ART IV Tax Treaty Are US estates and life insurance

My husband and I are Americans living and working permanently in Vancouver
(since Dec 2003). We have life insurance policies on ourselves and also on
one of our parents (at their request). Would money received from these
policies be taxable in Canada?
Also, would we owe Canadian tax on a US inheritance?
Thank you.
david ingram replies:
Canada does not have any estate taxes and will NOT tax the US life insurance
policies and usually you will not ever owe any money to Canada on a US
An exception would be (for instance) if your mother had been a professor at
a US college or University and had a CREF - TIAA pension which was left to
you as payments or if she had a life insurance policy which was part of a
registered retirement plan. In the case of CREF -TIAA, you will be taxed 15%
in the US BEFORE it leaves and pay a difference in Canada.
Any inheritance taxes would be paid by your mother's estate in the US BEFORE
the money comes to Canada.  Remember though that both you and your husband
are liable for US income tax returns and US estate taxes even though you are
living in Canada and have NO US source income at the moment.
You should have us do your US / Canada tax returns but if you want to go it
yourself, the following from US/Cdn Taxation will help you
with the likely forms.
 The following is excerpted from a twelve year old book I wrote - I should
update it but the principles are the same.
It used to be that people who lived in the United States and worked in
Canada paid no tax to the U.S. because the higher Canadian income tax meant
that the U.S. resident got credit for every cent by filing the Form 1116 and
claiming a foreign tax credit. That is no longer true if the total income
(after the "up to" $72,000 exemption) is over $45,000 for a family or
$33,750 for an individual or $22,500 for a married person filing separately.
The Alternative Minimum Tax (Form 6251) means that only 90% of the foreign
tax credit can be claimed. (Note, AMT kicked in at $40,000, $30,000 and
$20,000 from 1987 to 1993 - It is now $22,500, $33,375, and $45,000 for
1994, 1995,   1996, 1997 and 1998).  2004 is now $29,000, $40,250 and
The 2555 exemption in $80,000 for 2003 and 2004 having worked its way up
from $70,000 for years.
If you are a U.S. citizen who has not filed your past returns, you should
catch up your returns from 1987 to the present.  We regularly prepare 1987
to 1998 returns for U.S. citizens who have been "caught" or who are just
trying to catch up legitimately.  (For 2004, you should file 1999 to 2004).
For example, in a 1990 return for a man earning $70,000 in Canada and a
woman earning $10,000 in the U.S., their Alternative Minimum Tax worked out
to about $500.00 U.S. However, if she had made $20,000 in the U.S., there
would have been enough U.S. Tax paid that the Alternative Minimum Tax would
not have kicked in. Since the 1991 rate for the AMT is going from 21% to
24%, it is expected to more than triple the number of people who will be
caught in this situation. Persons in this situation should plan on making
sure that they have some U.S. income to knock out the AMT in the U.S. In the
above case, I had prepared the return and sent it in, before another return
pointed out to me that there was a tax liability under AMT and I had to
phone the couple and say "mea culpa".
Note that the AMT is 26% for 1993 and 1994, 1995, 1996, 1997, 1998, 1999,
and on to 2004.
What country is going to tax them?
The answer is not always easy. I am going to quote directly from the U.S. /
Canada Tax Treaty because that is the one we use most often, but the same
general rules apply with all treaty countries. At the moment, Canada has
signed treaties with 78 countries and is working on another 27. We have had
several cases where people have already paid $16,000 or $25,000 in tax to
Canada because they are clearly residents under most meanings. However,
because of the following "TIE BREAKER" rules, we are getting back all tax
paid on dollars earned in the other country.
There are many, many treaties.  The articles tend to be fairly consistent so
that when some one comes in from Indonesia, I am able to quote Articles IV,
IX, X, and XI etc., and look like a real expert on Indonesia, even if I have
not looked at it before.  The following ARTICLE IV for instance has been
used by myself more often for Australia and Germany than for the United
Please also note that a NEW US / CANADA TREATY was signed on August 31, 1994
and with various changes took effect on Jan 1, 1996. Parts of it (estate and
capital gains) are retroactive back to November 10, 1988.  This new Treaty
totally changes the rules between the two countries for estate and capital
gains tax upon death. It also completely changes the rules for the taxation
of U.S. Social Security, Canadian Old Age Pension and Canada Pension Plan.
Gambling losses are going to be allowed for Canadians as well.  See the
December 1995 edition of the CEN-TAPEDE for more information.
The "boxed" parts of the following treaty following are the parts taken out
as of  January 1, 1996.  The treaty as printed is as it should be now. It
was slightly different 1980 to 1995.
Article IV - Fiscal Domicile - (it is the same number in most treaties)
For the purposes of this Convention, the term "resident of a Contracting
State" means any person who, under the law of that State, is liable to
taxation therein by reason of that person's domicile, residence,
citizenship, place of management, place of incorporation or any other
criterion of a similar nature, but in the case of an estate or trust, only
to the extent that income derived by the estate or trust is liable to tax in
that State, either in its hands or in the hands of its beneficiaries. For
the purposes of this paragraph, a person who is not a resident of Canada
under this paragraph and who is a United States citizen or alien admitted to
the United States for permanent residence (a "green card" holder) is a
resident of the United States only if the individual has a substantial
presence, permanent home or habitual abode in the United states and that
individual's personal and economic relations are closer to the United states
than any other third State.  The term "resident" of a Contracting State is
understood to include:
(a) the Government of that State or a political subdivision or local
authority thereof or any agency or instrumentality of any such government,
subdivision or authority, and
(b) (i) A trust, organization or other arrangement that is operated
exclusively to administer or provide pension, retirement or employee
benefits, and
    (ii) A not-for-profit organization that was constituted in that State,
and that is, by reason of its nature as such, generally exempt from income
taxation in that State.
2. Where by reason of the provisions of paragraph 1 an individual is a
resident of both Contracting States, then his status shall be determined as
(a) he shall be deemed to be a resident of the Contracting State in which he
has a permanent home available to him. If he has a permanent home available
to him in both Contracting States, he shall be deemed to be a resident of
the Contracting State with which his personal and economic relations are
closer (centre of vital interests);
(b) if the Contracting State in which he has his centre of vital interests
cannot be determined, or if he has not a permanent home available to him in
either Contracting State, he shall be deemed to be a resident of the
Contracting State in which he has an habitual abode;
(c) if he has an habitual abode in both Contracting States or in neither of
them, he shall be deemed to be a resident of the Contracting State of which
he is a national;
(d) if he is a national of both Contracting States or of neither of them,
the competent authorities of the Contracting States shall settle the
question by mutual agreement.
Where by reason of the provisions of paragraph 1 a person other than an
individual is a resident of both Contracting States, the competent
authorities of the Contracting States shall by mutual agreement endeavour to
settle the question and to determine the mode of application of the
Convention to such person. Notwithstanding the preceding sentence, a company
that was created in a Contracting State, that is a resident of both
Contracting States and that is continued at any time in the other
Contracting state in accordance with the corporate law in that other
Contracting State shall be deemed while it is so continued, to be a resident
of that other State.
You can see that the countries themselves have set it up so that they will
get tax. It is up to you to arrange your affairs to pay the least tax
Both Canada and the U.S. will tax you on any money you earn within the
country. The BIG question is:
Canada taxes on RESIDENCY, not citizenship. Basically, if you have been in
Canada for more than 183 days (counting the hours - one hour is only one
hour, not one day as in the States), you are taxable on your world income,
no matter where it is located and under whose name you have your assets
stashed away. That is why Howard Hughes left Canada when he did back in the
70's. If he had stayed in Canada (even as a visitor) two more days, he would
have been taxable on his world wide holdings.
Note that in March, 1999 Denise Rondpre of  Revenue Canada Customs Excise
and Income Tax issued a policy letter to Foreign Air Crew flying for
Canadian Airlines and Air Canada. This directive stated that it was Revenue
Canada's opinion that one hour in Canada constituted a full day in spite of
the fact that the courts have ruled against them and the law, itself, has
not changed. I do not think that this is enforceable, but you must be aware
of it.
If you are in Canada for any period and earn more than $10,000, you must pay
tax on the total amount to Canada,  or vice versa if a Canadian is in the
U.S. Entertainers and sports figures are exempt for up to $15,000 but they
are to have 15% tax withheld from their gross salaries or remuneration
(including hotel rooms, plane tickets, car rentals, meals, etc.). Remember
that even though the first $10,000 or $15,000 above is not "taxable", you
must file a return and quote the treaty article number specifically to claim
the exemption.  The U.S. has a minimum $1,000 fine for failure to report the
treaty number to claim the exemption, even if there is no tax owing. In
practical terms, this means you only get fined if not taxable.  (Although
this was always here, Revenue Canada rarely enforced the rule.  In this case
the enforcement laws DID change in March, 1998 and the US resident MUST file
if working in Canada.)
Remember also, this refers to "where" the work is performed, not where the
money comes from.  Therefore, if you worked in San Francisco for one month
for your Canadian employer and were paid $6,000 U.S. by Bell Telephone in
Ontario, you would have to file a California return reporting your world
income and exempting the amount earned in Canada and would have some tax to
pay to California on the $6,000.  On the Federal return, you would file for
an exemption under Article XV of the U.S. / CANADA Tax Treaty and pay no
federal tax to the U.S.  You would then claim a credit for the California
tax paid on your Canadian income tax return.  You should also get BELL to
agree to pay the $400 to $1,000 accountant's bill to prepare these
complicated tax returns.
The U.S. taxes on citizenship first and residency or physical presence
second. If you have another tax home, and are just an extensive visitor in
the States, you can escape U.S. tax on your income from other countries.
However, if you renounce your other tax home or become a "green card" holder
or are in the U.S. for more than 183 days in one year, you are subject to
U.S. income tax on your world income.
The U.S. taxes its citizens and green card holders wherever they are and no
matter what they are doing. The U.S. taxes its citizens in Canada and they
will tax them in the North Sea. The U.S. will add on the benefit of housing
allowances, car allowances, servants, and education allowances for people
who have not been in the U.S. for twenty years but who are still U.S.
citizens.  If you want the benefit of U.S. Citizenship, you pays your
taxes.) The first $70,000 U.S. of income earned from personal  services (as
opposed to capital) is exempt if you have been out of the country for a full
calendar year in one test or for 330 out of 365 days in another test using a
fiscal year.
However, being "exempt" does NOT mean that you do not have to file a tax
return. You must still file your U.S. 1040, report the Canadian Earnings in
U.S. dollars and claim the "up to $72,000 U.S." by filing a form 2555 with
the 1040. If you have investment, [INCLUDING AMOUNTS EARNED WITHIN YOUR
CANADIAN RRSP], rental, royalty, or any income other than from services, you
must also report the income in U.S. dollars.  Since you will have paid tax
to Canada first, you will file a Form 1116 with the 1040 to claim your
foreign tax credit. A separate Form 1116 must be filed for each kind of
income, i.e. rental, pension, dividends, etc.
The RRSP earnings may be exempted under ARTICLE XXIX.5 of the U.S. / CANADA
Income Tax Treaty 1980.
Social security (FICA) taxes usually do not have to be paid to the U.S.
under Article XXIX.4 of the U.S./CANADA Income Tax treaty or Article V of
the CANADA / U.S. Social Security Agreement.  (I sure hope all this is
impressing you).
Therefore, a U.S. citizen living in Canada who had a rental house, a job, an
RRSP, some dividends and some capital gains from the sale of stock would
file his or her Canadian return first and then file a U.S. return with these
* 1040 - is the basic return for a citizen or resident of the U.S. or landed
immigrant of the U.S. (commonly called a "green card" holder).
* Schedule A - to claim itemized deductions if needed
* Schedule B - to report the dividend income
* Schedule D - to report the capital gains
* Schedule E - to report the rental income
* 4562 - to report depreciation on the rental house
* 1116 - (maybe two foreign tax credit forms) - one for any income from
services over
    $72,000, one for the rental, capital gains, and dividend income.
* 1116(AMT) - two more forms to calculate the foreign tax credit for
Alternative Minimum Tax purposes (AMT)
* 2555 - to exempt up to $72,000 U.S. of earnings from services
* 6251 - Alternative Minimum tax form
* FICA (Social Security) exemption - to exempt income from U.S. FICA
* RRSP election forms to exempt income earned within the RRSP from current
U.S. income tax until withdrawal
* TDF-90 form(s) - to report foreign bank accounts including Canadian RRSP
accounts which are considered "foreign trusts" - failure to file this form
can result in up  to a $500,000 fine PLUS up to five years in jail
He or she might also have to file either of the following two specialty
forms when he or she owns shares in corporations.
* 5471 form - If you are a U.S. citizen and 5% or more owner of a Canadian
corporation. Failure to file this form can create fines of $1,000 every 30
days up to $25,000
* 5472 form - If you are a Canadian who owns a U.S. corporation - failure to
file this one has fines of up to $30,000 every 30 days.
Even though you or your friend have not filed your U.S. return for years,
you have not necessarily "got away with it". At least once every two weeks,
a U.S. Citizen arrives "a little distraught" because the IRS has caught up
to them.
And the biggest problem is that they can tax you for many years, whereas you
might only be allowed to claim your exemptions and credits for two or three
years back.
For instance, In January, 1995,  I had a "new" U.S. citizen client bring me
a U.S. Tax bill for $194,000 for 1986, 1987, and 1988.  He had been "caught"
because he had applied for a new passport.
The tax was on the gross income he had received in those years when he sold
off a stock portfolio (remember the crash).  Although he made about $40,000
to start, he lost after the crash and ended up $30,000 down.  A Canadian
accountant told him he did not have to file U.S. returns because he was
living in Canada.
In another case, a lady who had come to see me ten years ago and had gone to
see someone else because (this is what she told me) they had a fancier
office, has suddenly received a rude awakening.  She and her husband have
been losing money on the rental of a large apartment complex in Seattle.
The penalty for not filing and reporting this rental income is up to $10,000
a year for not filing on non-resident rentals and 30% of the gross rent with
no expenses allowed.  In this case the rent is over $500,000 a year and the
total penalty and tax could be $2,000,000 with interest.  The other
accountant told her she did not need to file if she was losing money.  I had
quoted her $500 to do her return ten years ago and told her she had to file
the return.  The accountant with the fancier office told her she did not
have to file because she lost money.  (That advice is wrong in both
countries by the way). Even $1,500 a year would be cheaper than the tax bill
coming up.
If you are still claiming the protection and advantages of your U.S.
citizenship, do yourself a favour. Bring your U.S. income tax returns up to
date from 1987 to the present.
It is rare that you will have to pay tax to the States. Higher Canadian tax
rates mean that, with the exception of Capital Gains, the exemptions and
foreign tax credits "almost always" eat up the U.S. tax.
If you do have Canadian Capital Gains, it is usually important that you do
very accurate calculations to determine the tax. If you claim the $ 100,000
exemption in Canada, the U.S. does not recognize it and will tax you anyway.
Better to save the exemption or in some cases restructure the deal.
Restructuring might be as mundane as selling a business for less purchase
price and taking more wages to remain as an advisor.
That takes care of the majority of U.S. Citizens in Canada. Now to the
Canadian "visitor" to the U.S. - note that these ten year old "NEW RULES"
mean that many "Canadian Snowbirds" are taxable in the U.S. on their World
Income, even though they are only in the U.S. for four months a year.
What happens is that after three, four, five or ten years of wintering in
Florida, or Texas, or Arizona, or California, the Canadian visitor joins
clubs, buys property, attends meetings, becomes active in a condo
association and suddenly finds their "CENTER (CENTRE) OF VITAL INTERESTS" is
as much or more in the U.S. as it is in CANADA. Under those circumstances,
the U.S. government has every right to tax you.
At the back of the book around page 156, I have reproduced the April, 1994
edition of the CEN-TAPEDE newsletter for more information on this.
Long Time Visitors
For long time visitors to the U.S., the IRS uses the 183 day rule that
entitles most countries to tax anyone present in the country for more than
183 days. However, they are far harder on their 183 day rule than Canada is.
The U.S. counts an "hour" as a "WHOLE DAY". So, if you arrive in Hawaii at
10:50 PM, that is a day, and if you leave at 1:00 AM, that is a day.
In addition, to arrive at the 183 days, the U.S. looks at the two preceding
years. You have to take 1/3 of the days you were present in the U.S. in the
preceding year and add it to this year's days and then you have to take 1/6
of the days in the year preceding that and add it to this year's days.
Soooooooo! if you were in the States for six months in 1998, that counts as
1 month, or 30 days for 2000. If you were in the States for three months in
1999, that counts as 1 month or 30 days for 2000. You are now limited to
stay in the States for 120 (maybe 122) days in 2000, after which you become
taxable on your world income unless you can show a tax home in another
country (as in the treaty provisions above). There is a form called an 8840
that you may file to claim exemption from this if you can show that your
closer connection is to Canada.
This is tough to do however. As I was writing this little part on Sept 29,
95, I received a call from a 55 year old man in Alberta.  He has a home in
Canada, is retired already and spends the winters golfing at his golf course
condominium in Arizona.   In Arizona, he golfs, plays cards, goes to church
and visits with friends in the same golf course country club estate.  In
Canada, he visits his kids in B.C. and travels in his motorhome.  He can't
wait to get back down south where he now lives in his mind and which is fast
becoming his centre of vital interest and "closer connection."
His Canadian friends have died, divorced, moved away, are still working or
go south to  different places to spend their winters.  His closer
connection,  "his home" without much doubt, is now in the U.S.
Answers to this and other similar  questions can be obtained free on Air
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Dundee Wealth
Management and I, David Ingram  host a LIVE talk show called "ITS YOUR
Those outside of the Lower Mainland will be able to listen on the internet
at <>
Local calls are taken at (604) 280-0600 and Long Distance calls (BC only)
are taken at 1( 866) 778-0600
Callers to the show are invited to attend free seminars on financial
planning with such specialities as deductible mortgage interest. They are
held at Fred Snyder's Office at 1764 West 7th in Vancouver - (604) 731-8900
for more information.
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321 Fax (604) 980-0325
Email to taxman at <mailto:taxman at> <>
Disclaimer:  This question has been answered without detailed information or
consultation and is to be regarded only as general comment.   Nothing in
this message is or should be construed as advice in any particular
circumstances. No contract exists between the reader and the author and any
and all non-contractual duties are expressly denied. All readers should
obtain formal advice from a competent and appropriately qualified legal
practitioner or tax specialist in connection with personal or business
affairs such as at <> . If you forward
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Be ALERT,  the world needs more "lerts"
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