QUESTION:
We are Americans who closed on a condo in Vancouver in December 2002 and
have just learned that we were supposed to file NR4 and NR6 forms so our
agent could have witheld monthly tax payments. It appears that we are now
liable for taxes on our gross income (approx. $54K CAD)for 2003 and 2004,
with no opportunity to deduct any expenses. Is this true? Ouch! Any
alternate avenues available to us?
Thnx in advance for your response,
Rxxxxxxxx
==============================
david ingram replies:
We do a lot of these and the general rule is that you have to file within
"two years" of the due date to be able to claim expenses. You can read about
this in my 14 year old piece US / Cdn Taxation which you can find in the
second box down on the right hand side of the screen at www.centa.com.
I know that is what is happening because I have a series of assessments back
to 1995 where a British Resident failed to report his North Vancouver
rental. When they caught him, he ended up with over $64,000 or tax, late
filing fees and interest on a property which would have been a loss if the
returns had been filed on time. They did allow him the 2002 and 2003
expenses but none from 95 to 2001.
In my opinion, unless they have snuck a new law in, we can file the 2002
return (due June 30, 2003 now as long as it is in by June 30, 2005.
Send us the figures for 2002, 2003 and 2004 and we can get them all in at
the same time with an "explanation".
Remember, this also has to go on a Schedule E on your US return. Most
expenses are the same but depreciation which we call CCA (for capital cost
allowance) is treated differently. It is also important not to create
losses because non-residents do NOT get to carry rental losses forward.
My contact information will follow the following excerpt from my book but my
phone number is (604) 980-0321.
Excerpted from my BORDER BOOK and found at www.centa.com. I have included
the reverse so you can see what the US does if I have a rental property and
see that the US applies AMT while Canada does not.
RENTAL PROPERTIES - CANADA - OWNED BY U.S. RESIDENT
More important perhaps is the problem with rental properties in Canada. When
owned by a non-resident, they are subject to a 25% withholding (or 15% if
living in Bangladesh) tax. If the renter does not pay this tax, the
government can come along two years later and demand the tax.
Imagine the consternation of a tenant of a house in the British Properties
in West Vancouver, or Rosedale in Toronto. Assume the tenant has been paying
$2,000 a month for a $500,000 house owned by a Hong Kong resident. After
three years of paying $24,000 a year to the `non-resident', they finally buy
a house and move. Two months later, there is a knock on the door and a
National Revenue representative is standing there demanding 25% of $72,000
for NON-RESIDENT withholding tax (this is a true story by the way, only the
owner was in London).
There is a way around this problem. The tenant can ask to see, or rather
DEMAND to see a copy of the landlord's filed and accepted NR6 form. (See
forms in back of book). This form allows the tenant or agent of the landlord
to deduct a lesser amount (or nil if a loss) than 25% of the gross rent. It
allows for expenses to be taken off and the tax can then be withheld at 25%
of the net, rather than the gross. The property management division of david
ingram & Associates Realty Inc. files about 300 of these NR6 forms a year.
(This is only necessary if you are paying directly to a landlord whom you
KNOW to be a non-resident of Canada. If you are paying to an agent or
Canadian Resident, you are okay.)
Please note, the NR6 MUST BE FILED BEFORE the first rent cheque is received
or 25% of the gross rent must be remitted. For years, we were in the habit
of filing `this years' NR6 late with last years tax return. In 1989,
National Revenue stopped accepting this sloppy practice and demanded them on
time.
IF YOU SIGN THIS FORM AS AN AGENT, AND THE OWNER DOES NOT FILE HIS OR HER
RETURN BY JUNE 30TH OF THE FOLLOWING YEAR, YOU, THE AGENT, ARE RESPONSIBLE
FOR THE 30% OF THE GROSS RENT WITH NO REFUND PROVISIONS FOR ANYONE.
RENTAL PROPERTIES - UNITED STATES - OWNED BY A CANADIAN
If paying 25% of the GROSS rent to Canada sounds bad, cheer up. The United
States taxes the Canadian 30% in the same situation. To avoid this, the
Canadian needs to notify the U.S. Government that he wishes to be taxed as a
business rental house on the "net income" received. But if you do not notify
the IRS in advance, the IRS CAN tax you at the 30% of gross rate.
SALE OF REAL ESTATE - IN CANADA
The situation is different with the sale of REAL ESTATE. A non-resident with
property in Canada who sells the property is subject to a withholding tax of
33 1/3% on the GROSS sale price unless they fill out a form 2062A (sample at
back of book) and submit it to Revenue Canada for approval. You cannot use
the form in the book, it is the wrong size. It must be obtained from Revenue
Canada and filled out in quintuplet (5 copies). It does not have to be filed
before the sale unless you need the money immediately to close a back to
back deal - the lawyer can keep money in his trust account until the form is
approved.
CAUTION - This is serious, a Realtor and lawyer who were not aware of this
fact are at possible risk of law suit from a purchaser. The purchaser was
called upon to pay 25% of the purchase price of the property to Revenue
Canada for failure to withhold. The rate was 25% up to 1987, 30% for 1988
and 1989, and is now 33 1/3%). There is a proposal to make it 50% unless the
form 2062 is filed. The situation is serious enough that one should not
accept a person's declaration that they are a resident as sufficient reason
to "not withhold tax". In one case, the purchaser and the real estate agent
drove the vendor to the airport to fly back to Hong Kong. The vendor is not
a resident of Canada. Is it any wonder that National Revenue wants to
collect the tax from the purchaser and the purchaser wants to sue the real
estate agent and lawyer. "THE ONLY SAFETY IN THIS SITUATION IS FOR THE
PURCHASER TO REQUEST A T2062 EXEMPTION FROM REVENUE CANADA."
What form T2062 does is allows you to calculate the actual gain WHICH WILL
BE EARNED AND TAXABLE. The purchaser may then only DEDUCT/pay a withholding
tax on the taxable gain, not the gross sale price. Revenue Canada is
wonderful when it comes to quick approval of this form. I would love to give
out names of people who have gone overboard to accommodate clients but they
have said, "NO, NO, NO! " (Please note. Even though Real Estate Commissions
and other costs of sale are deductible when calculating the actual taxable
income for tax purposes on a return, they may NOT be deducted for the
purposes of the T2062).
If you are having trouble with a sale or purchase with a non-resident, feel
free to call upon the services of our office. David Ingram at (604) 649-4755
or FAX (604) 649-4759 is available to assist your lawyer or real estate
agent. In addition, if you need the services of a lawyer for this special
service, David Stoller, LLB shares office premises with us and is available
at the same numbers.
SALE OF UNITED STATES REAL ESTATE
The U.S. government does the same thing when a Canadian is selling property
in the states. They have a 10% withholding tax on the gross as well and
there is usually a state government withholding of another 3 1/2%. However,
all is not lost. The U.S. government has a form as well. It is form 8288-B
and is reproduced at the back of this book as well, next to the 2062. You
can use this form or a photocopy to request a reduction or total
cancellation of the 10% withholding. For instance, if you inherited a condo
in Wheeling, West Virginia and sold it right away, the estate tax would be
paid already and you would have inherited it at its present value. There
would be no capital gains expected and therefore, you could get the
withholding cancelled.
In addition, if the property is being transferred for $300,000 or less and
is being used as a personal residence by the purchaser, and the purchaser
will sign a letter saying that they intend to live it for six months or more
a year for the next two years as a principal residence, they or the escrow
agent do not have liability for withholding tax. However, it is still my
opinion that if on either side of this problem, one should read pages 17 and
18 of the 1990 edition of Publication 17 for more information and following
that format, write to the Internal Revenue Service with an 8288 and ask for
the exemption formally. Remember also that individual states like California
also have a withholding of (California 3 1/3%) non-resident tax and it is
necessary to write to them as well.
(After all, why should the average person get stuck with withholding tax in
what is an extremely sophisticated tax matter.)
REMEMBER THOUGH, Real estate capital gain profits from sales in the US by
Non-residents are subject to ALTERNATIVE MINIMUM TAX. The rate started at
17% in 1987 and is 26% today in 1999.
That means that if you had bought a property for $10,000 and sold it now for
$110,000 and had $11,000 tax withheld, you will; actually owe the IRS
another $15,000 when you file your tax return. When we prepare these
returns, about one/half get refunds, half pay more. See my June, July and
August newsletter for more information.
The manual says the preparation of the 8288A and B takes a total of 4 hours
for the first one you do (i.e. record keeping is 1 hr, 33 min; learning the
law of the form is l hr, 43 min; preparing the form is 37 min; and copying,
mailing, etc. is another 20 min). It is mailed to:
The Director
Philadelphia Service Center
P. O. Box 21086
Philadelphia, PA 19114
Again, if you are having trouble or cannot find anyone locally to help, call
our office at (604) 980-0321.
=====================
Answers to this and other similar questions can be obtained free on Air
every Sunday morning.
Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Dundee Wealth
Management and I, David Ingram host a LIVE talk show called "ITS YOUR
MONEY"
Those outside of the Lower Mainland will be able to listen on the internet
at
www.600AM.com <http://www.600am.com/>
Local calls are taken at (604) 280-0600 and Long Distance calls (BC only)
are taken at 1( 866) 778-0600
Callers to the show are invited to attend free seminars on financial
planning with such specialities as deductible mortgage interest. They are
held at Fred Snyder's Office at 1764 West 7th in Vancouver - (604) 731-8900
for more information.
=========================================
David Ingram's US/Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
4466 Prospect Road
North Vancouver, BC, CANADA, V7N 3L7
Res (604) 980-3578 Cell (604) 657-8451
(604) 980-0321 Fax (604) 980-0325
Email to taxman at centa.com <mailto:taxman at centa.com>
www.centa.com <http://www.centa.com> www.david-ingram.com
<http://www.david-ingram.com/>
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