Canadian Mortgages, Insurance, Investment, Tax Planning

Can You Outrun the IRS? Statute of Limitations: US Tax Returns & FBARs | Let's Talk About: US Tax

2012-04-18T00:35:00.001-04:00

Let's Talk About: US Tax

Can You Outrun the IRS? Statute of Limitations: US Tax Returns & FBARs

April 16, 2012

The tax laws contain what is known as a statute of limitations. The statute prescribes the length of time permitted to the IRS to enforce the tax rules. If the length of time runs out for a particular tax year, then the IRS is forever barred from claiming that you owe more tax in that year. It is important to understand how the tax statute of limitations works, because in certain cases, the statute of limitations will be longer than others or it will not start to run at all.

IRS has a Longer Time – Understatements of Income / Foreign Financial Assets

Once you file your income tax return, there are several possibilities with regard to the statute.

The general rule is that the IRS has three years after the later of the date the tax return was due or the date the return was filed, in order to assess tax. This rule applies if the tax return is timely filed or if it is filed late.

The statute can be extended to six years if there is a “substantial understatement” of income. This means the taxpayer omitted from gross income an amount properly includible in his income and that amount is more than 25% of the amount of gross income stated in the tax return.

Under a special rule added to the tax law in 2010, the statute can also be extended to six years if the taxpayer omits over $5,000 from gross income that is attributable to certain kinds of foreign financial assets.

File Your Income Tax Return to Get the Statute Running

Most important to remember is that the statute of limitations does not start to run unless you file your income tax return! Many Americans living and working overseas are under the mistaken assumption that they do not need to file tax returns if they earn less than the so-called “foreign earned income / housing exclusion” amounts. Tax returns must still be filed in order to claim the benefit of these exclusions. Delinquent filers should take prompt action for many reasons, including to start the statute running. http://dubai.angloinfo.com/countries/uae/ustax.asp See the sections titled: “Tax Information Reporting Requirements” and “Delinquent Tax Returns and FBARs”.

The Statute will Never Start to Run – Incomplete Foreign Reporting / Fraud

If there was a failure to file certain foreign-related information returns with one’s income tax return, such as Form 3520 or Form 5471, the statute of limitations did not begin to run because the return was treated as “incomplete”. The statute was suspended until the foreign information was provided to the IRS.

Under recently enacted tax rules (March 2010), the statute of limitations does not begin to run until the taxpayer has complied with all mandatory foreign reporting. This reporting can include information returns regarding ownership in foreign corporations, foreign partnerships, foreign trusts, information concerning “specified foreign financial assets” and many other transactions in the offshore context. Only when proper reporting is made will the statute of limitations begin. Furthermore, even though the statute starts to run, the entire tax return will remain open for IRS adjustments for a period of three years (rather than only for the portions of the return relating to the foreign reporting that had been missing).

Please see this link concerning “specified foreign financial assets” http://blogs.angloinfo.com/us-tax/2012/03/19/new-filing-requirements-for-2011-tax-returns/

The statute of limitations also does not start to run if a tax return is false or fraudulent or if there is a “willful” attempt to evade taxation. Please see this link to understand more about false returns and tax crimes involving “willfulness”. http://blogs.angloinfo.com/us-tax/2012/03/12/beware-of-filing-false-tax-returns/

Statute of Limitations for FBARs

The so-called FBAR is not a tax return. It takes its genesis not from the US income tax laws, but from the Bank Secrecy Act. The FBAR statute of limitations for civil penalties is six years from the date of the violation, which is generally June 30^th of the year following the calendar year to which the FBAR relates (e.g., the FBAR covering the 2011 calendar year is due June 30, 2012 and if not received on such date, constitutes the date of violation). The FBAR statute of limitations for criminal violations is only 5 years. Significantly, unlike tax returns, the FBAR statute continues to run whether or not the FBAR was filed. So, for example, on June 30, 2012, the FBAR statute of limitations will bar enforcement by the IRS for civil violations with regard to FBARs covering the year 2005 (these were due June 30, 2006) and earlier.

by Virginia La Torre Jeker J.D.,. Find out more about Virginia La Torre Jeker J.D., here.

via blogs.angloinfo.com

The Bank of Canada maintains the bank rate at 1.25%

2012-04-17T16:24:00.001-04:00

Check out this website I found at mail.google.com

2012 Federal Budget Highlights (KPMG)

2012-03-30T10:05:00.001-04:00

2012 Federal Budget Highlights (KPMG)

March 29 2012

No. 2012-15

Finance Minister Jim Flaherty delivered the government’s much-anticipated 2012 federal budget today. The budget expects a deficit of $24.9 billion for 2012, falling to $21.1 billion for 2013, $10.2 billion for 2014 and to $1.3 billion for 2015. As a result of expenditure restraints, the budget is expected to achieve ongoing savings of $5.2 billion.

A major thrust of the budget this year is innovation. The government has responded to the recommendations of the Jenkins panel. As a result, there is more direct support provided for R&D in Canada and a scaling back of the benefits of the Scientific Research and Experimental Development (SR&ED) tax incentive program. The government has also moved to close what it considers to be tax loopholes, including important changes in the personal, corporate, charities and international tax areas. In the GST/HST area, the budget extends some health care-related changes.

Details of tax highlights in the budget are as follows.

Scientific Research and Experimental Development Initiatives

Acting upon the recommendations of a recent report submitted by the Jenkins Panel, the government is looking to support innovation in Canada using a markedly different funding model. Effective immediately, the government announced $1.1 billion for direct research and development support as well as providing $500 million for venture capital initiatives. Approximately $1.3 billion of this new funding is being redirected from the flagship Scientific Research and Experimental Development (SR&ED) tax incentive program as the government seeks to stimulate and support innovation through research and development (R&D) activities carried on by business.

Canada continues to lag behind other countries when it comes to private sector investment in R&D and more importantly, the commercialization of research into products and processes that create high-value jobs.

Direct supports

This new approach to supporting innovation in Canada is accomplished though the following measures:

Venture capital funding — The government will provide $400 million for venture capital activities for private sector investments through a structure yet to be determined. In addition, $100 million will be provided to the Business Development Bank of Canada to further support venture capital activities.
Industrial Research Assistance Program (IRAP) – An additional $110 million per year will be provided to the National Research Council (NRC) to be used under the IRAP program which supports research and development projects carried out by small and medium sized businesses (SMEs). The NRC will also create a concierge service to assist SMEs in accessing and making effective use of federal innovation programs.
Funding is provided for various new or existing programs such as:
- Industrial Research and Development Internship Program
- Business-Led Networks of Centres of Excellence Program
- Expanding Market Opportunities Program and the Forest Innovation Program
- Canadian Innovation Commercialization Program
- National Research Council to support business driven and industry relevant applied research.

SR&ED tax incentive program

In an effort to simplify the SR&ED program, make the program more cost-effective and streamline the compliance and administration efforts of business and CRA, the budget announced the following changes:

Reduction of general tax credit rate — The general SR&ED investment tax credit rate will be reduced to 15% (from 20%), effective January 1, 2014.
Capital expenditures —Capital expenditures will be removed from the base of eligible expenditures for expenditures incurred in 2014 and subsequent years. All other expenditures such as salary and wages, materials, overhead expenses and contract payments remain eligible.
Proxy overhead calculation —The prescribed proxy amount will be reduced to 55% (from 65%) of direct labour costs commencing January 1, 2014.
Arm’s-length contract payments — Only 80% of the contract payments will be used for purposes of calculating the SR&ED tax credits effective January 1, 2013.
Administration — The government will spend $6 million over the next two years to implement changes to the administration of the program through the following measures:
- Have the CRA conduct a pilot project to determine the feasibility of a formal pre-approval process
- Enhance the existing online self-assessment eligibility tool
- Work with industry representatives to address emerging issues
- Improve the Notice of Objection process to allow for a second review of scientific eligibility determination.

The above initiatives complement the SR&ED policy review project currently underway, which will consolidate and clarify the administrative policies that are contained in about 70 documents pertaining to the SR&ED tax incentive program.

The budget also announced that the government would conduct a study, including consultation with taxpayers, to better understand why companies choose to hire consultants on a contingency fee basis to prepare their SR&ED claims. The result of this study will determine whether any action is required.

Research at universities and other research institutes

R&D is a long-acknowledged driver of economic prosperity and competitiveness, and the prevalent view is that more private investment in R&D will yield significant social benefit. A key driver to the government’s overall innovation strategy is to create new knowledge and a highly skilled workforce. The budget announced that the government will continue to support advanced research at universities and other leading research institutions by providing direct support to granting councils, genomics research, international research and infrastructure investment for Canadian universities, colleges, research hospitals and other not-for-profit research institutes across Canada.

Personal Tax Changes

Old Age Security and Guaranteed Income Supplement

As expected, the budget contains measures affecting seniors’ retirement income.

Eligibility age
The age of eligibility for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) will be gradually increased from 65 to 67, starting April 2023, with full implementation by January 2029. This measure will not affect anyone who is 54 years of age or older as of March 31, 2012. In particular, individuals born on March 31, 1958 or earlier will not be affected. Individuals born on or after February 1, 1962 will have an age of eligibility of 67. Individuals born between April 1, 1958 and January 31, 1962 will have an age of eligibility between 65 and 67.

Option to defer OAS pension
Starting on July 1, 2013, individuals will be allowed to voluntarily defer their OAS pension, for up to five years. These individuals will then receive a higher actuarially adjusted annual pension.

Group sickness or accident insurance plans

The budget proposes to include the amount of an employer’s contributions to a group sickness or accident insurance plan in an employee’s income for the year in which the contributions are made to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis. This measure will not affect the tax treatment of private health services plans or certain other plans.

This measure will apply in respect of employer contributions made on or after March 29, 2012 to the extent the contributions relate to coverage after 2012, except that such contributions made on or after March 29, 2012 and before 2013 will be included in the employee’s income for 2013.

Retirement compensation arrangements

A retirement compensation arrangement (RCA) is a type of employer-sponsored, funded retirement savings arrangement. The budget proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions. These rules will be based very closely on existing rules for Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs). As well, the budget proposes a new restriction on RCA tax refunds in circumstances where RCA property has lost value.

The prohibited investment rules will apply for investments acquired or investments that become prohibited investments on or after March 29, 2012. The advantage rules will apply to advantages extended, received or receivable on or after March 29, 2012, including RCA advantages that related to RCA property acquired, or transactions occurring, before March 29, 2012. Transitional rules will apply.

The budget proposes that, if RCA property has declined in value, the RCA tax will be refunded only in circumstances where the decline in value of the property is not reasonably attributable to prohibited investments or advantages, unless the CRA is satisfied that it is just and equitable to refund the tax. This measure will apply in respect of RCA tax on RCA contributions made on or after March 29, 2012.

Employees Profit Sharing Plans

The budget proposes a measure to limit certain employer contributions to Employees Profit Sharing Plans (EPSPs). The proposal introduces a special tax payable by a specified employee on an “excess EPSP amount”.

A specified employee is one who has significant equity interest in the employer or who does not deal at arm’s length with the employer. An “excess EPSP amount” will be the portion of an employer’s EPSP contribution, allocated by the plan trustee to a specified employee, that exceeds 20% of the specified employee’s salary received in the year from the employer.

The special tax will include two components: the first component will be equal to the top federal marginal tax rate of 29%. The second component will be equal to the top marginal rate of the province of the specified employee’s residence (unless the specified employee resides in Quebec, in which case this component will be zero). A new deduction will be introduced to ensure that an excess EPSP amount is not also subject to regular income tax. A specified employee will not be able to claim any other deductions or credits in respect of an excess EPSP amount.

The CRA will have the discretion to waive or cancel the application of this measure if it considers it just and equitable to do so.

This measure will apply to EPSP contributions made by an employer on or after March 29, 2012, other than contributions made before 2013 under a legally binding obligation arising under a written agreement entered into before March 29, 2012.

Mineral Exploration Tax Credit

The Mineral Exploration Tax Credit is available to individuals who invest in flow-through shares. The credit is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The budget proposes to extend eligibility for the tax credit for one year to flow-through share agreements entered into on or before March 31, 2013.

Other personal tax measures

Medical Expense Tax Credit
Expenses eligible for the Medical Expense Tax Credit will include blood coagulation monitors for use by individuals who require anti-coagulation therapy, including certain associated items, when they are prescribed by a medical practitioner. This measure will apply to expenses incurred after 2011.

Life insurance policy exemption test
The budget proposes to implement several changes regarding the life insurance policy exemption test which is the test that determines whether a life insurance policy is a tax-exempt policy.

The Investment Income Tax (IIT) on life insurance will be modified where appropriate to neutralize impacts of the proposed technical improvements to the IIT base. The government will consult with key stakeholders on these proposed improvements. Amendments to the tax provisions arising from these consultations will apply to life insurance policies issued after 2013.

Overseas Employment Tax Credit

Currently, employees who are residents of Canada and who qualify for the Overseas Employment Tax Credit (OETC) are entitled to a tax credit equal to the federal tax otherwise payable on 80% of their qualifying foreign employment income, up to a maximum foreign employment income of $100,000.

The budget proposes to phase out the OETC over four years, beginning with 2013. In particular, during the phase-out period, the 80% applied to an employee’s qualifying foreign employment income will be reduced as follows:

60% for 2013
40% for 2014
20% for 2015.

The OETC will be eliminated for 2016 and subsequent years.

The phase-out rules will not apply to qualifying foreign employment income earned by an employee if the employer has committed in writing (e.g., the employer tendered an irrevocable bid in writing for a project) before March 29, 2012. In this case, the 80% will apply for 2013, 2014, and 2015. However, the OETC will be eliminated for 2016 and subsequent years.

Registered Disability Savings Plans

The budget proposes several measures related to registered disability savings plans (RDSPs), including:

Plan holders
Certain family members (spouse, common-law spouse, common-law partner, or parent of the disabled individual) may, on a temporary basis, become plan holders of a registered disability savings plans (RDSPs) for an adult individual who might not be able to enter into a contract. Currently, a plan holder must be either the beneficiary or their guardian or legal representative. This measure applies from the date of Royal Assent of the enacting legislation until the end of 2016.

Proportional repayment rule
Under current rules, Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) paid into an RDSP in the preceding 10 years must be repaid to the government under certain conditions (the “10-year repayment rule”), including when an amount is withdrawn from an RDSP. The budget proposes to introduce a proportional repayment rule that will apply when a withdrawal is made from an RDSP. Generally, for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal must be repaid.

Maximum and minimum withdrawals
The budget proposes changes to the maximum and minimum withdrawals from RDSPs. These changes will apply after 2013.

Rollover of RESP investment income
The budget proposes to allow investment income earned in a Registered Education Savings Plan (RESP) to be transferred on a tax-free (or “rollover”) basis to an RDSP if the plans share a common beneficiary, if certain conditions are met. This measure will apply to rollovers of RESP investment income made after 2013.

Termination of RDSP following cessation of eligibility for the disability tax credit
The budget proposes to extend the period for which an RDSP may remain open when a beneficiary becomes disability tax credit-ineligible, i.e., the beneficiary’s condition improves so that he or she becomes ineligible for the disability tax credit (DTC).

To have this measure apply, the plan holder is required to make an election in prescribed form on or before December 31st of the year following the first full calendar year for which the beneficiary is DTC-ineligible. The election will generally be valid until the end of the fourth calendar year following the first full calendar year for which a beneficiary is DTC-ineligible.

This measure will apply to elections made after 2013.

Administrative changes
The budget replaces certain deadlines regarding the administration of an RDSP with a requirement that an RDSP issuer act “without delay” in notifying Human Resources and Skills Development Canada when an RDSP is established or transferred from one RDSP issuer to another.

Business Tax Changes

Eligible dividend designations

The budget proposes to allow a corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. The portion of the taxable dividend that is designated to be an eligible dividend will qualify for the enhanced dividend tax credit for eligible dividends and the remaining portion will qualify for the dividend tax credit for non-eligible dividends.

Under the budget proposal, the CRA will be allowed to accept a late designation of an eligible dividend if the corporation makes the late designation within the three-year period following the day on which the designation was first required to be made.

These measures will apply to taxable dividends paid on or after March 29, 2012.

Tax avoidance using partnerships

Elimitation of section 88 “bump” to partnership interests

The budget proposes changes to limit the application of the section 88 “bump” in the wind-up involving a partnership interest where all the fair market value of the partnership interest is derived from income assets.

Section 88 of the Income Tax Act (the Act) generally permits a taxable Canadian corporation that has acquired control of another taxable Canadian corporation to increase the cost base of certain capital assets acquired by the parent company on a wind-up or vertical amalgamation with the parent. The bump permits the parent to add the amount paid for the shares to the cost of certain assets acquired on the amalgamation or windup, within certain limits.

The bump applies to capital assets, such as land, shares of a corporation or interest in a partnership but does not apply to income producing assets such as eligible capital property, depreciable property, inventory and resource property.

The budget proposes to deny a bump in respect of a partnership interest to the extent that the accrued gain in respect of the partnership interest is reasonably attributable to the amount by which the fair market value of income assets exceed their cost amount.

These rules apply to income assets that are held directly by the partnership or indirectly through another partnership. However, assets directly owned by a taxable Canadian corporation, shares of which are owned by the partnership, will not be considered to be indirectly held by the partnership.

This measure will apply to amalgamations that occur, and wind-ups that begin, on or after March 29, 2012. However, the new measure will not apply where a taxable Canadian corporation amalgamates with its subsidiary before 2013, or begins to wind up its subsidiary before 2012 provided that before March 29, 2012 the corporation had acquired control or was obligated, as evidenced in writing, to acquire control of the subsidiary and the corporation had the intention, as evidenced in writing, to amalgamate with or wind up with the subsidiary.

Partnership disposition to a non-resident
Section 100 of the Act provides that income assets held by a partnership are fully taxable on the sale of the partnership to a tax-exempt person.

The budget proposes to apply section 100 to the sale of a partnership interest to a non–resident person or to an indirect transfer to a non-resident person or a tax-exempt entity. However, this proposal will not apply to the disposition of an interest to a non-resident person if the partnership, immediately before and immediately after the acquisition by the non-resident person, uses all of the property of the partnership in carrying on business through a permanent establishment in Canada.

This measure applies to dispositions of interests in partnerships that occur on or after March 29, 2012, except for arm’s-length dispositions made before 2013 where the taxpayer is obligated pursuant to a written agreement entered into before March 29, 2012.

Partnership waivers
The CRA may not, for a fiscal period of a partnership, make a determination or redetermination of any income, loss, deduction or other amount in respect of the partnership if more than three years have elapsed since the latter of the filings deadline for filing the relevant information return and the day that it is actually filed. However, where a waiver is obtained by the CRA, the period of time for making the determination or redetermination is extended.

The budget proposes that a waiver may be made by one member of the partnership if the member is designated on behalf of all of the partners.

Accelerated CCA for clean energy generation equipment

Waste-fuelled thermal energy equipment
Class 43.2 provides accelerated CCA (50% per year on a declining balance basis) for investment in specified clean energy generation and conservation equipment. Currently, this class includes waste-fuelled thermal energy equipment, subject to the requirement that the heat energy generated from the equipment is used in an industrial process or a greenhouse. The budget proposes to expand Class 43.2 by removing this requirement. As a result, waste-fuelled thermal energy equipment will be able to be used in a wide range of applications, including space and water heating.

District energy system equipment
Certain equipment that is part of a district energy system is currently included in Class 43.1 or Class 43.2. The budget proposes to expand Class 43.2 by adding equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment (that is itself eligible for inclusion in Class 43.2).

Energy generation from residue of plants
Currently, subject to certain requirements, equipment that uses plant residues to produce biogas or bio-oil is currently eligible for inclusion in Class 43.2. The budget proposes to add the residue of plants to the list of eligible waste fuels that can be used in waste-fuelled thermal energy equipment included in Class 43.2 or a cogeneration system included in Class 43.1 or Class 43.2.

Environmental compliance
The budget proposes that equipment using eligible waste fuels not be eligible under Class 43.1 or Class 43.2 if environmental laws and regulations are not complied with at the time the equipment first becomes available for use.

These measures apply to assets acquired on or after March 29, 2012 that have not been used or acquired for use before this date.

Corporate Mineral Exploration and Development Tax Credit

The budget proposes to phase out the corporate tax credit for pre-production mining expenditures. Currently, a tax credit of 10% is available. The credit will apply at a rate of 10% for exploration expenses incurred in 2012, and at a rate of 5% for expenses incurred in 2013. The credit will not be available for exploration expenses incurred after 2013.

The corporate tax credit will apply at a rate of 10% for pre-production development expenses incurred before 2014, at a rate of 7% for expenses incurred in 2014, and a rate of 4% for expenses incurred in 2015. The credit will not be available for pre-production development expenses incurred after 2015. However, transitional relief is provided in certain circumstances.

Atlantic Investment Tax Credit (AITC)

Oil and gas and mining activities
The budget proposes to phase out the 10% AITC for oil and gas and mining activities over a four-year period. The AITC will apply at a rate of 10% for assets acquired before 2014 for use in certain oil and gas and mining activities (a list of activities is provided in the budget document), at a rate of 5% for such assets acquired in 2014 and 2015. The AITC will not be available for such assets acquired after 2015. However, transitional relief is provided in certain circumstances.

Electricity generation equipment
Certain equipment is eligible for the AITC if the equipment is “qualified property”. The budget proposes amendments so that qualified property will include certain electricity generation equipment and clean energy generation equipment used primarily in an eligible activity. In general, and subject to certain requirements, qualified property will include electricity generation equipment described in Class 17 or 48 and clean energy generation and conservation equipment described in Class 43.1 or 43.2.

This measure will apply to assets acquired on or after March 29, 2012 that have not been used or acquired for use before this date, except that the measure will not apply to acquisitions of assets that are used primarily in oil and gas or mining activities.

Hiring credit for small business

Last year’s budget introduced a temporary Hiring Credit for Small Business of up to $1,000 per employer. The 2012 budget proposes to extend this temporary credit for one year. In particular, a credit of up to $1,000 against a small employer’s increase in its 2012 Employment Insurance premiums over those paid in 2011 will be provided.

Taxation of corporate groups

In the 2010 federal budget, the government announced that it was going to explore whether new rules for the taxation of corporate groups, including tax loss consolidation or loss transfer rules, should be considered to improve the functioning of the corporate tax system. Public consultations were held between November 2010 and April 2011 and the government has indicated that discussions with applicable stakeholders, including the provinces and territories, are ongoing.

International Tax Changes

Thin capitalization rules

The budget proposes a series of measures that impact the thin capitalization rules.

Reduction of debt-to-equity ratio from 2:1 to 1.5:1

The thin capitalization rules limit the interest expense deduction of a Canadian resident corporation where the amount of debt owing to certain non-residents exceeds a 2:1 debt-to-equity ratio. These rules apply to debts owing to a specified shareholder that is not resident in Canada and any other non-resident who does not deal at arm’s length with the non-resident. A specified shareholder is generally viewed as owning shares representing more than 25% of the votes or value of the corporation.

The budget proposes that the debt-to-equity ratio be reduced to 1.5:1 for all corporate taxation years that begin after 2012.

Inclusion of partnership debt in the debt-to-equity ratio

Currently, the thin capitalization rules only apply to Canadian resident corporations. The budget proposes to extend these rules to apply to debts owed by partnerships of which a Canadian resident corporation is a member.

In this situation, the debt of the partnership will be allocated to its Canadian resident corporation members based on their proportionate interest in the partnership. These debts will then be included in the corporation’s debt-to-equity ratio under the thin capitalization rules.

Where this calculation results in an amount of non-deductible interest that is related to the debt allocated from the partnership, an amount equal to the interest on the portion of the allocated partnership debt that exceeds the permitted debt-to equity ratio will be required to be included in computing the income of the Canadian resident corporation that is a member of the partnership. The inclusion will be treated as either business or property income and the source of this inclusion will be determined by reference to the source against which the interest is deductible at the partnership level.

This measure is applicable in respect of debts of a partnership that are outstanding during corporate taxation years that begin on or after March 29, 2012.

Interest disallowed in the debt-to-equity ratio treated as dividends

The budget proposes to recharacterize the disallowed interest expense from the application of the thin capitalization rules as a dividend for non-resident withholding tax purposes. This recharacterization includes an amount that is required to be included in computing the income of a corporation in respect of a disallowed interest expense of a partnership.

The budget proposes that any disallowed interest expense of a corporation will be allocated to specified non-residents in proportion to the corporation’s debt owing in the taxation year to all specified non-residents, including debts owing by the partnerships of which a corporation is a member. Withholding tax will then apply to the deemed dividend allocation. Withholding taxes on deemed dividends are due when applicable withholding taxes on interest payments are otherwise due. The corporation may allocate the disallowed interest expense to the latest interest payments made to any particular specified non-resident in the taxation year. Where the interest expense has not been paid by the end of the taxation year, the disallowed interest expense will be deemed to have been paid as a dividend to that specified non-resident at the end of the taxation year.

This measure applies to taxation years that end on or after March 29, 2012.

Foreign affiliate loans
The budget proposes that the thin capitalization rules will not include the interest expense of a Canadian-resident corporation that relates to interest that is taxable to the Canadian resident corporation as Foreign Accrual Property Income of a controlled foreign affiliate of the corporation.

This measure applies to taxation years of a Canadian resident corporation that end on or after March 29, 2012.

Foreign affiliate dumping

“Foreign affiliate dumping” is a term applied to certain transactions whereby a Canadian subsidiary uses borrowed funds to acquire shares of a foreign affiliate from its foreign parent, obtains an interest expense deduction in Canada on the borrowing and at the same time is eligible to receive exempt surplus dividends on the shares of the foreign affiliate that are exempt from taxation in Canada.

Certain transactions that could also be viewed as foreign affiliate dumping include:

Acquisitions of shares of a foreign affiliate that are made with internal funds of a Canadian subsidiary, which are viewed as an extraction of funds from the Canadian subsidiary free of Canadian withholding tax
Acquisitions of newly issued shares of a foreign affiliate where previously issues shares of the foreign affiliate are owned by the foreign parent or another non-resident member of the same corporate group
Acquisitions of foreign affiliate shares from a foreign subsidiary of the foreign parent
Acquisitions of foreign affiliate shares from an arm’s-length party at the request of the foreign parent.

The budget proposes the following:

Where certain conditions are met, a dividend will be deemed to be paid by a Canadian subsidiary to its foreign parent to the extent of the value of any non-share consideration given by the Canadian subsidiary for the acquisition of the shares of the foreign affiliate. Any deemed dividend will be subject to non-resident withholding tax.
Furthermore, it is proposed that paid-up capital of any shares of the Canadian subsidiary that are given as consideration by the parent will be disregarded.

These rules will not apply to transactions that meet a "business purpose test". The factors to be considered in applying this test will be non-tax factors and are intended to assist in determining whether it is reasonable to conclude that the investment in, and ownership of, the foreign affiliate belongs in the Canadian subsidiary more than in any entity in the foreign parent’s group. The government will receive submissions concerning the details of the proposed “business purpose test” before June 1, 2012.

This measure will apply to transactions that occur on or after March 29, 2012, other than transactions that occur before 2013 between parties that deal at arm’s length and that are obligated to complete the transaction pursuant to a written agreement entered into before March 29, 2012.

Related paid-up capital suppression rules will apply in corporate immigrations and emigrations.

The budget indicates that the government intends to monitor further developments in this area.

Base erosion test—Canadian banks

The budget proposes that amendments will be developed on the so-called “Base Erosion Test” of the foreign accrual property income regime as it applies to Canadian banks. Specifically, amendments will be developed to alleviate the tax cost to Canadian banks of using excess liquidity of their foreign affiliates in their Canadian operations. Also, amendments will be developed to ensure that certain transactions that form part of a bank’s business of facilitating trades for arm’s-length customers are not caught by the base erosion test.

These amendments will be developed with industry representatives.

Transfer pricing adjustments

The transfer pricing rules that generally govern the transactions or series of transactions between parties who do not deal at arm’s length are provided in section 247 of the Act.

Once an adjustment to the transfer price is made for income tax purposes by the CRA to reflect arm’s-length terms and conditions (commonly referred to as a “primary adjustment”), a resulting adjustment is generally required to account for the part of the transaction which was not deemed to made at acceptable transfer pricing terms. This part of the transaction is generally referred to as the “secondary adjustment” and is viewed as a benefit conferred on the non-residents participating in the transaction.

It is proposed that section 247 of the Act be amended to confirm that the secondary adjustment be treated as a dividend for purposes of non-resident withholding tax Part XIII of the Act, with the result that related withholding tax will apply. Further, when such an adjustment is applicable, the Canadian corporation subject to the primary adjustment will be deemed to have paid a dividend to each non-arm’s length non-resident that is part of the transactions in proportion to the amount of the primary adjustment that relates to that non-resident. This rule specifically applies regardless of whether the non-resident person is a shareholder of the Canadian corporation.

If a non-resident repatriates to the Canadian corporation an amount equal to its portion of the primary adjustment, and if the repatriation is made with the concurrence of the CRA, no deemed dividend will arise if the non-resident is a controlled foreign affiliate of the Canadian corporation.

These proposals will apply to transactions and series of transactions that occur on or after March 29, 2012.

Indirect Tax Changes

GST/HST streamlined accounting thresholds

Most small businesses and most public service bodies (PSBs) can elect to use the Quick or Special Quick Method of accounting respectively to determine the amount of GST/HST to remit. Most small businesses and most PSBs can also elect to use the Streamlined Input Tax Credit Method, which provides a simplified process for determining input tax credits (ITCs).

The budget proposes to double the existing thresholds for this streamlined accounting as follows:

The annual taxable sales threshold at or below which eligible businesses can elect to use the Quick Method will increase to $400,000 (from $200,000) of GST/HST-included taxable sales
The annual taxable sales and taxable purchases thresholds at or below which eligible businesses or PSBs can elect to use the Streamlined Input Tax Credit Method and eligible PSBs can elect to use the Prescribed Method for Calculating Rebates will increase:
- To $1 million (from $500,000) of taxable sales, and
- To $4 million (from $2 million) of taxable purchases.

This measure will be effective in respect of a GST/HST reporting period of a person (or a claim period of a person, in the case of the Prescribed Method for Calculating Rebates) beginning after 2012.

GST/HST health measures

The budget proposes changes to improve the application of GST/HST to a number of health care services, including pharmacists’ services, corrective eyewear and certain medical devices and drugs

GST rebate for books

The budget proposes to allow charity and qualifying non-profit literacy organizations to claim a rebate of the GST and the federal portion of the HST they pay to acquire printed books to be given away.

This measure will apply to acquisitions and importations of printed books in respect of which tax becomes payable after March 29, 2012.

Travellers’ exemptions

The budget proposes to increase the travellers’ exemption to:

$200 (from $50) for returning Canadian residents who are out of the country for 24 hours or more.
$800 for travellers who are out of the country for 48 hours or more. This new $800 threshold will replace the current 48-hour exemption of $400 and the current seven-day exemption of $750.

The new exemption levels will be effective for travelers returning to Canada on or after June 1, 2012.

Foreign-based rental vehicles temporarily imported

The budget proposes changes to the tax treatment of foreign-based rental vehicles temporarily imported by Canadian residents. The budget proposes to fully relieve GST/HST on foreign-based rental vehicles temporarily imported by Canadian residents who have been outside Canada for at least 48 hours, among other changes. These measures will apply to foreign-based rental vehicles temporarily imported by Canadian residents on or after June 1, 2012.

Green levy on fuel-inefficient vehicles

The Green Levy applies to certain fuel-inefficient vehicles. To ensure that recent changes to vehicle fuel consumption testing requirements do not affect the application of the Green Levy, the budget proposes amendments so that the weighted average fuel consumption rating for the purposes of the Green Levy continues to be determined by reference to the current test method. These amendments will apply on Royal Assent to the enacting legislation.

Tariff on imported oil

The budget proposes to eliminate the 5% Most-Favoured-Nation (MFN) rate of duty on certain imported oils used as production inputs in gas and oil refining as well as electricity production. This tariff elimination will be effective in respect of goods imported on or after March 30, 2012.

Charities Changes

The 2012 budget contains several tightening measures affecting charities, including the following.

Gifts to foreign charitable organizations

In general, donations made by Canadians to foreign charities are not eligible for the charitable donation tax credit or deduction. However, certain foreign charitable organizations may register as a qualified donee. The budget proposes to modify the rules for registering certain foreign charitable organizations as qualified donees so that organizations must pursue activities that are related to disaster relief or urgent humanitarian aid or that are in Canada’s national interest. The CRA will develop guidance regarding the administration of this proposal.

Foreign charitable organizations that have received qualified donee status under the existing rules will continue to be qualified donees until the expiration of the period of their current status.

This measure will apply to applications made by foreign charitable organizations on or after the later of January 1, 2013 and Royal Assent of enacting legislation.

Enhancing charities’ transparency and accountability

Political activities
A charity is allowed to engage in political activity as long as the activities represent a limited portion of its revenues, are non-partisan and are ancillary and incidental to its charitable purposes and activities. The government is concerned that charities may be exceeding these limitations. Further, there is currently no requirement for a charity to disclose the extent to which it receives funding from foreign sources for political activities.

As a result, the budget proposes to provide the CRA with additional enforcement tools. In particular, the CRA will be allowed to suspend the tax receipting privileges of a charity that exceeds the limitations on political activities for one year. As well, the CRA will be able to suspend the tax-receipting privileges of a charity that provides inaccurate or incomplete information in its annual information return until the charity provides the required information.

Funding political activities
Where a gift is made by a charity and it can reasonably be considered that the purpose of the gift is to support the political activities of a qualified donee, the gift will be considered to be an expenditure made by the charity on political activities.

These measures will also apply to registered Canadian amateur athletic associations. These measures will be effective on Royal Assent to the enacting legislation.

Administrative Measures

Tax shelters

The budget proposes the following measures to encourage tax shelter registration and reporting:

Promoter penalty on charitable donation tax shelters
Currently, the promoter penalty on charitable donation tax shelters is the greater of $500 and 25% of the consideration received/receivable for the tax shelter. The budget proposes that, in the case of a charitable donation tax shelter, the penalty will be the greater of the amount under existing rules and 25% of the amount asserted by the promoter to be the value of the property that participants in the tax shelter can transfer to a donee. This measure will apply on Royal Assent to the enacting legislation.

Unreported tax shelter sales
Currently, the penalty for not filing an annual information return on time is the greater of $100 and $25 multiplied by the number of days that the return is outstanding, to a maximum of $2,500. The budget proposes an additional penalty on a promoter who fails to either file an annual information return in response to a demand by the CRA to file the return or report in the return an amount paid by a participant in the tax shelter.

The new penalty will be equal to 25% of the consideration received or receivable by a promoter from all interests in the tax shelter that should have been, but were not, reported in the annual information return. Alternatively, in the case of a charitable donation tax shelter for which the amounts paid by the participants are not reported, the greater of 25% of the consideration received/receivable by the promoter and the amount asserted by the promoter to be the value of the property that those participants can transfer to a donee.

In the case of a failure to file an information return when the CRA demands the filing of the return, the proposed measure will be effective after Royal Assent to the enacting legislation. In the case of the failure to report in an annual information return an amount paid by a participant, the proposed measure will apply to returns filed after Royal Assent to the enacting legislation.

Tax shelter identification numbers
Currently, a tax shelter number does not have an expiration date. The budget proposes that a number be valid only for the calendar year identified in the application for the number filed with the CRA. This measure will apply to applications made on or after March 29, 2012. Tax shelter identification numbers issued as a result of applications made before March 29, 2012 will be valid until the end of 2013.

2012 Federal Budget Highlights (KPMG)

2012-03-30T10:02:00.001-04:00

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Directors' Liability: Execution Against Primary Debtor

2012-03-25T22:15:00.001-04:00

Directors' Liability: Execution Against Primary Debtor

In Barrett (2012 FCA 33), the minister sought to enforce a GST assessment against a director in his personal capacity. On the basis of the wording of the statute and case law, the FCA concluded that the minister is not obliged to make "reasonable" efforts to collect a GST debt from a corporation before he takes action against any director. The minister need only act in good faith.

Mr. B was a director of a corporation that had failed to remit GST for a period in the 1990s. The corporation ceased to carry on business, and Mr. B withdrew funds from the corporate account for his personal use. The minister registered a certificate in the FC in 1998 against the corporation and immediately obtained a writ of seizure and sale, which in 2000 he directed the sheriff to execute. The sheriff returned a nulla bona report to the minister. In 2002, the minister assessed Mr. B in his personal capacity in order to satisfy the corporate GST debt.

The TCC (2010 TCC 298) concluded that the minister's efforts to collect the GST debt from the corporation were relevant to the question of whether reasonable efforts were made to execute the writ. The court relied on its earlier comments in Miotto (2008 TCC 128) to conclude that in determining whether reasonable efforts were made, one must examine the entire execution process, including the steps the CRA took to search for assets and instruct the sheriff. The TCC said that because the minister failed to search for the corporate bank account, he had not made reasonable efforts to execute the writ against the corporation before he initiated action against the director. Thus, the court held that the requirements of ETA paragraph 323(2)(a) were not met, and it vacated the assessment against Mr. B.

ETA paragraph 323(2)(a) provides that before the director of a corporation can be held liable for its GST debt, a certificate for the liability's amount must be registered in the FC and the execution for that amount must be returned partially or wholly unsatisfied. On the appeal in Barrett, the FCA said that there was nothing in the provision's text that requires the minister to take reasonable steps to search for corporate assets before seeking to execute a writ. Instead, the FCA said that the rules of the federal court that issued the writ will establish the standards that govern the writ's execution.

The FCA then considered the FC rules and concluded that nothing in those rules requires a judgment creditor to make reasonable efforts to search for assets before instructing the sheriff to seek to collect the debt. The FCA acknowledged that the rules are complemented by provincial execution laws regarding writs, but said that nothing in the Ontario statutes or the rules of civil procedure requires a judgment creditor to make reasonable efforts to search for assets.

Thus, the FCA also considered the legal context and purpose of ETA paragraph 323(2)(a) and concluded that none of the administration or enforcement provisions of the ETA assist in ascertaining whether the minister must make reasonable efforts to search for corporate assets. Instead, those provisions confirm that a director's liability arises not merely from an ordinary debt, but from an obligation in respect of money collected from third parties and held in trust for the government of Canada. A director has the power to ensure that a corporation makes its remittances, but he can exculpate himself from personal liability if he can demonstrate his due diligence. Nothing in the relationship between a corporation and its directors is consistent with the proposition that the minister must take reasonable steps to search for the corporation's assets before taking action against directors. This is particularly so in cases where the director can be indemnified from existing corporate assets: a director who has been held liable for a GST debt has the same preferential rights as the minister over other creditors to be indemnified through the corporation's remaining assets.

The FCA also examined whether the trial judge concluded correctly that Miotto imposed a burden on the minister to make reasonable efforts to locate the corporation's assets and direct the sheriff accordingly. The TCC in Barrett had relied on an excerpt from Miotto that referred to the CRA's reasonable belief that the primary debtor had no assets, but immediately went on to say that the "execution of a writ . . . requires reasonable efforts on the part of the bailiff. It does not require perfection." The FCA said that further comments in Miotto--concerning the CRA collection officer's reasonable belief and the inappropriateness of the directors' criticizing the CRA for failing to find items that they had hidden--pointed to a simple good faith requirement on the minister's part.

Thus, the FCA concluded that the TCC had erred in finding that ETA paragraph 323(2)(a) imposed an obligation on the minister to make reasonable efforts when directing the sheriff and searching for corporate assets. At the most, the minister's obligation in seeking to execute a writ is to act in good faith. As the FCA suggested concerning the directors who spirited away assets in Miotto, it is difficult to sympathize with Mr. B's attempt to exculpate himself from personal liability as a director by criticizing the minister for not finding the money (before Mr. B spent it) that had been held in trust for the Crown in the corporation's bank account.

John Sorensen and Steve Novoselac
Gowling Lafleur Henderson LLP, Toronto

Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation

Pooled Registered Pension Plans, Part 2

2012-03-25T22:11:00.001-04:00

Pooled Registered Pension Plans, Part 2

Pooled registered pension plans (PRPPs) are intended to provide a new retirement savings option that is attractive to smaller employers and the self-employed. Bill C-25, An Act Relating to Pooled Registered Pension Plans and Making Related Amendments to Other Acts (also referred to as the Pooled Registered Pension Plans Act) was introduced on November 17, 2011 to implement PRPPs. On December 14, 2011, Finance released income tax legislative proposals for PRPPs that apply to both federally and provincially regulated PRPPs. Last month ("Pooled Registered Pension Plans, Part 1," Canadian Tax Highlights, February 2012) we offered an overview of PRPPs and discussed the tax rules that apply to individual and employer PRPP contributions. This article discusses investments and investment income of a PRPP, payments therefrom, and transfers between a PRPP and other registered retirement plans.

Investments. An administrator is responsible for investing a PRPP's assets. Although the assets are combined for investment purposes, each member has a personal account and, upon enrolling in the plan, can make investment choices from those options offered by the administrator. A member bears the investment risk, just as in any other defined contribution arrangement. Investments in PRPPs need not conform to RRSP "qualified investment" rules, but the investments are subject to restrictions that are intended to prevent an administrator from participating in an arrangement that may be used (1) to circumvent PRPP contribution limits, or (2) in the case of an older individual member, to reduce the value of the PRPP account in order to avoid or lower required RPP payments in retirement. A PRPP must take reasonable precautions to avoid (1) the acquisition of investments in which a member has a significant interest (generally more than 10 percent of a class of a corporation's shares or of a partnership's or trust's units, including interests held by all non-arm's-length parties); and (2) the concentration of more than 10 percent of the plan's assets in one business or non-arm's-length group. A small PRPP (generally, one with fewer than 10 unrelated employers participating) must also avoid holding investments in the participating employers.

Investment income. The investment income earned in a PRPP must be allocated to the member's account annually (or more frequently). The earnings in, as well as the contributions made to, the PRPP are tax-exempt until they are paid out of the PRPP, but that exemption does not extend to income from a business that is carried on by the PRPP.

Payments and transfers during a member's life. Funds in a PRPP are generally covered by locking-in rules similar to those applicable to an RPP. Subject to these rules, payments from a PRPP are generally included in the individual's income and are eligible for the pension tax credit and pension income splitting. Payments made to a non-resident are subject to withholding tax. The existing transfer rules for a defined contribution RPP (governing transfers between an RPP and another RPP, an RRSP, a RRIF, and certain other registered plans) generally apply to a PRPP. Employee and employer contributions to a PRPP (other than certain transfers) must cease by the end of the year in which the member turns 71, at which time the payment options to the member mirror those for a defined contribution RPP. The PRPP funds can be (1) paid as a single, non-periodic payment; (2) used to purchase a life annuity for the member; or (3) paid as variable benefits (RRIF-type payments).

Payments and transfers upon the member's death. Generally, the funds in a PRPP are included in income for the deceased member's last taxation year. However, as indicated in the table, if the deceased had directed that the funds be distributed to a "qualifying person"--a spouse or an infirm dependant--the transfer of funds is tax-deferred or included in the transferee's income.

PRPP Funds
	Tax-deferred transfer?
Fund transfer options	Surviving spouse or common-law partner	Infirm financially dependent child or grandchild

Become a successor member, assume ownership of PRPP	Yes	No
Transfer to one's own RRSP, RRIF, PRPP, or RPP	Yes	Yes
Acquire a qualifying annuity	Yes	Yes
Transfer to registered disability savings plan (RDSP) to the extent of available contribution room	No	Yes

Ken Griffin
PricewaterhouseCooopers LLP, Toronto

John Hnatiw
PricewaterhouseCoopers LLP, Mississauga

Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation

Untitled

2012-03-25T21:46:00.001-04:00

New US Reporting for Foreign Assets

Beginning with his 2011 tax return, a US citizen or resident who owns certain specified foreign financial assets (SFFAs) has a new US tax filing obligation, form 8938 ("Statement of Specified Foreign Financial Assets"). Most US citizens who are Canadian residents are already familiar with FBAR reporting of foreign bank and financial accounts on form TD F 90.22-1: reporting is required annually if the aggregate value of those accounts exceeds $10,000 during the tax year. Now, in addition to the FBAR, certain US individuals must file form 8938 with their US tax returns to report certain detailed information about the taxpayer's SFFAs (Code section 6038D, enacted with FATCA).

An SFFA includes many types of non-US financial accounts that are also reported on the FBAR, but the definition of an SFFA is broader than the definition of a foreign financial account for FBAR purposes. SFFAs include other foreign financial assets held for investment that are not in an account--namely, stock or securities of non-US issuers, any interest in a non-US entity, and any financial interest or contract that has a non-US issuer or counterparty.

For 2011, only specified individuals must file form 8938--a US citizen; a resident alien of the United States for any part of the tax year (even if he elects to be a non-resident under a treaty's residence tie-breaker rules); a non-resident alien who makes an election to be treated as a resident alien for the purposes of filing a joint US tax return; and, in some cases, a resident of a US possession. Proposed regulations have been issued that require form 8938 reporting by certain US entities for taxable years beginning after December 31, 2011. However, if a person is not required to file a US income tax return for the year, form 8938 is also not required.

A significant and favourable difference distinguishes form 8938 from the FBAR: form 8938 reporting thresholds are more generous and take into account both the taxpayer's filing status and his residence. For a taxpayer who lives in the United States and files a return other than a joint return, form 8938 reporting is required if the total value of his SFFAs for the year is $50,000 on the last day of the tax year or $75,000 at any time during the tax year; these thresholds increase to $100,000 and $150,000, respectively, for taxpayers who file jointly. For a taxpayer who lives outside the United States and files a return other than a joint return, the thresholds are $200,000 and $300,000, respectively, and $400,000 and $600,000, respectively, for taxpayers who file jointly. When compared with the $10,000 threshold for FBAR filing that applies regardless of residence, the reporting thresholds for form 8938 reflect a more practical approach on the part of the United States.

To qualify as living abroad for purposes of the higher filing thresholds, the individual's tax home must be in a foreign country and he must meet the same presence-abroad test that was established for the "foreign earned income" exclusion: the individual either has been a bona fide resident of a foreign country for an entire tax year or has been present in a foreign country for at least 330 full days during any 12 consecutive months that ends in the tax year being reported.

If an individual would otherwise be required to file form 8938 and has an SFFA that is reported on another US information return (such as form 3520, 3520-A, 5471, 8865, or 8891), the asset need not be reported on form 8938, but the value must be included in the determination of whether the threshold for filing form 8938 is met. Part IV of form 8938 must also be completed to disclose which and how many such other information returns report the particular SFFA.

The information that must be disclosed on form 8938 depends on the particular type of asset, but it generally includes basic identification of the account or asset; the name and address of the financial institution or the issuer or counterparty of stock, securities, or financial assets; the maximum value of the account or asset during the year; whether the account or asset was acquired or disposed of during the year; the amount of income, gain, loss, or other item recognized during the year and the schedule, form, or return on which it is reported to the IRS; and the currency exchange rate used. In addition, with respect to interests in foreign entities, form 8938 must disclose whether the foreign entity is a passive foreign investment company.

Non-compliance with the new form 8938 reporting requirements can have severe consequences. The penalty for failing to file form 8938 or to accurately report SFFAs is a minimum of $10,000. If the taxpayer does not file a correct and complete form 8938 within 90 days after the IRS mails a notice of failure to file, the penalty is increased by $10,000 for each 30-day period of non-compliance, up to a $50,000 maximum. Reasonable cause may be asserted to avoid the penalty only if the taxpayer affirmatively shows the facts that support that claim. A foreign law, whether civil or criminal, that restricts disclosure of the information that must be reported on form 8938 is not reasonable cause.

In addition, if a taxpayer underpays his US tax as a result of a transaction that involves an undisclosed foreign financial asset, the accuracy-related penalty is increased from 20 percent to 40 percent. Failure to file form 8938 can cause the limitation period to remain open for the income tax return with which the form should have been filed. If a taxpayer fails to file form 8938 or fails to report an SFFA, the limitation period for all or part of a taxpayer's US return for the tax year remains open until three years after a complete and accurate form 8938 is filed. Moreover, if on his tax return a taxpayer omits more than $5,000 gross income that relates to an SFFA, the limitation period is extended to six years from the date on which the return is filed.

It is clear that the IRS is serious about collecting more information on foreign financial assets that are held by US persons, as evidenced by the new form 8938 reporting, the IRS's FBAR enforcement efforts, and the impending FATCA regime that applies to non-US financial institutions with US clients. In light of the significant penalties associated with form 8938 reporting, the breadth of the information to be reported, and the compliance issues that many US citizens in Canada have faced with respect to FBAR reporting, a US taxpayer should carefully review new form 8938 and the regulations issued under Code section 6038D to determine whether he must file form 8938 with his 2011 US tax return.

Jessica S. Wiltse
Hodgson Russ LLP, Buffalo

Canadian Tax Highlights
Volume 20, Number 3, March 2012
©2012, Canadian Tax Foundation

Highlights of the 2012 Quebec Budget

2012-03-21T12:52:00.001-04:00

March 20, 2012 No. 2012-11 Highlights of the 2012 Quebec Budget Quebec Minister of Finance and Minister of Revenue, Mr. Raymond Bachand, tabled the Quebec provincial budget for 2012-2013 earlier today. The government announced that the deficit would be $3.3 billion for 2011-2012 and $1.5 billion for 2012-2013. The budget is expected to be balanced in 2013-2014. The Minister indicated that the government will intensify its actions against tax evasion, allocating increased resources to that initiative. Following are the highlights of the 2012 Quebec budget. Business Tax Purchase of shares of a labour fund by employers for the benefit of their employees The value of the taxable benefit related to amounts paid by an employer to acquire a share or fraction of a share issued by the Fonds de solidarité FTQ or Fondaction for the benefit of employees will be excluded from the base wages of employees for Quebec payroll tax purposes. Reduction in contributions to the Health Services Fund In order to counter the decline in Quebec’s working-age population attributable to the aging of the population, the budget provides for a reduction in the contributions to the Health Services Fund of private-sector employers who employ workers aged 65 or over. This new incentive is introduced to encourage private-sector employers to hire or keep such workers. This new measure, which will take the form of a reimbursement starting in 2013, will be worth up to $400 in 2013 per employee, $500 in 2014, $800 in 2015 and $1,000 afterward. This measure is in addition to the tax credit previously announced by the government in the 2011-2012 budget and is designed to eliminate the tax payable by persons aged 65 or over on part of their earned income in excess of $5,000. Public transportation organized by employers In order to encourage employers to cover part of the cost of public transit use of their employees, the government introduced two fiscal measures in the past to encourage the set-up of workplace programs that promote the regular use of public transit. The first measure allows for a deduction in the calculation of the employer’s income, of an additional amount equal to 100% of the amount otherwise deductible for reimbursements paid to employees for the cost of an eligible transit pass (eligible transit passes are provided by a public entity authorized by law to organize such a service), or for the cost of transit passes supplied to employees. Under the second measure, the value of the benefit received from their employer will not be included in the employees’ income. Since these services are still insufficient in some regions of Quebec, or even non-existent, amendments will be made to the tax legislation so that intermunicipal public transportation services organized by an employer, alone or jointly with other employers, for a large number of employees receive a similar tax treatment. More specifically, the employer may deduct, in the calculation of its income, an additional amount equal to 100% of the amount otherwise deductible for the setting up and operation of such a service. Employees will not be required to include the value of the benefits in the calculation of their income. These measures will be effective for 2012 taxation years. Extension of the refundable tax credit for labour training in the manufacturing, forestry and mining sectors This refundable tax credit is equal to 30% of eligible training expenditures incurred for employees before January 1, 2012. Considering the benefits arising from this tax credit for eligible employees who participate in training activities as well as for the businesses that benefit from them, the tax legislation will be amended to extend the refundable tax credit until December 31, 2015 under the same terms and conditions. Changes to the refundable tax credits for multimedia titles and for corporations specialized in the production of multimedia titles The 1996 budget introduced the refundable tax credit for multimedia titles and, in 1998, a second refundable tax credit applying specifically to corporations whose activities consist essentially in producing such titles was introduced (the Refundable Tax Credit for Corporations Specialized in the Production of Multimedia Titles). There are certain differences between the two tax credits, in particular with respect to certificates that are required and the way the amount of tax assistance is determined. Both of these tax credits will be changed to simplify their application. Accordingly, amendments to the tax legislation as well as to the sectoral parameters will be made in relation to the categorization of multimedia titles (including the withdrawal of the notion of titles resulting from an order), the specialized corporation certificate, the rules applicable to subcontracting, and eligible production work. In regards to the specialized corporation certificate, the condition requiring that all or almost all of the activities a corporation carries out in Quebec consist in producing eligible multimedia titles will be changed so that a corporation may obtain a specialized corporation certificate if 75% of the activities are eligible activities. This change is made to take into consideration all the other activities carried out in the normal course of carrying on a business. These changes will apply to a certification application filed with Investissement Québec after March 20, 2012 regarding a given taxation year ending after that day. Improvement to the investment tax credit relating to manufacturing and processing equipment The tax legislation will be amended so that property used primarily in the course of ore smelting, refining or hydrometallurgy activities other than ore from a gold or silver mine, extracted from a mineral resource located in Canada, may qualify as qualified property for the purposes of the investment tax credit. To qualify, such property must be acquired after March 20, 2012 and before January 1, 2018, in addition to satisfying the other conditions stipulated by the tax legislation. Introduction of fiscal measures to encourage the creation of new financial services corporations The budget introduces two new refundable tax credits for a period of five years in order to encourage the creation of new corporations in the financial services sector. The refundable tax credit for the hiring of employees by a new financial services corporation will represent 30% of the eligible salary that an eligible corporation pays to its eligible employees during a taxation year included in the five-year period of eligibility for this fiscal measure, but the credit will be limited to $30,000 per eligible employee on an annual basis. The refundable tax credit relating to a new financial services corporation will represent 40% of the eligible expenditures (essentially expenses related to the regulatory environment, to a participation in a stock exchange or to financial analysis or research services) that an eligible corporation pays during a taxation year included in this same five-year period but will be limited to $150,000 on an annual basis. Additionally, the budget provides a five-year tax holiday for foreign specialists whose duties will consist in carrying out specific activities with an eligible corporation under an employment contract entered into after March 20, 2012 as an expert in the field of finance. This tax holiday will consist of a deduction in the calculation on the employee’s taxable income and will generally correspond to a percentage of his salary. Introduction of a refundable tax credit pertaining to the diversification of markets of Quebec manufacturing companies The budget introduces a new refundable tax credit on a temporary basis in order to support Quebec manufacturing companies that want to commercialize their products in markets outside Quebec. An eligible corporation (i.e., a corporation at least 75% of the activities of which are described in specific NAICS codes for the year) that obtains an eligibility certificate after March 20, 2012, may receive a refundable tax credit equal to 30% of the eligible certification expenses it incurs regarding an eligible product that day but before January 1, 2016, up to a maximum of $45,000. Changes to the refundable tax credit for resources The budget provides a 10 percentage point reduction in the tax credit rate on eligible expenses for resources available to corporations that develop no mineral resource, oil or natural gas well. The rate of the tax credit available to such corporations regarding eligible expenses relating to other natural resources will be reduced by five percentage points. Regarding other corporations for which tax credits are available concerning eligible expenses relating to mining resources, oil or natural gas and other natural resources, the budget provides that the rate will be reduced by five percentage points. The rates relating to renewable energy and energy savings will not be changed. Additionally, the budget provides that an eligible corporation planning to incur exploration expenses in the mining, oil or gas field may claim an increase in the tax assistance in exchange for an option in favour of the Quebec government to acquire an equity stake in the development which will be managed by Resources Québec. More specifically, for corporations that develop no mineral resource, oil or natural gas well, the budget provides an increase of 10 percentage points for eligible expenses relating to mining resources, oil and natural gas and an increase of five percentage points for eligible expenses relating to other natural resources. For other corporations, the budget provides an increase of five percentage points for the aggregate eligible expenses. These changes will apply regarding eligible expenses incurred after December 31, 2013. Recognition of an eligible public research centre The budget provides the recognition of the Institut national de santé publique du Québec as a new eligible public research centre for the refundable tax credit for scientific research and experimental development. This recognition will apply after December 3, 2011. Measures pertaining to tourism A temporary refundable tax credit of up to $175,000 per taxation year is introduced in order to increase private investment and the development of Quebec’s tourism potential. This credit will be granted to corporations that own a hotel establishment, a tourist home, a resort, a bed and breakfast establishment or youth hostel located in Quebec, outside the Montreal and Quebec metropolitan areas, and that carry out renovation or improvement work on their establishment. In order to be eligible, corporations must in particular have a gross revenue of at least $100,000 for the given taxation year or immediately preceding taxation year and assets for such preceding taxation year of at least $400,000. Corporations that are members of a partnership may also benefit from the tax credit under similar conditions. The tax credit is equal to 25% of the portion of the eligible expenditures incurred in the year to carry out eligible work that exceeds $50,000. Eligible expenditures correspond to the total of the amounts representing the cost of labour supplied by the contractor to carry out eligible work and the cost of acquisition of goods that enter into the execution of the work, without exceeding an annual limit of $750,000. When corporations are associated, the annual limit must be covered by a sharing agreement within the group of associated corporations. The tax credit will apply regarding an eligible expenditure incurred after March 20, 2012 for eligible work done before January 1, 2016 and for goods acquired after March 20, 2012 and before January 1, 2016. Moreover, to ensure that the regional tourist associations (RTA) in every tourist region of Quebec receive adequate financial support to play their role in tourist development and promotion, the government offers them a new option for the lodging tax. Thus, RTAs have the option to choose between a tax of $2 or $3 per overnight stay, or a tax of 3% of the price of each overnight stay. Measures pertaining to culture A new refundable tax credit for the production of multimedia environments or events staged outside Quebec is introduced. Quebec corporations may, under certain conditions, claim a refundable tax credit equal to 35% of labour expenditures incurred to carry out a production certified by the Société de développement des enterprises culturelles (SODEC) and consisting of either an event staged in an entertainment venue, or of a multimedia event carried out under a contract entered into with a person who does not have an establishment in Quebec. The labour expenditures giving rise to this tax credit may not exceed 50% of production expenses. The tax credit allowed regarding a production is limited to $350,000. The budget also changes certain parameters of the existing rules supporting businesses in the cultural sector. New positions are recognized for purposes of the tax relief granted to foreign workers holding a key decision-making position as part of an eligible foreign production. In addition, the enhancement applicable to certain French-language film or television productions for the purposes of the refundable tax credit for Quebec film and television production is broadened to apply to certain animated films of fiction. Finally, the cap of the refundable tax credit for the production of performances is increased regarding musical comedies. Capitalization of businesses Refundable tax credit pertaining to the costs of issuing shares as part of an initial public offering under the Stock Savings Plan II (SSP II) The SSP II is a plan that helps small corporations to raise capital. This plan already provides for tax assistance that enables individuals to deduct the adjusted cost of an eligible share in calculating their taxable income. The deduction may not exceed 10% of the individual’s total income. The tax assistance is broadened to corporations that incur share issue expenses in an initial public offering under the SSP II (subject to certain limits). The corporation will be entitled to a refundable tax credit on 30% of the eligible issue expenses for the year provided an advance ruling from the Minister of Revenue is issued in accordance with the rules applicable of the SSP II. This credit is applicable to expenses incurred after March 20, 2012 and will end on December 31, 2014. Fonds de solidarité FTQ and Fondaction Changes are made to an Act to establish the Fonds de solidarité des travailleurs du Québec (Fund) to increase the authorized percentage from 5% to 10% of the total amount of the Fund’s investments in certain corporations, including a financial institution registered with the Autorité des marchés financiers or the Office of the Superintendant of Financial Institutions. In addition, the investment requirement imposed on the Fund requiring that its eligible investments represent at least 60% of the average of its net assets is broadened to allow the Fund to increase its major investments in Quebec corporations. The tax credit for the acquisition of a share issued by Fondaction, which will end when Fondaction reaches a level of capitalization of at least $1.25 billion, is modified in two ways. First, the capitalization limit is raised over the next three years in order to allow Fondaction to collect additional capital of $150 million. Second, at the end of the three-year period, the rate of the tax credit will be brought down to 15%. Personal Tax Voluntary Retirement Savings Plans As expected, the budget announces the introduction of Voluntary Retirement Savings Plans (VRSP) which are, in fact, collective pension plans that all Quebec employers will be required to implement if they have at least five employees with at least one year of uninterrupted service, if they do not have a retirement savings plan through payroll deductions already in place. With the exception of the mandatory nature of VRSPs in Quebec, the rules proposed by the Quebec government are generally similar to the rules announced by the federal government on November 17, 2011 with respect to Pooled Registered Pension Plans (PRPPs). Employers will not be required to contribute to the VRSP put in place for their employees although, if they do decide to contribute, their contributions will not be subject to Quebec payroll taxes, as is the case of employer contributions to registered pension plans, and will be tax-deductible. Where an employer is required to offer a VRSP, employees with more than one year of uninterrupted service will be automatically enrolled unless they elect to opt out of the plan within 60 days of enrolment. The government is proposing to establish the following employee contributions rate, by default: · 2% from January 1, 2013 to December 31, 2015 · 3% from January 1, 2016 to December 31, 2016 · 4% as of January 1, 2017. A participant will be able to choose another contribution rate, change it or even cease contributions for a certain period of time. In addition, a participant will be able to continue contributing to the same VRSP after changing employers. As is the case with RRSPs, a participant will be able to withdraw his or her contributions before retirement although they will be taxable at that time. However, if an employer decides to make contributions to a VRSP set up for its employees, the employer contributions can only be withdrawn as of age 55. Participant contributions to a VRSP will be tax-deductible and will share the same annual maximum contribution amounts as RRSPs. Finally, persons who are not automatically enrolled, such as self-employed workers and individuals, will be able to enroll in a VRSP by contacting a plan administrator directly. Quebec intends on tabling the necessary legislative provisions in the spring of 2012 so that VRSPs are in place by the target date of January 2013. Businesses that are required to implement VRSPs will have two years to comply, i.e., by January 1, 2015. After the initial compliance period, employers required to offer a VRSP will have one year to comply. Tax assistance for seniors living independently The budget includes a series of measures to assist seniors who continue living in their homes. Refundable credit for home-support services for seniors: A number of enhancements are being made to this credit as of January 1, 2013 as follows: · The tax credit rate will gradually increase by one percent per year from 30% in 2012 to 35% in 2017 · The cap on expenses eligible for the tax credit will be increased from $21,600 to $25,500 for dependent seniors, and from $15,600 to $19,500 for other seniors, an increase of $3,900 · The income-based reduction to the credit for seniors recognized as being dependent is eliminated and, where the credit is determined in respect of a couple, the elimination of the reduction will apply as soon as one of the members of the couple is recognized as being dependent · Services related to the use of remote monitoring systems for seniors not living in a private seniors’ residence will be recognized as eligible home-support services for purposes of the credit · The tables that must be used by persons aged 70 years and older living in a residence for the elderly to determine the amount of eligible expenses included in their rent and eligible for the credit are amended and the maximum amounts regarding most types of expenses are being increased. Refundable credit for informal caregivers caring for an elderly spouse: The amount of the credit is increased to $700 in 2012 (from $607) and will be gradually increased thereafter by $75 each year to reach $1,000 as of 2016. The credit will then be indexed annually after that time. New refundable tax credit for costs incurred by seniors for a stay in a rehabilitation centre: This new refundable tax credit will be available as of the 2012 taxation year and will be equal to 20% of the total amounts paid by a Quebec resident aged 70 years or older at the end of the year for a stay in a public or private rehabilitation centre. There will be no limit to the quantum of expenses nor with respect to the taxpayer’s income. New refundable tax credit for the purchase or rental of equipment to help seniors continue living independently at home: This new refundable tax credit, which will be available as of 2012, will be equal to 20% of the amounts in excess of $500 paid for the purchase or rental of equipment to increase the sense of security of seniors 70 years of age or older or to maintain their independence, such as walk-in bathtubs, hospital beds, or remote monitoring devices such as “panic buttons”. There will be no limit regarding the quantum of expenses nor with respect to the taxpayer’s income. Tax credit for new graduates working in a remote resource region Since 2006, a non-refundable tax credit is granted to new graduates who decide to begin their career in a remote resource region. This tax credit reduces the tax payable by up to $3,000 per year, up to a cumulative amount of $8,000 when the new graduate resides on a continuous basis in a remote resource region and holds a job there related to his or her field of specialization. To encourage more new graduates who have completed post-secondary studies to begin their career in a remote resource region, the tax legislation will be amended to stipulate, in certain circumstances, an increase of the cumulative amount to $10,000. Cooperatives and Trusts Cooperatives Cooperative Investment Plan Members and workers of a cooperative acquiring qualifying securities issued by the cooperative can deduct, in calculating their taxable income, an amount representing 125% of the acquisition cost of the securities (without taking into account borrowing expenses and other expenses related to the acquisition). Many changes are brought to the Cooperative Investment Plan concerning the special tax relating to the redemption or repayment of qualifying securities within five years following the date of issuance of the securities (in case of the winding-up of the cooperative) and also concerning the nature of the payment of interest on preferred units (the interest must now be payable in cash rather than in preferred units of the cooperative). In addition, the measures applicable to shareholding workers cooperatives and work cooperatives eligible for the Cooperative Investment Plan are tightened. Renewal of the patronage dividend tax deferral mechanism The budget renews for an additional period of 10 years the mechanism that allows tax to be deferred on the amount of the patronage dividend attributed to a taxpayer that consists of a preferred unit of the cooperative until the units are disposed of. In addition, the budget tightens the rules regarding the issuance of a qualification certificate that is mandatory to benefit from the mechanism. Trusts Change to the tax payable by an inter vivos trust The tax rate applicable to inter vivos trusts (including a mutual fund trust and a specified investment flow-through trust) is increased from 20% to 24% to correspond to the highest tax rate applicable to an individual. This change applies for taxation years of an inter vivos trust ending after March 19, 2012. Changes to the taxation of trusts that are not residents of Canada A specified trust (i.e., an inter vivos trust non-resident in Canada and not tax-exempt) will be required to pay an annual tax at the rate of 5.3% on its property income derived from the rental of immovable properties located in Quebec. This tax applies for taxation years ending after March 19, 2012. As of March 20, 2012, an inter vivos trust that begins to reside in Canada will be deemed to dispose (and reacquire) its immovable properties located in Quebec at their fair market value immediately before its immigration. As a result, the trust will be liable for Quebec tax on the taxable capital gain and the recaptured depreciation that may arise. The trust will have to obtain a compliance certificate before the disposition and pay the tax or provide sufficient security to guarantee payment of such tax.

My MeetMe.SO link

2012-03-13T14:15:00.001-04:00

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Pooled Registered Pension Plans, Part 1

2012-02-27T23:35:00.001-05:00

Pooled Registered Pension Plans, Part 1

On November 17, 2011, the federal government introduced Bill C-25, An Act Relating to Pooled Registered Pension Plans and Making Related Amendments to Other Acts (also referred to as the Pooled Registered Pension Plans Act). Bill C-25 establishes a regulatory framework for a federal pooled registered pension plan (PRPP), a voluntary savings plan aimed at individuals who do not have access to an employer-sponsored pension plan.

A PRPP is administered by a regulated financial institution, and thus reduces the cost and complexity to a small employer of offering its employees a retirement savings plan. A PRPP is intended to be used by self-employed individuals and by employees of small and medium-sized employers that do not currently offer their employees an RPP. The Pooled Registered Pension Plans Act applies to employees of an employer that participates in a PRPP and falls within the legislative authority of the federal government, including an employer carrying on business in interprovincial transportation, banking, or telecommunication. The act also applies to persons who are self-employed or employed in Yukon, the Northwest Territories, or Nunavut. Each province must introduce its own enabling legislation in order to authorize the implementation of provincial PRPPs.

On December 14, 2011, Finance released income tax legislative proposals that are applicable to both federally and provincially regulated PRPPs; public comments were due on February 14, 2012. The proposals come into force at the same time as the Pooled Registered Pension Plans Act. This article provides an overview of the tax rules for PRPPs and discusses the rules for individual and employer PRPP contributions. A future article will discuss investments and investment income of PRPPs, payments from PRPPs, and transfers to and from PRPPs and other registered retirement plans.

Overview. The tax rules for PRPPs are meant to complement the existing RPP and RRSP framework and operate in a manner similar to multi-employer money purchase RPPs. Like an RRSP, a PRPP is available from a financial institution or a public pension fund, which administers the plan: a PRPP is thus intended to allow more people to benefit from the lower investment management costs that result from membership in a larger, pooled pension plan. A single and separate account must be maintained for each PRPP member. The key features of a PRPP are as follows:

an individual member can have a PRPP regardless of employment status;
an employer is not required to but may contribute to an employee's PRPP;
PRPP contributions made by the member and the employer are deductible within limits;
combined PRPP and RRSP contributions by the member and the employer cannot exceed the individual's RRSP deduction limit;
investment income earned within a PRPP and contributions made to it are tax-sheltered until they are paid out of the PRPP;
payments of non-locked-in funds are taxable to the member; and
the transfer rules for a defined contribution RPP generally apply to a PRPP.

Contributions. PRPP contribution rates are set by the administrator, but each employee retains the option to set his or her contribution rate to 0 percent at any time. Any contribution is subject to applicable federal or provincial locking-in rules and can be made by an individual member (employed or self-employed) and by an employer, but no contributions (other than certain transfers) can be made after the year in which the member turns 71. An employee can contribute even if his or her employer is not involved with the PRPP. If the employer is involved with the PRPP, the employee is not required to become a member, but is automatically enrolled in a plan chosen by the employer and has 60 days to opt out. An employer that chooses to offer a PRPP to its employees is responsible for selecting the PRPP and enrolling its employees, and it must deduct the members' contributions from their remuneration. Presumably, self-employed individuals and employees of an employer that does not offer a PRPP are responsible for choosing a PRPP and remitting contributions to the plan.

Contribution limit. The total of the individual's and employer's contributions to a PRPP for a year are linked to the individual's available RRSP contribution limit for that year, including any unused contribution room from previous years. Any contribution that exceeds this limit--except for certain non-discretionary contributions made by the employer--may result in a monthly penalty tax to the individual equal to 1 percent of the individual's month-end excess. All contributions made in a year by the individual and the employer reduce the individual's RRSP contribution room for that year and future years. Employer contributions made in the year also reduce the individual's ability to make deductible PRPP contributions in that year and later years. In contrast to an RPP, employee and employer contributions are not subject to reporting of pension adjustments.

Individual contributions. The contribution deadlines for claiming a deduction in a calendar year parallel the RRSP rules: an individual must make PRPP contributions no later than 60 days after the calendar year-end (March 1--February 29 in a leap year--or the first subsequent weekday if the deadline falls on a weekend). An individual's contributions to a PRPP are treated as RRSP contributions for the purpose of determining the deductibility of total PRPP and RRSP contributions for the year. An individual can claim a deduction for certain transfers to a PRPP, including transfers of retiring allowances, and can designate payments to a PRPP as repayments of amounts withdrawn under the home buyers' plan or the lifelong learning plan, within specified limits.

Employer contributions. An employer can but is not required to contribute to an employee's PRPP. Employer contributions are excluded from salaried compensation and are therefore not taxable to the employee. For example, employer contributions are not subject to CPP/QPP or EI withholdings. Employer contributions must vest immediately and indefeasibly. In order to claim a deduction in a taxation year, an employer must make PRPP contributions with respect to employee service provided in that year no later than 120 days after the end of the year (as is the case with RPPs). To help reduce the possibility of overcontributions, unless the employee directs otherwise, the maximum employer contribution is equal to the employee's RRSP dollar limit for the year (not including unused amounts from previous years).

Ken Griffin
PricewaterhouseCoopers LLP, Toronto

John Hnatiw
PricewaterhouseCoopers LLP, Mississauga

Untitled

2012-02-27T23:19:00.001-05:00

IRS PTIN a Barrier for Canadian Preparers

Canadian professionals who want to prepare US tax returns for clients should keep in mind that paid preparers of most US tax returns must obtain a preparer tax identification number (PTIN) from the IRS. Except in limited cases, only a US attorney, a licensed certified public accountant (CPA), an enrolled agent (EA) who is qualified to practise before the IRS, and a registered tax return preparer (RTRP) can obtain a PTIN. A foreign professional such as a Canadian lawyer, a chartered accountant, a certified general accountant, or a certified management accountant can obtain a PTIN, but he or she may first have to obtain a qualifying US designation such as CPA or become an RTRP by passing certain competency examinations and satisfying continuing education requirements.

Provisional PTIN. Until at least April 18, 2012, the IRS will issue a provisional PTIN to a paid preparer who does not have the qualifying US designation required to otherwise obtain a PTIN. The IRS will announce the last date on which it will issue provisional PTINs in a news release that will be published at least 30 days before that date. A provisional PTIN will be accepted by the IRS until December 31, 2013 so long as it is renewed annually without lapse. If a provisional PTIN expires after April 18, 2012, the holder can obtain another PTIN only if he or she becomes an RTRP or obtains a suitable US designation. A provisional PTIN holder must meet the RTRP continuing education requirements. Each PTIN must be renewed for the next subsequent year by December 31 of the current year.

Regular PTIN. A US attorney, a licensed CPA, an EA, and any other qualified professional who can practise before the IRS are exempt from both the IRS competency examination and continuing education requirements and can thus obtain a PTIN with relative ease. A licensed CPA has no restrictions as to the taxpayers that he or she can represent, the types of tax matters that he or she can handle, and which IRS offices he or she can practise before.

A licensed CPA must pass the CPA examination and satisfy minimum education and experience requirements that vary from state to state. Some states, including Illinois, have two-tier CPA designations: a person can pass the CPA examination and obtain the CPA designation, but to become licensed he or she must meet minimum education and experience requirements. It is not uncommon for a US tax return preparer in Canada to hold an unlicensed Illinois CPA designation, but that is not adequate for the purposes of practising before the IRS or of obtaining more than a provisional PTIN.

A holder of the Canadian CA designation can write the international qualification examination (IQEX), commonly known as the CA-CPA reciprocity exam. This one-day multiple choice exam focuses on differences between US and Canadian rules and assumes a basic knowledge of the areas where the rules coincide. IQEX is offered in all major cities in Canada. A new IQEX format is pending in 2012. Once successful, an IQEX candidate must satisfy other education and experience requirements set by the state in which he or she applies to become a licensed CPA; a CA who passes the IQEX may be able to satisfy the licensing requirements in only a handful of states.

An RTRP, who may also obtain a PTIN, is a return preparer who passes a series of IRS competency examinations and complies with annual continuing education requirements. The first competency examination covering US individual income tax returns was offered late in 2011. An RTRP must complete a minimum of 15 hours of continuing education credits during each calendar year in which he or she is registered; even so, he or she has a more limited ability than other qualified professionals to practise before the IRS.

Supervised PTIN. An exception is made in IRS Notice 2011-6 (2011 3 IRB 315) for a "supervised PTIN." That notice says that certain individuals who are not attorneys, licensed CPAs, EAs, or RTRPs can obtain a PTIN in limited circumstances. As a practical matter, the exception may be difficult to exercise in Canada. The IRS permits an individual to obtain a PTIN if he or she is supervised by an attorney, licensed CPA, EA, enrolled retirement plan agent, or enrolled actuary authorized to practise before the IRS, provided that the supervisor will sign all returns and refund claims that are prepared by the individual. In addition, the individual and the supervisor must be employed at the same law firm, CPA firm, or other recognized firm.

For the purposes of this exception, a law firm or a CPA firm is a partnership, professional corporation, sole proprietorship, or any other association authorized to practise in a state, territory, or possession of the United States or the District of Columbia. A recognized firm--other than a law firm or CPA firm as defined--has one or more employees lawfully engaged in practice before the IRS. However, any law firm, CPA firm, or other recognized firm must be at least 80 percent owned by one or more attorneys, licensed CPAs, EAs, enrolled actuaries, or enrolled retirement plan agents who are authorized to practise before the IRS. Thus, a Canadian law or CA firm does not appear to satisfy the practice and ownership requirements of the supervised PTIN exception. As a result, only a regular or provisional PTIN, but not a supervised PTIN, should be available to a US tax return preparer in Canada.

The IRS further understands that an individual should not be required, as a condition of obtaining a PTIN, to pass a competency examination that covers tax returns and refund claims that are not prepared by the individual. At present, the competency examination covers only individual income tax returns. An individual can obtain a PTIN without taking a competency examination if the individual certifies that he or she does not prepare or assist in the preparation of all or substantially all of any tax return or refund claim that is covered by the competency examinations for an RTRP. The individual is also exempt from the continuing education requirements, although other restrictions apply.

Future PTIN applicants may be required to be fingerprinted as part of a background check. Exemption from fingerprinting will be extended to an attorney, a CPA, an EA, an enrolled retirement plan agent, and an enrolled actuary, and to a PTIN holder who resides and is employed outside the United States. Procedures to facilitate fingerprinting will not be implemented until at least April 18, 2012; the IRS will announce, at least 30 days before the date, the last date on which an individual may receive a PTIN without first being fingerprinted. An individual who obtains a PTIN before the date announced in the news release and who continually maintains the PTIN will not be required to be fingerprinted until December 31, 2013. Thereafter, unless an exemption applies, fingerprinting and background checks will be required in order to renew a PTIN.

Jeffrey Brown
KPMG LLP, Hamilton

Annie Long
KPMG LLP, Vancouver

Federal Tax Garnishment

2012-01-21T03:53:00.001-05:00

Federal Tax Garnishment

Provincial laws allow a creditor to enforce a debt by seizing assets or by garnishing third-party debts owed to the judgment debtor, but exemptions for some of the debtor's property limit the pace and scope of collection. For example, Ontario's Execution Act protects trade tools and basic furnishings from seizure; its Pension Benefits Act exempts money payable under a pension plan; its Insurance Act exempts life insurance and death benefits under an accident and sickness policy; and its Wages Act exempts 80 percent or more of wages and disability payments (net of source deductions). In Quebec (Attorney General) v. Canada (Human Resources and Social Development) (2011 SCC 60), the SCC concluded that a Quebec enforcement exemption for pension payments does not limit federal garnishment powers in the Employment Insurance Act (EIA).

Exemptions recognize that a seizure or garnishment of too much of the debtor's property is of no social value because it destroys the debtor's ability to work and live and thus his continuing ability to pay his debts and contribute to society. (See, for example, Mutter (Re), 2009 ABQB 28.) The underlying purpose of enforcement laws is to collect debts, not to punish the debtor by afflicting him with poverty. Nonetheless, garnishment rules in federal tax laws offer no enforcement exemption: the CRA and other revenue authorities can collect without limit, starving a business of funds to pay suppliers and staff or leaving an employee without money to pay rent or other living expenses. (See ITA subsection 224(1), ETA subsection 317(1), Canada Pension Plan Act section 23(2), and EIA section 126(4).)

The SCC might have opened its analysis with an examination of Crown immunity and sidestepped a determination of whether the federal law was paramount to the provincial law. But (1) the common-law rule "has been eroded somewhat"; (2) "the exceptions to the Crown immunity rule are now so numerous that the current law in this field is considered to be exceedingly complex"; and (3) "the immunity rule has tended to benefit the federal Crown asymmetrically." Instead, the SCC turned to the doctrine of federal paramountcy, which it said applied to two forms of conflict.

The first is operational conflict between federal and provincial laws, where one enactment says "yes" and the other says "no," such that "compliance with one is defiance of the other": . . . In Bank of Montreal v. Hall, [1990] 1 SCR 121, at p. 155, La Forest J. identified a second branch of paramountcy, in which dual compliance is possible, but the provincial law is incompatible with the purpose of federal legislation. . . . Federal paramountcy may thus arise from either the impossibility of dual compliance or the frustration of a federal purpose.

The court concluded easily that there was no operational conflict because the employment insurance commission could comply with the provincial exemption and still collect its debt at a reduced pace. (Theoretically, because pension benefits were exempt provincially, debt collection was impossible if the EI beneficiary had no other seizable source of income or asset.) After reviewing four earlier SCC decisions, the court concluded that to determine whether a conflict of purposes existed between the EIA garnishment power and the Quebec exemption, "it is necessary to consider each of the provisions in issue in its context and to review its legislative purpose in order to clarify its scope."

The court began by saying that "it is apparent from the purpose and scope of the federal measure that Parliament did not consent to the restriction imposed by the provincial provision." It then examined the EIA and related tax rules to show that Parliament is explicit when it wishes to subordinate tax collection rules to provincial exemptions. The SCC considered EIA section 126(1), which allows the commission to certify an amount payable and file a certificate with the Federal Court that "has the same force and effect, and all proceedings may be taken, as if the certificate were a judgment obtained in the [Federal] Court." (See also ITA subsection 223(3) and ETA subsection 316(2).) Federal Courts Rules 448 and 452 apply the provincial exemptions to seizures of assets and garnishment of wages under an FC judgment, and thus the certificate process is subject to provincial exemptions.

However, the CRA and the EI commission can instead use garnishment powers to collect assessed amounts by issuing a requirement to pay and never filing a certificate in the FC or any other court. Looking to the ITA rules for clearer proof of Parliament's intent, the SCC noted that under ITA subsection 225(1) the CRA can seize and sell a tax debtor's goods and chattels on 30 days' notice and exercise its power without resort to any federal or provincial court. However, an explicit rule in ITA subsection 225(5) renders these seizures subject to provincial exemptions. Thus, the SCC concluded that Parliament must be understood to have intended the EIA garnishment to be free of provincial exemptions due to the lack of an explicit rule such as that in ITA subsection 225(5). (Like the EIA provisions, the ITA subsection 224(1) and ETA subsection 317(1) garnishment rules are not subject to provincial exemptions.)

Parliament has, in enacting s. 126(4) EIA, chosen to give the Commission a freestanding positive right to require a third party to pay to the Receiver General any amount the third party owes a person who is liable to make a payment under the EIA, on account of that person's liability. The purpose of this measure is to ensure the integrity of the employment insurance [or the Income Tax, CPP, and Excise Tax] system by making it possible to recover amounts owed under the EIA, including benefit overpayments, in a simple and summary fashion, without regard for the provincial rules respecting exemption from seizure. This purpose would be frustrated if the Commission were to comply with the provincial provision creating an exemption from seizure.

Under section 91 of the Constitution Act, 1867, Parliament has "the exclusive Legislative Authority" to make laws within the "subjects" of "Unemployment insurance" and "The raising of Money by any Mode or System of Taxation." To give effect to those powers, Parliament must have the authority to make necessary and incidental laws, including laws to enforce the collection of tax. The SCC's decision thus seems sound: it is within Parliament's constitutional authority to legislate tax garnishment rules that are not subject to provincial exemptions.

One legislative means of softening the federal tax collection rules is to add tax garnishment exemptions. Another approach is to grant the CRA the power to compromise tax debts and collect less than the assessed amount: for example, taxpayer relief rules could be expanded to include a waiver of part of the tax debt itself. Currently, that remedy is available only through an elaborate remission order process.

However, a taxpayer for whom the provincial exemptions are intended is likely eligible to make a consumer proposal under division II of part III of the Bankruptcy and Insolvency Act (BIA). A proposal can stop collection action within a few days--quicker and more certain relief than that offered by the objection and appeal process for challenging assessments. Under a proposal, a debtor may offer a lump-sum payment or periodic payments for up to five years. The CRA may reject a consumer proposal, especially if it holds the majority of the debt, but in practice the CRA often seems to agree to a proposal that offers a reasonable amount of recovery, even if it is far less than the assessed amount. The proposal process allows a tax authority to agree to compromise the debt, a power otherwise unavailable to it. Even if the CRA rejects a proposal, the tax debtor may declare bankruptcy, and Directive no. 11R, "Surplus Income" (Office of the Superintendent of Bankruptcy Canada, October 3, 2000), protects monthly income below "the Low Income Cutoffs (LICO) released by Statistics Canada." Furthermore, BIA section 67(1)(b) is expressly subject to provincial exemptions in the determination of the "property of a bankrupt divisible among his creditors." Effectively, the BIA--a federal law that is constitutionally on a par with federal tax laws--allows a taxpayer the exemptions from seizures that "preserve to debtors the means to survive and to earn a living, thus contributing to their rehabilitation as citizens and to their capacity to repay their debts" (Mutter).

Richard Yasny
Payne Law, Toronto

Canadian Tax Highlights
Volume 20, Number 1, January 2012
©2012, Canadian Tax Foundation

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New Director and Past Non-Remittance

2012-01-21T03:49:00.001-05:00

New Director and Past Non-Remittance

A recent technical interpretation (TI 2011-0412471E5, November 4, 2011) confirms that a new director is not liable for interest that accrues on a corporate liability that arose from a former director's failure to remit source deduction amounts.

Generally, if a corporation has failed to deduct or withhold an amount or has failed to remit that amount as required by section 153, subsection 227.1(1) provides that both the corporation and its directors are jointly and severally liable to pay the amount and any related interest or penalties.

In the TI, a corporation with a sole director withholds source deduction amounts under subsection 153(1), but fails to remit them. Following the last remittance deadline, the sole director resigns and is replaced by a new director. The corporation no longer has employees, and thus there are no new withholding requirements except what the previous director was required (and failed) to remit. At issue is whether the new director can be held liable for interest on arrears related to the company's unremitted source deductions that arose before he became a director.

In its analysis, the CRA noted that only a person who was a director at the time the corporation failed to remit the amounts deducted or withheld under subsection 153(1) is jointly and severally liable under subsection 227.1(1). The CRA noted that this provision limits the liability to a person who was a director at the time when the corporation failed to remit. The CRA concluded that a new director is not liable for interest imposed against the corporation under either subsection 227(9.2) or 161(1) for an amount that the corporation failed to deduct, withhold, or remit before that individual became a director.

Jim Yager
KPMG LLP, Toronto
Canadian Tax Highlights
Volume 20, Number 1, January 2012
©2012, Canadian Tax Foundation

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Post-Secondary Education Outside Canada, Part 1

2012-01-21T03:48:00.001-05:00

Post-Secondary Education Outside Canada, Part 1

A student who plans to enrol in a foreign university, college, or other post-secondary educational institution outside Canada should consider the Canadian tax implications as part of the potential cost or benefit of attending the foreign school. This article considers the student's residence status and her eligibility for Canadian income tax credits for tuition, education, and textbooks. A future article will discuss other tax issues, such as those relating to scholarships, fellowships and bursaries, moving costs, and RESPs.

Residence status. The student's residence for income tax purposes determines her obligation to file a Canadian income tax and benefit return for a particular year. Before leaving Canada to attend school, the student should consider whether the move will be temporary or whether residential ties with Canada will be severed permanently. In most cases, a student who attends a foreign education program is still a Canadian resident and must file a Canadian income tax return. However, Canadian income tax obligations should be reviewed every year; if the student ceases to be a Canadian resident, Canada's departure tax regime can trigger significant tax implications, particularly if the student holds shares in the family's private business.

Tax treaties and residence. Even if a student is a resident of the foreign country under its domestic tax law, she may still be considered a Canadian resident under the applicable tax treaty. Tax treaties contain tiebreaker rules designed to ensure that for tax purposes a taxpayer is deemed to be a resident of only one country and thus does not pay tax twice on the same income. Canada has tax treaties with many countries, including Australia, the United States, and the United Kingdom, which are common destinations for Canadian post-secondary students. If the student is deemed to be a Canadian resident under the relevant treaty, she must file a Canadian income tax return that reports her worldwide income for the particular taxation year.

Foreign schools that qualify for Canadian tax credits. For a student to be eligible to claim tuition, education, and textbook income tax credit amounts on her Canadian income tax return, the student's foreign school must qualify as a "university outside Canada." To qualify, the foreign school must (1) have authority to confer academic degrees of at least the bachelor's level or equivalent, according to the education standards of the country where it is located; (2) have an academic entrance requirement of at least secondary school matriculation; and (3) be organized for teaching, study, and research in the higher branches of learning. Institutions that the CRA accepts as qualifying are listed in schedule VIII of the regulations. If the school qualifies as a "university outside Canada," the student must forward one of the following forms to the school to have it complete the form and certify the eligible fees: form TL11A ("Tuition, Education, and Textbook Amounts Certificate--University Outside Canada") or form TL11C ("Tuition, Education, and Textbook Amounts Certificate--Commuter to the United States"). The completed form should be retained in the student's records--in case of an audit by the CRA--and need not be included in the student's tax return.

Eligibility for tuition tax credit. A non-refundable tuition fee tax credit is available only if (1) the course leads to a bachelor's degree or higher; (2) the course lasts at least three consecutive weeks (reduced from 13 weeks by federal Bill C-13, An Act To Implement Certain Provisions of the 2011 Budget as Updated on June 6, 2011 and Other Measures (SC 2011, c. 24); (3) while enrolled, the student is considered to be in full-time attendance; and (4) the tuition fees are eligible fees and have been paid. As long as the fees are eligible, there is no upper limit, but more than $100 in fees must be paid for the year to the institution. Eligible fees include admission fees, charges for the use of library or laboratory facilities, exemption fees, examination fees, application fees (but only if the student subsequently enrols), and charges for a degree. Non-eligible fees include fees for student activities (social or athletic), medical care or health services, transportation and parking, and board and lodging, and administrative penalties incurred when a student withdraws from a program or university. A tuition fee tax credit is available federally and in all provinces and territories.

Courses taken over the Internet normally do not qualify for the tuition fee tax credit. To be considered in full-time attendance, the student must be physically present at the institution or be present via scheduled interactive virtual classroom sessions. Courses for which students study largely at their own pace and for which assignments are submitted electronically using a correspondence method do not qualify for the tuition credit, but they may be eligible for the education and textbook tax credit.

Eligibility for education and textbook tax credits. To claim the federal education amount of $400 for each eligible month, the student must be a full-time student enrolled in a qualifying education program, and the course must last at least three consecutive weeks (reduced from 13 weeks by federal Bill C-13) and lead to a bachelor's degree or higher. A part-time student who is enrolled in a specified education program may be able to claim the federal education amount of $120 for each eligible month. The education credit does not require that the student be in full-time attendance, but she must be considered to be taking a full-time course load. A student who qualifies for the education credit as a full-time student may also claim a federal $65 textbook amount for each eligible month (a part-time student may claim $20 for each eligible month). All provinces and territories also offer an education tax credit (although Quebec has different rules), but only Nunavut and Yukon offer a textbook tax credit; the provinces and territories set their own amounts for these credits.

Living in Canada and commuting to a US educational institution. Some different rules apply if the student lives in Canada all year and commutes regularly to the United States to take courses--for example, a student who is enrolled in a teachers' college program. For the tuition credit, form TL11C must be completed and the fees paid must consist of eligible tuition fees of more than $100; the student need not be in full-time attendance. For a commuter, neither the tuition credit nor the education and textbook credit requires that the course last three consecutive weeks (reduced from 13 weeks by federal Bill C-13) or lead to a degree; otherwise, the requirements for those credits are the same as those for non-commuters who use form TL11A.

Transfer of unused tuition, education, and textbook credits. The tuition, education, and textbook credits must be first claimed on the student's personal tax return, even if the amounts were paid by someone else, such as a parent or grandparent. If the student cannot use the full amount paid, the unused portion may be transferred to the student's spouse, common-law partner, parent, or grandparent, or may be carried forward to a future year. In any given year a student can transfer a maximum of $5,000 of tuition, education, and textbook amounts earned in the year to the extent that the student does not require them to reduce her tax payable to nil. These rules apply federally and in all provinces and territories, except in Ontario, which has a different maximum, and in Quebec, which has different rules.

Brennan Caiella and Beth Webel
PricewaterhouseCoopers LLP, Hamilton
Canadian Tax Highlights
Volume 20, Number 1, January 2012
©2012, Canadian Tax Foundation

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US Citizens Living Abroad: IRS Filing Guidance

2012-01-21T03:46:00.001-05:00

US Citizens Living Abroad: IRS Filing Guidance

A recently released IRS fact sheet (FS-2011-13, December 2011) provides guidance to US citizens who reside outside the United States and who have failed to file US tax returns and form TD F 90-22.1 ("Report of Foreign Bank and Financial Accounts (FBAR)"). A US citizen is generally required to file a US federal tax return to report his worldwide income, regardless of where he resides. In addition, a US citizen must generally file an FBAR if he has a financial interest in, or signature authority over, certain types of non-US financial accounts (bank accounts, securities accounts, mutual funds, and RRSPs) whose aggregate value exceeds $10,000.

Tax returns. The fact sheet confirms that a US citizen who is resident abroad and owes no US tax for the prior six tax years (currently, 2005-2010) may file US tax returns for those years without penalties for failure to file or to pay tax. Many US citizens resident in Canada fall into this category due to the availability of US foreign tax credits for taxes paid in Canada.

For a US citizen who owes US tax, the fact sheet indicates that the IRS will consider whether, on the facts, the failure to file or pay tax was due to reasonable cause. The IRS will consider whether the taxpayer exercised ordinary business care and prudence in meeting his tax obligations and other factors such as (1) the specific reasons given by the taxpayer; (2) his compliance history; (3) the length of time between his failure to meet his tax obligations and his subsequent compliance; and (4) circumstances beyond his control.

On the basis of the following factors, the IRS may conclude that the taxpayer has established reasonable cause for not being aware of specific obligations to file returns or pay taxes: (1) the taxpayer's education; (2) whether he was previously subject to the tax; (3) whether he was previously penalized; (4) whether there were recent changes in the tax forms or law that he could not reasonably be expected to know about; and (5) the level of complexity of a tax or compliance issue. Reasonable cause for non-compliance may also be established due to ignorance of the law if a reasonable and good faith effort was made to comply with the law or the taxpayer was not aware of, and could not reasonably be expected to be aware of, the requirement.

FBARs. The fact sheet also provides guidance for a taxpayer who failed to file an FBAR. In the absence of reasonable cause, a US citizen residing abroad who failed to file an FBAR may suffer penalties. The total penalties can be harsh, because a penalty is imposed per violation--that is, per account per year. The maximum penalty is $10,000 per non-wilful violation and more per wilful violation.

To establish reasonable cause, a US citizen who resides outside the United States should file a delinquent FBAR for each of the prior six years (2005-2010) and attach a statement indicating the reasons why he is filing late. Although no single factor is determinative, the IRS lists some factors that may weigh in favour of a finding that reasonable cause exists, including the following: (1) the individual relied on the advice of a professional tax adviser who was informed of the existence of the foreign financial account; (2) the unreported account was established for a legitimate purpose and no efforts were made to intentionally conceal the reporting of income or assets; and (3) there is no or only a de minimis tax deficiency related to the unreported foreign account. The IRS also considers factors that weigh against a finding of reasonable cause, including the following: (1) the taxpayer's background and education indicates that he should have known of the FBAR reporting requirements; (2) a tax deficiency relates to the unreported foreign account; and (3) the taxpayer failed to disclose the existence of the account to his tax preparer.

The fact sheet also reminds US taxpayers that, starting in 2012 and in addition to a taxpayer's FBAR reporting obligations, he must report in his US tax return on form 8938 any interest in certain foreign financial assets with an aggregate value exceeding $50,000.

The fact sheet is particularly welcome guidance for many US citizens resident in Canada: the 2009 and 2011 offshore voluntary disclosure programs (VDPs) frequently resulted in harsh penalties for US citizens resident abroad who were unaware of the need to file US income tax returns and FBARs, and the VDPs' parameters did not give IRS examiners any discretion to consider reasonable cause. However, many unanswered questions persist for non-filers. For instance, it is not clear whether the IRS will entertain reasonable-cause arguments for failure to file certain information returns (such as forms 5471 and 3520). In addition, the US tax treatment of RRSPs and other Canadian plans remains uncertain if no timely election was made to defer tax on the plan's income. The fact sheet notes that the IRS is continuing to review these issues and may provide additional guidance.

On January 9, 2012, an IRS news release (IR-2012-5) announced the reopening of the offshore voluntary disclosure program (VDP). The new VDP will be discussed in the February 2012 issue of Canadian Tax Highlights.

Marla Waiss
Hodgson Russ LLP, Buffalo
Canadian Tax Highlights
Volume 20, Number 1, January 2012
©2012, Canadian Tax Foundation

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Monetary Policy Report - Bank of Canada

2012-01-19T01:07:00.001-05:00

Home > Publications and Research > Periodicals > Monetary Policy Report
Monetary Policy Report

A quarterly report of the Bank of Canada’s Governing Council, presenting the Bank’s base-case projection for inflation and growth in the Canadian economy, and its assessment of risks.

The tables are updated one day after the Bank's most recent announcement date for the target overnight rate, based on information available up to that date.

Indicators of Capacity and Inflation Pressures for Canada

Monetary Policy Report - January 2012

Publication

The Canadian economy is estimated to have grown by 2.4 per cent in 2011, and is projected to grow by 2.0 per cent in 2012, and 2.8 per cent in 2013, returning to full capacity by the third quarter of 2013. Total CPI inflation is expected to return to the 2 per cent target by the 3rd quarter of 2013.
MPR Summary - January 2012

Related Information

Release of the Monetary Policy Report - 18 January 2012
Opening Statement - Mark Carney - Ottawa, Ontario

January 2012 - Monetary Policy Report press conference: video
Webcast of a press conference by Governor Mark Carney and Senior Deputy Governor Tiff Macklem.
January 2012 - Monetary Policy Report press conference: audio
Governor Mark Carney and Senior Deputy Governor Tiff Macklem speak to media at the National Press Theatre in Ottawa.

via bankofcanada.ca

Mise à jour du marché résidentiel

2012-01-15T01:57:00.001-05:00

Market Commentary The performance of Canada Mortgage Bonds (CMB) of five years, offered by the Canadian government, fell by about 8 basis points last week, mainly because of widespread pessimism regarding the economy for the new year and dire predictions made by economists of the major Canadian banks. Indeed, economists are forecasting an increase of less than 2% and no significant improvement in the unemployment rate. The rate of unemployable Canadian increasing for three consecutive months, unfortunately reinforces this sad overview: In December, the rate rose one-tenth of a percentage point to 7.5%. Due to continued uncertainty in global markets, it is more expensive to finance other credit products (eg, private sector securities, mortgages), in line with funding levels of governments

Mise à jour du marché résidentiel

2012-01-15T01:52:00.001-05:00

The Principal-Residence Exemption and Excess Land

2012-01-14T01:14:00.001-05:00

The Principal-Residence Exemption and Excess Land

The capital gain arising on a disposition of a "principal residence" (defined in section 54 of the Act) is reduced or eliminated by the amount of the exemption calculated under the formula in paragraph 40(2)(b). The principal residence of a taxpayer for a taxation year is deemed to include the land on which the housing unit sits and the portion of the immediately contiguous land that can reasonably be regarded as contributing to the use and enjoyment of the housing unit as the residence. If the total area of the subjacent land and the immediately contiguous land exceeds one-half hectare, the excess land is deemed not to be part of the principal residence unless the taxpayer establishes that the excess land was necessary to the use and enjoyment of the housing unit as a residence.

In Cassidy v. Canada (2011 FCA 271), the issue was whether the excess land formed part of the taxpayer's principal residence. The taxpayer and his common-law spouse acquired a house on 2.43 hectares of land in 1994. The taxpayer became the sole owner of the property in 1998, and he resided in the house on the property from 1994 until 2003, when the property was sold.

At the time that the taxpayer acquired the property, he could not acquire less than the 2.43-hectare parcel because of the applicable zoning laws. From May 2003 onward, he could have applied for a rezoning and subdivision of the property by virtue of an official plan amendment that came into force at that time. On May 23, 2003, the taxpayer entered into an agreement of purchase and sale of the property subject to certain conditions for the benefit of the purchaser, including a successful application for rezoning and subdivision. All conditions were satisfied, and the sale closed on November 27, 2003.

The taxpayer did not report a gain in his 2003 income tax return on the basis that the entire gain qualified for the principal-residence exemption. The CRA reassessed the taxpayer on the basis that the excess land did not qualify for the exemption. The TCC (2010 TCC 471), relying on Stuart Estate v. The Queen (2003 DTC 329 (TCC), aff'd. 2004 DTC 6173 (FCA) and The Queen v. Yates (83 DTC 5158 (FCTD), aff'd. 86 DTC 6296 (FCA), dismissed the taxpayer's appeal on the basis that the time for determining whether the excess land was necessary for the use and enjoyment of the property was the time of disposition or immediately before the disposition. Favreau J held that at the time of sale or immediately before, the minimum lot size in the area was 850 square metres, and the taxpayer was not prohibited from subdividing his property and disposing of any portion of it.

On appeal, the FCA analyzed the formula in paragraph 40(2)(b). Under that formula, the exempt portion of the gain is A × B/C, where A is the amount of the gain, B is 1 plus the number of taxation years that end after the purchase date for which the property was the taxpayer's principal residence and during which the taxpayer is resident in Canada, and C is the number of taxation years of property ownership by the taxpayer.

The FCA held that variable B requires that for each taxation year in which the property was owned by the taxpayer, one must determine whether the property met the definition of "principal residence." The court held that when the issue is whether the excess land is part of the principal residence, the formula should be applied in two stages: first to the portion of the gain allocable to the house and the one-half hectare of land, and then to the portion of the gain allocable to the excess land. Using the two-stage process, the court determined that the entire gain allocable to the house and one-half hectare of land was entirely exempt, as was the gain allocable to the excess land. With respect to the excess land, the court held that it qualified for the principal-residence exemption for 1994 to 2002; the court did not reach a conclusion with respect to 2003. Therefore, variable B was 10 and no capital gain arose with respect to the excess land.

In allowing the appeal, Sharlow JA considered or commented on several earlier cases, including Stuart Estate and Yates, which were distinguished on the basis that the facts relevant to the application of the one-half hectare rule had not changed during the period of ownership.

Cassidy is a welcome decision and changes our understanding of how the principal-residence exemption is determined. The determination is now made on an annual basis, and if excess land is involved, the two-stage method is to be used.

Philip Friedlan
Friedlan Law
Toronto and Richmond Hill, ON

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Canadian Housing Observer | CMHC

2012-01-10T01:07:00.000-05:00

Canadian Housing Observer CMHC

Combining a wide-ranging annual review of the state of Canada's housing and a substantial collection of online data resources, the Canadian Housing Observer will help you improve your understanding of housing trends and conditions and of key factors driving Canadian housing markets!

January issue of CAAMP Stats

2012-01-07T23:50:00.000-05:00

January 2012

Happy New Year. Welcome to the January issue of CAAMP Stats. For more information on CAAMP please visit www.caamp.org.

JUMP TO A SECTION:

Bank of Canada Interest Rate	Government of Canada Bonds
Bank Prime Lending Rate	Total New Housing Starts
Conventional Mortgage - 5 Year Rate	Average MLS® Resale Price for Local Markets
US Federal Reserve Board Discount Rate
Exchange Rate $CDN($US)

Bank of Canada Interest Rate

October 25, 2011	1.00 %
December 6, 2011	1.00 %
January 17, 2012	Next meeting date

Source: Bank of Canada
Top of Page

Bank Prime Lending Rate

October 26, 2011	3.00 %
December 7, 2011	3.00 %
January 18, 2012	Next meeting date

Source: Bank of Canada
Top of Page

Conventional Mortgage - 5 Year Rate*

October 12, 2011	5.29 %
November 16, 2011	5.29 %
December 21, 2011	5.29 %

Source: Bank of Canada
*Determinant for high ratio mortgage variable qualifying rateTop of Page

US Federal Reserve Board Discount Rate

November 2, 2011	0.00 % - 0.25 %
December 13, 2011	0.00 % - 0.25 %
January 25, 2012	Next meeting date

Source: US Federal Reserve
*US Federal Reserve has indicated it will keep this rate until Q2 2013Top of Page

Exchange Rate $CDN($US)

December 1, 2011	0.9859
December 14, 2011	0.9619
December 30, 2011	0.9833

Source: Bank of CanadaTop of Page

Government of Canada Bonds

Bond Type	November 16, 2011	November 30, 2011	December 14, 2011
1 year Treasury Bill	0.87%	0.92%	0.86%
3 year Benchmark Bond Yield	1.02%	1.10%	0.93%
5 year Benchmark Bond Yield	1.36%	1.46%	1.25%
10 year Benchmark Bond Yield	2.09%	2.15%	1.95%

Source: Bank of CanadaTop of Page

Total New Housing Starts (Seasonally adjusted and annualized)

Province	September 2011	September2010	October 2011	October 2010	November 2011	November 2010
Newfoundland/Labrador	3,400	3,200	3,300	3,400	3,700	3,100
PEI	1,300	600	900	400	1,300	1,000
Nova Scotia	6,000	4,200	3,300	4,700	2,600	3,100
New Brunswick	4,900	2,600	3,900	4,900	3,400	3,400
Quebec	59,700	52,300	44,200	48,600	43,500	42,000
Ontario	65,600	57,900	74,800	44,700	52,800	80,300
Manitoba	4,500	4,400	7,600	3,800	7,100	4,700
Saskatchewan	9,100	5,500	8,400	4,700	7,400	7,200
Alberta	24,300	27,800	32,000	25,200	28,700	21,100
British Columbia	29,700	29,900	30,400	27,500	28,700	22,200
CANADA	208,500	188,400	208,800	167,900	181,200	188,100

Source: CMHC Housing Now - December 2011 and December 2010. This seasonally adjusted data goes through stages of revision at different times of the year.

Top of Page

Average MLS® Resale Price for Local Markets

City	November 2010	November 2011
Halifax	$ 252,554	$ 262,714
Saint John	$ 170,610	$ 159,101
Quebec	$ 244,587	$ 250,888
Montreal	$ 305,042	$ 322,808
Ottawa	$ 325,150	$ 347,675
Toronto	$ 437,999	$ 480,421
Hamilton/Burlington	$ 310,492	$ 342,005
Winnipeg	$ 226,886	$ 236,127
Saskatoon	$ 312,893	$ 314,541
Regina	$ 265,590	$ 273,243
Calgary	$ 398,619	$ 398,722
Edmonton	$ 318,538	$ 319,559
Vancouver	$ 699,009	$ 728,118
Victoria	$ 511,648	$ 499,676

Source: Canadian Real Estate Association

Top of Page

Annual Provincial House Prices and Increases

CAAMP Stats

2011-12-07T20:01:00.001-05:00

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CAAMP Stats

2011-12-07T19:58:00.001-05:00

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Withholding tax rates around the world

2011-11-25T00:34:00.000-05:00

Chart legend:
Interest - applicable to interest income from:

non-registered GICs (include MVA)
non-registered life insurance policies:
- Dividends on Deposit,
- Withdrawable Premium Fund (WPF) /Overflow Fund,
- Delayed Claim Interest
non-registered deferred annuities
- Delayed Claim Interest (i.e. GIAs and AAs)
- Interest from Date of death to date of settlement for death claims
non-registered Payout Annuities
- Delayed Claim Interest
RRIF
- Interest from date of death to date of settlement for death claims

Dividend - applicable to dividends from non registered Canadian outside SPIO (stock purchase investment option) only
Trust - applicable to mutual funds distribution, segregated fund income allocation and employee profit sharing plan trust income
Lump Sum Pension - applicable to lump sum withdrawal from:

RPP
DPSP
RRSP
RRIF (amounts greater than 2 x minimum or 10% of value @ Jan 1)
withdrawal of commuted value from registered payout annuity at death

Periodic Pension - applicable to annuity payments from registered source

RPP - scheduled payments
DPSP - scheduled payments
RRIF - 2 x minimum or 10% of value @ Jan 1, whichever is greater
Payout Annuities - RPP, DPSP, RRSP scheduled payments

Lump Sum Annuity - applicable to the taxable portion of:

non-registered AA/IA if the annuitant was a non-resident at issue
non-registered payout annuity - commuted value

Periodic Annuity - applicable to taxable portion of scheduled payments from non-registered payout annuity
Foreign Income - applicable to foreign non business income and foreign interest from non registered foreign outside SPIO only
For payments from Canada:

Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	Income Averaging Annuity Contract	Foreign Income
Algeria	Y	15	15	25	25	15	25	15	15	25
Argentina	Y	12.5	15(1)	25	25	15	25	15	15	25
Armenia	Y	10	15	25	25	15	25	15	15
Australia	Y	10	15	15	15	15	15	15	25	25
Austria	Y	10	15	15	25	25	25	25	25	25
Azerbarjian	Y	10	15	15	25	15	25	15	15
Bahamas	N	25	25	25	25	25	25	25	25	25
Bahrain	N	25	25	25	25	25	25	25	25	25
Bangladesh	Y	15	15	25	25	15	25	15	25	25
Barbados	Y	15	15	15	25	15	25	15	25	25
Belgium	Y	10	15	15	25	25	25	25	25	25
Belize / Leeward / Windward Islands	N	25	25	25	25	25	25	25	25	25
Bermuda	N	25	25	25	25	25	25	25	25	25
Brazil	Y	15	25	25	nil/25(2)	nil/25(2)	nil/25(2)	nil/25(2)	nil/25(2)	25
British Virgin Islands	N	25	25	25	25	25	25	25	25	25
Bulgaria	Y	10	15(3)	15	25	15	25	10	10	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Cameroon	Y	15	15	25	25	25	25	25	25	25
Cayman Islands	N	25	25	25	25	25	25	25	25	25
Chile	Y	15	15 ⁽⁴⁾	15	25	25	25	15	15	25
China	Y	10	15 ⁽⁵⁾	25	25	25	25	25	25	25
Columbia	N	25	25	25	25	25	25	25	25	25
Common Wealth of Ind States	N	25	25	25	25	25	25	25	25	25
Costa Rica	TBD
Republic of Croatia	Y	10	15	15	25	nil/15 ⁽⁶⁾	25	10	10	25
Cuba	TBD
Cyprus	Y	15	15	15	25	nil/15 ⁽⁷⁾	25	15	25	25
Czech Republic	Y	10	15	15	25	15	25	15	15	25
Denmark	Y	10	15	15	25	25	25	25	25	25
Dominican Republic	Y	18	18	18	25	18	25	18	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Ecuador	Y	15	15	15	25	15 (on amounts over $12,000)	25	15	15	25
Egypt	Y	15	15	15	25	25	25	25	25	25
Estonia	Y	10	15	15	25	15	25	10	10	25
Finland	Y	10	15	15	25	20	25	15	25	25
France	Y	10	15	15	25	25	25	25	25	25
Gabon	Y	10	15	25	25	25	25	25	25	25
Germany	Y	10	15	25	25	15	25	25	25	25
Greece	N	25	25	25	25	25	25	25	25	25
Grenada	N	25	25	25	25	25	25	25	25	25
Guyana	Y	15	15	25	25	25	25	25	25	25
Holland (see Netherlands)
Hong Kong	N	25	25	25	25	25	25	25	25	25
Hungary	Y	10	15	15	25	15	25	10	10	25
Iceland	Y	10	15	15	25	15 ⁽⁸⁾	25 ⁽⁸⁾	15	15	25
India	Y	15	25	15	25	25	25	25	25	25
Indonesia	Y	10	15	25	25	15	25	15	25	25
Ireland	Y	15	15	15	15	15	15	15	nil	25
Israel	Y	15	15	15	25	15	25	15	25	25
Italy	Y	15	15	25	25	15 ⁽⁹⁾	25 ⁽⁹⁾	25	25	25
Ivory Coast	Y	15	15	25	25	15	25	15	15	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Jamaica	Y	15	15	15	25	25	25	15	25	25
Japan	Y	10	15	25	25	25	25	25	25	25
Jordan	Y	10	15	25	25	25	25	25	25	25
Kazakhastan	Y	10	15	25	25	15	25	25	25	25
Kenya	Y	15	25	25	25	15	25	15	25	25
Korea (South)	Y	10	15	25	25	15	25	10	25	25
Kuwait	Y	10	15	25	25	15	25	15	25	25
Kyrgyzstan	Y	15	15	15	25	15	25	15	15	25
Latvia	Y	10	15	15	25	15	25	10	10	25
Lebanon	Y	10	15	25	25	15	25	25	25	25
Liberia	Y	20	15	20	25	25	25	20	25	25
Liechtenstein	N	25	25	25	25	25	25	25	25	25
Lithuania	Y	10	15	15	25	15	25	10	10	25
Luxembourg	Y	10	15	15	25	25	25	25	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Malaysia	Y	15	15	15	25	15	25	15	25	25
Malta	Y	15	15	15	25	15	25	15	25	25
Mexico	Y	15	15	15	25	15	25	15	15	25
Moldova	Y	10	15	15	25	15	25	15	15	25
Mongolia	Y	10	15	15	25	15	25	15	15	25
Morocco	Y	15	15	25	25	25	25	25	25	25
Netherlands	Y	10	15	15 ⁽¹⁰⁾	25	15	25	15	15	25
Netherlands Antilles	N	25	25	25	25	25	25	25	25	25
New Zealand	Y	15	15	15	15	15 ⁽¹¹⁾	25 ⁽¹¹⁾	15	25	25
Nigeria	Y	12.5	15	25	25	25	25	25	25	25
Norway	Y	10	15	15	25	15	25	15	15	25
Oman	Y	10	15	25	25	15	25	15	15
Pakistan	Y	15	15	15	25	25	25	25	25	25
Panama	N	25	25	25	25	25	25	25	25	25
Papua New Guinea	Y	10	15	25	25	15	25	15	25	25
Peru	Y	15	15	15	25	15	25	15	15	25
Philippines	Y	15	15	25	25	25 ⁽¹²⁾	25	25	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Poland	Y	15	15	15	25	15	25	15	25	25
Portugal	Y	10	15	15	25	nil/15 ⁽¹³⁾	25	15	15	25
Puerto Rico	N	25	25	25	25	25	25	25	25	25
Romania	Y	15	15	15	25	15	25	15	25	25
Russia	Y	10	15	25	25	25	25	25	25	25
Saudi Arabia	N	25	25	25	25	25	25	25	25	25
Senegal	Y	15	15	15	25	15% (on amounts over $12,000)	25	15	15	25
Seychelles	N	25	25	25	25	25	25	25	25	25
Sierra Leone	N	25	25	25	25	25	25	25	25	25
Singapore	Y	15	15	15	25	25	25	25	25	25
Slovak Republic	Y	10	15	15	25	15	25	15	15	25
Slovenia	Y	10	15	15	25	15	25	10	10	25
South Africa	Y	10	15	15	25	25	25	25	25	25
Spain	Y	15	15	15	25	15	25	15	25	25
Sri Lanka	Y	15	15	15	25	15	25	15	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
Sweden	Y	10	15	15	25	25	25	25	25	25
Switzerland	Y	10	15	15	25	15	25	15	25	25
Taiwan	N	25	25	25	25	25	25	25	25	25
Tanzania	Y	15	25	25	25	15	25	15	15	25
Thailand	Y	15	15	15	25	25	25	25	25	25
Trinidad / Tobago	Y	10	15	25	25	15	25	25	25	25
Tunisia	Y	15	15	15	25	25	25	25	25	25
Turkey	N	25	25	25	25	25	25	25	25	25
Ukraine	Y	10	15	15	25	25	25	25	25	25
United Arab Emirates	Y	10	15	15	25	25	25	25	25	25
United Kingdom	Y	10	15	15	25	nil	25	10	25	25
Uruguay	N	25	25	25	25	25	25	25	25	25
Country	Treaty?	Interest	Dividend	Trust	Lump Sum Pension	Periodic Pension	Lump Sum Annuity	Periodic Annuity	IAAC	Foreign Income
USA	Y	10	15	15 ⁽¹⁴⁾	25	15 ⁽¹⁴⁾	25	15	25	25
Uzbekistan	Y	10	15	25	25	25	25	25	25	25
Vietnam	Y	10	15	15	25	15	25	25	25	25
Venezuela	Y	10	15	25	25	25	25	25	25	25
Virgin Islands (US)	N	25	25	25	25	25	25	25	25	25
Yugoslavia	N	25	25	25	25	25	25	25	25	25
Zambia	Y	15	15	15	25	15	25	15	25	25
Zimbabwe	Y	15	15	15	25	15	25	15	15	25

¹ Argentina: Dividends are taxed at 10% if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividend; 15% in all other cases.
² Brazil: Pension and periodic annuity payments - the first $4,000 paid in a calendar year is exempt.
³ Bulgaria: Dividends - for a non-resident owned investment corporation resident in Canada, withholding tax is at the rate of 10% if the beneficial owner is a company which controls directly or indirectly at least 10% of the voting power in the company paying the dividends.
⁴ Chile: Dividends - if the beneficial owner is a company that controls directly or indirectly at least 25% of the voting power in the company paying the dividends, withholding is at 10%; otherwise withholding is at 15%.
⁵ China: Dividends - if the beneficial owner is a company that controls directly or indirectly at least 10% of the voting power in the company paying the dividends, withholding is at 10%; otherwise withholding is at 15%.
⁶ Croatia: For pension payments, the first $12,000 CDN or equivalent in Croatian currency is exempt from tax.
⁷ Cyprus: Pension payments are only taxed on the excess of the basic amount of $10,000.
⁸ Iceland: Pension payments are only taxable in Iceland provided the total amount of pension paid in the year does not exceed $24,000 CDN or equivalent in Icelandic krones.
⁹ Italy: For pensions, nil if the amount is less than $10,000.
¹⁰ Netherlands: Income from a Trust is exempt from withholding tax if it is derived from sources outside the country in which the trust is resident.
¹¹ New Zealand: Pensions are taxable on the full amount only when payment exceeds $10,000.
¹² Philippines: Periodic pension payments arising in the Philippines are taxed at 30% on the amount in excess of $5,000.
¹³ Portugal: For periodic pension payments, tax is 15% of the amount in excess of $12,000 CDN or eqivalent Portuguese currency.
¹⁴ USA: Income from a Trust is exempt from withholding tax if it is derived from sources outside the country in which the trust is resident.
Under Article XVIII, Paragraph 3, the term "pensions" includes amounts paid under a sickness, accident or disability plan.

Published: 04/12/2009

October 2011: Monthly Indicator Recap

2011-11-24T09:19:00.000-05:00

HOUSING INDICATORS*	DIRECTION	% CHANGE (vs. last month)	OCTOBER LEVELS
Volume of MLS® Home Listings		0.26%	72,739
Volume of MLS® Home Sales		1.26%	38,819
Average MLS® Sale Price (Canada)		0.65%	$363,504
ECONOMIC INDICATORS**	DIRECTION	% CHANGE (vs. last month)	RATES
Unemployment Rate (October 2011)		0.20%	7.30%
GDP (August 2011)		0.30%	N/A
Retail Sales (August 2011)		0.50%	N/A
Consumer Price Index (September 2011)		3.20% (Year‐o‐year, September)	N/A
FINANCIAL INDICATORS	DIRECTION	% CHANGE (vs. last month)	RATES
Prime Rate**		0.00%	3.00%
5 Year Fixed Posted Mortgage Rate***		0.10%	5.29%

MLS® is a registered certification mark owned by The Canadian Real Estate Association.
*Seasonally adjusted month-to-month results; Source: The Canadian Real Estate Association
** Source: Statistics Canada
*** Source: RBC