April 1996 CEN-TAPEDE - Difference between Canadian and US Tax on Capital Assets

April 1996


david ingram's US/Canadian Newsletter        Page 163-166


$218,000 U.S. Tax Bill Cancelled Page 163

$19,000 U.S. F I C A Bill Not Cancelled Page 163

$2,700,000 Tax (My own) bill still there Page 164






The October and November 95 issues of the CEN-TAPEDE both contained copies of assessments issued by the U.S. government against U.S. citizens who were Canadian Residents and had not prepared their U.S. income tax returns because their incomes were being earned in CANADA. Yes, as I am fond of reminding people, the U.S. has the right to tax its citizens wherever they live in the world.


In M L's case, the first bill he received was for $194,000 U.S. and the charges went back to 1986, 1987 and 1988. The U.S. had received information that he had made several stock market sales in those years and taxed him on the gross receipts which they could prove because of information the IRS had received from Merrill Lynch. The "Arbitrary Assessment" issued eventually reached $218,000 with interest and penalties and although we started working on it in February, 1995, M L did not receive his answer until March, 1995. The final bill was reduced to $144 U.S. from $218,000.


It was extremely difficult to recreate. Numerous phone calls and three specific letters to Merrill Lynch to try and get details of his PURCHASES, did not get the courtesy of a single reply. In 31 years in this business, I have never seen such disdain for a client who once had $250,000 U.S. in their account, than was evidenced by Merrill Lynch's offices' complete failure to respond at all.


M L had destroyed all his records. After all, he had been told by a Canadian accountant that he did not have to file a U.S. return because he was living in Canada. And a U.S. accountant told him there was no sense paying to have those tax returns done because he had lost $30,000 and "now that he had moved to Canada", he couldn't use the losses against anything.


Both the Canadian and the American accountants failed to recognize the fact that he could have carried the losses forward in Canada by filing the losses on his Canadian return and that the IRS might come along with a GROSS INCOME ASSESSMENT NINE YEARS later "because they can".


$18,000 U.S. F I C A (social security) Bill Cancelled


The second client received a bill for $18,000 U.S. for FICA (social security) payments on CANADIAN earnings on which he had paid Canada Pension Plan premiums. Article V of the CANADA / US Social Security agreement exempts the CANADIAN Earnings from U.S. social security when CPP has been paid on CANADIAN Earnings. In addition Article XXIX.4 of the U.S. / Canada Tax Convention exempts the Canadian Earnings when the earnings have been exempted from U.S. income tax under the $70,000 "out of country" earned income exemption provided under Revenue Code 911.


This bill which was received in March 1995 was for the income tax years 1988 and 1989, (six and seven years previous). In this case, a close perusal of the clients' tax returns (only prompted by the $18,000 bill) resulted in my making amendments to 1987, 88, 89, 90 and 91 because of a legislative change which had taken place on June 30th, 1993.


The result? Not only did the client NOT OWE the $18,000, he and his wife received a refund of over $8,000 U.S. for the years 1987, 99, 89, 90 and 91.


In another case, because of a change to the U.S. / Canadian Tax Convention, we are getting an 84 year old client $42,000 U.S. Estate Tax back. This tax was paid on his deceased wife's U.S. estate when she died in 1994. The change to the Tax Convention which came into effect on January 1, 1996 was RETROACTIVE TO NOV 10, 1988. Interestingly enough, the American Accountant who originally prepared the return has not contacted our client with "the good news".




My own tale of woe is not likely to have such a happy ending. Some of you will remember when my hobby was running up to 105 income tax and real estate offices operating across Canada and down into California.


I assure you and the rest of the world that I did no day to day accounting and at that time, did not actively work in tax preparation. I certainly had no knowledge of corporate tax situations and was completely unaware of "shareholder's appropriation" and other technical shareholder type tax penalties. In fact we paid out some $400,000 those years to Chartered Accountants and Lawyers to look after all these details. In the trial, the tax department auditors admitted that David Ingram had not written a cheque and had not actually received any money. (It was sort of like when all the Directors of Canadian Airlines resigned in August 1994 because they could be held liable for two months wages for all the employees if Canadian Airlines went down. Those directors had better advice than I did.)


At that time, I was the world's living expert on child tax credits, baby sitting expenses, and other "family" type tax return problems. I was the "Colonel Saunders" of income tax preparation in Canada and used to live on talk shows talking about income tax for the family.


By contrast, I now have to ask someone how much can be claimed for baby sitting, but can warn you of potential shareholder problems in 43 states and three or four countries. This is the only advantage I have received from the "tax case".


The long and short of it is that I received a bill for some $3,000,000 for all sorts of Shareholder type appropriations for 1979, 1980 and 1981. When trying to arrive at their figure, (which I did and still consider predatory, rather than logical), the Revenue Canada auditors sent me no less than three different versions of assessments and were still arguing among themselves during the Tax Court of Canada trial which took place in 1990.


Judge Mogen took 2 years to render a judgment. His judgment gave me approximately 1/3 of the bill (which meant that Revenue Canada was wrong at least that much) but left me with a $2,000,000 + bill.


Rather than face me in another court case, Elizabeth Junkin of the Justice Department chose to try and have the case dismissed on a technicality and a Prothonotary Judge has ruled in her favour for the second time.


I really don't think I want to continue and would be interested in any feed back you might have. i.e. Should I appeal again and spend another ten years fighting a 1979, 1980 and 1981 tax bill, or should I quietly go bankrupt for the tax bill (which I do not believe for a minute that I technically owe and couldn't pay anyway) and get on with my life. It is too debilitating.


To put it into perspective, this all happened before I met my wife with whom I have an "almost thirteen year old bagpipe player, a nine year old paper folder and a 4 year old who can run a computer as well as I can."


However, my challenge to Ms Junkin is: "instead of hiding behind your court order to set the case aside, stand up like a man and set a court date as I have been asking for the last 10 months while you tried (and did) to win on your technical argument."



March 20, 1996 was the deadline for an easy renewal of your "Green Card" if you are a resident alien of the United States and have a card which is a real "green card" and does not have your picture on it (likely issued prior to 1979). All cards issued after 1978 have a back which is machine readable. Older cards do not and had to be renewed prior to March 20, 1996.


If your card was not renewed on time, "YOU CAN STILL DO IT". You have to present yourself at a Port of Entry which could be at the Vancouver Airport (second floor), Point Roberts, Douglas, Huntington, Sumas, Niagara Falls or Pembina, North Dakota.


The INS Officer will snip off the right hand corner of your "old" green card and issue an I-90 form. You can then proceed to the U.S. and wait for a new Resident Alien card to arrive. That is the last time that your old card can be used to enter the U.S. The next trip through, the entire card will be taken away.


The bad part is that if you do leave the U.S. and have to re-enter and have not yet received your new card, it will cost you $95.00 per entry "each and every time".




When you do this, be sure and have "proof of residence" documentation. Phone bills, car registration, rent receipts, property tax notices, and "NO B.C. or Ontario, or New Brunswick or any other province's" health card.




Nothing scares me more than seeing people lining up to buy "spaces in the air" as just happened in downtown Vancouver. NOBODY SHOULD BUY "PIE IN THE SKY". The "ELECTRA" condominiums are as good an example as any. Sold out in a couple of days three years ago, resale units are going at distress prices. A typical example had my client pay $167,120.45 (including GST and legal) to buy one of these "special" downtown units built in the old B C Hydro building at Nelson and Burrard. When it was finally finished in 1995, he sold it for a net of $143,735.25 and recorded a loss of $23,385 when he expected to "flip it" for significant profits.


Other quick sale buildings such as 1188 Quebec sold out quickly and some apartments like #1302 sold for $353,000 in 1992 and $266,355 (before costs of sale) in 1994. #1404 sold for $289,000 plus costs in 1992 and sold for $205,000 in 1994. My December, 92 prediction of price drops of 20 to 30% was not out by much. In MY opinion, there is no logical reason to think that any other new building will do any better! WATCH YOUR STEP IF YOU ARE INTENDING TO "FLIP IT!"


You see, I have been on both sides of the fence. Back in 1987, Royal Trust (remember them?) could not give my partner and I $4,000,000 fast enough. Why? We were going to build a 22 suite (with offices downstairs) luxury condominium project in Ottawa. They were expected to sell for $260,000 each and were going to satisfy a "pent-up" desire for this type of accommodation eight blocks from Parliament Hill because no new construction had taken place for five years and there was no product available and we were only building 22 suites.


Well, we had a construction strike and interest rates fooled around a bit but when the Mulroney Conservatives were elected with their massive majority in 1988, we "really had it made".


But it didn't work that way. Ontario where the streets had liquid gold running in the gutters in the fall of 1988, had the taps turned off on April 15th, 1989, seven years ago as I write this. On that day, we had four floors of steel up and could see the handwriting on the wall as the price of real estate plunged 40% in one day in Ontario.


Ontario went from people camping out in 20 degree below zero weather so that they could buy a lot at an auction, to 40 to 50% of the properties in the province worth less than the mortgage on them. That is why Olympia and York, Royal Trust, Cadillac Fairview, Bramalea and another two dozen major companies ended up in financial distress or did not survive.


The same factors are present here. There is no reason whatsoever for people to line up to buy a piece of air on Georgia when there are some 6,000 equivalent condominiums for sale within blocks. However, $700,000 worth of advertising does create a lot of interest.


I spend a lot of time talking to people about their finances. There are a lot of worried people out there. One of the smartest men I know, Sam Allman, who wrote the book "Buy it By the Acre, Sell it by the Foot", watched his project on Vancouver Island go down the tube overnight when a promised mortgage from a mortgage broker failed to materialize.


And Sam is not alone. Developers are going broke all over the province. They are going broke in Whistler. They are going broke in Prince George. They are going broke in Nanaimo. They are going broke in Victoria. They are jumping out of apple trees in the Okanagan.


When developers can't get money from the lenders, it is because the lenders have perceived something. We have had foreclosures go from 5 to 8 a week last year to as many as forty a week today.


We have a massive number of people who took their money out of an RRSP and put 5% down on something because interest rates were low and they had two jobs and no kids, etc. Now they have one job, two kids and the interest rate has gone up 1%. 1% interest increase means that they have to pay $2,000 more interest on a $200,000 mortgage. To pay $2,000 more on the mortgage, the family has to make $4,000 more, and pay $2,000 tax, UIC and CPP to have $2,000 left. In addition, they need $200 a month more to pay back their own RRSP from which they borrowed their money or have the amount added to their income which increases their tax bill which they can't pay either.


I estimate that there are perhaps 5,000 families ready to walk from their properties because when they call up their Realtor to sell the place, they find out that the place they paid $225,000 for is now selling for $200,000 and after a $10,165 (with GST) real estate commission, they will only be $15,000 in the hole.


And it is a myth that Vancouver has "gold plated balls" as it were. San Francisco is every bit a great place to live on the world stage. Their prices are 20% less than 5 years ago. Honolulu is 40% less than 5 years ago. Beverly Hills is 40% less than 5 years ago. Telecommuting means that a Province Newspaper Columnist lives in Lunenburg, Nova Scotia and I have clients living in the Chilcotin who work by computer for a company in Florida. I have clients living in California and Hawaii who work in Vancouver and clients in Florida who work in Toronto. In the last few hours, I have received email messages from Kuwait, the United Arab Emirate, Toronto, Edmonton, Florida, Hawaii and another dozen places. Who needs Vancouver?


This does not mean that you should sell your house and go to cash. If I am wrong and the values do go up again, it will cost you far more to get back in than your potential savings. However, if you are pressed to the max and everything is suffering because of your house, consider buying yourself a much cheaper "retirement condominium" for when the kids are gone, rent it out in the meantime and find yourself a cheaper place to rent while you need more room.

CEN-TA Cross Border Services - Tax, Visas, Immigration