My_question_is: Applicable to both US and Canada
Subject: money left to me in a US will
Expert: taxman at centa.com
Date: Tuesday May 30, 2006
Time: 09:25 AM -0700
QUESTION:
My mother died in California, I was born there, and made me beneficiary to
her University of California death benefit. It's 7,500 and I'm told I need
to pay federal tax on it..10%? Will I have to pay tax on it in Canada too?
thanks
----------------------------------------------------
david ingram replies:
If you were born in California and have not formally revoked your US
citizenship, you are a US citizen and should be filing a US tax return as
well as a Canadian return.
In fact, a US citizen in Canada usually has a larger responsibility to file
a US return than they do a Canadian return.
Let me explain.
Let's assume that you earn $100,000 Canadian and the company you work for
deducts $28,000 worth of tax and the full CPP and EI.
If you had no other income, you would not need to file a tax return because
you have a refund coming and you only have to file a Canadian return if you
owe tax unless asked specifically for a tax return by the CRA.
On the other hand, if you are a US citizen, at this point, you owe the US
government $20,418 UNLESS you file a US 1040 tax return to exempt the wages
(form 2555) or claim a foreign tax credit (form 1116). In addition, as a US
citizen living in Canada, you must report your foreign (Canadian accounts
are foreign to the US) accounts to the US treasury and internal earnings of
your RRSP to the IRS as well as the account's existence to the treasury.
For instance, failure to report a Canadian RRSP with $100,000 in it is
liable for fines of up to $500,000 plus five years in jail for failure to
file a form TDF 90-22.1 and 35% of the money in it plus 5% a year for
failure to file form 8891. At this point, I have never seen anyone fined
the 35% plus 5% but I have seen a $10,000 fine levied against a 105 year old
woman for having an unreported $380,000 in the Royal Bank in Edgemont
Boulevard in North Vancouver and a $60,000 fine against a 68 year old woman
for some $600,000 of unreported RRSP accounts. In addition, my
understanding the Treasury is in the process of fining over 1,000 clients of
a former Vancouver financial advisor Jerome Schneider who instructed his US
clients NOT to file the forms.
Read the fine print at the bottom of form TD-F.90-22 -
http://www.irs.gov/pub/irs-fill/f9022-1.pdf
You can find the 8891 form at
http://www.irs.gov/pub/irs-pdf/f8891.pdf for an example of the Form
8891
-----------------------
Back to your question. If you are a US citizen as I bet you are there is
likely no US tax after you file the return.
If you are simply inheriting this, then Canada will not tax it either
although they may try to because it will "look" taxable.
Go to www.centa.com and read the October 1995 newsletter (top left hand box)
to see the responsibilities of a US citizen living in Canada (or France) and
read the October 1993 newsletter on the advantages / disadvantages of dual
citizenship.
If you need help, you know who to call.
--------------------------------------------
This prior Q & A might help
Help!
I heard you on the radio, and am contacting you out of final desperation.
I am a dual US and Canadian citizen living in Vancouver. Since becoming
divorced from a husband who worked on both sides of the border (also a US
and Canadian citizen) three years ago, it has become very difficult for me
to pay between $600 and $700 Canadian to a tax service ( xxxxx xxxx), in
order to then make a yearly payment of "only" $US 1300 in taxes. I had the
insane idea that I would be able to figure out how to do the forms with the
help of friends this year (after all, it took only an hour or so to do the
Canadian forms.) I have asked at places like H & R Block, and they can't
help me.
I can't tell you how frustrating it has been trying to use last year's forms
to guide me through the US mess. I am a high school drama teacher, and can
barely understand the text--it is in English isn't it? Neither could I find
all the necessary materials on the internet. The IRS "help" dept. has been
no help at all.
My finances are quite simple, I think. My ex-husband pays me about $108,000
per year in alimony to cover my mortgage (he gave me the house) and the
grossed up taxes on the mortgage payments. I earned about $30,000 as a
xxxxxxxxx working for the xxxxxxxxxxxx in 2005, so I write off a few
things like professional dues and a course I take. I have two RRSPs--one
spousal (from the divorce settlement) and one of my own. That's about all
there is to my financial story.
Do I really have to pay $700 in order to pay the US $1300 for the privilege
of being a citizen? I'm seriously considering giving up my US citizenship
over this. I was hoping not to have to give it up until I was worried about
estate taxes, and leaving the house to kids, etc...I'm 41 now.
How can I be required to need a service so expensive?
Thanks.
h hotmail.com
---------------------------------------------
david ingram replies:
Although you will not want to hear it, the price of $600 to $800 is not out
of line for a US Canada Income Tax return, especially when there are foreign
tax credits, Alternative Minimum Tax and RRSPs to report.
My usual quote to you would be $800 to $2,000 for a new client. Repeat
clients could still be in the $600 range but it would be close. The price
paid has nothing to do with the tax owing. It is based upon the complexity
of the return. There are likely less than ten people in Vancouver who could
do your return competently. The person you mention, xxxxx xxxxx, is one of
the best and started his Canadian tax preparation career with me back in
1970 or 71.
For the record, however, I was curious and ran a quick dummy return and do
not see that you should owe any tax to the US based upon the $108,000 and
$30,000 figures you mention. In fact, if you happened to have two children
at home, you would receive a $50.00 US refund and if you had three children
at home, a $1,050 US refund.
Basically, what you need to file is two 8891 forms, likely four TDF 90-22.1
forms, two 1116 forms, two 1116AMT forms, one 6251 form, Schedule B,
Schedule A, your 1040 and if you do not have children at home, a 2555 form.
If you have 2 or more children at home, you should NOT file a 2555 because
you can claim the up to $1,000 child tax benefit.
You can find the 8891 form at
http://www.irs.gov/pub/irs-pdf/f8891.pdf for an example of the Form
8891
You can find the TDF 90-22.1 form at
http://www.irs.gov/pub/irs-pdf/f9022-1.pdf
Note that this is far more serious than not filing form 8891 - The penalty
for not filing the TD F 90-22.1 is up to $500,000 PLUS 5 years in jail.
This form does NOT go to the IRS or with your tax return. Send it to the
Department of the Treasury in Detroit at the address on the form.
------------------------------------------------
David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 10 PM 7 days a week Vancouver (LA) time -
(please do not fax or phone outside of those hours as this is a home office)
email to taxman at centa.com
www.centa.com www.david-ingram.com
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 for expert help, assistance, preparation, or
consultation in connection with personal or business affairs such as at
www.centa.com. If you forward this message, this disclaimer must be
included."
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US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325
Calls welcomed from 10 AM to 10 PM 7 days a week Vancouver (LA) time -
(please do not fax or phone outside of those hours as this is a home office)
email to taxman at centa.com <mailto:taxman at centa.com>
www.centa.com <http://www.centa.com/> www.david-ingram.com
<http://www.david-ingram.com/>
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 for expert help, assistance, preparation, or
consultation in connection with personal or business affairs such as at
www.centa.com <http://www.centa.com> . If you forward this message, this
disclaimer must be included."
Be ALERT, the world needs more "lerts"
David Ingram gives expert income tax & immigration help to non-resident
Americans & Canadians from New York to California to Saudi Arabia to Mexico
to China or Chile - Cross border, dual citizen - out of country investments
are all handled with competence & authority.
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