The End of Tax Integration?

As many of you have no doubt read or heard by now through various media sources, the Federal Government is in the midst of proposing changes to the Canadian Income Tax Act that have been described by others as the most significant in the last 50 years.

In all my years in Practice and accounting I have never heard the level of outrage directed at the current proposals brought forward by the Government.

The reason I believe that to be the case is that the proposals in part strike at the very heart of what the Canadian tax system has always been about, something known as the principle of “tax integration”.

It is a simple concept that posits that one dollar earned by an employee or unincorporated business owner will be taxed at the same rate as one dollar earned by a corporate owner.

Regardless of what you hear from the Government or any other sources this has always been the case.  The only difference has been that some corporate owners have had the ability to control the timing of when they pay a portion of their tax, but not that they will ultimately pay the same tax as anyone else.

This principle of integration will essentially be abrogated however should the recent Government proposals become law.

It will, in fact, become punitive for an incorporated business owner to earn certain types of income in their business such that they will pay far more tax than an employee or unincorporated businesswoman would in similar circumstances, in some scenarios close to double the tax.

I would certainly be hard-pressed to describe the excess taxation of one class of business over others to be “fair” but that is the message Government is sending.

More egregiously some of the rules under discussion will make it punitive to try and pass your very own business on to your children or other family members if you so choose.  In many cases this would result in paying more than double the tax someone selling their business to a third party would pay, is this fair?  Should the Government be involved in influencing to whom you sell your business?

Even further proposed changes will mean that CRA auditors will determine what you can pay to your spouse or other family members in your own business, what is “reasonable”, based on only a series of vague guidelines.  If you disagree with your auditor, too bad, your only option will be to go to Appeal and then Court, and all the time and expense that entails.

Once the very principle of tax integration has been breached, the guiding principle of our taxation system for generations, where will the Government stop in targeting specific groups it does not feel are paying their “fair share”?.

 

New Tax Measures Provide Planning Opportunity for Families

Its always nice to get good tax news to pass along, such as those impending tax changes recently announced by Government, but not yet enacted.

For the first time, families will have direct access to income splitting savings that have heretofore been restricted to spouses with pension income.  The mechanism will not be exactly the same but Canadian couples with a child under the age of 18 will be entitled to split up to $50,000 of taxable income, with an allowed maximum tax reduction of $2,000.  The larger the disparity between the current income of the spouses, the more advantageous this opportunity will be.  The cap of $2,000 in savings is a new wrinkle not previously circulated, but in any event, the change will be helpful to many families, and will apparently be available for 2014 tax reporting once legislation is passed.

In addition, families can look forward to increases for the Universal Child Care Benefit (UCCB) for children under six years of age, from $100 to $160 per month, effective January 1, 2015, but which will not be paid out until July, 2015.  Families with children between the ages of 6 and 17 will for the first time qualify to receive this support at a level of $60 per month.  Keep in mind that these payments are taxable in the hands of the lower income spouse, so are designed to be most beneficial to lower income families.

A further benefit for the 2015 tax year is a much needed increase to the annual cap on child care expense deductions from $7,000 per child under 7 to $8,000, a number that has not changed in decades and will help better reflect the actual costs families face for childcare services.  The rate for children age 7 to 16 will rise to $5,000 from $4,000, and for children who qualify for the Disability Tax Credit, the limit will be $11,000 per year.

Coupled with the previously announced doubling of the Children’s Fitness Tax credit there has been some very significant tax movement this year to the benefit of younger families.

For my clients I will be analyzing the impact of these changes on individual tax circumstances during our annual tax work and providing personalized feedback.

More information on these announced changes can be seen here: http://www.fin.gc.ca/n14/14-155-eng.asp

CRA cries Mea Culpa

I suppose this belongs in the category of ‘we didn’t need a report to tell us that’, but the Canada Revenue Agency recently released an internal report that found its own communications were “poorly organized, confusing, unprofessional, unduly severe, bureaucratic, one-sided and just plain dense.”  Ouch!  In addition, the report found that “Often the main purpose of the documents was not readily apparent, and other important information was scattered throughout the document or embedded in dense paragraphs,” Many Canadians have experienced just that however, so if you are struggling to decipher your latest correspondence from the tax Department, take heart, you are not alone.  You can see more here: http://www.cbc.ca/news/politics/revenue-canada-s-letters-full-of-gobbledegook-internal-report-finds-1.2814181

Having reviewed many of these letters over the years I can only agree.  The typical correspondence from the CRA is overly-technical in nature and often obscures exactly what they are asking the taxpayer to do, if anything.  Even worse, many study participants reported understanding what the CRA was asking of them, when in fact, they did not understand.  If in doubt, seek some help or call CRA directly for clarification.  I have seen many times issues with the CRA escalate simply because of misunderstandings in communication.  Get clarity before responding to any requests from the CRA and you can save yourself a lot of time and trouble.

Never Too Late to File Your Taxes

Over the years I have helped many people to catch up on their taxes, in some cases going back the maximum allowable of ten years.  Yes, you can file tax returns as far back as 10 years and they will be accepted by the CRA.

In many cases I have met people who had outstanding refunds waiting for them and had not filed for a variety of reasons.

In all cases the number one sentiment people tell me they experience once we have caught up on their tax filings is relief.

And don’t forget it is always better to come forward before you get the dreaded “demand letter”  from the tax department.  This allows you to potentially take advantage of the Voluntary Disclosure program offered by the CRA or perhaps the Fairness program if you have experienced a major personal disruption that has prevented you from filing your taxes.

Year end is Donation time

It is year-end time again but it is not too late to make your 2012 donations.

Any donation receipted by a registered Canadian charity on or before December 31 will be eligible to claim on your 2012 tax return.  If you are uncertain as to the eligibility of the charity of your choice check the CRA website registry here to ensure your charity is registered:

http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html

 

All the best for the New Year!

Good news for new OAS Applicants

You may have heard of the pending new Old Age Security (OAS) rules that will be coming into effect on July 1, 2013.

The rules are quite clear for those turning 65 after July 1, 2013 as they will have the option to defer taking their OAS and increasing their future benefit by 0.6% for each month of deferral up to age 70.  This option will work great for those who expect to be in a clawback position over the age of 65 due to other sources of income, such as from continuing employment, anticipated capital gains from sale of investments or significant dividends from their private corporations as they transition into retirement.

What was not clear in the proposed rules was whether those turning 65 before July 1, 2013 would be able to benefit from the new rules by deferring their application until after the July 1, 2013 start date.  For people in this situation I have good news!

I wrote to the Minster of Finance some months ago to raise this very question and have now received a reply from the office of the Minister of Human Resources and Skills Development to confirm that people in this situation will still be able to benefit from this deferral if they so choose:

“Individuals who turn 65 before July 1, 2013 can still benefit from this initiative. However, any months of deferral prior to July 1, 2013 will not be included in the calculation of the enhanced pension amount. For example, individuals turning 65 in January 2012 may choose to defer taking their OAS pension up to their 70th birthday, however, the calculation of their enhanced OAS pension will only be based on the number of months of deferral as of July 2013.”

Although the benefit will not grow until after July 1, 2013 deferral may still be an attractive option for those now close to age 65 who expect to be in a potential clawback situation.

I would be happy to discuss this further if you feel this may be an issue for yourself.

Clarity at last for US citizens in Canada that have not filed their tax returns

Fear and Uncertainty.  These two words were very representative of the general environment of US citizens in Canada that needed to catch up on US income tax return filings.  Until recently, that is.

If you are a US citizen living in Canada and have not filed your US returns for years, good news!

The IRS recently announced a new procedure for its citizens to come forward and comply.  The finer details have yet to be released, but most individuals will need only file three years of returns and six years of Report of Foreign Bank and Financial Accounts (“FBARs”).  The exact details of the procedures are scheduled to be released September 1, 2012.  For those individuals who want to come clean, and expect to owe $1,500 or less of taxes per year on their US tax returns (to be calculated by their tax preparers) this is great news. Prior to this announcement US citizens had no guidance on how far back they needed to file, and whether Canadian residents who had always been filing returns in Canada would receive leniency.

The combination of the recent IRS release and the December 2011 pronouncement that penalties will not apply in all cases means that fear and uncertainty should no longer be representative of the general environment.

Non-resident Tax issues in Canada – A Primer

Many people have heard of the idea of becoming non-resident for Canadian tax purposes.  Since the Canadian tax system is based on your residency becoming a non-resident means avoiding Canadian taxes in most, but not all, situations.  This blog does not address the steps needed to make yourself non-resident if you are currently a resident of Canada, but rather focuses on potential tax liability of non-residents in Canada.

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Incorporated? – T4/T5 deadline looms – Are you ready?

If you have an incorporated business and pay yourself, family members or other employees a wage or dividends from your company then your company is required to file a Tslip information return to the CRA by no later than February 28th each year to report these payments.  Slips must also be issued to recipients by this date or are also subject to penalty.  Penalties can be significant for failure to do so. Continue reading