Foreign Reporting Verification Statement: Transitional Rules
CRA’s revised version of Form T1135 Foreign Income Verification Statement applicable to tax years ending after June 30, 2013 requires far more detailed information, including names of specific countries and foreign institutions where offshore assets are located, foreign income earned on those assets, and maximum cost amount of those assets during the year – with the general requirement that each one of those assets be reported individually.
CRA recently released transitional rules by permitting streamlined reporting for certain specified foreign properties. Applicable to the 2013 tax year only, these transitional rules include the following:
- Taxpayers who held specified foreign property in an account with a Canadian registered securities dealer may now report the combined value of all such property at the end of the tax year, rather than reporting the details of each property. (Once chosen, this reporting method must be used for all accounts with Canadian registered securities dealers.)
- The filing deadline for Form T1135 has been extended to July 31, 2014, for all taxpayers.
Information on the form is open for reassessment for SIX (6) years – and if the proposed changes to citizenship go through, non-filing of T1135 would preclude getting citizenship.
Reimbursements of Employee Training Costs
Many employers cover the costs of employee training with the proviso that the employees reimburse some of the costs based on a timetable of early departure from employment. A recent case confirms that the costs of such reimbursement (18 months at $ 500/month) are NOT deductible by the employee.
The reimbursement was not tuition and was not a “supply” within the meaning of the Income Tax Act (the “Act”). “The amount paid was as damages liquidated in advance, payable upon termination of the employment and not in the performance of the appellant’s employment duties.” However, there is no symmetry: the $9,000 reimbursement is a taxable receipt to the employer.
Timing of Dividends or Interest Paid to Shareholders
A few days ago, CRA responded to a December 2012 request for clarification on when T5s should be prepared in respect of dividends and/or interest paid to a shareholder. In quoting the Oxford dictionary, CRA stated that “paid” means “to give (person) what is due in discharge of a debt”. “Received” is defined in the Act, and CRA noted that the taxpayer can “notionally or constructively receive it”. CRA concluded that dividends are paid when they are an “offset or credit to the shareholder’s account.” There are numerous cases that hold that an accountant’s journal entry or grouping of accounts is NOT enough to effect an offset of the accounts. Caution dictates that properly dated director’s resolution should exist before journal entries effect the offset or credit to the shareholders account.
Avoid Icy Relationships after an Estate Freeze
Most people are optimistic when planning to minimize family taxes, assuming that the family will continue to function as one unit. There are instances where that proves not to be the case – where a business owner implements an estate freeze, only to have the beneficiaries extort funds from the family for the privilege of being removed. Estate freezes often do not generate that much value over the present value of the professional fees; after all, there is only a tax deferral and not an absolute saving (absent effective income splitting), but there is an immediate and absolute cost. In addition to diverting wealth, an estate freeze can also remove the freezor’s sense of self. In a recent case, the children removed the father, who sued for reinstatement as majority owner and controller of the corporate group. There is no deduction permitted for legal fees incurred to obtain a job. Perhaps the father should have had better advice before the freeze!
Trusts and Principal Residence Exemptions
The principal residence exemption (PRE) is available on a year-by-year basis, and can be claimed in respect of a different property each year if the family owned enough residences. Trusts are often used to own vacation properties. Aside from the family dynamics of who funds upkeep and the timing of mature children (and their own families) having access, there are tax issues to consider. The trust can increase access to PRE in a number of ways:
- Transfer the property on a tax-deferred basis (i.e. a roll-out) to one or more beneficiaries who are deemed to own the property for all years it was owned by the trust – and in respect of which any eligible beneficiary could elect the PRE.
- Trigger a gain in the trust and have the trust claim the PRE. In such a case, all beneficiaries who ordinarily inhabited the property could not designate another property for that particular year.
Consider a family with three children owning a cottage. If the cottage is in a trust for the children, for the years after which the youngest child reaches 18 years of age, and until one of the children acquires their own residence, the trust could claim the PRE – thus sheltering potentially significant capital gains.
Can’t Always Trust CRA
CRA auditor told taxpayer that salary paid to wife for services actually provided were NOT deductible in computing taxable income. Spouse continued to work for years for no salary. When the spouse started taking salary again on advice from their CA, CRA attacked the spouse as being responsible for the husband’s tax debt. In dismissing CRA;s case, the judge observed: “This is not a case of a CRA auditor writing something incorrect or stating something incorrectly. It appears that it can only be considered to have been intentionally deceitful.” Auditors do NOT work for the taxpayers.
Technology Tid Bit
Like many of you, my paperless work breaks down when I need a signature – on an engagement letter, NDA or other agreement. Efficient document creation is followed by inefficient printing, signing, scanning, emailing – with delays if the recipient can’t complete all of those. My technology provider just introduced me to a “made in Canada” solution –providing service to lawyers. I just used it to get an NDA and engagement letter signed – without the signers having to print the document. You can look at this Canadian solution at www.signority.com. I uploaded the document to their server, put place holders for initials on each page, signature and date placeholders at the end. Multiple recipients can sign the same document with an input device or upload their signature and done!.
Michael Fromstein has been the Sloan tax associate since 2011. On a part-time basis, Michael also served as Director of Corporate Finance and Strategic Alliances for a small multi-national Software firm as a Service (Cloud) software developer. Contact Michael for answers to your tax questions.