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.

As mentioned last week, tax measures to be implemented from Budget 2008 include numerous changes relating to the application of the GST/HST. These include a number of amendments of GST and HST with respect to the following: Training for individuals with autism and other disabilities ñ Effective February 26, 2008 training that is specifically designed for individuals coping with autism or other disabilities will qualify for exemption from GST/HST. The exemption will be expanded to include training if supplied by a government; the cost of the training is reimbursed under a government program (partially or fully) or by a health professional, who in the course of a professional client relationship and is GST/HST exempt, identifies the program as a means of dealing with the disorder. Prescription drugs ñ The budget proposes to zero rate drug supplies to final consumers when prescribed by a health professional and is effective for supplies made after February 26, 2008. Medical and assistive devices ñ A number of medical and assistive devices are zero rated, and Budget 2008 has added four new categories to the zero rated list as follows: items for neuromuscular stimulation or standing therapy devices that are supplied on a written order by a medical practitioner; chairs designed for use by individuals with disabilities when supplied on a written order of a medical practitioner; chest wall oscillation systems used in airway clearance therapy and specially trained service animals used to assist an individual with a disability or impairment. Nursing services - Effective February 26, 2008 nursing services provided to individuals will be exempt from GST/HST regardless of where provided (i.e. health care facility or the individual's home). This would apply to services administered by a registered nurse, a registered nursing assistant, a licensed or registered practical nurse, or a registered psychiatric nurse, so long as the service is provided within a nurse-patient relationship. Treatment of Long-Term Residential Care Facilities ñ The application of GST/HST on these facilities will be clarified to ensure that they remain eligible for the New Residential Rental Property GST Rebate and the GST/HST exemption afforded to residential leases and sales of used residential rental buildings.

Recent changes have been made to the US-Canada Tax Convention (See July 10 release from The Department of Finance). In essence the release indicates that Canada agrees with the Technical Explanation of the Fifth Protocol that was issued by the IRS on July 10. The Knowledge Bureau is pleased to announce that an newly updated version of The Cross Border Taxation Course by John Mill is available to keep Real Wealth Managers© abreast of the application of the changes. This interesting course will especially prepare you to better work with clients who have questions about residency relating to their travels in and out of the US. A short excerpt of this course follows: The basic structure of the taxation of non-residents in both Canada and the U.S. involves two types of taxation. These types of taxation require either: the filing of a tax return; or withholding taxes on the gross amount of the payment. In general terms the dividing line between these types of taxation is whether the income is active or passive. Tax Returns Tax returns must be filed for: employment; business; and taxable property dispositions. Employment and business are dealt with in this chapter; the issues related to property dispositions are dealt with in the "Property" chapter. Both countries allow elective returns for rental income (see Property chapter); and Canada allows a return to be filed for pension income. Withholding Taxes The basic withholding tax rate in Canada is 25%. This basic 25% withholding rate is reduced by the Canada-U.S. tax treaty for all items of income except rent. Canada imposes a 15% withholding rate on payments to independent service providers. The basic withholding rate in the United States is 30%. This basic 30% withholding rate is reduced by the Canada-U.S. tax treaty for all items of income except rent. The United States imposes a 10% withholding rate on the sale of real property owned by non-residents. Exemptions Certain items of income received by non-residents are exempt from taxation. Exemptions are found within the general taxation law and are further expanded by exemptions granted by the tax treaty. In Canada these items include certain types of management fees, royalties and interest. In the U.S. these amounts include interest paid by banks and insurance companies. In addition certain types of royalties and management fees are exempt from taxation. The tax treaty adds exemptions for certain types of employment income, and business income. In addition the tax treaty exempts capital gains from the sale intangible property (shares) from taxation. Treaty Rules The tax treaty significantly modifies the source and withholding rules as follows: Salaries, wages, compensation - must be more than $10,000 or 183 days Sale of Inventory: business profit - permanent establishment Interest - 10% withholding Dividends - 5% or 15% withholding Rents - no change Patent, copyright, royalties, etc. - 10% withholding or exempt Sale of real property - shares of foreign corp. exempt Sale of personal property - exempt Pensions - 15% withholding (periodic) The tax treaty extends the number of situations in which income earned by non-residents is not taxable in the U.S. (and Canada). The most notable of these situations are: Personal services performed in the U.S. are not at taxable if they are: Dependant personal services performed for a Canadian employer for less than 183 days in a year in the U.S. Independent personal services performed in the U.S. for a U.S. employer for less than 183 days in a year in the U.S. Business income unless there is a permanent establishment Capital gains arising on the sale of personal property In the absence of the treaty these items would all be U.S. source income. The treaty does not affect the source of these items of income -- it simply provides that these items of income are not taxable in the U.S. It is important to note that income sourced in the U.S. but exempt by treaty requires the filing of treaty based return. Excerpted from Cross Border Taxation which has been updated for 2008. This course is a core course in the Investment Planning Services Specialist program and an optional course in the Tax Services Specialist program.

Did you know that the accumulation of investment assets in a corporation may adversely affect the shareholder's ability to claim the Capital Gains Deduction when the shares are sold? That's important news for anyone working with a corporate owner-manager.  Bookkeepers and accountants may know that there is typically a substantial tax deferral in retaining income up to the annual small business limit in a Canadian controlled private corporation, but income over that amount would normally be paid out as a bonus. A salary or bonus which takes corporate income below the annual small business limit may be advisable, however, only where the personal tax situation of a family member results in the salary attracting little tax. Furthermore, in some circumstances it may make sense to leave business income in the corporation to be taxed at a high rate. The after-tax amount of such income can later be distributed as an "eligible dividend", which generates a higher dividend tax credit than income which was taxed at the low corporate rate and may, indeed, result in a negative tax rate for a lower income shareholder. Both these issues must be considered in owner-manager compensation and retirement income planning.For more information on owner-manager tax planning, take The Knowledge Bureau's certificate course entitled Tax Planning for Corporate Owner-Managers.

The Department of Finance tabled draft legislative proposals to implement the remaining tax measures this spring's budget, along with several previously announced tax initiatives on July 14. Students of courses in the Knowledge Bureau Tax Services Specialist, Certified Bookkeeping Specialist and Tax Efficient Retirement Income Specialist programs will find a detailed synopsis posted on their Net Tools site. In brief, the proposals released draft legislation as follows: Personal Tax Provisions Implementation of many of the Tax Free Savings Account rules S. 18(1)(u) prohibits the deduction of fees related to an TFSA S. 18(11) prohibits the deduction of interest on money borrowed to contribute to a TFSA S. 40(2)(g) extends the stop-loss rule that applies to transfers to an RRSP or RRIF at a loss to transfers to a TFSA S. 74.5(12) adds an exception to the attribution rules for assets transferred to a spouse or common-law partner if those assets are contributed to that spouse's TFSA (and are not excess contributions). S. 104.4(1)(j) is amended to allow for the tax-free transfer between TFSAs S. 115.1(5.3) allows a charitable donation credit in the year of death for a donation of an individual's TFSA via a direct designation to a charity S. 128.1 is amended to include TFSAs in the list of assets that are not deemed disposed of on emigration S. 138.1(7) is amended to ensure that amounts payable out of a segregated fund policies held within a TFSA are not subject to taxation. S. 146.2 sets out the basic rules for TFSAs S. 149(1) makes a trust governed by a TFSA non-taxable Part XI.01 imposes a penalty tax on excess TFSA contributions, non-qualifying and prohibited investments, and on contributions made to a TFSA while the individual is a non-resident.  S. 207 also imposes taxes on excess TFSA contributions,  non-qualifying and prohibited investments, and on contributions made to a TFSA while the individual is a non-resident and includes the definitions of those terms S. 207.06 also allows the minister to waive those taxes in such cases as reasonable error or when penalties are imposed under Part XI.01 and S. 207 Business Tax Provisions The sharing of Business Number-related information in connection with government programs and services by more government entities Adjustments to the scientific research and experimental development investment tax credit rules S. 37(1.4) provides that certain SR&ED expenditures made outside Canada will be treated as having been made in Canada according to the rules set out in S. 37(1.5) and S. 37(9)(b) S. 37(2)(a) is amended to ensure that those expenses being treated as having been made in Canada under S. 37(1.4) cannot also be deducted as a current expense by virtue of having been made outside Canada An enhanced carry-forward for investment tax credits; Changes to computations of "eligible dividends", and the dividend tax credit to reflect lower corporate income tax rates in the future; S. 82(1)(b) adjusts the gross-up of eligible dividends to 44% for 2010, 41% for 2011, and 38% for 2012 and later years S. 121(b) adjusts the dividend tax credit for eligible dividends from 11/18 which is applicable to 2008 and 2009 to 10/17 for 2010, 13/23 for 2011 and 6/11 for 2012 and later years The extension of capital gains and losses treatment on an acquisition of control of a corporation to gains and losses that result from fluctuations in foreign exchange rates in respect of debt denominated in foreign currency; A clarification of the application of the excess corporate holdings rules for private foundations; Revised draft amendments relating to the computation of income, gains and losses of a foreign affiliate; Revised draft regulations that modify the tax treatment of foreign affiliate active business income earned in a jurisdiction with which Canada has concluded a tax information exchange agreement. New rules for the conversion of specified investment flow through (SIFT) trusts (often referred to as "income trusts") into corporations. Draft amendments to take into account financial institution accounting changes; Other provisions of the February 26, 2008 Budget were tabled on March 14, were passed in the House and received Royal Assent on June 18. The significant income tax provisions in that document included the legislative details behind the following: Tax-Free Savings Account investment details to begin in 2009. Notably, Investment income earned within the account will not be taxed and withdrawals will be tax-free. Related provisions included limitation of interest deductions, the extension of stop loss rules on the disposition of capital to a TFSA, softening of the Attribution Rules for property invested to a spouse or common-law partner's TFSA or that of a trust and rules relating to life insurance policies issued as a TFSA. Clarification of rules for the deductibility of over-the-counter medical costs including insulin purchases Changes to RESP contribution limits and time frames New rules relating to the Registered Disability Savings Plans (RDSPs) The Guaranteed Income Supplement earnings exemption increase The Northern Residents Deduction, which was increased by 10%, effective for the 2008 tax year. Reduction of the Dividend Gross up and related dividend tax credit on eligible dividends over the years 2010 to 2012 Rules regarding the donation of eligible medical gifts for the purposes of charitable activities outside of Canada Rules regarding donations resulting from the transfer of money from a deceased individual's RRSP or RRIF or TFSA. Disposition of Taxable Canadian Properties to afford ìsafe harbour protectionî to purchasers of property from non-resident vendors, a fine-tuning of rules surrounding withholding requirements has been tabled Other rules relating to changes in residency New rules surrounding taxes payable by SIFTs New rules surrounding Investment Tax Credits (ITCs) Details on the deduction of SR&ED expenditures incurred outside Canada Gifts of certain exchanged interest in a partnership for publicly traded shares which are then donated to a qualified donee within 30 days of the exchange The remaining tax measures to be implemented from Budget 2008 include numerous changes relating to the application of the GST/HST. These include a number of amendments of GST and HST with respect to health care services, including training for individuals with autism and other disabilities, prescription drugs, medical devices and the treatment of long-term residential care facilities. More details to follow in next week's issue.

It's half time, and that's a good time to review the income requirements of the owner-manager you may be working for. How should you begin this process? Here are some tips to consider: First, in determining the optimum income plan, each individual family member's total income and type will be important. It is important to ensure that the family member has enough total income to utilize fully his or her personal credits, excluding those that can be transferred to other family members. These are discussed below. So, the total amount of income is important. The type of income is equally important. The payment of a reasonable salary, for example, will increase both net and taxable income. It will also normally attract CPP and (often) EI contributions, both of which give rise to additional personal credits and may increase the family member's Canada Employment Credit. A decision to pay additional salary must take these into account. Another key issue is the fact that a salary is earned income for purposes of creating RRSP contribution room. If it is desirable to allow family members to accumulate retirement income there may be a preference for paying a salary. Dividend income, on the other hand increases both net income and taxable income as well, but also provides the dividend tax credit. Issues that need to be taken into account in evaluating the payment of a dividend as compensation include: the taxable amount of the dividend is greater than the cash amount, so dividends have a greater effect on clawbacks than do salary, dollar for dollar; dividend income is not earned income and does not create RRSP contribution room; dividend income is investment income for purposes of computing the Cumulative Net Investment Loss account, and the receipt of a dividend may increase access to the capital gains deduction; dividends paid from a private corporation to a minor will normally attract the kiddie tax, meaning that they are taxed at the highest possible rate; because of the dividend tax credit, the tax treatment of the dividend must be modeled closely where the taxpayer has relatively low income and may be in danger of not utilizing all of his or her personal credits. For more information on owner-manager tax planning, take The Knowledge Bureau's certificate course entitled Tax Planning for Corporate Owner-Managers. Next Time: Pitfalls with Surplus Investments Held in Corporate Accounts

Meet the Erosion Twins, Inflation and Taxes. Inflation has been out of the country for a while; Taxes is a homebody. They have a voracious appetite, respectively, for capital and income, and they need your support. Take Inflation for example. He's a growing boy. A June 19, 2008 news release from Statistics Canada confirmed that consumer prices rose 2.2% in May compared with May 2007, up from the 1.7% increase reported in April. According to the release, the 0.5 percentage point acceleration in the all-items Consumer Price Index (CPI) was the sharpest since September 2007. The main culprit? Over the past year, crude oil prices almost doubled. As a result, gasoline prices increased substantially across the country, rising the most in Quebec and Ontario. Higher mortgage interest costs were also a contributing factor to the rise in consumer prices in May; however, new housing prices continued to exert more upward pressure on this index than mortgage interest rates themselves. Canadians paid 1.9% more in May for store-bought food items compared with the same month last year, up from the 0.9% increase posted in April. Those households with a sweet tooth were most heavily burdened: prices for bakery products increased 13.2%, the fastest 12-month rise since October 1981. Inflation and Taxes together are big dependants in any household. Consider this scenario, as computed by The Knowledge Bureau's Retirement Savings Planner, (you can try a free demo at www.knowledgebureau.com/evergreen) Savings: $1,000 invested each year for 30 years at an average 5% return $69,761 Taxes: What's left after an average effective tax rate of 30% per year $38,513 Inflation: What's left after an average inflation rate of 2% per year $29,497 The Erosion Twins have been expensive. . .together they've eaten $40,264 of savings in a generation!