What CRA had to say at STEP

What CRA had to say at STEP

Always hotly anticipated, the annual CRA roundtable at the Society of Trust and Estate Society Practitioners (STEP) National Conference features CRA representatives answering tough questions on tax policy and administration.

This year’s edition, held June 13, was packed with insights — and a touch of humour. The 15 questions answered explored TFSA audits, the safe income rules and cross-border taxes. CRA cautioned that its verbal answers were conversational in tone, and that its full commentary would be released in a few months.

The roundtable was moderated by Paul LeBreux of Globacor Tax Advisors Professional Corporation and featured Michael Cadesky of Cadesky Tax and Kim Moody of Moodys Gartner Tax Law on the practitioner side. The CRA representatives were Steve Fron, manager, Trusts Section, Income Tax Rulings Directorate and Marina Panourgias, industry sector specialist, Trust Section II, Income Tax Rulings Directorate.

Below, see our Twitter summary of the first seven questions. Go here for the other eight questions.

Published at Tue, 13 Jun 2017 11:49:57 -0500

What CRA had to say at STEP, Part 2

What CRA had to say at STEP, Part 2

The annual CRA roundtable at the Society of Trust and Estate Society Practitioners (STEP) National Conference allows attendees to hear directly from agency representatives about tax policy and administration.

This year’s roundtable, held June 13, was moderated by Paul LeBreux of Globacor Tax Advisors Professional Corporation and featured Michael Cadesky of Cadesky Tax and Kim Moody of Moodys Gartner Tax Law on the practitioner side. The CRA representatives were Steve Fron, manager, Trusts Section, Income Tax Rulings Directorate and Marina Panourgias, industry sector specialist, Trust Section II, Income Tax Rulings Directorate. CRA cautioned that its verbal answers were conversational in tone, and that its full commentary would be released in a few months.

Read Part 1 of our summary here and below, see our Twitter summary of the last eight questions.

Published at Tue, 13 Jun 2017 11:52:35 -0500

Small business tax regime almost ‘unworkable’

Small business tax regime almost ‘unworkable’

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Ottawa’s changes to the private corporation and small business tax rules have made the new regime so complex that it’s almost unworkable, tax experts said at a conference panel Monday.

Speaking at the Society of Trust and Estate Practitioners’ annual conference in Toronto, panelists said rules around associated corporations, arm’s-length individuals and various carveouts make it more difficult than ever for many private corporations to claim the small business rate.

“These rules are so complex and the cross-referencing is so difficult to work through that I think it’s pushing the boundary of what non-specialist practitioners are able to do in light of the number of clients it’s going to affect,” says Ian Pryor, founder of Pryor Tax Law in Ottawa. “I think it’s pushing being unworkable.”

Read: Finance’s draft legislation tightens Budget 2016 changes

Kenneth Keung, director of Canadian tax advisory for Moodys Gartner in Calgary, offered the example of a small business whose owner holds shares in another Canadian private corporation through an ETF. The relationship is subject to a carveout if the person who is non arm’s-length with one corporation holds any interest in a second corporation while providing it a certain amount of property or services.

“Let’s say a family owns a car parts manufacturer. The family patriarch happens to own an ETF, which owns Ford [Motor Company], and that car parts manufacturer earns more than 10% of his income from Ford Canada,” he said.

Keung continued: “Ford Canada is a subsidiary of Ford USA, and Ford Canada is actually considered a private corporation under the Income Tax Act—but because the patriarch owns an ETF that has Ford USA shares in it, technically, they fall under this rule, and all of the income is not entitled to the small business deduction. You can bet your booty that Ford Canada is not sharing its $500,000 [small] business limit with this car [parts] manufacturing company,” Keung said.

He said he brought the issue to CRA for its opinion and the tax agency said, “Yep, this is how we read the rules, too.”

Pryor said CRA says it can’t do anything about the complexity and it’s not likely the government will change it.

He said there are two central theories about Ottawa’s rule changes. One is whether tax professionals are witnessing the gradual phasing out the small business deduction. The second may be a government effort for more revenues through audits.

Read: How to avoid factual control of a corporation? Avoid influence

“These rules are really complex, and the government just allocated $1 billion to auditors. Maybe that’s a good opportunity for them to make some money. I hope that’s not the case, but I think the compliance on this is going to be pretty hard to keep up with for a lot of people,” Pryor said.

There are challenging ways to plan around the rules, the tax experts noted. For instance, a private corporation owner can spin out businesses so that they’re owned by different arm’s-length people, and charge cross fees.

“[But] be careful of the non arm’s-length person providing services or property,” Pryor cautioned. “I think it’s almost guaranteed that there’s going to be unintended situations that are caught.”

He’s also seeing many partnerships move to joint venture structures—though a simple legal conversion can be risky. “If you don’t change the nature of the relationship and the way the business is carried on, not to mention the accounting, I think you open yourself up to challenge,” Pryor said.

Also read: 

Federal budget takes aim at associated corporations

Tax headache coming for professional clients

The good, the bad and the tepid: reaction to federal budget

Published at Tue, 13 Jun 2017 12:24:05 -0500

Tax-News.com: Canada To Amend Voluntary Disclosure Program

Tax-News.com: Canada To Amend Voluntary Disclosure Program

by Mike Godfrey, Tax-news.com, Washington

12 June 2017









The Canadian Government has announced a consultation on proposed changes to the Voluntary Disclosures Program (VDP) that will narrow the eligibility criteria and make the regime less generous.

The VDP provides taxpayers with an opportunity to voluntarily come forward and correct previous omissions in their dealings with the Canada Revenue Agency (CRA). If the disclosure satisfies the CRA’s conditions, the taxpayer will typically face a lower interest charge on the unpaid tax, and will not be liable for criminal prosecution or civil penalties. All evaded tax must be paid.

The Government’s proposed changes narrow the eligibility for VDP and impose additional conditions on applicants. The Government said the VDP will no longer be a “one-size-fits-all” program, and that major cases of non-compliance that are disclosed will not receive the same level of relief as they would under the current program.

In addition, under the changes, the Government would require the payment of the estimated taxes owing as a condition for qualifying for the program, and change the way the amount of interest relief available is calculated. The Government will exclude from the program applications that involve transfer pricing, applications from corporations with gross revenue in excess of CAD250m (USD185.95m), and applications that disclose income from the proceeds of crime. VDP relief will be cancelled if it is subsequently discovered that a taxpayer’s VDP application was not complete due to a misrepresentation attributable to wilful default.

The changes have been introduced in response to a report by the Offshore Compliance Advisory Committee. In December 2016, the Committee recommended that the CRA should provide less generous VDP relief where “sophisticated taxpayers have sought expert advice and used complex offshore structures to evade significant amounts of tax over several years.” It also questioned whether taxpayers that have made a voluntary disclosure should receive the same treatment as those whose disclosure is prompted by CRA activity, and argued that offshore and onshore (domestic) non-compliance should be treated similarly.

The consultation was launched on June 9, 2017, and will be open for 60 days. The Revenue Minister is expected to make a formal announcement on any reforms during the fall.

Published at Sun, 11 Jun 2017 19:00:00 -0500

Tax-News.com: OECD Seeks Taxpayer Input On BEPS Action 14 Peer Reviews

Tax-News.com: OECD Seeks Taxpayer Input On BEPS Action 14 Peer Reviews

by Ulrika Lomas, Tax-News.com, Brussels

12 June 2017









The OECD is seeking taxpayers’ input on the mutual agreement procedure (MAP) frameworks in place in the third batch of countries that will now be peer reviewed under Action 14 of the OECD’s base erosion and profit shifting Action Plan: the Czech Republic, Denmark, Finland, Korea, Norway, Poland, Singapore, and Spain.

The OECD’s Action 14 proposals concern making dispute resolution mechanisms more effective.

The MAP is used to settle disputes between countries and taxpayers concerning cross-border tax arrangements for trade and investment where double taxation of the same income occurs.

The MAP peer review and monitoring process under BEPS Action 14 was launched in December 2016, with the first peer reviews of frameworks in Belgium, Canada, the Netherlands, Switzerland, the UK, and the US underway. The peer review process is conducted in two stages: stage 1 seeks to evaluate implementation of the Action 14 minimum standard for Inclusive Framework members, and stage 2 focuses on monitoring how countries respond to recommendations resulting from Stage 1.

The OECD has invited input from taxpayers, as the main users of the MAP in the aforementioned countries, asking them to complete a questionnaire on specific issues relating to access to MAP, clarity, and availability of MAP guidance, and whether the implementation of MAP agreements is timely in these jurisdictions.

Responses to the questionnaire must be received by July 7, 2017.

Published at Sun, 11 Jun 2017 19:00:00 -0500

Understanding the new T1135

Understanding the new T1135

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Editor’s note: we have updated this article to reflect tax rules as of June 2017. It was originally published in 2015 by François Bernier.

CRA’s revised Form T1135 requires taxpayers to provide significantly more information about their foreign property. This article explains the new rules.

Who has to file a T1135?

A T1135 must be filed by:

  • Canadian resident individuals, corporations and trusts that, at any time during the year, own specified foreign property costing more than $100,000; and
  • certain partnerships that hold more than $100,000 of specified foreign property.

Read: T1135 gets another facelift

An individual does not have to file a T1135 for the first year he or she is a resident of Canada.

Note the $100,000 threshold isn’t based on the fair market value, but on the adjusted cost base of the asset in Canadian currency.

What is specified foreign property (SFP)?

Subject to the exceptions noted below, SFP includes:

  • Funds in foreign bank accounts;
  • Shares of foreign corporations (even if held in Canadian brokerage accounts);
  • Interests in foreign mutual funds;
  • Shares of Canadian corporations on deposit with a foreign broker;
  • Debts owed by non-residents including bonds, debentures, mortgages, and notes receivable;
  • Interests in a non-resident trust;
  • Interests in a partnership that holds specified foreign property;
  • Land and buildings located outside Canada (foreign rental property);
  • Tangible and intangible properties located outside Canada;
  • Life insurance policies issued by a foreign insurer;
  • Precious metals, gold certificates, and futures contracts held outside Canada.

There are many Canadian public corporations whose shares are trading on foreign stock exchanges; the shares of these corporations are not considered SFP if held with a Canadian broker.

What matters is not the currency of the holding, or the stock exchange where the investment is bought or sold. Canadian company bonds denominated in U.S. dollars are still Canadian. Canadian corporation stocks traded on the New York Stock Exchange are still Canadian and are therefore not considered SFP.

SFP does not include:

  • Foreign property held in a Canadian-based mutual fund;
  • Property used or held exclusively in the course of carrying on an active business;
  • Foreign property held for personal use and enjoyment, such as a vehicle, vacation property, artwork, etc.;
  • Foreign property held within registered plans like RRSPs, LIFs, RRIFs, LIRAs, TFSAs, RESPs and RDSPs;
  • Assets held in a foreign registered pension account (IRA, 401K);
  • Shares of a foreign affiliate;
  • Interests in a non-resident trust that neither the taxpayer nor a relative had to pay for (e.g. an estate);
  • Interests in or indebtedness of a non-resident trust that is a foreign affiliate.

What must be reported?

On the earlier version of the T1135, there was no need to identify particular foreign assets, or to give the precise cost.

For 2013 and subsequent years, the revised form requires the following for each foreign asset:

  • Name of the entity holding the SFP;
  • Name of the foreign corporation, name of the foreign trust or description of the foreign property;
  • Country where the SFP is located;
  • Maximum cost of the SFP during the year;
  • Cost of the SFP at year end;
  • Amount of income (or loss) related to the SFP; and
  • Amount of any capital gain (or loss) realized on the disposition of the SFP.

The two-tiered system

As of the 2015 tax year, CRA has introduced a two-tier information reporting structure for specified foreign property.

The first tier, known as the simplified reporting method, is for taxpayers who held specified foreign property with a total cost of more than $100,000, but less than $250,000, throughout the year. Under the simplified method, taxpayers simply check a box to identify the type of property held during the year (as opposed to providing details of each specific property). Also, taxpayers will need to identify the top three countries where the specified foreign property is held, based on the aggregate maximum cost amount of the properties held during the year. Finally, taxpayers will be required to disclose the total income as well as the combined gain or loss earned on the sale of all specified foreign property during the year.

The second tier, called the detailed reporting method, applies to taxpayers who own total specified foreign property with a cost base of more than $250,000 at any time during the year. The detailed method of reporting hasn’t changed; however, the threshold at which this applies increased to $250,000 as of 2015. Under the detailed reporting method, taxpayers are required to provide details of each specified foreign property, including the location of the asset (via the country code), the maximum cost amount during the year, the cost amount at year-end, and any income or capital gains/losses recognized from each asset.

Special rules have been implemented for SFPs held in account with a Canadian registered securities dealer (or a Canadian trust company) where taxpayers are permitted to aggregate and report the property on a country-by-country basis. There is no need to segregate the SFPs by categories (shares, debt, etc.) as required under the more detailed method. The amounts that have to be reported are the highest fair market value during the year. This amount may be based on the highest month-end fair market value that appears on the investment statements.  The fair market value at the end of the year must also be reported on a country-by-country basis.

In addition, the combined income (or loss) earned on all SFPs held at any time in the year, as well as the total gains or losses realized on the disposition of SFPs during the year, have to be reported on a country-by-country basis.

Detailed reporting on a SFP-by-SFP basis is still required when the SFP is not held in an account of a Canadian registered security dealer (or a Canadian trust company).

Amounts reported on the T1135 form are required to be determined in the applicable foreign currency, and then converted into Canadian dollars. In terms of which exchange rate should be used, taxpayers are required to use the exchange rates in effect at the time of the transaction (e.g., the time the income was received from the property, or the exchange rate on the date the property was purchased). However, if income is received throughout the year, CRA permits using an average exchange rate.

Filing the form

Form T1135 must be filed by the filing due date of the income tax return for the particular year. Individual as well as corporations can file this form electronically for the 2014 tax year and beyond. Trusts and partnerships are still required to paper file. For all taxation years prior to 2014, taxpayers must paper file the T1135.

Extension of the normal reassessment period

In the past, unless an omission in a tax return was due to negligence, tax authorities were prevented from processing a reassessment for additional tax after the normal reassessment period (generally three years after the day a notice of assessment is sent to a taxpayer).

For 2013 and following tax years, the reassessment period will be extended by three years if a taxpayer has failed to report income from a SFP on his or her income tax return and the T1135 was not filed, was filed late, or included incorrect or incomplete information.

Penalties

The penalty for not filing the T1135 is $25 per day, up to a maximum of $2,500. Additional penalties are possible if the taxpayer knowingly or negligently fails to comply.

Final thoughts

Always keep good records of clients’ investment holdings. Trade confirmation slips can be evidence of cost amounts. And, when in doubt, file the T1135. There are no penalties for filing it even if it is not required.

Read: Tax traps for divorcing clients

Published at Mon, 12 Jun 2017 04:00:37 -0500

CRA seeks comment on proposed changes to VDP tax program

CRA seeks comment on proposed changes to VDP tax program

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For several years, the CRA has increasingly sought to crack down on so-called tax cheats. In a June 9 release, the government and CRA say “some wealthy Canadians continue to find ways to not pay what they owe, which places an unfair burden on Canadians,” specifically those who “pay their share of taxes.”

Read: Here’s how CRA will crack down on tax evasion

The release notes Diane Lebouthillier, minister of national revenue, has launched an online consultation to get commentary from Canadians on CRA’s proposed changes to tighten its Voluntary Disclosures Program (VDP).

The call to make changes to the VDP follows an extensive review of that program that was completed in response to the recommendation by the Standing Committee on Finance. The CRA also received advice from the minister’s Offshore Compliance Advisory Committee.

The proposed changes to the VDP include:

  • narrowing the criteria of who is eligible;
  • ensuring severe cases of non-compliance do not benefit from the same level of penalty and interest relief;
  • ensuring requests that disclose proceeds of crime are excluded from relief; and
  • requiring payment of the estimated taxes owing as a condition to qualify for the program.

The CRA’s comment period will be open for 60 days. The CRA will announce changes to the program in the fall of 2017.

Quick Facts

  • The Government of Canada has invested nearly $1 billion in the 2016 and 2017 budgets to crack down on tax evasion. This investment is expected to have a federal revenue impact of over $5 billion over the next five years.
  • The VDP gives taxpayers an opportunity to voluntarily come forward and correct previous omissions in their dealings with the CRA.
  • The Voluntary Disclosures Program applies to disclosures relating to income tax, excise tax, excise duties under the Excise Act, 2001, source deductions, GST/HST, and charges under the Air Travellers Security Charge Act and the Softwood Lumber Products Export Charge Act, 2006.

Read: CRA charges stock promoter who avoided multimillion-dollar tax bill

Published at Mon, 12 Jun 2017 09:02:04 -0500

Tax-News.com: Clarity Sought On CRA Employment Insurance Rulings

Tax-News.com: Clarity Sought On CRA Employment Insurance Rulings

by Mike Godfrey, Tax-news.com, Washington

09 June 2017









The Canadian Taxpayers’ Ombudsman has called on the Canada Revenue Agency (CRA) to make more information available on its Canada Pension Plan (CPP) and Employment Insurance (EI) decisions process.

A CPP/EI ruling is an official decision made by the CRA that confirms whether a worker is considered an employee or self-employed. This decision determines if the employment is insurable and pensionable, and who is responsible for withholding and remitting CPP, EI, and income taxes.

In 2015-16, the CRA completed 44,091 CPP and EI rulings requests.

The Ombudsman has published a report in which it highlighted a number of difficulties with the current system. It raised concerns over a lack of information regarding the reasons for the decision and the potential consequences of a change in employment relationship, and as to the taxpayer’s right to obtain a written copy of the rulings report that contains the full reasons. It also found that there was insufficient guidance regarding the steps to be taken to pay any outstanding amounts.

The report explained: “We found that there are only two ways to receive an explanation of a CPP/EI ruling: the worker or payer can call the officer who issued the ruling and request a verbal explanation; or they can request a copy of the CPP/EI Rulings Report. However, both of these options are dependent upon the worker or payer being aware that this request for an explanation is available.”

The Ombudsman recommended that:

  • The CRA’s CPP/EI rulings letters should inform the parties to a ruling of their right to request a copy of the Rulings Report and how to request it;
  • The rulings letters should, where applicable, state that an amount owing or over-contribution may result from the decision;
  • The CRA should clearly communicate the steps a taxpayer needs to take following the receipt of a rulings letter, including the steps needed to pay any outstanding sums;
  • The CRA should continue to include in its rulings letters the contact information of the rulings officer for an explanation of the decision, as well as reference to the relevant webpages; and
  • The CRA should review the CPP/EI rulings program to determine whether efficiencies can be made that would allow for the inclusion of an explanation of the relevant factors within each rulings letter.

Published at Thu, 08 Jun 2017 19:00:00 -0500

Tax-News.com: Canada Explains Tax Treaty Changes To Prevent Abuse

Tax-News.com: Canada Explains Tax Treaty Changes To Prevent Abuse

by Mike Godfrey, Tax-news.com, Washington

09 June 2017









The Canadian Government has explained how it will incorporate into its tax agreements new provisions to counter base erosion and profit shifting, having signed the OECD’s multilateral instrument on tackling treaty abuse.

The Canadian Government said that the minimum standards consist of the inclusion in existing treaties of a new preamble and a substantive technical rule. This rule is intended to prevent so-called “treaty shopping,” whereby businesses and investors structure their activities to obtain treaty benefits in inappropriate circumstances.

Canada will introduce the “principal purpose test” provided for by the Convention, which would deny a benefit under a tax treaty where one of the principal purposes of an arrangement or transaction is to obtain a benefit under the tax treaty.

Over the longer-term, Canada will, where appropriate, seek to negotiate on a bilateral basis a detailed limitation of benefits provision that would also meet the minimum standard.

Canada has also chosen to adopt a provision to improve dispute resolution.

The implementation of the minimum standards will affect a majority of Canada’s tax treaties. However, for the amendments to apply, the relevant treaty partners must also ratify the Multilateral Convention and list its tax treaty with Canada. In certain cases, the Canadian Government may find it preferable, or necessary, to update particular treaties bilaterally.

Other than the minimum standard provisions and binding mandatory arbitration, Canada will register a reservation on the Convention’s other provisions. It will continue to assess whether to adopt these provisions at a later date. A country may expand the scope of its commitment under the Convention, but cannot narrow its commitment by adding or broadening a reservation at a later date.

Published at Thu, 08 Jun 2017 19:00:00 -0500

Tax-News.com: Canada To Amend DTAs With Germany, Switzerland

Tax-News.com: Canada To Amend DTAs With Germany, Switzerland

by Mike Godfrey, Tax-news.com, Washington

08 June 2017









The Canadian Government has announced its intention to update its double tax agreements (DTAs) with Germany and Switzerland.

The Government said on June 7 that negotiations with each country will be held this month.

The Government has asked interested parties to inform it of any particular issues of double taxation that could be resolved.

It is also interested to learn of any difficulties encountered by Canadians under either the German or Swiss tax systems, so that these issues might be taken into account during the respective negotiations.

Published at Wed, 07 Jun 2017 19:00:00 -0500