Deduct Canadian Interest on 1040

[weilerr81]

I departed Canada and moved to the US for employment purposes in early 2015 and plan to comply with all of the departure requirements. I understand that I’m filing late and may be exposed to some penalties.

In Canada I borrowed $250,000 for investment purposes several years ago and have been claiming the interest as a carrying charge on my Canadian return. The funds were used to purchase non-registered segregated funds with Canada Life and they are now aware that I’m a non-resident. They said I can still keep this account as a non-resident, I just can’t purchase any additional funds or make any fund switches; just sells.

From what I have gathered on this forum, I will no longer have a need to file a Canadian tax return after I depart. As a result, I will not receive any future benefit of deducting the interest in Canada. I would like to know if the Canadian interest can be claimed as an itemized deduction in the US on my 1040?

I know I’m deemed to dispose these funds on departure and should likely just sell them now and pay back the loan, but I will be exposed to a large deferred sales charge if I cash in the investments within the next 2 years. I may just wait until the early redemption penalty expires and sell the funds at that time. However, if I’m not going to get any benefit of a deduction on the US side, I may just sell them now and bite the bullet and pay the redemption charge.

Can anyone help with this?

[nelsona]

Interest you pay on funds used to acquire investments is deductible on your US return (if you itemize your deductions) on schedule A, regardless of where the loan is held. The deduction is limited to what you report as investment income , per form 4952.

Remember that in US, your basis for future cap gains will be your deemed disposition value determined on your Cdn departure return.

[weilerr81]

Very helpful, much appreciated.

One more quick question if you don't mind?

I'm working on the T1161 and wondering if a Guaranteed Interest Certificate (GIC) needs to be reported on this form? It says you don't need to report cash or bank deposits. Do you know if a GIC is considered a bank deposit? I have one GIC with a bank and another one with an insurance company (Manulife).

[nelsona]

GIC's are considered a bank depsosit.

[weilerr81]

Ok thanks. I just remembered that I also have a Canadian permanent life insurance policy with a bit of cash value and a term insurance policy. From the research I have completed (link attached below), it appears that the fair market value of my life insurance policy needs to be included on the T1161 as well. The market value is not simply the cash value or face value of the policy. Many factors are considered when determining the fair market value such as my age, my health, cash value etc.

Is it really necessary to get an official appraisal done, or will CRA just accept the face value plus the cash value of the policy on the T1161? I have found an actuarial firm that will complete an appraisal, but I would rather avoid this cost if it’s really not necessary.

https://repsourcepublic.manulife.com/wp ... 319e0f5575

[nelsona]

Should the life insurance firm be able to tell you all this?

[weilerr81]

No this is not something they will assist with, I already asked them. This is a very unique calculation that must be completed by an an external third party actuary and most firms charge a minimum of $1000-$1500 for this type of calculation.

This is the same calculation that's completed when a individual transfers a personal policy to his own corporation to extract tax free money out of the corporation (market value in excess of the cash surrender value). However, it appears this is no longer a worthwhile strategy as the Liberals came down hard on this in the most recent budget.

The firm I spoke to about this is called Gordon B. Lang & Associates Inc and they were familiar with this calculation. Mostly for transfers of individual policies to corporations, but they said the calculation is the exact same as the one required on departure.

Just thought you might have some first hand experience with this.

[nelsona]

Just so we are clear, in my opinion, your policy is NOT subject to deemed disposition when leaving Canada, by ITA 128(10) excluded interest definition (l), since it is a Cdn life insurance policy for an individual. However, it is subject to REPORTING (currently met by filing T1161) under ITA 128(10) reportable definition (b), as you have correctly concluded.

Since this is not a taxable event, it becomes much like your automobile valued over $10K: I would report a reasonable FMV. I would not spend any money getting a superfine evaluation, unless CRA would later demand one. A corporate owner of such a policy would need a actuarial FMV due to the need to provide an accurate valuation of the corporation on departure.

[weilerr81]

Thank you very much for your opinion. I totally agree with you. It just seemed very strange that CRA would require me to spend so much money for something that isn't even deemed to be disposed. They likely just want to have a record of it on file to make sure I pay the non-resident tax if I surrender it before I die. I will just provide a reasonable FMV as you have suggested.

If I surrender the policy as a non-resident, do you know if the withholding tax will be my final tax owing to CRA, or will I have to file a non-resident return to report the disposition?

I also have a car valued at more than $10K that I was just going to use the used car online "blue book value" for. Would it be better to use the value that customs assigns to my car or does it really matter? I won't owe any tax either way.

[nelsona]

It isn't CRA requiring that you spend the money, it is Manulife's refusal to know what you have with them (typical of insurance firms).

Withholding, as you know doubt read, can be very tricky for non-residents. But, in any event, you will be reporting this on a non-resident tax return.