So, you’re a Canadian who decides to move to the Sunshine State. At this point in the season – that season being “not winter, but also not spring” – it’s something I think about every day. However, if you’re a Canadian who: 1) Flew south for more than just the winter; 2) Is a resident of California; and 3) holds RRSPs, LIRAs, RRIFs or other Canadian tax-deferred accounts, you need to read this.

The Canada-US Income Tax Convention or “tax treaty”, provides a tax deferral for RRSP and similar retirement accounts until the time of withdrawal.  Essentially, giving Canadian retirement plans the same tax treatment as US Individual Retirement Accounts (IRAs). But not every state follows federal tax treaties. California is a state that does not abide by federal tax treaties. According to the California State Franchise Tax Board (FTB), your RRSP is…well…more like a savings account.  Translation – the income and capital gains are taxable in the year earned!

The IRS has issued Revenue Procedure 89-45 which provides guidance with respect to why, under US domestic tax law, RRSPs, LIRAs and RRIFs are not considered to be the same as US IRAs. This particular procedure goes on to explain that, in fact, the earnings from this type of plan should be reported as part of your gross income on your US tax return. Of course, this is before considering Income Tax Treaties.

In summary, a California resident must include any earnings from their RRSP in their taxable income and pay taxes in the year it is earned. There is an upside. (Finally!) But one would need to have good bookkeeping skills to take an advantage of it. After tax is paid on these earnings, the earnings will also be treated as capital invested in the RRSP, for California tax purposes. When a taxpayer receives a distribution from their RRSP, the amount of the contributions and the previously taxed earnings is considered a nontaxable return of capital for the California purposes.  However, the withdrawal will be taxable federally, meaning an adjustment will be required state-side to avoid double-taxation

This article was originally published on Mar. 2 2019 by The Winnipeg Free Press (www.winipegfreepress.com)

Unlike stock tips, tax tips don’t stir our greedy imaginations all that much. But a better basic understanding of the income taxation scheme our federal and provincial governments continually tinker with year over year can calculate into more cold, hard cash in our hands as a refund come spring.

While knowledge doesn’t necessarily translate into power when it comes to filing taxes, it often parlays into more money in your bank account.

Here are a few small jolts of insight on this taxing topic, so you’ll indeed be thrilled this spring about the prospect of a diminished tax bill:

No money, no problem

If you think it’s not worth filing your taxes because you have no income, think again, says renowned tax expert Evelyn Jacks, who has written several books on the subject including Essential Tax Facts.

“One reason you have to file a tax return is to receive those very lucrative refundable credits,” the president of the Winnipeg-based Knowledge Bureau says.

This further drives home the point that filing your taxes is one of the most important financial events of the year for the family household, she adds.

Case in point is the Canada Child Benefit, a refundable credit based on family income reported on your tax return. The monthly payment for each child in the family resets in July, indexed to inflation, and is calculated from net income reported on both parents’ tax returns for 2018.

Currently, the maximum benefit is $6,496 per child under age six and $5,481 per child age six through 17.

Another reason for filing is the GST credit for low-income Canadians.

Easing the pain of carbon taxes

If you need more incentive to file, here’s one more: Manitoba residents can apply for Climate Action Incentive. “It’s a prepayment of the regressivity (affects lower-income families more) of the carbon tax at the pump that begins on April 1, mandated by the federal government,” Jacks says.

In Manitoba, you receive $170 for the year as the primary filer in the household, and $85 as the spouse earning the lesser income. The family also receives $42 for each dependant. The neat thing is the tax hasn’t even kicked in yet.

“But if you file it early enough, you could get your money back before the tax hits the pump.”

Jacks adds that many Manitobans living in rural areas could receive an additional 10 per cent boost from the program given they have reduced access to public transportation and often consume more gasoline and diesel to get around.

Camp as child care?

Thomas Holmes, a wealth adviser with Assante Capital Management and a chartered professional accountant (CPA), says if the camps serve as a kind of child care you’d need otherwise, then costs up to $200 per week for a child under age seven and $125 per week for a child between ages seven and 16 are tax-deductible.

But “for the fees paid to a day sports school/camp to be deductible, child care must be a primary purpose,” he cautions. “As with all expenses, it is important to have supporting documents showing what was paid, particularly when paying a related party for the child care.”

Be receipt-ready

A good scout is always prepared.

So is a tax filer who wants to get the most out of a return, and, in turn, more tax dollars back from the Canada Revenue Agency (CRA).

“It’s important to have all your receipts for claimed expenses organized as well as all your T slips, many of which are coming this month,” Holmes says.

That includes your T3 slip for trusts, for taxable income from mutual funds in non-registered accounts (outside an RRSP/RRIF, TFSA and RESP). There’s also the T5 for income from dividends, capital gains, interest and foreign income from non-registered investments like stocks and bonds.

When it comes to expenses, the CRA can be a stickler about receipts and is now looking more closely at claims for auto expenses, for example. Thomas says this underscores the importance of having the actual bills for purchases of gasoline as opposed to relying on credit card statements.

“You want to make sure you have proof of purchase because CRA can really ding you over unclaimable expenses,” he says.

Also, if you are an employee, “it is necessary to also have a Form T2200 signed by your employer” to be able to claim automobile costs incurred for the job.

Keep in mind, however, you cannot claim driving from home to work and back again as a deductible expense.

Ontario-based cross-border tax specialist Elena Hanson says the more complex a return is, the more attention it will receive from CRA. “The CRA reviews around 10 per cent of the returns, but the more complex your return is the higher the chances you are going to be selected,” Hanson, a CPA, says.

A review doesn’t mean you are getting audited, but your return will be examined closely. And you might be called upon to offer proof for claims of credits. She cites claiming foreign tax credits as one trigger for a closer look from CRA.

“For foreign tax credits, the threshold is as low as $50, so once you claim a foreign tax credit of at least $50, your tax return will be reviewed, and you will require the proper documentation in support of the claim.”

So long, boutique credits

Some of these non-refundable tax credits — as in you need to have paid income tax to be eligible to receive them — are fully and completely kiboshed on the federal tax return.

While the arts and fitness amounts are long gone, having been phased out on the previous tax years, the public transportation amount is also no longer available as of 2018.

So, too, is the First-Time Donor’s Super Credit (FTDSC) that gave first-time donors, and individuals who haven’t claimed a charitable donation in the past five years, an extra 25 per cent on their tax credit for charitable gifts.

But there is a provision for those who might have donated in 2017, but didn’t claim the credit: “Let’s say your income was too low to properly use those credits,” Jacks says. “Then you could have decided not to claim those on your 2017 tax return and carry them forward instead for up to five years.”

Small business, big change

This is hardly news for Canada’s small businesses given all the intense interest — more like outrage — over changes to how dividends from private corporations are taxed when paid to adult family members.

Prior to the change, it had long been standard practice for many incorporated, service-oriented corporations to split income among family by paying spouses and adult children dividends from the business, which then received preferential (lower) tax treatment. Previously, only payments to minors had been subject to higher taxation — often referred to as the “kiddie tax.”

“Well, the kiddie tax has sort of moved up in the world to become an all-person tax,” says Jacks, who co-authored the recently published Defusing the Family Business Time Bomb.

“If you’re a spouse or adult child of a business owner, getting certain types of income paid to you from a private corporation, it’s going to be taxed at 33 per cent federally, with no graduated tax rate.”

That is unless you meet certain criteria like a labour test (i.e. providing 20 hours of work a week for the company). Then those dividends get the preferential treatment.

“Anyone who is receiving dividends from a private corporation is wise to check with a tax adviser to make sure everything is properly reported,” she says.

The new rules came into effect Jan. 1, 2018, and so did another regulation on income splitting for business owners. But this one is more favourable.

“A bright light is if the source individual — the actively engaged individual in the company — has reached age 65, then dividends can be paid to the non-active spouse without limitation.” This is a better deal than the rules regarding income splitting for private-pension income from RRSP or employer-sponsored-plan income. With those income sources, you can only split up to 50 per cent of eligible income, she says.

“So, once these folks (entrepreneurs) subject to the new income-splitting restrictions retire, then there is a good retirement income-splitting opportunity for them.”

Another goner: Manitoba Tuition Fee Income Rebate

The 2017 Manitoba budget discontinued the program, phasing it out for the 2017 tax year, Holmes says.

This means that for the 2018 tax year, the credit worth up to 60 per cent of tuition fees after graduating if you remained in Manitoba is now gone.

“So if you were expecting to benefit from this credit, it is no longer an option,” he says.

 

IRS Form 5471 Penalty

U.S. citizens or residents who are officers or directors of a foreign corporation (e.g. a Canadian corporation) often overlook their U.S. filing obligations, and it is important to understand the stiff penalties for not properly disclosing foreign interests.

If a U.S. citizen or resident is an officer or a director of a foreign corporation in which a U.S. person has: 1) acquired 10% or more of votes or value of the corporation during the year or 2) acquired an additional 10% or more of votes or value of the corporation during the year, the officer/director is required to report as a Category 2 filer on Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations).  Reporting is required whether or not the officer/director owns shares in the foreign corporation and regardless of whether the foreign corporation is a controlled foreign corporation (“CFC”).

Failure to file, or filing an incomplete Form 5471, can result in penalties of $10,000 per foreign corporation, unless a reasonable cause defense exists. At any time, the IRS may issue a written request to file Form 5471 within 90 days. If not filed, the continuous penalty applies at $10,000 per month to a maximum of $50,000. The combined penalty is capped at $60,000.

Other information returns that are either filed late or incomplete may attract initial and similar continuous penalties and are summarized as follows:

 

Form Initial Penalty Continuous Penalty Maximum Penalty
Form 8938, Statement of Foreign Financial Assets $10,000 per return Additional $10,000 penalty per month that the failure continues, beginning 90 days after initial notice Maximum continuous penalty of $50,000 for a combined penalty of $60,000
Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Greater of $10,000 or 35% of the gross reportable amount

 

In the case of greater than $100,000 of foreign gifts received, the penalty is 5% of the value of the gift per month.

Additional $10,000 penalty per 30-day period, or a fraction thereof, that the failure continues beginning 90 days after initial notice Gross reportable amount plus initial penalty

 

 

 

 

Maximum penalty of 25% of the value of the gift

Form 3520-A, Information Return of a Foreign Trust with a U.S. Owner Greater of $10,000 OR 5% of the gross value of trust assets owned by the U.S. person Additional $10,000 penalty per 30-day period, or a fraction thereof, that the failure continues beginning 90 days after initial notice Gross reportable amount plus initial penalty

 

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation 10% of the value of the property transferred Not applicable $100,000

 

No maximum if due to intentional disregard

Form 8865, Return of U.S. Persons with Respect to Foreign Partnerships $10,000 for failure to file

 

 

 

Plus, 10% of the value of any unreported transferred property

Additional $10,000 penalty per month that the failure continues beginning 90 days after initial notice Maximum continuous penalty of $50,000 for a combined penalty of $60,000

 

 

$100,000

Form 5472, Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business $25,000 per foreign corporation ($10,000 prior to 2018) Additional $25,000 penalty per month that the failure continues beginning 90 days after initial notice NO MAXIMUM PENALTY
Form 114, Foreign Bank Account Report Willful penalty of the higher of $100,000 or 50% of the total balance of the foreign financial account per violation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-willful penalty of up to $10,000 per account per year

 

 

 

 

Not applicable. Aggregate of all accounts that does not exceed $50,000, penalty is greater of $1,000 per violation on 5% of the maximum account balance in the calendar year

 

Aggregate balance of more than $50,000 but no more than $250,000, penalty is the greater of $5,000 per violation or 10% of the maximum account balance

 

Maximum aggregate balance is greater than $250,000 and less than $1,000,000, penalty is greater of 10% of the maximum account balance or 50% of the closing balance in the account on the last day for filing the FBAR

 

If the account exceeds $1,000,000, the penalty is the greater of $1,000,000 or 50% of the closing balance of the account

 

In most cases, the total penalty amount for all years under examination will be limited to 50% of the highest aggregate balance.  Although penalty may be higher or lower, the total penalty should not exceed 100% of the highest aggregate balance.

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Aggregate of all accounts that does not exceed $50,000, penalty is $500 per violation not to exceed $5,000

 

Aggregate of all accounts that exceed $50,000 but less than $250,000, penalty is lesser of $5,000 or 10% of the highest balance in the account during the year

 

For violations regarding an account exceeding $250,000, the maximum penalty is $10,000 per violation.

 

In no event will the penalties for non-willful violations exceed 50% of the account balances.