Archive for March, 2013

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Report Your Foreign Holdings

Canadians with foreign holdings at any time in 2013 (not just at the end of the year), will need to provide more information to the CRA, starting with the 2013 tax year.

This will include money on deposit in foreign bank accounts and marketable securities, which are considered to be specified foreign properties. Problem is, many Canadian tax filers miss ticking off the box on the tax return that requests information on holdings over $100,000.

More details on “specified foreign property holdings”, will be required on Form T1135, foreign Income Verification Statement. Taxpayers will be required to provide for each property held:

  • The name of the foreign institution or other entity holding the funds outside of Canada
  • What country the funds are held in
  • What foreign income was generated from the property

The March 21, 2013 budget also proposes to extend the reassessment period for a taxation year of a taxpayer by three years if the taxpayer failed to report income from a specified foreign property in their annual return and Form T1135 was not filed on time, or if a specified foreign property was either improperly identified or not identified at all.

So what is included in the definition of specified foreign holdings, subject to these rules and listed on Form T1135? Take special note of the following:

  • Patents, copyrights and trademarks held outside Canada
  • Funds in foreign bank accounts
  • Shares of Canadian corporations on deposit with a foreign broker
  • Shares of non-resident corporations held by the Canadian resident filer or on deposition with a Canadian or a foreign broker
  • Land and buildings located outside Canada, such as a foreign rental property
  • Precious metals, gold certificates and futures held outside Canada
  • Interests in mutual funds that are organized in a foreign jurisdiction
  • Debts owed by non-resident persons, such as government or corporate bonds, debentures, mortgages, and notes receivable
  • Property that is convertible or that can be exchanged for a right to acquire specified foreign property
  • Certain interests in non-resident trusts and partnerships

Here are some of the holdings excluded from these reporting rules:

  • Properties used or held exclusively in the course of carrying on an active business
  • Personal use property such as a vacation property held primarily as a personal residence, jewellery, art, or other listed personal properties
  • Trusts governed by an RRSP
  • An interest in an IRA (Individual Retirement Account)
  • Shares of capital stock or indebtedness of a non-resident corporation that is a foreign affiliate
  • An interest in a non-resident trust principally providing superannuation, pension, retirement, or employee benefits to non-resident beneficiaries that do not pay income tax in the jurisdiction where the trust is resident

IT’S YOUR MONEY. YOUR LIFE. Make it your business to understand the taxation of your cross-border transactions. Willful blindness – no matter how innocent – will not cut it when the CRA starts handing out fines for failure to report offshore investments. Tax and financial advisors can also expect to be held accountable in asking the question on the tax return: Did you own specified foreign property in excess of $100,000 during the year?

Evelyn Jacks is the best-selling author of 50 books on tax and wealth management and President of Knowledge Bureau. Evelyn’s books are available at www.knowledgebureau.com and better bookstores. To read more of her blogs, go to EvelynJacks.com.


Audit Defence – Hire a Tax Pro

You haven’t done your taxes for a year or two or more – yikes – now what? Bottom line: get on it, quickly, and more important, start a relationship with a qualified tax professional who has taken a recent audit defense course.

While I am a big fan of tax software, representing you to CRA is the one thing tax software won’t do for you, although some companies may offer to link you with a tax pro who can help.

Is tax filing procrastination common? Yes, more common than one would think…there are millions of procrastinators out there, judging by the response we get during our Audit Defense workshops for professional tax and wealth advisors across Canada every year. There is a brisk business in helping delinquent taxfilers catch up all year long, and these folks are often years behind. Most commonly, they procrastinate because they can’t pay their bills to CRA.

CRA has recently been more aggressive in going after people who don’t file and fining them. The convictions lists have become longer in recent years, for failure to file, in particular. On February 13, for example, a Brampton, Ontario lawyer who failed to file his T1 income tax returns for the 2009 and 2010 tax years, was fined $1,500 per count, for a total of $3,000 and given six months to pay the fine.  In another case in January, a Thornhill, Ontario lawyer, pleaded guilty to 25 counts of failing to file tax returns for various periods between 1999 and 2007. He was fined a total of $28,000 and was given twelve months to pay the fines.

The good news is that many people find that CRA actually owes them money when they do file. Filing is important from a tax efficient investing point of view as well – it’s your ticket to creating RRSP contribution room. Filing a return also provides access to refundable federal and provincial tax credits. And, if you have missed an important and lucrative provision like moving expenses, child care, employment expenses, disability or tuition, education and textbook credits, on a previously filed return, you can request an adjustment up to ten years back. That’s a great way to recover “tax gold”.

Three steps to take now if you are a tax delinquent:

  1. Dig out your receipts and documents from the delinquent years and get them in reasonable order. Take the time to contact employers for missing T4 slips, banks for missing safety deposit box slips and get duplicate medical, child care, tuition, charity, and other slips if missing. That will save you cash on your tax preparation fees.
  2. Make an appointment with a certified tax practitioner today. Look for the MFA or DFA-Tax Services Specialist designation. These pros are trained to work in a team with other financial professionals and the CRA. Ask about fees, guarantees of service, and whether they will represent you if CRA has questions.
  3. Set aside some money to pay your tax bill if necessary, and/or have your tax pro negotiate payment over time for you.

It’s Your Money. Your Life. If you owe money to CRA, it’s going to be expensive to ignore it – and it won’t go away. Your relationship with a tax professional can really pay off if you want to avoid confrontation with the tax man. The best defence?  File an audit-proof tax return every year on time.

Evelyn Jacks is President of Knowledge Bureau which offers the MFA and DFA-Tax Services Specialist Designation Programs available 24/7 as well as the Audit Defence Workshop, May 22-27 in Winnipeg, Calgary, Vancouver, and Toronto.


TFSA Analysis Fascinating

According to a new report, the middle class, women, and seniors have been stellar investors in the Tax Free Savings Accounts, amongst the 8.2 million Canadians who opened one up to the end of 2011.

The financial assets held in TFSAs based on the Tax Expenditures and Evaluations 2012 report released last week by the Finance Department was $62Billion. Good on us, Canada!

For the year 2011, the analysis found amongst other things:

  • 80% of individuals with incomes under $80,000 accounted for 80% of all TFSA holders and contributions
  • 30% of adult tax filers had a TFSA, with a stable participation rate between the ages of 25 to 49, but an increasing rate with seniors.
  • Even low income seniors have taken advantage – GIS recipients represent 6% of TFSA holders and their participate rate was 23% -3% higher than that of low income individuals in general!
  • The average contribution by a TFSA holder is $3727.

This compares favorably to the average RRSP contribution rate in Canada, which according to a 2012 study by Bank of Montreal was about $4,670 per contributor.

What’s impressive about the TFSA participation rates is that women have embraced them more exuberantly than their male cohorts:  33% vs. 29% for men. Age differences are interesting too. Below age 50 TFSA participation rates peak in the 25-29 age group, declining slightly after this until after age 49 when TFSA participation rises:  28% for 45-49, to 41% for 65-71. Over age 72, TFSA participation declines.

It’s Your Money. Your Life. TFSAs are a great way to avoid high marginal tax rates in retirement and on the final tax return of the deceased taxpayer. Consider the taxing alternative in the chart below, excerpted from Knowledge Bureau’s EverGreen Explanatory Notes:

 

 
*2013 rates for residents of Ontario – rounded to the nearest .5%

Notes:
1. All income (plus contributions) is taxed at the taxpayer’s marginal tax rate when removed from the plan.  However a tax deduction is allowed for contributions to the plan.
2. All income is tax-free while in the plan and when removed.
3. Return of capital is not taxable when received, but will reduce the ACB of the investment thereby triggering capital gains when the asset is disposed of.
4. Foreign dividends are taxed as ordinary income.

Evelyn Jacks is the best-selling author of 50 books on tax and wealth management and President of Knowledge Bureau. Evelyn’s books are available at www.knowledgebureau.com and better bookstores. To read more of her blogs, go to EvelynJacks.com.