FAQ

Non-Residents Providing Services in Canada – Tax Implications (Regulation 105)

Contact UHY Canada U.S. Tax Team

crossbordertax@uhyvictor.com
(514) 282-0067

 For assistance with your Regulation 105 issues.

We have expertise in filing requirements, applying for waivers and filing corporate and personal income tax returns to recoup Regulation 105 withholdings.

 

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Regulation 105 – Withholding Taxes

Regulation 105 of the Canadian Income Tax Act imposes a 15% withholding tax on fees, commissions or other amounts earned from services rendered in Canada by non-resident individuals and corporations. If these services are rendered in the province of Quebec, they will be subject to an additional Quebec withholding of 9%.

These amounts must be withheld by the Canadian payor even if the non-resident providing the services has no permanent establishment in Canada.

However even if the non-resident has no permanent establishment in Canada, these withholding taxes can be recouped. The non-resident entity must file a Canadian (and Quebec) tax return at the end of the non-resident’s fiscal year and claim a refund to the extent permitted on those tax returns.

Purchasers of services from non-residents are relieved from the obligation to withhold taxes only if the non-resident obtains a waiver from the CRA and the MRQ, where applicable.

The withholding tax on services is called Regulation 105 withholding. It applies to services only and NOT to the sale of goods (in bundled contracts) or the reimbursement of expenses where no profit is earned.

Penalties for not withholding can be high – 10% of the tax (and 20% in cases of gross negligence).

Non-residents have to apply to CRA for a business number (BN) and they should receive a tax slip (T4A NR) from each of their Canadian customers showing the gross amounts paid and the taxes withheld on a calendar year basis. The filing deadline for a T4A NR is February 28 of the year following to the payment(s).

 

Regulation 105 – Waivers

The 15% withholding is not the final tax of the non-resident. CRA considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts.

Where a non-resident can demonstrate that the withholding is higher than their potential tax liability in Canada, either due to treaty protection or income and expenses, the CRA may reduce or waive the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit a waiver application to the CRA tax services office in the area where their services are to be provided. Waiver applications have to be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services.

Waivers from withholding taxes can be applied for by the non-resident. These waivers can be one of two types:

1. Treaty-Based Waiver complete exemption

2. Income and Expense Waiver exemption to withhold on the basis of income net of expenses and at normal income tax rates.

The non-resident must provide a letter from Canada Revenue Agency authorizing a waiver or reduction of the withholding amount. If you do not receive such a letter, you have to withhold the usual 15%.

 

Form: Regulation 105 Waiver Application Form

Use this form if you are a non-resident self-employed individual or corporation and want to apply for a reduced amount of Regulation 105 withholding tax from amounts paid to you for services provided in Canada.

 

Regulation 105 – Tax Filing Obligations of the Non-Resident

Every non-resident providing services in Canada must file a Canadian tax return (and Quebec tax return where applicable) and report the income that it earned in Canada. This obligation is the same whether or not the non-resident has or is deemed to have a PE.

If the non-resident is an individual and has or is deemed to have a PE in Canada, then they will pay income taxes based on graduated tax rates without entitlement to any personal exemptions.

Corporations pay part I tax (29% to 35%, depending on the province in which they operate) as well as a branch tax (5% for US corporations), with an exemption on the first $500,000 of business profits.

Individuals have filing deadlines of June 15 of the following calendar year. Corporations have to file within 6 months after their year-end.

Regulation 105 withholding can be refunded by completing a Canadian tax return. The refunds could be received more than 18 months after the taxes are withheld. These taxes are not refundable if tax returns are filed more than 3 years after the relevant taxation year-end.

Regulation 105 – Goods and Services tax (GST)

GST and its provincial counterparts, HST & QST, have to be charged on supplies (goods and services) made in Canada.

Non-residents have to register for GST if they have a PE in Canada.

PE definition for GST purposes is broader than for income tax purposes – the only criterion which must be met for PE to exist for GST purposes is the existence of a fixed place of business like an office or a workshop.

Note that non-residents can voluntarily register for GST if they don’t have a PE in Canada. Registration for GST will entitle the non-resident to claim a refund on GST it incurs in its commercial activities in Canada. In this case, CRA requires the non-resident to post security. The security is waived if the non-resident’s taxable supplies in Canada do not exceed $100,000 annually and whose annual net tax is between $3,000 payable and $3,000 recoverable.

Regulation 105 – Permanent Establishment

Non-residents who provide services through a permanent establishment in Canada must file Canadian income tax returns. They must report and pay Canadian income taxes on the income they generate from the services provided.

Americans must refer to Article V of the US Canadian tax treaty for the definition of permanent establishment:

  • A fixed place through which business is carried on;
  • A person acting as an agent, other than an independent agent, who has the authority to conclude contracts;

Note that an independent agent who is acting in the ordinary course of his business does not create a PE;

PE specifically excludes a fixed place of business used solely for:

– Storage, display or delivery of goods

– Purchase of goods; and

– Advertising or supply of information or scientific research.

 

Regulation 105 – The US-Canada Tax Treaty and the Fifth Protocol

Changes to the rules on the taxation of services rendered by a US non-resident came into effect on January 1, 2010.

Article XIV was eliminated and new deeming rules were introduced and inserted at the end of Article V of the Treaty (paragraphs V(9)(a) & (b)).

The rules now state that if PE does not in fact exist based on the existing rules, then it will be deemed to exist if:

9(a) The Single individual Test (for Individuals)
Services are performed by an individual who is present in the other Contracting State for more than 183 days in a 12-month period and, during this period, more than 50% of the gross active revenues of the enterprise are generated from these services; or

9(b) The Enterprise Test (for Corporations)
Services are provided in the other Contracting State for more than 183 days in a 12-month period with respect to the same or connected project for a customer’s PE in the other Contracting State.

Collective presence of more than one individual providing services during one calendar day will only count for one day of physical presence by an enterprise in the other state.

Regulation 105 – Tips for Non-Residents Providing Services in Canada

Review any on-site installation and training activities in Canada to ensure that appropriate Canadian tax filings and payments are made.

Review and complete the CRA’s checklist (T2 SCH 91 E) to determine PE status in Canada.

If a PE is deemed to exist in Canada consider alternatives for recovering a portion of Regulation 105 withholding tax based on actual income earned on the contract in Canada.

Ensure that contracts with Canadian customers clearly distinguish between services provided in Canada and elsewhere. If the distinction is not clear, the entire contract would be subject to Regulation 105 withholding tax.

Review the obligation to register for GST/HST and QST where applicable.

Given the delay in receiving a refund of Regulation 105 withholding and the fact that the IRS will not grant a foreign tax credit on foreign taxes which should be refunded, the US resident should consider creating a PE in Canada in order to expedite the recovery of its foreign taxes.

Click here to find out more information about the UHY Canada/ U.S. Tax Team

Sources

Canada-US Income Tax Convention, article VII(1), article V, article XV(2)

Fifth Protocol to the Canada-US Tax Convention article V

Dudney decision 2000 DTC 6169 (F.C.A.)

ITA Regulation 105

CRA Information Circular IC 75-6R2 « Required Withholding from Amounts Paid to Non-Residents Performing Services in Canada »

Quebec TP-1016-V

Interpretation Revenu Quebec ADM. 7-, « Reduction in Source Deductions in Income Tax in Respect of a Payment for Services Rendered in Quebec by a Person Not Resident in Canada ».

Applications for a waiver or a reduction of withholding

The 15% withholding is not the final tax of the non-resident. Canada Revenue Agency considers the withholding to be a payment on account of the non-resident’s potential tax liability in Canada. Generally, non-residents are required to file a Canadian income tax return to calculate their tax liability or to obtain a refund of any excess withholding amounts.

Where a non-resident can demonstrate that the withholding is more than their potential tax liability in Canada, either due to treaty protection or income and expenses, Canada Revenue Agency may waive or reduce the withholding. Non-residents who want to request a waiver or reduction of withholding have to submit a waiver application to the Canada Revenue Agency tax services office in the area where their services are to be provided. Waiver applications have to be submitted no later than 30 days before the period of service begins, or 30 days prior to the initial payment for the related services.

The non-resident must provide a letter from Canada Revenue Agency authorizing a waiver or reduction of the withholding amount. If you do not receive such a letter, you have to withhold the usual 15%.

Waiver application form: Regulation 105 Waiver Application Form

Use this form if you are a non-resident self-employed individual or corporation and want to apply for a reduced amount of Regulation 105 withholding tax from amounts paid to you for services provided in Canada.

Toute personne, résidant au Canada ou non, qui paie des services d’un non-résident rendus au Canada doit retenir une partie des paiements bruts et la remettre au receveur général du Canada.

Les retenues sont fixées à un taux de base de 15%.

Un  9% doit être retenue par le ministre du Revenu du Québec pour les services fournis au Québec.

 

 

Contactez notre équipe fiscale transfrontalière pour plus d’informations concernant cet important changement de la convention fiscale des États-Unis avec le Canada.
crossbordertax@uhyvictor.com
514-282-0067

 

Cliquez ici pour des informations sur les retenues à la source pour les Américains fournissant des services au Canada.

 

Qu’est-ce qu’un « FBAR »?

Un « FBAR » est le «rapport des comptes bancaires et financiers étrangers» qui doit être déposé auprès du département du Trésor américain.

Le « FBAR » is now filed on FinCen Report 114 (formerly form TD F 90-22.1).

Cliquez ici pour un aperçu des options pour les Américains qui ne respectent pas leurs exigences de classement FBAR.

Quelle est la date limite de dépôt 2018?

Who Must File an FBAR?

Les États-Unis sont tenus de déposer une « FBAR » si:

Les personnes considerées Americaines doivent replir un  « FBAR » si;

  1. La personne considérée Americaine détenait un intérêt financier ou une autorité de signature sur au moins un compte financier situé en dehors des États-Unis; et 
  2. La valeur globale de tous les comptes financiers étrangers a dépassé 10 000$ dollars à tout moment de l’année civile à déclarer.

La personne considérées Americaine; Citoyéns Americains; Résidents américains; Les détenteurs de la carte verte, les entités, y compris, sans toutefois s’y limiter, les sociétés, les partenariats ou les sociétés à responsabilité limitée, créés ou organisés aux États-Unis ou en vertu de la législation des États-Unis; et des fiducies ou des successions constituées conformément aux lois des États-Unis.

 

Informations de déclaration et de classement

Une personne qui détient un compte financier étranger peut avoir une obligation de déclaration même si le compte ne génère aucun revenu imposable. L’obligation de déclaration est satisfaite en répondant aux questions sur une déclaration de revenus concernant des comptes étrangers (par exemple, les questions sur les comptes étrangers sur le formulaire 1040, annexe B) et en déposant un FBAR.

La « FBAR » est un rapport d’année civile qui doit être déposé auprès du Département du Trésor au plus tard le 30 juin de l’année suivant l’année civile indiquée. Généralement, les délais supplémentaires pour déposer un « FBAR » ne sont pas accordés.

La FBAR n’est pas produite avec une déclaration de revenus fédérale. Toute prolongation de délai accordée par l’IRS pour produire une déclaration de revenus ne prolonge pas le délai de dépôt d’un FBAR.

 

Depuis le 1 er juillet 2013 – Le dépôt électronique des FBAR est obligatoire

UHY Victor LLP est autorisé à déposer FBAR électroniquement au nom de la personne obligée de déposer une FBAR.

Les contribuables américains qui détiennent des actifs financiers étrangers peuvent également être amenés à produire un formulaire 8938 (Déclaration de certains actifs financiers étrangers) avec leur déclaration de revenus 1040 US tax return. 

Visitez: 

http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Report-of-Foreign-Bank-and-Financial-Accounts-(FBAR)

http://taxes.about.com/od/preparingyourtaxes/a/TDF90221.htm

 

Les expatriés américains se demandent s’ils vont souscrire une assurance maladie répondant aux critères de la loi sur les soins abordables (Obamacare) ou être pénalisé s’ils ne le sont pas.

La loi prévoit une exemption selon laquelle si un Américain est éligible à bénéficier de l’exclusion du revenu gagné à l’étranger (formulaire 2555) [voir: IRC 911] en tant que résident de bonne foi d’un pays étranger ou soumis au test de présence physique, le particulier est exempté des obligations de la loi en matière d’assurance maladie.

En outre, un Américain qui travaille à l’étranger et est couvert par le régime collectif américain ou par l’assurance-maladie est exempté de la Loi sur les soins abordables.Ceux qui ne travaillent que temporairement à l’étranger pendant quelques mois, puis rentrent aux États-Unis ne sont pas exemptés des exigences de la loi et doivent souscrire une assurance maladie ou subir des pénalités.

Les non-résidents qui ne restent pas assez longtemps aux États-Unis pour devenir résidents permanents (généralement entre 183 jours ou plus) ne sont pas tenus d’obtenir une couverture d’assurance maladie.

Question:
Puis-je quand même acquérir une assurance santé aux États-Unis si je réside en dehors des États-Unis?

Reponse:
Non. Pour acquérir une assurance en tant qu’individu, vous devez habiter aux États-Unis (2).

Question:
Quel sera l’impact d’ObamaCare en tant qu’expatrié? Est-ce que je devrai payer des taxes?

Reponse:
Si vous êtes un contribuable considéré comme un salarié à revenu élevé:

  • En tant que dépôt célibataire avec un revenu  (un revenu brut ajusté) supérieur de $200,000
  • En tant que dépôt marié conjointement avec un classement partagé avec un revenu supérieur $250,000
  • En tant que dépôt marié séparément (un revenu brut ajusté) au dessus de$125,000
  • En tant que chef de famille avec un revenu supérieur $200,000
  • En tant que Veuve (veuve) admissible avec un revenu brut ajusté supérieur à 250 000 

Vous devrez payer un impôt supplémentaire de 3,8% sur le revenu de placement net, qui comprend, sans toutefois s’y limiter, les intérêts, dividendes, plus-values, loyers, revenus de redevances, revenus de rentes non qualifiées provenant d’entreprises impliquées dans le négoce d’instruments financiers entreprises qui sont des activités passives pour le contribuable.

Il semble que la taxe supplémentaire de 3,8% payée par les citoyens américains résidant au Canada ne donne pas droit à un crédit pour impôt étranger sur leur déclaration de revenus canadienne.

 

Resources:

Divulgations volontaires – Un Aperçu 

 

L’Agence du revenu du Canada (ARC) et le ministre du Revenu du Québec (Revenu Québec) ont des programmes de divulgation volontaire (PDV) qui permettent aux contribuables qui n’ont pas rempli leurs obligations fiscales de remédier volontairement à leur situation sans encourir de sanctions et de poursuites judiciaires.Lorsqu’une demande de divulgation volontaire est acceptée, le contribuable ne paie que les impôts dus dus, plus les intérêts. Ces programmes ne sont pas destinés à toutes les situations et comportent certaines restrictions, et les contribuables devraient consulter un professionnel avant de procéder à une divulgation volontaire.

L’avantage principale de la divulgation volontaire est que le contribuable ne sera pas soumis à des pénalités qui pourraient par ailleurs être imposées pour des revenus non déclarés. Ces pénalités peuvent être substantielles – souvent supérieures à 50% et même à 100% des taxes dues. En outre, un allégement partiel des intérêts peut également être accordé.

Un contribuable peut également obtenir une protection contre les poursuites pénales dans certains cas par le biais d’une divulgation volontaire.

Divulgations volontaires – Conditions Les contribuables devraient rester en conformité après leur divulgation volontaire. Pour qu’une divulgation volontaire soit valide, elle doit remplir toutes les conditions suivantes:

  • La divulgation est volontaire:
La divulgation doit être faite avant que le contribuable soit au courant de toute mesure de conformité prise à son encontre.
  • Une pénalité s’applique au revenu non divulgué:

Si le contribuable ne doit pas payer d’impôts ou s’il a des pénalités à payer, il peut ne pas être admissible au programme de divulgation volontaire.

  • L’information est en retard d’au moins un an:

Le programme de divulgation volontaire ne concerne pas les dépôts actuels, bien qu’il puisse inclure l’année en cours s’il fait partie d’une divulgation s’étalant sur plusieurs années.

  • L’information est complète:

Lorsqu’il soumet la divulgation volontaire, le contribuable doit fournir des faits et des documents complets et exacts pour toutes les années d’imposition ou périodes de déclaration dans lesquelles se trouvaient auparavant des informations inexactes, incomplètes ou non déclarées concernant l’un ou l’autre des comptes fiscaux associés au contribuable.

Divulgations volontaires – Admissibilité Lorsque les conditions sont remplies, le Programme de divulgation volontaire peut obtenir une réparation dans les cas suivants:

  • Vous n’avez pas rempli vos obligations en vertu de la loi applicable;
  • Vous n’avez pas déclaré le revenu imposable que vous avez reçu;
  • Vous avez déclaré des dépenses non admissibles dans votre déclaration de revenus;
  • Vous n’avez pas versé les retenues à la source de vos employés;
  • Vous n’avez pas déclaré un montant de TPS / TVH;
  • Vous n’avez pas produit de déclaration de renseignements; ou
  • Vous n’avez pas déclaré un revenu de source étrangère imposable au Canada.

Le programme de divulgation volontaire n’accepte pas les divulgations concernant:

  • les rentrées de faillite;
  • les déclarations de revenus sans impôts dus ou avec remboursements prévus;
  • Elections;
  • Arrangements de tarification préalable
  • Dispositions de roulement; et
  • Demandes d’ajout de pénalités et d’intérêts après évaluation

Divulgations volontaires – méthodes d’évaluation
(Remarque – ce ne sont que des lignes directrices générales) Bien que les programmes de l’ARC et de Revenu Québec aient des conditions d’admissibilité similaires, les agences respectives ont des approches très différentes lors du traitement des divulgations volontaires. Agence du revenu du Canada: En règle générale, l’ARC imposera le revenu non déclaré datant des 10 dernières années, majoré des intérêts.

Revenu Québec: Normalement, Revenu Québec commence par taxer le capital d’ouverture non déclaré du contribuable (en partant du principe qu’il n’a jamais été déclaré au moment où il a été gagné), puis à imposer tout revenu sur 6 ans.

Toutefois, selon le scénario, Revenu Québec accepte de temps à autre d’autres méthodes de calcul des taxes exigibles.

Divulgations volontaires – nommés vs anonymes Lorsqu’il procède à une divulgation volontaire, le contribuable peut soit:

  • Fournir des informations complètes, y compris le nom et l’adresse au moment du premier contact ou;
  • Ouvrez le fichier de manière anonyme. Le contribuable dispose alors de 90 jours calendaires pour révéler son identité. Lors de l’ouverture anonyme du fichier, le contribuable doit fournir les mêmes informations que ci-dessus, à l’exception de son nom (mais il doit également indiquer les trois premiers chiffres de son code postal).

Les deux options ci-dessus présentent des avantages et des inconvénients, qu’il convient d’examiner avant de prendre contact avec l’ARC et Revenu Québec.

Pour plus de renseignements sur le Programme Divulgations Volontaires avec l’Agence du Revenu du Canada cliquez ici. Pour plus de reseignements sur le Programme de Divulgations Volontaires de Revenu Québec cliquez ici. Pour plus d’informations sur les changements recents de Revenu Québec sur le Porgramme Divulgation Volontraires cliquez ici.

Notre bureau a effectué un grand nombre de divulgations volontaires avec les deux agences gouvernementales. Nous avons mis au point des systèmes pour résumer efficacement les informations financières et créer des rapports conçus pour présenter les informations dans un format accepté par les agents au traitement des divulgations volontaires de l’Agence du Revenu du Canada (ARC) et Revenu Québec.

 

Besoin d’aide?

Contactez-nous si vous avez des questions concernant le programme DV.

Notre bureau est situé à Montréal, Québec, et nous pouvons vous aider avec les soumissions canadiennes et québécoises.

Contactez notre équipe fiscale transfrontalière:
crossbordertax@uhyvictor.com
514-282-0067

 

Disposition of Taxable Canadian Property: Non-resident sale of Quebec real estate

  • A non-resident vendor of real estate situated in Quebec must inform the Canadian and Quebec governments of the sale of real estate within 10 days of the sale.
  • The purchaser of the property (usually via the notary in charge of closing the sale transaction) is required to withhold non-resident taxes of 25% (federal) and 12% (Quebec) of the gross proceeds of sale.
  • To reduce the withholding of non-resident taxes, the non-resident owner can file forms within 10 days of the sale with both the CRA and Revenue Quebec, together with evidence regarding the sale proceeds and the adjusted cost base of the property. If approved, the forms enable the non-resident taxes withheld to be limited to the tax on the actual gain realized on the sale.
  • After their review of the non-resident’s forms, the CRA and Revenue Quebec will issue a Certificate of Compliance. This Certificate permits the purchaser to reduce the taxes withheld on the sale. Generally the notary will issue cheques from their trust account holding the sale proceeds to cover the amounts owing calculated on the certificate requests.
  • Once the non-resident taxes are paid, the notary will generally distribute the remainder of the proceeds to the non-resident vendor.

Note that this process describes the withholding taxes only. The actual income tax liability is determined by filing Canadian and Quebec tax returns by April 30 of the following year.

Contact us directly if you require assistance with the sale of real estate located in Quebec.

Resources:

ITA section 116

CRA form T2062 and T2063

Revenue Quebec form TP1097

CANADA US TRANSFER PRICING AGREEMENTS
Updated: March 23, 2009

For more information contact Jonathan Levy at jlevy@uhyvictor.com. Jonathan is the Chairperson of the UHY Canada US Tax Team. UHY Victor (Montréal) prepares transfer pricing reports.

Click here to obtain the most recent copy of our UHY Global Transfer Pricing Guide.

CANADA US TRANSFER PRICING – A DEFINITION
Transfer prices are prices that companies charge for goods, services, tangible and intangible assets they trade with subsidiaries and other controlled entities. Given that these transfer prices are set internally by management, they are frequently subject to scrutiny by both the IRS and the CRA.

Tax authorities concur that the proper transfer price is one which two parties dealing at arm’s length would agree to. Consequently, the objective of transfer pricing experts is to determine what is the « arm’s length price » or “market price” is for any particular situation.

In recent years both the CRA and the IRS have increased their emphasis on transfer pricing audits. Both these tax authorities require companies to have documentary evidence supporting their transfer prices.

The Pacific Association of Tax Administrators (PATA), which include Australia, Canada, Japan and the United States, have created a “Transfer Pricing Documentation Package” so that one set of transfer pricing documentation can meet the respective transfer pricing documentation requirements in multiple jurisdictions, and these are integrated into the following text.

A proper analysis of many factors is required to determine a transfer price, including:

  • Nature of the company’s activities
  • Risks
  • Tangible and intangible assets employed
  • Characterization of the entities and comparability of arm’s length with non-arm’s length transactions.

CANADA US TRANSFER PRICING AGREEMENTS – REGULATIONS IN CANADA
In the absence of proper transfer pricing documentation, the tax auditor is required to assess a penalty of 10% of the net adjustment of the transfer price.

In addition, companies are required to have transfer pricing documentation that is current ,and it must be provided to the CRA within three months of a written request to do so.

CANADA US TRANSFER PRICING AGREEMENTS – AN OVERVIEW
Companies start their transfer pricing analysis by identifying the transactions between related parties, which generally fall into the following areas:

1. Transfer of tangible products such as inventory.

2. Transfer of services such as management and administration services.

3. Transfer of intangible assets such as the use of a patent or copyright.

4. Transfer of tangible capital assets such as machinery and equipment.

5. Intra-group loans.

CANADA US TRANSFER PRICING AGREEMENTS – INDUSTRY & MARKET ANALYSIS
The industry and market analysis provides a description of the general business environment, and includes:

Industry profile.

Market size and level of concentration.

General profiles of competitors, their size, strategies and market shares.

Current trends in the industry.

Critical success factors.

CANADA US TRANSFER PRICING AGREEMENTS – FUNCTIONAL ANALYSIS
Functional analysis is at the core of the transfer pricing study and includes analysis of:

1. Functions – which entity carries out the following which activities:
Design
Manufacturing
Financing
Inbound logistics
R & D
Inventory management
Outbound logistics
Marketing
Sales activities
After-sale services
Supporting activities

2. Risks – which entity bears the risks associated with the transaction, and include:
Financial risk
Credit and collection risk
Operational risk
Market risk
Product risk

3. Intangible assets – which entity:
Developed the intangibles
Has the legal ownership of the intangibles
Receives the benefit of the intangibles.

CANADA US TRANSFER PRICING AGREEMENTS – SELECTION OF A TRANSFER PRICING METHOD
The CRA provides the following hierarchy of the following five methods:

1. Comparable Uncontrolled Price (CUP) method
2. Resale Price (R-) method
3. Cost Plus (C+) method.
4. Profit Split (PS) method
5. Transactional Net Margin method (TNMM).

The CRA requires that the CUP method be used if possible. In cases where the CUP method is not feasible, one of the remaining four methods are to be used. In the rare case that it is not possible to use any of the above methods, other unspecified methods may be used. However, in general, it is not advisable to use unspecified methods.

The selection of a method will depend on the functional analysis and availability of comparable transactions. If it is possible to use the internal CUP method, then the selection of a method can be relatively straight-forward.

CANADA US TRANSFER PRICING AGREEMENTS – ECONOMIC ANALYSIS
The economic analysis provides the following:

selection of comparable transactions or companies

consideration of the quality of data

assumptions and comparability factors

selection of appropriate economic and statistical methods

profit level indicators

quantification of appropriate adjustments

CANADA US TRANSFER PRICING AGREEMENTS – RECOMMENDATION
The recommendation is a clear statement of the recommended transfer pricing policy.

CANADA US TRANSFER PRICING AGREEMENTS – IMPLEMENTATION & MONITORING
This section details the most efficient method of implementing the selected transfer pricing policy.

A transfer pricing study should be updated each year to reflect any material changes in the transactions under consideration. Provided that no material changes have occurred, an update is generally simple and straightforward.

Since every study must be prepared by the filing due date (generally 6 months after the corporate year end), it is advisable to monitor and document all the changes as they occur during the year. If circumstances change such that some or all transactions did not represent an arm’s length price, it is possible to record a compensating year-end adjustment. This adjustment should be fully documented.

CANADA US TRANSFER PRICING AGREEMENTS – DOCUMENTATION (APPENDICES)
The appendices should include documentation that supports conclusions reached regarding the transfer price.

 

CANADA – US TRANSFER PRICING AGREEMENTS – RESOURCES

CRA
Income Tax Act Section 247
IC 87-2R International Transfer Pricing
IC 94-4R International Transfer Pricing: Advance Pricing Arrangements (APAs)
IC 71-17R4 Requests for Competent Authority Considerations

CRA Forms:
T106 – Information Return of Non-Arm’s Length Transactions with Non-Residents
T1134A – Information Return Relating to Foreign Affiliates That Are Not Controlled Affiliates
T1134B – Information Return Relating to Controlled Foreign Affiliates
T1141 – Information Return in Respect of Transfers or Loans to a Non-Resident Trust
T1142 – Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust

Canadian Treaties – Ministry of Finance
Canada – US Tax Convention

IRS

Internal Revenue Code – section 482

OECD
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations

Other
PATA Transfer Pricing Documentation Package

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DISCLAIMER:
While every effort has been made to ensure that this site contains accurate information, it is possible that errors do exist in the materials presented. All of the information provided here is provided “as is”, with no guarantees of completeness, accuracy or timelines, and without warranties of any kind, express or implied. The information presented on this site should not be considered to be, or construed as legal, economic, tax, or accounting advice.

 

UHY Victor – For Montréal Transfer Pricing

759 Square Victoria, Suite 400

Montréal, Québec, H2Y 2J7

If you owe the IRS taxes on your 1040, there are several payment options available to you including electronic payments.

Payment options include:

  • Direct Pay: This free online tool allows individuals to pay their income tax directly from bank accounts without any fees or pre-registration. Any taxpayer who uses the tool receives instant confirmation that their payment was submitted.
  • Electronic Federal Tax Payment System: This free service gives taxpayers a safe and convenient way to pay individual and business taxes by phone or online. To enroll or for more information, call 800-316-6541 or visit www.eftps.gov.
  • Electronic funds withdrawal: E-file and e-pay in a single step.
  • Credit or debit card: Both paper and electronic filers can pay their taxes by phone or online through any of several authorized credit and debit card processors. Though the IRS does not charge a fee for this service, the card processors do
  • Same-day wire federal tax payments: You can verify with your Financial Instituition if they are able to do same-day wire. There maybe cut-off times and costs
  • Check or money order: Make your check or money order payable to “U.S. Treasury”. Also, print on the front of the check or money order: “2016 Form 1040”; name; address; daytime phone number; and Social Security number. To help insure that the payment is credited promptly, also enclose a Form 1040-V payment voucher.
  • Cash: It can take up to seven days to have yourself set up to make a cash payment. Please read all the steps carefully on the IRS site.

More information is available at IRS Payment Options https://www.irs.gov/payments

 

Les plafonds de déduction des frais et les taux des avantages de 2018 sont:

  • Le plafond de déduction des allocations exonérées d’impôt versées par les employeurs aux employés qui utilisent leur véhicule personnel pour le travail sera majoré de 1 ¢ en 2018 pour passer à 55 ¢ le kilomètre pour la première tranche de 5 000 kilomètres parcourus et à 49 ¢ par kilomètre additionnel. Au Yukon, au Nunavut et dans les Territoires du Nord-Ouest, le plafond d’exonération, qui est fixé à 4 ¢ de plus, sera également majoré de 1 ¢; il sera de 59 ¢ le kilomètre pour la première tranche de 5 000 kilomètres parcourus et de 53 ¢ par kilomètre additionnel.
  • Le plafond de la valeur amortissable des voitures de tourisme aux fins de la déduction pour amortissement (DPA) restera fixé à 30 000 $ (plus les taxes de vente fédérale et provinciale applicables) pour les achats effectués après 2018. Ce plafond limite le coût d’un véhicule pouvant être déclaré à titre de dépense d’entreprise aux fins de la DPA.
  • Le plafond de déductibilité des frais d’intérêt payés sur les sommes empruntées pour l’achat d’un véhicule automobile restera fixé à 300 $ par mois pour les prêts effectués après 2014.
  • Le plafond de déductibilité des frais de location d’un véhicule automobile restera fixé à 800 $ par mois (plus les taxes de vente fédérale et provinciale applicables) pour les contrats de location-bail conclu après 2018. Cette limite est l’une des deux restrictions s’appliquant à la déduction des frais de location d’une automobile; par ailleurs, lorsque la valeur du véhicule dépasse le plafond de la valeur amortissable, les frais déductibles représentent une proportion des frais de location.
  • Le taux général prescrit servant à déterminer l’avantage imposable qu’un employé reçoit à l’égard de la proportion des frais de fonctionnement d’une automobile payés par l’employeur qui servent à l’usage personnel de l’employé s’établira encore à 27 ¢ le kilomètre. Pour les contribuables dont la principale occupation est de vendre ou de louer des automobiles, le taux prescrit restera aussi le même, soit 24 ¢ le kilomètre. Ces taux reflètent les coûts d’utilisation d’une automobile. L’avantage additionnel lié au droit d’usage d’une automobile (c’est-à-dire au fait, pour un employé, de pouvoir utiliser à des fins personnelles un véhicule fourni par l’employeur) est calculé séparément, en fonction de la valeur amortissable, et il est également inclus dans le revenu de l’employé.

Les plafonds de déduction des frais et les taux des avantages de 2017 et 2018 sont:

  • 54 ¢ le kilomètre pour la première tranche de 5 000 kilomètres parcourus
  • 49 ¢ par kilomètre additionnel
New FBAR Deadline- Effective in 2018

FinCen has announced a new filing date for the FBAR (FinCEN Form 114). The due date has now been changed from June 30th to April 15th 2018 for the 2017 tax year to coincide with the Federal Income tax filing date. An extension of six months, for an October 15th filing completion date has been automatically granted.

https://www.irs.gov/uac/rda-2018-01-11-2017-fincen-form-114

US persons are required to file an FBAR if:

  1. The US person has either a financial interest in, or signature authority over at least one financial account located outside of the US.
  2. The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

The following are considered US persons:

  • US citizens
  • US residents
  • Green card holders
  • Individuals electing non-resident status under a tax treaty
  • Entities which include: Corporations, Partnerships, Limited Liability Corporations, Trusts or Estates formed under the laws of the US.

For more information on the FBAR see the below links:

What is an FBAR?

FBAR- what should a non-compliant American do?

Date des impôts personnels:

  • 15 Mars
  • 15 Juin
  • 15 Septembre
  • 15 Décembre

Pour plus d’informations cliquez-ici

The Tax-Free Savings Account (TFSA) is an account that provides tax benefits for Canadians. It may contain cash or investments such as mutual funds, certain stocks, bonds, or GICs.

How the TFSA works:

  • All Canadian residents aged 18 and over can contribute to a TFSA.
  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  • Contributions are not tax-deductible.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
  • Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death.

Annual Contribution Limit:

The annual TFSA dollar limit for 2016 is $5,500.

The annual TFSA dollar limit for 2015 was $10,000.

The annual TFSA dollar limit for 2013 and 2014 was $5,500.

The annual TFSA dollar limit from 2009-2012 was $5,000.

The current cumulative total contribution limit is $46,500.

US Citizens

Please note that the TFSA does not exist in the US and is taxed and treated as a foreign trust by the IRS which requires certain foreign reporting forms to be filed which involve large penalties if they are filed late.

For more information on the TFSA, click here.

The late-filing penalty is 5% of the balance owing and an additional 1% of the balance owing for each full month that your return is late, to a maximum of 12 months.

NOTE: The penalty may be higher if you’ve already been charged the late-filing penalty in any of the three previous years. If you missed the tax-filing deadline because of circumstances beyond your control, Canada Revenue Agency (CRA) may waive the penalty and applicable interest.

The deadline to file your 2017 personal income tax return is on or before June 15 2018. If you have a balance owing from 2017, you have to pay it on  or before April 30, 2018.

However; if you, your spouse, or common-law partner carried on a business in 2017, your return must be filed on or before June 15, 2018.

For more details please visit the Canada Revenue Agency (CRA).

The Canadian Payments Association (CPA) has announced new specifications which all cheques must conform to by December 2006. The new cheque specifications are in effect right now. Printers and companies that print their own cheques are encouraged to begin making the required system changes as early as possible. All Canadian business cheques should conform with the new specifications by December 31, 2006.

Each year businesses face a choice – what report do they want on their year-end financial statements. There are several types of financial statements that we can prepare, including the following: audited financial statements (most costly), reviewed financial statements, compiled financial statements.

Audit Report: We give an opinion as to whether the financial statements, taken as a whole, are fairly presented. This opinion is given after extensive tests of the accounting records are made. The tests include confirmation with outside parties, analytical procedures, inquiry of client personnel and a detailed study of the accounting records.

Review Engagement Report: We express limited assurance that we have not noted any items that would require adjustments that should be made to the statements in order for them to be in conformity with accepted standards. The accountant must conduct a review and be satisfied as to the reasonableness of the statements through inquiry and analytical procedures.

Compilation Report: We expresses no assurance on the correctness of the financial statements. We only disclose, in the form of financial statements, information that is the representation of the management of the business entity.

The most common reason for obtaining the more costly audited financial statements include the requirements of outside parties (such as banks, bonding companies, creditors, absentee owners, or potential purchasers). Reviews are adequate for many businesses, because they give us enough familiarity with our clients to provide tax planning advice and a consulting perspective where appropriate. Compilations are generally appropriate for simple situations where limited business and tax advice is required.

If you operate a sole proprietorship, a partnership, or a corporation that has gross sales over $30,000 in a fiscal year, you are required to register for and collect GST and QST. If your sales are less than $30,000, registration is optional.

Sole proprietors operating more than one business must combine the income from all businesses when determining if they need to register.

If you are a public service body, such as a charity, you do not have to register for the GST/QST until your total revenues exceed $50,000.

If your income exceeds the $30,000 threshold for any four consecutive quarters, or in any quarter, you must register. You have 29 days from the time that your revenues reach $30,000 to register with Canada Revenue Agency (CRA) so that you can charge GST/QST.

Pros: Often businesses that are not yet required to register for the GST/QST do so anyway. One benefit of registering early is that you can claim back the GST/QST you paid for start-up purchases. For some businesses charging the GST/QST adds credibility, as customers won’t know that the company is earning less than $30,000 a year.

Cons: Being registered means that you have extra paperwork to do. And of course, you also have to charge and remit the tax.

One of the most popular year-end tax-planning strategies is tax-loss selling, which can help you reduce your capital gains tax. Particularly with the recent strong performance in the Canadian stock market, you may have significant taxable capital gains, triggered by selling stocks at a profit. Half of your net capital gain is taxable at your marginal rate. However, you can offset your capital gains with capital losses. While no one likes selling a stock at a loss, it can make sense when the stock no longer meets your investment objectives – and you can use the loss to reduce your taxes. Your investment advisor can help you identify which stocks are suitable candidates for tax-loss selling.

Key dates:
For Canadian tax purposes, a sale takes place on the “settlement date” – normally three days after you initiate the sale. If you are considering a tax-loss sale, make sure you allow enough time for the transaction to settle in 2018.

Initiate sale by:

Canadian securities – Thursday December 24, 2018

US securities – Not yet published.

Offsetting gains in past or future years: Capital losses have to be used to offset capital gains the current year first. If the losses exceed the gains, then you can apply the excess amount against capital gains in the three previous years (2015, 2016, or 2017) or you can carry it forward indefinitely.

Superficial losses: Simply selling a stock to trigger a loss, and then buying it back within 30 days is considered a “superficial loss” by the Canada Revenue Agency, which means that the loss will be denied. The superficial loss rule also applies when your spouse or a corporation controlled by either you or your spouse acquires or reacquires the same security 30 days before or after the sale.

Is it better to lease or buy a car?

This is a common dilemma and for many people, it can be unclear which option is better.

Leasing is really a form of automobile financing, and therefore the real comparison is between leasing and taking out a car loan to buy the vehicle. The lease payments are generally lower than the car loan payments, because a lease only finances the use of the vehicle for a few years, rather than the purchase of the entire vehicle. Some people prefer to lease because you can get a more expensive car for lower monthly payments.

However, this ignores the “payment-free” period you benefit from when buying after you pay off the car loan. If you crunch the numbers, purchasing and holding the vehicle for a longer period of time is almost always less expensive than leasing in the long run.

The benefit of leasing is that most people lease a new vehicle every two or three years, and therefore have no major repair risks, and also enjoy the pleasures of a new car more often. The tax rules for deducting the use of a vehicle are complex, whether leased or purchased. However, Canada Revenue Agency (CRA) attempts to structure the tax rules so that the tax savings will be similar whether you lease or buy a vehicle.

Overall drivers looking for a less expensive option will come out ahead in the long run if they purchase. However, some people are willing to pay more to change their vehicle every two or three years, and this is easier to do with a lease.

Note that the zoning of the listing is not a relevant factor in determining the answer to this question.

The key factor is how the building was used by the present owner (ie – the seller).

If the building was used primarily as a place of residence then the sale is exempt from GST and QST. In the case of a split-use property (part residential and part non-residential) then GST and QST would apply to the value of the non-residential portion. If the buyer requests it, the seller must provide a statement when the sale occurs, as to whether all or any part of the property is exempt from GST and QST. This statement is generally found in the deed of sale, but should also be sought in a binding offer to purchase.

Note that if the buyer is registered for the GST and QST, then GST and QST does not have to be charged on the transaction. It is the duty of the notary to ensure that the GST and QST is charged if required, and they will do this at or before the closing.

A student may be required to file an income tax return.

If they are not required to file, there are many reasons for a student to consider filing a personal income tax return, which include:

  • GST/QST refund which can total almost $400 per year
  • Claiming tuition and education amounts, which can be transferred or carried forward
  • Income tax refunds
  • Property tax refund
  • Create RRSP room

For more information regarding Students and Income Tax Returns, click here.

Under the US-Canada Treaty, and the US and OECD Model treaties, a Canadian corporation becomes taxable in the United States only where its activities in the United States give rise to a permanent establishment.

A permanent establishment is generally defined to include either a fixed place of business (e.g., an office, branch, place of management, factory, etc.) or a dependent agent who habitually exercises the authority to conclude contracts on behalf of the corporation in the United States.

The Fifth Protocol to the US-Canada Treaty which includes a clause that became effective January 1, 2010 provides that a Canadian corporation may be deemed to have a US permanent establishment if it either:

  • Performs services in the United States through an individual present in the United States for an aggregate of 183 days or more in any given twelve-month period and certain other conditions are met, or
  • Provides services in the United States for an aggregate of 183 days or more in any given twelve-month period with respect to the same or connected project for US customers.

If a Canadian corporation has or is deemed to have a permanent establishment in the United States, the Canadian corporation will be subject to US tax return filing obligations and will be required to pay US tax on business profits attributable to that permanent establishment.

If profits of a permanent establishment that are taxed by the United States are also taxed in Canada and foreign tax credits are unavailable to offset the full amount of the US tax payable, double taxation on the US source income of the Canadian resident may result. Moreover, if a Canadian corporation fails to file a US tax return because it believes its US activities do not constitute a permanent establishment, that Canadian corporation (if it is later found to have had a US permanent establishment during taxable periods for which a US return was not filed) may be denied the ability to subsequently claim any deductions against income attributed to its US permanent establishment.

 

Click here for more information on Canada/U.S. tax issues: http://uhyvictor.com/en/us-canada

There are many reasons why one might decide to use a holding company, which include:

Corporate Planning:
If you are a business owner you transfer the shares of your operating company (Opco) to a holding company (Holdco) and then you can pay part of the earnings of Opco to Holdco as a dividend each year. This is generally a tax-free, intercorporate dividend. Holdco then uses that money to purchase investments such as real estate, marketable securities, and other private businesses. If Opco requires more cash for any reason, Holdco can lend the money back to Opco.

If the business owner personally withdraws the same earnings from Opco, the dividend will be taxable. However since the dividend to the holding company does not trigger any taxes, more funds are available to invest, and therefore more investment income can be generated.

In addition, a Holdco can pay income to the business owner and other family members. If other family members are in low tax brackets, they will pay less tax on the income distributions than the major shareholder would.

One can consider a holding corporation as a private pension plan. The owners can accumulate funds in a holding company during high earning years, and then withdraw these funds when they are required, often when they are taxed in lower brackets.

Another benefit is the excess earnings are transferred out of the operating company every year. As a result, these amounts are generally protected from the creditors of the operating company. If necessary, Holdco can lend that money back to Opco on a secured basis to retain that protection from creditors.

Estate Planning:
If you die with many investments owned as an individual, each asset will have to be re-registered in the name of an heir, unless they are held in joint ownership with the intended heir. However if you owns the same investments in a company, transferring assets to an heir can be accomplished by simply transferring the shares of the holding company to the beneficiary.

If you own investments personally, the use of a holding company can allow you to do an estate freeze so that future growth accrues to your intended heirs, perhaps children or grandchildren. Properly structured, future growth goes to your heirs’ common shares, but voting control stays with you. Your estate’s potential tax liability will be limited to the value of the investments at the date of the freeze – the taxes on the future growth will be deferred to sometime in the future.

If you reside outside of Quebec, there may also be some advantages in using a holding company to reduce probate fees.

US Estate Tax:
Canadian residents could be subject to US estate tax if they own « US situs property, » which includes shares in US corporations, among other things. If you’re otherwise subject to US estate tax on those securities, you can hold these investments in a Canadian holding company to avoid the estate tax.

OAS Clawback:
Taxpayers start to repay any federal OAS received when their income exceeds $67,668. If the individual can transfer investments to a holding company, the individual’s personal income may be reduced below the level where the OAS clawback applies.

Notice: While holding companies offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

A family trust is established when legal title to property is transferred by a person (the “settlor”) to a trust, that is created for a particular purpose. A wide variety of assets can be held by family trusts, including real estate, cash, a portfolio of securities such as shares, bonds and mutual funds, and the shares of privately held corporations.

Once the assets are transferred to the trust, they are then administered by one or more trustees for the benefit of the beneficiaries, who have an interest in the trust’s property and/or income. The beneficiaries may be individually listed when the trust is formed, or may be identified later as part of a specified group (such as “children” or “grandchildren”).

The settlor and trustees execute a trust deed evidencing the settlor’s intention to create the trust, as well as setting out the rights, duties, and obligations of the trustees, and the principles governing the trust.

Once the assets are transferred to a trust, they are legally separate and distinct from the assets of the settlor, trustees and beneficiaries.

Potential Benefits of using Family Trusts

Income Splitting:

  • The owner/manager of a business who would like to split income with a spouse and adult children with low incomes (for example, university students) in order to reduce taxes.
  • For those who own significant investment assets or have an investment corporation, family trusts can be used to split income from the investment assets or corporation among adult children.
  • A Family Trust can be a tax-effective way to provide for a former spouse and/or children of a previous marriage.
  • A Family Trust can be a tax-effective vehicle for providing for elderly parents or other adult relatives who require financial support.

Succession Planning:
For an owner of a business with children who may or may not be interested in becoming active shareholders, Family Trusts can be a very useful succession-planning tool, providing a vehicle for ongoing management and control of the business. In this case, the trustees of the Family Trust could hold the shares of the corporation for the benefit of the entire family until the succession of the business has been determined.

Creditor Proofing:
For someone who is concerned about possible financial difficulties in the future, a Family Trust can help to provide creditor proofing and financial security for his or her family.

If all income and capital distributions are at the discretion of the trustees, the beneficiaries’ creditors generally cannot seize any of the Family Trust’s assets. In addition, under an appropriately established Family Trust, the Trust may help to provide some protection of assets from future marital property claims involving a beneficiary.

Tax Planning for the sale of a business:
Beneficiaries may be eligible to claim the $750,000 enhanced capital gains exemption on the capital gain allocated to them from the disposition of the shares of a Canadian business. As a result, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust.

Reduction of taxes on death:
A Family Trust could be used as a means of transferring the growth in the value of a family business to the next generation on a tax-deferred basis.

Support for Elderly or Special Needs Individuals:
A Family Trust can be an effective way to provide for their ongoing financial needs.

By holding assets in a family trust the above benefits can be achieved while the trustees maintain full control (subject to their fiduciary duties as trustees) over the trust property. It is important to note that it is the trustees who control the trust property and not the settlor. The settlor, however, sets the terms of the trust in the trust deed and the trustees are bound to act according to the terms of the trust deed as well as general trust law. In addition, the settlor can be a trustee of the family Trust.

Notice: While family trusts offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

There are several benefits to owning life insurance in a corporation:

  • The main benefit is cost. Life insurance premiums paid by a corporation are generally not tax deductible. However it is generally cheaper to have a corporation pay the premiums than to withdraw funds from a corporation and to pay the premiums personally.
  • When a corporation receives life insurance proceeds upon a person’s death these amounts are generally received non-taxable to the beneficiary corporation.
  • The life insurance proceeds can generally be withdrawn tax-free from the company. This is achieved by making use of the Capital Dividend Account (CDA) mechanism to declare a capital dividend, which will be received tax-free by shareholders resident in Canada for most or all of the insurance proceeds.
  • In addition, many shareholders prefer to spend corporate funds for life insurance premiums, and save personal dollars for other purposes.
  • Some individuals prefer having the life insurance in a company, which gives increased assurance that funds are available to pay required premiums and that these premiums are paid on a regular basis.

Notice: While corporate owned life insurance can make sense for certain situations, the rules can be complex and this route should not be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

A trust is a legal entity which is separate from its settlor (the person transferring property to the trust), its beneficiary (the person who can benefit from the transferred property) and its trustee (the person who controls and administers the trust property).

Spousal Trusts: A trust that is set up through a will upon one’s death is called a testamentary trust. A spousal trust is a form of a testamentary trust whereby specific property is set aside from the estate to be used to provide for the maintenance and support of the deceased individual’s survivor spouse. Generally the income earned on the assets is paid to the surviving spouse, who also has the right to encroach upon capital if required.

Upon death, Canadian tax laws deem that a disposition of one’s property occurs at its fair market value as at the date of death. As a result, the appreciation in value of a deceased person’s assets can trigger income taxes payable on the deceased’s final return. However if certain conditions are met, the assets transferred directly to a testamentary spousal trust are deemed to be disposed at their original cost, which defers the income taxes otherwise payable on their unrealized gains.

Creating a Testamentary Spousal Trust in a will can accomplish the following:

  • Defers the income tax on the deceased’s unrealized capital gains until the death of the surviving spouse.
  • Creates a separate entity for tax purposes which allows income generated from the transferred property to be taxed in the trust. This effectively doubles the lower income brackets available to each individual thereby reducing the income taxes on income generated by the transferred property.
  • Protects the deceased individual’s capital from exposure to potential creditors of the surviving spouse.
  • Allows the deceased to appoint responsible trustees to safeguard the capital in the Spousal Trust from inappropriate investments and risks.
  • Helps ensure payment of the income generated by the assets in the trust to the surviving spouse.
  • Helps ensure that the deceased’s capital is protected and will eventually be transferred to the deceased’s chosen beneficiaries after the death of the surviving spouse. This may be important in second marriages where the spouses have children from a prior marriage.

Notice: While spousal trusts can make sense in certain situations, the rules can be complex and this route should not be taken without first consulting with a qualified tax adviser.

Please contact Ken Shemie if you have any questions or comments.

For technical details refer to the CRA’s IT305R4 « Testamentary Spouse Trusts ».

There are many reasons why one might decide to incorporate a business, which include:

LIMITED LIABILITY
A corporation is a legally separate entity from the owners. Accordingly the shareholders’ personal assets can be protected from claims made by creditors of the business.

TAX ADVANTAGES
Income taxes advantages can often be realized because:

  • Business and professional incomes are generally taxed at lower income tax rates if they are earned by a corporation rather than earned personally.
  • Substantial income taxes can be deferred if the owner-manager does not require all of the earned income for personal needs.
  • Taxes can also be reduced by choosing to draw a calculated mix of salary and dividends.

INCOME SPLITTING
Family members can also own shares of a corporation, which can allow for the payment of dividends (directly or through a family trust) to other adult family members who are in lower tax brackets.

ESTATE PLANNING
Incorporating a business enables the owner-manager to freeze the value of the assets of the company so that the taxes on future increases in the value of the business can be deferred.

SMALL BUSINESS CAPITAL GAINS EXEMPTION
The tax authorities permit the first $750,000 of capital gains on the sale of a Canadian business to be tax-free.

SUCCESSION PLANNING
The use of a corporation can enhance the orderly transition of a business to family members or to acquirers of a business.

CONTINUITY OF EXISTENCE
A corporation is a legally separate entity from the owners. Therefore the death of a shareholder does not bring about the end of a business. The businesses activities can continue uninterrupted, and the new owner will be the party that inherits the companies shares from the deceased individual’s estate.

OTHER CONSIDERATIONS
The benefits of an incorporation must be weighed against the additional costs and effort that are required to set-up and administer a corporation.

Notice: While the use of corporations offer excellent planning opportunities for many individuals, this route should not be taken without first consulting with a qualified tax adviser.

Please contact Sylvie Plante if you have any questions or comments.

US Citizens and US Permanent Residents in Canada

(Since the update: January 7, 2014)
A US citizen is subject to US federal estate taxes no matter where s/he lives in the world.

Upon death, US federal estate taxes are calculated based on the fair market value of worldwide taxable assets, which generally includes the value of all of one’s property interests at the time of death.

Under current rules, estate taxes are calculated on an American’s taxable assets at rates of up to 40%. However the estate taxes payable amount is reduced by an exemption on the first USD $5.34 million of assets, which means that US taxpayers are only subject to estate taxes if their worldwide taxable assets exceed $5.34 million.

This USD $5.34 million exemption applies to estate taxes, generation-skipping transfer taxes (GST) as well as gift taxes.

Gifts are integrated into the estate tax regime, and the USD $5.34 million estate tax exemption is reduced by any gifts which exceed USD $14,000/year (for 2013) made during an US citizen’s lifetime. Note that the threshold for gifts to a non-resident alien spouse is USD $140,000/year.

The gift tax is designed to prevent individuals from gifting assets during their lifetime to their heirs, thereby reducing the estate taxes due on their death.

Relatively new rules (referred to as « portability ») permit any unused portion of an individual’s USD $5.34 million exemption to be transferred to a surviving American spouse, which then gets added to their own USD $5.34 million exemption. Note that this provision applies to the exemption amount for estate taxes only. In addition, an individual who has been widowed more than once may only use the most recent spouse’s available exemption amount.

Canadians

Upon death, US federal estate taxes can be due if you own « US situs assets ». US situs assets include:

  • US real property net of non-recourse debt (including real estate investment properties, country places and condominiums)
  • US personal property (including boats, vehicles)
  • Stocks of US corporations incorporated or continued into the US (including those held in RRSP`s and RRIF`s). Note that maintaining a brokerage account in Canada to hold US securities does not avoid exposure to US Estate Tax
  • Debts of US companies and persons

Excluded assets include:

  • US bonds
  • US bank accounts
  • US life insurance policies (excluded but included in the world wide assets values)
  • Canadian mutual funds which hold US investments

Canadians who die holding US situs assets in excess of USD $60,000 are subject to US federal estate taxes, which are calculated on the total value of their US situs assets at a rate of up to 40%.

However the estate will be reduced by an exemption of USD $5.34 million x the ratio of US situs gross assets over worldwide assets.

Therefore if a Canadian dies with US situs assets making up 50% of their USD $8 million of world assets, they will have an exemption of:

USD $5.34 million x $4 million/$8 million = USD $2.67 million.

On death, a Canadian will generally pay taxes in Canada on any accrued gains on US assets on their terminal Canadian income tax return. Depending on the specifics, the Canadian Revenue Agency (CRA) will permit a foreign tax credit to be claimed and applied in Canada for the US estate taxes paid on those assets.

However the provinces generally do not allow a foreign tax credit for US estate taxes paid and, as a result, the estate may be subject to some double taxation at the provincial level.

The filing deadline for a US estate tax return is generally nine months after the date of death.

Planning for Estate Tax Liabilities

If your estate is potentially subject to US estate taxes, there may be planning strategies available to reduce your US estate tax exposure. Contact us if you require assistance analyzing your exposure to US estate taxes, and how this liability can be reduced.

Notice: US estate tax rules are complex and no planning actions should be taken without first consulting with a qualified tax adviser.

Please contact Jonathan Levy if you have any questions or comments.

IRS Information

For additional information from the IRS click here.

This is a complicated and often challenging question!

Click here to find out what is an FBAR.

What is the 2018 filing deadline?

We regularly assist Americans residing in Montreal and across Canada and other countries deal with late FBAR filings, and their potentially expensive FBAR late-filing penalties.

Usually we start reviewing the details, such as:

  • Are they compliant with their Canadian income taxes.
  • Are the US 1040 personal income tax return filings up-to-date?
  • If the US tax returns were filed, were they deficient in some way? Problematic and often overlooked forms/issues can include form 3520, 3520a, 8891, 5471, sub-part “f” income, US Income Sourcing, etc.
  • What is the nature/location/magnitude of the accounts to be reported on the FBAR?
  • Has all income been reported completely/correctly on the Canadian tax returns?

FBAR – Streamlined Program

The IRS “Streamlined Program” commenced in September 2012.

This program is designed to facilitate the process for non-compliant individuals who are considered to be « low-risk » to bring their US tax filings up-to-date and potentially avoiding late filing penalties.

This program requires filing 6 years of FBAR’s and 3 years of tax returns, and can resolve the FBAR issue at the same time as the unfiled US tax returns.

However the “Streamlined Program”:

  • Does not deal with the scenario where the tax returns (1040’s) were filed and the FBAR’s were not filed;
  • Does not offer the structural protections that exist for filers using other options such as the Voluntary Disclosure Program (OVDI), and;
  • Many individuals do not qualify for the “Streamlined Program” because they do not meet the criteria for « low risk« . For instance, if their US tax returns reflect taxes payable of greater than $1,500/year, the submission is not considered « low risk ».

Clearly most Americans who are not compliant with their FBAR filings are concerned with the penalties that can be levied on late FBAR’s. While the Streamlined Program does not provide any guarantees, it can be an attractive option for those who’s US tax returns meet the IRS criteria of « low risk ».

FBAR – Voluntary Disclosure

A voluntary disclosure is one method of rectifying deficient tax filings.
Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process.

Note FAQ 17 of the OVDI web page states:

“The purpose for the voluntary disclosure practice is to provide a way for taxpayers who did not report taxable income in the past to come forward voluntarily and resolve their tax matters. Thus, if you reported, and paid tax on, all taxable income but did not file FBARs, do not use the voluntary disclosure process. »

However many US and Canadian tax attorneys still recommend using the OVDI program because this FAQ appears to be IRS « policy » only, and is not actual law.

The OVDI is an option which should be considered, but keep in mind that the voluntary disclosure process can be expensive and arduous. Our experience is that the IRS OVDI program is backlogged with files, and processing a file can take several years.

FBAR – Quiet Disclosure

Another option is the « Quiet Disclosure », which consists of quietly mailing in late filings with no special program or cover information.

Quiet Disclosures were often successful in the past based on the experience that the IRS processed these tax filings and penalties were rare.

We do not recommend this option because the IRS has been alerted to this issue, and we have been informed that their ability to identify late-filings has increased, and they are intending to assess been late-filing penalties.

FBAR – Noisy Disclosure

Some practitioners are still advocating the “Noisy Disclosure” approach, which involves bringing taxpayers through the normal filing process, but with a carefully worded legal letter and personal contact with the IRS.

The “Noisy Disclosure” option has not been endorsed by the IRS, and therefore there is little comfort that it avoids late filing penalties.

FBAR – New Filing Procedures

Effective July 1, 2013, FBARs must be filed electronically using the E-Filing System maintained by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”). This mandatory electronic filing requirement applies to all FBARs, and to amendments of previously filed FBARs, that are submitted by individuals or by entities on or after the effective date.

FBAR – Final Comment

American residents in Canada and elsewhere are becoming increasingly aware of FBAR filing issues.

Great care should be taken when filing late FBAR’s because the penalties can be onerous. Note that in extreme cases individuals can be subject to criminal prosecution with jail sentences as well as high financial penalties.

Violation Civil Penalties Criminal Penalties Comments
Negligent Violation Up to $500 N/A 31 U.S.C.
§ 5321(a)(6)(A)
31 C.F.R. 103.57(h)
Non-Willful Violation Up to $10,000 for each negligent violation N/A 31 U.S.C. § 5321(a)(5)(B)
Pattern of Negligent Activity In addition to penalty under § 5321(a)(6)(A)
with respect to any such violation, not more than $50,000
N/A 31 U.S.C. 5321(a)(6)(B)
Willful – Failure to File FBAR or retain records of account Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $250,000 or 5 years or both 31 U.S.C. § 5321(a)(5)(C)
31 U.S.C. § 5322(a)
and 31 C.F.R. § 103.59(b) for criminal.
The penalty applies to all U.S. persons.
Willful – Failure to File FBAR or retain records of account while violating certain other laws Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. Up to $500,000 or 10 years or both 31 U.S.C. § 5322(b) and 31 C.F.R. § 103.59(c) for criminal
The penalty applies to all U.S. persons.
Knowingly and Willfully Filing False FBAR Up to the greater of $100,000, or 50 percent of the amount in the account at the time of the violation. $10,000 or 5 years or both 18 U.S.C. § 1001,
31 C.F.R. § 103.59(d) for criminal. The penalty applies to all U.S. persons.
Civil and Criminal Penalties may be imposed together. 31 U.S.C. § 5321(d).

If you would like to discuss FBAR’s, contact Jonathan Levy (Montreal, Quebec, Canada) from our US Tax Group.

Tax Cuts and Jobs Act: IRC Section 965 « Repatriation Tax »

Newly enacted section 965 imposes a « Repatriation Tax » on certain previously untaxed earnings of specified foreign corporations (SFCs) of U.S. shareholders by deeming those earnings to be repatriated.

  • Foreign earnings held in the form of cash and cash equivalents: taxed at a 15.5% rate;
  • Remaining earnings: taxed at an 8% rate.

The repatriation tax generally may be paid in installments over an 8 year period.

Controlled Foreign Corporations (CFC’s) subject to the « Repatriation Tax »

Under the « Repatriation tax » rules, a US shareholder of an SFC must include in its/his/her income the pro rata share of the accumulated post-1986 deferred foreign income of the corporation for the last taxable year beginning before Jan. 1, 2018.

Guidance provided by the IRS (Notice 2018-07) and the Tax and Jobs Cuts Act indicates that the repatriation tax on deferred foreign income is applicable to all US shareholders (including individuals, LLC’s, partnerships and corporations) who own a 10% or more voting interest in SFC’s. SFC’s include controlled foreign corporations (CFCs) and 10/50 companies, but not passive foreign investment companies (PFIC’s) that are not CFC’s.

Controlled Foreign Corporations (CFC’s) subject to the « GILTI »

The “global intangible low-taxed income” (GILTI) imposes a tax on the excess income of CFC’s over a 10% rate of routine return on tangible business assets. This restricts the benefits of the tax deferral that could exist in CFC’s.

Americans residing on Canada who own Canadian Corporations

The « Repatriation Tax » and GILTI apllies to Americans residing in Canada who own Canadian corporations. These individuals must carefully consider the implications of the « Repatriation Tax ». Our Canada-US Tax Team has established a « Repatriation Tax Task Force’, which has identified a number of methods of reducing the « Repatriation Tax » amounts payable.
For further details please contact Jonathan Levy CPA, CA at jlevy@uhyvictor.com.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Tax Cuts and Jobs Act

Tax Cuts and Jobs Act: Section IRC 965 « Repatriation Tax » and GILTI applies to Americans who reside in Canada and own Canadian Corporations.