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CRA to Start Review of U.S. Real Estate Transactions by Canadians

On June 25, 2020, the CRA posted a tender notice asking for assistance so that CRA would be able to mine the data of Canadian residents who purchase, sell or transfer U.S. real estate.  The goal for CRA is the ability to sort through bulk information including historical records, mortgage transactions, property taxes, real property records and deeds.  The CRA wants to “enhance the CRA’s ability to administer tax programs, to enforce the various tax acts in order to protect Canada’s revenue basis, and to support the CRA’s business and research processes.”

This is a significant event that all taxpayers must be aware of.  This means that CRA is actively planning to obtain information to determine if Canadian residents have properly recorded the U.S. transactions on their Canadian tax returns.

There are several issues that Canadians should be aware of when they have U.S. or foreign real estate property:

  • T1135 – Foreign Reporting;
  • Reporting rental income;
  • Reporting the sale of the property;
  • Voluntary Disclosure

T1135- Foreign Reporting

Where a Canadian owns foreign property costing more than CDN $100,000, a Canadian taxpayer is required to report the foreign property on a form T1135.  If the property is completely personal and / or has a cost base of CDN $100,000 or less, then there is no need to report.

If the property should have been reported and it was not, there is a penalty of $25 per day up to a maximum amount of $2,500.  This would apply for each year that the property has not been reported on the T1135.  There are harsher penalties which could apply, for example, a penalty of 5% of the cost of the foreign property if it has not been reported for 24 months.

Reporting Rental Income

A Canadian resident taxpayer is required to report its world-wide income.  This means that any income earned on the rental of a property located outside of Canada needs to be reported in Canada.  If there are foreign income taxes payable, then the Canadian taxpayer would get credit for those foreign income taxes.  However, the fact that there may be no Canadian taxes because there were foreign taxes paid does not negate the fact that the rental income must be reported along with the foreign tax credit.  Generally, there are Canadian taxes over and above foreign income taxes because of Canada’s high tax rates.

For U.S. rental properties, the U.S. tax rules on depreciation and deductible expenses are not the same as the Canadian rules.  Therefore, it is possible that there would be no taxable income in the U.S. but that there would be taxable income and taxes in Canada.  Again, a taxpayer cannot assume that because there is no income or taxes in the U.S. that there is nothing to report in Canada.

Reporting Sale of U.S. Real Property

In the United States, a taxpayer must report the disposition of U.S. situs property such as U.S. real estate.  There are certain exemptions which may reduce the taxes payable in the United States.  However, as a Canadian resident, the taxpayer must report this disposition in Canada as well.  The U.S. tax rate on capital gains is slightly less than the capital gains tax rate in Canada.  Therefore, there likely is additional Canadian tax payable on the disposition of the property.  Moreover, there will be instances where there may be little or no gain in the U.S., but because of foreign exchange adjustments, there would be a capital gain in Canada.  The capital gain in Canada is based on the foreign exchange rate at the time of the purchase and the foreign exchange rate at the time of the sale.  In 2007, the Canada / U.S. foreign exchange rate was par.  At present, it is close to 1.40.  Therefore, a property that did not go up in value in U.S. dollars would have a 40% capital gain in Canada.

Voluntary Disclosure

If any of the above situations apply, taxpayers can avail themselves of the voluntary disclosure process if they meet certain conditions.  In very general terms, the conditions would be that CRA has not asked about any of the above items and has made no communication as to whether these items have been reported.  Once a taxpayer receives any kind of correspondence from CRA, it is very difficult to get into the voluntary disclosure program.  The benefit of the voluntary disclosure program is that no penalties would be assessed.  If there are taxes owing, there would still be the taxes owing and interest.  For the foreign reporting, especially, the voluntary disclosure program ensures that there is no tax cost to filing the unreported T1135 forms for the prior years.

Your Segal GCSE LLP representative would be happy to discuss these options and prepare the necessary filings and possible voluntary disclosure.

Contributed by Howard Wasserman, CPA, CA, CFP, TEP, from Segal LLP. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.

Coming Soon: Taxing the Pandemic

As reported on CBC.ca:

“The federal government’s latest projection of how much it will spend on direct support for Canadians to get through the COVID-19 crisis have risen to more than $152.7 billion as of May 28 … Ottawa estimates that overall total — including measures to protect Canadians health and safety and to provide business and tax liquidity support as well as the direct support for individuals, businesses and sectors — amounts to more than $929.7 billion”.

These numbers are astronomical and makes the cost of the recent SpaceX launch look as cheap as a Yugo.

Statistics Canada estimates our population at 37,894,799 . That is direct support of $4,030 a person and total support of $24,534 per person. Based on the number of taxpayers, a different story unfolds. Based on the 2017 year with number of taxpayers per income threshold, the costs per taxpayer would be:

How will this be paid for?

In the UK it has been reported that:

“…COVID-19 could create a gulf of almost £300 billion (US$367 billion) in the UK’s public finances …, according to a leaked report seen by UK daily The Telegraph.

The report … reportedly recommends that the Government could look to a multi-year plan to increase taxes that could include a combination of a one to five per cent hike in personal income tax rates, changes to pension tax rules, a value-added tax increase, and a hike in social security contributions, among other measures… ” .

In Finland:

“…the Finnish Government published a report … and considers what taxes could be increased to help restore the public finances. … the report identifies certain taxes where there is scope for revenue increases without threatening the economy. These are:

  • Property taxes…;
  • Corporate tax…;
  • Environmental taxes, with the taxation of fossil fuels increased further;
  • Value-added tax”
While other countries are looking at funding the COVID crisis, SO IS CANADA!

What will this look like? Will there be more tax increases for the wealthy? For the business owners? In the current governments’ name of fairness, you only need to look at their record where they have:

  • Increased the highest personal tax rate 13.8%;
  • Expanded the scope of the tax on split income (kiddie tax);
  • Penalized business owners for investing corporate profits within a corporation;
  • Restricted access to the recovery of refundable taxes;
  • Accelerated the taxation of work in progress of professionals; and
  • Invested of over half a billion dollars to increase audit activity, increasing the cost of compliance for business owners.
Time will tell how wealthy is defined by our government as the gap to fill will and should include more than the top 1% of Canadians as in the past. Will competitive and skilled labor emigrate as a result of any changes; keeping in mind that since 2016 the marginal income tax rate on income of $150,000 would be subject to lower taxes in all US states when compared to all Canadian provinces.

What about the GST? When the Harper government lowered the rate from 7% to 5% the opposition parties were anything but supportive.

What about the capital gains inclusion rate? For years now the inclusion rate has been 50%. There have been rumors this will increase – is now the time?

Another proposal is the taxation of the gain on your principal residence over a certain threshold.

While we do not have a crystal ball to predict what changes are coming, we can predict with confidence that tax changes are coming and coming soon! The Federal Budget for 2020 was scheduled for March 30, 2020 but has been postponed indefinitely. Why is this being deferred? Are new tax changes being considered for this next budget?

Owner managers of Canadian corporations may bear the weight to pay for the Pandemic. Now is the time to protect what may be targeted in the next budget.

Contributed by Brad Berry CPA, CA, from Mowbrey Gil. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore North America.

Tips for Picking Your Year-End

The new year brings new changes and new ideas; if you’re planning on incorporating or starting a business as a sole proprietor here is some advice to consider for planning an effective year-end.

Plan in Accordance with Your Highs and Lows

If your business is seasonal or cyclical, you’ll ideally want to establish a year-end that coincides with the end of your busiest period. The downtime following year-end will allow you to catch up on record keeping and will give you a clearer idea of how well your business has done. As an example, a landscaping business generally peaks over the summer season and may favour a September 30 year-end.

The year-end of a business that is structured as a sole proprietorship is always calendar year-end. The activity of your sole proprietorship is recorded on your personal tax return on a specific form. As a tax filer with a sole proprietorship, your return is due by June 15th instead of the usual April 30th due date. If there is a balance owing, it must be paid by April 30th.

Type of Business

Independent: A sole proprietorship or a taxpayer that is self-employed must use a December 31 fiscal year-end. It’s important to remember, a sole proprietorship is still subject to collect and remit HST if the revenue exceeds $30,000 in the year. Furthermore, a sole proprietorship needs to file all T-slips (i.e. T4s, T5s) depending on the extent of its operations.

Incorporated: If your business is incorporated, you have the option to choose any year-end if its within 365 days of incorporation. As previously stated, when selecting your year-end, you should consider your industry and choose the end of the busiest time for your fiscal year-end. Another bit of information that is important to note is that some year-ends are fixed for some industries, so be sure to check if yours is among those.

Changing a Fiscal Year

If you’ve come to realize your fiscal year is not the best fit as it currently stands, you do have the option to change it. The process is to first correspond with the Canadian Revenue Agency (CRA). You cannot change your year end for just any reason. It must be something substantial that the CRA will likely acknowledge as a valid reason. For example, if you opened your business and then realized that you’re busy in one season but not another, it would make fiscal sense to change your year end. Pursuing a tax advantage simply for convenience (IE. You have a vacation that you would like to plan around) is not a reason that will likely be accepted.

Greg Shagalovich CPA,CA

Greg is an experienced professional in the mid-size accounting industry. At Segal, he coordinates teams to fulfill large audits and reviews. Furthermore, Greg has experience in financial advisory services, including due diligence assignments. He is also one of the firm’s primary client liaisons. Greg is well adept at conducting compilation engagements for owner-managed business and corporations. Additionally, he plays an important role in developing the firm’s junior staff and co-op students. Greg also keeps the firm up-to-date on important new technology and tax preparation techniques with in-house seminars and presentations.

New Quebec sales tax and e-commerce

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This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.

Measures relating to the Quebec sales tax and e-commerce

The rise of e-Commerce created QST collection difficulties for suppliers with no physical or significant presence in Quebec. This situation negatively affected Québec’s supplier competitiveness, and it’s shorting the provincial government necessary revenue. The policy response to this was the Mandatory Registration System (MRS).

About the MRS

In its 2018-2019 budget, the Quebec government introduced the MRS (also known as the “specified registration system”) for non-resident suppliers. The rules require non-resident suppliers to collect and remit the QST on taxable incorporeal movable property and services supplied in Québec to people who live in Québec but who are not registered for the QST. Moreover, Canadian suppliers will be required to collect and remit QST on corporeal movable property supplied in Québec to a Quebec consumer.

To establish residency and location, non-resident suppliers can refer to a customer’s billing address, IP address or banking information. And customers who falsify this information could face stiff penalties.

MRS and eCommerce

Digital property and services distribution platforms (“digital platforms”) are now required to register under the MRS in cases where the digital platform controls the key elements of transactions with specified Québec consumers (billing, transaction terms & conditions and delivery).

Mandatory registration will apply to non-resident suppliers (NRS) when the value of taxable goods and services exchanged in Québec exceeds $30,000 a year. As NRSs registered under the new MRS are not subject to other QST provisions, claiming an input tax reimbursement is not possible. However, an NRS can register under the general QST if it meets registration requirements.

The Québec government’s goal is the make the MRS simple and easy to use. The return must be filed electronically on a quarterly basis and the remittance can be paid in USD and EURO.

The MRS comes into effect on January 1, 2019, for non-resident suppliers outside Canada, and September 1, 2019, for non-resident suppliers located in Canada.

For more information about the MRS, what it means for your business and how it may or may not affect how you do business, book a consult with us and we’ll get you prepared for continued success in Québec.

Contributed by Benoit Vallée from Demers Beaulne. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.

Deciphering the Notice of Assessment

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By the middle of May 2018, the Canada Revenue Agency (CRA) had processed just over 26 million individual income tax returns filed for the 2017 tax year. Just over 14 million of those returns resulted in a refund to the taxpayer, 5.5 million required additional payment and about 4.4 million returns were “nil returns” where no tax was owing and no refunds were claimed, but the return was used to provide income information to determine eligibility for tax credit payments (like the federal Canada Child Benefit or the HST credit).

No matter what the outcome of the filing, all returns filed with and processed by the CRA have one thing in common: they result in the issuance of a Notice of Assessment (NOA) by the Agency, outlining income, deductions, credits and tax payable for the 2017 tax year, whether you will be receiving a refund or you have a balance owing. The amount of any refund or tax payable will appear in a box at the bottom of page 1, under the heading “Account Summary.”

On page 2 of the NOA, the CRA lists the most important figures resulting from their assessment, including your total income, net income, taxable income, total federal and provincial non-refundable tax credits, total income tax payable, total income tax withheld at source and the amount of any refund or balance owing. Page 2 also includes an explanation of any changes made by the CRA to your return during the assessment process and provides information on unused credits (like tuition and education credits) that you earned and can claim in future years.

On page 3 of the NOA, you will find information on your total RRSP contribution room (i.e., maximum allowable RRSP contribution) for 2018.

Finally, page 4 provides information on how to contact the CRA with questions about the information provided on the NOA, on how to change the return filed and on how to dispute the CRA’s assessment of the individual’s tax liability.

In a minority of cases, the information presented in the NOA will differ from what you provided on your return. Where that difference means an unanticipated refund, or a refund larger than the one expected, it’s a good day! If the NOA will swing the other way, that’s less good.

When that happens, you must figure out why, and to decide whether or not to dispute the CRA’s conclusions. In that case, your best bet is to consult a tax or accounting professional at Segal GCSE LLP.