MORTGAGE INTEREST AS A DEDUCTION IN CANADA - Free Seminar with Fred Snyder David Ingram Ozzie Jurock expert income tax help

Free Canadian Mortgage Interest as a deduction seminar on February 11, 2010.  5 PM at the Langley events Centre at  78th  Avenue and 200th Street (just south of Walnut Grove off Highway one.) The Speakers are myself on how to make a Canadian Mortgage tax deductible, Ozzie Jurock on Real Estate Trends, Own Dolan on Canadian Estates, Martin Murenbeeld, economist and Fred Snyder on written Financial Plans.  Phone Fred's office at (604) 731-8900 to register free of charge.  Bring you r financial advisor, bank manager or mortgage broker with you.

xxxxxxxx wrote:

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DAVID INGRAM REPLIES:

Until Jan 1, 2008 a resident of the USA receiving interest from Canada owed the Canadian Government 10% tax on the interest received under Article 11 of the US Canada Income Tax Convention.

Your question implies in one place that you paid 20% tax for 2008. If so, this is incorrect and the CRA should refund the money to you if it was from an arm's length transaction, i.e. a Bank or Trust Company, etc.  If it was paid to you by a brother or sister or other non-arm's length person, you would still owe tax on a reducing basis as follows from the CRA website:
. 
Remember, this is effective as of Jan 1, 2008 - p.
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The Fifth Protocol

The Protocol signed on September 21, 2007 proposes to change and update many of the provisions of the existing Canada-U.S. Income Tax Convention. This fifth Protocol will enter into force once it is made law ("ratified") by both the Canadian and United States governments (or on January 1, 2008, if it is ratified in 2007). The Protocol is accompanied by two exchanges of diplomatic notes which set out many of the more technical aspects.

Below are brief explanations of several key elements of the Protocol:

Elimination of "withholding tax" on interest

Who it affects: Any resident of Canada or the United States who pays interest to a person in the other country.

Current rule: If interest is paid across the Canada-U.S. border, the tax treaty generally allows the payer's home country (the "source country") to tax that interest. The tax, at up to a 10% tax rate, is collected by requiring the payer to withhold and remit a portion of the interest payment - hence the term "withholding tax".

New rule: The source country cannot tax cross-border interest.

Example: A resident of Canada who borrows money from a U.S. lender will no longer have to withhold and remit Canadian tax on the interest payments.

Significance: Reduces borrowing costs; makes cross-border investment more efficient.

Application: Applies to interest paid between unrelated (arm's length) persons - e.g. a bank and its customer - as of the second month after the Protocol enters into force. For interest paid between related persons - e.g. a subsidiary company and its parent company - full exemption applies as of the third year after entry into force. (For the first and second years after entry into force, the source country tax rate limit is reduced from 10% to 7% and 4%, respectively.)

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If you paid 20%, I am concluding that the 20% was  composed of tax penalty and interest which added up to about 20%

You would owe the 10% tax to the CRA for 2005, 2006, and 2007.  If that is what the  amendments are for, you owe the tax to Canada and would be able to claim a foreign tax credit on your US return by filing form 1116.

However, I also hope that you were careful to check off yes (or no if the total is under $10,000) to question 7 on schedule B to let the IRS know that you had foreign bank accounts.  The US IRS penalty for not filing schedule B if you have foreign accounts in Canada or France or Germany, etc., is now $10,000.  If the total of all accounts plus any RRSP or RRIF accounts is over $10,000 US, you must also file forms TDF 90-22.1 with the Department of the treasury under FIRPTA rules.  The penalty for failure to file form TDF 90-22.1 is $10,000 to $500,000 PLUS 5 years in jail.

I am willing to be that if you left deposit accounts in Canada, you also left an RRSP or two behind.  They require you to check off yes to question 8 on schedule B and file form 8891.  The penalty here is 35% of the amount in the RRSP plus 5% for every year it was not reported.

Make sure you get this stuff up to date.  At this point, I can say that no one we have dealt with has been penalized when they have come forward voluntarily.  However, I have seen and met a 105 year old woman who was fined $10,000, a 68 year old woman who was fined $60,000 and a 60 year old man who was fined $100,000 and spent a very real more than 6 months in jail.

This older question will help a bit as well


QUESTION:

Canadian resident US citizen owns many Canadian mutual funds, what are the filing requirements? I heard some people have recorded on their 1040 returns the same allocation as per T3; others have put the total distribution as income on Schedule B so have reported the capital gain distribution as straight income along with the return of capital. Some have suggested that Form 3520 needs to be prepared. Others have said no instead prepare Form 8621 and a QEF election should be considered. So what are you thoughts and how have you been handling this mutual fund issue???

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david ingram replies:

Treat a T3 or a T5 as a 1099-Div or 1099.  convert the figures to US dollars if in Canadian and put in the proper place on Schedules B and D.

Calculate the tax you paid to Canada and claim it as a foreign tax credit on form 1116

There is no reason to fill out a form 8621 or QEF (Qualified Electing Fund)  because the Canadian taxes will just about always wipe out any US tax by filing form 1116.

You can see Form 8621 here - http://www.irs.gov/pub/irs-pdf/f8621.pdf
 
Assuming all of your accounts total more than $10,000 US, you will then fill out forms TDF 90-22.1 for every financial account including RRSP, RRIF and RESP accounts, AND any mother or father or sister or brother's or company accounts yo may have signing authority over.  See Question 7  at bottom of Schedule B.

Form TDF 90-22.1 -  http://www.irs.gov/pub/irs-pdf/f90221.pdf-

For your RRSP, RRIF and RESP accounts you should file form 3520.  The good news is that for the RRIF and RRSP accounts you can substitute the much easier form 8891.

Form 8891 - http://www.irs.gov/pub/irs-pdf/f8891.pdf

The penalties for failure to file these forms are immense.

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This older question explains penalties:

QUESTION:

I would like to put some money away for retirement. I'm a 
U.S. citizen living in Canada for the near future, but I know 
I'll be living in the U.S. again before I retire. Should I put my money in an RRSP or an IRA?

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david ingram replies;

This would be a great question for the Sunday morning radio program on CKBD 600AM  from 9:00 AM to 11:00 AM.

The answer,though, is that you would likely be better putting after tax dollars down on your mortgage if you have one.  Other than that, you can only buy an RRSP for a tax deduction.  Of course, you then have to make sure that you fill in forms TDF 90-22.1 and 8891 as follows:

The following question deals with a US resident but you have to fill in the same forms living in Canada - failure to file them can mean big big big penalties.

TDF 90 rules here

I am a Canadian citizen and legal US resident. I've lived in Florida for 25 years and now, at 65, I'm considering taking distributions from a spousal RRSP with Royal Bank.

 

Unfortunately, income tax information I've received from different sources is terribly conflicting and, at worst, indicates that my nest egg will be gobbled up by governments. Is this something you can steer me straight on?

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david ingram replies:

If you roll the RRSP into an RRIF (Registered retirement investment Fund), The payer will have to deduct 15% non resident withholding tax under the terms of Article XVIII of the US . Canada Income Tax Convention (Treaty).

You will then report it again on form 8891 of your 1040 and there may or may not be US tax to pay.  If your income is high enough that you are in a federal 28% tax rate, there 'will' be tax to pay on the RRIF. 


You will claim the 15% tax paid to Canada on US form 1116.
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Now, you have been supposed to report the existence of that account to the Department of the Treasury in Detroit on form TDF 90-22.1 since 1989 when that law was passed and shown in bulletin 89-45.  Failure to report can be a penalty of a minimum of $10,000 to a maximum of $500,000 PLUS up to 5 years in jail for each year you did not report it.  See the bottom question on schedule B of your 1040 where your foreign trust requires the preparing and filing of a 3520.

Thankfully, you do NOT have to do a 3520.  the 8891 takes it place and is much easier.

The penalty for not also reporting the RRSP and its internal earnings to the IRS (it was the Dept of Treasury above)  is 35% of the principal plus 5% for each year it was not reported since 1989 when the reporting rules started.  The form 8891 is an exemption for paying the tax on those internal earnings.

See form 8891 at:  http://www.irs.gov/pub/irs-pdf/f8891.pdf

RELIEF

Although I know of over 1,000 people who have paid $10,000 fines for not filing form TDF 90-22.1, I (at this time) do not know personally of a single individual who has been fined under the 8891 / 3520 rules.  I also have NEVER seen a person fined for filing the TDF 90-22.1 forms late and voluntarily.

In my opinion, you should file the TDF 90-22.1 forms retroactively for six years.to the Department of the Treasury.

See Form TDF 90-22.1 at http://www.irs.gov/pub/irs-pdf/f90221.pdf Note the penalty of up to $500,000 plus five years in jail for failure to file.  The minimum fine is now $10,000.
 
You should file retroactive 8891 forms with a 1040X to the IRS for the same years.  Note that you are the BENEFICIARY so follow the Beneficiary rules.  The 8891 form is actually only 3 years old.  Before that, you just wrote out the information on a free form page but it is a convenient form to use retroactively.

Hope this helps and we would be glad to assist if needed.

 

If your question was not answered fully or you wish to go further, I am available for individual consultations by phone or email or in person for $450 per professional hour. 

Please also note that we prepare Canadian, US, Australian, UK and New Zealand returns on a mail in, email, fax, snail mail or couriered basis. At any time, our clients are in 40 countries or more.  They have every occupation from nuclear Submarine captains to FedEx pilots to Major Bank officers to Politicians, Diplomats and border patrol officers.  My favourite, however, is a penguin catcher in Antarctica among others there..

If you 'really' only have a single question requiring a 'couple' of minutes, you can try phoning me for free as part of the following.

- For a quick free question

Most Wednesday evenings, from 6 to 9 PM Vancouver (Pacific - LA, Seattle) time, I interview others and answer short US Canada, Great Britain, Spain, Indonesia,  Mexico, etc.  tax and immigration questions.  GOTO www.david-ingram.com - the North American phone number is (866) 980-0499 - the local number in the lower mainland is (604) 980-0321.

OR

You might try calling Fred Snyder's own radio program for an answer. 

Fred Snyder's  "IT'S YOUR MONEY" radio show. on CISL,  650 AM on the dial in Vancouver from 9 to 11:00 AM every Sunday  (604) 280-0650 or (877) 280-0650 - You can listen live from anywhere in the world at www.am650radio.com from anywhere in the world. click on the button in the top left hand corner.-
- You might try calling Fred Snyder's weekly radio programs for an answer. 

IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.