My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, December 21, 2015

Year-End Financial Clean-up - 2015 Version

In 2016, would you like to improve your money management, minimize taxes and ensure your loved ones have a financial road map?

Then this holiday season, in between your family gatherings and trying to watch 2016 IIHF World Junior Championship games from Finland, consider undertaking a financial cleanup.

So what is a financial cleanup? In the Blunt Bean Counter’s household it entails the following (Note: For full disclosure, this post is just an update of my 2015 year-end Financial Clean-up).

Yearly Spending Summary


I use Quicken to reconcile my bank and track my spending during the year. If I am not too hazy on New Year’s Day, I print out a summary of my spending by category for the year. This exercise usually provides some eye opening and sometimes depressing data, and often is the catalyst for me to dip back into the spiked eggnog!

But seriously, the information is invaluable. It provides the basis for yearly budgeting, income tax information (see below), and amongst other uses provides a starting point for determining your cash requirements in retirement.

Portfolio Review


The holidays or early in the New Year is a great time to review your investment portfolio and annual rates of return; although this year, this may be a very gloomy exercise, especially if your portfolio is Canadian based. I like to compare my returns to some large standard indexes and to the yearly returns on the Canadian Couch Potato’s low cost ETF model portfolios. The Couch Potato typically provides the data for the prior year’s returns on his model portfolio’s in the first week or two of January. I also have the advantage of reviewing my returns to those of the various investment managers my clients engage.

January is also a great time to review your asset allocation, and to re-balance to your desired allocation and risk tolerance.

Tax Items


As noted above, I use my yearly Quicken report for tax purposes. I print out the details of donations and medical receipts (acts as checklist of the receipts I should have or will receive) and summaries of expenses that may be deductible for tax purposes such as auto expenses. If you use your home office for business or employment purposes (remember you need a T2200 from your employer), you should print out a summary of your home related expenses.

Where you claim auto expenses, you should get in the habit of checking your odometer reading on the first day of January each year. This allows you to quantify how many kilometres you drive in any given year, which is often helpful in determining the percentage of employment or business use of your car (since, if you are like most people, you probably do not keep a detailed log as the CRA requires).

Medical/Dental Insurance Claims


As I have a health insurance plan at work, I also start to assemble the receipts for my final insurance claim for the calendar year. I find if I don’t deal with this early in the year, I tend to get busy and forget about it.

To facilitate the claim, I ask certain health providers to issue yearly payment summaries. This ensures I have not missed any receipts and also assists in claiming my medical expenses on my income tax return. You can do this for physiotherapy, massage, chiropractors, orthodontists, and even some drug stores provide yearly prescription summaries.

Stress-Test Checklist


If you are a regular reader, you know I have seemingly written a hundred times about stress-testing your finances and writing your financial story (in case you pass away). The holidays or early January is a great time to update your financial story or checklist for any changes that occurred in the prior year. Such things as new brokerage accounts, online passwords, changes in insurance, etc. need to be updated. If you have not yet got around to stress-testing your finances and writing your financial story, there is no better time to start than early in the year.

Speaking of the year-end, this is my last post for 2015 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. See you in January.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, December 14, 2015

Getting Your Financial Affairs in Order

I was recently interviewed about my book Let's Get Blunt About Your Financial Affairs, by Promod Sharma, a Toronto based actuary, for his Tea at Taxevity series. The interview ended up being as much about my opinions on the importance of getting your financial affairs in order as about the specifics of my book. If I do say so myself, I think the interview is interesting and informative (especially considering you have an accountant being interviewed by an actuary; who would have imagined :).

I thought today, instead of writing, I would link to this interview, so you can actually hear my views on the topic. By the way, and you can believe it or not, that empty space from the bottom of my forehead to the top of my head once was full of flowing locks - big sigh.

Enough about being “follicly-challenged". Here is the interview, I hope that it spurs you to take action and you get your financial affairs in order.





This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, December 7, 2015

Inbound and Outbound International Taxation Issues for Corporations Doing Business in Canada

In today’s economy, businesses look outside their borders for expansion and growth. There are many factors to consider when expanding internationally. In my experience, the income tax considerations are typically an afterthought. Often the people ‘steering the ship’ on the expansion project are not well versed or frankly don't give enough thought to the income tax aspects of any expansion project. However, if international taxation matters are not dealt with proactively or upfront, they can result in significant tax assessments and issues down the road.

Today, my guest poster, Harry Chana an International Tax Expert with BDO Canada LLP will review some high-level issues that need to be proactively considered when investing into Canada or when Canadian companies are looking to expand outside of Canada or dealing with their foreign parents.

As Harry says "I’m a firm believer that tax should not drive the business decisions but it is a critical input that should be considered part and parcel with any international expansion".

Inbound and Outbound International Taxation Issues for Corporations Doing Business in Canada 

By Harry Chana


Inbound Investment to Canada - Welcome to Canada


So you decided to expand your business into Canada. First of all welcome to Canada! Canada is a very good place to do business. However, as a non-resident coming to Canada, you may surprised by some of the tax rules around doing business in Canada. Here are some issues you should consider:

Trips and Traps Where You Have Canadian Customers


A couple of questions you should ask yourself if you are a non-resident of Canada and have Canadian customers:

1. How did you acquire that customer? For example, did you have a sales agent in Canada soliciting customers, did you send your employees to Canada to solicit, or did your employees attend a trade show or conference in Canada which resulted in a sale?

2. Are you required to be in Canada to service, support etc. that Canadian customer? For example, are you doing a supply and installation contract, onsite maintenance or warranty repairs, or customer site visits?

The above list is not exhaustive, but if any of the above apply, YOU, YOUR EMPLOYEES and YOUR COMPANY could be liable for Canadian tax and required to file Canadian tax returns.

You may be surprised to know that if you are sending your employees to Canada to work (such as on an installation contract, project management and /or client visitations), your non-Canadian employees are subject to Canadian source deductions. There is currently no de minimis number of days that exempt one from these deductions. Consequently, even if your non-resident employees are in Canada for only 1 day, they could be liable for Canadian tax. There is legislation that is proposed in the 2015 Federal budget to reduce this compliance requirement, where non-resident employees do not spend significant amounts of time in Canada.

In addition, there are penalties where a non-resident corporation fails to file a required Canadian income tax return. Luckily, if the non-resident is resident in a treaty jurisdiction (such as the U.S.), with proper planning, there are ways to possibly reduce or eliminate any Canadian tax that may arise.

Thin Capitalization Rules


The Thin Capitalization rules (also known as the Thin Cap rules) were brought in to prevent the erosion of the Canadian tax base by having foreign companies capitalize a Canadian company with nominal equity and large related party debt, to obtain an interest deduction in Canada and repatriate money outside of Canada. The rules around thin cap have expanded in scope greatly over the past couple of years and there are additional punitive measures if the rules are not respected. Canadian companies can be capitalized with debt, however certain related party debt-to-equity must not be exceeded (1:5:1). If this ratio is exceeded, a portion of the interest expense will be denied permanently and deemed to be a dividend back to the foreign parent, thereby attracting a withholding tax liability.

Outbound Tax Issues


Loans are used in tax planning quite often to finance operations outside of Canada. For example a foreign parent can loan money to its Canadian subsidiary and charge interest as a way to finance the Canadian subsidiary and repatriate money outside of Canada. Or vice versa, a Canadian company can lend money and charge interest to its foreign subsidiary as a way to finance it and repatriate money back to Canada. Of course, since we are talking tax, nothing is ever that simple and straightforward. A couple of things need to be considered with loans:

1) Shareholder Loans to foreign parent - Rather than declaring a dividend to a foreign parent (with withholding tax implications), you might think to just loan the money directly from the Canadian entity. However there are Canadian rules that if the loan remains outstanding for a certain period of time, the company is deemed to have paid a dividend to the foreign parent (and therefore is subject to withholding tax). This effectively puts the Canadian company in the same position as if it had paid a dividend in the first place. If you have a loan receivable from your foreign parent, you most likely need to consider these rules. However, there are some new planning strategies available to possibly reduce the withholding tax exposure.

2) Loans to foreign subsidiary - Similar to the comment above on loans to a foreign parent, there are tax implications if the Canadian company makes a loan(s) to a foreign subsidiary and doesn’t charge sufficient interest on the loan. There may be a deemed interest income pick-up on the loan which will result in additional income to the Canadian entity. There are exceptions to this rule, and sometimes the deemed income inclusion can be avoided.

Withholding taxes


I have mentioned withholding taxes a couple of times. They apply anytime interest, dividends and royalties are paid by a Canadian to a non-resident. The general withholding tax rate is 25%. There are some exceptions to this rate. For example certain interest paid to arms-length parties are not subject to withholding tax. Withholding tax can be reduced if there is a tax treaty between the two countries (ie. Canada and the foreign country). For example, under the Canada-US Tax Treaty withholding tax can be reduced to 0% if certain criteria are met. However a word of caution, a Canadian corporation paying interest, dividends or royalties to a US corporation is not automatically subject to reduced treaty rates, certain criteria must first be met. These tests are known as the Limitation of Benefit provisions.

The rules around international tax can be complex when dealing with foreign companies expanding into Canada or Canada companies with foreign subsidiaries. There are numerous pitfalls and traps for the unwary; the above are just a small glimpse into the tax implications that can result without proper planning. As I mentioned in the beginning, tax shouldn’t drive the business, but it is a critical input that you need to consider to avoid an unintended tax bill.

A final caveat. There are many other issues I have not touched on in this blog post. When dealing with international tax laws, a tax specialist is always required.

Harry Chana is a Partner in International Tax Services with BDO Canada LLP. He can be reached at 905-946-5457 or by email at hchana@bdo.ca

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, November 30, 2015

Should You Claim Capital Cost Allowance on Your Rental Property?


It has been my experience that minimizing income taxes is typically the number one objective for many of my clients. Yet, some clients instruct me to not claim depreciation (the technically correct term for income tax purposes is capital cost allowance or “CCA”) on their rental property(ies), which results in a higher income tax liability.

I am further confounded when clients who have claimed CCA in prior years will not sell their rental property because they will owe income tax on both their capital gain and recaptured CCA (see detailed discussion below). Today I try and breakdown the reasoning for these counter-intuitive income tax positions.

A discussion as to whether or not one should claim CCA can become extremely complex when you consider inflation, purchasing power, discount values and present values. In an effort to not over complicate the issue, I will essentially ignore most of these factors; however, one must always be cognizant of them. For the purposes of today’s blog post, I will work under the assumption that you hold your rental property for 20 or so years and a dollar today is worth a heck of a lot more than a dollar 20 years from now.

When someone purchases a residential rental property, they can claim CCA at the rate of 4% on the building portion of the property (non-residential property may be entitled to a 6% claim). The land portion cannot be depreciated. In the year of purchase, only 50% of the CCA may be claimed.

For example: if you purchase a residential building for $800,000 in 2015 and you determine that 75% of the property related to the building and 25% related to the land, you will start claiming CCA on $600,000 ($800,000 purchase price x .75%). The allocation may be determined through negotiation with the seller and is reflected in the purchase and sale agreement, by appraisal or based on an insurance policy or other relevant information.

In the first year you can claim CCA to a maximum of $ 12,000 ($600,000 x .04% CCA rate x 50% rate allowed the first year).

In year two you can claim CCA of $23,520 ($600,000 -$12,000 CCA previously claimed x 4%). In all future years, the CCA claim is equal to the original cost of $600,000 less CCA claimed in all previous years x 4%. Technically, the remaining amount to be depreciated is called Undepreciated Capital Cost or “UCC”.

It should be noted that in general you are not allowed to create a loss for tax purposes with CCA. So continuing with the above example, if in year two you had net rental income of $15,000 before CCA, you cannot claim the $23,520 of CCA and create a loss of $8,520. You may only claim $15,000 of the CCA to bring your rental income down to nil. If you have more than one rental property, you can claim the maximum CCA even if it creates a loss on one property, if the net income of all rental properties does not become negative. For example, if in addition to the rental property above, you had a second property with net income of $9,000 after CCA on that property, you could claim the full $23,520 to create a loss of $8,520 on that property and net income of only $480 on both properties ($9,000-$8,520).

Thus, to the extent you can claim CCA; you have absolute income tax savings or a tax shield equal to the CCA you claim times your marginal income tax rate. Consequently, one wonders why anyone would not claim CCA if their marginal income tax rate was say at least 35% and they plan to hold the property long-term.

The reason some people do not claim CCA is a concept known as recapture. When you sell a building or rental property for proceeds equal to or greater than the original cost of the building, any CCA claimed since day one is “recaptured” and taxed as regular income. Thus, say you purchased the $800,000 building in the example 25 years ago and over those 25 years you claimed $350,000 in CCA. If you sell the land and building for $1,000,000, which is more than the original purchase price of $800,000, you would have to add $350,000 in recapture to your income and report a capital gain of $200,000 ($1,000,000-800,000).

At this point I could get into a technical discussion of the present value of the CCA tax savings over multiple years versus paying recapture 25 years later, however (1) I think it causes unnecessary confusion for purposes of this discussion and I don’t think most people even take this into account and (2) even though I am an accountant, I hated doing PV calculations in school, so if I tried to do them, I would probably get them wrong. But seriously, I have never had a client ask about the present value of their deprecation tax savings; they know intuitively a dollar saved today is typically worth far more than a dollar in tax paid in the future.

We can now discuss the second issue that confounds me in regard to CCA, that being some people are not willing to sell for the $1,000,000 we use in the example above because of the recapture they will owe.

Say Judy Smith purchased the property initially for $800,000 and she is in the 35% marginal tax bracket. If Judy sells the property, she will have to pay income tax on $350,000 of recapture and a $200,000 capital gain. The additional income tax that results from the sale for Judy will be approximately $220,000 (because she moved into the higher marginal rates).

Judy will thus net $780,000 ($1,000,000 proceeds less $220,000 tax), $20,000 less than her original cost. If Judy is like some people, she may not want to sell the property because she does not feel she made any money on the property. I have trouble understanding this position, since she would have benefited from the tax shield on $350,000 of CCA, which at a tax rate of 35% was worth approximately $125,000 and would have grown to between $200,000 (using a 4% return on the after-tax savings) and $260,000 (using a 6% return on the after-tax savings) and still broke even on her investment. If Judy did not want to sell because she feels the property still has large upside, or her tax rate would be lower in a future year and/or she cannot find another investment that can provide the same returns, that is another issue.

If Judy had purchased the property in 1990, she would need approximately $1,280,000 to purchase the property today (See bank of Canada inflation calculator).

In summary, I will typically recommend that a client claim CCA on their rental property. I also generaly tell them to not let the income tax due on recapture cloud a potential sale decision. In the end analysis, tax savings today are almost always worth more than taxes paid in the future, unless the purchase to sale period is very short.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, November 23, 2015

Can You Deduct Your Own Labour and is Your RRSP Creditor Proofed?

Today you will read about a couple interesting topics. They are:

  • Can you deduct the value of your own labour and materials?
  • Is your RRSP creditor protected?

Deducting Your Own Labour


I am often asked whether you can deduct the value of your own labour and/or add your notional labour cost to the adjusted cost base of a property. Typically this question arises in the context of real estate (be it building a deck on a cottage or renovating the bathroom of a rental property) or in relation to services provided to a self-employed business (such as providing professional skills or bookkeeping, etc.).

My answer is always the same. No, you cannot deduct the value of your own labour. I have some do-it-yourselfers clients who have been flabbergasted when I tell them their own labour is not a deductible expense.

Last week, I watched a Video Tax News segment that referenced a June, 2015 Technical Interpretation 2015-0580791M4 by the CRA. The issue was whether a taxpayer could (1) deduct the value of his own labour in computing his income from a farming business; and (2) if they could include the value of their lumber in calculating the cost base of a farm structure that was built with the lumber.

The CRA said that the answer to both questions is no. They reference a couple sections of the Income Tax Act and Guide T4002. For more detail, hit the link above for the Technical Interpretation.

It should be noted that the above relates to income reported on your personal income tax return. If you are a shareholder in a corporation, you can pay yourself a wage for your time and deduct the expense, as long as you issue a T4 to yourself.

Are RRSPs Creditor Proof?


Recently, I was reviewing a proposal for a Personal Pension Plan (“PPP”) with one of my clients. During the conversation it was noted that one advantage of a PPP is that it offers creditor protection whereas a Registered Retirement Savings Plan (“RRSP”) may not. I was surprised by this, as I had understood, that RRSPs had become creditor proofed several years ago.

It was explained to me that RRSPs/RRIFs (Registered Retirement Income Fund) are creditor protected under Canada’s Bankruptcy and Insolvency Act in all provinces. However, in some provinces, such as Ontario, RRSPs are not protected from creditors in situations outside of the bankruptcy context, such as lawsuits, or possibly a claim by an estranged spouse.

For example, if you have a professional corporation or are self-employed in Ontario and your creditors sue you, it is my understanding that your RRSP would be at risk if you do not wish to declare bankruptcy and enter formal bankruptcy proceedings. You should confirm my understanding with your lawyer.

I also understand that the provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Prince Edward Island, and Newfoundland and Labrador have specific legislation that protects your RRSP and RRIF from creditors. Again, as I am not a lawyer, you should confirm such if you live in those provinces.

If you live in a province in which there is no specific protection, you are at risk to creditors attacking your RRSP. Many legal commentators suggest the best way to protect yourself from creditors, is to purchase a segregated fund insurance contract (the management fees may be high and the investment options limited) or if your situation merits it and your advisor feels it appropriate, consider the benefits of setting-up a PPP.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, November 16, 2015

Blended Families are Twice the Estate Planning Fun…What, No Marriage Contract?

Blended families add complexity to any estate plan. Last week, my special guest contributor, Katy Basi, addressed situations in which married spouses entered into a valid marriage contracts with each other, thus waiving all potential claims against each others estates. Today Katy discusses what happens when there is no such contract is in place.

Blended Families are Twice the Estate Planning Fun…What, No Marriage Contract?
By Katy Basi

 

Upon the death of a spouse, the surviving spouse has the right to inherit from the deceased at least the amount that the surviving spouse would have received as a “property equalization payment” if the spouses had separated or divorced (assuming that no marriage contract is in place waiving this right). The calculation of this amount can become fairly complex, and there are a number of rules to be followed. In addition, only married spouses have the right to make this equalization claim – common law spouses are left out in the cold.

You may remember married spouses Kurt and Brigit from my blog post last Monday. In order to meet his contractual obligations under his separation agreement with his ex-wife Amber, Kurt has acquired a $500,000 term life insurance policy on his own life and has made Amber the beneficiary of the policy. Upon Kurt’s death, Amber will receive the $500,000 life insurance proceeds. As life insurance proceeds are “excluded property”, this amount would not be included in the calculation of any equalization claim made by Brigit against Kurt’s estate. Therefore, life insurance is a fairly safe way to provide for a beneficiary like Amber. Kurt should also, of course, ensure that the remainder of his estate is large enough to provide for Brigit and their children.

John and Olivia’s situation is far more complex. Olivia has minor children with John and a minor child from her first marriage. She is legally obligated to support all of these children.

Let’s assume that Olivia wants to leave her estate to her children in equal shares, in trust as they are minors. John does not inherit any part of Olivia’s estate, but he is named as the trustee of the funds held in trust for their children, and Olivia’s sister is named as the trustee of the funds held in trust for Olivia’s child from her first marriage. Olivia figures that John is self-supporting, and that he will benefit financially from having his support obligations for their children reduced by the funds he holds in trust for them under the provisions of her will.

In this case, John would have the right to make an equalization claim against Olivia’s estate. The calculation of the amount of the claim requires a fair amount of investigation and information. Depending on the facts, the amount of the claim can be as high as half of the value of the Olivia’s estate (in the unusual case where John owns no property and none of Olivia’s property is “excluded property” (e.g. certain gifts and inheritances)). Similarly, if John wants to leave his entire estate to his children, Olivia may have the right to make an equalization claim against John’s estate.

Equalization claims are costly, create uncertainty, and delay the administration of an estate. Therefore, in this scenario an estates solicitor would normally recommend that a client leave a carefully considered inheritance to their spouse. The amount of the inheritance should be calculated to ensure that the spouse would likely not receive more if they made an equalization claim against the estate. This amount is a constantly moving target, as asset values are always changing, so the estate plan should be reviewed on a regular basis.

In my practice, I have had a few clients who have wanted to cut out the spouse and leave their entire estate to their children. After explaining the potential for an equalization claim to be made by the disinherited spouse, a common client response is “oh, he/she would never do that….” I then point out that, while that may currently be the case:

1) the disinherited spouse may feel very differently once my client is deceased, or

2) the disinherited spouse’s new partner may encourage the claim to be made, or

3) if the disinherited spouse is mentally incapable of making financial decisions when my client dies, the attorney for property of the disinherited spouse may feel legally obligated to make the equalization claim, as part of the attorney’s obligation to act in the best interests of the disinherited spouse.

Finally, while it is common for spouses to see an estates lawyer together to make their estate plans (known in the law biz as a “joint retainer”), this arrangement does not always work well in blended family situations. In a joint estate planning retainer we have a “triangle of confidentiality” (the three points of the triangle being the two spouses and the lawyer). While no one outside of the triangle has the right to hear about any information or decisions, there are no secrets within the triangle. If one spouse wants the lawyer to keep something secret from the other spouse, the lawyer cannot comply with that request. Therefore, it is fairly common in blended family scenarios that each spouse retains their own estates lawyer to advise them and to draft their will and powers of attorney. While two lawyers are clearly more expensive than one, the higher level of confidentiality and privacy and the benefits of having a lawyer completely “on your side” are often worth the extra fees.

If you enjoyed this post by Katy, just type her name in the "Search This Blog" box on the right side under the Hire The Blunt Bean Counter badge and you will find numerous excellent blog posts she has contributed on wills and estates.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates, and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, November 9, 2015

Blended Families are Twice the Estate Planning Fun…Even with a Marriage Contract

I have received numerous requests to write about estate planning for blended families. I thus asked Katy Basi, my resident wills and estate planning contributor, to write about this topic. Katy has graciously provided a two part post on estate planning for blended families. Today she writes about situations where there are marriage contracts in place and next week she discusses the issues that arise when you do not have a marriage contract. So without further ado, here is Katy!

Blended Families are Twice the Estate Planning Fun…Even with a Marriage Contract 

By Katy Basi

 

In any list of situations that create complexity in an estate plan, “blended families” are near the top. Given the number of potential issues involved, this post will address situations in which the currently married spouses have entered into a valid marriage contract with each other waiving all potential claims against each other's estates. My blog post next Monday will address cases in which no such contract is in place.

Note: All discussion is based on Ontario law – the relevant law in other provinces may be different.

Even in the simplest blended family situation, where there are no children from past marriages or common law relationships, the provisions of any contracts or court decrees relating to the prior relationships must be taken into account in creating the estate plan for the current spouses. Let’s take the example of married spouses Kurt and Brigit. This marriage is the first for Brigit, but Kurt was previously married to and divorced from Amber, and has ongoing support obligations to her due to Amber’s inability to work.

There are no children from Kurt’s first marriage. Kurt and Brigit want to leave their entire estates to each other, failing which to their children. However, Kurt has forgotten about the provision of his separation agreement with Amber requiring him to maintain a $500,000 term life insurance policy for her benefit. He used to have such a policy in place, but inadvertently let it lapse a number of years ago.

Kurt’s estates lawyer advises him that unless he reinstates the policy, Amber will have a $500,000 claim against his estate. This claim would greatly reduce his current family’s inheritance and lead to additional complexity, delay and cost in the administration of his estate. Kurt therefore puts an insurance policy in place for Amber’s benefit as soon as possible.

Now let’s take the example of John and Olivia, both of whom have children from their first marriages. John’s children from his first marriage are self-supporting adults who have finished their post-secondary education. Olivia’s child from her first marriage is still a minor, and she is required by her separation agreement to pay child support. This support obligation lasts until the child is 18 years of age, or, if the child is still in school, until the child attains age 25. John and Olivia also have two minor children together.

As John and Olivia have a marriage contract, each is free to create an estate plan without worrying about a claim by the other against their estate (it is also assumed that each of John and Olivia is self-supporting, and therefore would not be able to make a claim for spousal support against the estate of the other).

Olivia is therefore free to split her estate among her minor children from both marriages, if she so desires. She is under a legal obligation to provide for her child from her first marriage, as that child is a dependent of hers and could otherwise make a “dependent’s relief” claim against her estate through a litigation guardian.

John is under no such obligation with respect to his adult children, as they are not financially dependent on him. However, John may wish to leave part of his estate to his adult children, and he is free to do so as long as his estate plan provides for his minor children from his current marriage.

My next blog post will address these scenarios where there is no marriage contract. If we think of these testators as having a number of estate planning balls to juggle, failing to have a marriage contract adds a flaming torch into the mix!

Blunt Bean Counter Note: As per this post on recent changes in legislation in relation to the taxation of trusts, the new legislation can impact on estate planning for blended families. Thus, you may wish to confirm with your estate lawyer, that your will does not need to be amended in light of these tax changes.

If you enjoyed this post by Katy, you may wish to check out some of her prior guest posts such as: Qualifying Spousal Trusts - What are They and Why do we Care? and a three part series on new will provisions for the 21st century dealing with your digital life, RESPs and reproductive assets. She has also posted on the family cottage and wrote a very well received post titled, An Estate Fairy Tale.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts, estates and income tax law (including incorporations and corporate restructurings). Katy practiced income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com. 

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. 

Monday, November 2, 2015

Tax Loss Selling - 2015 Version

For the fifth year in a row, I am posting a blog on tax loss selling. I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.

Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you have to initiate the contact, consider that a huge black mark against your advisor).

For full disclosure, there is very little that is new in this post from last year's version, other than my discussion of identical shares

I would suggest that the best stock trading decisions are often not made while waiting in line to pay for your child’s Christmas gift. Yet, many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2015 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. As the markets are down this year, you may have some unrealized capital losses you can realize to use against capital gains reported the last 3 years. Alternatively, you may want to trigger a capital loss to utilize against capital gains you have already realized in 2015.

I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses, be wary if you are planning to sell and buy back the same stock.

This blog post will take you through each step of the tax-loss selling process.

Reporting Capital Gains and Capital Losses – The Basics


All capital gain and capital loss transactions for 2015 will have to be reported on Schedule 3 of your 2015 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses


If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income. However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation


I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2014 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.

2. If you do not have capital losses to carryforward, retrieve your 2012, 2013 and 2014 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2012, 2013 and 2014.

3. For each of 2012-2014, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2013 or 2014, review whether you carried back those losses to 2012 or 2013 on form T1A of your tax return. If you carried back a loss to either 2012 or 2013, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2012 to 2014, you can potentially generate an income tax refund by carrying back a net capital loss from 2015 to any or all of 2012, 2013 or 2014.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses


For discussion purposes, let’s assume the following:

· 2015: realized capital loss of $30,000

· 2014: taxable capital gain of $15,000

· 2013: taxable capital gain of $5,000

· 2012: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2015 against the $7,000 and $5,000 taxable capital gains in 2012 and 2013, respectively, and apply the remaining $3,000 against your 2014 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2014 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2015 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2014. Alternatively, if you have capital gains in 2015, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Identical Shares


Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the average adjusted cost base of all your Bell shares, not the higher cost base shares.

Creating Gains when you have Unutilized Losses


Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor). 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2015 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2015 and 2016, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $9,200 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2017 for $18,000 you will have a capital gain of  $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $27,200 ($18,000 +$9,200 in tax savings) on a $20,000 investment.

Donation of Flow-Through Shares


Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses


One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.

Disappearing Dividend Income


Every year, I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains


In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.

Settlement Date


It is my understanding that the settlement date for stocks in 2015 will be Wednesday December 24th. Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2015 by December 24, 2015.

Summary


As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while sitting on Santa’s lap in the third week of December.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.


Monday, October 26, 2015

The Liberal Victory - How it May Affect TFSAs, Personal and Corporate Taxes

Last week on Twitter, one of my favourite tweets was by sportswriter Dave Hogg. He tweeted, “Two thirds of Canada is covered by the Liberal Party. The other third is covered by Kevin Pillar" (the Toronto Blue Jays center fielder). 

Unfortunately, since the Blue Jays are toast (how could they not score that man from third?), I will talk about the Liberal victory and what it may mean to income taxes. I say “may mean” because, until we see legislation, we are never sure as to what proposals or promises will be implemented and the exact wording of the actual legislation.

The Roll-back of the TFSA Contribution Limit


Liberal leader Justin Trudeau (as I understand it, Mr. Trudeau is a prime minister-designate, thus I will not call him Prime Minister in this article to be technically correct, and just stick with Mr. Trudeau for now) emphatically stated several times he would cancel the tax-free savings account (" TFSA") limit increase from $5,500 to $10,000. There is much hand-wringing and concern over what will happen to the extra $4,500 many people contributed this year.

This is probably much ado about nothing. Personally, I think the Liberals will probably just do something like this to clean up the issue:
  1. Send out a press release prior to December 31, 2015 (assuming they cannot pass legislation on time) saying that as of January 1, 2016, the maximum cumulative TFSA limit will be re-set to $42,000 ($36,500 old limit [before the 2015 increase to $41,000] plus $5,500).

  2. State that when the legislation is passed, it will be retroactive to January 1, 2016, so if anyone contributes in excess of $42,000, they will be subject to over-contribution penalties.
Assuming I guess correctly, this would clean-up the TFSA issue. Those who contributed the extra $4,500 in 2015 will only have another $1,000 to contribute in 2016 and they will be warned in advance that if they over-contribute they will be subject to a penalty. Easy peasy IMHO.

Potential Changes to Your Personal Taxes


The Liberal platform included some of the following potential changes:
  • Reduce the middle income tax bracket ($44,700 - $89,401) from 22% to 20.5%, resulting in a potential tax savings of up to $670 for those earning between $44,700 and $89,401.
  • Cancel the Family Tax Cut which provides for up to $2,000 in family income tax savings. This seems counter-intuitive based on the middle income tax cut, so there may be more to this proposal.
  • Increase taxes on people making more than $200,000 by creating a new tax bracket of 33%. My comments on this proposal were provided to Rob Carrick of The Globe and Mail in this article. As noted in Rob’s article, my concern is once you increase the highest marginal rate past 50%, you break a significant psychological barrier. I know this is a bit of an airy-fairy comment, but you would be surprised at how many people were already upset last year by their increase in personal taxes when Ontario changed the tax rates, and high-wage earners were paying 49.53% tax on income over $220k. Wait till this year when they will be paying 53.53% at the highest marginal rate.
  • Remove the Conservative plans to gradually raise the age of Old Age Security to 69.

Potential Streaming of the Small Business Corporate Tax Rate


The Liberals stated they plan to follow through with a proposed small business corporate tax rate decrease from 11% to 9%. However, they want to ensure that private corporations, known as Canadian Controlled Private Corporations ("CCPCs") are not used to reduce personal income tax obligations for high-income earners.

As noted in this National Post article, Mr. Trudeau said the following in a CBC interview, “A large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes. We want to reward the people who are actually creating jobs, and contributing in concrete ways. So there’s a little tweaking to do around that.”

In a follow up article  Mr. Trudeau said “that several studies have shown that more than half of small business owners are high-net-worth individuals who incorporate…to avoid paying as high taxes as they otherwise would”. The Post noted that “in that group are doctors and lawyers, groups that may find themselves squeezed by the policy Trudeau loosely outlined this week”.

Mr. Trudeau went on to say that “We want to focus on helping small business owners who are working hard, who are creating jobs for members of their community and serving their community. We are committed to evidence-based policies and I will make no apologies for that.”

To the best of my knowledge, there has been no discussion on how the Liberals would carve out part of the small business population from using the small business deduction. This would be an extremely complex piece of legislation.

In the Rob Carrick article, I noted that I would expect some people may start considering leaving Canada to move to a lower tax jurisdiction or consider moving their funds offshore. As discussed in one of my earlier blogs, in my personal experience, this is typically something only the ultra-rich undertake. What I have found is that once people understand the income tax consequences (deemed disposition of certain assets) that results upon emigration and when they account for family and healthcare, they typically grin and bear income tax increases. I do have some concern that higher tax rates may impact the amount higher income earners invest in their current or new businesses.

Last week a doctor told me he was starting to see other medical professionals consider leaving Canada for the United States. I told him I was surprised as I thought that exodus had been stemmed by better pay policies implemented over the last ten years or so. If that doctor is correct, it will be interesting to see if higher personal and corporate tax rates are implemented, whether mobile professionals and small business owners will in fact consider leaving Canada for lower taxing jurisdictions.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, October 19, 2015

Believe it or Not - We Are Not Immortal

Last week, Adam Mayers of The Toronto Star reviewed my book, Let’s Get Blunt About Your Financial Affairs. Thank you Adam for your review and in particular, your discussion about my views on inheritances.

Adam interviewed me for this article and one of the questions he asked me was "if there was anything I had learned or anything that I wanted to say about my book". I told him that while the book had an income tax bent, I had come to understand that an underlying theme of the book was to ensure that you put your financial house in order.

I also told Adam that while writing my speech for my book launch, I realized how much of my talk revolved around our denial of our mortality and the massive impact that it had financially and emotionally upon our families.

Think about it. Many of us do not want to accept our eventual death. The net result is either we avoid preparing a will (a 2012 survey by Lawpro says 56% of Canadians do not have a will) or we procrastinate updating our will, even when we have significant life events. I’ve seen this pattern repeated first-hand over the last 25 years.

When people finally prepare a will, many do not even inform their executor of their appointment. Even fewer provide the executor with a list of assets and where they are located. Why make the executor’s job easier if we are never going to die?

Finally, since we don’t want to consider our death, we often leave our spouse's in the financial dark, at a time of immense distress, because they have no idea what assets the family has and where they are located. Over the years, I have written several times on this subject and how you should stress-test your finances.

Ensure your spouse and loved ones are prepared and avoid hardship by providing them with the following financial roadmap:
  • Location of your will and the name of the lawyer who drafted the will
  • Name of your Executor(s)
  • List of assets
  • List of insurance policies
  • List of digital assets including passwords
  • Contact list for accountant, insurance agent, investment advisor, banker etc.
  • Existence of accounts, safety deposits, safes
Ask yourself, could your spouse move forward seamlessly from a financial perspective if you passed away today? If your answer is no, get to work on preparing an Information Checklist/Estate Organizer.

As John F Kennedy said in a 1963 address to American University, “in the final analysis, our most basic common link is that we all inhabit this small planet. We all breathe the same air. We all cherish our children's future. And we are all mortal”.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Monday, October 12, 2015

The Income Tax Implications of Selling U.S. Real Estate

Many Canadians own U.S. real estate, especially winter vacation properties. If you own such a property, the income tax consequences can be very complex. Some people erroneously think they are subject to double tax on the sale of their U.S. property, which is not true. Today I will review some of the issues
in relation to the sale of a U.S. property.

Let’s assume you purchased your U.S. vacation property for $200,000 USD several years ago when the exchange rate was $1.10. Thus ignoring legal and other acquisition costs, your Canadian cost base of the property is $220,000 Cdn. Let’s also assume you have just sold your Miami property for $325,000 USD or approximately $420,000 Cdn.

U.S. Withholding Tax Issues


I am not a U.S. income tax specialist, so if you are selling, confirm the following with a U.S. accountant. However, as I understand the process, one of the first things you need to do is obtain a US Individual Taxpayer Identification Number (ITIN), if you don't already have an ITIN or Social Security Number. The ITIN is obtained by filing a Form W-7, and the application is generally filed concurrently with the first U.S. federal tax form you are required to file, which could be either a tax return or a withholding tax form.

If you sell your vacation property for less than $300,000 USD and the buyer intends to use the property as a “residence” for more than half of the time it is used in the 2 years after purchase, you should be able to obtain an outright exemption from any tax withholding. The buyer would simply be required to sign an affidavit as to their intended use of the property.

If you sell for more than $300,000 USD, you will generally be subject to a 10% FIRPTA withholding tax on the gross proceeds. In this example, the tax would be $32,500 USD. But this is not the final determination of tax. A 1040NR U.S. non-resident tax return should be filed to report the actual gain. You can apply the $32,500 USD withholding tax against any tax owing or if your actual U.S. tax liability is less than the amount withheld, you may be entitled to a refund.

However, there is another means to potentially reduce or eliminate the withholding tax. On or before the closing date, one can file an application for a withholding certificate via Form 8288-B. This would reduce the withholding tax from 10% of the gross proceeds to 20% of the actual capital gain (which is the theoretically maximum amount of tax that could be owing). If the certificate is not received by the closing date, the transfer agent or lawyer handling the sale would hold the 10% default tax in escrow until such time that the certificate is received from the IRS, at which point the reduced withholding (if any) would be remitted to the IRS, and the excess funds would be released to the seller.

U.S. Tax Filing Issues


You must file a U.S. 1040NR to report the disposition of your property, regardless of whether or not income tax was withheld, or whether the property was sold at a gain or a loss. Continuing with our example, you would report a capital gain of $125,000 USD ($325,000 USD proceeds less $200,000 USD cost) on the U.S. tax return. If we assume the actual U.S. income tax owing is $15,000 USD (just an assumed tax number for this example), you would receive a refund from the IRS of $17,500 USD ($32,500 USD withholding less $15,000 USD tax owing).

As noted above, many Canadian think they are double taxed. That however is not the case. Any U.S. tax paid becomes eligible for what is known as a foreign tax credit (FTC) in Canada. The final result should be you never owe double tax, but that you are taxed only once, albeit at the higher rate of the two countries.

Canadian Filing Issues


As a Canadian resident, you are taxed on your worldwide income. For Canadian tax purposes, you would have a capital gain of $200,000 Cdn ($420,000 Cdn proceeds less $220,000 Cdn cost). Let’s assume the income tax on this capital gain is $50,000 Cdn. On your Canadian return you will claim a FTC of $20,000 Cdn (rounded equivalent of $15,000 USD actual US tax) against the $50,000 Cdn and as consequence, you will owe an additional $30,000 Cdn in Canadian income tax.

If you add the US tax paid ($20,000 Cdn) to the $30,000 Cdn actual Canadian income tax, you will note that you will have paid $50,000 Cdn in combined tax to the IRS and the CRA. The $50,000 Cdn in total tax is the same amount as the capital gains tax in Canada. So you have not paid tax twice, just once at the higher Canadian tax rate.

The sale of a U.S. property is very complex; please consult a US and/or Canadian tax advisor before you sell to understand the compliance procedures and income tax consequences of your property sale.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.