


I am told that it is as different from Bismarck to Montgomery and Montgomery to Wheeling as it is from Winnipeg to the U.S. in the first place.


One of the reasons is that institutions like Blue Cross and Blue Shield are actually franchises and have different ownership, different rules and different benefits in each state.


For instance, Blue Cross went bankrupt in West Virginia and several other states, four years ago and doctors were not paid an average of some $100,000 each. If your insurer goes broke and you have to get new insurance in the U.S., any pre-existing condition which would have been covered under the old policy is likely NOT COVERED by your new insurer. Good luck!


In addition, the proliferation of HMO's (Health Management Organizations) has meant that the quality of service is dropping from New York to Los Angeles for employees who are part of a large company. (DATELINE made this very clear in a Dec 2 96 broadcast).


By buying and paying for your own insurance, you are in control now. However, this can change quickly if you are not careful.


It is my observation that the U.S. system works best for male executives which gives you and I better service. This is because historically, the U.S. system is mainly paid for by men or male dominated businesses. I hope to have a comment on this from a Vancouver cardiologist for the next edition.


More men are covered than women and the system caters to us with all the male oriented machinery and paraphernalia that one can ever hope for.


Canada's system caters to women and children. With universal health care, mothers and their children go to the doctor or the emergency ward at the drop of a hat. Women with a gynecological problem can get an appointment in Canada with one or two phone calls. With 4,000 or more different insurance plans in the United States, doctors are loath to try and see someone from out of the area. Men can wait months in Canada for tests and heart problems but I have known women who have gone from diagnosis to a mastectomy in less than a month in Canada.


For instance, a new program in British Columbia is aimed at giving women with an abnormal mammogram a yes or no answer with in a week. I, on the other hand am waiting six weeks to see a urologist (the fact that I don't really want to go likely adds to the time).


And to be fair, $1,000,000 was also added to the budget to shorten the waiting list for Heart problems in B.C. However, in general, men in Canada have tended to avoid doctors. Companies have not insisted on us going annually. It is only in the last few years that men have "found themselves" and started talking about and acting on male problems as a large group. Hence the proliferation of magazines such as "MALE HEALTH" and who would have thought that the cover picture and article in an issue of FORTUNE would be on prostate cancer.


As a consequence, in my opinion, women in Canada get better service. And men get better service in the U.S.


But it is not universal. In spite of being a medical doctor with a specialty, the reason that my sister and brother in law ended up in Wheeling, West Virginia, is that it was the "only place" they could get special and unique services for their son. The services they wanted were not available in North Dakota, Alabama or most of the continental United States.


However, the sad part is that none of the equipment is available in the U.S. to the "working poor" who comprise some 30% of the population. In Canada, whatever we have is available to everyone.


Remember, in Canada your benefits do not run out.


I have several U.S. clients who have moved back to Canada because their U.S. benefits have run out and they came back to Canada before they lost everything.


At the same time, one Canadian lady we know has sold everything and has spent over $100,000 in the last year seeking alternative therapies for her cancer in Kenya and Mexico.


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