My question is: US-specific

QUESTION: We have property in Birch Bay Village ( a building lot) We are
thinking of selling. Is this the right time or should we wait another
year.Birch Bay Village is a gated community.

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david ingram replies:

The first time I was asked about selling Birch Bay Village lots was back in
1969.

Then a Friend Ed Keate wrote a wonderful witty book called "Land, Land,
Loverly Land" which was a blatant push for Canadians to buy land in Whatcom
county. I have likely prepared 300 or more tax returns for Canadians who
have bought and sold down there and done okay. Another 100 have lost their
shirts, usually when they bought in Sudden Valley which just sat there and
sat there and sort of compares to Canada's Hemlock Valley.

Should you hold or sell now? I haven't got a clue. The prices there are
always an anomaly to me.

I was down at one of the other developments three weeks ago and amazed at
the recent price spike.

If you have a better use for the money, sell and use it. If you do not have
a specific or better use of the money hold on.

During fiscal year 2006, 109 tax return preparers were convicted of tax crimes and sentenced to an average of 18 months in prison. (see #6 below)

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Fraudulent Telephone Tax Refunds, Abusive Roth IRAs Top Off 2007 “Dirty Dozen” Tax Scams

IR-2007-37, Feb. 20, 2007

WASHINGTON –– The Internal Revenue Service today identified 12 of the most blatant scams affecting American taxpayers and warned people not to fall for schemes peddled by scamsters.

This year the “Dirty Dozen” highlights five new scams that IRS auditors and criminal investigators have uncovered. Topping off the list are fraudulent refunds being claimed in connection with the special Telephone Excise Tax Refund available to most taxpayers this filing season. The IRS is actively investigating instances of this scam involving tax preparers who are preparing inflated refund requests.

Also new to the Dirty Dozen this year are abuses pertaining to Roth IRAs, the American Indian Employment Credit, domestic shell corporations and structured entities.

“Taxpayers shouldn’t let their guard down,” IRS Commissioner Mark W. Everson said. “Don’t get taken by scam artists making outrageous promises. If you use a tax professional, pick someone who is reputable. Taxpayers should remember they are ultimately responsible for what is on their tax return even if some unscrupulous preparers have steered them in the wrong direction.”

Involvement in tax schemes leads to problems for scam artists and taxpayers. Tax return preparers and promoters risk significant penalties, interest and possible criminal prosecution.

The IRS urges taxpayers to avoid these common schemes:

1. Telephone Excise Tax Refund Abuses: Early filings show some individual taxpayers have requested large and apparently improper amounts for the special telephone tax refund. In some cases, taxpayers appear to be requesting a refund of the entire amount of their phone bills, rather than just the three-percent tax on long-distance and bundled service to which they are entitled. Some tax preparers are helping their clients file apparently improper requests. The IRS is investigating potential abuses in this area and will take prompt action against taxpayers who claim improper refund amounts and against the return preparers who help them.

2. Abusive Roth IRAs: Taxpayers should be wary of advisers who encourage them to shift under-valued property to Roth Individual Retirement Arrangements (IRAs). In one variation, a promoter has the taxpayer move under-valued common stock into a Roth IRA, circumventing the annual maximum contribution limit and allowing otherwise taxable income to go untaxed.

3. Phishing is a technique used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for loans in their names. These Internet-based criminals pose as representatives of a financial institution –– or sometimes the IRS itself –– and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking Web site. The Web site then solicits a social security and credit card number. It is important to note the IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts. If a taxpayer has any doubt whether a contact from the IRS is authentic, the taxpayer should call 1-800-829-1040 to confirm it.

4. Disguised Corporate Ownership: Domestic shell corporations and other entities are being formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity. Once formed, these anonymous entities can be, and are being, used to facilitate underreporting of income, non-filing of tax returns, listed transactions, money laundering, financial crimes and possibly terrorist financing. The IRS is working with state authorities to identify these entities and to bring their owners into compliance.

5. Zero Wages: In this scam, which first appeared in the Dirty Dozen in 2006, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 showing zero or little income is submitted with a federal tax return. The taxpayer may include a statement rebutting wages and taxes reported by the payer to the IRS. An explanation on the Form 4852 may cite statutory language behind Internal Revenue Code sections 3401 and 3121 or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation.

6. Return Preparer Fraud: Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. Such preparers make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote filing fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer. As the old saying goes, “If it sounds too good to be true, it probably is.” Remember that no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others. During fiscal year 2006, 109 tax return preparers were convicted of tax crimes and sentenced to an average of 18 months in prison.

7. American Indian Employment Credit: Taxpayers submit returns and claims reducing taxable income by substantial amounts citing an American Indian employment or treaty credit. Although there is an Indian Employment Credit available for businesses that employ Native Americans or their spouses, there is no provision for its use by employees. In a somewhat similar scam, unscrupulous promoters have informed Native Americans that they are not subject to federal income taxation. The promoters solicit individual Indians to file Form W-8 BEN seeking relief from all withholding of federal taxation. A recent “phishing” variation has promoters using false IRS letterheads to solicit personal financial information that they claim the IRS needs in order to process their "non-tax" status.

8. Trust Misuse: For years unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. There are currently more than 150 active abusive trust investigations underway and 49 injunctions have been obtained against promoters since 2001. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

9. Structured Entity Credits: Promoters of this newly identified scheme are setting up partnerships to own and sell state conservation easement credits, federal rehabilitation credits and other credits. The purported credits are the only assets owned by the partnership and once the credits are fully used, an investor receives a K-1 indicating the initial investment is a total loss, which is then deducted on the investor’s individual tax return. Forming such an entity is not a viable business purpose. In other words, the investments are not valid, and the losses are not deductible.

10. Abuse of Charitable Organizations and Deductions: The IRS continues to observe the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income. Contributions of non-cash assets continue to be an area of abuse, especially with regard to overvaluation of contributed property. In addition, the IRS is noticing the return of private tuition payments being disguised as charitable contributions to religious organizations.

11. Form 843 Tax Abatement: This scam rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request. Often, one of the reasons is: "Failed to properly compute and/or calculate IRC Sec 83-Property Transferred in Connection with Performance of Service."

12. Frivolous Arguments: Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

IRS Still Watches Scams That Fall Off the List

Five of last year’s Dirty Dozen tax scams rotated off the list for 2007. While the IRS has seen a decline in the occurrence of some of these scams –– abusive credit counseling agencies, for example –– other problems, such as offshore abusive transactions continue to be an area of particular concern for the agency. The absence of a particular scheme from the Dirty Dozen should not be taken as an indication that the IRS is unaware of it or not taking steps to counter it.

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov, or by mail by calling 1-800-829-3676. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential. The person may also be entitled to a reward.

Links:

http://www.irs.gov/businesses/small/article/0,,id=3D106788,00.html
http://www.irs.gov/newsroom/article/0,,id=3D164032,00.html
http://www.irs.gov/individuals/article/0,,id=3D136324,00.html
http://www.irs.gov/compliance/enforcement/article/0,,id=3D130597,00.html
http://www.irs.gov/compliance/enforcement/article/0,,id=3D106778,00.html
http://www.irs.gov/pub/irs-pdf/f3949a.pdf
http://www.irs.gov/newsroom/article/0,,id=3D167542,00.html
http://www.irs.gov/newsroom/content/0,,id=3D105771,00.html

QUESTION: We are 1st time home buyers and we want to use our RRSP. If we
> have a RRSP at work, and at several banks, can we withdraw from all of them
> as long as its less than $20,000 each? My question is can I use the RRSP
> from several institutions or just from one? Thank you.
>
> ---------------------------------------------------------------------------
david ingram replies:

You can take them out of as many RRSP accounts as you have. However, I
would just roll them all over into one and take it out of that one for
convenience sake.

And, in my opinion, you are better off paying down your mortgage an extra
bit than you are paying back the HBP at 1/15th a year for fifteen years.

QUESTION: Hi David,

I am a Canadian citizen. However, from March 2000 to Nov 2004, my family and I became non residents while I worked overseas. During the period that we were overseas we rented our home in a long term lease agreement. When we returned to reside in Canada we purchased another home to live in and we have continued to rent our original house. Could you please explain how capital gains will be handled? Do we need to file anything forms with CRA prior to selling the rental house? Also, how would capital gains be handled if we sell our current personal residence and move back into the rental house?

Best regards,

________________________________________________________________
david ingram replies:

The first house has incurred capital gains tax from the moment you left the country. Although it is possible to rent a house out for 4 years and claim it capital gains tax free by filing an election under section 45(2), this does NOT apply to non-residents. We have had a couple of cases lately where the capital gains tax on the house is more than the tax saved bt becoming a non-resident for three or four years because the houses went up so much in value.

I am assuming here that the second house you are living in has increased in value more than the rental since you returned and it should be your principal residence for that time because it would have been possible to declare the rental capital gains tax free after your return by filing the election.

Deemed Disposition!

Moving in to a rental house 'triggers' the capital gains right now although it does not have to be paid right now. The capital gains is calculated on schedule 3 an dthe amount put on line 127 of the T1 General Canadian Tax return. You then make an election to defer payimng the tax until actual sale under section 45(3) and deduct the line 127 amount on line 256.

This older question will likely help you understand it.


QUESTION:

We have moved out of country for job reasons and now look to return to
Canada. Before leaving we tried to sell our home and were unable. For the
last 10 years we have been renting it. We plan to move back into and then
sell it. What must we do in order to avoid paying capital gains tax.

Dan

PS We did not know that we could have declared it our principal residence
as we moved for job reasons and thus, did not do that!
====================================================================
david ingram replies:

When you moved out of Canada, you should have done a departing Canada return
and filled in either a T1161 or the former form (number escapes me a t ithe
moment) to declare assets left behind.

At any rate, if you became a non-resident of Canada from your job move,
there is no exemption from capital gains tax on the increased value of the
house unless you were a deemed or factual resident of Canada while you were
gone. A deemed or factual resident status can apply to people who are
working on CIDA projects, are members of the armed forces, are members of a
Canadian Diplomatic mission, working for the United Nations and a couple of
other esoteric items covered by Regulation 3400.

Your Belgian email address makes most of these possibilities unlikely.

In addition, you would have had to report your earned income to Canada every
year and I presume that you did not do that but did file a Section 216(4)
rental return to report the rent received.

A further complication is that if you returned to Canada and bought another
house which you moved into, there would not be an immediate tax bill but if
you move into the rental house, it is deemed to have been sold and you (and
your spouse if joint) owe tax on the increased value.

Fortunately, under section 45(3) of the Canadian Income tax act, you can
notify the CRA (Revenue Canada when you left 10 years ago) that: I hereby
elect under section 45(3) of the Income Tax Act to defer the payment of tax
on the residence at XXX your street, until the actual sale. Attach a
proforma Schedule 3 to calculate the profit and then pay it when you
actually sell the house.

In other words, if your intention was to move in for a short time to try and
make it tax free, you are just doubling your moving expenses and increasing
your accounting and legal fees.

If the idea is to move into a new house on your return, you are better off
to sell the one you have first and buy the new one
before you come back so that you have the most capital freed up to buy the
next house and move directly.

- Incidentally - If you decided to keep the old one as a rental and borrow
money against it to use to purchase the new one, the interest on the
borrowed money is NOT deductible against the rental income even though the
mortgage is registered against the rental house because the money was USED
to buy the personal residence you are about to occupy.

You can learn more about this by reading CRA Bulletin IT-533 at:
http://www.cra-arc.gc.ca/E/pub/tp/it533/it533-e.pdf

You can find out more about interest as a deduction by reading my November
2001 newsletter by going to www.centa.com, clicking on newsletters in the
top left box, click on 2001 and click on November.

QUESTION: I work in Indonesia. I am married to a woman from Singapore. I am an American citizen and she is not. We are expecting a baby next fall. It is possible that we would like her to deliver in America. This is particularly true if it is a boy as boys born in Singapore are required to serve in the armed forces for two years and we would rather him not do that. We would continue to live in SE Asia once the child is born. Are they any immigration obstacles that we need to clear in order for her to have the baby in America? If so, what are they? Thank you.

____________________________________________________________________________________________
david ingram replies:

A dozen things could go wrong.

Sorry, but I am not the person to deal with. Under the circumstances you need a good lawyer, a member of the AILA (American immigration Lawyers Association) or very good luck in dealing with it yourself.

You should contact Joe Grasmick at www.grasmick.com or Greg Siskind at www.visalaw.com.

Both are set up to do phone consultations and can follow up later with Homeland Security..

I have just sold a property in the uk which I have had let for nine years and made£100.000 profit I am a canadian resident now for six years.
who do I pay the capital gains tax on the profit to the uk or canadian tax authorities and at what rates
_________________________________________________________________

david ingram replies:

I do not have time to answer this but am including an answer from last week which should do the trick


------------------------------------------

QUESTION: MY SON IS A CANADIAN RESIDENT AND HAS SOLD SOME RENTED FLATS THAT HE HAS OWNED FOR 10 YEARS IN THE UK,HE HAS BEEN A CANADIAN CITIZEN FOR SIX YEARS.WILL HE HAVE TO PAY CAPITAL GAINS TAX ON HIS PROPERTY SALE IN THE UK OR CANADA.IF HE HAS TO PAY IN CANADA AT WHAT PERCENTAGE RATE WILL HE BE CHARGED

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david ingram replies:

Any capital gain is taxable in Canada from the day he became a Canadian resident, not from the day he became a citizen.

So, if he paid $500,000 for them and they were worth $600,000 the day he came to Canada, and he sold them for $1,000,000 today, his UK capital gain would be $500,000 and his Canadian capital gain would be $400,000.

Canada taxes 1/2 of a capital gain so he would owe tax on $200,000. Every province has different tax rates so the following is just approximate. BC, for instance has 6 progressive rates starting at about 22% on the first $35,000 and topping at about 43% over $130,000

Because the six rentals were not his residence before he left, they will be taxable in the UK first.

He will get credit in Canada on line 431 Schedule 1 of his Canadian return for the tax paid to the UK.

The following might help as well
______________________________

My_question_is: Applicable to Another Jurisdiction or Multi-jurisdictions
Subject: UK Capital Gains tax on UK Property Sale
Expert: [email protected]
Date: Friday March 02, 2007
Time: 09:31 AM -0500

QUESTION:

Hi - I am a British citizen who has been resident in the US for 11 years, and a green card holder for 8 years. I have a property in the UK which I am considering selling. I have rented it out since I left, and have been paying tax in the US on the rental proceeds. I gather that I will have to pay capital gains tax in the US if I sell it. Will the UK Inland Revenue also expect me to pay capital gains tax on the sale? (It would seem a little unfair to have to pay twice!)
Thanks for your help.

___________________________________________
david ingram replies:

The property is taxable in the US and may be taxable in the UK first. If it is, the tax will be credited to you US tax by filing form 1116. This reply to a Canadian will give you a heads up.
--------------------------------------------



My_question_is: Canadian-specific
Subject: Tax on property sale in UK
Expert: [email protected]
Date: Wednesday January 24, 2007
Time: 10:25 AM -0500

QUESTION:

I hold both Canadian and British citizenship. I own property in the UK (I
have owned an apartment for about 15 years)and was wondering about the tax
situation, both in the UK and Canada, if I were to sell the property there.
-------------------------------
david ingram replies:

The UK is similar to Canada in terms of selling a principal residence.

I can also claim a British Passport but at 64 I am not likely to do so at
this time.

I know that if (always a non-resident) I had bought the house as an
investment, I would not owe any tax to the UK but would to Canada.

In the case of a house that you used to live in, it can be subject to UK
private residence tax relief if you lived in it before you left and can not
return because of job circumstances for either spouse.

If it is just an investment property, it is likely taxable. It does not
matter much though because the tax will be lower than the Canadian tax and
it "IS" taxable in Canada - the tax paid to the UK will be a tax credit in
Canada on lines 431 and 433 of the Canadian T1.

I suggest that you need to talk to a UK accountant or maybe the Inland
Revenue itself.

You can also find out a bit by reading


http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/TaxOnPropertyAndRental
Income/DG_4020890

Do me a favour and let me know the answer if you find out.

This will be going out to another 13,000 people and someone may write back
with the answer. If so i will forward it to you.

QUESTION:

I want to gift $200,000 to my 21 yrs old son for him to buy a condo.

Will he have to pay income tax on that amount?

Should I write a formal letter for the CRA stating that it is a gift from me?

Thanks for your advice.
________________________________________
david ingram replies:

There is no gift tax in Canada. If the $200,000 pays for the condo, you do not need to do anything other than write a check. then you get to watch him get married, have the marriage collapse and the ex wife take half of the condo which is now worth $400,000 - do NOT worry about this or try and take steps so that it will not happen - it is a fact of life.

If there is going to be a mortgage on the property, the mortgage company will want a gifting letter from you stating that you have NO claim against the property.

The CRA does not need a letter unless your son gets involved in something illegal in which case you will want to prove that the $200,000 was not the result of proceeds of crime. Then it will be CRA for tax purposes and the RCMP or local police force that needs it to stop them from seizing the property under proceeds of crime legislation.

If this sounds pessimistic both situations are happening with the children of some nice people I know and I saw that a really nice 24 year old I used to coach in baseball was just busted for smuggling drugs into the US. Have not seen him for 9 or 10 years but these things happen.

QUESTION: Have owned a rental condo since 1994 purchased for 120K and have just sold it for 186K.
> It went through a building envelope repair at a cost of 45K. I managed to write of 100% in 2005.
> Can you advise if I can add the 45k to calculate the ACB even though I have written this expense off?
> There has been no CCA on the unit since purchase. I am rolling the proceeds into another property
> (bare land) that I hope to develop and live in within 5 years. Anything I can do to negate or at least
> somewhat mitigate the tax consequences?
>
> I assume I would pay tax on 50% of the profit? (taxed on 30k?) Thanks.
> ____________________________________________________

david ingram replies:

If you wrote the $45,000 off as a rental expense you received two times the benefit because you received a deduction for the entire $45,000.

Used to increase the ACB (adjusted cost base) of the unit would only have resulted in a deduction of 1/2 or $22,500 because Canada only taxes one-half of a capital gain.

There is no rollover of capital gains allowed in Canada at this time for rental properties and it would not apply when you sell a condo for vacant land. Capital gains rollover provisions DO exist for the sale of business properties or for expropriated land.

QUESTION: My 23 year old son bought a condo in coquitlam for 170k. He had 30k as a down deposit and he borrowed the rest from me. I lent him 140k through my home owner's line of credit. He just got a real job that might last him awail, so he hasen't been there long enough to qualify for financing just yet.
My question:

1. when it's tax time, how does he claim the interest, and do i need to do anything with my taxes?

2. Is it the same as if he had a conventional mortgage?

3. Do you think it is more advantagous for my son to get a convention mortgage as soon as he qualifies?

thank you, and sorry for all those questions in one.
____________________________________________
david ingram replies:

1. If it is a rental, he would just put the interest he pays you down on line 8710 of the schedule T776 he has to file to report the rental income. If he is living in the unit, there is nothing for him to do. It is not deductible.

At the same time, you have to report the interest he has paid you on schedule 4 and line 121 of YOUR tax return. It is taxable to you. At the same time, you will report the interest you have paid out on the appropriate line in Section IV on schedule 4. I imagine that you are charging him what you are paying and it will be a wash.

2. Depends upon what the interest rate is.

3. Depends upon what the interest rate is. However, if he gets his own mortgage, it can stop family conflicts and frees up your own credit.