US citizen in for short period -

I have a rather complex situation. I am a US citizen working in Canada under a 3 year work permit. 
 
First, the company transferred me (and my non working wife) to Canada in the beginning of 2007. The process involved creating a separate Canadian employee account since the division I was working for was a separate U S owned division. This meant that I had to severe all my ties to my existing 401k since I had no US income. When I transferred to Canada, I was told I could keep my Social Security and Medicare from the States and not contribute to the CPP; no problem but, I could not continue to contribute to my 401k since it is not recognized as a retirement plan in Canada After investigating the company Defined Contribution RSP and personal RRSP's,   I am still without a place to put my retirement contributions (including any company match of funds). Am I am missing something?  There doesn't appear to be any advantage to these plans since I would need to claim the income when I return to the US and pay up to 25% to close out my account if I emptied it earlier than retirement 
age. (I do not plan on retiring in Canada).  My income is about $150K Cdn (plus $50K Cdn bonus which is taxed at a capital gain rate). With no options to shelter my money I am subject to a substantial tax burden. 
 
Are there any tax shelters or deductions available to US citizens working as temporary residents in Canada?
 
Second, I enrolled in the company stock purchase plan (after tax purchase) when I arrived in Canada. This plan was eliminated when our US entity bought out the minority share holders.
The good news was a nice return on my stock purchases, the bad news is that I may have to give up every dollar made to capital gains.  As I understand it, US citizens must submit returns where ever they live but having to pay capital gains to both CA and the US seems a bit much.  My initial calculations indicate I may owe the US about $15K US, and I haven't even figured out what my hit will be from Canada.
 
Do I actually have to pay capital gains to both? What is the capital gains tax rate assuming I earned $200K Cdn in 2007 and my net gain from the sale of the stock was $30Cdn.
 
Last question, I sold my house in NY when I moved to Canada and purchased a house in Oakville with intent to honor my 3 year stay. But, as situations have it, the company may want me to relocate back to the states (So. Carolina) in a couple of months. This will mean that I will not satisfy the 2 year residency requirement for avoiding capital gains on my house.
Are there exceptions to the 2 year rule? And will I have to pay capital gains on the profit from my Canadian house to the US?
 
Thanks for entertaining these questions and any advice given.
-----------------
david ingram replies:

1.        In your position, it is a normal situation for your company to apply tax equalization to your in come.  that means we calculate the tax in Canada and the tax you would have paid in the US with the same savings potential, etc., and the company makes up the difference plus the tax on the difference pus the tax on the difference, etc.

2.        The Canadian company defined contribution is what you should have participated in.  You would have needed to file US form 8891 to deal with it. As part of the equalization, the company should pay you their share of what they were putting in your 401(K).

When you put money into a Canadian RRSP at your income level, you save tax at about 44%.  After you returned to the US, Canada would have withheld 25% as their tax.  That is a saving of 19%.  You do not pay tax to the US on the total withdrawal.  You pay tax to the US on the internal earnings only as defined on form 8891 (see it at www.irs.gov).

3.        Canada taxes 50% of capital gains at your marginal tax rate.  The most that would work out to is about 22/23% of whatever the gain is at your income level.  The US taxes short term gains at your marginal rate and long term gains at a reduced capital gains rate.  In both cases, you can claim the tax paid to Canada as a foreign tax credit on US form 1116.                   

4.        If you short sell the house (less than 24 months) because of a job transfer, you get to prorate the tax free capital gains at $10,416.67 per month.  If you and your wife only owned the house for 10 months, you could claim $104,166.70 each tax free on the sale of the Canadian house.

I suggest that your returns should likely be sent here for preparation.  If you have prepared them in some manner, they should likely be sent here to be checked.

goto www.centa.com and read

1.        The November 1995 newsletter in the top left hand box, and 

2.        the US/Canada Taxation section in the second box down on the right hand side for information about what you have to do as a US citizen living in Canada.

Make absolute sure that you file your TDF 90-22.1 forms if you have more than $10,000 combined in your Canadian accounts.
----------------

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???

------------------------------
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.
--
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?


-----------------------------------------

david ingram replies;

This would be a great question for the Sunday morning radio program on
CKBD 600AM  from 9:00 AM to 10:30 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?
----------------------------------------------------------

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.
---------------------------------------

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 you are in the lower mainland,
this will be of interest

Every Thursday at 12 noon and 7 PM, Fred
Snyder of Dundeee Wealth Management presents free Financial Seminars for his clients, potential clients and
anyone who phones and asks to attend.


THERE is NO CHARGE!  (I used to charge up to $999.00 for
essentially the same thing)

AND - NO ONE'S ARM IS TWISTED TO BUY SOMETHING.

They are presented at the Dundee Boardroom (holds about 30 people max)

1764 West 7th
Vancouver, BC

phone (604) 731-8900 - ask for Freda to register for free.

These are genuine educational seminars dealing with everything from how
to buy a house to making your mortgage tax deductible to buying an RRSP
to alternatives to RRSP accounts to estate planning.  What started as
13 separate seminars has now evolved into 23 separate topics.


IT IS NOT UNUSUAL FOR PEOPLE TO COME TO ALL OF THEM. 

ONE LADY CAME TO 53 separate seminars and her husband came to about 20
with her.

If you have a financial consultant, bring them.  People have brought
their bankers and life insurance agents with them.

Take your spouse, your best friend, your son, your daughter, your
mother or your worst enemy But do phone 604-731-8900

Fred Snyder  also is the
host of ITS YOUR MONEY every Sunday morning on CKBD 600AM  (600
on AM
dial)  from 9:00 to 10:30.  This is a phone in financial show which I
appear as a guest on most Sundays (when I get up).  (Originally I
was the co-host but the program is really devoted to BC finances
because of BC Securities Legislation and my practice is world wide.) 
You can listen to 4 weeks back at www.600am.com and listen to the
program live around the world every Sunday morning at the same spot. 
We have taken calls from around the world.  In one case, a lady phoned
from Florida, got her answer and then asked if I was the David ingram
she knew in Regina back in 1959.  Small world as they say.


Call (604) 280-0600 with your
question on Sunday Morning.