April 1999 CEN-TAPEDE - US Residents Will be Able to Deal with RRSP Accounts, Wrong or Misleading Answers on Radio, RRSP Relief

April 1999

Newsletter of: the CEN-TA Group

email to: [email protected]





There has been a major problem for U.S. residents with Canadian
mutual funds or securities bought through a Canadian dealer even when
the account was opened while the U.S. (presently) resident was a
resident of Canada.

The IDA (Investment Dealers Association of Canada) has been
working assiduously to get the situation changed and it seems that they
have had some success. In a Feb 1, 1999 Press Release. Greg Clarke,
senior vice president of the IDA announced that some relief was in
sight for the US resident owners of Canadian RRSP accounts.

John Mountain vice president of Regulation for the IDA announced
that a related dispute involving mutual funds looked like it would be

The restrictions came to light after the SEC's crackdown to root out
Canadian based cross border stock and mutual fund scams. The
$22,000,000 Carter-Ward mutual fund fiasco was a prime example.
Decades old rules were "suddenly" enforced throwing panic into
Canadian dealers from coast to coast but mostly in Vancouver. Under
these SEC rules, foreign (Canadian or English or French or
German) brokers cannot legally manage money for expatriates. This
included RRSP accounts with mutual funds or securities included.

That situation is about to change . It appears that a magic date has been
decided on for RRSP accounts but that is all for the moment.

Up until May 28, 1999 it is still SERIOUSLY illegal for a Canadian
mutual fund or securities salesperson to deal with a U.S. resident with
regard to the sale of mutual funds or securities through a Canadian
broker or mutual fund representative including a bank, trust company
or credit union.

HISTORY - or Why.

If a Canadian moved to the United States or a U.S. citizen moves back
to the states and they have a Canadian account containing securities, it
has been a dog's breakfast to deal with.

The two main reasons:

Under Canadian provincial securities law, it is illegal for a B.C. broker
to sell securities or mutual funds to a non-resident of the province that
licensed the representative.

Under U.S. securities law, it is illegal for a person who does not have a
U.S. licence to sell to someone who is a resident of the United States.
Thus we had Arizona going after a Vancouver broker for selling
securities to Canadians (and the odd American) living in Arizona.
This legislation is so strong that it even applies to snowbirds. - Under
U.S. securities law, it is actually an illegal act for a Canadian
snowbird (with a self-directed RRSP for instance) to phone his
dealer, bank or mutual fund representative in Vancouver or
Toronto and move some shares around.

It is not illegal for the snowbird to phone his or her broker in Canada.
It is a violation of the U.S. securities law for the Canadian
representative to deal with the situation. At least one Canadian broker
has paid out over $3,000,000 in legal fees fighting the authorities in
Arizona over their actions in this situation. Another senior securities
person in Vancouver told me that his firm has paid out over $5,000.000
to get his company registered in just four jurisdictions in the U.S.

The above situation still applies for non-RRSP accounts. If you are
living in the United states and you have used a Canadian address so
that your old favourite stockbroker can look after your account (and he
or she knows it) be aware that your broker is willingly setting his
employer up for serious ramifications. Fines could be in the
$3,000,000 range.

Unfortunately, all too many brokers are operating accounts this way,
leaving both their client and broker in danger. For instance, if
something went wrong with the investment and you wanted to sue the
brokerage company, and broker (think Bre-X, Eron Mortgage,
Magellan Properties, Waverly Properties, Principal Trust, etc,
etc.) your participation in a fraudulent transaction to circumvent
securities legislation in two countries, a state and a province will not
put you in a sympathetic position with the authorities or the courts.

If you leave Canada, it is easy enough to move your regular account
south and that is certainly my recommendation. However, RRSP
accounts were and are a problem.

1. RRSP's are required to keep 80% Canadian content and it is un-
reasonable to expect a broker in St Louis, or Des Moines, or
Pocatello, or Sacramento or Raleigh, or Chicago, or Mobile or Coos
Bay (if there is one) to understand or follow Canadian securities for the
one or two Canadian RRSP accounts that have found their way to their

2. If you cash it out, you have lost an immediate 25% of your
invested capital because of the Canadian tax on the account. You are
guaranteed that whatever you do with the money from your RRSP
in the U.S. will start off with 75% less to start with.

3. You cannot roll your RRSP into an IRA so any earnings in the
future become taxable as earned and you lose the deferred taxation
part of an RRSP.

4. By law, Canadian RRSP pension accounts must be managed by
a Canadian broker.

5. Many company pension plans require departing employees to
transfer their pension accounts into a "locked in" RRSP.

As a consequence, many individuals who might have wanted to switch
their portfolios from cash to securities in the recent run-up were
prevented from doing so by the refusal of their brokers to change
anything while their client was a resident of the United States.

The IDA has estimated that there are at least 20,000 RRSP and RRIF
holders living in the USA. This figure has got to be low. I can likely
list 300 from my own files alone. The other problem of course is that
the US requires that you notify the Treasury Department in Detroit
each year on a TDF-90 and it is necessary to report the INTERNAL
earnings of the RRSP to the IRS each year on your US income tax
return. (For an example write or fax back and we will send you a copy
of our Oct, 1995 CEN-TAPEDE which


Last month I mentioned hearing a guest on an open line radio show
answer three out of four calls in a manner which I did not consider
complete. The guest called me to answer my criticism and he has my
sympathy. While trying to answer questions, he had a producer
making hand motions to "hurry up".

My answer to the guest was that he should just leave the studio and not
bother answering anything else. It is a hard decision, but no radio or
television producer is likely to have any idea of when an answer is
right or complete. (The exception, of course, is Peter Helm, my
ROGERS producer who has an economics degree from UBC and
regularly makes astute financial comments to me and my guests.)

When answering an open line telephone call, it is particularly important
to recognize the other people with similar problems who are listening.
If you complete an answer to the caller and you know that others may
misinterpret the answer, If you are the guest, YOU MUST continue to
answer the other side of the question. Failure to do so can lead
someone with a similar but different problem to take the wrong course
of action.

An extreme but possible example could be like this. An eighty year old
woman phones and tells you that she has a cabin at Birch Bay and she
rents it out once in a while. You ask a couple of questions and
determine that she is a U.S. citizen who lives in Canada, and her sole
income is Old age pension and guaranteed income supplement from the
Canadian Government and that she only gets about $400 US as the
gross rent from renting the cabin for a couple of weeks and that by the
time she pays her expenses, there is no profit. You can tell her that she
does not need to file a tax return period because she is not taxable in
either country. We would, in fact be wasting government tax dollars
by filing tax returns and causing the governments extra paperwork. Of
course, if the lady wanted her $50.00 tax credit and her GST credit,
she has to file a Canadian income tax return.

The problem is that another Canadian 80 year old lady or man might be
listening and hear the answer and not file a U.S. return. However,
because he or she is not a resident or citizen of the U.S. they MUST
file a U.S. return. Failure to do so could result in a fine of $10,000
plus 30% of the gross rent with no deduction for expenses. You
have to answer both questions, even though only one was asked on the

You are going to laugh but I saw the $10,000 fine administered against
a 105 year old lady with money in the Royal Bank in Edgemont
Village in North Vancouver. (This U.S. citizen living in Canada
failed to report her foreign bank accounts to the U.S. Treasury on a
TDF-90 - To give them credit, Jacqueline Pelt at Treasury canceled the
penalty when I told her how old the taxpayer was.)

You may have missed it but ROGERS COMMUNITY TELEVISION (cable 4)
has been presenting the "INGRAM" show live from 9 AM to 10 AM, Monday
to Friday and rebroadcasting it each day at 2 PM and 11 PM. In July 1998,
Informational Talk Shows out of approximately 1400 entries in North America

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