First of all a non-resident for tax purposes is generally considered to be anyone who has spent less than 183 days inside Canada in the calendar year, has no residential ties in Canada and routinely lives in a country outside Canada.  If you spend 183 or more days in Canada in a year you may be considered a sojourner and become a deemed resident for Canadian tax purposes unless excluded by the relevant tax treaty with your country of origin.

Full non-residents are still subject to Canadian tax reporting for all Canadian-source income earned while in-country, whether from employment, business, property or capital gains from disposition of taxable Canadian property (ie. real estate).

Non-residents who dispose of real property in Canada must also obtain a clearance certificate and file a Canadian tax return in the year they dispose of the property.  Until a clearance certificate is obtained an amount equal to 25% of the value of the property disposed must be remitted to the Canada Revenue Agency by the purchaser.  The difference between the actual tax due and the amount remitted may be recovered by filing a tax return.  If in joint ownership each individual must file a return.

If the property in Canada is rented then the renter is obligated to remit a portion of the monthly rent directly to the CRA (the general rate is 25% unless otherwise specified by treaty).  This may also be typically handled by an agent of the non-resident owner who acts to ensure all necessary tax reporting is filed.

Income from business or employment is also subject to Canadian tax unless modified by tax treaty with your country of origin.

For example, under the Canada-US tax treaty a non-resident American resident is exempt from Canadian tax if they are an entertainer (movie industry, radio, television, theatre etc….) or an athlete on the first $15,000 of income earned in Canada.

Business profits earned by an American resident business in Canada will be exempt to Canadian tax if they do not maintain a “permanent establishment” in Canada and earn income in Canada for less than 183 days in the year.  Permanent establishment is defined within the treaty.  Otherwise it may be necessary to pay Canadian tax on an amount of income that is reasonably attributable to Canada.

Double taxation is generaly eliminate through the use of foreign tax credits availbale to offset any tax paid in the other jurisdiction when filing your domestic taxes.  This will vary and is also governed by your tax treaty in force.

As you can see the tax issues related to non-residents in Canada are complex and it is highly advisable to seek professional assistance in order to avoid penalties for failure to comply with Canadian tax laws.

Canadian tax treaties my be accessed here:

Canadian tax treaties

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Keep watching the CBC site for my next interview regarding income splitting opportunities.

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If you have paid yourself a salary (T4), or dividends (T5), or certain other payments (T4A) out of your company during the calendar year reports must be filed and slips issued.

For salary or wage payments it is also necessary to calculate the amount of withholdings deducted and remitted to CRA during the year to ensure that funds are not owed for deficient remittances.

If you are newly incorporated and haven’t dealt with this type of reporting before be sure you have taken the necessary steps by the end of the month and by February 28th of any year that such payments are made out of your company.

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Attribution rules

So what is the big deal with the attribution rules?  Well, simply put, these rules are triggered whenever you attempt to split income with a family member such as a spouse or child by giving them money and then trying to report the income generated by that money on their tax return.  In such cases these rules will apply and the income that you may think is now being earned by your spouse or your children will still belong to you and you may be re-assessed as such by CRA, defeating the whole purpose of the exercise.

The Solution

When you make a loan to a family member that is on commercial terms, then the attribution rules will not apply.  That is, if you loan money to your spouse as if they were an arms length third party, and charge them interest, and collect it each year, there is no attribution of the income your spouse now earns from the borrowed money.

The Income Tax Act mandates that a certain minimum rate of interest must apply to prove the commercial nature of the loan, a rate which is set by the CRA on a quarterly basis.

The reason spousal loans have again become a popular planning tool is because this “prescribed rate” is now at a historically low 1% rate of annual interest (subject to review after September 30, 2011).  As a result you need only charge your spouse 1% interest, which must be paid each year on the outstanding balance, no later than January 30.  Another great feature is that the rate can apply indefinitely into the future, it is not a floating rate, so even if the prescribed rate rises in the future, you do not have to collect more interest, as long as you establish your loan before the rate increases.  You must charge at least the prescribed rate in effect on the date the loan is advanced.

In addition, this amount must be reported by the lending spouse as interest income, but is deducted by the borrowing spouse as a carrying charge of their investments.

Therefore, all investment income currently earned, above 1%, is now going to be taxed at the lower income spouses marginal rate.  This can mean significant tax savings that will be generated every year the loan remains in effect.

Make sure such loans are properly documented with a promissory note or other loan agreement and that a cheque is used to transfer the funds to your spouse.  It is also critical that a cheque changes hands every year to pay the interest to your spouse.  This is important because you need to evidence that you are treating the loan as if you had made it with an unrelated party.

Of course, a loan is a legal agreement, and other considerations may apply in your situation, particularly if you are in a second marriage situation, so ensuring any loan agreement is properly structured may require the use of legal advice.

A family trust may also be an alternative to achieve similar splitting goals.

I have seen this strategy save thousands of dollars for families, particularly in cases where a higher income spouse has received a significant inheritance and invested the proceeds.

Talk to your tax advisor if you think this strategy may benefit you.

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What does this mean?  Well, instead of claiming a personal tax credit of only 15% for amounts greater than 3% of your net income or $1500 you can write off 100% of your expenses inside your company with pre-tax dollars.  This will generate a substantial savings for people who are currently making their medical payments with after-tax dollars and generating relatively small medical tax credits tied to their income.

Sounds good?  Yes, but there are a few rules to follow.  One is that the plans must be available to all employees on the same terms.  You can’t cherry pick the best plan for you and leave your other employees out otherwise CRA will not accept it as a bona fide plan so this may not work if you have a large staff, unless you choose to create such a plan in lieu of, or supplemental to wage increases.  Plans can be created even if you are the only employee of your company (such as many professionals).

What medical expenses are eligible for coverage?  That depends on the terms you establish but they may include all eligible expenses under the Income Tax Act, such as dental, prescriptions, physiotherapy, chiropractic, acupuncture, eyeglasses etc…  Spouses and dependants of employees may also be made eligible.

As an incorporated professional in Victoria you may establish a plan that covers just you and your family, if you are the sole employee.

How do I set one up?  Two ways, pay a third party PHSP provider, usually an insurance company, who will set up and administer your plan on a cost plus basis.  You pay your medical costs personally, then submit your claim to your administrator who reimburses you and then bills your company for the cost, usually adding 10% for their services.

The second method is the do-it-yourself approach.  It is not required by the Income Tax Act that a third party administrator be employed.  If you choose this method there are a number of steps to ensure your plan is in compliance, including passing the necessary Director’s resolution to establish the plan and creating an appropriate employment agreement between yourself and your company establishing your eligibility.  Your chartered accountant in Victoria should be able to assist you.

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People change, goals change, economic circumstances change but your relationship with your accountant should remain strong and you should feel comfortable asking questions about your changing life or business situations.  You should also trust that your accountant will give you the straight goods about any financial issue you face.  Trust is the cornerstone of any good relationship and accounting is no different.

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Things to be considering include:

• optimize your dividend/salary mix from your company – consider your cash requirements, the tax position of yourself and your family personally as well as corporate income for the year
• accrue a bonus – if in a high corporate income situation it may be appropriate to accrue a bonus for yourself to ensure maximum RRSP room for 2011.  Salary must be at least $125,000 for 2010 to achieve maximum RRSP contribution room for the following year.
• see my other blog regarding foregoing RRSP contributions in favour of dividends and investing inside your company, a holding company or family trust http://www.gustafsonaccounting.ca/blog/uncategorized/tax-planning-for-professionals-is-an-rrsp-necessary – this may be an appropriate strategy for you

• Pay eligible dividends if you have an available GRIP balance in your company – Eligible dividend tax rates are going up in British Columbia in 2011 by 2.4%!  That means now is the time to clear your GRIP balance by declaring the appropriate amount of dividends for the year.  If you have accumulated a GRIP balance through high tax income in your company or from portfolio investments you should be ensuring that you issue enough dividends and report them appropriately to qualify as eligible dividends.  Consult your tax advisor.
• Pay your family – Yes, you can pay your family members a reasonable wage for services performed, including minor children or your spouse.  This is a great way to reduce higher rate marginal income.  CRA will support positions that are reasonable where services are actually being performed by family members such as bookkeeping assistance, administrative duties etc..

There are many other year end issues to consider, some of which need to be addressed before year end, and some that should be considered in preparing your December 31, 2010 professional year end – make sure you are considering them to optimize your 2010 and 2011 tax positions.

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Generally the move must be from one point in Canada to another point in Canada but moves outside the country may qualify if you are a deemed or factual resident of Canada.

If you do not generate sufficient income at the new location to use all your moving expenses, then the unused portion may be carried forward to apply against future years income from employment or self-employment.  Investment income and employment insurance earnings are examples of two types of income that cannot be used with moving expenses.

Moving expenses are claimed when you file your personal tax return using a special form T1-M.

This is also a category of expense that is frequently reviewed by CRA so be sure to keep all your receipts and invoices to support your claim.

Not all expenses that you may think will qualify and many you may not think of will qualify.  Consult your tax professional for assistance if you find yourself in this situation.

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It is also the season when many charitable organizations are in full marketing mode, seeking your donation dollars.  Be careful, however, when a promoter comes calling with an offer for you to get back two or three times your donations in tax credits.  By now most people have heard of these “donation schemes” but what is being done about them?

Well, for its part, the CRA has been warning people about donation schemes for years, advising them to avoid any promotion which offers more money back than the donation itself.  In fact, they have been tracking these schemes and have been systematically auditing people who have claimed them on their tax return.  To date over 26,000 Canadians have been audited and had $1.4 billion dollars of donation claims from various schemes overturned.  An additional 20,000 audits are currently underway and another 50,000 are planned.  Check out the official news release: http://www.cra-arc.gc.ca/nwsrm/lrts/2007/070813-eng.html

The moral of the story appears to be that if you want a CRA audit, claiming one of these donation schemes on your tax return is a really good way to get one.  So please think twice if you hear a promoters pitch for donations of art at inflated appraisal prices or a donation of medical supplies to the third world for three times what you contribute.  The amount of money you think you are saving will not be worth the years of aggravation that will come with it and the cheque you have to write at the end of the day.

Just what are the risks:

• your donation credit will be reduced to a fraction of what you originally claimed and perhaps to nothing and you will be required to pay the extra tax plus interest and possible penalties from the date of the re-assessment.  This could be done years after the fact;
• Are you likely to get a refund from the promoter for the original “donation”?  Not likely;
• Legitimate charities lose out on your donation dollars

What can you do if you reported one of these donations in years past but haven’t yet been advised of an audit by CRA?  In this circumstance, consider making a voluntary disclosure which will potentially allow you to avoid penalties, although you will still be required to pay all tax due including interest.  Consult your adviser for assistance.

There are other, legitimate, tax planning investments available to you if minimizing tax is a significant goal without the need to resort to shady plans that will almost certainly blow up in your face.

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Here are some of the key changes from the 2010 Federal Budget to be on the lookout for when considering your own situation.

1. RDSP contributions can now (effective March 4, 2010) be made via a rollover from a deceased contributor’s RRSP account to the beneficiary if they were a financially dependent child or grandchild of the deceased.  No matching Canada Disability Savings Grants will be generated by the contribution and it may not exceed the available contribution room of the beneficiary.
2. As of 2011 Canada Disability Savings grants and Canada Disability Savings Bonds will be eligible for a 10 year carry-forward for unused contribution years up to an annual grant limit of $10,500.  Previously no carry-forward of eligibility was allowed.
3. Medical expenses incurred for purely cosmetic purposes will no longer be eligible for medical tax credits if incurred after March 4, 2010 unless required for prescribed or reconstructive purposes.  This also applies to related travel expenses.
4. Post doctoral fellowships for 2010 and later will now be fully taxable and no longer eligible for the 100% education exemption.  This change does not affect scholarships and fellowships received while eligible for education tax credits in pursuit of a College diploma, bachelor’s, masters or doctoral degree.
5. US social security payments will only attract tax on 50% of benefits received (down from 85%) if you have been receiving benefits since before January 1, 1996.  This applies to benefits received since January 1, 2010.
6. The Universal Childcare Benefit may now be taxable in the hands of the child who qualifies for the Eligible Dependent Credit, not the single parent who may otherwise have been claiming this income, effective for the 2010 tax year.
7. Shared custody changes are coming for July 2011, in which two individuals will be able to share the Canada Child Tax Benefit and the Universal Childcare Benefit as well as the child component of the HST credit.  Currently it has to be agreed that only one of the parents may claim eligibility.

Although the 2010 Federal budget did not contain the type of substantive and far-reaching changes to the Income Tax Act that we have witnessed in the last five years these are some of the highlights that may affect you.  If in doubt as to your eligibility consult your tax advisor.

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