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.

We'd like to thank all our readers who sent us feedback on our articles on pension income.  The following are some points brought up.   Is Pension Income Splitting Always a Good Idea? There are instances where splitting of pension income between spouses or common-law partners can have more negative effects than positive.  One area not discussed in our previous article is the claiming of medical expenses.  Since medical expense claims are reduced by 3% of the taxpayer's net income, the possibility exists that the transfer of pension income could reduce or eliminate a claim for medical expenses.    Since the credit for a medical expense claim is only 15% of the claim, adding $1,000 to a taxpayer's income will reduce the claim by $30 and the credit by $4.50.  This is more than offset by tax reductions for the transferor if he or she is a higher tax bracket, but if the two spouses are in the same tax bracket, the net effect may be negative.  The scenario, then, for this negative effect is both spouses are taxable both spouses in the same tax bracket one spouse is claiming medical expenses Where one of the spouses has no pension income, tranferring enough to claim the full pension income amount may still be beneficial although transferring more would be detrimental.   You should also look at the effects on provincial taxes as the brackets often do not coincide with the federal ones and the amount of the pension income credit will also vary for many provinces.   The effects of this election are not always straightforward so be sure to work out the optimum transfer for each client situation.   German Pensions In our article on pensions from the Republic of Germany we mistakenly indicated that private pensions received by Canadian residents were not taxable in Canada.  In fact, such pensions are subject to taxation in Canada and will likely have income tax withheld which is eligible for the foreign tax credit.  We apologize for this error.

What kind of service have you been receiving from the CRA? If you're not satisfied with it, there are now more options available to you to resolve any problems. The Taxpayer's Bill of Rights outlines the following right for individuals: to receive entitlements and to pay no more and no less than what is required by law to service in both languages to privacy and confidentiality to a formal review and a subsequent appeal to be treated professionally, courteously, and fairly to complete, accurate clear, and timely information not to pay income tax amounts in dispute before you have had an impartial review to have the law applied consistently to lodge a service complaint and to be provided with an explanation of CRA findings to have the costs of compliance taken into account when administering tax legislation to expect CRA to be accountable to relief from penalties and interest under tax legislation because of extraordinary circumstances to expect CRA to publish their service standards and report annually to expect CRA to warn you about questionable tax schemes in a timely manner to be represented by a person of your choice Plus CRA's commitments to small business: to administering the tax system in a way that minimizes the costs of compliance for small businesses to working with all governments to streamline service, minimize cost, and reduce the compliance burden to providing service offerings that meet the needs of small businesses to conducting outreach activities that help small businesses comply with the legislation we administer to explaining how we conduct our business with small businesses These rights and commitments are explained in the CRA's publication RC17 Taxpayer Bill Of Rights Guide: Understanding Your Rights As A Taxpayer. If you find that a CRA representative is not respecting any of these taxpayer's rights of commitments to small business, you should follow up on taxpayer right #9: ìto lodge a service complaint and to be provided with an explanation of our findings.î Probably the most common complaint we here is of the service received from the CRA. Some common service complaints noted in RC17 are: undue delays in meeting service standards errors, omissions, or oversights on CRA's part poor or misleading information received in your dealings with CRA, and unprofessional behaviour from CRA staff. The CRA even has a form (RC193 Service-Related Complaint) for you to file such complaints. If you're feeling that you're getting nowhere with the CRA, the government has recently appointed Mr. Paul Dubé to act as a Taxpayer's Ombudsman to help resolve issues with CRA. According to the Taxpayer's Ombudsman website Mr Dubé's mandate is to: ensure that CRA respects taxpayer's service rights conduct impartial and independent reviews of service-related complaints about the Canada Revenue Agency (CRA); facilitate taxpayer access to assistance within the CRA; identify and review systemic and emerging service-related issues within the CRA that have a negative impact on taxpayers; and provide advice to the Minister of National Revenue about service‑related matters in the CRA. To file a complaint to the Taxpayer's Ombudsman, you must file the Tax Ombudsman's Complaint Form which is available online. The complaint form can be mailed or faxed to the Ombudsman's office (along with any supporting documentation).   The ombudsman cannot review complaints dealing with tax policy or legislation, or decisions that can be dealt with by the courts.

By John Mill A non-resident is required to file a tax return in Canada if they are employed, carry on business, or if they sell "taxable Canadian property" (TCP). This article considers the Budget 2008 rules that relate to a subset of TCP known as treaty protected property (TPP). TCP is appreciable capital property owned by a non-resident. When a non-resident disposes of appreciable capital property s. 116 imposes a 25% withholding obligation on the purchaser. Canada has an extensive treaty network and a number of those treaties exempt a non-resident from Canadian capital gains tax unless the property, directly or indirectly, derives its value from Canadian real estate. There are exceptions to the real estate rule for business properties. Recently the venture capital industry in Canada has lobbied the government on behalf of US venture investors citing the drag on investment created by the s. 116 procedures. US investments in shares of non-real estate companies are TPP; however, until Budget 2008 s.116 applied across the board and caught TPP in its dragnet. Budget 2008 proposes three changes to the s.116 process more efficient. TPP exemption: TPP will be exempt from the s.16 withholding requirement, there is a 30 day (after sale) notice requirement for related party transactions; Purchaser exemption: It is not enough to exempt TPP, because s.116 applies to the purchaser. Purchasers need assurance as to when they no longer have to withhold if they are wrong then they become personally liable for the 25% withholding plus penalties and interest. "Reasonable Inquiry" Protection: Purchasers will be exempted from s.116 if they make reasonable inquires. Currently purchasers are exempt from s.116 if they sell to Canadian residents. The reasonable inquiry is satisfied upon receipt of a declaration sworn under oath from the Vendor (unless the circumstances indicate otherwise) that they are a Canadian resident. Budget 2008 proposes a reasonable inquiry protection for purchasers if three points are satisfied (taken from the Minister's notes) : the purchaser concludes after reasonable inquiry that the vendor is, under a tax treaty that Canada has with a particular country, resident in that country; the property would be treaty-protected property of the vendor if the vendor were, under the tax treaty referred to above, resident in the particular country; and the purchaser sends to the Minister of National Revenue, on or before the day that is 30 days after the date of the acquisition, a notice setting out basic information about the transaction and the vendor. Some commentators have raised concerns regarding the purchaser's ability to verify residency. In addition to declarations under oath: a number of tax authorities including the IRS will issue a "certificate of residency". US citizens and green cards holder are considered US residents. TPP identification can be dealt with by an opinion from the vendor's lawyer or accountancy firm. Return exemption From Filing Returns A new twist is that for the first time non-residents will no have to file tax returns on the disposition of TCP; the conditions are (again from the Minister's notes): no tax is payable under Part I of the Act by the non-resident for the taxation year; the non-resident is not currently liable to pay any amount under the Act in respect of any previous taxation year (other than an amount for which the Minister of National Revenue has accepted, and holds, adequate security under section 116 or 220 of the Act); and each TCP disposed of by the non-resident in the year is "excluded property" for section 116 purposes ó which, under the first change described above, will now include certain treaty-protected property, or a property in respect of the disposition of which the Minister of National Revenue has issued to the non-resident a certificate under section 116 of the Act. These changes will apply in respect of dispositions that take place after 2008. John Mill has practiced corporate commercial law as a sole practitioner in Windsor, Ontario for 15 years. He is the author of The Knowledge Bureauís certificate course entitled Cross Border Taxation. To Book John for your next educational event, check out his biography and call 1-866-953-4769.

Personal Tax Changes Tax-Free Savings AccountA Tax-Free Savings Account (TFSA) is a registered account in which investment earning, including capital gains accumulate tax free. Starting in 2009, taxpayers over the age of 17 may contribute up to $5,000 each year to such an account. If a taxpayer's contribution room is not used in one year it may be carried forward to the next year allowing for a larger contribution in that year. In some ways the TSFA is similar to an RRSP and in a lot of ways it is not. Contribution room in TFSA does not depend on "earned income" but is a flat $5,000 per year. Unlike the RRSP, contributions to a TSFA do not result in an income tax deduction and withdrawals from a TFSA are not reported as income nor be included in income for any income-tested benefits, such as the Canada Child Tax Benefit or Goods and Services Tax Credit. The CRA will establish contribution room for all taxpayers on the basis of income tax returns filed. Taxpayers who do not file for a number of years may establish their contribution room by filing those returns. WithdrawalsThe proposed TFSA will be flexible in that when a taxpayer withdraws funds from a TFSA, those withdrawals will be added to the taxpayer's contribution room in the following year thereby allowing full access to the funds in the account with no penalty for withdrawal. However, like the RRSP, excess contributions will be subject to a 1% per month penalty tax. TFSA InvestmentsThe same rule for eligibility of investments within an RRSP will apply to investment within an TFSA. The budget proposes to implement additional rules to prohibit a TFSA from making investment in any entity with which the account holder does not deal at arm's length. Like RRSPs, the cost of borrowing to invest in a TFSA are not deductible. AttributionThe attribution rules will not apply to income earned within an TFSA so taxpayers may freely contribute funds to allow their spouses to take advantage of their TFSA contribution room. DeathUpon death of the TFSA holder, the funds within the account may be rolled over into their spouse's TFSA or they may be withdrawn tax-free. Any amounts earned within a TSFA after the death of the taxpayer are taxable to the estate. Other TransfersUpon breakdown of a marriage or common-law partnership, the funds from one party's TFSA may be transferred tax-free to the other party's TFSA. This will have no effect on the contribution room of either of the parties. Leaving CanadaUpon leaving Canada, a taxpayer may continue to hold a TFSA, however, no additional contribution room will be earned and no additional contributions may be made to the TFSA while the taxpayer remains a non-resident. Other Proposals Registered Education Savings PlansThe budget proposed to extend the period of contribution for RESPs by 10 years, beginning in 2008. For most beneficiaries, the current limit of 21 years will be extended to 31 years. For beneficiaries eligible for the Disability Tax Credit, the 25-year contribution period will be increased to 35 years. Likewise the deadline for termination of the plan will be extended by 10 years - from the 25th anniversary of the plan to the 35th for most plans and from the 30th anniversary to the 40th anniversary for plans where the beneficiary is eligible for the Disability Tax Credit. The age limit for beneciaries will also increase from 21 years to 31 years. The budget also proposes that beneficiaries under an RESP be allowed to receive of Educational Assistance Payments for up to six months after ceasing enrolment in a qualifying educational program. Northern Residents DeductionThe current rates of $7.50 and $15.00 per day is increased to $8.25 and $16.50 per day for 2008 and subsequent years. Medical ExpensesThe maximum reduction in medical expense claim as a result of the 3% reduction will be increased from $1,926 to $1,962 for 2008. Medical expenses previously allowed only to taxpayers who are blind, deaf or have a marked restriction to the use of their arms or legs are extended to those with severe autism or epilepsy. Such expenses include the cost of acquiring, caring for and maintaining an animal to assist the taxpayer travel, board and lodging expenses for attending a school or other facility for training in the use and handling of such animals. Additional medical deductions for 2008 and subsequent years: altered auditory feedback devices for those with speech impairments electrotherapy devices designed to be used by a person with a medical condition or a severe mobility impairment standing devices designed for those with a severe mobility impairment to undertake standing therapy pressure pulse therapy devices designed for use by those with balance disorders Registered Disability Savings PlansMinor adjustments to the proposed RDSP plans were announced. The plan is still to make RDSPs available sometime in 2008. Mineral Exploration Tax CreditThe current Mineral Exploration Tax Credit, which was first introduced in 2000 will be extended to flow-through share agreements entered into on or before March 31, 2009. Donation of SecuritiesThe budget proposes to extend the current capital gains exemption on the donation of publicly-traded securities to include capital gains on the exchange of unlisted securities for publicly traded securities that are donated within 30 days of the exchange. This exemption will apply to donation made on or after February 26, 2008. Dividend Gross-Up and Dividend Tax CreditAs a result of proposed reductions in the corporate tax rate, the treatment of eligible dividends will be adjusted starting in 2009 with the adjustments being finalized in 2012. The following table shows the proposed adjustments:

Finance Minister Jim Flaherty characterized this budget as "Responsible Leadership for Uncertain Times". The focus of this budget was on spending with only a few tax-related items, most of which are of little consequence to the majority of Canadians. The most significant of these is the new Tax-Free Savings Plan which is discussed elsewhere in this issue. Debt reductions continue, but at a significantly reduced pace. The roughly $10 billion slated for debt reduction this fiscal year reduces to approximately $2.3 billion next year and $1.3 billion the following year. Many were disappointed that no provision for the deferral of capital gains, originally promised in the last election, this provision was expected by many to be implemented in this budget.

The February 26, 2008 federal budget was short on the multiplicity of targeted tax fixes we have seen in previous budgets by this government, but contained one significant provision that will assist those in the throws of retirement income planning in particular, and families seeking new income splitting opportunities. Tax-Free Savings Account The new Tax Free Savings Account (TFSA) is an investment vehicle, unfortunately not available until 2009, that will allow Canadians over 18 to accumulate savings room of $5000 a year throughout their lifetime, and so with a life expectancy of approximately 80 years for the average Canadian, that means a funding potential of $310,000 over an average adult life span of 62 years. Contributions to the account are not deductible, but earning accumulate on a tax free basis including interest, dividends and capital gains and withdrawals of both earnings and principle are tax exempt. However, those withdrawals will make new TFSA contribution room, on an indefinite carry forward basis, which provides us with some interesting new savings strategies for virtually every family member. Moreover those withdrawals will not affect income-tested tax preferences like Child Tax Benefits, Employment Insurance Benefits or Old Age Security pension. This means you can earn the tax free investment income in the plan and avoid clawbacks, too. So how can Canadians take advantage of the plan? Several strategies come to mind: Family Income Splitting. There is no attribution rule attached to the new TFSA resulting income is tax exempt. So this is a great opportunity for parents and grandparents to transfer $5000 per year to each adult child in the family for the rest of their lives. Recipients can take the money out for what ever purpose they wish and create new TFSA contribution room; which means they can put it back to grow when the withdrawal need is met and new savings are achieved. This will be welcome news to grandparents in particular. Leveraging Tax Preferences: Consider funding this new bucket of savings' with your RRSP tax savings a great way to leverage two available tax provisions. But also look at your new investment options from the tax-exempt income within the TFSA. For example, it may make some sense to look at the tax-free income in the TFSA as a source for funding assets that will multiple on a tax exempt basis: for example life insurance, critical illness insurance or a tax exempt principle residence. TFSA or HBP? In the market to buy a new home. Consider whether it makes more sense to withdraw funds on a tax free basis from within an RRSP to fund a new home purchase under the Home buyers Plan or should the taxpayer save and withdraw funds under the TFSA instead? Certainly there are no tax penalties for failure to pay back the funds to the TFSA, and withdrawals automatically create new TFSA contribution room, so our vote would be to accumulate money in this new savings vehicle instead. TFSA or LLP? Education savings strategies should now be revisited as well for similar reasons as outlined in the last point. Saving within the TFSA allows you to accumulate funds on a tax-deferred basis and then withdraw them without penalty or a requirement to repay the funds. This is not so under the Lifelong Learning Plan, which allows for a tax-free withdrawal from the RRSP but requires an annual repayment schedule. The avoidance of income inclusion penalties therefore makes the TFSA a more attractive withdrawal vehicle for these purposes than the Lifelong Learning Plan. Better to leave the funds in the RRSP for tax deferred retirement savings. TFSA or RESP? This new account would also appear to be a better savings vehicle for education purposes than the RESP, which eventually could provide a tax penalty on withdrawal if intended recipients do not end up going to school. However, in making this choice the investor misses out on the Canada Education Savings Plan sweetener. Offsetting Pension Contribution Limitations. Contributors to employer pension plans are often precluded from making RRSP contributions because of their pension adjustment amount. Likewise those who have contributed the maximum to an RRSP 18% of earned income to $20,000 in 2008 and want to do more to supplement their savings on a tax-assisted basis now have the opportunity to tap into another tax deferred savings opportunity. In particular the TFSA a good place to park interest-bearing investments. Supplementing Executive Pension Funding: Executives who earn more than $111,111 in 2007 will be unable to save for retirement on a tax assisted basis for income above this amount. The TFSA provides a small window of opportunity to shore that tax assistance up. This option should be employed in conjunction with planning for funding of top hat plans like Individual Pension Plans or Retirement Compensation Arrangements. New Tax Sheltering Opportunities for more Pre-Retirees: The TFSA is a great savings option for people who do not have the required earned income for RRSP contribution purposes and therefore have few opportunities for tax sheltered retirement savings. This includes those in receipt of inactive income sources like pension income, investment income or employment insurance benefits. New Tax Sheltering Opportunities for RRSP Age-Ineligible Taxpayers: The tax shelter can continue for those who reach age 71 and don't need the money in their RRSP. While withdrawals must be generated under the usual rules, reinvestment into a TFSA will allow those tax-paid funds to grow again faster in a tax sheltered account, as opposed to a non-registered account. Benefits for Single Seniors: RRSP Melt Down Strategy Enhancements: It has always made some sense to melt down RRSPs to top income up to bracket in circumstances where taxes will be higher at death than during life. We generally use that strategy for singles or widow(er)s for example. Now surplus funds can be deposited into the TFSA so that retirees can continue to build wealth on a tax deferred basis and keep legacies intact. TFSA Borrowing and Excess Contribution Penalties: Because income from the TFSA is not taxable, borrowing funds to contribute to a TFSA will not be tax deductible. Using borrowed money to invest in non-registered accounts makes more sense as interest is then tax deductible. Also be aware that the new provision will result in a penalty of 1% per month if excess contributions are made to the account. Therefore it pays to look carefully at your Notice of Assessment from CRA. Estate Planning Considerations. Also note that the TFSA loses its tax-exempt status after the death of the plan holder, meaning that the investment income will become taxable, however a rollover opportunity is possible when the spouse or common-law partner becomes the successor account holder. This will not be affected by the spouse's contribution room and will not reduce existing room either. However, when a child dies without a spouse, the plan should be collapsed or transferred to another appropriate savings vehicle. Marriage Breakdown: Investors in the TFSA will be able to transfer from one party to the split to the other on a no-penalty basis, however, the transfer in this case will not re-instate contribution room for the transferor. Nor will it affect the contribution room of the transferee. File a Tax Return: yet another reason to endear oneself to the tax system: a return is required to build TFSA contribution room and so it is folly to file late or miss filing a return. Remember there is a statute of limitations of ten years in filing late or adjusted returns. Don't cut into your tax exempt wealth accumulation potential by being tardy on this front. Investment Ordering Decisions. The New TFSA requires a second look at the order in which investors maximize accumulation activities. Taxable investors should consider family priorities and then contribute funds in this order: To an RPP To an RRSP (including spousal RRSP) To a the TFSA To RESPs (Registered Education Savings accounts to maximize Canada Education Savings Grants and Bonds) To RDSPs (Registered Disability Savings Plans to maximize Canada Disability Savings Grants and bonds.) To non-registered accounts OTHER BUDGET HIGHLIGHTS: RESP contribution, withdrawal and savings periods have been extended Northern Residents Basic Residency Deduction increases to $8.25 and $16.50 per day. Medical Expenses: There are four new prescribed expenditures, including the acquisition, cost, care, training and maintenance of service animals who assist people with autism or epilepsy. The capital gains exemption on donations of publicly traded securities to public charities and private donations will be extended to gains realized on the exchange of unlisted securities that are shares or partnership interests for publicly traded securities. Dividend tax credit and gross up rates will drop effective 2010. CCA accelerated rates have been extended in manufacturing and processing and clean energy generation The Scientific Research and Experimental Development Program has been enhanced. Businesses who make source remittances late will get a break on penalities in the first late week. Details of individual provisions follow. Next Time: Taxes Just Keep Rising for Pre-Retiring Baby Boomers and their Heirs. The federal budget predicts that personal tax revenues ñ by far the largest revenue line item for the government ñ will increase by $2 Billion in 2007-2008 and thereafter increase faster than personal income growth to $125,475 Billion in 2009-2010.