Working with Canadians: YEAR END TAX PLANNING FOR … · 2017-10-18 · • Canada Disability...

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Copyright Knowledge Bureau, Inc. All Rights Reserved

Working with Canadians:YEAR END TAX PLANNING FOR

INDIVIDUALS AND CORPORATIONS

EVELYN JACKS, PRESIDENT

KNOWLEDGE BUREAU


• Evelyn is Canada’s most respected educator in tax and financial services and one of Canada’s most prolific financial authors, having penned 52 books on tax planning and family wealth management.

• Evelyn is also the Founder and President ofKnowledge Bureau, Canada’s leading national educational institute focused on excellence in financial education for advisors and their clients.

• She is the winner of the Rotman School of Business Women Entrepreneur of the Year Awards.

• She was appointed as a member of the Federal Task Force on Financial Literacy.

• Evelyn has twice been named one of the Top 25 Women of Influence in Canada

• Follow her on twitter: @evelynjacks

ABOUT EVELYN JACKS, MFA™, DFA‐Tax Services Specialist™

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• Over 400,000 Online continuing education course module registrations

• Over 17,000 Knowledge Bureau Report subscribers

• Over 18,000 Technical training certificates issued

• Over 9,600 Distinguished Advisor Workshop & Conference Attendees

• Over 8,700 Active students working in Diploma programs

• Over 1,500 Distinguished Financial AdvisorTM , Master Financial AdvisorTM and Real Wealth Manager Designation program students

ABOUT KNOWLEDGE BUREAU

Your Academic Path to Professional Development in:

*PERSONAL, CORPORATE, TRUST TAXATION

*RETIREMENT AND ESTATE PLANNING


• A lifecycle approach to family wealth management

• Tips in planning with individual investors

• Tips in planning for family businesses

• Tips in cross‐border issues

AGENDA

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JOB 1 ‐ TAKE STOCK:

WHAT ARE THE TRIGGERS THAT WILL REQUIRE FINANCIAL DECISION‐

MAKING IN THE FAMILY?

A LIFECYCLE APPROACH TO PLANNING


PRE‐RETIREMENT

IN‐RETIREMENT

POST‐RETIREMENT

YEAR END PLANNINGWHAT’S THE PLANNING HORIZON?

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• 60% don’t know how much money will be needed to maintain standard of living in retirement

• 30% not confident their household income in retirement will be enough

• More people are working longer

– 140% increase in workers over age 65 since 2005

– 67% increase in workers over 55

THE RIGHT ANSWERS FOR BIG QUESTIONS

Source: 2014 Financial Capabilities Survey, Statistics Canada


• Strategy ‐ Tax Efficiency:– Accumulation

– Growth

– Preservation

– Transition of Wealth

• With Sustainability – after Taxes, Inflation, Fees

• Result:– Increased purchasing power

– Financial peace of mind

• Required: Collaboration with a multi‐disciplinary team

REAL WEALTH MANAGEMENT™

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CANADIAN TAX PRIMER


MANAGE TAX BRACKETS

MANAGE TAX BRACKETS

SPLIT INCOMESPLIT

INCOME

INVEST WITH TAX

EFFICIENCY

INVEST WITH TAX

EFFICIENCY

MAXIMIZE DEDUCTIONS AND CREDITS


FOUR TOP TAX PLANNING PRINCIPALS

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MANAGE TAX BRACKETS


Average Tax on Income

Diversify Income Sources

Split Income and Use Tax Preferences

THREE OPPORTUNITIES IN MANAGING TAX BRACKETS AND RATES

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AVERAGE DOWN TAXES

2017 Federal Tax Brackets 2017 Federal Tax Rates

Up to $11,635 0

$11,636 to $45,916 15%

$45,917 to $91,831 20.5%

$91,832 to $142,353 26%

$142,354 to $202,800 29%

Over $202,800 33%


DIVERSIFY – PLAN INCOME SOURCESTop Marginal Tax Rates: Incomes over $202,801

Income Source B.C. Alberta* Ontario*

Ordinary Income. This includes interest and foreign

dividends, pensions and employment income net of

deductions and credits, net rental income and net

income from proprietorships.

47.7% 47/48% 51.97

/53.53%

Dividends – Non‐eligible. These are paid by Small

Business Corporations on income eligible for the

Small Business Deduction (SBD) or from investment

income.

40.95% 40.07%/41.29% 43.48

/45.3%

Dividends – Eligible. These are paid from income

subject to the general corporate tax rate and

excludes investment income.

31.30% 30.33%/31.71% 37.19

/39.34%

Capital Gains. Currently 50% of taxable gains on the

disposal of income‐producing assets is included in

the investor’s income.

23.85% 23.50%/24.00% 25.98

/26.76%

*Additional tax brackets occur over $202,801.

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SPLIT INCOME AND REDUCE CLAWBACKS


SPLIT INCOME: Over $150,000 BUT UNDER $202,801

TOP TAX BRACKETS

ORDINARY INCOME CAPITAL GAINS

SMALL BUSINESS DIVIDENDS

ELIGIBLE DIVIDENDS

ONTARIO 47.97% 23.98% 38.80% 31.67%

ALBERTA 42% 21% 34.27% 23.43%

HNW CLIENTS PAY MORE

B.C. 43.7% 21.85% 36.27% 25.78%

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SPLIT INCOME AND REDUCE CLAWBACKS

Investments:

Inter‐spousal investment loans, transfer of dividends or business involvement

Public and Private Pension Withdrawals

Do you qualify for income splitting?

OAS: Individual Net Income between:

$74,788 and $121,314*

Age Amount: Individual Net Income between:

$36,430 ‐ $84,597

Is Income In

Clawback Zones?


UNDERSTANDING CLAWBACKS

Credit

2017

Maximum Amount

2017

Reduction Begins

2017

Credit Eliminated

OAS $6,994.62 $74,788 $121,314EI Varies $64,125 Varies with EI

amount

Age Amount $7,225 $36,430 $84,597Spouse or Common‐Law Partner Amount (not infirm)

$11,635 $0 $11,635

Spouse or Common‐Law Partner Amount (infirm)

Possible higher claim under CCC

+$2,150 $0 $13,785

Amount for Eligible Dependants (not infirm)

$11,635 $0 $11,635

Amount for Eligible Dependants (infirm)

Possible higher claim under CCC

+$2,150 $0 $13,785

Amount for Infirm Adult Dependants

Now Canada Caregiver Credit

$6883 16,163 $23,046

Caregiver Amount (not infirm)

No credit for 2017

n/a n/a n/a

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INVEST WITH TAX EFFICIENCY


AT YEAR END: ASSESS TAX EFFICIENCY GAPS

Grandparents TFSA $11,000

RRSP Room $8100 x2 =

$16200

Average Tax Refund

$1734 x 2 = $3468

Unused TFSA Room $17,000 x 2 =

$34,000

TFSA Room $5500 x 2 =

$11000

RESP $2500 x 2 = $5000

Unused RRSP Room $50,000 x

2 = $100,00

Average CCB $4650

Average Earnings $90,000

$185,318

Average Middle Class Family of Four

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• Taxpayers with earned income (employment, self‐employment, CPP disability, rental income)

• Generate contribution room (For 2017: 18% x 2016 earned income of $144,500 = maximum contribution of $26,010)

• 2018 Planning: Earned Income of $145,722 in 2017 generates maximum contribution of $26,230 ($2185.83/mo)

• Contribution limits are reduced by pension adjustments and PRPP contributions by employee or employer

• Unused contribution limits are carried forward until used

• Contributions can be made up to 60 days after year end

RRSP Contributions


• Retirees: RRSPs are efficient if the tax rate applicable to the deduction exceeds the tax rate payable on withdrawal– Takes some future predictions

– TFSA makes more sense for low income earners

• Where tax rates are the same on the contribution and withdrawal, be wary of:– Inefficiencies of dividends and capital gains in RRSPs

– Clawbacks in retirement

• Parents: CCB clawbacks should be added to MTR

Optimizing RRSP Contributions

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RESPS

• Make contributions of a maximum of $50,000 over 31 years

• Canada Education Savings Grants (CESG) is based on net family income:

• Canada Learning Bond is up to $2000 per child for families with low net incomes. Initial deposit is $500 plus $25 account opening.

Under $45,917 $45,917 ‐ $91,831 Over $91,831

40% of $500Plus 20% of $2000

30% of $500Plus 20% of $2000

20% of $2500

Up to a maximum of $600




# of children Family net income limit

4 $51,809

5 $57,724

6 $63,640

7 $69,556

8 $75,472

CANADA LEARNING BOND ELIGIBILITY

Fewer than 4 children: Family net income under top of lowest tax bracket: $45,916

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• EAPs ‐ Amounts withdrawn from an RESP by a student are taxable to the student as Education Assistance Payments (EAP)

• CESG/CLB ‐ If the RESP is collapsed (no student) the CESG and CLB are repaid to the government, capital is returned to the subscriber tax free, income is reported by contributor as AIP

• AIP – the amount is added to income but can be offset by contributing those to an RRSP if room is available.

• AIPs that are not contributed to an RRSP are subject to an additional penalty tax of 20%

RESP ‐ WITHDRAWALS


• Contributions of a lifetime maximum of $200,000 to age 59 for disabled person with Disability Tax Credit (T2201).

• Withdrawals must begin at age 60, Lifetime Disability Assistance Payment (LDAP) no less than 10% of FMV.

• Canada Disability Savings Grant: Net income over $91,382 will match dollar for dollar up to $1000. Net income <$91,382.

• Canada Disability Savings Bond – no contribution required if family income is <30K. Annual entitlement $1000; lifetime maximum $20,000. Available to age 49 of eligible disabled person.

RDSP

Contributor Government

Contribution $500 300% = $1500

Next $1000 200% = $2000

Total $1500 Total = $3500

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• RDSP withdrawals (Disability Assistance Payments) are subject to the following rules:– Minimum withdrawal must be made starting the year the beneficiary

turns 60

– The portion of the DAP coming from contributions is non‐taxable

– Maximum withdrawal per year is

/ 3 )

– Upon withdrawal, the plan must repay the lesser of

• The grants and bonds received in the prior 10 years

• $3 for every dollar withdrawn

– Since no grants or bonds are paid after age 49, a lifetime pension payment at age 60 or later does not require any repayment

RDSP


• VOLUNTARY DISCLOSURE PROGRAM

• December 31, 2017

• Changes coming in 2018

• CHARITABLE DONATION PLANNING

• Winners vs losers

• Transfers to charity

• Charitable donation receipting

OPPORTUNITIES ENDING

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• Claim for charitable donation for 2017 is – 15% of the first $200 plus

– 33% of the lesser of the gift over $200 plus taxable income over $200,000 plus

– 29% of the remainder plus

– 25% of the first $1,000 of cash, if the taxpayer is a first‐time donor.

• First time donor credit expires AFTER 2017– Must be in cash up to a maximum of $1000

– Donation must be made after March 20, 2013

– No donation credit claimed by taxpayer or spouse after 2007

GIFTS TO REGISTERED CHARITIES


• Income inclusion rate is zero when capital property is transferred to registered charities

• Donation receipt based on regular charitable donation rates (no First Time Donor’s Super Credit)

• Eligible capital property to be transferred– Mutual Funds (corporate class or mutual fund trusts)

– Interest in segregated fund trusts

– Prescribed debt obligation

– Share, debt obligation, right (ie. Stock options) in company listed on designated stock exchange

– Ecologically sensitive land (no transfers to private foundations)

TRANSFER OF CAPITAL PROPERTY TO CHARITIES

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• Maximum dollar amounts (or 2/3 or earned income)

• In‐home: Boarding school/overnight camp:– Under 7: $8,000 $200/week

– Age 7‐16: $5,000 $125/week

– Infirm: $11,000 $275/week

• Maximums are aggregated per family and not applied per child.

• Students: – Full‐time students max claim is 2.5% per week of $ paid

– Part‐time students max claim is 2.5% per month of $ paid

• Who claims? Spouse with lower net income, but higher earner claims if spouse is infirm, in prison, in school– Maximum Claims x 2.5% x number of weeks paid (except if lower earner

was part time student – us 2.5% x number of months)

CHILD CARE EXPENSES

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• Criteria– Must move 40km or more closer to work location– Must no longer work at old location if changing jobs

• Limits– Total non‐reimbursed expenses– Eligible income earned at new work location (net employment or self‐

employment income or taxable amount of scholarships/bursaries)

• Most out‐of‐pocket expenses allowed• Temporary living expenses for up to 15 days (new/old location –

includes 100% of meals)• Travel may be by simplified method, based of province of old

residence.• Not allowed: fixing‐up expenses, cleaning, lost items, pre‐move

expenses, mail forwarding, GST/HST on new home

MOVING EXPENSES


Benefit for Children Under 6 $6,400 ($533.33 per month)

Benefit for Children Between 6 and 17

$5,400 ($450 per month)

CANADA CHILD BENEFIT

Family Net IncomeNumber of Children Under $30,000 $30,000 to $65,000 Over $65,000

1 0% 7.0% $2,450 + 3.2%2 0% 13.5% $4,725 + 5.7%3 0% 19.0% $6,650 + 8.0%4+ 0% 23.0% $8,050 + 9.5%

For the benefit year July 2016 to June 2020:

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1. Parents: TFSA, CCB Accounts, RRSP, RESP

2. Students: Age 18 ‐25 – GSTC and Tuition credits: TFSA, RRSP ‐ LLP, RESP, SME Issues

3. Young Adults: Moving Out, Car & Rental Payments – TFSA, RRSP – HBP

4. The Indebted:Mortgages, lines of credit, tax deductible debt, Debt repayment plan

5. Marriage: Principal Residences, Spousal Investments, Family Net Income

LIFE EVENT – BY INVESTOR PROFILE


1. Births: Canada Child Benefit (plus RRSP planning), RESP, Insurance

2. Divorce: Split Assets, Split Credits, Alimony, Child Support

3. The Cottage: The Cost of Personal Residence Dispositions

4. The Boomers: Cognitive and Physical Decline, POAs & Incapacity Planning

5. The Aged: Death of a Taxpayer, Executors, Trusts, Corporate Assets

LIFE EVENT – BY CIRCUMSTANCES

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1. Career: Bonus or Severance?

2. Retirement: CPP Early or Late? OAS Early or Late? RPP, RRSP – early or late?

3. Sale of Personal Residences

4. Start of Business; Sale of Business

5. Crystallization of LCGE

6. Cross Border Taxation and T1135

7. Receipt of inheritance, life insurance

8. Year End Charitable Donations

9. Year End Medical Expenses

10. CRA ‐ Correction of Errors, Omissions

10 FINANCIAL EVENT TRIGGERS


1. Interest rate changes

2. Currency Fluctuations

3. Real estate price fluctuations

4. Inflation Risk & Asset Transfers

5. Black Swan Events: financial crisis, Brexit, NAFTA, natural disasters, political changes . . .

6. PLUS. . .changes for owners of shares in private corporations

SIX ECONOMIC TRIGGERS

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SPOTLIGHT ON PRIVATE BUSINESS OWNERS

TAX PLANNING WITH PRIVATE CORPORATIONS. Three Big Changes Proposed :

1. Taxation of passive income in corporation2. Income sprinkling

3. Multiplication of capital gains exemptions


Winnipeg Free Press, September 11, 2017. . .

YUP!

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• Taxable passive investment income earned by private corporations has increased from $8.6 billion in 2002 to $26.8 billion in 2015.

• The taxman wants a bigger piece of that pie. . .sooner

• Wants to raise $250 Million annually. . .but is that so?

WHAT’S AT STAKE


SMALL BUSINESS RATE REDUCTION TO 10% I 2018, 9% BY JANUARY 1, 2019

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PRINCIPLES OF INTEGRATIOININSIDE OR OUTSIDE THE CORPORATION?

PROVINCE

2016 RATES

TOP PERSONAL

RATE

SMALL BUSINESS RATE

INCOME

CORPORATE INVESTMENT

INCOME*

GENERAL RATE BUSINES INCOME

ONTARIO 53.53% 53.51% 55.97% 55.41%

BC 49.67% 48.33% 51.90% 49.16%

NL 48.30% 48.25% 53.94% 47.37%

TOP INTEGRATED PERSONAL – CORP. RATES

2016 INCOMES OVER $220,000 ** CORPORATE INCOME OVER $500,000Source: Collins Barrow NL: THE GENERAL CORPORATE TAX RATE ROSE TO 15% AND THE M & P PROFITS TAX CREDIT WAS ELIMINATED.


• Passive investment income will be taxed a rate equivalent to top personal rates

• None of the tax paid in corporation will be refundable

• No additions to the Capital Dividend Account

• Significant impact on distributions to individual shareholders, who must pay personal tax again

• Methods of computation bring extreme complexity – based on the source of the capital – low‐taxed or high‐taxed:– Apportionment Method

– Elective Method

PROPOSALS :TAXATION OF PASSIVE INCOME

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Tracing of source of investments required.

• Assumption is that money comes from three separate pools (tracked by shareholder and class of shares):

– Income subject to small business rate – generates non‐eligible dividends

– Income taxed at general rate – generates eligible dividends

– Shareholder contributions pool – generates tax free/capital dividends

• After tax proceeds of investments attached to each pool;

• When dividends are distributed, choose which pool to pay from and that determines the tax rate:– Non‐eligible dividends (higher rate taxation)

– Eligible dividends

– Tax‐free dividends

APPORTIONMENT METHOD


• Default tax treatment, unless taxpayer elects otherwise.– Neither approach recognizes shareholder contributions

• Default treatment:– All dividends paid treated as non‐eligible dividends

– Assumes all investments are financed with low taxed business earnings

• Elective method:– Assumes all income earned is subject to general tax rates

– All dividends paid treated as eligible dividends BUT

– But corporation no longer able to claim small business deduction on first $500,000 of active business income

ELECTIVE METHOD

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Taxation of Public Company Dividends

• Subject to non‐refundable tax of 38 1/3%

• May no longer be able to be distributed as eligible dividends

Taxation of Capital Gains

• Taxed as passive income

• Generally – CDA eliminated

• Limited additions to capital dividend account (e.g. arm’s length sale of a subsidiary corporation that exclusively earns active business income)

In Addition


• Corporation focused on passive investments– Not engaged in active business and only earns passive income

– Maintains current regime ‐ existing RDTOH system would apply

– Additional refundable tax may apply to inter‐corporate dividends received

– Would existing CDA rules continue to apply?

CORPORATIONS FOCUSED ON PASSIVE INVESTMENTS

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• Income $1000

• New Tax 50.4 % ( 504)

• Dividend to shareholder $ 496

• Personal tax @ 45% ( 223)

• Total Tax ($504 + 223) ($727)

• Effective rate of tax 72.7%!

• Taxpayers will be incented to flow through income from SBC and invest personally

• FINANCE CANADA SAYS: New rules will have “limited impact” on existing passive investments BUT ARE THEY RIGHT?

$1000 Passive Investment Earnings In CCPCManitoba; highest rate on dividends 45%

OPPORTUNITIES?


EFFECTIVE TAX RATE

EMPLOYEE PRIVATE COMPANY

INTEREST 50.4% 67.3%

DIVIDENDS FROM PUBLIC COMPANIES

37.78% 66.5%

CAPITAL GAINS

25.2% 59.4%

OVER 20 YEAR HOLD PERIOD

Calculations by Larry Frostiak, FCPA,FCA, CFP, TEP

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25,000 families subject to high

income tax in Ontario pay 20% of all taxes

Top 1% make 12% of all income from

taxable sources – pay 27% of all income tax

Top 10% of all earners are responsible for 27% of all net taxes

Top 25% of all earners are responsible for 88% of all provincial

taxes

Bottom 75% of all taxpayers pay only 12% of all taxes

EMERGING ISSUE: TAX RATE RELIEF ON FINAL RETURNS?

PRE‐BUDGET PERSPECTIVES2012 CD Howe Institute Study


• Still working: – 38% of Canadians age 55 and over

– 14% of Canadians over age 65

• Median retirement age: 63.3– Age 61.2 ‐ Public Sector – 90% in Defined Benefit plans (DB)

– Age 64.1 ‐ Private Sector – 41.7% enrolled in private plans have DB

– Age 66.9 – Self Employed (men 68.3, women 64.6)

• Unpaid workers in farming or business ventures– 1% of self employed or 23,700 people

• Pension income splitting rules RRSP vs. RPP unequal

RETIREMENT STATISTICS2016 Labor Force Survey Statistics Canada

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INCOME SPLITTING WITH FAMILY MEMBERS

SPECIFIED INDIVIDUAL

• Currently under 18 with parent resident in Canada

• After reforms, any Canadian resident individual, regardless of age, who receives split income

• Dividends received taxed at top marginal tax rates

• Reasonable salary or wages taxed at individual marginal rates

CONNECTED INDIVIDUAL

• Has Strategic Influence –factual control

• Equity Influence – more than 10% of equity value

• Earnings Influence – primary contributor to activities or revenues or performs the services

• Investment Influence – 10% or more of the value of corporation’s property


DEFINITION OF SPLIT INCOME

PROPOSED TO INCLUDE

• Income from debt obligations

• Gains from certain disposition after 2017

• Property subject to TOSI rules or Attribution Rules

• Top marginal rates, no personal amounts

• Yet income to be included for income‐tested tax credits

•

LINKED TO LABOR AND CAPITAL CONTRIBUTIONS

• Over age 25: Labor ‐ must be involved in daily activities, remunerated by salary or wages.

• Capital – contributed assets and assumed risk to support the business

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BUT FOR 18‐25 YEAR OLDS, STARTING IN 2018:

LABOR

• Must be actively engaged on a regular, continuous and substantial basis in the activities of the business

• Otherwise income is taxed at top tax rates

• This is not true of the taxes paid by an unrelated person you employ

CAPITAL

• The allowable return on assets contributed by the individual must not exceed the prescribed rate of interest (currently 1%)

• The allowable return on assets contributed by an unrelated person investing in the business would not be restricted


• Currently $835,716 for qualifying small biz corporation shares and $1,000,000 for qualifying farm/fishing properties

• Further increases in value after 2018 will not qualify for ineligible gains

• Establishes an election for crystalizing gains in 2018

• Could generate an AMT liability

• Parents will have to cover for younger adults. . .

CHANGES TO CGE ‐ CANCELLED

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• Consider optimum salary – dividend mix

• Review and repay shareholder loans

• Defer income not required personally?

• Review timing of income and expenses

• Maximize CCA

• Review GRIP balances

• Review RDTOH balances

• Delay disposing of capital assets

• Consider subsequent year instalments

• Review Qualified Small Business status

STRATEGIES FOR YEAR END


• Residents: T1135 for foreign assets

• Snowbirds

• Investments in the US

CANADIANS IN THE U.S.

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CANADIANS:REPORTING FOREIGN INCOME & ASSETS

• Canadian residents must report World Wide Income in Canadian funds

• A. INCOME

• Includes employment, self‐employment, pensions, investment income, rental income and capital gains

• Use average exchange rate (1.3248 in 2016)

• Or exchange rate at time of transaction

• B. FOREIGN INVESTMENT ASSETS

• Since 1995, Canadians must file Form “T1135 Foreign Income Verification Statement.”


FORM T1135 ‐ WHO MUST REPORT

• Canadian resident individuals

• Canadian resident corporation

• Canadian resident trusts (some exceptions)

• Certain partnerships

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DUE DATES AND PENALTIES

• Form T1135 – by April 30

• Penalties ‐ $25 per day to maximum of 100 days ($2500)

• Minimum penalty of $100

• Gross negligence or fraud: additional penalties –– $500 per month to a maximum of $12,000

– Double it if Minister has issued a demand to file

– Late filing penalty for returns more than 24 months late:

• 5% of the greatest total costs

– Tax assessment period can be extended to 6 years

• Voluntary disclosure – no late filing penalties


WHAT MUST BE DECLARED?

• Canadian taxable income transferred outside of Canada

• Foreign taxable income

• Ownership of specified foreign property (see next slide)

• Participation in Tax Avoidance schemes involving offshore transactions

• Trusts held offshore – holding federal income that has not been declared.

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NOTE: SNOOPING OUT DISPOSITIONS

• IF

• Aggregate cost (not FMV) of all specified foreign property owned over $100,000 at any time in the year.

• Cost is reported at two different points in time:– The maximum cost at any time during the year

– The cost at the end of the year

• The differences between the two costs are additions and/or dispositions during the year

• Lower values at end of the year reflect dispositions which should have been reported as capital gains/losses


WHAT ARE SPECIFIED FOREIGN PROPERTIES?

• Funds – including funds in foreign bank accounts held outside Canada

• Interest in non‐resident trust, including foreign mutual funds

• Interest in foreign insurance policy

• Indebtedness owed by a non‐resident person (foreign bonds, debentures, mortgages and notes receivable)

• Precious metals, gold certificates, futures contracts held outside Canada

• Intangible or tangible property or incorporeal property

• Interest in a partnership that owns or hold SFP

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EXCEPTIONS

• Personal use assets– Example Florida vacation home used “primarily” for personal use

– This means more than 50% of the time based on use for a whole year

– If rented 51% of the time or more = reportable


SNOWBIRDS: SUBSTANTIAL PRESENCE TEST

• 31 Days of physical presence in the current year. Then: – Number of days in current year plus

– Number of days in the first prior year x 1/3 plus

– Number of days in the second prior year x 1/6

• If total is more than 183 days, you are a US tax resident from the first day of physical presence in the current year.

• 120 days is used as a guideline – 120 = (120/3) = (120/6) = 180 which is less than 183

• If over 183 days, but not all in this year, rely on the “closer connection” argument – File form 8840

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OVERSTAYING YOUR WELCOME

• Snowbirds usually have a B‐2 Tourist Visa

• Maximum stay is 6 months less a day

• Immigration officer at point of entry determine how long you may stay

• Overstaying your welcome may invite a subsequent ban from re‐entry ‐ waiver would have to be applied for


PENALTIES FOR FAILURE TO FILE

• If you owe US taxes – penalties can be up to 50% of the balance owing plus interest

• Penalty for not filing information returns – up to $10,000 for each failure

• No ability to waive interest charges

• Reasonable cause must be proven to waive penalties

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• Residency is based on unique facts –what is intent? Continuing ties?

• Deemed disposition at FMV – not on registered assets, land

• Principal Residence ‐ FMV

• Payable if you have lived in Canada 60 months

• Departure tax is not recognized by U.S. unless an election is filed. (Article XIII(7)

LEAVING CANADA FOR THE U.S.


• File part year return AND prorate personal amounts

• Possible additional forms

– T1161, “List of Properties by an Emigrant of Canada”

– T1243, “Deemed Disposition of Property be an Emigrant of Canada”

– T1244, “Election, Under Subsection 220(4.5) of The Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property”

• Departure tax: pay or post security prior to exit

YEAR OF EMIGRATION

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• Article XVIII

• Earnings deferred until withdrawn

• Exempt from Departure Tax – crystallize before becoming U.S. resident

• 25% withholding tax on lump sums

• 15% withholding tax on periodic payments

RPP/RRSP/RRIF


• Not considered retirement vehicles

• Not covered under Article XVIII

• Income fully taxable in U.S. without deferral; no offsetting Canadian foreign tax credit

• No IRS guidance on whether they are foreign trusts for U.S. tax purposes

• Form 3520‐A/3520 may be required

TFSA/RESP/RDSP

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• Passed March 18, 2010; exchange of information between Canada and the U.S. started July 1, 2015

• Catches U.S. persons evading U.S. taxes using accounts outside of the U.S.

• Canadian financial institutions must report to IRS or face a 30% withholding tax on U.S. source payments

FOREIGN ACCOUNT TAX COMPLIANCE ACT (FATCA)


• Form 8938 Statement of Specified Foreign Financial Assets on tax return (if assets exceed certain thresholds)

• In addition to FBAR (FinCEN Form 114 Report of Foreign Bank and Financial Accounts ‐ not filed with IRS)

• Withholding obligations are imposed on foreign entities and financial institutions– Lots of form filings: W‐8BEN/W‐8BEN‐E/W‐8ECI/W8‐IMY and

W‐9

WHAT’S REQUIRED

2017‐10‐18

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THREE OPPORTUNITIES TO LEARNMFA – TAX SERVICES SPECIALIST DESIGNATION

DISTINGUISHED ADVISOR CONFERENCE NOV. 5 – 8 IN KELOWNA

CE SUMMITS NOV. 28 IN TORONTO


BOTTOM LINE IN YEAR END TAX PLANNING: WHAT MATTERS IS WHAT YOU KEEP

Thank You!

2017‐10‐18

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PLEASE CONTACT US 1‐866‐953‐4769

www.knowledgebureau.com

Thank You!


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