March 1994 CEN-TAPEDE - Retroactive US Citizenship, Liability for US Tax, Exemption from US Filing Requirements, IRS catching up

March 1994



david ingram's US/Canadian Newsletter



R E T R O A C T I V E  C H A N G E S

or "Something else I didn't know"


Today is March 15, 1994 and I have just received a four page fax from the IRS Attache's office in Ottawa. This 4 page fax was sent as a result of a request I submitted after a West Vancouver US citizen had phoned the IRS Attache at my suggestion. This Fax changes the rules RETROACTIVELY for those people who thought they had lost their US citizenship and have now "got it back".


This gentleman became a Canadian several years ago and at that time, becoming a Canadian was considered an "expatriating act" and he lost his US citizenship (see my October Newsletter). The US laws and interpretations of the old laws have made it possible for persons in this position to get back their US citizenship. He now wanted to know how many years of back taxes he had to file. Well, up until December, 1992, he had to file them all. In December, 1992 the rules changed retroactively.


There are three kinds of situations here. In the first, the US government found out about the expatriating act (i.e. taking out Canadian citizenship) and actually issued a "Certificate of Loss of Nationality" which was actually served on the ex US citizen. In the second situation, the US government did not learn of the expatriating act, and the person was never issued a Certificate of Loss of Nationality.


In the third case, someone has found out that they are a US citizen because of birth. i.e. They were always a US citizen, but did not really "know it".


All have now applied for a US passport and the subject of Income Tax has come up.


In case one, to quote, "Individuals who lost their United States citizenship and had it retroactively restored will not be held liable for federal income taxes as United States citizens between the date they lost their United States citizenship and the beginning of the taxable year when their citizenship was (or is) restored, and will not be held liable for federal gift taxes as United States citizens between the dates they lost their United States citizenship and January 1 of the calendar year when their citizenship was (or is) restored.


In cases two and three, the person is and always was a US citizen and is liable for US federal income tax returns and gift tax returns "all the way back" to 1967 although for administrative purposes, the IRS is accepting the returns from 1987 forward. To make this easier, they have also extended the $70,000 earned income exemption back to 1987.


But All US citizens out there, get your past tax returns in BEFORE the IRS catches up. It is my opinion that along with making it easier to comply, there will come heavier and darker penalties for those who are "caught" retroactively.






In the February CEN-TAPEDE, I told the story of how I had personally put $9,200 too much interest on one client's return and how I had left another client's plumber's pension off another return.


The omissions seemed to be enjoyed by all who read them. Perhaps it does help to be humble once in a while.


However, we have now had two months of the 93/94 tax season and enough other errors and omissions have shown up that I think that they should be pointed out. After all, if I OR MY ASSOCIATES CAN MAKE THESE SILLY ERRORS, so can you.


A new error has surfaced with regard to Workers Compensation and welfare payments.


Up until 1992, these items were not prominently featured on the tax return and had to be plugged in on schedules like the Federal Sales Tax Credit, the Child tax Credit, or the Goods and Services Tax Credit, or transferable amounts from your spouse.


In 1992 and again in 1993, these items are being put onto the return on lines 144 to 146. In this manner, the non-taxable income increases the Net Income of the taxpayer. The income for these items is now reported from these sources on a T5007 slip.


What happened with the change from 1991 to 1992 was that otherwise competent preparers seemed to stumble with the concept. I kept on seeing people who had their returns prepared "elsewhere", coming to the office with the same problem. They had put their "spouse's" T5007 in on line 144 or 145 and then managed to claim the spouse as a full dependent.


Using this scenario, one gets back an extra $1,400 or so which one is not entitled to. It is tough explaining to someone that they should report this error and pay back the $1,400. I thought we were immune until Max Weston of our Capilano Mall office came in with an example of the same thing in our own office. One of our consultants with five year's experience did the same thing last year and Max had to tell the client that they were not going to get the same benefit this year and would owe back the tax for 1992.


What surprises me about this is that "to this date", I have not seen Revenue Canada catch a single example. "What is their computer system doing?" The reason for the T5007 was so that these figures would be in the computer and it would stop people from claiming others who were receiving welfare or worker's compensation. It isn't working.


1994 Winner as "most changed" tax returns - The Prize: a $4,400 refund.




At the same time, a change in the Indian Act snuck through "retroactively" on April 7, 1993. In 1991, Tax Free income paid to a Status Indian on a reserve was added to the tax returns. The instructions in the E-FILE manual stated that the income was to go in on line 101 for wages or line 119 for unemployment insurance. The wages were then to be deducted on line 256 leaving the person with a net income so that they could not be deducted as someone else's dependent. UIC was still taxable under this scenario.


In the meantime, Glenn Williams 92DTC6320 won his case for non taxability of UIC if it was paid because of earnings on the reserve. This was a SUPREME COURT Decision involving 1984 earnings. The INDIAN INCOME TAX REMISSION ORDER on April 7, 1993 then allowed for retroactive changing of returns for Status Indians back to 1985 to remove UIC which had been taxed because it could now be removed (along with the wages) on line 232 meaning that net income is now being reduced to zero in most cases. In addition, Bulletin IT 62 allows for tax free interest from a reservation source. Therefore, if a Status Indian keeps their money in the Bank of Montreal at Park Royal, it is free of income tax because Park Royal South is on the Squamish nation Reserve, but if they keep their money in the Royal Bank of Canada in Park Royal North, it is taxable.

At the same time, at least one Status Indian is setting up a small business in Park Royal South. That's right, no income tax. It does get a little silly, but like Monopoly, Income Tax has rules.


These retroactive changes are a killer. You will remember from the November CEN-TAPEDE, that on June 30th, 1993 the US government came out with penalty free filing for US citizens living in Canada who had failed to file their past tax returns. (Remember, a US citizen living in Canada must continue to file US returns on their Canadian income but can claim an exemption for the first $70,000 of "earned" income).


I have a US Citizen who came in to backtrack his US returns for 1987 to 1992. He owed tax and interest because when he came in, the $70,000 exemption could only be claimed back one year.


So as I suggested in that November newsletter, he was one of the ones that had to be looked at to see if it was worth refiling to get the tax and interest back. However, he was also (I assure you that this is true) married to a Status Indian who had got back her status after losing it by marrying a non-status man.


She got her status back in 1987 so we could not go back to 1985 but she has had UIC and earnings and interest from (you guessed it), the Bank of Montreal in Park Royal.


So, I now find myself refiling the wife's Canadian returns to remove UIC and interest from her net income for 1987, 88, 89, 90, 91 and 92. I am refiling his Canadian return to claim her as a full exemption for 87, 88, 89, 90, 91 and 92. I am refiling his 1987, 88, 89, and 90 US returns to claim the $70,000 exemption retroactively.


Then, when 1993 is almost finished, he shows me a letter from Worker's Compensation which meant that everything had to be changed again for 93. Instead of paying the Worker's Compensation directly to him and issuing a T5007, WCB had paid it to his employer who had paid him his full wages and issued a standard T4 slip with no footnotes. Now we had to break the amount out to put on line 144 so it would be deducted on line 250.


But what a guy my client is. He fell into almost every retroactive tax change possible except the following:


CARS OVER $24,000


The only good part is that he has not bought a class 10.1 car (worth more than $20,000 87, 88, 89 and $24,000 after Sept 89). If he had sold such a car in 87, 88, 89, 90, 91, we would be refiling for the sale of the car to claim the half/year rule which Revenue Canada has just changed retroactively.


The new application of the half/year rule to a Class 10.1 vehicle is that you are allowed to claim one half of the normal depreciation (CCA) in the year you sold it and you may change your old return retroactively back to 1987.






Are you living common-law?


Page 10 of the 1993 T1 General Income Guide defines SPOUSE as follows:


"The term spouse used throughout this guide applies to a legally married spouse and a common-law spouse. A common-law spouse is a person of the opposite sex who, at that particular time:


* was living with you in a common-law relationship and is the natural or adoptive parent (legal or otherwise) of your child; or

* was living with you in a common-law relationship and had been living with you for at least 12 continuous months (when you calculate the 12 continuous months, include any period of separation of less than 90 days).


Once either of these two situations applies, we consider you to have a common-law spouse, except for any period that you were separated for 90 days or more due to a breakdown in the relationship.




THE GOOD NEWS is that couples who have been living together for 20 years and have no children and only have one spouse with income are now able to get the tax exemption amount for the spouse. This means that this couple will get an extra $1,400 of tax refund this year. Of course the spouse who is being claimed as a dependent can now not claim a GST credit based upon his or her income only, but must include the income of their common-law spouse.


THE BAD NEWS is that common-law couples with children where both spouses have income will be paying much more tax. Because they must now count each other as a spouse, they lose the ability to claim one child (and sometimes one each) as a single or married exemption.


So if a common-law couple with a child each got together at Xmas, 92, they would have filed 1992's return as single parents and depending on their income could have received major tax breaks.


Assuming they both made $25,000 each and had one child each, they would have received about a $1,400 tax refund for their child as a married equivalent exemption and likely another $600.00 in GST credits. The total amounts to $4,000 in refunds.


Now, even if they have not "married" formally, Revenue Canada says that they must consider themselves married and they will now each lose the GST credit each and lose the married equivalent exemption. That's right, the couple owe $2,800 more income tax and receive $1,200 less in GST credits if they have lived together for 12 continuous months and are together at Dec 31, 1993.


I am beginning to feel like "God" (himself or herself) as I inform couples "VABOOM", you are married.


Note that this does not happen to same sex couples where both are working and there are children involved. Another part of the act says that the married or equivalent exemption can only be claimed once per housing unit. However, since a housing unit can be a rented room, this last regulation is almost unenforceable and most common law couples likely have been claiming two exemptions.


WATCH OUT for T4A slips.


On T4 slips, Box 14 is a total of all other figures on the T4 slip. It is easy to fall into this trap and ignore the other boxes on a T4A slip (I have done it once this year already with a favourite client). Please note that in particular, the amount in box 28 (usually extended medical benefits) should be reported on line 130 and is in "addition" to the pension income in box 16 which goes on line 115 of the return. On the other hand, sometimes Box 28 includes DPSP payments which also go on line 115 OR it could be a Wage loss replacement which goes on line 104. Some companies (like the longshoremen) send two slips.



david ingram

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