Hello

I am an American citizen (naturalized) and also a Romanian citizen (by birth)
spending most of my time in Romania (more than 300 days/year), where I own a
permanent home and real estate investments, have family, civic activities,
etc.

In the US I own a vacation home which I visit for less than 60
days/year, and I only have some interest income from US banks, while from
Romania I have capital gains and rental income.

There is a Tax Convention between US and Romania, which qualifies me as a
fiscal resident of Romania, and which precludes the US from taxing my income
from Romania.

Question: Can I file as a NR (although a US citizen), possibly attaching form
8833 to 1040NR and exclude my income in Romania from US taxes ?

Thank you

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david ingram replies;

Article XIII of the treaty DOES seem to stop the US from taxing your Romanian Capital Gains but it stops there.

For everything else, you are taxable on a US 1040 because as a US citizen, you are taxable on your income anywhere in the world.

The US will give you a foreign tax credit for taxes that you paid to Romania on interest and dividends and Romania will give you a credit for the 10% net tax you pay to the US. To achieve the 10% rate it might be necessary for you to file form 1116 and check off the 'resourced by treaty box'. Claim the benefits of Article XI.

A US citizen MUST file form 1040. US citizens do not file form 1040NR. Don't forget to file the TDF 90-22.1 forms for your Romanian Financial accounts. See the bottom two questions on schedule B.

QUESTION:

I have invested funds from my US self directed IRA retirement account to purchase stock in a private company in Canada. The Canadian private company is going to be taken out by another company. I realize I will have to pay capital gains tax in Canada on the stock gain, however since it's my IRA retirement account funds in the US, is there any way to recover these taxes that I pay to Canada?
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david ingram replies:

If the funds are within an American IRA, they do NOT form part of your Canadian tax return although the reverse is not true with American holders of Canadian RRSP accounts being required to report the internal earnings on their US 1040. Thankfully, all these internal earnings can be exempted from current tax by filing IRS form 8891.

You have no current tax liability to Canada on the Capital Gain.

When you cash in the IRA or take it out as a pension, you will be taxable on 100 percent of the gain in both countries as you withdraw the money. However, Canada will then give you a tax credit for the tax paid to the US. If you are living in Canda at the time of withdrawal as a pension, the maximum tax the US can take is 15% under Article XVIII of the US Canada Tax Treaty.

If you are living in the US at the time, Canada will not have any right to tax the IRA.

QUESTION: I am a Canadian citizen who has been resident in the US for 7 out of the past 10 years.
>
> I've never filled out a 1040 Schedule B because I've never had taxable interest or taxable dividends totalling more than $1500. However upon recent closer examination of the form, I think I should have because of Part III Forgeign Accounts and Trusts.
>
> I have more than $10K in RRSP's (not collapsed) and more than $10K in a non-interest bearing Canadian savings account.
>
> I want to fulfill my reporting obligations to the IRS so do I need to send in an amended tax return for each year I was resident in the US with a Schedule B and Form 8891 attached, or can I simply start the process for the 2006 tax year and all subsequent years?
>
> Similarly, I inadvertently never filled in form TD F 90-22.1 for each year I was resident in the US that I had more than $10K in foreign accounts. If I send in TD F 90-22.1 for the 2006 tax year (by June 30) and all subsequent years, do I need to do anything for the previous years?
>
> --------------------------------------------------------------------------
david ingram replies:

You have discovered that you should have been filling in forms TDF 90-22.1 for both accounts and form 8891 for the RRSP.

You do NOT need to file retroactively. Thankfully the 8891 form has a place to start now. Send it in with a 1040X.

The TDF 90-22.1 forms go separately to Detroit.



This older Q & A will likely help


Sent: Sunday, February 11, 2007 4:51 PM
To: Centapede-questions
Subject: RRSP


Can you handle one more question about Canadians residing in the US who hold RRSPs??

Thanks to your info, I have been filing form TDF 90-22.1 and 8891 since 2002. On form 8891, I made the election to defer income in 2002 and have been declaring the current December 31 year-end value on that form every year since 2002. I thought I had it figured out but now I'm reading all the other questions from your other readers and I guess it's tax time so I have to freak out just a little. My RRSPs have gained value since I've been here, but I thought as long as the earnings stay within the RRSP and I am not withdrawing any, all I need to do is declare the year-end value on the 8891 and the TDF 90-22.1 ??

Just double-checking. Thanks. One day I will have to think about how to report and take some of that money as income, but not this year!

Thank you.
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david ingram replies:

The internal undistributed earnings of the RRSP must be reported on the 8891 on line 10 - a - b - c - d - and e

However, the form is poorly written and tells you to put the income on Schedule B. If you stop there, you end up paying tax on the money because the form does not tell you how to take it off. What you do is put it on and deduct it immediately (per line 6 form 8891).

In the last couple of years, the gain has been mostly from exchange rates.

I put the difference between Dec 31 of last year and Dec 31st of the current year on line 10 with the following statement written in the explanation space, "A combination of internal earnings and changes in exchange rates have resulted in a paper profit (or loss) of $XXX,XX

My Turbotax program is not working properly for this as well.

Another method is to put the income on the schedule B and remove it per form 8891 on line 22 of the 1040.

That may be the better way in the long run.

QUESTION:

I have a client who is a US citizen but resides in Canada. She received a $20,000 dividend from a CCPC in 2006. What are the US tax issues?


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david ingram replies:

The actual amount (not the grossed up amount) is taxable on her US 1040 and uis resported on schedule B. Pay attention to the two bottom questions because she will 'have to' fill in US form T D F 90-22.1 for the account she holds these shares in and any other accounts as well evewn if there is only a dollar in the account.

If she owns 5% or more of the CCPC (Canadian Controlled Private Corporation), she wil also need to deal with form 5471.

Penalties are up to $50,000 a year for not filling in form 5471 and $500,000 plus five years in jail fro not filling in the TDF 90-22.1.

Any tax paid to Canada on the dividend can be claimed as a foreign tax credit on US form 1116.


This older answer will likley help.

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A question I am hoping you will be able to help us with.
>
> My son's fiancee who has been living common law with him for over a year and living in Canada is trying to file her US taxes. She is in the process of applying for her residence status here, which should come through any time now. They have "filed" common law status with the Canadian authorities as of March of the past year and the paperwork was filed in May for her Canadian residency. She has no US income so how does she file her return for 2006 with the US?
>
> If you can help us, it certainly would be appreciated.
>
> Thank you,
> ___________________________________________________
> david ingram replies:
>
> Well, she could send it all to us and we would do it for her and likely charge $800.00 plus GST.
>
> OR,
>
> If she just has one or two T4 slips from Canada, she can goto www.centa.com and read the 'US/Canada Taxation' section in the second box down on the right hand side. She should also read the October 1995 Newsletter which explains the responsibilities of a US citizen living in Canada. She can find that newsletter in the top left hand box on the same page.
>
> I have reproduced part of it here
>
>
>
>
The U.S. taxes on citizenship first and residency or physical presence second. If you have another tax home, and are just an extensive visitor in the States, you can escape U.S. tax on your income from other countries. However, if you renounce your other tax home or become a "green card" holder or are in the U.S. for more than 183 days in one year, you are subject to U.S. income tax on your world income.

The U.S. taxes its citizens and green card holders wherever they are and no matter what they are doing. The U.S. taxes its citizens in Canada and they will tax them in the North Sea. The U.S. will add on the benefit of housing allowances, car allowances, servants, and education allowances for people who have not been in the U.S. for twenty years but who are still U.S. citizens. If you want the benefit of U.S. Citizenship, you pays your taxes.) The first $82,400 U.S. of income earned from personal services (as opposed to capital) is exempt if you have been out of the country for a full calendar year in one test or for 330 out of 365 days in another test using a fiscal year (form 2555).

However, being "exempt" does NOT mean that you do not have to file a tax return. You must still file your U.S. 1040, report the Canadian Earnings in U.S. dollars and claim the "up to $82,400 U.S." by filing a form 2555 with the 1040. If you have investment, [INCLUDING AMOUNTS EARNED WITHIN YOUR CANADIAN RRSP], rental, royalty, or any income other than from services, you must also report the income in U.S. dollars. Since you will have paid tax to Canada first, you will file a Form 1116 with the 1040 to claim your foreign tax credit. A separate Form 1116 must be filed for each kind of income, i.e. rental, pension, dividends, etc.

The RRSP earnings may be exempted under ARTICLE XXIX.5 of the U.S. / CANADA Income Tax Treaty 1980 - file form 8891.

Social security (FICA) taxes usually do not have to be paid to the U.S. under Article XXIX.4 of the U.S./CANADA Income Tax treaty or Article V of the CANADA / U.S. Social Security Agreement. (I sure hope all this is impressing you).

Therefore, a U.S. citizen living in Canada who had a rental house, a job, an RRSP, some dividends and some capital gains from the sale of stock would file his or her Canadian return first and then file a U.S. return with these forms:

* 1040 - is the basic return for a citizen or resident of the U.S. or landed immigrant of the U.S. (commonly called a "green card" holder).

* Schedule A - to claim itemized deductions if needed

* Schedule B - to report the dividend income

* Schedule D - to report the capital gains

* Schedule E - to report the rental income

* 4562 - to report depreciation on the rental house

* 1116 - (maybe two foreign tax credit forms) - one for any income from services over $82,400 - one for the rental, capital gains, and dividend income and another for the wages.

* 1116(AMT) - two more forms to calculate the foreign tax credit for Alternative Minimum Tax purposes (AMT)

* 2555 - to exempt up to $82,400 (2006) U.S. of earnings from services - Note that htis ran from $70,000 to $80,000 before.

* 6251 - Alternative Minimum tax form


* 1161 AMT - AMT foreign tax credit

* FICA (Social Security) exemption - to exempt income from U.S. FICA

* 8891 - RRSP election forms to exempt income earned within the RRSP from current U.S. income tax until withdrawal

* TDF 90-22.1 form(s) - to report foreign bank accounts including Canadian RRSP accounts which are considered "foreign trusts" - failure to file this form can result in up to a $500,000 fine PLUS up to five years in jail

He or she might also have to file either of the following two specialty forms when he or she owns shares in corporations.

* 5471 form - If you are a U.S. citizen and 5% or more owner of a Canadian corporation. Failure to file this form can create fines of $10,000 every 30 days up to $50,000

* 5472 form - If you are a Canadian who owns a U.S. corporation - failure to file this one has fines of up to $30,000 every 30 days.

QUESTION:

We are buying a property in US. The down payment is to come from India selling a property there. What is the quickest and best way to do this?
Please help us figure this out.
Thanks

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david ingram replies:

If you have just become US residents and are buying a house to live in, there is problem. Just have the bank in India send the money to your bank in the US.

If you have been US residents for some time, you have to take capital gains tax into account.

Any profit you have realized on the India property is subject to US capital gains tax.

Claim any tax paid to India as a credit on US form 1116.

If the property in India was rented, any rents should have been reported each year on US form Schedule E.

And any India Bank or other financial accounts you have should have been reported on form 'T D F 90-22.1' if the total of all your accounts exceeds $10,000 US (it will for the sale for sure). See the bottom two questions on US form Schedule B.

QUESTION: Hi David,
I will be starting my job under TN-1 in June 1. I have no real estate in Canada and plan to sell my car.

I have been separated with my ex-wife for 3 years now but have not filed a divorce yet. Though filing an uncontested divorce this year is not impossible. My daugther, who is still a minor is staying with her mother and I pay her child support.

My remaining ties in Canada include a life insurance policy, two bank accounts with with very small amount of savings, 2 credit cards, two lines of credit and some RRSP.

I believe I can file my next year canadian income tax as a non-resident and will not have to pay canadian tax for the US income I will earn from June onward.

Is that correct? Any other ties I have to take care of? such as divorce?

Regards,
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david ingram replies:

As described, you will be a non-resident of Canada.

No divorce is necessary but you should likely put a legal separation document together. Get rid of the two Canadian bank accounts and open US accounts. Get a US credit card

File form T1161 with your final Canadian return next year.

Hi Dave
You advised recently that deduction of rental property mortage interest(s) is Kosher only if you realistically expect to realise a positive cash flow from rental income within a reasonable span of time.

With the cost of an average house or condo nowadays, a mortgage would have to be payed down alot for the rent to actually provide a surplus.

What if it never produces a positive cash flow and you just sell it? Will the years of claimed deductions come into question?

What if you move into it upon retirement? Will you be accused of never intending to realise a positive cash flow?

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david ingram replies:

If you bought an apartment to move into in five years and the projected rental cash flow upon purchase showed negative every year, you would not be allowed to claim the rental loss in the interim.

If you bought a rental profit to movie into in 15 years and it projected rental losses for seven years and a rental profit for eight, you would be allowed the rental losses even if the actual projection became wrong and you actually lost money for 11 years.

If you bought an apartment as an investment to sell at a profit and rent it out in the meantime as a method of helping with the payments, any losses are NOT deductible because you did not buy it to rent but to sell for a profit at a specific time.In addition, any profits on the sale would be subject to straight income taxes, not capital gains.

If you bought an apartment to rent out for ever and were forced to sell in 3 or 7 or 10 years because of outside circumstances, the rental; losses would be deductible and any profit on the sale would be taxed at Capital Gains rates.

Obviously, there is something in between. However, 'Anything' you buy for personal use or eventual personal use is subject to restrictions on the amount of rental loss you can claim as a deduction against other income.

Goto www.centa.com and read the rental income section in the TAX GUIDE in the top left hand box.

Hi David,

You didn't address the whether living outside Canada with a Canadian would allow his wife's immigration status to continue.

Thanks,
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david ingram forgot to reply:

Once your wife has officially landed in Canda and has her PR (permanent resident) card, it will remain valid as long as she is living with you in or out of Canada. If the two of you separated, she would have to live in Canada for 24 months (not necessarily consecutive) out of any 60 month period.

This means that under Article IV of the US and another 100 international tax treaties, it is possible to live in Ontario for 5 months (153 days) a year and qualify for Ontario Medical but not be taxable in Canada on your world income because you are in your other country for more than the 183 days. Ontario is the only province or territory that does not require your presecnce for 6 months or six months plus a day to qualify for your medical which means that in every other province, to qualify for medical, you make yourself taxable in Canda on your world income.

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At 12:57 AM 5/24/2007, you wrote:
Please see bottom of message if you wish to unsubscribe.
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Time: 03:01 PM -0400

QUESTION:

Hello Tax Experts
I am a Canadian going down from Vancouver to Seattle to work on an L1. I have been transfered to the company's head office.
I am also brining my wife with me whom I met on a cruise ship. She is xxxxxxxxx and has her Canadian immigration papers in process.
I have been told that to claim non residency would cancel my wife's application so our intention is to keep our residency status which I imagine would be easy as the visa is really only for 3 years anyway.
We will rent out our apartment via a management company but I'm wondering how much difference there would be in taxes by doing things this way. If I was making a nice round number like 100K per year US... is it easy to say what the difference would be remaining a resident vs becoming non-resident?
I was always told that if I was in a 30% bracket in the states and a 33% bracket in Canada, I would owe Canada 3% at the end of the year by remaining a Canadian resident.

Is that correct?

Thanks for any information you can give me!

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david ingram replies:

Without paying any attention to the rental or cost of living, as a resident, you would owe Canada $6,600 or so more if you earned $100,000 in Seattle and this was converted to $110,000 Caandian.

This assumes a full year of employment and that you earned all of the income and your wife earned nothing.

The advantage of being a factual resident is that you could avoid capital gains tax on your apartment.

Dear Mr. Ingram,

My wife and I moved from Canada to the U.S.A. as permanent residents more than 10 years ago. Can we roll our Canadian RRSPs into U.S. 401K, IRA or Roth IRA accounts? Any tax implications for such a move?

Thanks and best regards,

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david ingram replies:

The answer is no. There is no practical way to roll or move an RRSP into a US tax sheltered account all at once. You can, of course, just remove 'X' dollars a year from your RRSP, pay the 25% tax and use that amopunt of money to make a contribution to a company account by thinking of it as substituted money.

i.e. use the Canadian RRSP money to make a larger contribution than you might be able to afford otherwise.