Business

Tax traps lurk for the unwary
Canadian who retires to the United
States. How you handle your
RRSP alone could cost — or save
— you thousands of dollars.

“The appropriate tax strategy
depends on many factors, so it’s
usually a good idea to get profes-
sional advice,” said Virginia Perry,
senior tax manager in the U.S. and
cross-border tax group of Peat
Marwich Thorne, chartered
accountants.

“But the following tax tips —
and traps — will alert you to the
type of planning you should con-
sider.”

John (or Joan), 55, is a Canadian
citizen who has never been a USS.
citizen. He (she) has lived and
worked in Canada and retired to
live in the U.S. late last year. So for
1990, he will be a U.S. resident for
fax purposes.

Over the years, John has contri-
buted $100,000 to his registered
retirement savings plan. When he
moved to the U.S., interest earn-
ings had boosted his RRSP total to
$250,000 and the plan earned
another $25,000 for 1990.

“We'll assume an exchange rate
of $1.17 and a US. federal mar-
ginal tax rate of 28 per cent —
although an increase to 31 per cent
has been proposed effective Jan-
uary 1, 1991,” Perry said. “Also,
most states have their own income
taxes and may not follow the
federal rules.”

Perry noted that these rules
covering an RRSP also apply to a
registered retirement income fund

(RIE).

While the money in the RRSP/
RRIF can continue to grow tax
free as far as Revenue Canada is
concemed, the earings will be
taxed in the US. unless John elects
to defer the tax.

TAX TIP ONE. Elect to defer
tax On income accumulating in an
RRSP/RRIE

Surge in siaris

Despite the onset of a recession,
the building trade on the Peninsula
received a shot in the arm last
month.

Canada Mortgage and Housing
Corporation spokesman Lee King
said the Peninsula and the rest of
Greater Victoria saw a boom in
housing starts in October.

A total of 148 units began con-
Struction in the metropolitan
region, which is the highest figure
since June’s 209 starts, he said.

_ YOUR LOCAL POLICE C ICBC

Ne a a i ee

Tax tips and traps can cost or save

By attaching a statement with
the necessary information to his
US. federal tax return, filed by the

deadline, John will defer U.S..

$5,983 of federal tax for 1990. He
must make this election each year.
Note: information dating back to
the beginning of the RRSP may be
needed.

TAX TIP TWO. Decide each
year whether this election to defer
tax is beneficial.

If John has other deductions or
credits on his U.S. tax return, he
might be able to declare his
RRSP/RRIF earnings and still not
pay any tax. this would increase
the US. cost base of his plan and
may result in lower over-all tax
when he withdraws the funds.

TAX TIP/TRAP THREE. If
John has mutual funds or similar
corporations in his RRSP, these are
considered “passive foreign inv-
estment companies”’ and could
result in unexpected U.S. tax bills.
These PFICs should be converted
to other investments before the
RRSP-holder moves to the U.S.

TAX TIP FOUR. Plan with-
drawals to minimize tax.

“When you take money out of
your RRSP/RRIF as a USS. resi-

dent, if you take out a lump sum,
Revenue Canada’s withholding tax
is 25 per cent, but if you take
regular income, only 15 per cent is
withheld,” Perry said.

Let’s say John cashes his entire
$250,000 RRSP early in 1990.
Revenue Canada withholds
$62,500 and John pays no USS.
federal tax.

John might even be able to use
the $62,500 as a tax deduction or
foreign tax credit if he has other
passive income from Canada.

(Contrast this approach with
cashing the RRSP before moving
to the U.S. Revenue Canada would
withhold $75,000 but the entire
$250,000 would be taxed in Can-
ada resulting in a total tax bill of
probably more than $100,000.)

Now let’s say John uses his
RRSP to buy an annuity to age 90,
with payments of $26,000 (Cana-
dian) a year starting in 1990.

Revenue Canada withholds 15
per cent, or $3,900. John will be
subject to U.S. $4,513 USS. federal
tax — but can claim the Canadian
taxes as a credit and so end up
paying only US. $1,180.

TAX TIP/TRAP FIVE. Perry
said because of U.S. tax rules,
before moving to the U.S. you
should sell any investments in an
RRSP/RRIF with accrued gains,

like securities that have gone up in

value.

“Tf you don’t, you will be sub-
ject to US. tax on those accrued
gains,” she said.

Mike Grenby is a Vancouver-
based columnist and independent
personal financial adviser; he
will answer your questions as
Space allows in his column —
write to him clo The Review, P.O.
Box 2070, Sidney, B.C. V8L 3C5.

‘While the money in the RRSP/ RRIF
can continue fo grow fax free as
far as Revenue Canada is
concerned, the earnings will be
taxed in the U.S. unless John elects
to defer the fax.’

just temporary

However, demand for now
homes is expected to continue a
weakening trend for the rest of the
year and through 1991, he said.

“The October surge in housing
Starts is contrary to recent trends,”
he said.

Central Saanich led the way on the
Peninsula with construction on 17
housing units starting last month.

And North Saanich and Sidney
each saw the foundations laid for
seven houses in October.

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TheReview Wednesday, November 21,1999 — A14_

Sporiswear company
sees new horizon

A Sidney company that designs
equestrian sportswear is moving
into the international marketplace
with the help of the B.C. govern-
ment.

prosperity of the whole commun-
ity through more permanent jobs

International Business Minister | Are you
Elwood Veitch provided Dedica- managin our
tion Design Inc. with $2,000 to money ae y
help the local firm take part in a His? TATA
trade fair in Cologne, Germany. b ag g
Dedication Design president o get by-

Diane Miller said that showcasing
her firm’s products at the fair was
a great success.

She said she won contracts for
the top-of-the-line equestrian wear
from distributors in six European
countries while at the fair in early
September.

Financial assistance from B.C.’s
new Market Development Pro-
gram is a smart way of helping
small firms reach a much larger
market, Veitch said.

“Under this program, each time

Call me today to find ont
how Investors can help
you start building your
financial future.

DIANE DOBBIN, B. Ed.

such a marketing venture is suc- 388-4234
cessful, the money is repayable Investors
and is used to assist another com- Group

pany,” he said.
“Practical help of this sort for
smaller B.C. companies in finding

Building futures since 1940.
734 Broughton St.

export markets is adding to th

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