House registered in wife's name but likely 'theirs' under CONSTRUCTIVE TRUST Rules for US and Canada -david ingram expert US CAN

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david ingram replies:

Under the terms of what is called a "Constructive Trust", the house was undoubtedly the property of both of you unless you can tell me that you did not make any contributions to the mortgage payment, did not cut the grass, shovel the sidewalk, paint the porch or anything else and absolutely had NOTHING to do with the management of the house.

If you can assure me that you told all of your neighbours and relatives and business associates that the house was your wife's house and that you had nothing to do with it and sat in the  living room drinking a rum and coke or a beer while your wife cut the lawn and sat in the rec room with a hot chocolate while she shoveled the sidewalk and swept the leaves off the lawn, I might accept that it was your wife's house.

Now that I have made my point, the Canadian sale is tax free and in my opinion, the US return should only show one half of the sale and profit and claim her half as tax free.

Make sure that you fill in forms TDF 90-22.1 and 8891 if your wife has any Canadian accounts and has bought an RRSP.

Your wife should read the Oct 93 newsletter on dual citizenship and the Oct 1995 newsletter on the duties of a US citizen living in Canada. find them in the top left hand box at www.centa.com -- Also read the Nov 2001 newsletter for hints on how to make your Canadian mortgage interest deductible on a Canadian return.

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QUESTION:

We have watched the Cdn$ rise against the US$ and now wonder what the impact is if we cash in the RRSP's and bring the cash back to the USA.  It seems that the exchange rate would offset the tax impacts 9presuming of course that the exchange rate is temporarily high).

Logically there is Cdn penalty withholding and then the cash would be taxed at non resident rates.  Can we cash in in smaller amounts to get reduced rates?  

In the US what would happen?

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david ingram replies:

I am one of the people that thinks the Canadian Dollar will be worth $1.20 US.  However, I have been wrong before and will be wrong again.  However, you might want to hedge your bets and just transfer 50% and be happy you did not do it three years ago.

A non-resident of Canada owes the Canadian government 25% withholding tax when he or she withdraws an RRSP as a non-resident.

The principal part of the RRSP is not taxable in the US.

The total withdrawal (including the tax deducted) goes on line 15a and the taxable portion goes on line 15b on put zero on 15b and put the actual growth on schedules B and D if you know what the interest, dividends and capital gains portions of the increase are.  The increase in exchange will go on Schedule D for instance.

The taxable portion is the increase in value since the day you crossed the border to the US and will be the part you have been reporting and exempting every year on form 8891 and the previous reporting you did under 89-45 and 2003-57, etc., etc.

Any tax paid to Canada will be deductible as a foreign tax credit on US form 1116 on a pro-rata basis.
 
You have also, of course been reporting the existence of the RRSP on form TDF 90-22.1  -  the hint about these two forms are the two questions at the bottom of schedule B. The 8891 is a new simpler form for the last three years and takes the place of the draconian 3520  mentioned in the bottom question.

This older Q & A will help you I hope.

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.

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