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TFSA's and Residency

Posted by Steve Frye Posted on 18 July 2018

Recently, one of my blog colleagues wrote on the residency rules regarding tax free saving accounts (TFSA’s). Generally, as an owner of TFSA, if you leave Canada, the accumulated funds may remain in the TFSA without Canadian tax consequences. You can’t make any further contributions but you can make withdrawals.

What if in a scenario recently presented in a round table discussion with the Canada Revenue Agency (“CRA”), the CRA subsequently reassessed the TFSA for several taxation years on the basis that the TFSA was allegedly taxable on the income earned from carrying a securities trading business. As reported quite extensively in the press recently, under the application of the tax rules, if a TFSA carries on a business then it must pay income tax on its business income.

As the plan holder, you contend that the central management and control of the trust rested with you and was exercised outside of Canada since you were actively trading securities, and was making all the key investment decisions for the trust. Therefore, the trust was not resident in Canada and was not taxable in Canada on the income earned.

The CRA disagreed with that interpretation, and contended the trust would always be resident in Canada since its real business was carried on in Canada. The CRA acknowledged the TFSA is a self-directed, trusteed arrangement giving the primary responsibility for managing the investments for its non-resident plan holder, not to the corporate trustee. Nevertheless, the TFSA trustee was a corporation licensed under the laws of Canada or a province to carry on in Canada the business of offering trustee services to the public.

The CRA contended that a trust will always reside where its central management and control takes place, which is Canada, given all the duties and obligations imposed on the trustee under the Act. For the same reason, the residence of any trust governed by an RRSP, RRIF, RESP, or RDSP will also be located and remain in Canada.

 

Happy Reading

Income Splitting Loans: What's the Use?

Posted by Steve Frye Posted on 06 June 2018

We have blogged about income splitting arrangements available to individuals who wish to loan funds to his/her lower income spouse or adult child, or in the case of minor children, a discretionary family trust. Such loans would be used to invest in income producing properties such marketable securities, mutual funds, real estate income trusts (to name a few). The income from these properties less the interest paid on the loans would be claimed by the spouse, beneficiaries of the trust etc.

For these plans to work as designed, we have blogged about how the loan must carry the appropriate rate of interest (i.e. at least the prescribed rate of interest pursuant to the Income Tax Act) and the interest on the loan must be paid by a certain date every year.

What has not been written about very much about is how one has to be careful about the use of the funds borrowed to maintain full interest deductibility. Generally, the Income Tax Act allows a taxpayer to deduct interest expense on borrowed money that is used to earn income from a business or property.

The use of the borrowed money is determined for the taxation year or period in which the interest deduction is being claimed, commonly referred to as “current” use. Current use must be for the purpose of earning income for it to be “eligible” for interest deduction. To maximize interest deductibility so the income splitting plan works as efficiently as possible, the current use of the borrowed money should remain eligible throughout the period.

When property acquired with borrowed money is disposed of and the proceeds are used to acquire another property, the current use of the proceeds is relevant. Former use is not. This is a principle that has been developed by the courts and the Canada Revenue Agency.

In a recent case tax court case Van Steenis v. The Queen (2018 DTC 1063 (TCC)) this principle was extended to “return of capital” in mutual fund trust units. The taxpayer received a significant portion of the investment money as return of capital. The taxpayer continued to own the units, but some of the return of capital went for personal and “ineligible” use. The CRA denied part of the interest deduction to the extent the use of the returned capital was ineligible. The Tax Court agreed.

In addition to exercising care over making the interest payments when they should be made, be also mindful of how the borrowed money is used on a continued basis to preserve maximum interest deductibility.

Happy Reading

How to save money on legal and accounting fees

Posted by Roger Pierce Posted on 07 May 2018

Every dollar counts when you’re running a small business. That’s no business owner wants to spend more money than necessary on professional fees for accountants or lawyers. There’s no doubt the advice and assistance available from your accountant or lawyer is extremely valuable and worth money:

• Accountants are valuable advisors to any business, because an accountant can help you to reduce taxes, increase revenue, decrease costs and plan ahead.

• Lawyers are valuable advisors to a business because a lawyer can help you to create contracts, review agreements and avoid legal hassles.

However, you owe it to your bottom line to take whatever steps you can to get the professional services your business needs without paying a fortune.

Follow these suggestions help keep costs down.

Do the easy work

If you hand an accountant a shoebox of receipts, or ask a lawyer to create a document from scratch, that professional will need to do more work on your file. And that will cost you more money.

Instead, you can save money by doing some of the work required to prepare a project or file before you hand it over to a professional.

For example, if you want a lawyer to create a sales contract for your company to use with customers, you can start by finding a free version of a contract online, downloading a copy, and making some edits. Along with some instructions, give your edited version of the file to the lawyer and ask him or her to draft the agreement from there. It’s a lot less expensive to have a lawyer work from your draft document than preparing an original document from scratch.

Share your budget

No one likes to receive a big invoice by surprise, but that’s exactly what can happen if you don’t set a budget with your professional advisor.

By disclosing your budget upfront with the professional, a lawyer or accountant can communicate the level of service they are able to provide. It helps to clarify expectations on both sides: you’ll know what you’re getting for your money, and the professional will know what to deliver for the agreed fee. If your budget is too low for the work required, ask if you can do some of the preparatory work on the file—like entering receipts into bookkeeping software instead of handing a shoebox of loose papers to your accountant. Or, you may need to shop around for another provider.

Tip: Be sure to ask about payment policy. Ask how much of the fee must be paid upfront and how much can be paid 30, 60 or even 90 days after the work is complete.

Shop around Take your time when selecting a professional because you will likely be working with that individual or firm for a long time. Identify and approach at least three other professionals in order to find the best choice. The right professional for your business will be the one who:

• Has experience working with similar clients.

• Can do the work within your budget.

• Makes you feel comfortable.

Lastly, before you make the decision to hire a professional, be sure to ask for references. It’s always wise to first check the experiences of other business owners.

 

Trust Reporting: New Requirements Coming Soon!

Posted by Steve Frye Posted on 25 Apr 2018

Under the current rules, a trust only needs to file an annual tax return but generally does not need to file the return if it does not earn an income or make any distributions in the year. (Notwithstanding that the Canada Revenue Agency has increased its demand for “nil returns” to be filed under certain circumstances). Further, there is currently no requirement for the trust to report the specific identity of all of its beneficiaries.

The recent Federal Budget refers to this current situation as an information gap that can apparently be exploited by taxpayers engaging in aggressive tax avoidance and/or criminal activities of the “white collar” variety.

The Budget proposes that most trusts will be required to report on the identity of all trustees, beneficiaries, and settlors of the trust, as well as the identity of each person who exerts control over trustee decisions, effective 2021. The proposed requirements will apply to most trusts resident in Canada as well as non-resident trusts that are currently required to file a tax return in Canada.

Trusts to which the proposed reporting requirements apply will need to file a return each year regardless of whether there was distribution of income or not.  A new beneficial ownership schedule will be added to the return and must also be completed if required. Failure to comply with the new reporting requirements will be met with penalties.

The overall compliance burden for trust reporting will increase shortly. Trusts will be forced to share information not previously shared, which could be awkward for some trusts (non-resident trusts) in particular. Lack of awareness of these new requirements (or unwillingness to provide the information) may lead to significant non-compliance problems.

Happy Reading

RRSP's and Early Withdrawals

Posted by Steve Frye Posted on 27 Mar 2018

Registered retirement savings plans (RRSP’s), introduced in 1965 by the way, are a great vehicle for retirement savings and a keystone found in most retirement and estate plans. It is one of the few ways to earn an income-tax reduction in your earning years (the amount you contribute is tax deductible). Income tax is paid on RRSP money when it is withdrawn, when you are likely in a lower-tax bracket.

Traditionally, most folks would contribute to their RRSPs’ every year until age 71, when they must turn an RRSP into either a registered retirement income fund (“RRIF”) or an annuity. Early withdrawals were considered punitive (and discouraged) under the general assumption that when doing so, the individual withdrawing the amount was in a high tax paying bracket when making the withdrawal.

But the times they are changing!

These days, folks are taking early retirement for health and/or other reasons, often without pension plans and may not have another sources of taxable income except maybe CPP benefits and/or OAS income until they turn 71 when their RRSPs are converted to RRIF’s.  In these instances, it would make sense to make some RRSP withdrawals in these low taxable income years, as the tax savings can be substantial.

I understand a strategy which is becoming more common for folks over 65 in the circumstances above is to convert an appropriate amount of RRSP into a RRIF when they become eligible to apply $2,000 of eligible annual retirement income toward the federal pension credit, plus the appropriate provincial credits, and then use some of the money if they can to eliminate some debt or other obligations, all in a lower tax environment.

To stretch the point a bit, an argument could be made for early withdrawals if someone is not expected to have a very long life expectancy to help cover immediate medical and other expenses.

Early on, I was trained to think early RRSP withdrawals was a no-no. I can see now that sort of thinking does not apply to all and in fact not the most tax effective way to manage one’s affairs leading up to age 71.

Happy Reading

Spousal Support and Beyond

Posted by Steve Frye Posted on 26 Mar 2018

I was traipsing thru some estate journals and articles recently and I stumbled upon the reporting of a recent matrimonial case which gave me pause, and to many practitioners in estate and matrimonial matters, I am sure.

Practitioners have long held the view that entitlement to spousal support under most matrimonial settlements do not survive the death of the spouse receiving the support.  As one Justice noted in a recent case in Saskatchewan, “The obligation to pay spousal support is ended when the beneficiary of that support dies. The concept is just basic common sense…. There appears to be no juristic or moral reason to continue the obligation in the absence of any need.”

That is until very recently!

In the facts of Re Marasse Estate (Alberta) decided in  November, 2017, approximately 3 months after spousal payments began as agreed to between the parties to a separation agreement, the spouse receiving support payments died. Only a few payments out of the total required were made. Remarkably, the estate of the deceased spouse applied for the balance of spousal support payments.

Consistent with previous jurisprudence in this area, the paying spouse argued that the obligation to pay spousal support ended when the recipient spouse passed away.

Nevertheless, the Court held that the agreement between the parties created a basis to continue support for the following reasons:

(1) There was a clause in the agreement providing that the terms of the agreement could be exercised by the parties’ heirs, executors, etc.

(2) There were no clauses which set out events or matters, financial or otherwise which might lead to a change in terms or obligations thereof.

(3) The agreement was comprehensive as to distribution of property, personal and matrimonial.

For these reasons primarily, the Court declared that the payer spouse’s obligation for payment to the estate of the deceased payee spouse under the Agreement would continue in full.

I am looking forward to reading more about this and its impact on matrimonial settlements. In the meantime, just out of interest, mention this case to a colleague or a friend and ask for a reaction. You will be interested in the results.

Happy Reading

Post-Death Decline in the Value of RRSP or RRIF: What Happens?

Posted by Steve Frye Posted on 24 Jan 2018

Generally, when an annuitant of a Registered Retirement Savings Plan (“RRSP”) or a Registered Retirement Income Fund (“RRIF”) dies, the Canada Revenue Agency (“CRA”)  will consider that the annuitant received, immediately before death, an amount equal to the fair market value (“FMV”) of the property held in the RRSP or RRIF at the time of death. This amount and all other amounts the annuitant received from the RRSP or RRIF in that same year have to be reported on the annuitant’s income tax return for the year of death.

What happens if there a post-death decline in value of the RRSP or RRIF when the final distribution is made?

If the final distribution from the RRSP or RRIF is made in the year of death, the decline in value can be claimed as a deduction on the terminal return. If the distribution is made in the year after year of death, the annuitant’s legal representative can file a T1 Adjustment for the deduction.

In both cases, the administrator of the plan must fill out the CRA approved form to document the decline in value and the annuitant’s legal representative files a copy of the form with the terminal return (if in the year of death) or with the T1 adjustment (if in the year after year of death).

If the final payment from the RRSP or RRIF was made after the end of the year following the year of death, some or all of the post-death decline in value may not be allowed to be deducted. However, the CRA has the authority to waive this condition depending on the circumstances.

Similar rules apply to pooled registered pension plans.

Happy Reading

The Prescribed Rate is About to Change – for Real this Time?

Posted by Steve Frye Posted on 20 June 2017

The prescribed rate is the minimum interest rate prescribed by the Canada Revenue Agency (“CRA”) that should be charged on various non-arm’s loans such as those made by you to your spouse or child (through a family trust). Such loans are a common device to split income with others in your family. The money is often used to invest in income-producing properties and the income is taxable in the hands of the loan recipient, as long as the loan recipient faithfully pays the interest on the loan at the minimum prescribed rate on an annual basis.

In a blog I wrote about 4 years ago, I suggested that the prescribed rate was about to change, or so we believed at the time and several times since. At the risk of sounding like the proverbial shepherd boy who cried “wolf, wolf”, we believe it will happen soon.

The CRA has just announced the third quarter rates and they will not change from the second quarter. It is currently 1%. The prescribed rate is based on the T Bill rate, which is hovering at around .54% recently. Nevertheless, interest rates in general are expected to be on the rise soon (Bank of Canada rate, mortgage rates etc.) and with that we can expect a rise in 90 day Canadian Treasury Bills yield (“T Bill rate”) over the next couple of quarters.  As this rate edges up beyond 1%, it is CRA’s policy to round up to the next full percentage, hence 2%.

If you set up a loan in the next few months the charge rate will be 1%. After the prescribed rate change it will be 2%. A $500,000 loan might cost $5,000 more a year.

If you are contemplating such a plan or have had a plan recently presented to you, the time to act is now, really.

The content provided within this site is for general information purposes only, and should not be used or construed as a substitute for consultation with qualified professional advisors.