Helping First Nations, Inuit and Metis with Tax Filing

The Canada Revenue Agency is trying to reach out to Canada’s First Nations, Inuit and Metis to encourage them to file their tax forms on time and could use your help to make sure these communities get all the tax benefits they are entitled to. But filing tax returns are not always easy, especially when there is income on and off the reserve.

On December 16th, 2008 Canada's Department of Finance and the U.S. Department of the Treasury each announced the entry into force of the fifth Protocol amending the Canada-U.S. Income Tax Convention (the "Treaty"). The 5th Protocol was signed on September 21, 2007 and ratified by Canada in December 2007. For a copy of the Protocol click here.  For a copy of the Technical Explanation click here. For a copy of the News Release issued by Canada's minister of Finance click here.  For a copy of the comment on the Fifth Protocol prepared by the US Joint Committee on Taxation click here. For a copy of the testimony of Treasury Deputy Assistant Secretary for International Tax Affairs Michael F. Mundaca before the US Senate Committee on Foreign Relations click here.  

The Department of Finance has released explanatory notes for the Notice of Ways and Means Motion tabled on November 28, 2008. These proposals, a thorough review of the pertinent changes to the 2008 personal tax return, the tax impact of the current financial crisis on households for 2009/2010 and the tax consequences of debt management will be discussed in detail on The Knowledge Bureau Nationwide Update Tour January 9 to 17, 2009 . Spaces are still available for locations in Toronto, Winnipeg, Calgary, Edmonton and Vancouver. There are a number of tax initiatives contained in the Motion from the 2008 budget as well as tax changes released in July 2008. These initiatives were presented in the July 16th and July 23rd Breaking Tax and Investment issues. Click here for a link to those archived versions. The Motion also includes provisions that were proposed in the 2008 Economic and Fiscal Statement issued on November 27, 2008. Other provisions outlined in the Motion are as follows: Changes for Employees Employee Benefit Plans Because of changes to the Canada US Income Tax Convention (Fifth Protocol), S. 6(1)(g) is adjusted so that only employee contributions to an employee benefit plan which not deductible are excluded from income when received. Exchange of Employee Security Options S. 7(1.4)(b) is amended to ensure that when a SIFT is reorganized into a corporation, any employee securities options in the successor corporation are deemed to be the same as the original options for SIFT units. Canada Employment Credit S. 118(10) is amended so that income received under the new Wage Earner Protection Program Act (WEPP) is eligible for the Canada Employment Credit, beginning in 2008. Changes for Investors TFSA After Death S. 12(1)(z.5) stipulates that income earned after death and during the first year of the trust created by that death, on capital that was part of a TFSA at the time of death will be included in the income of the recipient if paid out of the trust and otherwise in the income of the trust if not paid out. Definition of Investment Contract S. 12(11) is amended to exclude a TFSA from the definition of "Investment Contract" so that TFSA earnings will not be included in income by virtue of S. 12(4). Capital Gains - Identical Property S. 40(3.5)b.1) is amended to deem that shares in capital stock in as SIFT wind-up corporation be identical to equity in a SIFT wind-up entity. This change is to ensure that no deemed dispositions occur when a SIFT is converted to a corporation. Annuities in TFSA S. 56(1)(d) is amended to ensure that income from an annuity held within a TFSA is not included in income. TFSA as Collateral for Loans S. 146.2 is amended to ensure that taxpayers may use their TFSA as collateral for arm's length loans with no income tax consequences. SIFT Unit for Share Exchange S. 85.1 is amended to allow for a tax-deferred exchange of SIFT units for shares in the successor corporation so long as the fair market value of the units and exchange shares are the same. Where the FMV of the exchange shares exceeds the FMV of the SIFT units, the taxpayer must include the difference in income as a shareholder benefit. Where the FMV of the exchange shares is less than the FMV of the SIFT units and it is reasonable to regard that excess as a benefit that the taxpayer wanted to be conferred on a non-arm's length person or partnership, the taxpayer must include that excess in income as a shareholder benefit. Non-Resident Income Earned in Canada S. 115 is amended to ensure that amount received by a non-resident under the new Wage Earner Protection Program Act (WEPP) are considered to be income earned in Canada for 2008 and subsequent taxation years. Former Resident ñ Replaced Shares S. 128.3 is amended to allow for the replacement of SIFT units with shares in a successor corporation to be treated as if they were the same property. This will affect the taxation status of former residents who owned SIFT units when they departed which were subsequently replaced with shares when the SIFT was reorganized. Other Provisions Income Assistance S. 56(1)(r) is amended to ensure that assistance received under government assistance programs that are similar to income replacement payments provided under the Employment Insurance Act are to be included in the recipient's income. This will include income received under the new Wage Earner Protection Program Act (WEPP), beginning in 2008. Moving Expenses S. 62(1)(c) is amended to include WEPP (Wage Earner Protection Program Act) payments paid with respect to work at a new location to be included in income earned at the new work location for the purposes of limiting moving expenses to income earned at the new work location. RRIF Minimum Payments and Re-Contributions S. 60.021 and S. 146.3 are added to implement the proposed changes to RRIFs for 2008 that was announced on November 28. For tax year 2008 only, the minimum withdrawals from RRIFs are reduced to 75% of the minimum withdrawal amount otherwise calculated. Taxpayers who have already withdrawn more than the new minimum may re-contribute any excess to the RRIF and exclude the re-contribution from income. The deadline for recontribution is the later March 29, 2009 and 30 days after the legislation receives Royal Assent. RPP Variable Benefit Minimum Amount ITR 8506 are amended for the tax year 2008 only to adjust the minimum amount required to be received as variable benefits under a money-purchase RPP to be consistent with the 25% reduction in the minimum amount for RRIF withdrawals. Refundable Medical Expense Supplement S. 122.51 is amended to ensure that income received under the new Wage Earner Protection Program Act (WEPP) is included in "earned income" for the limitation of the Refundable Medical Expense supplement. Working Income Tax Benefit S. 127.2 is amended to income received under the new Wage Earner Protection Program Act (WEPP) in the definition of "working income" for the purpose of the Working Income Tax Benefit. Investment Tax Credit Carryover S. 127(9.01) is amended to allow unclaimed ITCs to be carried forward for 20 years, beginning with unclaimed amounts from tax year 1998. Likewise, S. 127(36) is amended to allow for recapture of ITCs claimed back to 1998. TFSA Abuse Rules S. 207 is adjusted to further clarify the circumstances under which the penalty for the extension of an advantage to a non-arm's length person in respect of a TFSA. S207.02 is adjusted to clarify that a person's TFSA contribution room is not increased by a distribution that is necessary to remove any excess TFSA amount. S. 207.01 is adjusted to remove "exempt contributions" from the definition of excess TFSA amounts. Exempt contributions are amounts rolled over from the TFSA of a deceased taxpayer to the TFSA of a surviving spouse or common-law partner. The rules surrounding "exempt contributions" in S207.01 are modified to require that the transfer be made by the end of the taxation year following the death and extending the deadline for the designation to 30 days after the date that the transfer is actually made. S. 207.03 is amended to allow a noon-resident to make qualifying transfers or exempt contributions to their TFSA without attracting a penalty tax. S. 207.06 is amended to remove the minister's authority to waive penalty tax on prohibited investment income earned within a TFSA. Business Numbers S. 241 is amended to allow sharing of Business Number information with other levels of government Disclosure of Personal Information S. 241 is amended to allow an official to share with a representative of a government entity the business number and the name of the holder of a business number so long as that entity uses the business number as an identifier in connection with a program, activity or service. A "government entity" is defined in S. 241(10) to include federal, provincial, municipal and aboriginal entities, including boards or commissions established by such groups to perform administrative or regulatory functions. New S. 241(9.3) allows the minister to make public the business number and name of the holder in connection with a program, activity or service provided or undertaken by the minister. New S. 241(9.4) allows a representative of a government agency to make public the information provided to them by the minister under S. 241. Medical Expenses ITR 5700 is amended to add the following medical devices, the cost of which is an allowable medical expense, beginning in 2008: altered auditory feedback devices for the treatment of a speech disorder; electrotherapy devices for the treatment of a medical condition or a severe mobility impairment; standing devices for standing therapy in the treatment of a severe mobility impairment; and pressure pulse therapy devices for the treatment of a balance disorder. New ITR 5701 describes the types of substances, the cost of which is an allowable medical expense, for expenses after February 26, 2008. To qualify, the substance must meet the following criteria: be manufactured, sold or represented for use in the diagnosis, treatment or prevention of a disease, disorder or abnormal physical state, or its symptoms, or in restoring, correcting or modifying an organic function; be prescribed for a patient by a medical practitioner; and may, in the jurisdiction in which it is acquired, be lawfully acquired for use by the patient only with the intervention of a medical practitioner. This change allows medicines that are available without a prescription to be claimed so long as they are made available to the patient by a medical practitioner (such as a pharmacist). Auto Expenses ITR 7305.1 is amended to agree with the automobile benefit rates for 2008 that were announced on December 24, 2007. ITR 7306 is amended to agree with the automobile deduction limits for 2008 that were announced on December 24, 2007. Pension Credits ITR 8308 is amended consequential to the changes to the Fifth Protocol so that individuals who accrue benefits under an unregistered foreign pension plan in respect of employment with an employer who is carrying on business in Canada do not accrue RRSP contribution room in respect of that employment. Corporations Taxable Income Earned in a Province, etc. Part IV of the ITR provides prescribed rules for the determination of the net income of a corporation earned in the year. Subsection 400(1) of the Regulations is amended to refer to the definition of taxable income earned in the year in a province in subject 124(4) and clarifies the prescribed rules. The 2009 and subsequent tax years will be impacted by the amendment. International Banking Centres - New Subsection 400(1.1) provides for amounts related to a corporation's income or loss from its international banking centre business. This will also apply for 2009 and subsequent taxation years. Permanent Establishment - Subsection 400(2)(e.1) provides that for a corporation that doesn't have a permanent establishment, the jurisdiction of its head office or registered office is deemed to be their permanent establishment. Foreign Net Insurance Premiums New subsection 403(4) provides that net premiums for insurance on property located in a country other than Canada will be deemed to be a premium to respect of insurance on property to the corporation's permanent establishment is located.

It's already time to start your tax planning for NEXT year! Employers should include a copy of the new TD1 forms to all employees with their year end pay cheques in order that the correct source deductions are deducted for 2009. Form TD1, Personal Tax Credits Return, is to be completed by employees and provided to their employers. The forms are used by the employer to determine the amount of federal and provincial or territorial tax that is to be deducted or withheld from the employee's employment income. Generally employees will complete a Federal TD1 plus a TD1 for the province or territory of employment. The federal TD1 has been revised to include the increased non-refundable tax credits available to taxpayers at the end of the year. The basic personal amount and spousal amount have now been increased to $10,100 and the amount that may be claimed for every child born in 1992 or later is now $2,089. For a link to the CRA website and the TD1 form click here. Form T1213 is to be completed by taxpayers when requesting reduced tax deductions at source for deductions or non-refundable tax credits that don't appear on Form TD1, Personal Tax Credits Return. For example, if there are registered retirement savings plan (RRSP) contributions being made outside of contributions made through your employer or there are support payments made and tax deductions at source should be lowered due to these deductions, it is appropriate for a taxpayer to use Form T1213 to request reduced tax deductions at source for the tax year. For a copy of Form T1213, click here. For more tax tips, purchase a copy of Essential Tax Facts written by The Knowledge Bureau's President, Evelyn Jacks, to learn how to ace your 2008 tax return and save money all year long. 

Beginning in 2008, CRA will no longer produce form T2124 Statement of Business Income or form T2032 Statement of Professional Income.  These two forms have been replaced with new form T2125 Statement of Business or Professional Income.  The new form will not be released by CRA until January 7. The new form has been rearranged to accommodate both types of income but does not ask for any additional information than was asked for on the old forms.  It may be used for either business or professional income but if a taxpayer has both, separate T2125 forms will need to be prepared, one for each type of income.  Reporting on the T1 General return has not changed. Although not yet available from CRA in electronic format, T4002 Business and Professional Income (2008 version) is available in EverGreen Explanatory Notes. Check it out today.

Don's incredulous. His half a million dollar portfolio is now worth $250,000. How much does it take to accumulate $250,000 over the next ten yearsóthe time Don has left until retirement? Simple math would tell you that's $25,000 in new savings every year, and that's a lot of new moneyóimpossible for most, unless a lottery or inheritance suddenly falls out of the sky. What can be done? At one point Don had decided to "stop the bleeding" and sold his stocks. Now he's looking at safer fixed income investments to recover his losses. Trouble is, with a 50% decrease in value, he'll need a 100% increase in his remaining capital just to get back to square one - and that's not even taking into account that inflation will have eroded the purchasing power of his savings during the recovery process. Let's take a look at recovery times at various income levels and how much additional capital will be required to recover within Don's 10-year window. See the following table.  These calculations assume that the savings are in a registered account so that the earnings are not eroded by income tax.  For non-registered accounts, to adjust for taxes, use an interest rate that is equal to the actual rate x (1 - MTR).  Thus, for example if you invest at 5% and your marginal tax rate is 40%, the equivalent yield is 5% x (1 - 0.4) = 3%.  Interest Rate Years to recover Value after 10 years Additional Capital Required Annual Deposits Required 2.50% 28.07 $320,021 $179,979 $16,064.69 3.00% 23.45 $335,979 $164,021 $14,307.63 3.50% 20.15 $352,650 $147,350 $12,560.34 4.00% 17.67 $370,061 $129,939 $10,822.74 4.50% 15.75 $388,242 $111,758 $9,094.71 5.00% 14.21 $407,224 $92,776 $7,376.14 5.50% 12.95 $427,036 $72,964 $5,666.94 6.00% 11.90 $447,712 $52,288 $3,966.99 6.50% 11.01 $469,284 $30,716 $2,276.17 So, if Don were to invest the entire $250,000 in 10-year government bonds, which are currently yielding 3.17%, his saving would have recovered to $341,566 at the end of 10 years. In order to make it back to $500,000 before retirement, Don would have to add an additional $13,712 to the pot each year.  He should also keep in mind that, depending on inflation rates over the next ten years, that $500,000 could have a purchasing power of less than what $400,000 has today. Tips on short term, tax efficient recoveries: Make RRSP Contributions Make TFSA Contributions (January 1) Reduce tax withholding and the December 15 instalment payment Increase this year's tax refund: dig for every tax deduction and credit you are entitled to Transfer winning stock: make charitable donations before year end Carry losses back to offset taxes paid on previously reported capital gains Buy assets before year end to increase deduction for Capital Cost Allowances Reduce mortgage interest and credit card payments, invest savings Take a second job or consulting contract Rent out a room in the house Stop feeding the kids cheese. . .

Many folks seem to be chronic late filers when it comes to their personal tax returnónever a good idea when CRA owes you money, as you have continued to give the government an interest free loan. Worse, however is when you owe them; and yes, they will be charging you interestócompounded dailyóand more. Voluntary compliance can really pay off when you file a tax return to clear up your guilty conscience. CRA will not charge penalties if you tell them about your tax indiscretions before they tell youócheck out the potential list below if you are a chronic late filer. There are several layers of penalties that can be invoked including interest, compounded daily, at the prescribed rate of interest, plus 4%. OUCH! To comply voluntarily, see your tax advisor with details regarding all under-reported income, over-reported deductions or credits and file form T1ADJ to correct your errors or omissions. Remember, tax filing year 1998 will be statute barred after the end of this year, so if CRA owes you a refund, you'll lose it if you don't claim it in December. In fact, this could all turn out well if you hurryóan unexpected refund from an adjustment or late filed return could help with the credit card payments in January! NON-COMPLIANCE PENALTIES FOR TAXPAYERS Late filing penalties ó first time: 5% of unpaid tax plus 1% per month for 12 months; second time within a three year period after demand to file: 10% plus 2% per month for 20 months Failure to file a return ó for each such failure, the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100 during which the failure to file continues. Gross negligence ó false statement or omission of information in the return - 50% of tax on understated income with a minimum $100 penalty. This penalty will also apply to a false statement relating to the GST Credit. Failure to provide information on a required form ó $100 for each failure Failure to provide Social Insurance Number ó $100 for each failure unless applied for within 15 days of the request to file False statements or omissions with regard to foreign properties ó 5% of the fair market value of contributions made to the property, minimum of $24,000 Failure to provide information with regard to a foreign-held property ó $500 per month for a maximum of 24 months; $1,000 a month, maximum of 24 months if there is a failure to respond to a demand to file plus an additional penalty of 5% in some cases. Effect of carry back of losses ó Penalties assessed may not be offset by the carry back. Late or insufficient instalments ó 50% of interest payable exceeding $1,000 or 25% of interest payable if no instalments were made, whichever is greater. Misrepresentation by a third party ó the greater of $1,000 and the total of gross entitlements from the scheme or in all other cases, $1,000 Third party participation in make of false statements ó greater of $1,000 and the lesser of the penalty to which the taxpayer is liable above and the total of $100,000 plus the person's gross compensation Failure to deduct or remit source deductions ó1 to 3 days: 3% penalty; 4 or 5 days: 5% penalty; 6 or 7 days: 7% penalty; more than 7 days: 10% penalty Second such failure in same year if grossly negligent ó 20% of amount not withheld or remitted. Criminal Penalties Taxpayers who participate in tax evasion can also be liable to a second level of punishment by being charged with an offense. Here's what you need to know: Anyone who is found to be guilty of an offence as a result of failure to file a tax return can face a fine of not less than $1,000 and not more than $25,000 or both the fine and imprisonment for up to 12 months. Anyone convicted of tax evasion will face a fine of not less than 50% and not more than 200% of the tax that was sought to be evaded or a prison term not exceeding two years, or both. An additional fine of not less than 100% and not more than 200% of the tax sought to be evaded or credits sought to be gained. This additional penalty would be sought by election of the Attorney General and could also be accompanied by a prison term of not more than 5 years. To learn more about preparing T1 tax returns, register for Introduction to Computer-Based Personal Tax Preparation or call 1.866.953.4769 today to make an appointment for your free professional development consultation.