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By Gigi Suhanic
National Post
FP Money
Saturday, April 19, 2003
Question: My mother came from Europe to visit
us and spent just under a year with us in
2002. Is there any opportunity for a tax
credit or deduction?
Answer: This is a situation where you will
have to consider all of the pertinent facts
to arrive at the correct answer.
Adrian Mastracci, president
of Vancouver based ‘fee-only’ KCM
Wealth Management, says, “One possibility
is that there may be some opportunity for some
tax relief if the conditions are met for a
dependent.”
One possibility is that there may be some
opportunity for some tax relief if the conditions
are met for a dependent, says Adrian
Mastracci,
president of KCM Wealth
Management in Vancouver.
In your case, a dependent is one who is resident
in Canada at any time in the year and is the
parent of you or your spouse. That related
person would have been dependent on you for
support at some time during the year.
There will be two tests to examine. The first
is that the person is truly dependent on you
for support. The second is the income threshold
for individuals ($7,634 in 2002).
The key is that you made a contribution to
supporting the dependent for which you are
seeking a claim.
Special claims may also be made for dependents
by reason of physical or mental infirmity.
Question: Are child support payments taxable?
Do they have to be declared? Are spousal support
payments taxable? Do they have to be declared
if they are not taxable?
Answer: Child support payments paid under
a written agreement or court orders finalized
after April 30, 1997, are no longer deductible
from income of the paying parent, or included
as taxable income to the recipient under the "new" tax
rules, says Keith Hazell.
Generally, for orders or agreements entered
into before May 1, 1997, child support payments
are deductible by the payer and taxable to
the recipient.
However, if a new order or agreement post-April
30, 1997, amends the child support payable
under the pre-May 1, 1997, agreement, or where
both parties jointly elect by filing Form T1157
with the Canada Customs and Revenue Agency,
the "new tax rules" apply.
Spousal support payments are deductible to
the payer and taxable to the recipient if made
under a written agreement or court order and
meet defined criteria.
The payer and receiver both enter the total
of all support payments in an information box
on their tax return.
Deductible amounts are claimed on line 220.
To support a claim, generally the written agreement
or court order has to be registered with CCRA.
Use Form T1158 Registration of Family Support
Payments with CCRA. Taxable amounts are reported
on line 128.
It is advisable to seek professional tax advice.
Question: I'm Canadian, used to work in the
U.S. and started an Individual Retirement Account
(IRA). I now live and work in Canada. I have
recently cashed out my IRA. I have paid a 10%
penalty for premature withdrawal.
Do I pay any taxes in the United States or
Canada on this withdrawal? If so, how do I
pay the least tax?
Answer: The big question is whether, at the
time you cashed in the Individual Retirement
Account, you were a U.S. citizen, a "green-card" holder,
or a non-resident alien (neither a citizen
nor a resident), says Kevyn Nightingale.
A green-card holder is a lawful permanent
resident of the United States. Many people
who work in the United States, obtain a green
card, return to Canada and continue to hold
it.
A citizen of the United States is required
to file a U.S. tax return (form 1040) annually
no matter where she lives. She must pay U.S.
tax on her worldwide income, no matter where
it arises. So if you're a U.S. citizen there
would be U.S. tax, and a 10% additional tax
if you were under age 59 1/2 at the time.
A non-resident alien, on the other hand, would
pay tax only on the Internal Revenue Service
withdrawal.
The tax would be levied at a flat rate (usually
30%, but it will often be reduced to 15%).
Usually, the additional tax would not be applied,
but there is some dispute about this item.
To pay the appropriate tax, form 1040NR should
be used.
Normally, a green-card holder files form 1040
like a citizen. Under the Canada-U.S. Income
Tax Convention, she can elect to file form
1040NR like a non-resident alien.
There are some immigration and other tax issues
that are important in making a decision to
file form 1040NR, so a professional should
be consulted.
After the U.S. has taxed the IRA withdrawal,
Canada will tax it again.
It will allow a foreign tax credit for the
regular U.S. tax paid, so double-taxation is
avoided. CCRA's position is that the additional
tax for early withdrawal is not eligible for
credit.
This position has not been tested in court,
and some practitioners believe CCRA is wrong.
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