Keeping my investments in - moving to Mexico - Articles X and XI of Mexico Treaty- Dan Walkow SEABANK CAPITAL - Darell Thompson

This seems personal and you might think - :I know that person Delores from Red deer - However, I have  combined the thoughts from a couple of different emails on the same question into one.
david ingram

QUESTION:

I understand most of the things I have to do when I move to Mexico.  I will be renting out my Condo just in case I want to come back.  My other real estate investment I will have will be an empty lot.  I would like to keep my investment portfolio in Canada.  I have an international bank that is setting up an international account for me.  I am 41 and I am moving to Mexico due to health issues.  I need a sunny climate, want to be relatively close to Canada, and just love Mexico.  I lived in the US for 10 years, and moved back to Canaday 2 years ago.  I already did all the paying capital gains on the value of my stock at the time of my move and have since liquidated all but my 401K (about 200,000 in the 401K).  I will have aprox 2 Million in investments in Canada and have asked that my Investment Manager generate $3500.00 income per month.  I do not want to move my investments at this time.  I know my Canadian investment councellor (and company) can not sell me product.  I am 
really happy with the company.  I will invest aprox 100K in Mexico i
n money market and ceta's.  So the majority of my income will be generated in Canada.  And the majority of my investments will be in Canada.
Mexico (including home) $550,000K
US (401K $200,000)
Canadian property (450K)
Canadian investments (2 Million)

Also, I have not filed US income tax since I left.  I do have documents showing I left and did turn in my Green Card.  Always filed taxes in both countries when I had income in both.

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david ingram replies:

You have no more responsibility to the US other  than to pay tax to the US on the pension when it comes out of the 401(K) under article XIX of the US Mexico tax treaty (which I expect to change to paying 15% tax to the USA in the next 14 years to ,match other US Treaties).

The present US / Mexico treaty states

ARTICLE 19
Pensions, Annuities, Alimony, and Child Support
1. Subject to the provisions of Article 20 (Government Service):
a) pensions and other similar remuneration derived and beneficially owned by a resident
of a Contracting State in consideration of past employment by that individual or another
individual resident of the same Contracting State shall be taxable only in that State; and
b) social security benefits and other public pensions paid by a Contracting State to a
resident of the other Contracting State or a citizen of the United States shall be taxable only in
the first-mentioned State.
2. Annuities derived and beneficially owned by an individual resident of a Contracting State shall be
taxable only in that State. The term "annuities" as used in this paragraph means a stated sum paid
periodically at stated times during a specified number of years, under an obligation to make the
payments in return for adequate and full consideration (other than services rendered).

With regard to your investments in Canada, you are governed by Articles X and XI of the Mexico / Canada Tax Treaty.  With an FM2 visa, under the treaty, you are taxable on your world income in Mexico and will pay 10% to Canada on any interest received from Canada and 15% tax to Canada on any dividends received.  As a Non-resident of Canada, you are NOT taxable in Canada on any capital gains made from the sale of any publicly traded stock. 

You will have to file a section 216(4) return to report the rental apartment.  This also means that you need to have a Canadian Agent who will sign form NR-6 and then file NR4 for you each year.

You WILL be taxable first by Canada if and when you sell the lot or condo as a non-resident and have to file Canadian forms T2062 and T2062A.

The relative parts of the treaty are reproduced here.

Article 10

Dividends

1. Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:

a) 5 per cent of the gross amount of the dividends if the beneficial owner is a company that controls directly or indirectly at least 10 per cent of the voting power in the company paying the dividends; and

b) 15 per cent of the gross amount of the dividends, in all other cases.

The provisions of this paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

3. The term "dividends" as used in this Article means income from shares, "jouissance" shares or "jouissance" rights, mining shares, founders' shares or other rights, not being debt-claims, participating in profits, as well as income which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident.

4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.

5. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment situated in that other State, nor subject the company's undistributed profits to a tax on undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other State.

6. Nothing in this Convention shall be construed as preventing a Contracting State from imposing on the earnings of a company attributable to a permanent establishment in that State, a tax in addition to the tax which would be chargeable on the earnings of a company which is a national of that State, except that any additional tax so imposed shall not exceed 5 per cent of the amount of such earnings which have not been subjected to such additional tax in previous taxation years. For the purpose of this provision, the term "earnings" means the profits or income attributable to a permanent establishment or immovable property in a Contracting State and gains that may be taxed in that State in accordance with the provisions of Article 13 after deducting therefrom all taxes, other than the additional tax referred to herein, imposed in that State on such profits, income or gains.

7. The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the shares or other rights in respect of which the dividend is paid to take advantage of this Article by means of that creation or assignment.

Article 11

Interest

1. Interest arising in a Contracting State (CANADA) and paid to a resident of the other Contracting State (MEXICO) may be taxed in that other State (MEXICO).

2. However, such interest may also be taxed in the Contracting State (CANADA)  in which it arises and according to the laws of that State (CANADA), but if the beneficial owner of the interest is a resident of the other Contracting State (MEXICO), the tax so charged shall not exceed 10 per cent of the gross amount of the interest.

3. Notwithstanding the provisions of paragraph 2:

a) interest arising in a Contracting State (CANADA) may be taxed only in the other Contracting State (MEXICO) where the beneficial owner is a resident of that other State and the person paying the interest or the recipient thereof is a Contracting State (CANADA) or its central bank, or a political subdivision or local authority thereof;  (CSB's Tax Free in Canada but taxable in Mexico)


b) interest arising in Mexico and paid to a resident of Canada who is the beneficial owner thereof shall be taxable only in Canada if it is paid in respect of a loan having a term of not less than three years made, guaranteed or insured, or a credit for such period extended, guaranteed or insured, by Export Development Canada, or by any other institution as may be agreed to from time to time between the competent authorities of the Contracting States;

c) interest arising in Canada and paid to a resident of Mexico who is the beneficial owner thereof shall be taxable only in Mexico if it is paid in respect of a loan having a term of not less than three years made, guaranteed or insured, or a credit for such period extended, guaranteed or insured, by Banco Nacional de Comercio Exterior, S.N.C. or Nacional Financiera, S.N.C., or by any other institution as may be agreed to from time to time between the competent authorities of the Contracting States;

d) interest arising in a Contracting State and paid to a resident of the other Contracting State which was constituted and is operated exclusively to administer or provide benefits under one or more pension, retirement or other employee benefits plans shall not be taxable in the first-mentioned State provided that:

(i) the resident is the beneficial owner of the interest and is generally exempt from tax in the other State;

(ii) the interest is not derived from carrying on a trade or a business; and

(iii) the interest is not derived from a related person.

4. The term "interest" as used in this Article means income from debt-claims of every kind, whether or not secured by mortgage, and in particular, income from government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, as well as income which is subjected to the same taxation treatment as income from money lent by the laws of the State in which the income arises. However, the term "interest" does not include income dealt with in Article 8 or Article 10.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises through a permanent establishment situated therein and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment. In such case the provisions of Article 7 shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is a resident of that State. Where, however, the person paying the interest, whether that person is a resident of a Contracting State or not, has in a Contracting State a permanent establishment in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment, then such interest shall be deemed to arise in the State in which the permanent establishment is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person:

a) the amount of the interest exceeds, for whatever reason, the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention;

b) the conditions (including amount) of the debt-claim differ from those that would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the interest thereon may be taxable according to paragraph 2 of Article 10.

8. The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.

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To eliminate double taxation, Article 21 (2) states

2. In the case of Mexico, double taxation shall be avoided as follows:

a) residents of Mexico may credit against the Mexican tax on income arising in Canada the income tax paid in Canada in any amount not exceeding the tax payable in Mexico on such income; and

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I have put the country names in brackets in the Article X section above to show you what it means.

As you can see, the items taxed in Canada are absolutely taxable in Mexico.  Mexico can write to the CRA and find out about every single cent reported to you in Canada
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When you leave Canada, be sure to file forms 1161, 1243 and 1244. If your accountant does not recognize those form numbers right away (without looking them up) you should NOT use that accountant.

You can always send your tax work here because we specialize in dealing with people who are living out of Canada in another 30 or 40 different jurisdictions at any one time.  My associate, david Holroyd is a Canadian from Rocky mountain House who has lived in Guadalajara's for the last 18 years and is now a Mexican citizen.  He comes to Vancouver for 4 months a year to help in my international practice.   country
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If you would rather deal with someone more  local to you, I recommend the following:


Gary Gauvin is absolutely qualified to deal with you.  He is an old business partner of mine from Ottawa.  He now practices outside of Dallas Texas as a one or 1 1/2 person office.  If you deal with Gary, you will deal with Gary.  He is a US enrolled agent.  You can find his website easily.  Type - income Tax Expert -  into
google.  Gary will come up as number one or two.  Why, because he is.  If I am looking for a first or second opinion, I call Gary. Disadvantage -

Gary is a one and a half  person office.  Advantage - You will always get to talk to Gary.

Gary likes corporations.  I  and my four associates do not like them. I like dealing with individuals who deal cross-border withOUT corporations.

OR   KPMG in Vancouver. The last time  I checked they had 22 people in their US/Canada department.  call (604) 691-3025.  Advantage - Lots of Backup.  Disadvantage - It will be hard to get the same person to deal with you three times in a row.

OR   Steve Peters with KPMG in Halifax (902) 492-6011

OR    Kevin Nightingale in Toronto (416) 733-9595

OR     Len Vandenberg with BDO Dunwoody in Kelowna, BC.  (250) 763-7600

OR     Steve Katz in Vancouver at (604) 732-1515

OR    Brad Howland in Victoria at (250) 598-6258

And remember, even if you make the payments, your BC Medical is void 90 days after you leave Canada.  I have had clients in your position billed over $100,000 a dozen times because they came back to Canada for medical services after leaving the country.  My first person in this position was in 1995 and he and his wife were living in Mazatlan.  They were caught because he told his story at a 'Canadian club' group meeting and they reported it as something to do in their newsletter and someone asked BC Medical if it was okay to do that and they said no and went after the person.

I have had people billed ten years later for everything from Kidney Transplants to breast and prostate cancer.  Be careful what you say in public meetings about your situation.  It can cause tax, medical and border problems.

If you are buying insurance, make sure it covers pre-existing conditions.  For instance having gastric by-pass surgery would cancel any insurance on anything to do with that procedure, Have a problem and you could lose everything you own with one medical condition.  Having had congestive heart failure, I am stuck with staying here.  (also considering gastric by-pass but heart condition likely makes too risky).

Last but not least, leaving your money where it can NOT be changed is not very with it in my opinion.  Some people do specialize in dealing with people out of the country as the following shows:

Two ethical people who specialize in selling securities, RRSPs, etc., to US citizens in Canada or Canadians in the US  or other countries are:

Mr Darrell Thompson
Blackmont Securities
Toronto
Local    (416) 874-8007
LD        (866) 775-7704
www.blackmont.com

AND

Dan Walkow
Seabank Financial
White Rock
Local     (604) 541-9952
L D        (866) 541-9952
www.seabankcapital.com
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These two individuals and their companies have gone to the effort to get themselves registered just about everywhere so they can deal with a Canadian in Florida or California or Nevada, etc.
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Note that because of their specialty, they tend to deal with accounts in excess of $200,000

However, I am sure that both parties would welcome an exploratory call.

Hoping this helps, i remain

david ingram

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