david ingram's US/Canadian Newsletter Pages 187-194
Free US / CANADA TAX AND IMMIGRATION Questions on ROGERS Cable Page 187
BORN IN AMERICA!! - BANNED FOREVER FROM AMERICA! Page 187
NEW DEPARTURE REPORTING REQUIREMENTS Page 187
UIC / CUSTOMS declaration checks catches UIC vacationers (SERIOUS consequences) Page 187
CANADA A TAX HAVEN COMPARED TO UNITED STATES Page 188
ANOTHER REAL ESTATE WARNING Page 188
BILL CLINTON / BORIS YELTSIN SUMMIT Page 188
REPORTING OFFSHORE ASSETS OVER $100,000 at cost Page 189
OPINION to VANCOUVER SUN - Leave limit at $100,000 - 10 x's U.S. limit Page 189
UNITED STATES PENALTIES - EXTREME Page 190
105 year old U.S. woman penalized $10,000 Page 191
CONFUCIUS SAYS - when man (opinion) is good Page 192
TDF-90 Form (failure to file - $500,000 fine plus 5 years jail) Page 193
PARKING METER LAW (income tax enforced same way) Page 194
Two Important quick tips from the new act to pay attention to:
1. Michael Jacobsen's and Dennis Olsen's office (featured Jan 1995 CEN-TAPEDE) quickly pointed out that one can only collect Social Security benefits now, if the payments "into" the plan were made while a LEGAL working resident of the U.S. This provision literally disqualifies millions of illegal immigrants who have been working in the United States and paying up to 15.3% of their income into U.S. Social Security.
2. Greg Boos' office (featured July 96 CEN-TAPEDE) pointed out in a press release that our March 95 warning has come to pass. From now on, if you give up your U.S. citizenship, you may not ever go back to the United States. Not for a funeral, not for a wedding, not for a vacation. Greg further points out that if one tries to go, their vehicle can be seized. Terry Preshaw (Feb 96 CEN-TAPEDE) called to point out that this only applies if you have renounced to avoid U.S. gift, inheritance or income taxation, a fact I should have seen on Greg's original notice to me.
U I C WARNING. REVENUE CANADA is running a computer check of persons who have filed customs declarations against UIC claims back to 1993. What this means is that if you were collecting U.I.C. in the summer of 1993 or 94 or 95 and filed a customs declaration to claim your one week exemption amount, expect a bill for the U.I.C. you collected plus a 100% penalty plus interest. They hope to recover some $200,000,000 from individuals who collected UIC benefits while on vacation. A preliminary "test run" found 257 "hits" out of 16,800 "names" run. This is a 1.53% fraud rate. If this could affect you, you should come forward voluntarily and save fines and penalty. Under federal law, first time offenders must reimburse the payments they were not supposed to receive and pay an equivalent amount as a fine.
The following started off as a note to Rafe Mair and Chartered Accountant Russ Wilson (582-7270) who were doing a program on the offshore situation which requires Canadian TAX RESIDENTS to report their offshore holdings to REVENUE CANADA when the total cost of their offshore holdings exceeds $100,000. The program was too short and over so fast that I did not get a chance to send it while they were on the air. I then expanded it and sent it to the SUN for their OP/ED page. I have no idea whether it will be used or not. However, it is obvious from the publicity given to large groups of new Asian immigrants who are protesting this legislation and threatening to LEAVE Canada, that there is a very one-sided argument going on in the media at the moment and the "other" side needs to be explained. And I certainly do NOT want to tarnish a whole group with my comments. I doubt if more than 1% of over-all Asian immigrants would even consider going back. It is unfortunate that two or three vociferous accountants, one life insurance agent, and one particular radio media person have made such a fuss, that one would think that every Hong Kong immigrant is going back to Hong Kong. However, some have said they are going and some have left. Their departure is having a negative effect on Vancouver real estate prices. Read on for another fact that will further affect their decision.
On October 1, 1996 all departing residents will have to report their world wide assets if over $25,000. There is a deemed disposition of all assets and accrued capital gains are taxable. the main difference is that shares of your private Canadian Corporation are no longer exempt. The departing resident will now have to post security on the share of his or her private corporation. Note that this new regulation is retroactive to Jan 1, 1996.
These new offshore reporting requirements are just bringing Canada in line with the United States. Up until now, CANADA HAS BEEN A TAX HAVEN compared to the U.S.
ANOTHER REAL ESTATE WARNING
In spite of the lowest interest rates in 40 years, real estate is not increasing in value anywhere in Canada. Things are looking up in the Golden Horseshoe of Ontario, but the rest of Canada is in "malaise". The number of resales is generally up over last year, but actual resale prices tend to be lower. We are "spent out" in BC and we can still expect further declines in prices of specific houses and resales. DO NOT, under any circumstances, make an offer to buy a new property without putting in a clause which makes your new purchase "subject to the sale of your old home". In 1992, I predicted that our Real Estate market would fall. This was because of two factors.
1. There was too much product in the pipeline. This has proven to be true. A lot of new construction projects have gone down 20 to 30% since their original sales in 1990, 91, 92, and 93 and there is likely a six year supply of condominiums in the lower mainland. (See April and May 96 CEN-TAPEDES for specific addresses).
2. In 1992, Several Asian (usually Hong Kong) clients were returning to Asia after getting their Canadian citizenship. If they stayed in Canada, they would have to start paying tax on their world income. This was because immigrants are given a five year window during which they do not have to pay tax on their world wide income. They were having a problem deciding whether to keep their big, expensive homes in Canada or sell. For the most part, they held on to the houses in Canada and some Taiwanese started coming and taking up the slack. Now, those individuals, many whom had already left, are selling their Vancouver homes to prove that they do not live in Canada. That is driving down the price of big single family homes.
CLINTON - YELTSIN SUMMIT
(WHY DID THEY KEEP THEIR VANCOUVER HOUSES AS LONG AS THEY DID?)
I think a large part of the decision to keep their homes, revolved around the Boris Yeltsin / Bill Clinton Summit which was held in Vancouver in April, 1993. Up to this time, Canada was just a place to escape to without the heavy tax problems associated with U.S. citizenship. The Summit gave CANADA and particularly Vancouver, a lot of "face". If you had said you were in Vancouver, everyone suddenly knew where you were.
If you are having trouble with this concept, sit back and think about Japan, China, India, England, France, Australia, Russia, New Zealand, Germany and Greece. Vancouver is full of people from these countries, but unless you are a geography nut, I defy you to correctly identify the correct placing of London and Liverpool, Edinburgh and Glasgow in the United Kingdom; Melbourne, Brisbane, Darwin and Sydney, let alone Cairns, Australia; Aukland, Christchurch and Wellington, New Zealand, Tokyo, Nagasaki, Hiroshima (famous bombs), Kobi (earthquake - we should know where that was, shouldn't we) and Nagoya, Japan; Bejing, Shanghai, Hong Kong and Kowloon, China; Bombay, Calcutta, and New Delhi, India; Athens, Greece; and how about Dublin and Belfast. My brother-in-law is from Belfast and I have to think twice to remember whether Belfast is Northern Ireland or part of the United Kingdom (it isn't), and what about Cork and Dublin, where are they?
Until Bill Bennett's EXPO 86, Vancouver was just a big port "somewhere". After EXPO, it had an international flavour. Clinton and Yeltsin gave us a "position" or "face" which lasted a couple of more years and very "subtly" encouraged a lot of people to "stick around" for a while.
However, when the immigrant's five year "tax free trust" time is up, it is often time to go for those who only came to CANADA as an escape valve and whose heart is still "back home". And, to be sure, the new regulations make it that much more likely.
Prior to the new regulations, Revenue Canada was not in a good position to figure out how much money one had out of the country. And, if the limit is raised from $100,000 to $1,500,000 as has been suggested, that will still leave Revenue Canada in a second fiddle position.
A person's life style allows taxing authorities to determine expenditures. If people spend capital, it is not taxable. If people spend "income from capital", it is taxable. If the limit was $1,500,000, it would be theoretically possible for a person to claim that they were bringing in $50,000 of capital a year (forget about inflation here please) for 30 years without having any taxable "earned" income.
With the presently proposed $100,000 limit, a person could only bring in $50,000 a year for two years and would then have to be dealing with "income". It is obvious, that the lower $100,000 limit makes it easier to control offshore wealth and will ultimately reduce the overall tax burden for those who are properly paying their taxes now.
REPORTING CRITERIA IS THE ACTUAL "COST" OF THE ASSET
It is important to remember here that the reporting legislation is "draft" legislation and still subject to change. For instance, one of the provisions is that it is the "cost" of the property out of the country that must be reported.
Therefore, if you were lucky enough to buy the waterfront lot next to the country club at Cape Coral, Florida for $12,500 (I sold it in 1968) in 1968 and it is now worth $1,250,000 U.S. (it is), you do not have to report it because you only paid $12,500 plus $25,000 for the house and that is less than $100,000 Canadian.
Of course, the immigrant may be in the same position, having paid $50,000 for a printing company in Frankfurt or Hong Kong in 1968 and never paying another dollar into his company. Theoretically, that ownership does not have to be reported even if worth $15,000,000 now. Of course, he does have to report his income from the company and if he sold the company, any capital gain would be taxable.
Again, Canada makes this easier on the immigrant and only taxes the immigrant on the increased value after immigration. i.e. if paid $50,000 and it was worth $12,000,000 upon immigration to Canada and sold three years after immigration for $13,000,000, Canada only wants tax on the $1,000,000 earned AFTER coming to Canada and will give a tax credit for any tax paid on 75% of that amount to the country where the asset was located.
The United States, on the other hand, would tax the immigrant on the entire $12,950,000 profit although it would also give credit for the tax paid to the other country. However, using Hong Kong as an example and assuming a 15% tax in Hong Kong, the U.S. Federal Government would want another 13% on the whole $12,950,000 and 43 states would also want a piece of the pie.
In addition, the United States would require the Immigrant Shareholder of Offshore companies to fill out a 5471 form for each offshore company of which he is a shareholder of 10% or more or acquires 5% more of in a year. Failure to file this form for each company can have fines of $25,000 assessed as $1,000 for the first 90 days late and $1,000 every 30 days to a maximum of $25,000 per year. That is correct. If you had three companies and had not filed the required forms for 1990 and they had been asked for, but you did not pay any attention or the notice was sent to an old address, you could be liable for $75,000 for 90, $75,000 for 91, $75,000 for 92. - If you do not understand this, see pages 135 and 136 of the Nov, 1995 CEN-TAPEDE.
See page 88 of the March, 1995 edition of the CEN-TAPEDE for another explanation of the "departure / arrival" tax valuations between the two countries.
The Following is what was actually sent to the VANCOUVER SUN with a couple of additions. It started off much shorter to fit into the "OPINION COLUMN" format.
October 19, 1996
To: OPINION - VANCOUVER SUN - by fax to (604) 732-2323
From: david ingram - (604) 657-8451
Re: Offshore Reporting of Assets if cost over $100,000
Present Canadian income tax law allows immigrants to Canada to put their wealth (hide their worldwide income with) into an offshore trust for the first five years of their new life in Canada.
Only after five years, does the income generated within these five year "immigrant trusts" become taxable income in Canada.
This allows someone to immigrate to Canada, live almost "Canadian income tax free" for five years in Canada (just long enough to get their Canadian citizenship) and then leave to go anywhere they can. When they give up their Canadian RESIDENCY, they no longer have to worry about paying tax to CANADA on their worldwide income.
As Victor Matlarek (Globe & Mail Investigative Reporter, 5th Estate, book "GUT INSTINST") said, in many cases, immigrants from Hong Kong were set up with phoney Canadian "prescence" to qualify for their citizenship, even though they were not even in Canada.
The Immigrant who leaves and their family can then come back to Canada because of their Canadian citizenship at any time they want.
In 1992, 1993 and 1994 our office had at least 38 clients move back to Hong Kong under these circumstances. It was BEFORE the present reporting of offshore assets was even proposed.
Why?? They can! with no repercussions!!!!!!
In many cases, they have not been able to find gainful employment in Canada.
In other cases, there was no real intent to live in Canada. Canada was simply an "escape valve" and this was evidenced by the fact that mom, dad or both spent as much time as possible in Hong Kong "looking after business" while still officially living in CANADA just long enough to qualify for Canadian citizenship..
It wasn't the climate!
It is important to note the reason SO MANY Economic Immigrants came to CANADA instead of immigrating to the United States:
1. The U.S. has, for as long as I remember, required the worldwide reporting of all accounts totalling more than $10,000. i.e. each account has to be reported if their combined total is more than $10,000 U.S. and this includes RRSP's in Canada, security accounts in Hamburg, and seized bank accounts in Tehran. If the immigrants to Canada had gone to the U.S. under "their" Investor Immigrant program, they would have had to report their offshore accounts and companies from day one.
2. The U.S. taxes its "CITIZENS" on their worldwide income no matter where they live. CANADA only taxes "residents" i.e. persons who are usually physically present IN CANADA.
Therefore, if the HONG KONG immigrant had gone to the United States (instead of Canada), he or she would not get their world wide income exempted for the first five years.
AND, if the U.S. economic immigrant leaves the U.S. with their new U.S. citizenship, they are still taxable IN/TO THE UNITED STATES on their worldwide income for the rest of their lives no matter where they live and for as long as they remain a U.S. citizen and for ten years later if they give up their citizenship to avoid U.S. gift, income, or estate taxation.
United States PENALTIES ARE EXTREME AND APPLIED LIKE PARKING TICKETS
Remember the PROVINCE newspaper front page picture on Wednesday, Oct 2, 1996. Ms Manon Chouinard, 8 months pregnant, was shown shackled to a hospital bed for SIX DAYS for unpaid parking tickets. The real kicker was that she does not have a driver's licence (does not drive), DID NOT GET THE PARKING TICKETS HERSELF, and, did not even own the car. She had allowed someone else to register a car in her name. Over the years I have bailed three people out of jail for unpaid parking tickets. One in Winnipeg and two in Vancouver. (I add this part so that you do not think I am picking on Quebec). If I am sounding like a WASP here, let me assure you that I still want Parliament to pardon Louis Riel.
However, setting Louis aside for the moment, the penalties for not reporting a single foreign bank account to the United States Treasury Department are up to $500,000 PLUS 5 years in jail. (see sample U.S. TDF-90 form on page 193)
By Contrast, Canada's penalties are pegged at $500 per month for two years and then an additional 10% of the value of the undeclared asset. Please note though, that if there is an "advisor" involved, the penalty will also be applied against the advisor.
And, DO NOT THINK THE PENALTIES ARE JUST THERE FOR SHOW! Two of these penalties I know of personally were assessed against:
1. A 105 year old (North Vancouver) woman (and U.S. citizen) was given a $10,000 fine by the U.S. government for not reporting her Royal Bank account in Edgemont Village in North Vancouver. (You did read that correctly, the U.S. citizen in Canada must still report worldwide income and accounts to the U.S. government on an annual basis.)
2. A 68 year old woman was sent to jail for 6 months and paid a $60,000 fine for not reporting her offshore accounts to the U.S. Government.
NEW SUPER "DUPER" PENALTY
In addition, the new U.S.
ILLEGAL IMMIGRATION REFORM AND IMMIGRANT RESPONSIBILITY ACT OF 1996
which President Clinton just signed two weeks ago on Sept 30, 1996 states that a citizen who gives up their U.S. citizenship to avoid their worldwide income tax when they do not live in the U.S. is FORBIDDEN to ever return to the U.S..
That is correct. They may not go back to the United States for business, not for a wedding, not even for a funeral (unless it is their own).
AND, if they try to cross the border by car, their (or friend's) car will be seized. This is the same situation which applies if you try to enter the United States after a criminal conviction in CANADA. Even a Canadian "Conditional Discharge" which leaves no criminal record in Canada, bars you from entry to United States without obtaining a specific waiver from the U.S. Justice Department.
O P I N I O N
In my opinion, after 31 years in the field of taxation and 30 in the specific field of international income taxation, although unpopular, Paul Martin's proposals are not unreasonable in the North American climate.
Many of our clients and many other Canadians have Offshore ASSET PROTECTION TRUSTS for varied and legitimate reasons. They report their income and have no problems.
The present pressure on the Federal Government to delay the implementation and / or to increase the limits to $1,500,000 is an unwarranted and unreasonable pressure. My opinion will prove unpopular with many of my existing clients and I am sure with a lot of my readers.
However, I would refer those who do not like the opinion to the great Chinese philosopher, CONFUCIUS. He was once asked, "CONFUCIUS, is it good when all the people in town like a man?" CONFUCIUS said, "NO!" He was then asked, "Is it good when all the people in town hate a man?" CONFUCIUS said, "NO!" He was then asked, "when is it good then?"
CONFUCIUS SAID, "IT IS GOOD WHEN THE GOOD PEOPLE LIKE HIM AND THE BAD PEOPLE DO NOT LIKE HIM!"
There is no LEGITIMATE reason that a person who is ALREADY reporting their worldwide income should have any problem with reporting the assets which helped generate that income.
There are, in fact, already hidden penalties for hiding these assets. I have a situation on my desk right now. A widow client has found paperwork showing that her husband had an offshore account with East Asia Corporate Services (BVI) Ltd. in Tortola, in the British Virgin Islands.
Even though the widow has documentation that would indicate there is at least $10,000 and likely more on deposit with that institution, East Asia has refused to give any details for over 10 months.
EAST ASIA claims privilege and bank secrecy. If this sounds familiar, I refer you to the present situation where survivors of the HOLOCAUST are trying to get back "dad's" money from a Swiss Bank.
This is likely the 100th such situation I have seen in 30 years (only 3 a year, but still a lot). The reason is simple. When someone hides it from the government, they usually end up hiding it from their heirs.