Non resident tax considerations

A non-resident of Canada is subject to Canadian income tax on certain types of income from Canadian sources, including

  • income/loss from employment in Canada,
  • income/loss from a business carried on in Canada, and
  • capital gains/losses from dispositions of taxable Canadian property

A non-resident of Canada is required to file a special income tax return (Income Tax and Benefit Return for Non-Residents and Deemed Residents of Canada) to report the above sources of income. A non-resident who doesn’t have a social insurance number is required to obtain an individual tax number (ITN). The ITN can be obtained by completing Form T1261, “Application for a Canada Revenue Agency Individual Tax Number (ITN) for Non-Residents.” Although certain deductions and tax credits are allowed, there are some restrictions.

Non-residents of Canada are not required to file a Canadian tax return if their only income from Canada is from certain types of passive income, such as dividends, and pension income. In such cases, tax is withheld at source by the payer when the amount is paid to the non-resident. The general rate of withholding tax is 25%, but this may be reduced to a lower rate pursuant to the tax treaty that Canada has with the non-resident’s country. In the vast majority of cases, the non-resident may be able to claim a foreign tax credit in their country of residence for Canadian taxes paid. Rental income earned by a non-resident is also subject to the 25% withholding tax (on the gross rents received). However, in the case of real property rentals, there is the option for the non-resident to file a special return under Section 216 whereby tax is paid on the net income earned from the property. There are also additional procedures and filings that can be undertaken to reduce the amount of tax withheld to that based on estimated net income.

Non-residents are also generally exempt from filing Canadian income tax returns if the following criteria are satisfied:

  • No tax is payable by the non-resident for the current taxation year
  • Each taxable Canadian property disposed of in the year is either exempt from Canadian tax due to a tax treaty or a property for which the CRA has issued a clearance certificate to the non-resident

As noted above, a non-resident of Canada is liable to pay Canadian income tax on capital gains from dispositions of “taxable Canadian property.” Taxable Canadian property includes real estate situated in Canada, capital interests in certain partnerships and trusts, and shares of some corporations, certain business assets used in a business carried on in Canada and, in some cases, a Canadian resource property, a timber resource property, an income interest in a trust and a life insurance policy in Canada.

When a non-resident of Canada sells (or transfers to a trust, corporation or relative) real estate located in Canada, it is necessary to obtain a certificate of compliance for the disposition of taxable Canadian property, commonly referred to as a clearance certificate.

The application for a clearance certificate must be filed with Canada Revenue Agency (CRA) within 10 days of the closing date to avoid penalty.  The steps in completing the filing are as follows:

  1. There must be a binding contract of sale or statement of adjustments for a completed sale.
  2. The vendor must be able to document the purchase of the property and any improvements to the property to establish the adjusted cost base. It can sometimes be difficult for the vendor to establish an adjusted cost base without proper invoices or paid cheques in which case the capital gain calculation may be challenged by CRA.
  3. If the property was rented, the vendor must have filed all necessary Canadian tax returns to report rental income.
  4. Vendors who are individuals must have or apply for a Canadian social insurance number.

The process of obtaining a clearance certificate can take several weeks depending on the nature of the sale. Funds will be withheld by the vendor’s lawyer until clearance is received and withholding taxes submitted.

The initial withholding is 25% (occasionally 50%) of the selling price of the property which is held in trust by the vendor’s lawyer.

  1. Once the clearance certificate is received, the withholding tax of 25% of the capital gain is remitted to CRA and the balance held in trust by the lawyer is forwarded to the vendor.
  2. The vendor must file a Canadian tax return for the calendar year in which the sale completed to report the capital gain and determine the actual tax liability. As additional costs are allowed as deductions at this stage, refunds are common.

The lawyer and accountant will typically coordinate the flow of documents. The waiting time can be lengthy but the process is generally not difficult.

There will always be exceptions and complications to the general rules. If you have questions, please contact Michael Pinch, CPA,CA at mike@praccountants.com or call 1 (250) 338-1324.

 

Canada Post Service Disruption

While there is still time to reach new agreements, Canada Post has advised that its customers should take precautions as a labour disruption remains a possibility in early July 2016.  In the event of a full labour disruption, Canada Post will not operate.  Mail and parcels will not be delivered, and no new items will be accepted.  Any mail and parcels within the postal system during a work disruption will be secured and delivered as quickly as possible once operations resume.

With this potential in mind, Pinch and Reid advises that payments for any and all accounts can be made via email interac transfer.  This option is provided by most chartered banks and credit unions via your online banking.  Please direct your payment to the following email address:

info@praccountants.com

Alternatively, you can also use PayPal which can be accessed here

Click on the Paypal button on the right hand side.

Should you have any questions please do not hesitate to contact us at 1 (604) 485-9790.

Canada Revenue Agency Phone Scams

Scam artists, posing over the phone as Canada Revenue Agency officials, have been very active recently.  We have received a number of phone calls from clients.  These individuals are trained and skilled at preying on your fears.  The caller will usually supply a phony name and a made-up badge number.  They may even have your social insurance number.

They will often say there was a problem with your return, and that they need you to follow a specific set of instructions in order to correct the error.  If the CRA was actually starting collection action against you, you would have already received a notice of assessment by mail (which you have 90 days to respond to), and thus would be aware of an amount owing.   Anyone who swoops down on you out of the blue (even appearing at your door) is a scam artist and you should simply hang up the phone, or lock the door.

Remember that you have good fortune to live in a free and democratic society.  The Canada Revenue Agency – like any arm of the government – has to follow due process.

If you have any concerns, you may call us, or contact the CRA directly at 1.800.959.8281.

Visit the Canadian Anti-Fraud Centre.

 

Tradespersons tool expenses

    If you are an employed tradesperson you may be entitled to a tax deduction for the cost of new tools used in carrying out your employment duties.  For 2014 the amount you can claim is equal to the cost of the new tools in excess of $1,127 that your required to purchase as a condition of your employment, subject to a maximum claim of $500.

    An eligible tool is a tool (including associated equipment such as a toolbox) that:

  • you bought to use in your job as a tradesperson and was not used for any purpose before you bought it;
  • your employer certified as being necessary for you to provide as a condition of, and for use in, your job as a tradesperson; and
  • is not an electronic communication device (like a cell phone) or electronic data processing equipment (unless the device or equipment can be used only for the purpose of measuring, locating, or calculating).

Your employer has to complete and sign Form T2200, Declaration of Conditions of Employment. Have your employer complete question 11 of Part B of the form to certify that the tools being claimed were bought and provided by you as a condition of your employment as a tradesperson. Attach to Form T2200 a list of the tools you are claiming, as well as the related receipts. You do not have to include Form T2200, your receipts, or your list of tools with your return, but you should keep them in case the CRA asks to see them.

Example

In 2014, Karsten is employed as an electrician with ABC Company, and he needs to purchase additional tools for his job. He paid $2,500 for the tools he needed and he earned $45,000 in employment income in 2014 as an electrician.

He calculates his maximum deduction for eligible tools in 2014 as follows:

Maximum deduction for eligible tools is the lesser of:

a) $500; and

b) the amount, if any, determined by the formula

A – $1,127 where

A = the lesser of:

1. $2,500; and

2. $45,000

Karsten’s maximum deduction for 2014 is the lesser of $500 and $1,373 ($2,500 – $1,127). Karsten claims a deduction of $500 at line 229 of his 2014 income tax and benefit return.

Donations – personal or corporate?

Small business owners often wonder if their charitable donations should be paid in the corporation, or donated personally.

Below is a quick summary, followed by more detailed examples.

Essentially:

  • If it’s a private corporation with active income, then it’s probably best to donate personally as you are likely in a higher tax bracket than the small business, and it will give you a higher tax deduction.
  • If you need to pull salary out of the corporation in order to make the donation personally, its likely that you would be better of making the contribution in the corporation.
  • If you need to pull dividends from the corporation in order to make the donation personally, its likely the difference will be negligible and it therefore there are likely less costs involved in making the donation in the corporation.
  • If you have a holding company or company that is not enjoying the small business deduction the calculation will become much closer, and there may not be a large difference either way.

There is a limit to the amount of donations that may be claimed. Individuals and corporations can claim a non-refundable tax credit for up to 75% of net income. Individuals can claim 100% in the year of death, and in the year preceding death. Donations not used in the current year may be carried forward for up to 5 years.

For individuals the first $200 of donations (registered charity) receive a tax credit at the lowest combined marginal rate (20.06% in BC).  The remaining donations receive a tax credit at the highest combined marginal tax rate (45.6% in BC).

In corporations the donations is treated simply as an expense.  Active small businesses in Canada receive a preferred rate of corporate tax on earnings less than $500,000.  In BC this combined rate is 13.5%

Therefore the most tax effective way to donate depends on the income tax rate the corporation is paying.  We will provide a couple or examples.

First example 
You are an incorporated business in BC, eligible for the small business deduction, and have $10,000 to contribute.  This would decrease the corporations tax expense by $1,350 ($10,000 x 13.5%).

Alternatively if the business owner was in a 40% marginal tax bracket, and donated $10,000 from cash on hand, they would receive a $4,000 tax credit (ignoring the lesser tax on the first $200).

Therefore the after tax cost of donating in the corporation is $8,650, compared to $6,000 if they contributed personally.

Second example
Same business situation as above, but the owner would need to draw $10,000 in salary to make the contribution.  In order to withdraw the $10,000 from the corporation it would pay additional salary.  If we assume a top tax rate of 46%, this $10,000 in salary will cost the owner $4,600 in personal tax.  The $10,000 donation would save the owner approximately $4,600 in personal tax .  As a result the additional taxes owing on the salary are offset by the tax credits from the charitable donation.  It is likely easier to make the donation in the corporation.

Is it more beneficial for the corporation to pay out dividends?  With a concept called integration the tax position on dividends and salary has been made even more equal.  So the result is practically identical to the salary example in the preceding paragraph.

Third example
Its possible that the donation could come from a holding company or investment corporation.  Investment income is not eligible for the small business deduction, so the corporate tax rate on this type of income is much higher than 13.5%  Therefore it may make sense for the holding company to make the donation.  You would need to compare the marginal tax rate of the holding company to your personal marginal tax rate.

The last consideration would be who you want the donation to be named for.  A business donation may make sense for raising the awareness of your business name, rather than using your personal name on the donation which clients or potential clients may not relate to.

 

CRA offers online payment service

My Payment is an electronic payment service offered by the CRA that uses Interac® Online to allow individuals and businesses to make payments directly to the CRA from their online banking account.

Use this service to make payments to one or more CRA accounts, from your personal or business account, in one simple transaction.

You can use My Payment if you have an online banking account at the following financial institutions that currently participate in Interac Online:

  • BMO Bank of Montreal (personal accounts only)
  • Scotiabank
  • RBC Royal Bank
  • TD Canada Trust
  • Envision Financial
  • Libro Credit Union

The MyPayment system may be unavailable from midnight to 3 AM PST due to routine maintenance.

 

2014 personal tax season

It may seem early to start thinking about your 2014 taxes however our goal at Pinch & Reid is to provide you with valuable information to make the process as seamless as possible.

We have prepared a checklist to assist you in identifying the major sources of income and deductions.    Information slips (ie: T4’s and T5’s) should be received by the end of February, however some investments slips (ie: T3’s and T5013’s) may not be received until the end of March.

Canada Revenue Agency is becoming more diligent in imposing penalties for slips not reported.  If you miss reporting two slips in a three year period, the second omission may be subject to a penalty of 20% of the unreported amount.  Please provide us with any slips received late or omitted from your tax return so that we may process an adjustment.

If you have disposed of capital properties (investments, real estate or other property) during the year, please be aware that you need to provide us with both the sale price of the disposition and the amount you paid for it.  It is important to retain all documentation relating to capital investments.

Once you are satisfied that you have all the necessary information please deliver your 2014 tax information to our office.  Unless there are significant changes in your personal situation that require an appointment, you may leave your documents with our receptionist.

2014 T1 Check List

2014 Statement of business and professional income

2014 Statement of real estate rentals

2015 TAX HIGHLIGHTS

Family tax cut
Under Canada’s tax system, federal personal income tax rates increase with the level of taxable income of the individual. As a result, a couple in which one individual has a higher taxable income than the other often pays more federal income tax than a couple where both individuals have equal taxable income.

The October 30, 2014 announcement included a proposal to introduce the Family Tax Cut, a new non-refundable tax credit of up to $2,000 for eligible couples with minor children based on the net reduction of federal tax that would be realized if up to $50,000 of an individual’s taxable income was transferred to the individual’s eligible spouse or common-law partner. This would take advantage of a spouse’s lower income tax bracket. Below is a table with some examples:

In order to calculate the “split-adjusted income”, the difference in the taxable income of the individual and eligible relation is calculated. One half of this difference is the “split adjustment”, to a maximum of $50,000. This amount is used to calculate the split-adjusted income, by adding this amount to the lower taxable income, and deducting it from the higher taxable income.

There are a number of issues around qualification, etc. Rather than reprint them all here, we would refer you to the CRA link here. If you have any additional questions please feel free to contact us.

Medical expenses
The medical expense tax credit applies to a whole host of eligible expenses from home care services, to laser eye surgery, to orthopedics that are in excess of $2,152 or 3% of net income. There is no limit on the amount of eligible expenses a taxpayer can claim for themselves, their spouse or children under 18.

Public Transit Credit
Transit users can claim a non-refundable credit of 15% of the cost of their yearly or monthly public transit passes. This means that if you buy transit passes that cost $85/month you could claim over $150 per year.

First-time donors super credit
The First Time super donors credit (FDSC) was created to encourage new donors to give to charity. The FDSC increases the value of the Federal charitable donations tax credit by 25%. To be eligible neither the taxpayer or their spouse has claimed the credit since 2007. Donors will receive a 40% federal credit for donations of $200 or less, and a 54% federal credit for the portions of donations over $200 but not exceeding $1,000. This credit may only be claimed once for the 2013 to 2017 taxations years).

Children’s Fitness and Arts credit
By participating in sports and arts children learn the value of sportsmanship, unleashing their creativity and living healthy lifestyles. The Children’s Fitness credit allows parents to claim a tax credit on up to $1,000 per child under the age of 16 against the fees for sports and programs like ballet, hockey and soccer.

The Children’s Arts credit also allow parents to claim a tax credit on up to $500 per child under the age of 16 against the fees for artistic and cultural activities like art or music lessons.

Caregiver amount
Caring for a loved one who is dependant on you due to a physical impairment can be challenging both emotionally and financially. If at any time you (either alone or with another person) maintained a residence where you and the person you care for lived (a spouse or common law dependent is not considered your dependant for this purpose) you may be able to claim a maximum amount of $4,490. CRA link here.

Family caregiver tax credit
This credit is an additional way for families that care for infirm relatives to save. Caregivers will benefit by claiming an enhanced amount under other eligible credits, such as the Child tax credit, or the caregiver amount. The family caregiver tax credit is a 15% credit on the amount of $2,000. As of 2012 it now includes spouses, common-law partners and minor children.

Child disability credit and the Registered Disability Savings Plan (RDSP)
There are special challenges faced by parents caring for a child with a severe disability. The RDSP helps families ensure that a child’s long-term financial security is provided for when they are no longer able to provide support. Recent enhancements to the plan include greater flexibility for withdrawals and an expanded definition of who may be the plan holder.

Child care expenses
Parents have the ability to deduct child care expenses when you (or another person) paid to have someone look after an eligible child so that you or the other person could earn employment income; operate a business either alone or as an active partner; attend school or conduct research.

Textbook and scholarship exemption
Hard working students who achieve strong results and receive scholarships and bursaries now enjoy the fact that these amounts will be exempted from income. Eligible students also have the textbook tax credit available to them.

Adoption expense credit
For adoptions that are finalized in 2013 and subsequent years, an adoption credit is available by multiplying the amount claimed by the lowest income tax rate (15% FOR 2014) for expenses incurred from the time an initial application is made to begin the registration and adoption process.

Pension income splitting
Generally, each individual Canadian pays taxes on their full income earned. Pension income splitting allows and Canadian resident who receives qualifying pension income to allocate to their spouse (or common-law partner), with whom they reside, up to one half of that income. This is why we highly recommend ‘coupling’ tax returns for spouses. This allows us to optimize the pension split to allocate.

Hiring credit for small business
This credit (HSBC) for small businesses provides a credit of up to $1,000 against a small employer’s increase in its EI premiums, helping them expand and hire more workers.

Apprenticeship Job Creation tax credit
Employers who employ an eligible apprentice in a skilled trade in the first two years of an apprenticeship contract (registered with the federal, provincial, or territorial government) can be eligible to receive a non-refundable tax credit equivalent to 10% of the salaries and wages paid to the apprentice. This can translate into a maximum of $2,000 per eligible apprentice.

Volunteer firefighters and search and rescue tax credit
Many communities across Canada depend on firefighters (VFA) and search and rescue volunteers (SRVA) to respond to fires and other emergencies. This is particularly true in our communities around Powell River. For VFA and SRVA that perform at least 200 hours of service per year, an amount of $3,000 has been made available. The hours volunteered for both search and rescue and firefighter activities can be combined to claim either the VFA or the SRVA. You cannot claim both. Click here for more information.

Tradespersons’ deduction for small tools
Construction and trade workers need tools to carry out there jobs and these expenses are often paid out of their own pocket up front. There is a deduction available for qualifying expenses that is a calculation between the expenses and the income earned.

First-time home buyers tax credit
To assist Canadians with purchasing their first home the government has a credit available to first-time home buyers. The credit allows taxpayers to save $750 on qualifying homes purchased after January 27th, 2009. This credit is also available to existing homeowners (you do not have to be a first-time home buyer) who are eligible for the disability tax credit (DTC) who purchase a more accessible or functional home, or for the benefit of a DTC eligible person who is related to the individual purchasing the home by blood, marriage, common-law partnership or adoption.

Home Buyers Plan
Canadians can now withdraw up to $25,000 (per spouse) form their RRSP to assist in purchasing (or building) their first home. Generally, you have to repay all withdrawals to your RRSPs within a period of no more than 15 years. You will have to repay an amount to your RRSPs each year until your HBP balance is zero. If you do not repay the amount due for a year, it will have to be included in your income for that year.

The Financial Consumer Agency of Canada has a number of toolkits available to Canadians if you are looking for some additional resources.

Including: Your Financial Toolkit :: Planning your retirement :: Tools and calculators

Horizon Business Awards

The Powell River Chamber of Commerce hosted its 20th annual Horizon Business Awards recently. Pinch & Reid was nominated in the Professional Services category and we are very proud to announce we placed first in our category. Many thanks to everyone who voted for us, and in particular to all our wonderful clients in our community and beyond. The Powell River Peak published an article this week, and their on-line post can be found here. Thanks again to everyone involved and the Powell River Chamber of Commerce for a great event.

Is your business healthy?

Although it would seem apparent when a business is struggling, some of the more obvious signs are often overlooked.  The foundation of every company is in the management of its cash flow.  A brief examination of some key financial reporting signs will go a long way in keeping your business healthy.

Revenues

Are your revenues decreasing or not meeting budgeted expectations?  This is probably the most obvious indicator yet the trend can be overlooked, particularly if billings are not completed on time.  Revenue under expectations may be attributed to unbilled work or other timing problems.  These results are often accompanied with comments like “we’ll make it up next month’; or ‘we have a lot of work in the hopper’.  Ensure your invoicing is current, revenue is being charged to the correct period and you have budgets to compare to.

Accounts receivable (A/R)

Are your receivables increasing?  It’s natural for A/R to increase when following an increase in sales, however it’s imperative to watch the aging of your accounts receivables in buckets of 30, 60, 90 and over-90.  Meeting or exceeding all your expectations in sales won’t increase your cash flow if you are not collecting your billings in a reasonable amount of time.  Industry collection periods vary but exceeding 45 days will likely put pressure on your bank account, particularly if you have a lot of wages that have already been paid to your employees.  Receivables beyond 90 days become increasingly difficult to collect.  If most or all of your sales are on credit, it’s very important to have someone consistently (at least monthly) contacting customers for payment.

Accounts payable (A/P) and operating lines of credit

Are you receiving more and more phone calls for late payments, and/or are your lines of credit increasing?  Similar to A/R invoicing, A/P invoices must also be entered into the appropriate period.  Missing invoices may result in profits being overstated.  Shareholder draws and personal expenses must also be accounted for as they can reduce available cash.

Government remittances

Are your government remittances late or in arrears?  This is double jeopardy; from a cash flow perspective and that government remittances are a liability of the directors.  Depending on the level of the arrears, digging out can be difficult.  Using government remittances as a method of financing is a sure sign of an un-healthy business.  Often the business will require debt or an injection of cash from shareholders personal assets to pay the arrears.

Records and financial statements

Poor accounting records and or incomplete financial information are in themselves a warning sign.  If you have no way of determining your financial position, you are at a major disadvantage despite all the positive aspects and efforts of running your business.  Are your records up to date?  Are all your invoices entered and all bank accounts reconciled?  Many businesses operate independently and a spouse ends up ‘keeping the books’.  If your records are not up to date, consider hiring a professional bookkeeper.

Note: This article is not a substitute for professional advice.

Moving expenses

The deduction for moving expenses is potentially available in most situations where an individual moves to a new work location (this is still available even if you remain with the same employer) or to attend a post-secondary institution full-time – and is available by both employees and independent business people.

Moving must bring you at least 40 kilometers closer to your new place of work or school. The minimum distance is the shortest route normally open to the public and includes ferries and rail lines (where applicable).

Form T1-M is filed with your tax return which details a number of important deductions:

• The cost of transporting or storing household effects in the course of moving (including such items as boats and trailers)
• Selling costs in respect of the sale of the old residence (these include real estate commissions, mortgage penalties, and legal fees)
• Where the old residence is being sold the cost of legal services in respect of the purchase of the new residence as well as any tax, fee or duty (not GST) which include transfer of title registration taxes
• The cost of cancelling your lease on the old residence
• Travel costs (including reasonable amounts for meals and lodging) for you and your family members
• Meals and lodging near the old residence for a period of up to 15 days

Recently the list of expenses has been extended to include certain costs of maintaining a vacant former residence to a maximum of $5,000. Revising legal documents, renewing drivers licenses and non-commercial vehicle permits (inspections) are examples of other deductions available.

There are two methods of claiming meals and vehicle expenses and we would recommend calculating both as the differences can be dramatic. If an individual has filed with actual receipts the CRA will usually not allow an amended return.

There are some restrictions for students in deducting moving expenses. Deductions may be taken if a student moves to take a job (including summer jobs), but if the student moves to attend post-secondary school full-time, deductions can only be taken against taxable scholarships and research grants.

Another important point is that moving expenses can be deducted against income earned in the new location in the year of the move. Moving expenses can be applied however in the next year’s tax return against the future income.

Moving expenses that are paid or reimbursed by your employer are of course not deductible. There is an option however to include partial payments in income, then deduct eligible moving expenses.

If you are moving in the course of employment, or to a new job, consider requesting a reimbursement of expenses from your employer as an alternative to claiming the deductions yourself. There is usually a timing advantage as you won’t have to wait for your tax refund. There may also be other reimbursements such as the loss on your old residence for which you would not be equally compensated by normal deductions or capital loss considerations.

Note: This article is not a substitute for professional advice.