Posts Tagged ‘bookkeeping’

What changes come with the revised T1135?

The Revised T1135 – This Could Get Ugly for Taxpayers, Investment Advisors & Accountants

 

The T1135


To provide some symmetry to my return to blogging, I start off where I left off. You may recall that my last blog discussed the revised T1135 Foreign Income Verification Form (“T1135”). In that post I discussed the new reporting requirements, which now includes the following:

  • The name of the specific foreign bank/financial institution holding funds outside Canada
  • For each foreign property identified on the T1135, the maximum funds/cost amount for the property during the year and cost amount at the end of the year (the old form only required the cost amount at the end of the year if at anytime in the year you exceeded the threshold)
  • For each foreign property identified on the T1135, the income and capital gain/loss generated (the old form asked for total income or gains from all foreign property in one lump sum)
  • Specific country where each foreign property is located (the old form had pre-defined groupings based on each continent for all the property on an aggregate basis) 

 

The T3/T5 Exclusion


I concluded my July 2nd post by saying that “There is one important saving grace to these rules. If the income for a foreign property is reported on a T3 or T5, the details do not have to be reported. This will exempt most U.S. or foreign stocks held with Canadian brokerages; but the details for property held outside Canadian institutions will be burdensome”.

While the above statement is essentially correct, the CRA’s administrative position in regard to this exemption may prove problematic. You see, the CRA is saying that even where you hold a foreign stock or bond in an account with a Canadian brokerage firm that issues a T3 or T5 for that account; if that security does not pay income in the form of a dividend or interest and thus is not reported on the T3 or T5, the specific stock or bond will not be excluded and will have to be reported in detail on the T1135. This position was recently confirmed by a CRA representative to one of my tax managers.

 

In addition, it must be noted you will still be required to file the T1135 if the total cost amount of your foreign holdings exceeds $100,000 at anytime during the year, even if dividends or interest is reported on a T3 or T5. See the example discussed in this article by Jamie Golembek, where the CRA representative states you would still need to file the form and check the reporting exclusion box for the stocks reported on a T-slip.

The Tax to English Version

 

So what does this all mean in English? Say you own 25 foreign stocks held at a Canadian brokerage that have a total cost of $150,000, but five of those stocks do not pay dividends or fail to pay a dividend in that year. As we now understand the CRA’s position, even though the 20 dividend paying stocks do not need to be individually listed, the 5 non-dividend paying stocks must be reported. Thus, you will need to tick the box on the T1135 Form to claim the exclusion for the 20 stocks, but you will also have to determine the highest cost amount of each of the five non-excluded stocks during the year (troublesome if you bought and sold) and the cost amount at the end of the year in addition to providing other information such as country location and capital gain or loss.

In the example above, if all 25 stocks pay dividends that will be reported on a T3 or T5, you will still have to file the T1135 and check the exclusion box; however, you do not need to report all the details of each individual stock. Clear as mud.

For people with only a few foreign holdings, this is not much of an issue. However, I have clients who are in private client programs with the large Canadian financial institutions that own 20-50 shares of multiple foreign stocks or have private managers running their money who have upwards of 50 U.S. and foreign stock/bond holdings. This means that the client, the advisor, or their accountant, or probably a combination of all three must review all these stocks to determine which ones are exempt from reporting because they paid a dividend or interest that was reported on a T3 or T5 from those that did not have any income reported on a T3 or T5.

My tax manager said the CRA representative he spoke with, gave him the impression that the CRA’s position has not gone over very well. Let’s hope the CRA simplifies life for many Canadians and just exempts any foreign security held at any Canadian Institution whether income is reported on a T-slip or not.

 

This article is posted on The Blunt Bean Counter website.  It provides information of a general nature and should not be considered specific advice, as each reader’s personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the article.

What is my risk as a director of a corporation?

Director’s liability

Being a director of a corporation carries a lot of responsibility, as well as a certain level of risk. The harshest penalty available in our society — criminal sanction — can befall a director if he or she acts fraudulently or negligently. This reflects Parliament’s view that, under subsection 227.1(3) of the Income Tax Act, directors must “exercise the degree of care and skill that would be exercised by a reasonably prudent person in comparable circumstances.”

At common law, judges had long held that a director was to be judged according to his or her particular knowledge and experience. But that old common law standard of subjective liability was seen as insufficient protection for the public. To protect the public generally and shareholders specifically, Parliament decided to impose a higher standard, holding directors to the standards imposed on comparable professionals. So, Parliament created objective liability through the insertion of subsection 227.1(3) into the Act.

This had the effect of raising the standards of directors to the level of the reasonable, professional director who shares the characteristics (education, experience etc.) of the one under scrutiny.

To avoid liability, then, a director need only show that he or she acted the way a reasonably prudent individual in similar circumstances would have acted. That means a director is justified in trusting his or her officials to execute their duties according to corporate policies — if a reasonable person in that position would not have grounds for suspicion.

Generally, a director will be personally liable only if he or she assists the corporation in committing an offence or is grossly negligent in his or her dealings for the company. So, the director needs to participate actively in the offence.

Even if the corporation is not prosecuted or convicted for an offence, the director can still be held liable. If the corporation has committed an offence under the Act and the director participated with knowledge in some way in the commission of that offence, then the two elements of culpability are established. A director may be convicted, but only if it is established he or she had the mens rea (that is, the “guilty mind”).

Directors may also be liable for gross negligence, which is a greater departure from the errant behaviour associated with regular negligence. In Venne v The Queen (1989), the court stated: “Gross negligence must involve a high degree of negligence tantamount to intentional acting, an indifference as to whether the law is complied with or not.”

Parliament and the courts have made it clear directors have a lot of responsibility and are subject to immense liability if they act fraudulently or negligently. The goal is to ensure shareholders have adequate protection, but it is also a balancing act — no one wants to dissuade professionals and those with business experience from becoming directors.

Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.

Are you aware of the revised T1198 statement?

CRA has just issued a revision to Form T1198 Statement of Qualifying Retroactive Lump-Sum Payments, which is completed by the payer of qualifying amounts.  

 

Taxpayers who are in receipt of a lump sum of $3000 or more that relates to one or more prior years may qualify for this averaging provision, a calculation which CRA does for you when the form is attached to your return. 

Qualifying income amounts include income from office or employment if received as a result of an order or judgment, arbitration, or damages for loss of office or employment received in a lawsuit settlement. 

In addition, lump sum benefits from employment insurance, superannuation or pension plans other than lump-sum withdrawals, lump sums received for spousal or taxable child support payments, or benefits from a wage-loss replacement plan may all qualify. 

Not included, however, are salary reimbursements, top-ups of disability payments, repayments of pension benefits, or negotiated back pay. Tax advisors who are up to date with the latest rules can provide guidance.

This article was written by Evelyn Jacks.  Evelyn Jacks is president of Knowledge Bureau, whose curriculum includes wealth-management and income tax-preparation courses. You can also offer Knowledge Bureau financial education books to your clients or family members. Visit http://www.knowledgebureau.com/ for more information regarding The Knowledge Bureau

Does the Bank of Canada email to the public?

Bank of Canada Warns of Ongoing Email Scam

The Bank of Canada (the Bank) has warned Canadians that an unsolicited email scam has falsely claiming to originate from the Bank has been circulating.

 

These scams are misrepresenting the Bank and use the institution’s name, logo, and other identifiers without authorization. The Bank has warned that it has no connection to such emails. In a statement released on its website, stating that: 

“The Bank of Canada is Canada’s central bank and therefore does not accept deposits from or on behalf of individuals, nor does it collect personal or financial information from individuals. The Bank has reported these fraudulent emails to the police. If you receive an unsolicited email, delete it immediately. The Bank of Canada and its employees and officers do not request personal or financial information through email and do not participate in any email or Internet-based communications that request information or payment for services.”

The Bank suggests the following if you receive an email that purports to be from the Bank of Canada, and you have concerns about the contents of that email:

  • Delete the email immediately and contact your local authorities.

  • Access the Bank of Canada website at www.bankofcanada.ca by typing the URL yourself (do not follow links). Look for references to the program identified in the suspect email.

  • Call the Public Information Office at 1.800.303.1282 (toll free in North America), or see the “Contact Us” page on their website.

    Link to the Bank’s warning: http://www.bankofcanada.ca/bank-of-canada-warns-of-email-scams/

Is Canada’s economy improving?

Canada’s gently improving economy

A number of recent numbers from Statistics Canada testify to gently improving economic conditions.

• In November, wholesale sales  rose 0.7% to $49.6 billion, continuing a gradual upward trend begun in early 2009, deep in the recession. Five of the seven subsectors made gains with the computer and communications equipment and supplies industry leading with a 6.3% increase. The motor vehicle and parts subsector, up 1.5%, recorded its second consecutive increase.

Retail sales also edged upward in November to $39.4 billion, adding 0.2%, the fifth consecutive monthly gain. Higher sales at motor vehicle and parts dealers as well as electronics and appliance stores more than offset declines at most store types, says StatsCan.

Manufacturing sales,  likewise, increased in November, up 1.7% to $49.9 billion. As with wholesale sales, manufacturing sales have pursued a gradual upward trajectory since early 2009. Sales rose in 12 of 21 industries, says StatsCan, with the transportation equipment industry — up 3.8% to $8.7 billion in the month — leading the charge and accounting for more than a third of the total increase. Within that industry group, motor vehicle industry sales increased 4.1% and aerospace product and parts industry gained 6.5%.

In the primary metal industry, sales rose 5.9% to $4 billion, the highest gain since July 2011.

• Also on a positive note, the number of people receiving regular Employment Insurance  (EI) benefits in November decreased by 4,500 or 0.8% to 528,000, says StatsCan. From a peak close to 850,000 in mid-2009, the number of EI recipients has consistently edged its way downward.

• Investment in non-residential building construction was $12.0 billion in the fourth quarter, a 1.0% gain from the previous quarter. This was the third consecutive quarterly increase and was led by higher spending for commercial and industrial buildings.

• Canadian existing home sales continued to weaken in December, plunging 17.4% year over year, reports the Canadian Real Estate Association. The silver lining in that dark cloud is a mere 1.6% slippage in housing prices year over year.

“The Canadian housing market continues to cool,” wrote Bank of Montreal senior economist Benjamin Reitzes in a recent report. “While some will focus on the deep dive in sales from a year ago, it looks as though prices are providing a better read on the health of the sector, as homeowners are in no rush to sell. Prices are easing gently, consistent with a soft landing through much of the country.”

TD Bank Group economist Francis Fong, likewise, ends his recent report on an upbeat note. Although he doesn’t see a lot of growth in the first half of this year, the second half is a different story. “By the second half of [the] year, we do anticipate an acceleration of economic growth,” he wrote, “particularly in the United States. With Canadian manufacturers and exporters still tightly linked to the fortunes of the U.S. economy, this should translate into a stronger pace of manufacturing sales growth.”

This article was written by Evelyn Jacks. Evelyn Jacks is president of Knowledge Bureau and has authored several of its tax courses and books.

Would a partnership be a useful vehicle?

Changes to the “Bump” Rules for Partnership Interests

Subject: Partnerships

“partnerships are still a useful vehicle”

Number: 12-36

Date: November 16, 2012

A partnership is a useful form of business organization that has tax advantages as a flow-through vehicle.  If you are planning the acquisition of a business, a partnership can be useful as a way of flowing income and losses (especially losses!) to the purchaser.

Income tax rules allow a purchaser to increase, or ”bump”, the tax cost of certain assets (e.g. land that is not inventory, marketable securities and partnership interests) owned by the acquired corporation (the “target” corporation), if the target corporation is merged with the acquiring corporation after the purchase.

These rules are useful where the purchase price for the shares of the target corporation is higher than the underlying tax basis in the assets of the target corporation, such as companies that own substantial amounts of real estate.  Acquisition planning often involves a tax-free transfer of assets that would not be eligible for a bump (such as depreciable assets and goodwill) to a partnership in advance of the acquisition so that, at the time of the acquisition, the target corporation owns a partnership interest (eligible for the bump) as opposed to assets that were not eligible. 

The March 2012 budget, and the October 2012 draft legislation implementing the budget proposals, will effectively eliminate this planning opportunity. These rules also prevent planning that would otherwise restore the ability to bump the partnership interest.

While the ability to bump the partnership interest has been restricted, partnerships are still a useful vehicle for business acquisitions or structuring newly formed businesses.  Your TSG representative would be happy to discuss with you the best way to structure your business.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group  member firms.  The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

Do you qualify for the SR & ED program?

Despite Proposed Changes, Scientific Research and Experimental Development (SR&ED) Still Provides Big Benefits for Small Businesses

Subject: SR&ED
Number: 12-37
Date: 11/23/2012

it is a good idea to review upcoming SR&ED expenditures and accelerate the spending

On August 14, 2012, the Department of Finance released draft proposals to reduce some of the benefits available under the SR&ED program however significant benefits still remain for small businesses.  In particular, the 35% refundable credit has not been changed.

What is SR&ED?

The SR&ED program provides tax credits to businesses conducting research and development in Canada that will lead to new, improved or technologically advanced products or processes. The definition of SR&ED for tax purposes is the subject of much uncertainty and beyond the scope of this tax tip.  In general, however, eligible SR&ED is a subset of what is commonly referred to as research and development.

CCPC vs. Non-CCPC

Canadian Controlled Private Corporation’s (CCPC’s) generally receive a cash refund of 35% of the first $3,000,000 eligible SR&ED expenditures, annually. This benefit is ground down if the prior year’s taxable income exceeds $500,000, or taxable capital exceeds $10 million. The draft proposals do not reduce this refundable credit.

Non-CCPC’s receive a 20% investment tax credit (ITC) which can be applied to reduce current year taxes payable, carried back 3 years or carried forward 20 years. The Non-CCPC tax credit rate will be decreasing to 15% effective January 1, 2014.

Proxy method instead of actual overhead

The proxy method can be used to determine the amount of overhead costs that can be claimed for tax credit purposes.  This amount is usually easier to determine (and audit) as it is calculated as 65% of direct R&D wages. The proxy factor will be reduced to 60% effective January 1, 2013 and to 55% effective January 1, 2014. The decreasing proxy factor may cause organizations to consider whether using the traditional method of accounting for overhead will now result in a greater claim. The traditional method requires detailed calculations to track overhead so consideration should be given to the time it will take to produce (and support on audit) the detailed overhead calculations required by the traditional method.

Summary of changes

 

2012

January 1, 2013

January 1, 2014

Non-CCPC rate

20%

20%

15%

CCPC rate

35%

35%

35%

Prescribed proxy amount (PPA)

65%

60%

55%

With the modifications to the SR&ED rules coming into force over the next two years, it is a good idea to review upcoming SR&ED expenditures and accelerate the spending, where practical, before certain rates are curtailed.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

 

What deductions apply to Artists & Musicians?

Special Tax Deductions for Artists and Musicians

Artists and musicians may claim expenses for items specific to their profession, including capital cost allowance on musical instruments.

 These claims are limited to the lesser of $1000 and 20% of employment income. Claims may be made for items such as ballet shoes, body suits, art supplies, drum sticks, computer supplies, home office costs, as well as rental, maintenance, insurance and capital cost allowance on those musical instruments. This is another example where consistent gathering and storing of out of pocket expenses can pay off for taxpayers with unique costs.

Have I paid more taxes than necessary?

Evelyn Jacks: Don’t pay more taxes than necessary

You may not be able to control the economy but you can control the amount of income taxes you pay.

 

The growth of wealth in your lifetime will occur naturally if you do some of the right things. But the capital you accumulate — your savings — can fall victim to the eroding effects of inflation and economic uncertainty if you aren’t careful. Fortunately, under our system of self-assessment, it is your legal right to arrange your affairs within the framework of the law to pay the least possible taxes. So, to secure your own future and that of your heirs, be tax-efficient and protect earnings and savings.

This is very important because — even though you may not see your financial affairs this way — your provincial government may consider you “rich” for income tax purposes and you’ll be in line for the new, “high-income surtaxes” on withdrawal of savings as a pension or on money that’s left unspent.

So, when you complete your tax returns, be tax-efficient. If you discover you have overpaid your taxes, you can request adjustments to prior filed federal T1 returns within 10 years after the end of the taxation year being adjusted. Adjust your tax return by following these instructions:

  • If you think you missed claiming something on a previously filed return, call your tax practitioner to make an adjustment, or do it yourself using form T1-ADJ, available on the CRA’s website.
  • You can also make an electronic adjustment on the CRA website. Log on to “My account” and choose the “Change my return” option.
  • Have supporting documentation available in case of audit.
  • Never file a second tax return.

It’s Your Money. Your Life.  File a tax return each year on time to recover tax refunds and preserve wealth. You can even recover “gold” from prior years by adjusting previously filed returns. Many taxpayers miss claiming all the deductions and credits to which they are entitled. Be sure you’re not one of them.

Evelyn Jacks is the best-selling author of Jacks on Tax, Your Do-it-yourself Guide to Filing Taxes Online and Essential Tax Facts, Secrets and Strategies for Take-Charge People, available at www.knowledgebureau.com and better bookstores.

What are the consequences in off-shore tax evasion?

International Tax Information Leak Exposes 450 Canadian Tax Cheats

On April 4th, the Canada Revenue Agency released two separate statements in regards to recent media coverage that has identified rampant disregard for Canada’s tax laws, specifically hiding money in offshore tax havens.

 

CBC News and media outlets in 35 other countries reported earlier in the week that they were uncovering information regarding certain transactions as part of a huge leak of offshore financial information received by the International Consortium of Investigative Journalists in Washington D.C. Many believe it is one of the largest leaks of financial data in history.

The information procured by the Consortium exposed more than 130,000 taxpayers from various countries around the globe who have been hiding their money from their home government; the list included about 450 Canadians.

Perhaps the most high-profile Canadians on the list are Pana Merchant and her husband, prominent Prairie lawyer Toney Merchant. Merchant, also known as the class-action king, evidently tried to hide about $2 million in the Cook Islands, a New Zealand territory famous for its financial secrecy.

Over the last six years, the CRA has conducted approximately 8,000 compliance actions and reassessed in excess of $4.5 billion in federal taxes as the result of its efforts. In her announcement, Revenue Minister Gail Shea called on The International Consortium of Investigative Journalists to hand over their list to allow the Canadian Government to crack down on tax evaders and, in addition, repeated new measures from the recent Federal Budget that will be used to combat international tax evasion:

  • Requiring certain financial intermediaries, including banks, to report to the CRA international electronic funds transfers of $10,000 or more.
  • Introducing a new Stop International Tax Evasion Program through which CRA  will make payments to individuals with knowledge of major international tax non-compliance that lead to collection of additional taxes.
  • Extending the normal reassessment period by three years for taxpayers who have failed to report income from a specified foreign property on their annual income tax return and failed to properly file the Foreign Income Verification Statement (Form T1135).
  • Revising the T1135 Foreign Income Verification Statement to require reporting of more detailed information.
  • Streamlining the process for the CRA to obtain information concerning unnamed persons from third parties such as banks.

This article was written by Evelyn Jacks.  Evelyn Jacks is president of Knowledge Bureau, whose curriculum includes wealth-management and income tax-preparation courses. You can also offer Knowledge Bureau financial education books to your clients or family members.

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