the CEN-TA PEDE
david ingram's US/Canadian Newsletter
U.S. CITIZEN and GREEN (resident alien) CARD HOLDER TAX FILING and FOREIGN ACCOUNT REPORTING REQUIREMENTS
I want to make it clear that what you are about to read applies to Americans who have never lived in the United States, as well as those who have emigrated from the U.S. to other countries (including CANADA).
Even if they have no U.S. income now, and they have never had one cent of U.S. income in their lives, United States citizens are required to file a United States income tax return (reporting their world income) no matter where they live in the world if they have income from any source. There are severe penalties for failing to file an annual U.S. return. The attached assessment on page 127 shows $190,000 tax and penalties levied against a U.S. citizen living in Vancouver, and shows that the IRS can go back to 1986 (or even 1967) with impunity. In this case, the gentleman has lived in Canada since 1986, and was told by professionals that he did not have to file United States returns. The attached notice dated January 23, 1995 was the first correspondence that he received from the IRS since 1986. The IRS found him after he lost his U.S. passport in a robbery and had to get it renewed.
This $194,000 bill is for stock market trades. The person actually lost money. For those years he did not file U.S. tax returns, the IRS has taxed him on the GROSS sales without allowing any costs for the stock. The IRS knew of some $500,000 US of income from these sales and assessed accordingly. Unfortunately, because he did not report the sales, and the tax returns are technically statute barred (for refunds), and because he has thrown away all that old paperwork, my client has no legal method of forcing the IRS to amend the returns to allow the costs. We have spent countless hours trying to reconstruct the figures. For instance, we wrote to Merrill Lynch 3 times and did not receive the courtesy of a single reply. Phone calls were really useless. Fortunately, the IRS has agreed to look at my reconstruction, and we are hopeful that the bill will be cancelled.
And, in case you are thinking this is a wealthy man who will just have to "pay up", the person involved has averaged less than $15,000 Canadian per year of earnings from employment for the years 1986 to 1995. This bill could wipe him out for life, and HE LOST MONEY. A Canadian professional accountant told him explicitly that he did not have to file U.S. tax returns because he had lost money and he was living in Canada. It is true that MOST Canadians do not have to file Canadian returns if they move to the U.S., or Australia, or Germany, etc. BUT! ALL AMERICANS do have to keep filing no matter where they live.
If you ARE a U.S. citizen, and have not been filing your U.S. returns, you should get a copy of my November, 1993 CEN-TAPEDE and use the information in that newsletter to file your returns retroactively to 1987 without penalty.
What else does an American in Canada (or Paris for that matter) have to worry about?
1. Taxation of the Family Residence
Americans come to Canada and are amazed that the family home in Canada is income tax free. Unfortunately for the American, the sale of a Canadian (or Australian, etc.) family house is still reportable by the American on their annual 1040 income tax return when sold. The first $250,000 per owner is tax free if it has been used as a personal residence for 24 out of the past 60 months. If the sale has been because of outside largely unconytrollable factores, it is possible to prorate the $250,000 by 24 months but a good explanatioon is necessary.
2. Gift Tax (if this applies to you, read my February 1994 newsletter)
After selling the family house (which they think is tax free) it is not unusual for an American living in Canada to give their children some of the proceeds and buy a less expensive house or condo for themselves. A U.S. citizen can only give a child up to $10,000 to $13,000 a year (depending on the year) before incurring U.S. gift tax. The February, 94 newsletter has all the rates, but suffice it to say that if U.S. mom gives her daughter $20,000 U.S. in one year, MOM OWES gift tax of $1,800 and has to file a U.S. 709 gift tax return.
You might ask, "How will the IRS find out?" Easy! The daughter will go across the U.S. border with her new car, and a customs/IRS agent will ask her where she got the money to buy the car. Or daughter will buy a Hawaii condo with the money and when she is audited on the sale and asked "where did the money come from to buy the condo?" she will have to answer that "Mom gave it to her."
This situation took place in my office the week I wrote this. I spent 21 hours over a 3 day period in a tax audit with a young couple, the tax department auditor, and a 1 1/2 year old tyke. The auditor spent 4 hours asking how much they spent for beer, diapers, clothing, rent, gas, travel, and Xmas gifts, etc., IN DETAIL back as far as 1986 for some items. The auditor was doing a "source and application of funds" audit and was particularly concerned with how much money the husband's father had given them, and just as importantly, when? After thirty-one years in the tax business, I still could not figure out whether the auditor was after the 35 year old "kids," or whether the auditor was after the father. I am inclined to think the auditor was after "dad."
The auditor also mentioned the "close" cooperation which now exists between customs, tax, and immigration. She can get whatever she wants from any of the departments and we are seeing this ourselves almost daily. In addition, the U.S. and Canadian tax authorities are now proactive in their reporting. If a Canadian auditor is dealing with someone with an American identity or income (rental, stock, director's fees, etc.) the Canadian auditor MUST now automatically report it to the U.S. and vice versa because of the U.S. / CANADA Tax Treaty signed on November 8, 1995. (This treaty is the planned subject for the December 1995 CEN-TAPEDE newsletter).
3. Ownership of Foreign Companies (Also see September 94 newsletter)
If a U.S. citizen owns 5% or more of a foreign corporation, he or she has to file some rather rigorous forms with their 1040 tax return. Basically, Form 5471 requires them to recalculate the company's profits using a Dec 31 year end, and put their resulting share of profits (even if not received) on their 1040 return. Penalties for failure to file this form can add up at (are you ready for this?) $10,000 every 30 days late up to a maximum of $50,000. This can be even more significant if you own 4 Canadian companies. The hard part here is for the American to realize that his Canadian Company is a foreign company to the U.S.
4. Taxation of "Tax Free" Dividends
This is always a heart breaking moment. A Canadian accountant has spent hours explaining to "hubby" why his wife should have "X" number of shares in his company and how beneficial it is because she can take out $23,753.60 of actual dividends and not have to pay any tax to Canada because of Canada's dividend tax credit. They are totally dismayed and the accountant mortified to find out that the dividends were 100% taxable on her U.S. return, and that the U.S. does not recognize the Canadian dividend tax credit. In addition, she is also liable to file the 5471 forms mentioned in "3" above or suffer the penalties.
5. Reporting of Foreign (Canadian) Accounts.
U.S. citizens with signing authority on foreign financial accounts which total more than $10,000 U.S. at any one time in a year must report the details of ALL the accounts to the U.S. Treasury in Detroit on a form TDF-90. Failure to file this "simple little form" carries a penalty of up to $500,000 PLUS 5 years in jail. Note that this form is filed with TREASURY in Detroit, NOT WITH the IRS.
Notice that this TDF-90 form requires details of accounts on which you have a signing authority. It does not need to be your account, or contain your money or securities. If you are a nurse and sign on the nurse's union account, you must report the details asked for on the form TDF-90 enclosed with this newsletter. If you are a cub leader, or a signing officer for your Kinsmen account, or a deacon at your church and sign the church's account, you must give the details to the Department of the Treasury in Detroit. This also applies to RRSP accounts which are even more serious because they are also classified as "FOREIGN TRUSTS".
Note. In June of 2007, the US Treasury announced a minimum penalty for failure to file this form or if the form is not required (because total less than $10,000 US), the same penalty can be applied if the taxpayer fails to answewr no to question 7 on Schedule B of the 1040. The rules for filing schedule B is that IT MUST BE FILED IF Y9U HAVE "ANY" FOREIGN ACCOUNT. I have personally seen a 105 year old woman fined $10,000 for failure to file their TDF 90 forms and I know of another 1072 people fined who were clients of Jerome Schneider. see
The following will give you an idea of some penalties of both cash and jail.
Feb. 4, 2010 — Jack Barouh of Golden Beach, Fla., pleaded guilty to filing a false tax return. Barouh admitted to filing a false tax return for 2007 in which he failed to report a foreign bank account.
Oct. 5, 2009 — Roberto Cittadini of Bellevue, Wash., pleaded guilty to filing a false tax return and admitted to concealing nearly $2 million in Swiss bank accounts. Cittadini, a retired sales manager for Boeing, failed to file a Report Foreign Bank and Financial Accounts for 2001 through 2003. Cittadini was sentenced on Jan. 8, 2010, to six months home detention and one year supervised release and was ordered to pay a $10,000 fee and $17,985 in restitution.
Sept. 25, 2009 — Juergen Homann of Saddle River, N. J., pleaded guilty to failure to file a Report of Foreign Bank or Financial Accounts and accepted responsibility for concealing more than $5 million in Swiss bank accounts. Homann was sentenced on Jan. 6, 2010, to five years probation and was ordered to pay a $60,000 fine.
Aug. 14, 2009 — John McCarthy of Malibu, Calif., pleaded guilty to failing to inform the government of a Swiss bank account as part of a scheme to move at least $1 million from the United States into Swiss bank accounts with the goal of avoiding the payment of federal income taxes.
July 28, 2009 — Jeffrey P. Chernick of Stanfordville, N.Y., pleaded guilty to charges of filing a false tax return. Chernick, who owns a corporation which represents toy manufacturers in China and Hong Kong, accepted responsibility for concealing more than $8 million in Swiss bank accounts. Chernick was sentenced on Oct. 30, 2009, to three months in prison and one year of supervised release with six months served in home detention.
June 25, 2009 — UBS client Steven Michael Rubinstein of Boca Raton, Fla., pleaded guilty to filing a false tax return for tax year 2004. On April 1, 2009, Rubinstein was charged with filing a false tax return that intentionally failed to disclose the existence of a Swiss bank account maintained by UBS of which he was the beneficial owner and failed to report any income earned on that account. Rubinstein was sentenced on Oct. 28, 2009, to three years probation, of which 12 months will be served in home detention.
April 14, 2009 — Robert Moran of Lighthouse Point, Fla., pleaded guilty to a criminal information charging him with filing a false income tax return. Moran accepted responsibility for concealing more than $3 million in assets in a secret bank account at UBS in Switzerland. Moran was sentenced on Nov. 6, 2009, to two months in prison and one year of supervised release with five months in home confinement.
6. Annual Taxation of RRSP Accounts
NOTE that ANY U.S. CITIZEN who is the owner of a CANADIAN RRSP (which is a foreign trust under U.S. law) is liable for a fine of up to $500,000 U.S. PLUS 5 years in jail if they do not report the existence of the account to the Treasury Department as explained in item "5".
Note that the internal earnings of the RRSP MUST be reported on the U.S. 1040 income tax return. The RRSP earnings can only be exempted AFTER reporting them under the US/Canada Tax Treaty.
For the years 2005, 6, 7, 8 and the future, there is now a form 8891 which makes it much easier to file this information. The official penalty for failure to report the internal earnings is 35% of the amount in the RRSP PLUS 5% for every year it has not been filed. At this time (January 10, 2010), I have never seen a US person fined under this legislation.
7. Social Security Tax on Canadian Self Employed Earnings
If you are earning money in Canada, you are liable to pay U.S. FICA taxes of 15.3% on those earnings UNLESS you file an exemption request (as on page 125) under the U.S. / CANADA Tax Treaty or Article V of the CANADA / U.S. Social Security Agreement. Page 128 shows an example of a $19,000 retroactive bill for 1988 and 1989 when an American couple living in Canada did not make the elections.
8. All Canadian Wages or Self Employed Income is Taxable in the U.S.
There is an "up to $70,000" U.S. exemption but to get the exemption, you HAVE to file the return and submit a form 2555 to claim the exemption. If you do not fill in the exemption form, your Canadian earnings are taxable on a U.S. return and you could end up with double taxation if you do not come forward voluntarily.