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. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, December 19, 2016

CRA Information Requests - 2016 Update

Lately, many accountants feel like their main area of practice is responding to information requests sent to our clients by the Canada Revenue Agency (“CRA”). Below, I update you on what I have been seeing in these requests, for both small business owners and individual taxpayers.

What Small Business Owners Need To Know

In 2015, many clients received letters from the CRA requesting support for their equipment (capital cost additions) for income tax purposes. Essentially, the CRA wanted back-up for asset purchases on which capital cost allowance (depreciation) was claimed. These requests were fairly benign and just required some information gathering.

This year, many of my clients have received a CRA information request letter asking for documentary back-up of professional fees claimed on their financial statements.

It appears that for 2016, professional fees are the flavour of year. From the CRA’s perspective, they are looking for personal professional expenses put through small business owner’s corporations. Examples of these types of expenses would be: legal bills for divorces, personal estate planning, and corporate expenses for reorganizations, that should either be all or partially allocated as Eligible Capital Expenditures.

Taxpayers and their accountants are finding these requests extremely time consuming to comply with. The information requested includes a general ledger print out of the expenses, copies of each invoice and where the invoice does not say paid, (invoices issued by professional very rarely are receipted – for example, when your lawyer issues you an invoice for updating your minutes, when you pay, they do not issue a paid receipt) and copies of bank statements to support payment.

Say you have been requested to provide this information for 2014 and 2015; you could be looking for 25-50 invoices if you have a lot of professional subcontractors or are billed monthly by your bookkeeper. You then need to either get each professional to issue a summary receipts letter noting all the invoices issued and paid or provide bank statement back-up (which most clients tend to do).

Once the documentation is provided, the CRA reviews the information (some clients have been contacted to provide additional information or facts) and in some cases issues a reassessment. However, the actual reassessments do not provide any detail as to which expenses have been denied and for what reason(s). Where clients were contacted by the CRA, they assume those expenses were the cause of the reassessment. In other cases, we have to call the CRA to find out what expense(s) were denied. These reassessments are a bit atypical of the CRA who usually provide greater detail in respect of changes made.  

Individual Taxpayers

Non-corporate clients have been receiving several types of information requests. They include:

1. Interest deduction expense claims
2. Foreign tax credit claims
3. Matching income requests

Interest Expense Claims

Several clients have received an information letter request asking for details of their interest expense claims. The letters ask taxpayers for correspondence from the lending institution detailing the original amount of the loan, reasons for the loan, interest expense back-up and bank loan statements. Obtaining this information can be very frustrating, especially where you no longer deal with the lender/bank.

The reasoning behind these information requests is that the CRA is attempting to track the use of funds to a deductible use. i.e. if you took out an investment loan, they want to see the money went into your investment account to purchase marketable securities and was not used partially or wholly for your kitchen renovation.

Foreign Tax Credit Claims

These letters are looking for back-up for foreign taxes paid, where you have claimed a foreign tax credit for investment income or employment or business income earned in another country.

Where you have an investment account with a financial institution and receive a T3/T5 that has foreign income allocated to you and foreign tax withheld, this request is fairly innocuous, as you just essentially send in the T3s or T5s.

However, if you have earned employment income or business income in the United States or another country, you need to provide proof of payment of the taxes. This has become a huge issue for the US, since the IRS does not provide a notice of assessment similar to Canada that shows tax assessed and paid. Thus many people have had to make special requests to the IRS for this information and it is not easily obtained or provided, let alone requests for information from less sophisticated foreign countries. Lately, in the case of the U.S., the CRA is now allowing bank statements and cancelled cheques in lieu of the special request letter, where these documents can support the actual tax paid.

Matching Income Requests

I have written many times about the matching program. Each fall the CRA compares tax slips in its data base to those reported on Canadian’s tax returns. Often slips are missed since they were lost in the mail or misplaced by the taxpayer and the matching program catches the missing slip and related income.

This year, we have started seeing three page print-outs requesting proof that the income was reported. Clients, who have received such requests, have been very concerned that somehow they (or their accountant) missed reporting thousands of dollars of tax slips. However, in most cases, all these slips have been reported, there is just one or two on the three page list that have been reported as perhaps a 50/50 split with a spouse or had an incorrect SIN number.

However, it takes hours to respond to these requests, slip by slip (especially since the financial institutions often summarize income from various sources on T5's, yet report source by source to the CRA. We thus need to reconcile these amounts).

We all accept that the CRA must ensure income tax compliance; however, I wonder if these requests can be streamlined in certain cases? I know some accountants who refuse to Efile and continue to still paper file, solely to reduce the amount of requests they have to deal with.

This is my last post for 2016 and I wish you and your family a Merry Christmas and/or Happy Holidays and a Happy New Year. May your 2017, be information request free :)

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 12, 2016

U.S. Estate Tax for Canadians

Estate tax has been a political hot potato in the United States for many years. Essentially it has been a debate amongst those who believe in an inheritance tax and those who do not. The political infighting even resulted in a year (2010), where if you died there was no estate tax. As per this article, George Steinbrenner saved his estate 600 million by dying in 2010. Imagine, your estate planning all revolves around planning to die in a certain year.

Since 2011, U.S. estate tax has again been levied and can apply to Canadians who hold U.S. property. With the election of Donald Trump, it is possible the estate tax will be repealed again. However, for purposes of this blog post, we will deal with the current law.

Today, I explain how the U.S. estate tax can affect Canadians.

U.S. Estate Tax for Canadians

Death and taxes. They say that these are the only two things in life you can’t avoid. Unfortunately for some Canadians, this saying extends beyond Canadian borders to the United States; as the U.S. can impose the estate tax on unsuspecting Canadian citizens and residents.

Regrettably, many Canadians do not consider their potential U.S. estate obligations until it is too late. Where proper planning is not done on a pre-emptive basis, it can lead to administrative headaches and substantial monetary consequences for your loved ones.

The Rules

For starters, the U.S. estate tax regime is a tax based on the fair market value of the worldwide estate of any person who was a U.S. citizen at the time of their death (even if they are resident in Canada), or was “domiciled” in the U.S. at that time. Collectively, we’ll refer to these people as U.S. persons. Estate tax rates are graduated, and the maximum tax rate is 40%. There is an exemption from estate tax for any estate that is below the effective exemption amount, which is currently $5,450,000 USD for deaths in 2016. The exemption amount is pegged to inflation, so it is scheduled to increase modestly year over year. However, the exemption amount could change more dramatically if there are any future legislative changes (e.g. with the election of Mr. Trump). So this provision essentially deals with Canadians who were born in the U.S. or live in the U.S.

But the tax does not stop with former citizens or Canadians living in the U.S. Not only does the U.S. have the right to tax U.S. persons, but it also has the right to tax certain U.S. assets held by people who are not U.S. persons, essentially any Canadian resident who falls within the U.S. estate tax provisions.

The U.S. will levy estate tax to non-U.S. persons on what they call “U.S. situs property”. This includes assets such as real estate and tangible personal property situated in the U.S., U.S. securities (including those held in brokerage accounts in Canada), certain U.S. debt obligations, and assets used in a U.S. business activity. As a result, property such as your Aspen vacation home or Google stock could potentially be taxed.

Individuals who are not U.S. persons don’t normally have access to the $5,450,000 USD exemption amount - only a basic exemption covering $60,000 USD of U.S. situs assets. As a result, any non-U.S. person who dies owning over $60,000 USD of U.S. situs assets must file a U.S. estate tax return.

How the Tax Works for Canadians

Fortunately, under the Canada - U.S. tax treaty, there are provisions that effectively allow Canadian residents to have access to the same exemption for worldwide assets that is available to U.S. persons. U.S. persons are entitled to a “unified credit” against U.S. estate tax equal to the estate tax on the exemption amount (currently a credit of $2,125,800 USD representing the tax on $5,450,000 USD). The treaty will allow Canadians to claim a unified credit that is prorated based on the ratio of their U.S. situs assets to their total worldwide estate. For example, if a Canadian was to die holding the following assets:

Canadian residence: $1,500,000 USD

Canadian securities: $1,500,000 USD

U.S. vacation home: $1,000,000 USD

Worldwide assets: $4,000,000 USD

The gross estate tax on $1,000,000 USD of U.S. situs assets is $345,800 USD. The unified credit for 2016 would be limited to $531,450 USD (i.e. $2,125,800 x 1,000,000 / 4,000,000). In this example, the unified credit is enough to eliminate the estate tax. Conceptually, this makes sense because this person’s worldwide assets are less than the $5,450,000 USD effective exemption.

But what if we change the scenario such that one has $5,500,000 of Canadian securities, and as a result the worldwide assets are now $8,000,000 USD? The tax on the U.S. situs assets is still $345,800. However, the prorated unified credit is only $265,725 (i.e. $2,125,800 x 1,000,000 / 8,000,000), such that there is net estate tax payable of $80,075. The higher one’s net worth, the more one’s estate tax exposure is on any given amount of U.S. assets.

But all hope is not lost! If one’s assets are passing to their Canadian spouse upon death, an additional marital credit equal to the unified credit can be claimed. Roughly speaking, this marital credit doubles the size of an estate that can be effectively exempted from estate tax. In the scenario above, one would be able to double up on the unified credit of $265,725, eliminating the estate tax payable.

Strategies to Mitigate the Estate Tax

So what if someone’s estate is large enough that they have estate tax exposure, even after the relief described above - how can one plan to mitigate the U.S. estate tax? Here are some strategies one can utilize:

1. Don’t have any U.S. assets at death – This may be the simplest way of avoiding the estate tax. By liquidating U.S. securities before death, or selling your vacation property to a family member or third party, you could avoid having U.S. situs assets in your worldwide estate. If you’re thinking of transferring real estate to a family member, you should ensure that the property is sold at fair market value, otherwise you could run afoul of the U.S. gift tax rules (another topic for another day). Note: There may be Canadian and/or U.S. income taxes on the transfer of property, so obtaining both U.S.and Canadian tax advice is strongly suggested.
2. Hold U.S. assets through a Canadian corporation – A Canadian corporation would generally shelter the U.S. situs real estate or securities from estate tax, as the U.S. would not consider shares of a Canadian corporation to have U.S. situs. The downside of this plan is that you may pay more in combined Canadian and U.S. tax on income generated by the U.S. assets, particularly for U.S. real estate. As well, personal use of a U.S. real estate property would generally give rise to taxable benefits for the shareholders of the company unless they pay market value rent. Thus, in general the use of a corporation is effective to hold U.S. stocks and securities, but not personal use U.S. real estate.

3. Hold U.S. assets through a Canadian trust – Provided that the trust is set up properly, assets held by the trust should be able to be excluded from your estate. A trust is more income tax-friendly than a corporation as well. The main catch is that you would need to give up a significant degree of control over the assets. This approach is often used for U.S. real estate that one intends to pass on to the next generation.

4. Hold U.S. assets through a partnership. It is a grey area as to whether an interest in a partnership holding U.S. real estate and stock is a U.S. situs asset, so one should be cautious about using a partnership to mitigate estate tax exposure. This ownership method is commonly used for U.S. rental properties, particularly those with multiple unrelated owners.

5. Have an insurance policy to cover the tax – It may be simpler and more cost-effective to take out a life insurance policy as a contingency to cover the estimated estate tax exposure, rather than try to avoid the estate tax altogether. However, premiums might be costly depending on the age and health of the individual. As well, the proceeds of life insurance would be included in the worldwide estate value, and could increase your exposure to estate tax.

There is no universally best way to hold U.S. situs assets, and the “right” answer for you depends on your facts and circumstances. Once a decision has been made as to hold U.S. assets, it can potentially be difficult to change the holding method without triggering income or gift tax. So an ounce of prevention can be worth a pound of cure!

The advice in this blog post is general in nature. U.S. estate tax is a very complicated area of tax law and any planning discussed above should only be undertaken after obtaining professional tax advice, typically from someone who is familiar with both the Canadian and U.S. tax laws. It is also strongly suggested that you obtain tax advice before acquiring any significant U.S. situs assets.

I would like to thank Grant Campbell, Manager, U.S. Tax for BDO Canada LLP for his extensive assistance in writing this post. If you wish to engage Grant for U.S. tax planning, he can be reached at
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. Please note the blog post is time sensitive and subject to changes in legislation or law.