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UWO Faculty Income
Tax Presentation
March 21, 2014
Presented by:
Julia Klann
Stephanie Sinclair
Diane Wood
Overview
• Canadian Tax Considerations
–
–
–
–
Residency Status For Individuals
Income Inclusions & Tax Deductions
Tax Credits
Consulting Income and Incorporation
• US Tax Considerations
– Filing Requirements & Overview of US Tax System
– Income Inclusions & Tax Deductions
– Foreign Reporting Requirements for US Citizens in
Canada
– Expatriation Provisions
2
Basis of Canadian Taxation
• Resident of Canada
– Taxed on world wide income from all sources
– Entitled to foreign tax credits for non-Canadian source
income
– Files a T1 Individual Tax Return
• Non-Resident of Canada
– Taxed on Canadian source income
– Entitled to utilize provisions of Canada – United States
Income Tax Convention (1980) to determine Canadian
income tax liability
– Files a T1 NR Individual Tax Return
3
Residency Status For Individuals
1. Deemed full-time residency
– sojourned in Canada for 183 or more days
2. Full-time residency
– based on continuing relationship with Canada based on
surrounding facts
3. Part-time residency
– severing or creating ties to Canada in departure or arrival
4. Non-resident
– Not resident under 1 – 3 above
4
Income Inclusions
•
Employment Income
– Includes remuneration and taxable benefits reported on T-4
•
Property Income
– Includes interest, dividends, royalties and rental income
•
Business Income
– Includes self employment income such as consulting
•
Taxable Capital Gains
– Includes 50% of capital gains in excess of capital losses
•
Other Sources
– Includes items such as pensions, RRSP and alimony
5
Scholarships, Fellowships and
Bursaries
• Taxable to the recipient net of available exemption
– amounts received from the employer of a parent are
included in the child’s income
– amount received by an employee from his/her employer
are taxable as employment income and not eligible for the
exemption
6
Scholarships, Fellowships and
Bursaries
• Exemption calculated as the aggregate of:
i.
Scholarships, fellowships and bursaries received for
enrollment in:
• a program for which the education deduction can be claimed;
or
• an elementary or secondary school educational program
ii.
The lesser of:
• scholarships, fellowships, bursaries and prizes received to be
used in production of literary, dramatic, musical or artistic
work; and
• amounts expended to produce the work
iii. Lesser of:
• $500; and
• amounts received in excess of exemption claimed in i. and ii.
7
Research Grants
• amount “received” in excess of “allowable expenses” is
taxable in year of receipt
• an amount is not considered received if all the following
conditions are met:
– funds are available to individual who has an academic
appointment to university;
– funds are paid directly to university;
– funds are to be used solely for costs of research; and
– funds were not used or otherwise available for personal benefit of
individual
• allowable expenses include cost of equipment, fees,
laboratory, charges, etc and exclude:
– personal living expenses;
– unreasonable amounts; and
– amounts otherwise deductible or paid/reimbursed by University
8
Motor Vehicle Expenses
• Deductible if:
– ordinarily required to carry on duties away from place of
employment
– required to pay expenses under employment contract
– not in receipt of non-taxable allowance for motor vehicle
expenses
– Form T2200 signed by employer
• Amount of expenses not limited but amounts must be
reasonable and substantiated by receipts and records
9
Dues and Other Expenses of
Performing Duties
• Amounts paid in year as:
– Annual professional dues necessary to maintain
professional status
– Office rent, salary of assistant or substitute if required by
employment contract
– Cost of supplies consumed in duties if required by
employment contract
– Annual union dues
• Require a Form T2200 signed by employer
10
Registered Retirement Savings
Plan Contributions
• Annual limit calculated as the lesser of:
– 18% of prior year’s earned income, and
– Annual dollar limit (see below)
reduced by pension adjustment for prior year
• Annual dollar limits:
2013
2014
– Current
$23,820 $24,270
– Indexed based on increases in average wage levels
• Pension adjustment is value of pension earned in prior
year
11
Moving Expenses
• Moving expenses incurred in respect of a move
originating outside Canada are not deductible
• Moving expenses deductible in respect of a move to a
new business or employment in Canada if:
– Both the old residence and new residence are in Canada; and
– Distance between new residence and new work is at least 40
km closer than old residence
• Deduction is limited to business or employment income
at new location and undeducted amounts may be
carried forward
12
Moving Expenses
• Deductible moving expenses include:
– Travel costs for family members
– Transportation and storage of household effects
– Cost of meals and accommodations for up to 15 days during
the move
– Lease cancellation costs in respect of old residence
– Selling costs of old residence
– Legal fees, transfer taxes in respect of new residence if old
residence was sold
– Up to $5,000 related to mortgage interest, property taxes,
insurance, heat and power on vacant old residence during
period reasonable efforts made to sell
– Utility connection and disconnection fees and costs related
to revising legal documents to reflect new address
13
2014 Personal Tax Credits
Federal
Ontario
Tax rate applied
15.00%
5.05%
Basic personal
$11,138
$9,670
11,138
nil
8,211
821
2,255
nil
Spousal/partner
- income threshold
Child
Children’s fitness / artistic
500
$55 refundable credit
Adoption
11,774
11,797
Disability
7,766
7,812
Medical
-income threshold
------Amount paid------2,171
2,189
(see footnote)
14
2014 Personal Tax Credits
Federal
Ontario
15.00%
5.05%
$2,426
$2,426
EI (max)
914
914
Education
- Full time – per month
- Part time – per month
465
140
520
156
Tax rate applied
CPP (max)
Tuition
-------Amount paid--------
Interest on student loan
--------Amount paid-------
• Medical credit is for eligible medical expenses exceeding lesser of :
–3% of net income
–Threshold amount
15
Charitable Donations Tax Credit
• Gifts to:
–
–
–
–
–
–
–
Registered charity
Registered Canadian amateur athletic association
An exempt housing corporation
A Canadian municipality
The United Nations or an agency of UN
A prescribed university o/s Canada
A charitable organization o/s Canada to which Canada made a gift in
year or preceding year
• May claim gifts made in year and preceding five years
• Federal and Ontario credit of 15% on first $200 and 29% on
remainder to of 75% of net income
• Foreign donations may be used to reduce Canadian tax on foreign
source income from the same jurisdiction
16
First-Time Donor’s Super Credit
• For first-time donors, a federal tax credit of 25% is
available for the first $1,000 of monetary charitable
contributions.
• First-time donors are those who:
– Have not claimed a donation tax credit between the 2008
and 2012 taxation years
– Do not have a spouse who has claimed a donation tax
credit between the 2008 and 2012 taxation years
17
Consulting Income / Business Income
• consulting income is included in the calculation of
business income on Form T2125
• an unincorporated business must have a December
31 year end
• required to register for GST purposes if taxable sales
exceed $30,000 in a fiscal period
• business income is calculated on an “accrual basis”
and not on a “cash basis”
– accounts receivable at year end included in income
– accounts payable at year end deducted from income
18
Business Expense Limitations
The ITA prohibits deduction of:
•
an outlay unless incurred for purpose of earning business or
property income
•
an outlay of a capital nature
•
an outlay incurred to earn exempt income nature
•
a reserve for contingent liability, unless otherwise allowed
•
a personal or living expense
•
club or recreational facilities dues and amounts incurred for
use or maintenance a yacht, a camp, a lodge, or a golf course
Business Expense Limitations
• one-half the cost of meals and entertainment subject to
exceptions for office functions and work at remote work
locations
• home office expense unless:
– principal place of business; or
– used on regular and continuous basis for meeting clients,
customers or patients
• remuneration unpaid within 179 days of taxation year
Incorporation of Consulting Income
Incorporated
Business
Unincorporated
Business
Income
$100,000
Consulting
Company
Proprietorship
Income Tax
$0
$49,530
Corporate
$15,500
Personal
$30,441
Mr. A
Mr. B
$49,530
Total Tax
$45,941
21
Incorporation of Consulting Income
Advantages:
•
•
11% tax rate on first $500,000 of taxable income
from business sources
Capital gains exemption
– Only applies to sale of shares
– $750,000 for qualified small business corporation shares
•
•
Ability to split income with family members
Flexibility in remuneration package and in timing of
receipts
22
Incorporation of Consulting Income
Disadvantages:
•
Shareholder benefits
– can apply if corporation pays personal expenditures or has a
loan receivable from the shareholder
•
Complexity
– additional reporting requirements
– have to maintain separation between corporation and
individual
• Set-up costs and annual carrying costs
23
International Income Tax Conventions
Select Non-Resident
Withholding Tax Rates
Interest
Dividends
Royalties
Pensions
•
Australia
10%
5/15%
10%
15/25%
•
China, People’s Rep
10%
10/15%
10%
25%
•
France
10%
5/15%
0/10%
25%
•
Germany
10%
5/15%
0/10%
15/25%
•
India
15%
15/25%
10/15/20%
25%
•
Pakistan
15%
15%
0/15%
25%
•
United Kingdom
10%
5/15%
0/10%
0/10/25%
•
United States
0%
5/15%
0/10%
15/25%
24
Overview of the US Tax System
• The United States taxes the following individuals on their
worldwide income:
– US Citizens
– US Permanent Residents (Greencard holders)
– US Residents
• Citizens are taxed on their worldwide income even if not
physically present or resident in the US
• Entitled to foreign tax credits for non-US source income
• File a 1040 Tax Return
25
Americans in Canada:
General Filing Requirements
• All US citizens are required to file Form 1040 annually
– Form 1040 is due on April 15th but an automatic extension is granted to
June 15th for Americans who live abroad
– Extension does not extend the time to pay but late payment penalties
are not imposed until after June 15th
• US citizens are taxed on worldwide income, regardless of
their country of residence
– Therefore US citizens living in Canada must file a Canadian return
reporting their worldwide income and a US return reporting their
worldwide income
• Potential for double tax exists, but several provisions of the
Act/Code/Treaty help mitigate this exposure
26
Relief from Double Taxation:
Foreign Earned Income Exclusion
• Qualified individuals may elect to exclude up to $97,600 US
of foreign earned income from taxable income
– Reported on Form 2555
• Income is reported on the return and then the exclusion is
reported as a subtraction from gross income
• Business income can also qualify for the foreign earned
income exclusion
• Foreign taxes paid on excluded income do not qualify for
the foreign tax credit
– Therefore proration of taxes required
27
Relief from Double Taxation:
Foreign Earned Income Exclusion
• An individual generally qualifies for the exclusion if his
tax home is in a foreign country and one of the
following tests are met:
– Bona Fide Residence Test – must be a resident of
the foreign country for an uninterrupted period that
includes an entire tax year
– Physical Presence Test – must be physically
present in a foreign country for 330 full days during
a period of 12 consecutive months
28
Relief from Double Taxation:
Foreign Tax Credit
•
Foreign tax credit may be claimed for foreign taxes paid on foreign source
income
•
Separate “baskets” for sources of income
– Passive Basket: generally includes interest, dividends, rents, royalties
and capital gains
– General Limitation Basket: all other types of income
•
Foreign taxes eligible for credit include Canadian income taxes, EI
premiums and Canadian/other foreign withholding taxes paid
– Note that the top Canadian tax rate is 49.53% vs. top US federal rate of
39.6% therefore the FTC usually eliminates all US tax on Canadian
source income
•
Note that Canada also allows a FTC for US taxes paid on US source
income taxable in Canada
29
Americans in Canada:
Taxation of Income
• Employment Income
– Cannot deduct RRSP
– RPP contributions are deductible under the new Treaty protocol
– Sourcing depends on where the services are performed
• Dividend Income
–
–
–
–
Qualified vs. Ordinary dividends are taxed at different rates
Dividends from Canadian corporations may qualify for the reduced rate
Dividends are sourced to the country of the payer
Holding Canadian mutual funds can create issues for US citizens
• Capital Gains
– Tax rate depends on whether the gain is short term or long term
– Sales of stock are sourced to the country of the taxpayer’s residence
– FTC issues can arise depending on the period of time the stock was held,
as well as foreign exchange
30
Americans in Canada:
Taxation of Income
• Pensions
– Treaty provides for matching treatment of US pension
plans in Canada. Therefore if a distribution from a
plan is not taxable in the US, Canada will not tax the
pension income either
– Roth IRAs are also granted Treaty benefits provided
that the taxpayer does not make any contributions to
the plan while resident of Canada
– This includes conversion from traditional IRA to Roth
IRA
31
Taxation of Income Cont’d
• Scholarships
– Amounts received as a qualified Scholarship by an individual
who is a candidate for a degree at a qualified educational
organization are excluded from income
– This does not apply to any amounts received which
represent payments for teaching, research or other services
as a condition for receiving the scholarship
- Sabbatical Leaves
– Expenses can be deductible on Schedule A as other
itemized deductions limited to 2% of AGI
– Expenses must be directed related to the Sabbatical
– Should write a sabbatical proposal outlining the research
projects you plan to pursue, establish a formal visiting
arrangement with the host institution and keep good records
32
Consulting/Business Income
• Tax treatment the same if treated as business income
earned personally
– Taxable on both the Canadian and US return
– Eligible for FTC
• Corporations
– Can be a CFC if a Canadian corporation or a controlled foreign
affiliate if a US corporation
– Therefore additional filing requirements exist
– Can trigger additional deemed income inclusions
• LLC or S-Corps are not recommended since the tax
treatment differs in Canada and the US
– Canada does not provide for the flow through of income to the
shareholder
– Results in mismatch of income inclusion/foreign tax credits
33
Americans in Canada:
Other Filing Requirements
• Registered Retirement Savings Plans (RRSP)
– IRS treats RRSPs the same as regular investment accounts
therefore there is no deferral of income tax
– Income earned in RRSPs is not taxed in Canada until
withdrawn from plan
– Canada-US Tax Treaty allows for a resident of the US to
defer inclusion of income currently earned in an RRSP until
such time that the income is taxed in Canada
• Must disclose Treaty election on Form 8891
– Separate Form 8891 required for each RRSP
• This election cannot be made on a late filed return
• Must also disclose RRSP account on FinCEN 114
and Form 8938
Americans in Canada:
Other Filing Requirements
• Registered Education Savings Plans (RESP)
– Plan allows for individuals to make contributions for
the future post-secondary education of beneficiaries
• Contributions cannot exceed $50,000 per beneficiary
– Earnings are not taxable in Canada until received by
the beneficiaries
– US treats RESP account as a grantor trust
• Income in the account must be included on the
taxpayer’s US return annually
• Must be reported to the US on Form 3520/3520A
Americans in Canada:
Other Filing Requirements
• Tax Free Savings Account (TFSA)
– Plan allows for individuals to earn investment income
in Canada tax-free
• Contributions cannot exceed $5,500 per year
– US treats TFSA account as a grantor trust
• Income in the account must be included on the
taxpayer’s US return annually
• Must be reported to the US on Form 3520/3520A
36
Americans in Canada:
Other Filing Requirements
• Reporting may be required for investments in nonUS entities:
– 5471 “Information Return of US Persons with Respect to
Certain Foreign Corporation”
• Disclosure form for all US persons who have investments in certain
foreign corporations (includes investments in Canadian corporations)
• Special reporting rules when foreign corporation is a considered a
controlled foreign corporation (CFC)
• Potential for deemed income inclusions in the US which could result
in a timing difference in income/taxes between Canada and the US
• Most common deemed income inclusions are for passive income and
shareholder loans, as well as personal services income
– Form 8865 – Required to report investments in certain
foreign partnerships
– Form 8858 – Required to report investments in foreign
disregarded entities
Americans in Canada:
Other Filing Requirements
• FinCEN Form 114, “Report of Foreign Bank and
Financial Accounts (FBAR)”
– Separate filing from the tax return
– US persons who have a financial interest in or signature
authority over foreign bank, securities, or other financial
accounts, both business and personal, whose total value
exceeds $10,000 are required to file annually
– Must disclose details of each account held, including the
highest monthly balance of the account in the year
– Due date is June 30th of each year
– Significant penalties for failure to file can be imposed
– Must be electronically filed
Form 8938: Statement of Foreign Financial Assets
• Any individual that holds in aggregate more than $400K
(MFJ residents of Canada) in reportable financial assets
must report information about these interests on their
return
– Does not replace FBAR requirement
• Specified foreign assets that must be disclosed on the
return include:
–
–
–
–
Foreign financial accounts
Foreign brokerage accounts
Interests in foreign entities
Foreign pensions, retirement plans, etc
39
New for 2013:
Medicare Tax on Investment Income
•Medicare Tax on Investment Income
3.8% tax imposed on the lesser of
(a) Net investment income
Interest, dividends, capital gains
Royalties, rents (unless ordinary course of business)
(b) Modified adjusted gross income in excess of
$250,000 (joint filers)
$125,000 (separate filers)
40
Americans Should Avoid Canadian
Mutual Funds
• US considers foreign mutual fund to be a passive
foreign investment company (“PFIC”)
– Highest tax rate on excess distribution and gains
– Interest charged on deemed deferred tax amount
– No problem if held by RRSP if election made
• Also be cautious if investing in Canadian Income Funds
– Distributions may not qualify for reduced US tax rate
on dividends
– Return of capital for US purposes is likely different
from Canadian return of capital
41
Expatriation Provisions
• Imposed on certain individuals who renounce US
citizenship or relinquish a greencard
• New rules involve a deemed disposition of all property
held by the taxpayer at expatriation
– The covered expatriate is deemed to have sold nearly all his worldwide assets at
FMV on the day before the expatriation and is taxed on the accrued gains above
the threshold amount
– Gain is taxed as ordinary income
• Covered Expatriates are those taxpayers who meet
any one of the following:
– Average net income tax for the previous 5 years exceeds $155,000
– Net worth exceeds $2M at the time of expatriation
– Fails to certify under penalty of perjury that he/she has met the requirements of the
US tax code for the 5 preceding tax years
42
Canadian Tax Treatment of US
Pension Plans
• Canadian law requires a taxpayer to include in
income amounts received from a foreign retirement
arrangement (FRA)
– Payments out of a FRA are not taxable in Canada to the
extent that they would not be taxable in the other country
to a resident of that country
– FRA definition includes an IRA
• Intention of FRA designation is to provide matching
for Canadian residents with IRA plans
• Allows payments to be transferred from one IRA to
another without triggering Canadian tax
43
Canadian Tax Treatment: Roth IRA
• A Roth IRA is not a FRA
– Therefore a Roth IRA is not treated the same way as a traditional
IRA
• Treaty discusses the treatment of Roth IRA plans and
includes Roth IRA in the definition of pension
• Under 3(b) of Article XVIII a Roth IRA will be treated as a
pension as long as no contributions are made to the Roth IRA
after December 31, 2008 while the taxpayer is resident of
Canada
– Therefore income can accrue in the plan without being subject to
US tax.
– Distributions are not taxable in the US; therefore they should not
be taxable in Canada
• Contributions do not include rollover contributions from a
different Roth IRA or Roth 401(k) but do include a conversion
from an employer plan or traditional IRA into a Roth IRA
Roth IRA as “Pension”
• If a contribution is not made into the Roth IRA the
taxpayer can elect to defer Canadian taxation with
respect to the income accrued in the Roth IRA
• Under paragraph 1, pension income arising in one
country and paid to a resident of the other country
may be taxable in the other country but if the
pension income would be excluded from income in
the first country, income cannot be taxed in the
other country
– Roth IRA distributions are not taxable in the US,
therefore should also not be taxable in Canada
Transfer of Plans to Canada
• Lump-sum payments out of a IRA would be taxable in
Canada (because it would be taxable in the US)
– Therefore US tax applies to transfers of IRA plans to
Canada
• Eligible for contribution to a RPP or RRSP plan if
derived from contributions made to the IRA by the
Canadian taxpayer
– The transfer must be made within 60 days following the end
of the year in which the payment from the IRA is received
• The lump sum payment is treated as income and then
the taxpayer claims a deduction for the contribution of
the lump sum into the RRSP
Questions?
47
Julia Klann, CA, CPA (Illinois)
(519) 747-8295
[email protected]
Stephanie Sinclair, CA, CPA (Illinois)
(519) 747-8201
[email protected]
Diane Wood
(519) 660-2123
[email protected]
48