QUESTION:
Hello,
I emigrated from Canada to the U.S. in October. I earned approximately
$25,000 in Canada prior to moving and have $20,000 in outstanding Life Long
Learning withdrawals. Based on the income tax I paid on my income, I would
expect a sizeable refund absent the $20,000 being deemed to my income.
However, if it is deemed I obviously can expect to pay a substantial amount
in income tax.
I am wondering whether it is possible and even advisable to not claim
non-residency until 2006 and to therefore defer the addition to my income of
the $20,000. In the meantime, for 2005, I would of course add the U.S.
income I earned in 2005 since October to my Canadian income in calculating
Canadian taxes.
Thank you for your advice.
david ingram replies:
If you add the $20,000 this year and the new budget goes through, your tax
will be less than $5,300 on the LLP.
If you include the US income this year, you will likely be paying another 7%
to 10$ tax on your US earnings to Canada.
If your US earnings were $5,000 Canadian, you would be paying an extra $500
to Canada.
If you then emigrated officially on or about Jan 1, 2006, the tax bill in
2006 on your LLP would be about $4,405
The $4405 plus the extra $500 in 2005 means a saving of maybe $300 and you
are skating on the edge.
The best part about including it on your 2005 return is that it will not and
does not impact on your US return.
The extra paperwork and the strong possibility of having the CRA question
and reverse what you did makes it better to report it in 2005 and bite the
bullet in my opinion.
The same applies to someone having to pay back a Home Buyers Plan.
Emigrants from Canada have to take forms T1161, T1243, and T1244 when
leaving.
although not absolutely on point, there is something for you in the
following Q & A
QUESTION:
When we left Canada in early 2001, our account didn't ask us to fill up Form
T1161 as it wasn't in circulation then. I did some research on the forms
used in 2001 and it wasn't there. It appeared in 2002/2003.
We did dispose of our property and some investments.
Will this be an issue if we come back?
Thanks for your input.
===============================
david ingram replies:
Departure tax rules have existed in Canada since July 17, 1971. Before the
formal T1161, you just listed the items in a free form manner. However, your
research is incorrect.
http://www.cra-arc.gc.ca/E/pbg/tf/t1161/t1161-04e.pdf
The form T1161 was originally issued in draft form in about Oct 1996 along
with new regulations which added other items for reporting. For instance,
up to Oct 1996, no departure tax had to be calculated on the value of shares
of a private CCPC (Canadian controlled Private Corporation).
There is a certain analogy to the US form 8861 for reporting RRSP accounts -
we knew the form was coming for over a year - then we had a draft form for 6
months - and then the full fledged form - however, the rules for reporting
were originally made in 1989 and the requirements to report Canadian RRSPs
to the US Government was handled with free flow designed reporting rules
according to US REV-PROC 1989-45 which was modified by REV-PROC 2002-23 in
April and then codified with form 8891 in 2004
http://www.irs.gov/pub/irs-pdf/f8891.pdf). At all times there were big
penalties for failing to report a Canadian RRSP. The current penalty is 35%
of the amount contributed to the Canadian RRSP plus 5% a year for every year
that the RRSP is not reported. This would apply to you as well if you have
left a Canadian RRSP behind. Then of course, you need to report your
Canadian RRSP accounts and any other Canadian financial accounts on form T
DF-90.21 (see bottom of Schedule B of your 1040) and the failure to report
the financial accounts (to the department of the Treasury in Detroit)
carries a penalty of up to $500,000 PLUS 5 years in jail. At this point in
time, I have never seen anyone penalized with the 5% a year for an RRSP
account but I have seen several $10,000 penalties for failing to report the
accounts to Treasury including one 105 year old lady with a $10,000 fine for
failing to report a $38,000 bank account at the Royal Bank of Canada in
Edgemont Village in North Vancouver, and a 68 year old Arizona lady with a
$60,000 fine for failing to report over $500,000 in Canadian RRSP's. Note
that the $60,000 fine was not the 5% a year, it was for failing to report
the existence of Canadian financial accounts.
http://www.irs.gov/pub/irs-pdf/f9022-1.pdf
Back to Canada - By similar rules, departure tax clearly existed before the
T1161 was issued and was to be reported in writing without a specific form.
If you have disposed of assets affected by form T1161, you should do some
amending and be prepared to pay the proper tax to Canada. When you do so,
the US government will issue you a federal foreign tax credit and a refund
for up to ten years.
I cannot guarantee that it will be an issue on your return. At the moment,
the CRA is not doing a good job of catching people on these items. I doubt
if the CRA is catching 2%. However, the intention is to get them all so I
think you should correct the situation to stay clean.
Unfortunately, the CRA can go easily go back eight years if they feel that
you have wilfully evaded the situation and obviously, since you now know
about it, your failure to fix it would be wilful evasion.
Your accountant was clearly incorrect in not calculating a departure tax or
at least taking it into consideration on your departure. Remember that
there is no departure tax to be paid on small amounts. The only time it is
necessary to provide security is when the federal tax exceeds the guidelines
to be found on form T1243
(http://www.cra-arc.gc.ca/E/pbg/tf/t1243/t1243-04e.pdf) and T1244
(http://www.cra-arc.gc.ca/E/pbg/tf/t1244/t1244-04e.pdf $12,107.50 for
Quebec and $14,500 Fed tax for former residents of all other provinces)
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