Tag Archives: Canadian income tax

When To Incorporate

Many people make a big mistake by incorporating at the wrong time. One of my friends made this mistake and he was a Chartered Accountant. He was involved in a real estate development scheme. He incorporated the whole scheme prematurely. Their plans showed the development as becoming profitable at a particular date and he set up the incorporation a few months ahead. The rental market changed and they lost a lot of money for several months, or possibly two or three years.

Because they were incorporated they could not carry the business losses back to their personal tax returns so they had to pay it and could not take deductions for it. This was in Canada. The equivalent in the US would be changing from an S corporation or an LLC to a C corporation.

Before income tax became such a major drag on businesses it was only necessary to incorporate when many or most of the investors did not take an active part in running the business. Now income tax is a major factor, usually much more important than the operational point mentioned above.

It is always difficult to determine when a business is going to become profitable. Unless most of the investors have experience in the business they are guessing. There are also factors that come out of the blue to bite you in the behind. Once a long time ago I was working in a small steel fabrication business. We were churning out estimates for small metal-clad buildings for potential buyers. All of them expected the Canadian government to remove the sales tax on building materials at the next budget. The budget came and the tax stayed. All of a sudden we were not producing any estimates and I was unemployed.

In conclusion you should not set up a corporation or go from an S corporation to a C corporation until the business is actually making money and there are good reasons to expect it to continue to do so. You can never be completely certain but this will often save you from big disasters.

Border Hijinks

There are many strange things that happen at international borders. It seems like many politicians and bureaucrats make up rules for some purpose known only to themselves. Let me fill you in on some of those that happen at the US-Canada border.

For many years a white woman who lived in eastern Canada was hassled every time she crossed the line into the US. The reason was that a black man with the same date of birth and a similar name had done something in the US to attract police attention. Apparently it took her over half an hour every time to convince the border guards that she was not the bad guy. How long does it take you to tell the difference between a white woman and a black man?

The Canadian border guards will usually refuse entry to anyone who has been convicted of impaired driving. This created a problem once when a man who was in charge of the FBI for a couple of states came to Canada, with an invitation from the prime minister’s office, and was refused entry because of an impaired driving conviction. Going the other direction, a Canadian with a conviction for shoplifting was refused entry to the US.

In the US the right to bear arms is guaranteed under the constitution. The same does not apply in Canada. Many US citizens drive into Canada without realizing that it is illegal to transport guns across the border. Please be careful about this. Check the glove box of your car before entering Canada.

My friend George had several problems at the border. He was a citizen of India. He had taken part of his education, including his CPA and a Master’s degree in taxation, in the US. I could not imagine how a CPA could make such a stupid mistake but he let his visa lapse. He drove into Ontario on a vacation and tried to re-enter the US. He was told that since he had overstayed his visa he would not be allowed to re-enter the US for a set period, five years I think.

For some reason that was not clear to me he was really upset that it was a female officer who gave him this message. I do not believe that a male officer would have treated him any differently. I am not sure how he got a Canadian work permit but apparently he did not have a problem doing that. Eventually he applied for and received a waiver on the bar, which cut his exile time from about 5 years to about 3. He also applied for and received Canadian citizenship.

There is a type of visa that is usually referred to as a TN. It applies to the NAFTA countries. It allows entry for anyone who has a job offer in one of about 120 different occupations, generally those that require a bachelor’s degree. George got one as a Canadian citizen. On the north border these are given out at the border.

A little later he was working in California as a CPA. His visa was near expiry so he went across the border to Tijuana and attempted to return and get another TN visa. He was not allowed to do so. I do not know where he should have gone, possibly Mexico City. After a day or two he got a permit allowing him to go back into California, pick up his gear, and drive north to Vancouver. He arrived one evening and we had a nice chat. The next day he went to the border and asked for a TN visa. They gave it to him with no problem and he went back to his job in California.

A couple of times I prepared US and Canadian income tax forms for a Canadian man who was working in California as a Chief Operating Officer of a software company. Sometime after this job ended and he had returned to Canada he tried to enter the US using his Canadian passport. He was told that this was incorrect, since he had a green card and was supposed to present it. They stated that this was entering the US under false pretenses. They kept him at the border while his wife went back to their home in Vancouver to pick up his green card. They processed it and let him go. He was told that if she had not brought his green card he would have gone to jail.

Another Canadian man was not so lucky. He was a client of the company I was preparing income taxes for but I never met him. He went across the border to the US on a Sunday morning. At the border he told them that he and his wife were going shopping in Bellingham, a small town just over the border. Then he drove to the Bellingham airport. The border people had someone on duty at the airport and they closed in on him because this did not match what he had told them at the border. They searched him and discovered that he had scheduled a job interview in California. They were going to take him to jail in Seattle but my employer intervened and persuaded them to send him back to Canada. I am not sure if he got a 5-year or a 10-year bar from entering the US but he definitely could not take the job that he wanted to interview for.

Several years ago they ran a bus every week. It started at Seattle and went all the way to the Mexican border. At every stop along the way they picked up illegals from Mexico and Central America. At the border they told them all not to come back. We all thought that it was hilarious that sometimes some of the passengers were back in Seattle before the bus came back the next week.

Two different people made the same totally idiotic mistake. One had moved from the Deep South, say Alabama, to Canada many years before. He began driving into the US frequently. He saw that some people went right across, bypassing the lines of cars that were waiting at the border. About 2006 he inquired and was told that if he wanted to join them he could fill in a form to get approved. He filled it in and sent it off. Sometime later he got a message telling him to come to the US Customs office to pick up his certificate. He arrived and was told that he was on his way to a murder trial in Alabama. He was to be the defendant.

A few years later another man made virtually the same mistake. There are charter airlines that take Canadians to Mexican beach resorts. They usually go once a week. It is a direct flight. One man was on this and missed his return flight. He decided to take another flight, and selected one that changed planes in the US. As he went through Immigration he was informed that his travel plans had to be changed because the state of Washington was going to put him on trial for murder.

I cannot imagine what these guys thought they were doing. In both cases the charge was about 28 years old but no law enforcement agency writes off a murder.

I am passing them on to you because I thought that some of you might be interested. I do not want you to make the same mistakes.

As stated in another post here, I prepare US and Canadian income tax forms and would appreciate the chance to do yours this year.

Ready for Tax Year 2014

I finally finished preparations for Tax Year 2014. I took the 2-hour ethics course, the 10-hour tax theory course, and the 6-hour update course. I passed the exams for these courses as well. Today I spent a frustrating time renewing my IRS license, otherwise known as a PTIN or tax preparer identification number. This number has been required for the past couple of years for anyone who prepares US income taxes and charges for this preparation. As nearly as I can tell their intention was that if they find a fraudulent tax return they can easily zero in on the preparer who was involved and check a few more of the returns that he or she prepared to see if the fraud was confined to the return that they found fraudulent entries in or if the preparer was really in the business of preparing fraudulent returns. Last year a postie notified the IRS that he had delivered dozens of refund checks to one address and had dozens more to deliver there. They stopped payment on all of them. The person who wrote this up said that it was not clear why the IRS had not noticed this themselves.

Two years ago the IRS also required preparers to obtain credit for a tax course. Someone fought them in court over it and the final result was that it was declared that it was not necessary. This year they have announced that anyone who takes and passes the courses, similar to those I described above, will be listed in a directory that they will publish in January. It seems that since they can´t force preparers to take the courses they will bribe them with free advertising. I took these courses partly to get the free advertising and partly because I wanted to get up to date before tax season starts.

A lot of the course work was devoted to the Affordable Care Act, also known as Obamacare. It is unbelievably complex. If you are having your taxes prepared anywhere please remember to get all of the information from your employer or from your insurance exchange or both. It is frustrating to have to send a taxpayer back to get more information. It means that the preparer will have to start all over again. In many cases the client will not be willing to pay for this extra time spent on his or her return. This will lead to friction and bad feelings all around.

It is difficult to see how anyone believed that adding 51 insurance exchanges and lots of new complex regulations could possibly reduce overall costs. In my blog on the subject I pointed out 5 or 6 things that could have been done to reduce medical costs. As nearly as I can see none of them have even been attempted.

Above I referred to a problem renewing my PTIN. What happened was someone in the IRS did not bother to check that the renewal page would work with both of the most common browsers. I was left facing a screen that wanted three entries but would not tell me what was to be entered in these spaces.

Anyway I will be available to help with US or Canadian taxes this year. My specialty is taxpayers who have to file in both countries. These are typically people who have moved across the border in either direction in 2014 or US citizens who live in Canada.

Canada-US Income Tax Preparation

US and Canadian income tax are similar in objectives but different in all details.  The similarity in objectives is because both governments want citizens and residents to do the same things, that is work hard, earn a paycheck, support your kids and send them to school, and save for your old age.

All of the details are different because the Canadian tax laws are prepared by the finance department. The Finance Minister is not concerned with local effects so he takes a broad view. The US tax laws are prepared by Congress, with about 535 different legislators taking part, with each one hoping to reward his voters and his campaign contributors. If not he wants to at least tell them that he introduced a legislative amendment that would have helped them if it passed. This is why the US tax code is about 80,000 pages and the Canadian is about 700 pages.

The US taxes its citizens no matter where they live in the world. I believe that Eritrea is the only other country that does this. When a Canadian citizen leaves Canada he pays taxes on all the previously-untaxed capital gains achieved during his stay and has no further tax reporting liability until he re-enters Canada unless he has Canadian-source income.

The US government goes to great effort to keep track of any financial transactions performed out of the country by its citizens. It has required citizens who have foreign financial accounts with a maximum combined value of $10,000 or more to file form TD F 90-22.1 for more than 30 years. In 2005 they introduced form 8891 to track the value of Canadian Registered Retirement Savings Plans. In recent years they have introduced form 8938 to ask for more information about foreign financial accounts. The most intrusive of all takes effect January 1 of 2014. It requires financial institutions that are outside the US to report all accounts owned by US citizens to the IRS. Most banks have responded by closing all accounts owned by US citizens. This is utter nonsense. The US has as much right to order Zimbabwean banks to obey US laws as the Zimbabwean government has to order US banks to obey Zimbabwean law. A sane person would expect legislators, most of whom are lawyers, to remember Law 101 and the first lesson, which should have been jurisdiction.

There is a tax treaty which is intended to make clear rules about cross-border income issues so that the taxpayer will pay tax once and only once on each income item. Normally he or she takes a credit on the second return for the tax paid on the first return.

When a person has to file taxes in both countries it is nearly always advantageous to have them prepared together by the same person.