April 1995 CEN-TAPEDE - Doing Business in California, Form 4868, Exemption Top Up

April 1995       Pages 92-95


david ingram's US/Canadian Newsletter





When George Orwell wrote "1984", he was off by ten years. It should have been called "1994" because that is the year that the IRS and Revenue Canada computers kicked into high gear. I started in this business with Young, Peers, Milner and Co (now Deloitte) and after 29 years and some 2,000,000 returns prepared under my management, I can say "I have never seen anything like this". Both the IRS and CANADA are running their computer tapes back as far as the mind can imagine. We are getting as many re-assessments for 1986, 87, 88, 89, 90 and 91 as we are for 1993. The State governments are in the act as well with California being the most efficient. In the last short while, we have had clients from Washington, Florida and Vancouver receive California bills for 1990, 1991 and 1992.


Revenue Canada and the IRS (and Mexico) are sharing all information under the new amendments to the CANADA / U.S. Income Tax Convention and NAFTA. In fact, as I write this, Revenue Canada is running U.S. Social Security Payment computer tapes for 1990, 91, 92, and 93 and coming up with a lot of Canadian residents who have not been reporting their U.S. social security payments on their Canadian income tax return. Although the Social Security payments are usually not taxable in the U.S., 50% of the payment IS taxable in Canada. (And to make matters more complicated, it will be taxable only in the U.S. and not taxable in Canada under the new treaty, but that will be the subject of two or three newsletters).


Revenue Canada is also running "baby bonus / child tax credit" information as far back as 1988 and sending out $2,000 bills from St John's to North Vancouver Mothers who have never been east of the rockies. "As they say on "60 Minutes", "don't touch that dial".




In the March issue, I talked about the U.S. FEDERAL Government tracking down U.S. citizens living in Canada as far back as 1986, the new U.S. departure tax (we beat FORBES magazine with that story) and touched on the problems being caused by the cutting off of the Canadian $100,000 capital gains exemption.


In this edition, I am going to deal with Canada's tracking down Canadians and STATE tax in the U.S. Go to Vancouver Airport and take a look at Canadian business people who are going to Los Angeles or San Francisco for a business meeting. No one thinks much about it but California rules are "real clear". If you work in California for a day, by California law, you have to file a California income tax return even if paid from Canada.


For instance, every professional athlete who plays in Candlestick Park, or Dodger Stadium has to file a California state income tax return. In fact some professional athletes have to file as many as 20 state tax returns. Just as a bus or truck has to have a permit to drive through the state, ANYONE WORKING IN CALIFORNIA HAS TO FILE A CALIFORNIA STATE RETURN (including the bus or truck driver).


If you win money at a California race track, you have to file a California State tax return. If you go to California for a day to negotiate a deal and your Canadian company pays you for the three days you are there, you are required to file a California state tax return.


In fact, because California has access to all Federal Tax files, California has access to all Revenue Canada information. California is presently running their tests on over 200,000,000 IRS files looking for California addresses and other items in the Federal files.


We have had clients here from North Vancouver, Washington, Florida, Arizona and Nevada who have been hit. I understand that even as we speak, the California state tax authorities are going through mobile home parks on the border of Arizona and California (places like Big River, CA). They are catching Canadians with their winter homes.


The U.S. / CANADA Income Tax Treaty DOES NOT APPLY to California state tax. For instance, even though most Canadian RRSP earnings are tax exempt from Federal U.S. tax under ARTICLE XXIX.5 of the treaty, California will tax the earnings within a Canadian RRSP and apply heavy penalties for failure to report.


California has stated in a press release that they expect to find 500,000 individuals who owe tax to California under their rules for 1993 alone. California expects to raise $680,000,000 in tax, penalties and interest.



Bruce Cohen's article on page 22 of the Friday, April 7, 95 edition the Financial Post has also made a point about "just how hard" the $100,000 exemption is to calculate and implement on the various parts of the return.


It takes an hour longer for an existing client (with all the information already in our computer system) to look after one item. It takes hours to bring a new client into line with accumulated CNIL amounts and past claims for capital gains and losses.


Clients wishing to claim the $100,000 "top up" exemption should expect to pay their tax professional a lot more this year. However, don't think that the professional is making a mint this year. There is only so much time. We are always busy in April and many are just not taking on any more clients because of the T664. As a consequence, for the tax professional, it is no more money, and the net result will be a one year drop in their client base as people die and move away.


The United States has a simple form to file in cases like this. It is called a 4868 and we will be filing a lot of them.


I am sending a copy of that form with this newsletter. If you are a U.S. citizen or have a U.S. tax return to file, it is due on April 17th unless you have been physically out of the U.S. from February 16th to April 17th, 1995. If you were out of the U.S. for that period of time, you have an automatic extension to June 15, 1995. BUT, if you go down to Blaine for gas, you were in the U.S. and do not qualify for that automatic extension (remember, the penalties are large and your licence plate number was put in that U.S. government computer when you went across the border at Blaine.


If you have been to the U.S. (or are not sure), file the enclosed form 4868 and you have until August 15, 1995.


Mail the extension request to: Internal Revenue Service, Office of International Operations, Philadelphia, PA, USA, 19255.

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