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class account" and was told this was tax-advantaged in Canada, deferring capital gains if any until the money is withdrawn.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 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 9:00 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. 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