(Based on SSA Publication #05-10198, ICN 480199)
|
OMB Approval Number: 0960-0554
Expires 11/30/07
|
|
Table of contents
|
- The agreement may help you, your family and your employer
- Summary of agreement rules
- Certificates for employees
- Certificates for self-employed people
- Effective date of coverage exemption
- How benefits can be paid
- How credits get counted
- Computation of U.S. benefit under the agreement
- Payment of benefits
- Absence from U.S. territory
- Appeals
|
|
Part I -- Introduction
|
An agreement effective August 1, 1984, between the United States and Canada improves Social Security protection for people who work or have worked in both countries. It also helps protect the benefit rights of people who have earned Canadian Social Security credits based on residence and/or contributions in Canada.
Because the Canadian Social Security system includes a special pension plan operated in the Province of Quebec, an additional understanding has been concluded with Quebec to extend the agreement to that province—also effective August 1, 1984. Terms of the U.S.-Canadian agreement and U.S.-Quebec understanding are very similar, and except where otherwise noted, references in this document to the U.S.-Canadian agreement also apply to the U.S.-Quebec understanding.
The agreement with Canada helps many people who, without the agreement, would not be eligible for monthly retirement, disability or survivors benefits under the Social Security systems of one or both countries. It also helps people who would otherwise have to pay Social Security taxes to both countries on the same earnings.
For the United States, the agreement covers Social Security taxes (including the U.S. Medicare portion) and Social Security retirement, disability and survivors insurance benefits. It does not cover benefits under the U.S. Medicare program or the Supplemental Security Income program. For Canada, the agreement applies to the Old-Age Security program and the Canada Pension Plan. The understanding with Quebec applies to the Quebec Pension Plan.
This document covers highlights of the agreement and explains how it may help you while you work and when you apply for benefits.
|
|
The agreement may help you, your family and your employer
|
- While you work––If your work is covered by both the U.S. and Canadian Social Security systems, you (and your employer, if you are employed) would normally have to pay Social Security taxes to both countries for the same work. However, the agreement eliminates this double coverage so you pay taxes to only one system (see Part II).
- When you apply for benefits––You may have some Social Security credits in both the United States and Canada but not have enough to be eligible for benefits in one country or the other. The agreement makes it easier to qualify for benefits by letting you add together your Social Security credits in both countries. For more details, see the section on "Monthly benefits" in Part IV.
|
|
Part II -- Coverage and Social Security taxes
|
Before the agreement, employees, employers and self-employed persons could, under certain circumstances, be required to pay Social Security taxes to both the United States and Canada for the same work.
Under the agreement, if you work as an employee in the United States, you normally will be covered by the United States, and you and your employer will pay Social Security taxes only to the United States. If you work as an employee in Canada, you normally will be covered by Canada, and you and your employer will pay Social Security taxes (contributions) only to Canada.
On the other hand, if your employer sends you from one country to work for that employer or an affiliate in the other country for five years or less, you will continue to be covered by your home country and you will be exempt from coverage in the other country. For example, if a U.S. company sends an employee to work for that employer or an affiliate in Canada for no more than five years, the employer and the employee will continue to pay only U.S. Social Security taxes and will not have to pay in Canada. Even if your occupation (such as truck driver or professional athlete) requires you to make frequent short trips from one country to the other over a period of more than five years, each trip can be considered separately so that you remain covered only by the country from which you are sent.
If you are self-employed and residing in the United States or Canada, you generally will be covered and taxed only by the country where you reside.
|
|
Summary of agreement rules
|
The following table shows whether your work is covered under the U.S. or Canadian Social Security system. If you are covered under U.S. Social Security, you and your employer (if you are an employee) must pay U.S. Social Security taxes. If you are covered under the Canadian system, you and your employer (if you are an employee) must pay Canadian Social Security taxes (contributions). Part III explains how to get a form from the country where you are covered that will prove you are exempt in the other country.
|
|
| |
Your work status
|
Coverage and taxes
|
You are working in Canada/Quebec:
|
For a U.S. employer who:
|
- Sent you to work in Canada/Quebec for five years or less
|
U.S.
|
- Sent you to work in Canada/Quebec for more than five years
|
Canada/Quebec
|
- Hired you in Canada/Quebec
|
Canada/Quebec
|
For a non-U.S. employer
|
Canada/Quebec
|
For the U.S. government
|
Write to the U.S. address in Part III.A below for further information.
|
You are working in the U.S.:
|
For an employer in Canada/Quebec who:
|
- Sent you to work in the U.S. for five years or less
|
Canada/Quebec
|
- Sent you to work in the U.S. for more than five years
|
U.S.
|
|
|
U.S.
|
For a non-Canadian/Quebec employer
|
U.S.
|
For the Canadian/Quebec government
|
Write to the appropriate Canadian address in Part III.A below for further information.
|
You are self-employed and you:
|
|
|
U.S.
|
|
|
Canada/Quebec
|
If this table does not seem to describe your situation and you are:
|
|
|
Write to the U.S. address in Part III.A below for further information.
|
|
|
Write to the appropriate Canadian address in Part III.A below for further information.
|
NOTE: As the table indicates, a U.S. worker employed in Canada can be covered by U.S. Social Security only if he or she works for a U.S. employer. A U.S. employer includes a corporation organized under the laws of the United States or any state, a partnership if at least two-thirds of the partners are U.S. residents, a person who is a resident of the U.S. or a trust if all the trustees are U.S. residents. The term also includes a foreign affiliate of a U.S. employer if the U.S. employer has entered into an agreement with the Internal Revenue Service (IRS) under section 3121(l) of the Internal Revenue Code to pay Social Security taxes for U.S. citizens and residents employed by the affiliate.
|
|
Part III -- Certificate of coverage
|
A certificate of coverage issued by one country serves as proof of exemption from Social Security taxes on the same earnings in the other country. Generally, you will need a certificate only if you will be working in the other country for more than 183 days in a calendar year. If you will be in the other country for 183 days or less, a certificate will not be needed unless the other country requests that you obtain one.
|
|
III.A. Certificates for employees
|
To establish an exemption from compulsory coverage and taxes under the Canadian system, your employer must request a certificate of coverage (form USA/CAN 101 or USA/ QUE 101) from the U.S. at this address:
Social Security Administration
Office of International Programs
P.O. Box 17741
Baltimore, Maryland 21235-7741
U.S.A.
The request may be sent by FAX, if preferred, to (410) 966-1861. Please note this FAX number is only for requesting certificates of coverage.
No special form is required to request a certificate but the request must be in writing and provide the following information:
- Full name of worker;
- Date and place of birth;
- Citizenship;
- Country of worker’s permanent residence;
- U.S. Social Security number;
- Date of hire;
- Country of hire;
- Name and address of the employer in the U.S. and Canada; and
- Date of transfer and anticipated date of return.
In addition, your employer must indicate if you remain an employee of the U.S. company while working in Canada or if you become an employee of the U.S. company’s affiliate in Canada. If you become an employee of an affiliate, your employer must indicate if the U.S. company has an agreement with the IRS under section 3121 (l) of the Internal Revenue Code to pay U.S. Social Security taxes for U.S. citizens and residents employed by the affiliate and, if yes, the effective date of the agreement.
Your employer can also request a certificate of U.S. coverage for you over the Internet using a special online request form available at www.socialsecurity.gov/coc. Only an employer can use the online form to request a certificate of coverage. A self-employed person must submit a request by mail or fax.
To establish your exemption from coverage under the U.S. Social Security system, your employer in Canada must request a certificate of coverage from Canada as follows:
- If your work will remain covered by the Canada Pension Plan, obtain a certificate (form CPT 56A) from:
CPP/EI Rulings Department
Department of National Revenue
Seventh Floor
333 Laurier Avenue West
Ottawa, Ontario
CANADA K1A OL9
- If your work will remain covered by the Quebec Pension Plan, obtain a certificate (form QUE/USA 101) from:
Bureau des ententes de sécurité sociale
Régie des rentes du Québec
1055, René-Lévesque Est, 13e étage
Montréal, Québec
CANADA H2L 4S5
The same information required for a certificate of coverage from the United States is needed to get a certificate of coverage from Canada or Quebec except that you must show your Canadian social insurance number rather than your U.S. Social Security number.
|
|
III.B. Certificates for self-employed people
|
If you are self-employed and would normally have to pay Social Security taxes to both the U.S. and Canadian systems, you can establish your exemption from one of the taxes.
- If you reside in the United States, write to the Social Security Administration at the address in Part III.A above; or
- If you reside in Canada, write to the appropriate Canadian address in Part III.A above.
Be sure to provide the following information in your letter:
- Full name;
- Date and place of birth;
- Citizenship;
- Country of permanent residence;
- U.S. and/or Canadian Social Security number;
- Nature of self-employment activity;
- Dates the activity was or will be performed; and
- Name and address of your trade or business in both countries.
|
|
III.C. Effective date of coverage exemption
|
The certificate of coverage you receive from one country will show the effective date of your exemption from paying Social Security taxes in the other country. Generally, this will be the date you began working in the other country.
Certificates of coverage issued by either the Department of National Revenue in Ottawa or the Bureau des ententes de sécurité sociale in Montreal should be retained by the employer in the United States in case of an audit by the IRS. No copy should be sent to IRS unless specifically requested by IRS. However, a self-employed person must attach a photocopy of the certificate to his or her income tax return each year as proof of the U.S. exemption.
Copies of certificates of coverage issued by the United States will be provided for both the employee and employer. It will be their responsibility to present the certificate to the Canadian or Quebec authorities when requested to do so. To avoid any difficulties, your employer (or you, if you are self-employed) should request a certificate as early as possible, preferably before your work in the other country begins.
If you or your employer request a certificate of coverage, you should read the Privacy Act and Paperwork Reduction Act Statements below.
|
|
| |
|
Authority to collect information for a certificate of coverage
Privacy Act
The Privacy Act requires us to notify you that we are authorized to collect this information by section 233 of the Social Security Act. While it is not mandatory for you to furnish the information to the Social Security Administration, a certificate of coverage cannot be issued unless a request has been received. The information is needed to enable Social Security to determine if work should be covered only under the U.S. Social Security system in accordance with an international agreement. Without the certificate, work may be subject to taxation under both the U.S. and the foreign Social Security systems.
Paperwork Reduction Act Notice
This information collection meets the clearance requirements of 44 U.S.C. section 3507, as amended by section 2 of the Paperwork Reduction Act of 1995. You are not required to answer these questions unless we display a valid Office of Management and Budget (OMB) control number. We estimate that it will take you about 30 minutes to read the instructions, gather the necessary facts, and write down the information to request a certificate of coverage.
|
|
|
Part IV -- Monthly benefits
|
The following table shows the various types of Social Security benefits payable under the U.S. and Canadian Social Security systems and briefly describes the eligibility requirements for each type of benefit. If you do not meet the requirements for these benefits, the agreement may help you to qualify (see Part IV.A below).
We should point out that Canada provides old-age, survivors and disability benefits through two different programs. The Old-Age Security (OAS) program pays a flat-rate benefit to people age 65 or older based on periods of residence in Canada. The Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP) pay retirement, survivors and disability pensions based on a worker’s earnings and total years of coverage beginning January 1, 1966 (when CPP and QPP started).
This table is only a general guide. You can get more specific information about U.S. benefits here on our web site, at any U.S. Social Security office or by calling our toll-free number at 1-800-772-1213. More detailed information about the Canadian system may be obtained by writing to the appropriate Canadian address in Part VIII or by visiting the Department of Human Resources Canada or the Régie des rentes de Québec.
Under U.S. Social Security, you may earn up to four credits each year depending on the amount of your covered earnings. For example, in 2005, you get one credit for each $920 of your covered annual earnings up to a maximum of four credits for the year. Under the Canadian system, credits are measured in years. To simplify the information in the table, U.S. requirements are shown in years of credits.
|
|
Monthly benefits and eligibility requirements
|
| Retirement or old-age benefits |
| United States |
Canada |
| Full benefit at full retirement age, or reduced benefit as early as age 62. Required work credits range from one and one-half to 10 years (10 years if 62 in 1991 or later). |
OAS-An Old-Age Security pension is paid to anyone in Canada who is at least 65 and has been a resident of Canada for at least 10 years after age 18. This benefit is payable outside Canada for only 6 months following the month of departure from Canada unless the person has at least 20 years of Canadian residence after age 18. No work credits are required.
A supplementary benefit called Guaranteed Income Supplement (GIS) is paid to OAS beneficiaries living in Canada who have little or no income beyond the OAS benefit. GIS is payable outside Canada for only 6 months following the month of departure from Canada.
CPP-Worker can get full pension at age 65 or reduced pension as early as age 60. Only one contribution (1 year coverage) required.
QPP-Same as CPP.
|
| Disability benefits |
| United States |
Canada |
| Under full retirement age can get benefit if unable to do any substantial gainful work for at least a year. One and one-half to 10 years credit required depending on age at date of onset. Some recent credits also needed unless worker is blind. |
OAS-No provision.
CPP-Worker under 65 must have a physical or mental disability which prevents any substantial gainful work and will be of long and indefinite duration or result in death. Worker must have contributions in four of the last six years.
QPP-Definition of disability same as CPP. Worker must have contributions in:
- 1/2 the years in the contributory period with a 2-year minimum; or
- 5 of the last 10 years in the contributory period; or
- 2 of the last 3 years in the contributory period, or 2 years if the contributory period is 2 years.
|
| Family benefits to dependents of retired or disabled people |
| United States |
Canada |
| Spouse-Full benefit at full retirement age or at any age if caring for worker's entitled child under age 16 (or disabled before age 22). Reduced benefit as early as age 62 if not caring for a child. |
Spouse-
OAS-An allowance is paid to the spouse or common-law partner (whether of the same or different sex who have lived together for at least one year) of an OAS pensioner when the couple has little or no income. The spouse or common-law partner must be age 60-64 and the OAS beneficiary must also be receiving GIS. The allowance is payable outside Canada for only 6 months following the month of departure from Canada.
CPP-No provision for benefits. However, under certain conditions, retirement pensions can be shared by married spouses if they are not legally separated.
QPP-Same as CPP. |
| Divorced spouse-Full benefit at full retirement age. Reduced benefit as early as age 62. Must be unmarried and have been married to worker for at least 10 years. |
Divorced spouse-
OAS-No provision.
CPP-No provision for benefits. However, total earnings credited to the couple during the marriage (while they lived together) may be split equally upon a divorce or legal annulment which occurred after 1977.
QPP-No provision for benefits. Provision on earnings splitting similar to CPP. |
| Children-If unmarried, up to age 18 (age 19 if in an elementary or secondary school full time) or any age if disabled before age 22. |
Children-
OAS-No provision.
CPP-No provision for children of retired worker. Children of disabled worker up to age 18 (or age 25 if in school full time).
QPP-No provision for children of retired worker. Children of disabled worker up to age 18 (or age 25 if in school full time and worker died or became disabled prior to 1/1/94). |
| Survivors benefits |
| United States |
Canada |
| Widow or widower-Full benefit at full retirement age or at any age if caring for the deceased's entitled child under age 16 (or disabled before age 22). Reduced benefit as early as age 60 (or age 50 if disabled) if not caring for child. Benefits may be continued if remarriage occurs after age 60 (or age 50 if disabled). |
Widow or widower-
OAS-An allowance is payable to widowed spouses or common-law partners (whether of the same or different sex) age 60-64 with little or no income. The common-law partner must have lived with the deceased for at least one year. The allowance is payable outside Canada for only 6 months following the month of departure from Canada.
CPP-Age 35 or older, or under age 35 if disabled or maintaining dependent child of the deceased spouse or common-law partner (whether of the same or different sex). In addition, a same-sex common-law partner can qualify for benefit only if the worker's death occurred on or after January 1, 1998. The deceased worker must have credits for at least one-third of the years in the contributory period for a minimum of three years up to a maximum of 10 years. Remarriage will not affect entitlement.
QPP-Same as CPP, except no age requirement. |
| Divorced widow or widower-Same as widow or widower if marriage lasted at least 10 years. |
Divorced widow or widower-
OAS-No provision.
CPP-No provision.
However, see note under divorced spouse.
QPP-No provision.
However, see note under divorced spouse. |
| Surviving children- Same as children of retired or disabled worker. |
Surviving children-
OAS-No provision.
CPP-Same as children of disabled worker. Same contributory requirements as for widow/widower.
QPP-Same as children of disabled worker. Same contributory requirements as for widow/widower.
|
| Lump-sum death benefit-A one-time payment not to exceed $255 payable on the death of an insured worker. |
Lump-sum death benefit-
OAS-No provision.
CPP-Same minimum contributory requirements as for other survivor benefits. One-time payment equal to six times the monthly retirement pension of the deceased worker to a maximum of CDN $2,500.
QPP-Same minimum contributory requirements as for other survivor benefits. One-time payment of CDN $2,500.
|
|
|
IV.A. How benefits can be paid
|
If you have Social Security credits in both the United States and Canada, you may be eligible for benefits from one or both countries. If you meet all the basic requirements under one country’s system, you will get a regular benefit from that country. If you do not meet the basic requirements, the agreement may help you qualify for a benefit as explained below.
|
|
IV.A.1. Benefits from the U.S
|
If you do not have enough work credits under the U.S. system to qualify for regular benefits, you may be able to qualify for a partial benefit from the United States based on both U.S. and Canadian (CPP/ QPP) credits. However, to be eligible to have your Canadian credits counted, you must have earned at least six credits (generally one and one-half years of work) under the U.S. system. If you already have enough credits under the U.S. system to qualify for a benefit, the United States cannot count your Canadian credits.
|
|
IV.A.2. Benefits from Canada
|
Canada provides retirement, survivors and disability benefits through two separate programs.
- Old-Age Security (OAS) Program
To get OAS benefits, you must be 65 or older and must have been a resident of Canada for at least 10 years after age 18 (or 20 years after age 18 to have benefits paid outside Canada).
Under the agreement, Canada will consider your U.S. Social Security credits earned after 1951 and after age 18, along with periods of residence in Canada after 1951 and after age 18, to meet the OAS residence requirements. However, to be eligible to have your U.S. credits counted, you must have resided in Canada for at least one year after 1951 and after age 18.
- Canada Pension Plan and Quebec Pension Plan
The Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP) pay retirement, survivors and disability pensions based on your covered work performed on or after January 1, 1966 (when CPP and QPP started), and the amount of your earnings. The CPP operates throughout Canada, except in the Province of Quebec. Both plans require a minimum amount of work credits to qualify for benefits. People who have contributed to both CPP and QPP receive one benefit based on their total contributions to both plans.
Under the agreement, U.S. Social Security credits completed after 1965 may be considered along with CPP or QPP work credits, if necessary, to meet the minimum requirements for CPP or QPP disability or survivors benefits. However, to be eligible to have your U.S. credits counted, you must have earned at least one year of credit under the CPP or QPP. It is not necessary to consider U.S. Social Security credits in determining eligibility for CPP or QPP retirement benefits since anyone who has made at least one contribution to either plan can qualify for a retirement benefit at 65 or a reduced retirement benefit as early as 60.
|
|
IV.B. How credits get counted
|
You do not have to do anything to have your credits in one country counted by the other country. If we need to count your credits under the Canadian system to help you qualify for a U.S. benefit, we will get a copy of your Canadian record directly from Canada when you apply for benefits. If Canadian officials need to count your U.S. credits to help you qualify for a Canadian benefit, they will get a copy of your U.S. record directly from the Social Security Administration when you apply for the Canadian benefit.
Although each country may count your credits in the other country, your credits are not actually transferred from one country to the other. They remain on your record in the country where you earned them and can also be used to qualify for benefits there.
|
|
IV.C. Computation of U.S. benefit Under the agreement
|
When a U.S. benefit becomes payable as a result of counting both U.S. and Canadian Social Security credits, an initial benefit is determined based on your U.S. earnings as if your entire career had been completed under the U.S. system. This initial benefit is then reduced to reflect the fact that Canadian credits helped to make the benefit payable. The amount of the reduction will depend on the number of U.S. credits: the more U.S. credits, the smaller the reduction; and the fewer U.S. credits, the larger the reduction.
|
|
Part V -- A CPP/QPP pension may affect your U.S. benefit
|
If you qualify for Social Security benefits from the United States based only on U.S. credits and a CPP/QPP benefit from Canada, the amount of your U.S. benefit will be reduced. This is a result of a provision in U.S. law which can affect the way your benefit is figured if you also receive a pension based on work that was not covered by U.S. Social Security. Receipt of a Canadian Old-Age Security pension, which is based on residence in Canada, will not affect the way your benefit is figured. For more information, call our toll-free number, 1-800-772-1213, and ask for the publication, Windfall Elimination Provision (Publication No. 05-10045). If you are outside the United States, you may write to us at the address in Part VIII.
|
|
Part VI -- What you need to know about Medicare
|
Medicare is the U.S. national health insurance system for people age 65 or older or who are disabled. Medicare has two parts: hospital insurance (also called "Part A" Medicare) and medical insurance (called "Part B" Medicare). You are eligible for free hospital insurance at age 65 if you have worked long enough under U.S. Social Security to qualify for a retirement benefit. People born in 1929 or later need 40 credits (about 10 years of covered work) to qualify for retirement benefits.
Although the agreement between the United States and Canada and the understanding between the United States and Quebec allows the Social Security Administration to count your CPP or QPP credits to help you qualify for U.S. retirement, disability or survivor benefits, the agreement does not cover Medicare benefits. As a result, we cannot count your credits in Canada or Quebec to establish entitlement to free Medicare hospital insurance.
For more information about Medicare, call our toll-free number, 1-800-772-1213, and ask for the publication, Medicare (Publication No. 05-10043) or visit Medicare’s website at www.medicare.gov.
|
|
Part VII --Claims for benefits
|
If you live in the United States and wish to apply for U.S. or Canadian benefits:
- Visit or write any U.S. Social Security office; or
- Phone our toll-free number, 1-800-772-1213, 7 a.m. to 7 p.m. any business day. People who are deaf or hard of hearing may call our toll-free TTY number, 1-800-325-0778.
You can apply for Canadian benefits (OAS, CPP or QPP) at any U.S. Social Security office by completing application form CDN-USA 1 (for OAS and CPP benefits) or QUE/USA-1 (for QPP benefits).
If you live in Canada and wish to apply for U.S. benefits:
- Visit or write any U.S. Social Security office located along the U.S.-Canadian border; or
- Contact any Canadian or Quebec Social Security office.
If you live in Canada and wish to apply for Canadian or Quebec benefits, contact any Canadian or Quebec Social Security office.
You can apply with one country and ask to have your application considered as a claim for benefits from the other country. In that case, your application will be sent to the other country. Each country will process the claim under its own laws––counting credits from the other country when appropriate––and notify you of its decision.
If you have not applied for benefits before, you may need to provide certain information and documents when you apply. These include the worker’s U.S. and Canadian Social Security numbers, proof of age for all claimants, evidence of the worker’s U.S. earnings in the past 24 months and information about the worker’s coverage under the Canadian system. You may wish to call the Social Security office before you go there to see if any other information is needed.
|
|
VII.A. Payment of benefits
|
Each country pays its own benefits. U.S. payments are made by the U.S. Department of Treasury each month and cover benefits for the preceding month. Benefits under Canada’s OAS and CPP systems and Quebec’s QPP system are paid near the end of each month and represent payment for that month.
|
|
VII.B Absence from U.S. territory
|
Normally, people who are not U.S. citizens may receive U.S. Social Security benefits while outside the U.S. only if they meet certain requirements. Under the agreement, however, you may receive benefits as long as you reside in Canada, regardless of your nationality. If you are not a U.S. or Canadian citizen and live in another country, you may not be able to receive benefits. The restrictions on U.S. benefits are explained in the publication, "Your Payments While You Are Outside The United States" (Publication #05-10137).
|
|
VII.C Appeals
|
If you disagree with the decision made on your claim for benefits under the agreement, contact any U.S. or Canadian Social Security office. The people there can tell you what you need to do to appeal the decision.
The appropriate Canadian Social Security authorities (i.e., OAS, CPP or QPP) will review your appeal if it affects your rights under the Canadian system, while U.S. Social Security authorities will review your appeal if it affects your rights under the U.S. system
 
QUESTION:
I have a near-hysterical friend who moved to Alberta for a job, since her Vancouver job ended, so she rented out her condo (formerly her principal residence). She rented a place in Alberta but job did not work out after 6 months - she can't get the tenants out because of a lease and she now has a job offer on Vancouver Island. Can she be exempted from capital gains if she temporarily rents on the Island,sells her place in Vancouver and buys a new place (principal residence). How horrific would the tax be for that year given the rise in housing prices if she does have to pay. The tenants have rented for 5 or 6 months and might be induced to leave with a big cash incentive but she would be working on the Island. She lved in US for 3 moths doing another temporary job, where she rented , but left her Vancouver condo empty.
Thank you for your help for this complicated issue.
---------------------------------------------------------------
david ingram replies:
Under section 45(2) of the income tax act, she can elect to claim the property as a tax free for ever while transferred or up to four years under any other circumstances.
She also has to report the US earnings on her Canadian return on line 104 and 433. She claims the tax, state tax, medicare and Social security she paid to the US on line 431 of her Canadian return and will get dollar for dollar credit fo the taxes paid to the US on her Candain return.
For the US, she has to file form 1040NR and what ever State return needs to be done. For instance, New York would be form IT203 and California would be 540NR.
The following older Q & A will likely help.
My question is: Canadian-specific
QUESTION: I have owned my home for 4 years and have subsequently moved in with my boyfriend and am now planning to sell my home. I have been renting it out for the past six months and am wondering about the tax implications relating to capital gains, thank you in advance,
david ingram replies:
You have not been living with the boyfriend long enough to be considered a common-law spouse sop at the moment - for a year anyway - you can both have a principal residence tax free.
After that, you are limited to one as a common law couple. Since you are selling yours now within a year, you will get any profit capital gains tax free by filing a section 45(2) election with your 2006 return reporting the rental income on schedule 776.
Attach a note to your 2006 tax return stating something like this
I hereby elect to consider the residence at xxx address, city, prov,etc, to be my principal residence for up to four years even though i did not ordinarily inhabit it after (date).
When you do sell, complete form T2091 to calculate the tax free portion. Form 2091 says you to do not need to file it with your return but keep it in case the CRA wants to see it. My suggestion is that you send it with the return and get it over with.
These older questions will give you a little more:
>> QUESTION:
>>
>> Hi,
>>
>> Last year, we rented out our condo in Vancouver. The
>> plan then was to have the rent cover our mortgage
>> payments for the 12 months that we would be away. A
>> short term solution.
>>
>> Now, we are planning to be away from BC for a longer
>> period of time (approx. 2 years) and wish to sell the condo
>> in the middle of the year, as we are unable to rent the
>> condo for any longer due to strata council by laws.
>>
>> 1) If we sell the condo when there has been a tenant living
>> in it for 12 months, will we pay capital gains?
>>
>> 2) What are our best options to avoid paying this tax?
>>
>> 3) If capital gains would be owed, for how long would we
>> have to make the unit our principal residence again before
>> we can sell it and not pay CGT?
>>
>> Thank you,
_________________________________________________________________
david ingram replies:
If you filed a section 45(2) election with your first year's rental, you
can rent the condo out for up to 4 years (plus 1 in the calculation)
without incurring capital gains tax if you have not bought another
residence that you are lioving in.
See Below:
My question is: Canadian-specific
QUESTION: Dear Mr. Ingram,
I bought a house in the December of year 2000, lived there till the end of December 2000 (3 weeks) and started to rent it out on January 1, 2001. I filed the election 45(2) to claim the house as my primary residence for years 2001, 2002, 2003 and will do it for 2004.
I do not claim a depreciation for those years.
I want to sell the house now. Do I need to move in house first in order to avoid the payment of the capital gain taxes. For how long I have to stay there to be eligible for not paying the capital gain taxes on sold house if I need to move in.
Thank you in advance for you help,
----------------------------------------------------------
david ingram replies: First I am going to repeat your old question from last July and my answer. My question is: Canadian-specific
QUESTION: Hi, David!
I would like to know is it possible to use the election under the section 45(2) again if the old house is sold and the new one is bought. Can it be used unlimited number of times by the condition that it is used for each house only once.
Thank you
---------------------------------------------------------------------------
David Ingram replies: Section 45(2) is intended to allow people to try something out. This means that if you move to a rented condo for a couple of years and rent your house out, you can move back into the house without suffering a capital gains tax under section 45(2). Since it was passed on June 17, 1972, (32 years ago now) I have never seen it used more than twice by one person. Does not mean it has not been used more than twice in thirty years, it just means it is unlikely. There is no numeric restriction but if you are moving in and out of houses, the CRA will treat you as a trader and tax you at full rates.
Hi David,
I am a dual citizen Canada/USA. I have earned the majority of my income in Canada and am not eligible for a pension in the USA as I was self employed for the few years that I earned minimal income there. I have filed income tax returns in both countries for a number of years but have never owed anything to the US, do I need to keep filing?
Thanks!
----------------------------------------
david ingram replies:
I hate to have to tell you that the answer is a simple yes. as long as you are a US citizen, you have to file a US return. However, you can NOT use form 2555 to exempt income as you have done to exempt up to $82,400 of earnings in the past. You must now use form 1116 to calculate the foreign tax credit.
Hi David, Even though I have not get any reply to my last few emails (with a few questions) - not sure if I'm not doing something right or may be it just doesn't reach you, I'm still trying to ask you a question (only one this time). We're living in a condo and we a HELOC against it. I've been using money from this HELOC to buy a few of my rental property (as a downpayment) and do a Smith Manuver. We're planning buy a new condo (a bigger one since we're expectin of expand of our family). The price for the condo will be almost twice as big as the current amount we own to the bank (mortgage & HELOC together)/ The downpayment for the new property will coming out of HELOC. My wife is thinking to move to a new place right away but I'm proposing to keep it as a rental (and subsidise it from our pocket) and have all interest (on mortgage and downpayment money) as tax deductable; and then a few years later switch the property purpose for CRA (so current will be a rental and a new one will become our residential). What do you think we should do (and if my approach is good) and what way would you suggest here??? Thanks in advance and looking forward to hear back from you. Thanks,
-----------------------------------------------------------------
david ingram replies:
If your name is not in the Subject Line, it will not likely be replied to. Even then, it is getting unlikely because of the sheer number of questions. To date it has been very rare for me to charge for a question unless it is a phone consultation or an "in person". However, by October 1, 2007, I am going to start a pay in advance PAYPAL account for people who send questions. It is the only way to separate them out. As it is, my clients are being ignored half the time and people who will never be a client are getting a question answered.
For instance, I have been gone for three days and on my return have 561 emails to try and reply to. I will answer about 20 and erase the others - No one can answer the email I get so no one should consider email sent to me to be delivered to me. As I say, if they are not replied to in two or three days, they are gone. I do look for PAYING CLIENT and the Client's name as it suggests in the subject line and will always try and answer another one first for people who have been to see me and have a follow up dealing with the original consultation.
You are starting over here.
However, in general, if you are taking down payments for rental properties out of a HELOC on your own residence, the interest is clearly deductible. BUT, if you take a down payment out of the HELOC for a unit you move into, the interest is NOT deductible.
To be deductible the interest must have been paid on money borrowed for investment purposes.
I gave a free seminar on the subject three weeks ago and we had 91 people out.
James Golombek of Trimark Fund had an interesting article on page FW4 of the Financial Post Weekend. He suggests that one should say goodbye to the Singleton Shuffle and then proceeds to say that Cash Damming is fine. In fact, I think is article is positive and the headline writer misread it.
The following is what I handed out at the seminar. As I have always said, I believe that proper paperwork will still get the mortgage interest as a deduction if a business reason is incorporated into the process
I have no idea what you should do from your question and am not prepared to spend an hour doing what if's with another 400 questions.
The following is what I handed out at the free seminar which lasted from 12 noon to 5:30 at night on August 12th.
David Ingram's US/Canada Services
Mortgage Interest as a Deduction in 2007 – dealing with GAAR
I first conceived of this method in 1975/76 when a client of mine had a rental duplex and had a tenant who was injured in a car accident. It was at the time of the changeover from private insurance to ICBC and the injured single mother tenant was waiting for an insurance settlement.
My client allowed his tenant to stay in the half duplex for more than a year and to stay afloat him self, he borrowed money to pay the duplex bills. When doing his 1975 tax return, we deducted the interest paid on the loan because the purpose of the loan was clearly to fund the rental duplex.
When he finally got his cheque for more than $5,000 from the tenant, it would have been all over if he had just paid the loan off and we had not thought about it. But my client, bless his soul, phoned and asked if he had to pay off the loan (which was deductible) or could he use the money for another non-deductible purpose.
My answer, after thinking about it for a day or so, was that he could us e the $5,000+ for any purpose he could think of. At the same time, I said this, I was also writing something for the North Shore Credit Union and put my ‘new’ method of making the mortgage interest deductible in this report which they then published as part of an advertisement in the North shore News in (I think) November, 1976.
I expanded it and it was next published by Hancock House Publishers in my Investment Guide in 1979, 1980 and 1985 and 1991 and BC Business magazine in 1979. Sometime in there, the Ontario Dental Association also ran it in their magazine. It then became part of the internet and can be found in the March 1997 and November 2001 newsletters.
I was pretty heavily involved in the Federal Conservative Party (ran for the North Shore Nomination in 19780 and am proud to say that we got mortgage interest as a tax deduction on the 1979 federal Income tax return.
Unfortunately, Joe Clark, the Prime Minister at the time, did not count the number of yes votes and lost a non-confidence motion on Dec 12, 1979, and on Feb 18, 1980, Pierre Trudeau was re-elected as Prime Minister and even though there was a 4-page form and a line on the T-1 General that year, the deduction was killed retroactively by the liberal government and we no longer had this benefit for all without manipulating the paperwork.
In 1981, Fred Snyder was running a series of seminars and teaching my method to a lot of different groups. In one seminar, he taught it to Realtors, McCauley, Nicolls, Maitland and Company and the manager Fraser Smith wrote Fred a letter thanking him for explaining the methods. In 1985, Fraser Smith than published the SMITH MANOUVRE which explains the method in great detail and at the time, VANCITY Savings Credit Union was featured in the book and was very good at setting up the method.
Then on Oct 27, 1988 John Singleton had approximately $300,000 in his lawyer’s capital account. He got permission to take the $300,000 out (it was his but was being used as security in his law practice). He used it to buy a house and then used the house as security to borrow $300,000 which he then put into his capital account; this was all done in one day. Of course, since the money in the account was now borrowed for business purposes, he deducted the interest on his 1988 and 1989 returns and the Tax Department turned him down. He appealed and lost in the Tax Court of Canada but won in the Federal court of Appeals. The CRA appealed to the Supreme Court and in October 2001, the Supreme Court of Canada found in favour of John Singleton in a 5 to 2 decision.
This case has now been quoted and cited in many other cases. In OVERS 2006 TCC 26, Mr Overs paid back a shareholder-loan, which would have been included in his income. By doing what he did, co-incidentally, the interest expense was made deductible.
Mrs Overs borrowed funds to purchase shares of his holding company at their fair market value. However, Mr Overs did NOT use a 73(1) rollover as Lipson did. Therefore, no capital gain was realized but the attribution rules in section 74(1) worked to transfer the interest expense on the wife’s borrowed funds -- back to him.
Judge Little turned down the CRA’s claim that tax benefits arose from this series of transactions. The taxpayer followed the Income Tax Act in repaying his loan and transferring the shares to his wife. Justice Little ruled that the transactions were NOT avoidance transactions and therefore GAAR did not apply. Judge Little ruled that none of the transactions could be considered “abusive tax avoidance”.
And Judge Bowman ruled in favour of Evans (2005 TCC 684). JuJudge Bowman found there were no avoidance transactions in what could only be described as a super complicated and very sophisticated series of business restructurings that ended up with a former shareholder receiving cash by using specific rules in the Act, including sections 85
(rollovers), 110.6 (capital gains exemption), 112 (tax free inter-corporate dividends), 74.5 (attribution) and ss. 84(3) (deemed dividends).
Judge Bowman assumed that there ‘were’ avoidance transactions. He then dealt with them on an individual basis to decide whether the avoidance transactions were ‘abusive’. His final decision was that provisions of the Income Tax Act operated as intended and there could not be any abuse.
However, he was not of the same opinion with the LIPSON Family who lost in Lipson v. The Queen, 2006 TCC 148
Mr Lipson owned a profitable business and:
- The Lipsons contracted to buy a home in Forest Hills in Toronto
- Mrs Lipson took out a demand loan to buy share in the family business from her husband.
- The shares were transferred to Mrs Lipson as a section 73(1) rollover
- Mr Lipson used the funds to buy the house
- They “both” took out a mortgage on the house to repay the demand loan
Judge Bowman used the Section 245 GAAR provisions to rule that the Lipson family was guilty of Gross Abuse of the Tax system. Perhaps, if they had a business reason for the loan or had not used the Section 73(1) tax free rollover, he would have found in their favour as he did with the EVANS 2005 DTC 1762 case. In the LIPSON case the wife’s borrowing did not put income in her hands and it was unclea
The following was an excel spreadsheet that was presented and you might be able to figure it out.
| 1 |
|
WHY BOTHER MAKING YOUR MORTGAGE INTEREST DEDUCTIBLE?? |
|
1 |
| 2 |
|
by david Ingram - www.centa.com - |
|
(604) 980-0321 |
|
2 |
| 3 |
|
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING |
|
$ 100,000.00 |
3 |
| 4 |
|
Let's pretend that you are paying 6% |
|
0.06 |
times |
6000.00 |
4 |
| 5 |
|
|
|
|
|
|
|
|
|
5 |
| 6 |
|
How much do you have to earn to pay |
|
6000 |
|
6000.00 |
6 |
| 7 |
|
At a |
0.3 |
marginal tax rate |
|
you would need |
8571.43 |
7 |
| 8 |
|
|
|
you would pay tax of |
|
|
2571.43 |
8 |
| 9 |
|
|
|
To Have enough to pay the interest of |
|
6000.00 |
9 |
| 10 |
|
TWO |
|
|
|
|
|
|
|
10 |
| 11 |
|
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING |
|
$ 300,000.00 |
11 |
| 12 |
|
Let's pretend that you are paying 6% |
|
0.06 |
times |
18000.00 |
12 |
| 13 |
|
|
|
|
|
|
|
|
|
13 |
| 14 |
|
How much do you have to earn to pay |
|
18000 |
|
18000.00 |
14 |
| 15 |
|
At a |
0.35 |
marginal tax rate |
|
you would need |
27692.31 |
15 |
| 16 |
|
|
|
you would pay tax of |
|
|
9692.31 |
16 |
| 17 |
|
|
|
To Have enough to pay the interest of |
|
18000.00 |
17 |
| 18 |
|
THREE |
|
|
|
|
|
|
|
18 |
| 19 |
|
WELL - LET'S PRETEND THAT YOU HAVE AN OUTSTANDING |
|
$ 600,000.00 |
19 |
| 20 |
|
Let's pretend that you are paying 6% |
|
0.06 |
times |
36000.00 |
20 |
| 21 |
|
|
|
|
|
|
|
|
|
21 |
| 22 |
|
How much do you have to earn to pay |
|
36000 |
|
36000.00 |
22 |
| 23 |
|
At a |
0.4 |
marginal tax rate |
|
you would need |
60000.00 |
23 |
| 24 |
|
|
|
you would pay tax of |
|
|
24000.00 |
24 |
| 25 |
|
|
|
To Have enough to pay the interest of |
|
36000.00 |
25 |
| 26 |
|
|
|
|
|
|
|
|
|
26 |
| 27 |
|
You can easily see that the larger the mortgage payment |
|
|
27 |
| 28 |
|
the more money you have to make and the larger your |
|
|
28 |
| 29 |
|
marginal tax rate would be - BC runs from 23% up to $35,000 |
|
|
29 |
| 30 |
|
and is 44% over $118,000 or so |
|
|
|
|
|
30 |
| 31 |
|
DEDUCTIBLE |
|
|
|
|
|
|
31 |
| 32 |
|
But if the last mortgage of |
600000 |
could be deductible |
|
36000.00 |
32 |
| 33 |
|
the interest paid of |
36000 |
would get a tax deduction of |
|
14400.00 |
33 |
| 34 |
|
|
and you would only need to earn the difference |
|
21600.00 |
34 |
| 35 |
|
|
instead of the |
60000 |
|
on line 23 above |
|
35 |
| 36 |
|
Why only |
21600 |
|
|
|
|
|
|
36 |
| 37 |
|
Well, you could earn |
21600 |
, borrow |
|
14400 |
(line 33) |
|
37 |
| 38 |
|
for a few days from Fred, and then pay Fred back with the refund |
|
38 |
| 39 |
|
|
|
|
|
|
|
|
|
39 |
| 40 |
|
The difference in earnings is |
60000 |
|
line 23 |
|
|
40 |
| 41 |
|
minus new necessity of |
21600 |
|
Line 34 |
|
|
41 |
| 42 |
|
for an earnings savings of |
38400 |
|
|
|
|
42 |
| 43 |
|
or a monthly difference of |
3200 |
|
|
|
|
43 |
| 44 |
|
|
|
|
|
|
|
|
|
44 |
| 45 |
|
And, if you are self employed as I am, I would have to do |
|
|
45 |
| 46 |
|
$200,000 of business and pay $140,000 of expenses to have a profit of |
|
46 |
| 47 |
|
$60,000 left over to pay the tax on the $60,000 on line 23 |
(Aug 11, 2007) |
47 |
And this will also show the mathematics of paying down a mortgage with the earnings from a Mutual fund.
| Using New Securities Account to make mortgage deductible |
|
This is to show the method only |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Most, if not all people buy a Mutual fund and have the dividends reinvested |
|
|
|
|
|
| in the fund. Do NOT DO THAT if you want a deductible mortgage |
|
|
Non |
|
|
|
|
|
|
|
|
|
|
|
|
Deductible |
Non |
HELOC |
| Assume you have a borrowed |
|
100,000 |
to buy funds and they pay |
0.06 |
original |
less |
Deductible |
interest |
| A |
B |
C |
D |
E |
F New |
G |
H |
I |
J |
K |
L |
M |
| You pay |
0.06 |
pay your |
35% Tax |
borrow for |
Invest't |
Mutual |
earnings |
worth |
mortgage |
earnings |
original |
not de- |
|
borrowed |
interest |
Refund |
new funds |
loan |
Fund |
0.06 |
|
|
|
|
ductible |
| 2007 |
100000 |
6000 |
2100 |
6000 |
106000 |
100000 |
6000 |
106000 |
100000 |
6000 |
94000 |
6000 |
| 2008 |
106000 |
6360 |
2226 |
6360 |
112360 |
106000 |
6360 |
112360 |
94000 |
6360 |
87640 |
5640 |
| 2009 |
112360 |
6742 |
2360 |
6742 |
119102 |
112360 |
6742 |
119102 |
87640 |
6742 |
80898 |
5258 |
| 2010 |
119102 |
7146 |
2501 |
7146 |
126248 |
119102 |
7146 |
126248 |
80898 |
7146 |
73752 |
4854 |
| 2011 |
126248 |
7575 |
2651 |
7575 |
133823 |
126248 |
7575 |
133823 |
73752 |
7575 |
66177 |
4425 |
| 2012 |
133823 |
8029 |
2810 |
8029 |
141852 |
133823 |
8029 |
141852 |
66177 |
8029 |
58148 |
3971 |
| 2013 |
141852 |
8511 |
2979 |
8511 |
150363 |
141852 |
8511 |
150363 |
58148 |
8511 |
49637 |
3489 |
| 2014 |
150363 |
9022 |
3158 |
9022 |
159385 |
150363 |
9022 |
159385 |
49637 |
9022 |
40615 |
2978 |
| 2015 |
159385 |
9563 |
3347 |
9563 |
168948 |
159385 |
9563 |
168948 |
40615 |
9563 |
31052 |
2437 |
| 2016 |
168948 |
10137 |
3548 |
10137 |
179085 |
168948 |
10137 |
179085 |
31052 |
10137 |
20915 |
1863 |
| 2017 |
179085 |
10745 |
3761 |
10745 |
189830 |
179085 |
10745 |
189830 |
20915 |
10745 |
10170 |
1255 |
| 2018 |
189830 |
11390 |
3986 |
11390 |
201220 |
189830 |
11390 |
201220 |
10170 |
11390 |
-1220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Because the earnings from the mutual fund are mostly dividends and capital gains which are very tax efficient |
|
|
| there will be litle tax on the earnings - certainly less than half of the tax savings in column D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| In this example, I have assumed an interest only HELOC and assumed that you would have paid your regular non-dedcutible interest |
| which would decrease each year because of the principal being paid down in column K. |
column M represents HELOC interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Every one's situation is different. YOUR cash flow will be different. And to escape GARR, you must be making a business decision |
| If you wish to make your mortgage deductible. A perceived increase in earnings from a mutual fund loan would likely be sufficient |
| but there are NO, NONE, NOT ANY Guarantees. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| If this situation interests you, you are advised to get a written financial plan from Fred Snyder FIRST - His Number is (604) 731-8900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| david ingram, home office phone (604) 980-0321 - Please do NOT phone before 10 AM or after 9 PM but you can phone 7 days a week |
| there are NO message machines - If you do leave a message with a person, If I do not get back in 4 hours, I WILL NOT BE RETURNING |
| the call - I leave it to YOU to follow up. I get over 700 emails a day and my record for phone calls on April 30 2006 was over 140. |
|
Not sure if this will help or not. What you should do is get Fred Snyder to do a written financial plan for you. see the red a couple of lines up.
QUESTION: I am planning on relocating to USA in the near future. I will not
work in USA but I do have retirement income from Canada, that I would use to
live on in the USA. I only plan to live not work in USA, are their going to
be any tax concerns for me.
I realize I have to file a Canadian tax return can I be taxed again in USA
on this income.
Regards
--------------------------------------
david ingram replies:
You can NOT just retire to the USA. You can spend up to 6 months a
year there as a visitor IF you have a home ready for you at a moment's
notice in Canada. That means you can NOT rent your home ouot to a stuent
or visiting professor while you go south. It has to be ready for you to
go home to if you get turned back at the border.
In addition, to keep your provincial or territorial medical plan alive,
you have to be in your home province or territory for more than 183 days
a year with the exception of Ontario which only requires you to be there
more than 153 days for some reason or the other.
Under the substantial Presence test, if you are in the USA more than 120
days a year three years in a row or 140 days a year two in a row, you
will need to file a 1040NR US tax return and claim a closer connection
to Canada on form 8840.
Read the April 1994 newsletter in the top left hand box at www.centa.com
for more information. The numbers are a little out of date but the
concept is exact.
QUESTION:
David, Is there a way to cash in my RRSP to avoid some of the taxes?
Thanks,
Max
----------------------------------------------------
david ingram replies:
1. you can take it out in a low income year
2. you can buy flow through shares or movie deals which are risky
3. you can roll the money into an RRIF and take ouot $2,000 a year tax free after age 65
4. you can leave Canada and take it out a a maximum rate of 25%
5. you can use an RRSP drain technique where you borrow to buy an equivalent amount of funds outside of an RRSP and use the interest as a deduction. You withdraw enough out of the RRSP to pay the interest on the loan and thereby 'drain' the money out of the RRSP. After a while, the money outside of the RRSP equals what was in the RRSP. �
Monday 06-Dec
Sunday 05-Dec
Friday 15-Oct
Wednesday 15-Sep
Tuesday 14-Sep
|
