the CEN-TA PEDE
david ingram's U.S./Canadian Newsletter
1. NEW, NEW, NEW, U.S. / CANADA TAX TREATY Page 1
2. United States, No longer a Safe Haven from Revenue Canada Page 1
3. U.S. GAMBLING REFUNDS - AGAIN - At Last! Page 1
4. Gambling Loss Report - Cal-Neva Casino Page 2
5. No More Double Taxation on CANADIAN / U.S. Estates Page 2
6. Worldwide $1,200,000 exemption on stock for Canadians Page 2
7. United States Citizens / residents owning Canadian Companies
(the dreaded FORM 5471) Page 3
8. Canadians Owning U.S. Corporations (FORM 5472) Page 3
9. Health Insurance Page 4
10. Waiting Period Page 5
11. Intent to Live (WHERE?) Page 5
12. Moving Back to Canada (or a province) Page 6
13. CANADIAN OVERSEAS EMPLOYMENT TAX CREDIT (T626) Page 6
14. United States Social Security Number Application Page 8
NEW! NEW! NEW! CANADA / U.S. TAX TREATY
This long awaited agreement has been signed by both governments but must still be ratified by both the Canadian Parliament and by the U.S. Senate.
The UNITED STATES is NO LONGER A CANADIAN TAX HAVEN!
BOTH GOVERNMENTS ARE NOW COLLECTING FOR EACH OTHER! I have been in the tax business for some 28 years now and have run across literally hundreds of people with serious tax problems in the U.S. who have brought their money to Canada and considered it safe. Conversely, I have met dozens of people who have put their money in the U.S. because of problems with the Canadian Tax Man. NO MORE!
The U.S. has the right under its law to tax Canadians on their U.S. Holdings and a main provision of the treaty allows Revenue Canada to collect U.S. taxes for the U.S. Government and the IRS to collect Canadian taxes for the Canadian government. This is heavy duty. The U.S. can now request income figures from Revenue Canada for a U.S. citizen living in Canada (they get the information from the U.S. Passport Office), issue an arbitrary "jeopardy" assessment against the person, and ask Revenue Canada to collect the tax.
United States GAMBLING - REFUNDS - AT LAST!
Again, I do not yet know if this section is retroactive, but I have over 200 U.S. gambling returns sitting in abeyance waiting for this amendment to the treaty. Up until 1985, the U.S. did not tax Canadians who won in Vegas, Reno, or Atlantic City. But then, Gambling winnings slipped through the treaty and Canadians became taxable at 30% of the GROSS amount received with no deductions allowed period.
The situation was silly. A person could put $5,000 into a slot machine and then hit a $2,000 jackpot. The IRS would take 30% or $600.00 and it would not be refundable. For a while, we continued to file U.S. returns and get refunds where there were losses. These returns continued to get refunds even though the instructions to the 1040NR said that no refund would be given out for gambling tax deductions for Canadians.
Then, in 1991, Mike Damasiewicz of the IRS in Washington, D.C. said that they were considering laying criminal charges against those who continued to assist Canadians with these returns. We wrote a hundred letters to Michael Wilson, Brian Mulroney, George Bush, and other government departments in both countries. I also encouraged a lot of people in my books and other newsletters and radio and television shows to prod the Governors of New Jersey and Nevada and to write their own letters to Bush and Mulroney.
It seems to have got some reaction. Canadians are now going to be allowed to deduct their losses against their winnings and will be able to get a refund if they did not really make a profit. This was all we asked for. Following this is an example of a Gambling Loss Form from the CAL-NEVA Casino in Reno. These are available from every Casino when one is playing the slot machines. If you are a gambler, make sure you get one after plugging a slot for a while. If you play Bingo, keep a record. If you play the horses, don't throw away your losing bets, they may be deductible.
NO MORE DOUBLE TAXATION ON U.S. ESTATES!
(RETROACTIVE to November 10, 1988)
Up until "now", if a Canadian died leaving U.S. assets which had accumulated large amounts of capital gains, (an extreme example would be a waterfront house in Cape Coral, Florida, which was bought for $35,000 in 1967 and worth up to $3,000,000 today) it was possible to have up to 90% total taxation upon the death of the owner. This is because the U.S. would tax the corpus of the estate at up to 55% and Canada would tax the capital gains at what could be another 42%.
For Estate purposes, the U.S. will tax the value of a U.S. home and its furnishings (including a mobile home, sailboat, timeshare, condo, or ski chalet), government or corporate bonds, stock in U.S. corporations, and even a U.S. club membership. The U.S. does not tax a Canadian's money on deposit in a U.S. bank unless it is associated with a trade or business. What this means is that if a Canadian in West Vancouver (or Toronto, or Winnipeg) owned $1,300,000 of Bank of America Stock, his estate would owe estate tax to the U.S. upon his death even if he or she had never been to the U.S. However, if there was $1,300,000 cash on deposit in the Bank of America, there would be no estate tax, even if the Canadian spent 120 days a year in the U.S. (After 120 days, the U.S. would start taxing the Canadian on world income - see the April, 1994 CEN-TAPEDE.).
The NEW FAVOURABLE wrinkles are:
1. There is a $1,200,000 worldwide estate tax exemption for stock holdings in the U.S. What this means is that if your worldwide estate is less than $1,200,000 U.S., you will not pay estate tax on your U.S. shareholdings. Note though, that this exemption does not apply to real estate, boats, cars, etc. Also note that the IRS can tax the value of the shares even if they are located in Canada and the new Tax Treaty means that the CANADIAN Government will collect the tax for the U.S.
2. The old $60,000 non-resident exempt limitation has been changed to a proportion of the $600,000 allowed to a U.S. citizen or resident. For simplicity, let us assume that the Canadian's worldwide estate is $1,600,000 and the U.S. portion of that is $400,000. For the purposes of the exemption, the calculation would be $400,000/$1,600,000 x $600,000 or $150,000. The non-exempt portion of $250,000 ($400,000-$150,000) would be subject to U.S. Estate tax of $70,800.
(The wrinkle here is that if the U.S. estate represented a purchase price of say $100,000 and a date of death value of $400,000, Canada's deemed disposal rules would create a Canadian capital gain of $300,000 and a taxable capital gain of $225,000 (75% of $300,000). A 50% Canadian marginal tax rate would mean a Canadian Capital Gains tax of $112,500 and under the new treaty rules, Canada would allow the $70,800 as a foreign tax credit against the $112,500 and the estate would only owe $41,700 to Revenue Canada.
However, the credit is only available against the U.S. sited assets. If the person had made the profit in Canada and paid all his tax and then went to the U.S. and bought a $1,000,000 house or $1,000,000 of Stock and the items had not gone up in value, the estate tax would still be payable and the person would have paid the capital gains tax. Think about this the next time you think that U.S. tax rates are lower than CANADA. (See the February, 94 CEN-TAPEDE for gift tax rates.)
United States Citizens Owning Canadian Companies
(or shares of companies in any other country)
The Dreaded Form 5471
A warning to accountants and bankers. This could be your client. Since May, I have had three or four people tell me that they have known of the form but been told by their CANADIAN accountant that they do not need to file this form because no one else does. This is simply NOT TRUE! and the fines are enormous.
The United States government is very concerned with the possibility of its citizens or green card holders using shareholdings of foreign companies to hide income and assets. Although the legislation is designed to catch someone in San Francisco who is hiding money in the Grand Cayman Islands for example, the legislation catches all U.S. citizens living in Canada if they own 5% or more of a Canadian Company.
We are talking serious here. The MINIMUM fine for failure to file the form 5471 and tell the IRS the details of the company of which you own 5% or more of is 10% of the tax PLUS $1,000 for the first 90 day default. If notified by the IRS of the default, further penalties of $1,000 are added for each 30 day default to a maximum of $25,000. If you did not file or report income because it was "tax free anyway under a treaty", the minimum fine for not reporting the treaty position is $10,000. If you haven't filed for five years here, we are talking VERY serious money.
Remember the 5471! If you are a U.S. Citizen or if you have a green card and you own 5% or more (even if you inherited them or your father gave them to you as an early inheritance), make sure you file your 5471 each year. This last situation is one of the great conflicts of life. Father gives his children shares for Canadian tax purposes. Three of the kids move to the U.S. Father now finds the U.S. authorities wanting more information about his Canadian company than Revenue Canada wants.
The Dreaded Form 5472 (foreigners owning U.S. Corporations or corporations "Deemed" to be U.S. Corporations)
In the opposite case where a Canadian owns 25% of the shares of a U.S. corporation (for instance, shopping centre in Phoenix) and does not report certain transactions between himself and the corporation), the fines are $10,000 for the first 90 days and $10,000 every thirty days thereafter. The same fines could be imposed on a CANADIAN CORPORATION that was deemed to be a U.S. Corporation because of the amount of business it does in the U.S. and because it has a fixed base in the U.S. (i.e., that same shopping centre in Phoenix). There are THREE separate situations where the form should be filed. The fines are cumulative and it is possible to be accruing $30,000 a month of fines if for some reason or other, the IRS has written to the last address they have for you and demanded the forms. Please note that even if the request or demand has been returned to the IRS as undeliverable, the fines still stand because all that is required is for the IRS to write to the last address you provided for them. Therefore, if you are one of the 400,000 or so U.S. citizens who have stopped filing your U.S. tax returns (remember, all U.S. citizens in CANADA must continue to file their U.S. returns) and you have moved, you could have large bills accruing against you. The largest I have seen was over $200,000 U.S. of tax and penalties which the client had never been notified of.
As I was writing this section, a lady from Calgary with rental property in Arizona phoned to ask some questions after I had done a Ron Collister program on CHED in Edmonton. She and her husband had lost money on the rentals and were told by her Canadian Chartered Accountant that they did not need to file a U.S. return because they had lost money. This information or answer was wrong both ways. If no return is filed in the U.S., the minimum penalty is 30% of the GROSS rent with no deductions allowed. In addition, the IRS can impose an arbitrary $10,000 fine which is almost impossible to appeal. The information would also have been incorrect for a U.S. resident with a rental in Canada. In this case, even if the rental lost money, Canada would tax a minimum of 25% of the gross rent with no deductions allowed for expenses. Arizona, Hawaii, California and another 40 U.S. states also require a tax return whether you made a profit or not. And don't forget Hawaii's G.E.T. (general excise tax) and T.A.T. (transient accommodation tax) which have to be paid on rental properties even if all money changed hands in Canada.
I must reiterate. Do not deal with any tax advisor who does not specialize in "out of country matters" if you are dealing across international borders.
Health Insurance when returning to CANADA
I just returned from a trip to Kelowna, Calgary, Drumheller, Dinosaur Provincial Park, Eastend (for the Tyrannosaurus Rex dig), Regina, Brandon, Winnipeg, Selkirk, Batoche, Duck Lake, Edmonton, and Vancouver. While in Regina, I drove around the Legislative Grounds where I once protested the implementation of Universal Medicare.
How wrong I and thousands of other misinformed individuals were at that time. In the last two years, my family has used emergency medical services in Ottawa, Portage la Prairie, Calgary, Kelowna and Merritt as well as our own home base in North Vancouver.
Nothing more than a B.C. Medical card was needed to receive instant and courteous service at all locations in Canada. It was not necessary to produce cash, cheque or credit card. On the other hand, service in San Diego required cash payment up front and the submission of the bill to three separate companies for reimbursement.
Still, we are not perfect today and one of the problems of the CANADA HEALTH ACT is that it allows the provinces to set different rules for their coverage.
As an example, BC charges a premium for coverage (but if you haven't paid your premium, you will still be covered at an emergency ward), and Alberta does not. Some provinces will cover your out-of-province hospital bill for the same amount as they would pay a local hospital.
Hospital Day Rate
BC has only covered your out of province hospital bill for $75.00 a day and Ontario has just followed suit even though this is specifically against the rules of the CANADA HEALTH ACT. This means that if you get charged $2,000 a day in San Francisco for a total of $8,000, B C Medical will only reimburse $300.00 and you or your extended coverage are responsible for the other $7,700.
It is easy enough to buy temporary out of country coverage but some of the rates have gone out of sight, particularly for those over the age of 65.
Waiting Period for returning Canadians or new immigrants.
BC and New Brunswick have always had a 90 day waiting period for coverage and if I remember correctly, Saskatchewan and Manitoba had the same thing at one time. The reason is obvious. It stops someone from moving to BC and immediately using up expensive medical services. It can be revoked however by ministerial discretion. In early 1994, Paul Ramsay, BC's Health Minister cancelled the 90 day waiting period to allow a woman who was dying of cancer to return to BC from the U.S. where she did not have coverage unless she was physically in a U.S. military hospital.
What this means is that if you leave a job in Singapore and move back to Canada and settle in BC or New Brunswick or now, Ontario, you will not be covered for medical services until you have been in the province for 90 days. A number of companies can sell you a policy that will cover you just as if you were buying an emergency policy for someone who was visiting you from another country.
As a resource person, you might try Alec Bodrogi of Seavury & Smith in Vancouver. His phone number is (604) 669-3566 (fax to 681-0170). John Ingles Insurance is also in the process of coming up with a policy which will fit here as a provincial health care replacement policy.
INTENT TO LIVE IN A PROVINCE
It is not enough to just be in the province for 90 days to qualify either. You must fall into the following category to qualify. Remember, the physical possession of a medical card is not enough to be covered. If the medical plan discovers that you do not really qualify, the plan can cancel your coverage retroactively for up to 10 years. When they do this, they refund the premiums paid and bill you for the services. Although not common, I know of $80,000 past service medical bills from BC Medical and they are cancelling about 60 people a day. New Brunswick has discovered that there are some 32,000 more medical cards in existence than there are people in the province. This is because people have slipped across the border from Maine or Vermont or New York and obtained New Brunswick Medical cards or they have just kept them active when they have moved to the United States or a jurisdiction with no coverage.
To be qualified for a Canadian provincial medical plan's coverage, an individual must:
1. Be lawfully admitted as a resident of Canada, AND
2. Make his or her home in the province, AND
3. Be physically present in the province for at least 183 days.
This last item is the real kicker. Under this rule, even if you make your home in a province, if you spend four months of the winter in the sun in Mexico or the U.S. and four months of the summer in the Yukon panning for gold and four months of the fall and spring in Vancouver at your home, you would not qualify for either Yukon or BC Medical.
And remember, if you spend 180 days in the U.S. and come back to Canada, if you were to go to another province for two weeks, you have been out of your province for more than 183 days. Your provincial medical would be technically cancelled unless you had written permission to leave under those circumstances. If you have a question, do yourself a favour and write to your provincial medical plan if you intend to be away for more than four or five months. Also remember that most extended benefit plans depend upon your being a member of a provincial plan first. Cancellation of the provincial coverage cancels all the other plans which you have added on.
(I had already written the preceding paragraph when I received a call from Edmonton from a CHED "Ron Collister" listener who had heard our Sept 2, 94 broadcast (over 80 people have now phoned me in Vancouver over that program). This gentleman spends 6 months of the year in Arizona and another month or two in Europe and travelling. He had paid some $1,000 out in medical fees in Paris last year and is not having any success getting his money back from Alberta Medical or his extended plans because his recent claims have shown him to be out of the province more than he is in the province. This was actually my first instance of a real live person from Alberta being turned down although I know of hundreds from BC and Ontario.)
Moving back to Canada (and a province)
If you are moving back to BC, New Brunswick or Ontario from out of the country, make sure that your old coverage covers you for your first 100 days or so in Canada. As you get off the plane in BC, New Brunswick or Ontario, make sure that you fill in your medical plan application the first day.
Remember that even if you get the traveller's insurance or the new John Ingles policy, you will likely find that pre-existing conditions are excluded. Unless you are lucky enough to have Paul Ramsay waive the waiting period as he did in the aforementioned case, you could find yourself unable to pay for your continuing care during the interim period because you can't afford Canadian medical costs. i.e. If you are working overseas and end up in a hospital in Singapore, and have to come back to Canada, you could find yourself in the position that you can't come back.
For instance, if you are claiming the following federal and provincial tax credit, you are officially stating to the government that you do not qualify for your provincial medical plan. To get the OETC you have to state you have been out of Canada for more than six months.
CANADIAN OVERSEAS EMPLOYMENT TAX CREDIT - T626
The U.S. allows any of its citizens working at any occupation out of the country (for any employer including ones self) to exempt up to $70,000 U.S. (plus housing costs) from taxable income (you still have to report it first before you exempt the income). To qualify, they must be out of the country for 330 out of 365 days OR have a bone fide residence in another country for an entire calender year from Jan 1 to Dec 31st.
At first glance, it would seem that Canada has much tighter rules. Only persons who are working overseas for a specified employer at a specified occupation are entitled to an Overseas Employment Tax Credit and if they are paying a high foreign tax as they would working in Libya, Chile or Borneo, they may claim a foreign tax credit as well on the money that is not eligible for the OETC. The difference is that a Canadian only has to be away for 6 months to qualify for the exemption and can even come home for a holiday.
It works like this. A specified employer is a Canadian company or a partnership or foreign affiliate where at least 10% of the company is owned by Canadian Residents.
The employment must be for mining, extraction or exploration of petroleum or mineral resources or for construction or computer sciences or other prescribed services. However, it cannot be for sales or maintenance or for flying an airplane for instance.
Essentially, 80% of the overseas earnings up to a total of $80,000 are excluded from Canadian basic income tax although when one gets over $40,000 of net income, the alternative minimum tax does kick in.
Because of the way the calculation works, people in this position should usually not buy an RRSP but should save their eligible room for the future. (When they report their gross earnings, they accrue an RRSP deductible amount which is called the RRSP "ROOM". This room can be accumulated and saved for use in future years. In the meantime, the person should still buy the savings plan they would have bought for the RRSP. When it is worthwhile, they can just register the plan as an RRSP and get the deduction when it is worth more.)
The $80,000 is pro-rated by the number of days worked out of the country. Therefore a nine month employment would have a limit of $60,000 of earning eligible for the tax credit.
To qualify, one must be performing the duties for at least 6 continuous months out of Canada. A problem arises when a person comes back to Canada for vacations, funerals, etc. Bulletin IT497R2 makes it clear that one can return to Canada for any of the above and could even come back and work on his own farm (lots of Kuwait, Libya, and Saudi Arabia oil workers are Alberta farmers for instance and come home to work on the farm for spring planting and fall harvest) or for another company. It also seems clear to me that the employee must NOT perform any constructive duties for his overseas employer while in CANADA unless the employee is performing those duties "in between" two periods which will exceed six months each. This is because one must work for six continuous months in the overseas position before he or she qualifies for the OETC.