This article was originally published on October 4 2019 by Globe and Mail Inc.
At your company, are you a jack of all trades or master of one? Shakespeare might put it like this: ‘To specialize or not to specialize, that is the question.’ Indeed, it’s a question often asked by business owners, managers and leaders.
Adam Smith, who is often regarded as the father of capitalism, wrote The Wealth of Nations where he described a pin factory with 10 employees who divide the work of making a pin into multiple steps, each person an expert at one step. Think of it as a precursor to the automaker’s assembly line. Using this model, Smith reasoned that pin production is greater than if each employee had performed all the steps in making the pin.
While that might work great for pins, what about something like professional services?
Large professional services firms tout themselves as “one-stop-shops.” At first glance, they appear to be generalists in such areas as audit, tax and advisory services. However, their services are broken down further into highly specialized practices led by experts in their respective functional areas.
For the customer, this can be the best of both worlds – all the expertise they need in one place and a collaborative “team” of people to deliver the goods.
The reality of this model is that experts are rarely the ones doing detailed work. They may serve as client contact or provide sign-off on the file, but the work is done by more junior staff who may be off-site or even offshore.
Such an approach would tend to follow the Adam Smith approach to greater productivity.
I’m familiar with the accounting industry. The Big Four firms employ a model encompassing many service lines for clients to choose from. Oftentimes, individual employees become specialized in one area, which can happen early in that person’s career, limiting exposure to other service lines.
This is great for achieving firm-wide efficiencies and developing experts in many areas, but where does it leave the employee in terms of skill development? Adam Smith identified this as well. He observed that individuals who do only one thing may be very good at it but lose the ability to grow and typically end up stagnating in their career.
In fact, most professional services practitioners want a broad scope. They don’t want to be stuck in the same silo their entire career.
Today professional service firms have specialization within the organization which means professionals are not exposed to multiple disciplines. In the world of tax, which is what I know, very rarely does a transaction or tax event happen in a vacuum. Thus, only by exposure to everything does the accounting professional get to test the waters and see what disciplines they enjoy.
Specializing too early in one’s career can be a liability. Imagine a doctor who skips right to neurosurgery and doesn’t get a foundational knowledge of the human body. The same logic can be applied to specializing in a certain area of taxation.
When the neurosurgeon graduates from medical school and starts a practice, do they incorporate or operate as a sole proprietor? A tax professional who focuses only on corporations would tend to advise to incorporate because that’s what they know. But it may not be the best advice.
If the neurosurgeon is a Canadian who went to medical school in the United States and decides to practice there, they need an accountant familiar with tax complexities south of the border. In my business, I often come across accounting professionals, as well as lawyers and financial advisers, who lack basic foundational skills because they never got this cross-section of experience. In other words, they worked in a silo.
My firm hires cross-border taxation experts, many of them from a Big Four environment who were frustrated with career-stifling silos.
Every business wants to reduce costs and gain market share over competitors. But how do you contribute to those factors and avoid becoming too specialized?
- Focus on the “big picture” for your career. First, do the foundational work in order to increase the efficiency, accuracy and overall value of specialized work.
- Think twice about being called ‘expert.’ It looks good on paper but being pigeonholed can be career-limiting. Explore areas that are unfamiliar but related, and work for people who prioritize career growth. Given the chance, you could be more valuable to your company in a different role.
- Bring your ideas and perspectives to the table and have a say in what you do. Being fully engaged in your job will always produce optimal results.
In today’s marketplace, the value of specialization doesn’t come from being laser-focused on one area. It comes from knowing many things that impact that area.
This article was originally published on August 26 2019 by Private Wealth Canada
We all like receiving and giving gifts. But how does tax law view the act of giving? Did you know that giving a gift could have tax implications?
In fact, depending on the value of the gift, there could be serious tax implications. And when it comes to transfers of money or property between spouses, the income tax laws in Canada and the United States are very different, which means if you’re gifting to an American or even to a Canadian who lives in the U.S., it’s best to be prepared.
By way of background, the Canada Revenue Agency employs what is known as anti-income splitting rules. The idea is to deter the practice of gifting for the purpose of income splitting between spouses. So, cash and acquired assets are traced to the spouse who earned or contributed money (in order to acquire the asset). And any future income generated by such a transaction, even including appreciation of a property, is on the record for that spouse at tax time. Even if the spouse who owns the asset wants to give their partner partial or full ownership, the one doing the gifting still gets dinged for taxes.
Is there a way around it? Yes.
To avoid this situation, the principal spouse (the one doing the gifting) can sell the asset to their spouse at fair market value and pay tax on any resulting capital gain, or the asset can be loaned to the other spouse under an ‘intra-family loan agreement’ with specific terms and rates, and that document must be signed by both parties.
When it comes to property gifting between spouses, the U.S. Internal Revenue Service (IRS) is more generous as it allows unlimited, tax-free transfers for as long as both spouses are American citizens, or green card holders, or they are treated as a U.S. domiciliary under certain provisions of the Internal Revenue Code. Most of the time, transfers between U.S. spouses have no tax implications at all since the parties tend to file their returns jointly and are taxed on the household basis and not an individual earner basis.
parties tend to file their returns jointly and are taxed on the household basis and not an individual earner basis.
Unfortunately, if you are U.S. citizen and your spouse is Canadian, the IRS is less generous. For example, let’s say a Canadian resident who is a U.S. citizen wants to gift money or property to their Canadian spouse who is not a U.S. citizen. If the annual market value of the gift exceeds US$155,000 (2019 rates), gift tax may result. Gift tax rates range between 18 per cent and 40 per cent of the market value of the gift. Furthermore, the same gift may end up being double-taxed – first as a deemed disposition in Canada at the rate of up to 26.76 per cent (for an Ontario resident in 2019), and then again under the U.S. gift-tax provision.
On the flip side, when a Canadian citizen gifts to a spouse who is a U.S. citizen, the IRS requires a timely disclosure if the gift exceeds a certain amount. Failure to do so could result in a penalty – US$10,000 or 25 per cent of the value of the gift, whichever is greater.
What about asset transfers resulting from divorce or separation? In Canada, the property would be transferred at the original cost unless ‘an election is made to do so at fair market value.’ In the U.S., the transfer at cost is only available if both spouses are American. If an asset goes from a separated or divorced spouse who is a U.S. citizen to a Canadian citizen, it is measured at market value and the principal spouse is subject to capital gains tax.
Overall, when dealing with multinational households, it is always best to plan in advance so you can match the value of property being gifted under the provisions of both U.S. and Canadian regimes. Also, be aware that the location of the asset may create additional tax considerations.
A wise man once said, “It is more blessed to give than to receive.” Evidently, that man wasn’t dealing with the potential tax implications of cross-border gifting! All the more reason you should consult with a tax professional who is familiar with the tax regimes and laws of any country you may be dealing with.
This article was originally published on September 17 2019 by Financial Independence Hub
The latest buzzword is “disruption” and nothing has caused more disruption in the investment world than virtual currency, most commonly referred to as cryptocurrency. If you’re considering cryptocurrency as an investment option, there are a few things to know.
In a nutshell, cryptocurrency is a digital asset that can work as a medium of exchange. It uses cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.
The main difference between virtual currencies and traditional currencies is the decentralized control system. Cryptocurrencies like Bitcoin, which has been around since 2009, and Ether use distributed ledger technology such as block chain as a public database for transactions. Distributed ledgers are virtual ledgers that are decentralized across multiple locations, resulting in multiple copies of a transaction. While there is no central authority governing these transactions, the public nature of the ledger serves as a check and balance. However, having a currency that isn’t tied to any country or banking system can make regulation a challenge.
Just ask the 10,000 U.S. taxpayers who recently received letters from the Internal Revenue Service informing them that they may have improperly reported transactions involving virtual currencies and may owe back taxes on unreported cryptocurrency earnings.
The letters were accompanied by a stern warning from IRS Commissioner Chuck Rettig, who issued a press release on the matter. He said: “Taxpayers should take these letters very seriously by reviewing their tax filings and, when appropriate, amend past returns and pay back taxes, interest and penalties. The IRS is expanding our efforts involving virtual currency, including increased use of data analytics. We are focused on enforcing the law and helping taxpayers fully understand and meet their obligations.”
The IRS treats cryptocurrency like physical property and taxes it the same way. For example, if you receive a virtual currency as compensation from an employer, it is considered income subject to withholding and payroll taxes. And if you sell it, you could face capital gains tax. According to the IRS: “If you sold, exchanged, or disposed of virtual currency, or used it to pay for goods or services, you have engaged in a reportable transaction.”
CRA treats virtual currency much like the IRS
So, how does the Canada Revenue Agency treat virtual currency? Unfortunately, much like the IRS.
As far as the CRA is concerned, when cryptocurrency is used to pay for goods or services, it is subject to the rules for “barter transactions” or transactions that don’t involve legal tender. When accepted as payment for goods or services by a GST/HST registrant, the GST/HST portion must be calculated based on the fair market value at the time of the transaction.
Also, just as in the U.S. tax system, capital gains or losses could be considered taxable income because a commodity is bought or sold. Finally, cryptocurrency must be reported as income when it is received as compensation from an employer.
More information is available on the CRA website, which has a link to what you need to know about the Voluntary Disclosure Program. The CRA hasn’t issued any dire warnings yet, but its website says that failing to report cryptocurrency transactions is considered illegal and that the agency is “actively pursuing cases of non-compliance in order to make sure that the tax system is fair for everyone.”
If you’re considering cryptocurrency transactions for business or investment purposes – or you’ve already ventured down that path and this is all news to you – you are wise to seek out the services of a tax expert to make sure you are compliant.
This article was originally published on August 19 2019 by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc
If you’re a Canadian resident working for a U.S. company in Canada, there are a multitude of crossborder implications regarding employment law, payroll reporting, income taxes and Social security taxes. The evolution of the professional employer organization (PEO) since the 1980s has become a popular solution for U.S. and Canadian employers when employing remote workers.
PEOs make up a billion-dollar industry. What began as a provider of payroll services evolved to a provider of virtually all HR management functions and it could affect tax responsibilities. Many people, lawyers included, are not familiar with PEOs.
PEOs involve leased employment agreements with a company in which the PEO acts as the legal employer through a co-employment relationship and the PEO is responsible for hiring, firing, payroll, benefits administration, etc. In the U.S., there are more than 900 PEOs employing about 3.7 million people and the number is growing. In Canada, the concept is relatively new, with only 177 PEOs operating as of 2017.
While there are benefits in choosing the PEO route, the arrangement can lead to confusion about tax liabilities and determination of joint employment regarding who is liable for certain taxes, such as for unemployment and workers’ compensation. There may also be confusion about whether income paid to employees is exempt under a tax treaty.
The U.S. Department of Labor recently proposed a new standard to test the relationship between a PEO and its “client” in terms of joint-employer status. It is deemed to be joint employment if the
PEO meets any of these conditions:
- Hires or fires the employee.
- Supervises and controls the employee’s work schedules or conditions of employment.
- Determines the employee’s rate and method of payment.
- Maintains the employee’s employment records.
Here is how the Canadian PEO works for a U.S. company. The company enters into an agreement with the PEO to “lease” an employee. The PEO is the legal employer, responsible for payroll,
benefits, employment standards and other HR management functions, while the U.S. company retains daily oversight of the employee (i.e., common law employer). This allows the company to
hire the talent it needs and to manage the employer’s regulatory requirements at a reasonable cost with little disruption to the business.
Let’s say a U.S.-based company — we’ll call it ABC Inc. — employs a Canadian resident remotely in Canada; we’ll call him John. How does ABC Inc. manage John’s payroll and HR matters? Should
ABC Inc. hire a Canadian payroll expert or an employment lawyer to keep it out of trouble? It might because Canada has a different framework than the U.S. for employment law.
So ABC Inc. enters into an agreement with the Canadian PEO to effectively lease John. But what happens, in terms of taxation, if he travels to the U.S. to meet clients or attend meetings? Who is
the employer when it comes to determining if his remuneration is eligible for a treaty exemption under Article XV of the United States – Canada Income Tax Convention (1980)?
In this case John lives and works in Canada, but his “functional employer” is ABC Inc. even though a Canadian-based PEO administers his payroll and benefits. So when he travels south of the
border on business he is advised that he is covered under the treaty because his “legal employer” is in Canada. Therefore, John doesn’t have to pay income tax in the U.S.
John assumes he is exempt from U.S. taxation because his compensation earned while working on U.S. soil is paid by the Canadian PEO. Here’s what the treaty says according to subparagraph
XV(2)(b): If the compensation is not paid/borne by a U.S. resident and the employee doesn’t spend more than 182 days in the U.S. during any 12-month period beginning or ending in the
year, the compensation earned while on U.S. soil will be exclusively taxed in Canada, the employer’s country of residence.
That sounds straightforward. John gets paid in Canada. He pays tax in Canada. He does not meet any of the U.S. residency tests and continues to be a tax resident of Canada. Also, the PEO is
based in Canada and is not a U.S. resident.
Unfortunately for John, the relationship between ABC Inc. and the Canadian PEO constitutes a joint-employer relationship and ABC Inc. is a U.S. resident. That means the “borne by” test of the
treaty is met. So, despite being a Canadian resident who lives and works in Canada, John is still working for a U.S. company and any compensation allocated to time spent working on U.S. soil is
subject to taxation by Uncle Sam, assuming his compensation during the year exceeds the treaty threshold of US$10,000.
What is the upshot of all this? If you are a company in a cross-border PEO arrangement or an employee under this arrangement, understand what joint-employer status means and the possible
cross-border implications for income taxes and Social Security taxes. Will the PEO administer the U.S. payroll obligations in addition to the Canadian? What if a U.S. state does not follow the
This is where the advice of a cross-border tax expert is highly recommended.
The Canada Revenue Agency (CRA) sent more than 700,000 records to the U.S. Internal Revenue Service (IRS) in 2017 as part of a tax-information sharing deal between the two countries, said a CRA official during a roundtable discussion at the annual national conference of the Canadian arm of the Society of Trust and Estate Practitioners (STEP Canada) in Toronto on Friday. The figure is current as of April 2019.
In 2014, the Canadian government signed an intergovernmental agreement (IGA) with the U.S. to exchange tax information on each other’s tax residents on an annual basis.
Under the IGA, which took effect in 2015, Canadian banks and other financial institutions report information on their American accountholders who have an aggregate balance of US$50,000 or more, excluding balances in some tax-sheltered accounts, to the CRA, which shares the data with the U.S. government.
In effect, the IGA implements the U.S. Foreign Account Tax Compliance Act (FATCA), a law passed in the U.S. in 2010 that compels global banks to report on their U.S. clients to the U.S. government. FATCA was designed to prevent offshore tax evasion by U.S. taxpayers.
So far, the U.S. government has not requested any further information in respect of the data sent by the CRA, said panellist Marina Panaourgias, an industry sector specialist in the trust section of the income tax ruling directorate of the CRA.
Terry Ritchie, director of cross border wealth services at Cardinal Point Capital Management in Toronto, suggests he isn’t surprised that the IRS has made no further inquiries about the exchanged data.
“Now that they have that information, what is the IRS likely to do with it? Probably nothing,” Ritchie says. “They have more problems in their own backyard that they should be more attentive to than to be chasing non-compliant U.S.-resident taxpayers in Canada.”
In recent years, global governments have made it an increasing priority to clamp down on offshore tax evasion.
For example, in 2017, Canadian financial institutions began identifying accounts belonging to individuals who are tax residents of foreign countries and reporting that information to the CRA under the Common Reporting Standard (CRS) regime, which was developed by the Organization for Economic Co-operation and Development. Canada began exchanging that information with foreign countries under the CRS the following year.
This article was originally published on June 7 2019 by The Advisor’s Edge (www.advisor.ca)
This article was originally published on June 7 2019 by The Lawyer’s Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.
Identity theft was an issue long before the Social Insurance Number (SIN) existed, but it keeps evolving. It is common today because high-tech hackers work around the clock to find new ways to access our personally identifiable information. This makes taxpayer data some of the most sought-after information for cybercriminals.
So what are the Internal Revenue Service (IRS) and the Canada Revenue Agency (CRA) doing to protect our sensitive information from being used to file a fraudulent tax return? A comparison between the two agencies shows a big gap when it comes to planning and strategizing ways to protect taxpayers from tax-related identity theft.
With a population as large as that of the United States, there are hundreds of millions of opportunities to steal a person’s identity. In fact, this has been a major concern of the IRS for some time. In 2015, in response to the surge in identity theft that came along with taxpayers’ increased use of online technologies, the IRS formed the Security Summit.
The IRS Security Summit is a public-private partnership made up of representatives from the IRS, state tax agencies, the larger tax community (i.e., tax-preparation firms, software developers, payroll and tax financial product processors, and tax professional organizations) and financial institutions. They work together to protect U.S. taxpayers from identity theft refund fraud. In 2017, the summit also established the Identity Theft Tax Refund Fraud Information Sharing and Analysis Center (IDTTRF-ISAC) to facilitate information exchange, provide a real-time forum for discussion and promote the use of data analysis, all with a view to detecting and preventing tax- related fraud.
This ambitious initiative has proven to be very successful. IRS statistics for 2015 to 2018 show that during this time frame:
- taxpayer reporting of identity theft fell by 71 per cent;
- confirmed identity theft returns intercepted by the IRS declined by 54 per cent;
- US$24 billion in fraudulent refunds were protected by the IRS stopping confirmed identity theft returns;
- an additional US$1.4 billion in fraudulent refunds was recovered by financial industry partners.
In contrast to the formal programs and awareness campaigns of the IRS, the CRA seems to be in the dark. Its so-called “strategy” to prevent tax-related identity theft puts the onus on Canadian taxpayers to be vigilant around such things as telephone scams and phishing expeditions. And its “awareness campaign” appears to be limited to four posters reminding taxpayers that we can protect ourselves; tax agencies and tax preparers are encouraged to put these posters on their office walls! There is no Canadian equivalent to the Security Summit and nothing like IDTTRF- ISAC. The Office of the Canadian Privacy Commissioner (OPC) is working to address data breaches that lead to identity theft by provisioning a mandatory requirement that organizations give proper notice to affected individuals and to the OPC when a data breach occurs. And that’s pretty well it.
But it seems the IRS has always outpaced the CRA in matters of data security. In 2014, some 900 SINs were stolen from the CRA due to the Heartbleed Internet bug, which was a serious vulnerability in an encryption software intended to secure web communications. The IRS was not impacted at all. Meanwhile, the CRA had shut down online services to prevent incidents such as the theft of SINs from happening. Yet the theft still occurred, while IRS online services continued unscathed for the duration of the notorious cyberthreat.
It’s high time that the CRA get in step with its American cousin.
According to an IRS press release issued on April 8, IRS commissioner Charles Rettig was happy to celebrate the wins of the summit, but was also quick to caution about sophisticated criminals. “Identity thieves are often members of sophisticated criminal syndicates, based here and abroad,” he said. “They have the resources, the technology and the skills to carry on this fight. The IRS and the Summit partners must continue to work together to protect taxpayers as cyberthieves continue to evolve and adjust their tactics.”
Tax lawyers and tax accountants should be aware that part of this ongoing cybercriminal evolution involves targeting tax professionals and their clients’ personal data. This remains a major issue for the IRS, as the agency has no control over third-party data security. If you are a tax professional and believe you have experienced a theft of your U.S. taxpayer client data, contact the IRS stakeholder liaison for assistance.
And what if you are a tax professional in Canada with concerns about data breaches on this side of the border? Well, I know I’m suddenly longing for the days when data security came in the form of a paper shredder.
What is Subpart F Income?
Generally, the taxation of earnings and profits in the U.S. of a controlled foreign corporation (“CFC”) are deferred until repatriation through the distribution of dividends. A CFC is a foreign corporation that is owned more than 50 per cent of vote or value by a U.S. person or persons (i.e. U.S. citizens, resident individuals, U.S. partnerships and corporations, non-foreign estates and U.S. trusts) who each own at least 10 per cent of vote or value. However, there are exceptions to the deferral with respect to passive and certain types of active business and personal services income. These types of income, under specific circumstances, are taxable in the hands of the U.S. person whether or not distributed to the shareholder. The deemed income inclusion is what is referred to as “Subpart F” income. The Subpart F rules are anti-deferral provisions to prevent U.S. persons from delaying the recognition of taxable income through the use of foreign entities.
What are the changes?
Beginning in 2018, a US citizen resident in Canada, who is required to accrue passive income (or other subpart F income) on his US personal tax return under the subpart F provisions of the CFC rules, will exclude the income from his US tax return if a Canadian corporate tax of over 18.9 per cent is paid on the income. This is what is commonly referred to as the “high-tax exception”. In Ontario, investment income is taxed at 50.17 per cent to the CFC (including capital gains taxed at 25.09 per cent), therefore, the high-tax exception would apply to exclude the investment income from being taxed currently as subpart F income. The current provisions ignore any subsequent reduction to the corporate tax as a refundable dividend tax on hand (“RDTOH”) once the income is distributed to the shareholder as a dividend for purposes of the high-tax exception.
Why were the changes enacted?
Treasury is aware that certain jurisdictions use a tax integration system where the corporate income tax paid by the CFC is refunded when the income is distributed, even if the shareholder is subject to little or no tax on receipt. This has raised concerns where CFCs are formed specifically to exempt passive income (or other subpart F income) from US taxation under the high-tax exception. To address this perceived abuse, proposed regulations were released on November 28, 2018 that modify the high-tax exception. Now, if foreign taxes paid or accrued are reasonably certain to be refunded to the shareholder on a subsequent distribution, such foreign taxes are not treated as paid or accrued for purposes of the high-tax exception.
What about capital gains?
As previously noted, Ontario’s tax rate on investment income is 50.17 per cent. After the RDTOH, the tax is reduced to 19.5 per cent on a subsequent distribution and the high-tax exception should apply. However, the high-tax exception with respect to capital gains will not be available due to a reduced tax rate of 9.75 per cent after the credit for the RDTOH. There may be situations where accumulated RDTOH can reduce the effective tax rate to below 18.9per cent. In this case, the high tax exception will not apply.
The regulations are still in proposed form and may change after the IRS receives comments from the public. If enacted in its original or revised form, it will be effective for tax years ending after December 4, 2018.