November 2001
The
CEN-TAPEDE
david ingram's US/Canadian
Newsletter
4466 Prospect Road, North
Vancouver, BC, V7N 3L7
(604) 980-0321 (10 AM - 9 PM) - Fax 980-0325
DID
YOU KNOW? -- TAXATION IS BASED UPON WHERE YOU WORK
- NOT WHERE YOU
LIVE.
Canadians performing
services in the United States, and in 43 of the states in
particular, are required to file the respective state return(s) and
a US federal 1040NR or 1040 income tax return, even if their
remuneration was paid from Canada. This applies, but is not
limited to:
* Executives
attending meetings in the US and, in particular,
California,
* Service
technicians servicing Canadian products under warranty,
* Salespeople selling
Canadian products in the US,
* Journalists (eg.
covering Canucks Hockey games, INDY races or O J Simpson
trial),
* Horse trainers, race car
mechanics
The above are exempt from tax
up to $10,000 of earned income but the taxpayer must file returns to
prove his or her exemption per Article XV. If you earned over $10,000 in the US, US
taxation depends on where the employer gets its ultimate tax
deduction for the wages paid out. If you are in the US more than 183
days, you are usually taxable on your world
income.
**
Entertainers, actors, musicians,
performers,
**
Professional athletes, race car drivers,
jockeys.
The above are exempt from tax up to $15,000 in gross earned
income (which includes travel expenses) but still have to file the
return to prove their exemption under Article XVI.
*** Transport Employees,
Truckers, Flight Attendants, Pilots if over
$15,000.
Transportation employees are exempt from tax in most cases
even if in the US for more than 183 days, if they are exercising
their regular employment.
They must, however, file the tax return to exempt the
income.
With
Chartered Accountants, US Lawyers, and US CPA's as associates, I
feel that the CEN-TA Group has the experience and the qualifications
to look after most, if not all, US / Canadian tax
problems.
Contact George Hatton, CA, Sonja Clark, CA, CPA,
LLB, D'Arcy von Schleinitz,
David Ingram, or Gail Ritter at (604)
913-9133 - Fax (604) 913-9123 for US and CANADIAN INCOME TAX
PREPARATION, ACCOUNTING and / or CONSULTATION.
Contact David Ingram for US Working
Visas.
MORTGAGE INTEREST AS A
DEDUCTION
People usually think
that Americans have it all because they can deduct their mortgage
interest and property tax on their income tax return. This is true. They can make these
deductions, but to do so, most families give up a $7,000 standard
deduction. This is fine
if your mortgage interest is over $5,000 or so, but the practical
fact is that 90% of mortgages in the US are $50,000 or less and
interest on $50,000 isn't enough to justify giving up the standard
deduction.
In addition,
Americans might have to PAY TAX ON THE PROFIT when they sell their
principal residence. If
you have lived in the house for two of the last five years, there is
a $250,000 per person exemption.
The US deductions
are not free. There is a future potential tax liability. The principal residence
house profit can be taxable even if you did not claim the
deductions.
Canadians DO
NOT PAY TAX on profits from the sale of the family home. AND, Canadians can re-arrange their
affairs to make their mortgage deductible.
HOW TO MAKE YOUR CANADIAN
MORTGAGE INTEREST DEDUCTIBLE FROM YOUR TAXABLE
INCOME
(and maybe make a
million on the side at the same time)
It is useless if not
downright dangerous to plan personal finances around "US", so let's
get on with planning for "ME". We will either be divorced or a
widow(er) or dead. We all have to plan for ourselves alone and
assume the other person will be gone. Let's also make our decisions
based upon investments that we understand as opposed to diamonds, or
jewelry, or art or antiques, or strip bonds, or or
or....
We all know that
indulging in consumer credit at high interest rates to purchase
diminishing assets is a luxury we cannot afford. Compound this fact
with the non-deductibility of that high interest and we come up with
rule number 1: INTEREST PAYMENTS THAT ARE NOT DEDUCTIBLE ARE A
NO NO!
However, before I
talk about how to make interest payments deductible, I want to point
out that nothing can be deductible if you do not have a record of
it. This whole subject makes me angry. If I start sounding like the
movie "NETWORK", do not be surprised. People tell me, "lawyers cost too much" and
then pay through the nose, because they did not consult a lawyer in
time. They tell me that doctors cost too much and
then find out just how much they do cost when they do not pay their
medical premiums. People tell me that dentists cost too much and
do not brush their teeth. But what really makes me angry is when
they say that accountants
cost too much and wander into my office or anyone else's office
with a shoe box or garbage bag or attaché case full of receipts with
three different years on them. Why don't they do a basic sort... at
least into years? It is this same person who will complain when we
charge for sorting the receipts. All we have to sell is our time; if
you use an accountant's time, expect to pay for it.
Would you like to
know the simplest way to look after your records if you are a
commission sales person, farmer, fisherman, or just plain one man or
woman business? It isn’t tying you to a computer program. TRY
THIS!
KEEPING RECEIPTS THE EASY
WAY
Take over one drawer
in a desk or vanity and get about 25 or 30 # 10 envelopes. Label
them with an expense item in your business or work: Gas, Oil, Hotels
and Motels, parking, telephone, and so on. When you get home at
night or to the office in the morning, merely empty your pocket,
purse, etc. into the relevant envelope. Around Jan 15th of the next
year, simply add up the contents of each envelope and write the
amount on the outside of the envelope. Those are your expense items
for your profit or loss statement or expense statement in either
Canada or the United States.
YOU DO NOT NEED DOUBLE ENTRY
BOOKKEEPING FOR YOUR "SIMPLE" BUSINESS.
The only
reason for double entry bookkeeping is to try and stop people from stealing from
you. If you have no employees, no one is stealing from
you.
If you are audited
by the Internal Revenue Service (IRS) or the Canada Customs and
Revenue Agency (CCRA), you have all the relevant receipts for their
query neat and totaled. Best of all, when you go to your accountant
or tax man to have your return prepared, you will not be paying $75
to $150 an hour to have someone else sort and add your receipts.
When it comes to an audit, the auditor will prefer to have the
receipts segregated in this manner.
On the subject of
why you should keep receipts, try this one on for size. We will
pretend you earn $55,000 per year and are on the edge of a 45%
marginal tax bracket. You take a business trip from Vancouver to
Victoria. It costs $100 for the ferry there and back. You spend $15
for a meal on the ferry going and $30 for a meal there and $30 for a
meal coming back (you meet a client on the ferry and buy him
dinner); total expenses $175. If you do not keep these
deductible receipts, you might just as well have torn up a
“seventy-five” dollar bill and thrown the pieces
overboard.
At least most of
that trip was deductible. Even though you spent $175, you got $75
back in the form of a tax refund or tax you did not have to pay. It
only cost you $100. However, one of the rubs in this life is that if
you just decided to take your family out to dinner and spent $70,
you would have to earn $120 and pay $50 tax to have $70 to pay for the
dinner.
This is the best
example to arrange your affairs to make them 'deductible'. WORK AT
IT! If you do not, no one else will and you will pay three to four
times as much for the same thing.
By the way, the VISA / MC / AMEX
receipt is NOT sufficient.
The reason is that people going to lunch have been known to
give the actual receipt to one person while the other person uses
his or her VISA slip as a receipt. Both the CCRA and IRS insist
on the actual receipt.
PAYING FOR A NEW CAR
Try this. I will
ignore any finance charges for the purpose of this example and
assume everyone has the ability to pay cash, (the example is far
worse with interest factored into the equation).
A commission
salesman buys a $24,000 Magic Wagon and it is used 75% of the time
for business. He is able to write off $18,000 of the purchase price
of the car and gets back at least $8,100 as a tax refund. The car
cost $16,000 or so in out of pocket cash. Or the salesman would have
to earn $30,000 and pay $14,000 tax to have $16,000 net to pay for
the car. His neighbor buys an identical car and has to earn about
$44,000 and pay $20,000 tax to have $24,000 left to pay for the car.
Add in the differences in gas, oil, insurance and interest and the cost can easily be two or
even three times more to pay for the non-deductible
car.
NOT KEEPING RECEIPTS IS
EXPENSIVE!
If you can't afford
a new car and your salesman neighbor buys a new car every year, it
is partly because the tax system is helping to pay for
it.
Although there is no
doubt that a self-employed person is entitled to certain expenses,
as is a real estate agent or even a sea captain, YOU MUST HAVE
RECEIPTS. In 79 DTC 899,
Judge Delmar Taylor made the ruling that although employees
earning commissions were permitted deductions for certain expenses
not deductible by other types of employees, it was incumbent upon
them to maintain records and documentation in support of such
expenses. When no documentary evidence was produced, the whole claim
was dismissed. It should be noted that Mr P Litvinchuk had earned
$47,700 in 1974 and claimed unvouchered expenses for "parking
meters, drinks, pay phones, etc. of $2,400". He earned $55,570 and
claimed $2,000 for 1975, and during 76, he earned $67,834 and
claimed $600. The tax office offered $600 for 74, $600 for 75 and
$300 for 76 and Mr Litvinchuk appealed to get his original claim. Judge Taylor gave him
nothing.
Many taxpayers seem
to think that there is a reasonable or an `allowable' amount of 5%,
10%, 15%, etc. that the tax office allows without receipts. NOT SO!
Although the policy of the tax office is to allow `something', they
in fact do not have to allow anything as the previous case showed.
(For more wonderful `real life' stories of tax cases, see my "The
Ultimate Year Round Tax
Book" which is also published by Hancock House). Certainly the
amounts claimed by Mr Litvinchuk were small in relation to the
earnings, but as you have seen, reasonableness does not enter into
it.
Tax Law is like Parking
Meters
Either you are
over-parked or you are not. The fact that you were going for change
for a $1,000 bill is irrelevant. You should have had a Magic Wagon
with a built in change dispenser. The difference between over
parking or speeding and income tax is that when they catch you for
speeding, they do not go back three years and give you a ticket for
every day you sped in the last three years. Income tax goes back
three, four, up to eight years on a regular basis.
And, when you get
caught for speeding, you KNOW you were breaking the law. You would never tell the
nice traffic officer, “what do you mean, I can’t speed here, I have
been speeding here EVERY DAY FOR TEN YEARS, but, when the CCRA auditor
suggests that you can’t claim something, the first thing you will
say is: “I’ve been
claiming that for ten years and EVERYONE ELSE at the office has been
claiming it as well.”
On the other hand,
also in 1979, a Sea Captain,
Paul Allen from Lunenburg, Nova Scotia, who was an employee, was
allowed 100% of his truck expenses because it was used to transport
goods to and from the boat and was used exclusively for boat related
activities. He also used his car for business trips and was allowed
20% of his car. He had an office in his home which he used to
interview prospective crew members and was allowed 10% of the
expenses of his house and last but not least, he had spent $447 for
a party at his house (he did not have receipts) and Judge J B Goetz allowed the
total amount because the party was for crew members, suppliers and
maintenance personnel.
Obviously,
the quality of the evidence, the mood of the judge, and the
circumstances change in each and every case.
I will now return to
the subject of making interest deductible. Twenty-two years ago I
was very heavily into rearranging peoples' finances to make mortgage
interest deductible. The
1979 election of Joe
Clark and the actual production of a mortgage interest
deduction form with the tax return stopped the momentum. Lately, it
has been rare for people to come in and pay their money to make
their interest deductible. And this is strange, because of course
the interest is usually three times what it was in 1977 and 1978. In
fact, in 1978, I would get thirty people a month and now I get 20 a
year. I guess that people just like paying taxes or maybe those that
would have come in and paid a $300 fee have now figured it out
themselves by reading my book or a prior edition of this newsletter.
Or, maybe they just want to pay more tax.
Our "deductible
mortgage" program typically took four to five years to implement. Joe Clark's government
was bringing the deduction in for mortgages up to $50,000 over a
four-year period. The deduction was actually included on the 1979
Income Tax Form. But Joe Clark was defeated
and so was the deduction.
The biggest part of
our mortgage interest deductibility involved purchasing some rental
real estate (you need an outside source of income). I am proud to
say that as well as making the house mortgage deductible, in most
cases the rental real estate has gone up significantly. Some of our
purchasers in Brampton realized $120,000 profits from $10,000 down
and made their mortgage deductible at the same time.
CANADA VERSUS THE UNITED
STATES
The mortgage
interest situation in Canada is different from the US. In Canada,
mortgage interest is not deductible where the mortgage was put on
the house to buy it as a principal residence or as a seasonal
cabin/chalet. On the other hand, we in Canada do not have to pay tax
on the capital gains profit when we sell our house. In the United
States, there is a standard deduction or a person may `itemize'
deductions. Itemized deductions include mortgage interest, property
taxes, medical and dental, and even income tax preparation fees.
When a mortgage is getting small (because of age or buy down), it is
possible that a family of six could have a larger standard deduction
than the mortgage interest and property taxes works out to and they
have to pay tax on the profit (capital gain) as well.
And in the States, mortgage
interest is no longer deductible on that part of a mortgage, which
exceeds the original purchase price. So after years of saying that
there has been less need of my type of service in the US, it has
become obvious that the US's changing to a `more Canadian' type of
system makes the following proposal appropriate for both
countries.
It used to be that
all other interest in the US was also deductible. Your Sears interest was
deductible, your Visa
interest was deductible, and your mother's car loan was deductible.
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