September 1996 CEN-TAPEDE - Departure Tax, US and Canada Tax cooperation, Sample Penalties Letter - They'll Get you

September 1996

the CEN-TAPEDE

david ingram's US/Canadian Newsletter Page 183-186

US . CANADA TAX / IMMIGRATION SEMINAR Page 183

KITCHENER PROPERTY FOR SALE Page 183

UNITED STATES DEMANDS old returns from U S citizens living in Canada Page 183

REVENUE CANADA TAX PROCESSES WRONG YEAR Page 185

MUTUAL FUND SUCCESS STORY Page 185

140.25% TAX ON DEATH - U.S. TAX SYSTEM UNFAIR Page 185

 

U S / CANADA TAX SEMINAR $299.00

 

You can pay $400 for an individual consultation or "Register now" for OUR October 5, 1996 US / CANADA Tax and US Immigration seminar. We will also be touching on U.S. Immigration, and Tax, and waivers for those who have been convicted of a criminal offense in Canada and cannot go to the U.S. Learn about Canadian DEPARTURE TAX. Find out what a U.S. Citizen living in Canada has to know.

 

The Tax Portion of the seminar will run from 10 AM to 2:30 or 3 PM with an hour break at Noon followed by 1 to 2 hours on dealing with the questions of U.S. Visas and waivers. Phone 681-1646 to register. We have about 20 seats left.

 

Real Estate Seminar and Investment Opportunity

 

I have not recommended a real estate investment for 4 years. We have some interesting Real Estate Investments in Kitchener. $15,000 or less down buys a High Rise steel and concrete condominium which will carry itself. They are selling for less than current appraised value, they are six years old and selling for about 75% of replacement value. This is an owner occupied building, not one of the "investor only" disasters which are being shown. Please note that this is "NOT A SECURITY", NOT AN LLP, HAS NO RENT GUARANTEES WHICH CAN FAIL, AND YOU CAN SELL THROUGH ANY REALTOR IN CANADA IF YOU SO DESIRE.

 

 

I R S Collection and Enforcement Officer in Vancouver this week

 

Last year at this time, Nancy Williams was the IRS tax collector who came to Vancouver from the IRS office in Washington, D.C.

 

This year, the weeks of September 3 to September 19, 1996 see Arthur Goe in Vancouver at the U.S. Consulate, 1095 West Pender Street, Vancouver, B.C., V6E 2M6, Ph (604) 685-4311.

 

Why do I mention this? Well, You have a chance to come clean and get your (or your spouse's, or your friend's) US. taxes in order. With the mutual enforcement and collection procedures agreed to in the new U.S. Canada Income Tax Treaty which came into effect on January 1, 1996, Mr Goe's letter to errant U.S. taxpayers is a little scary to say the least.

 

Sample of text of letters sent to B C residents by Mr Goe:

 

"(X) Our records further indicate that you have not filed the tax returns for the tax period listed below:

 

Form Tax

Number Form Title Period

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-88

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-89

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-90

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-91

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-92

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-93

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-94

1040 U.S. INDIVIDUAL FEDERAL INCOME TAX RETURN 12-31-95 "

 

"I have scheduled an appointment for you to discuss this matter on (for instance) Tuesday, September 3, 1992 at 3 P.M. at the U.S. Consulate, 1095 West Pender Street, Vancouver.

 

If you have filed the requested returns with required tax payments, please be prepared to present proof of payment, in the form of cancelled checks (legible front and back), and / or a copy of your tax return (sic) with your original signature."

 

The next paragraph gives you a method of changing the time and date of the appointment.

 

And, the next paragraph gives another option you may want to take advantage of:

 

"If you prefer that I visit you at your residence or place of business, please complete the attached visitation form and return it to me by mail OR fax no later than August 20, 1996." (this is a little tough if you were away the last two weeks of August and did not get back until the 6th of September.)

 

A balance of over $200,000 owing last year did not receive statements as threatening as one of this year's letters with an actual acknowledged balance outstanding of less than $100. This year's letter goes on to point out the powers that exist. I quote:

 

"Because of its serious nature, I must inform you that we may take any or all of the following actions, if not already done so, to satisfy your outstanding liabilities - - -

 

1. File a NOTICE of Federal tax Lien, and levy against your wages, bank accounts, or any other income.

 

2. Seize any of your property or rights to property.

 

3. Provide your account information to the U.S. Customs authorities for an immediate contact with you upon your re-entry to the United States.

 

4. Seek collection assistance from REVENUE CANADA by providing them with your account information pursuant to the Article 15 of the U.S. - Canada Convention. (For the rest of the changes to the treaty which may affect you, ask for the December 95 CEN-TAPEDE.

 

5. File your returns on your behalf and assess taxes based on information available to us for the delinquent tax periods.

 

For this reason, we strongly request you to be present at the meeting and resolve these outstanding issues.

 

If you are unable to pay the liability in full at the meeting, we request you to complete in advance the enclosed form 433-A (and 433-B, if you are self-employed), the Collection Information statement and bring them with you to the meeting with any supporting documents to substantiate your financial position. (Please see enclosed list of "things you should bring" for the types of supporting documents.) We will discuss various options for you to resolve your tax liability."

 

Effective end of letters except for another small paragraph which suggests that you take the letter with you to the consulate so that they will let you in the door.

 

Let me make some observations here.

 

A. The gloves are off. With the new treaty (ask for the December 1995 CEN-TAPEDE for a copy) Mr Goe can ask Revenue Canada for the details of your Canadian income from 1985 to 1995 and file returns for you as in #5 above.

 

B. Mr Goe can ask a member of Revenue Canada to accompany him to your home or business.

 

C. If you or your acquaintance is a U.S. citizen, it is time to get caught up on old returns before the I R S catches up to you. Ask for the November, 1993 CEN-TAPEDE for an explanation of how to claim the $70,000 earned income exemption retroactively to 1986 to avoid Alternative Minimum Tax (AMT).

 

And, of course, if you need help with the preparation of these returns, the CEN-TA Group would be pleased to assist you at 913-9133. For other competent help see the February, 1996 issue of the CEN-TAPEDE newsletter. Note that tax lawyer Roberta Shapiro has retired.

 

REVENUE CANADA PROCESSES WRONG YEAR

 

Another unusual situation took place at the end of August. We prepared two 95 tax returns for a couple for about the sixth year in a row. They are partners in a business and their returns are identical. Both 95 returns went in to the department with identical cheques for over $8,000 each.

 

The wife's return was processed properly. Hubby's return was treated as a 1994 return and an amended 94 assessment was issued asking for more money. The cheque was applied to a 1996 Installment account and a request to file a 1995 return was sent out.

 

Sounds impossible, but I have the paperwork.

 

MUTUAL FUND SUCCESS STORY

 

George Hatton, who is licenced to sell mutual funds for Regal Capital Planners gave me this interesting story.

 

A "real person" (this is not theory) bought $70,000 of mutual funds in June 1973. The fund value promptly plummeted to the point that at the end of December, 1974, the value was only $50,154. However, this real person did not panic and sell out. He followed his financial planner's advice and left the money there to grow and even invested another $10,140 on March 16, 1978.

 

From March 1983 to February 1984, he took out (redeemed) $1,000 a month in a systematic withdrawal plan. From March 1984 to January, 1989, he withdrew (redeemed) $2,000 per month. In January, 1989 he withdrew a lump sum of $25,000. From February, 1989 to May, 1992, he redeemed $4,000 a month. From June 1992 to February 94, he took out $3,000 per month.

 

At that time, he had taken out or withdrawn and presumably spent $459,167.51 of largely tax free or greatly tax reduced dividends.

 

The remaining value of the fund was still $1,245,921.16.

 

Thanks to George Hatton for this piece of information. George is at (604) 913-9133.

 

140.25% Tax (ONE HUNDRED AND FORTY PER CENT)

 

Those of you who consider the U.S. tax system superior should take note of the following. You can find the actual tax rates in the February, 1994 CEN-TAPEDE (if you lost it or mislaid it, check off the box on the last page and we will fax you another). Please also note that credit goes where credit is due. I borrowed this tidbit from Samuel Slutsky's column on PAGE 36 of the Tuesday, September 10, 96 article of the Financial Post.

 

Also, please note that this only applies to truly wealthy people but we can all dream, can't we?

 

At $3,000,000 of estate value, the U.S. estate tax reaches 55%. Therefore anything over $3,000,000 attracts estate tax at 55%. The assumption is that capital will be taxed at each generation, meaning that if Grandad leaves to his child, then that child will leave it to his or her children and there will be a second tax.

 

To get around "double taxation", some individuals will bypass a generation and leave money directly to grandchildren. The U.S. therefore has a "Generation Skipping Tax" which kicks in at anything over $1,000,000 to a grandchild. In other words, every dollar is subject to both the basic 55% tax on the $1,000,000 but also the 55% generation skipping tax making a total of 110%. To further compound the problem, when the estate pays the first 55% tax on the first million, this is considered a benefit and attracts another 55% of tax on the 55% (30.25) adding up to a total of 140.25% tax on any money left to a grandchild over $1,000,000. This means that if you left your grandchild $2,000,000, the grandchild would get $47,500 after paying $550,000 on the first million and $1,402,500 on the second million. Leave them $2,200,000 and your grandchild owes tax.

 

DEPARTURE TAX

 

You will have to come to the seminar for more details, but as I was writing this, a couple came to me to talk about the Canadian "departure tax" which would have to be paid when they moved to the U.S. They owned RRSP's and rental real estate in Canada and substantially more rental real estate in the U.S.

 

They were very surprized to find that there was no departure tax on the CANADIAN rental property or the RRSP accounts, but there WAS departure tax on the U.S. rental properties which were worth substantially more than the Canadian properties.

 

The reason is simple. The financial institution has to withhold tax when you cash in the RRSP. When you sell Canadian real estate as a non-resident, there is a 33 1/3% withholding tax and there is no need for a departure tax.

 

However, Canada has no control over the American properties and any capital gains realized must be calculated and tax paid. This causes problems with the foreign tax credit when you sell the U.S. properties as a U.S. resident. You now owe tax to the U.S. and you have time shifted your ability to claim the foreign tax credit in Canada. There is a solution. You can post a bond with the Canadian government for the amount of expected tax. However, because of Section 1031 Rollovers in the States (which Canada does not recognize for rental property), you might go to your grave without ever cleaning up the situation.

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