US taxation on Canadian corporate

QUESTION:
Hi, David.
My husband and I are US citizens, residents of Canada, filing tax returns in
both countries. We file joint returns in the US.
Last year my husband received a large inheritance. On the advice of our
Canadian financial advisor, who doesn't know about US tax law, he invested
the money in something called a "corporate class account" and was told this
was tax-advantaged in Canada, deferring capital gains if any until the money
is withdrawn.
So, on the basic principle that anything that's tax-advantaged in one of the
two countries is NOT tax-advantaged in the other, what do I do about
reporting this to the IRS?
We did not switch any money to any different funds within the family this
year. Does this mean I don't have to worry until we do switch, and then just
report any capital gains from the sale of one fund based on my own records?
I didn't get any year-end tax form from this fund, either. Is that a problem
for our US returns?
I have filed the report to the Treasury stating that we hold this account
(TD F 90-22.1)
So... am I right to be worried? Thanks for any light you can shed on this.
Sincerely,
--------------------------------------------------
david ingram replies"
First of all, I trust that you have no mortgage on your home that is not
deductible.  If you have a non-deductible mortgage (under Canadian law),
then the first thing the money should have been used for was to pay down the
mortgage.  If your consultant/advisor did not tell you this or suggest it
first, change advisors. He or she is feathering their own nest for
commission rather than giving you the best advice.  Goto www.centa.com and
read the November 2001 newsletter in the top left hand box for more
information.
Back to your question.
A corporate class account is sort of an indexed fund where you do not
actually own a specific unit or units but are part of a big pool and the
intent is to make capital gains.
I do not know which one you have but most, as I understand it are based upon
US Securities.
You will not realize your gain until you actually cash it in at which time
you will realize a capital gain or capital loss as the case may be.
If you filed one T DF 90-22.1 for this account only, you are in violation of
the rules.  Once the total of all accounts you have signing authority over
(including RRSP's, Trust accounts, bank accounts, credit union accounts,
whole life insurance policies, universal life insurance policies, secured
visa or MasterCard accounts, or the Girl Guide, Boy Scout, Church, or office
Xmas party pool) has ever exceeded $10,000 during a year, EVERY ACCOUNT you
have signing authority over, MUST HAVE ITS OWN T DF 90-22.1.  These forms do
NOT go with the tax return but are mailed to Detroit.  And, if a joint
account
In addition, every RRSP account needs a form 8891 filed WITH your 1040.
The penalty for not filing a form T DF 90-22.1 is up to $500,000 plus 5
years in jail.  I have seen a 105 year old lady with a $10,000 fine -
really - and a 68 year old lady with a $60,000 fine and a day in jail.
Read the fine print at the bottom of form TD-F.90-22  -
http://www.irs.gov/pub/irs-fill/f9022-1.pdf
The penalty for not filing form 8891 is 35% of the amount in the RRSP PLUS
5% per year for every year it is not filed.  That penalty is NOT shown on
the form. You find it in REV-PROC 2002-23 which you can find (along with an
excellent National Post /Financial Post article by Jonathon Chevreau). at
http://www.centa.com/CEN-TAPEDE/2003/august/national_post_reprint.htm. Note
that the article or my copy does not say 5% per year but it is 5% penalty
per year.  The good news is that the current form 8891 gives you a chance to
forgive and forget and check off a box that you want to start now.
You can find form 8891 at
http://www.irs.gov/pub/irs-pdf/f8891.pdf
--------------------------------------------------------
David Ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
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Disclaimer:  This question has been answered without detailed information or
consultation and is to be regarded only as general comment.   Nothing in
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and all non-contractual duties are expressly denied. All readers should
obtain formal advice from a competent and appropriately qualified legal
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