DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Posts Tagged ‘non-resident’

Sold your House? Make Sure You Report It!

In Canadian Income Tax, Estates and trusts, Non-residents, Personal Tax, Principal Residence on November 18, 2016 at 8:31 pm

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If you have sold your home recently, you should take note of the new reporting rules announced by the CRA regarding the principal residence exemption (“PRE”).

The PRE applies on a pro-rata basis based on the number of years you are claiming the house as your principal residence. Form T2091 is technically required to report and claim the PRE on the sale. If you were claiming the exemption for the full period of ownership, then the gain on the sale is fully exempt from tax. The CRA’s policy until now has been that no reporting was required in such a case.

However, for 2016 and future years, this administrative policy has changed. Form T2091 is still not required if the full exemption is claimed, However, the sale must be reported on Schedule 3 of your tax return for the year. You will need to report a description of the property,  the year of acquisition and  the proceeds of disposition. Failure to report the sale will result in the denial of the PRE. However, you may go back and amend your return to report the sale and claim the exemption, subject to possible penalties of $100 per month to a maximum of $8,000.

For Quebec tax reporting, there has never been any administrative policy regarding a fully exempt sale of a principal residence and form TP-274 continues to be required.

Changes for Trusts

If your principal residence is owned by a trust, new rules will apply to you. I outlined the current rules in a previous post.

Under the new rules, only certain specialized trusts are now eligible to claim the PRE. They are alter-ego trusts, certain spousal or common law partner trusts, certain protective trusts or certain qualified disability trusts.

Starting in 2017, any trust that owns a home and does not fit within any of the categories above, will no longer be eligible for the PRE on the sale of the home. Therefore, if the house is sold before the end of 2016, the PRE can still be claimed.

For 2017 and later years, a home that was owned by a trust that no longer qualifies for the PRE will be allowed to calculate the exemption based on transitional rules that would require a valuation of the property as at the end of 2016. The PRE will be available for the “notional” gain up to the end of 2016, while the future growth in value will be subject to capital gains tax.

Anyone who currently lives in a home owned by a personal trust should consult their tax advisor.

Changes for Non-Residents

New rules will also apply to anyone who was a non-resident at the time they purchased a residential property in Canada. Under the current rules, the pro-rata formula that is used to calculate the PRE allows for an extra year (the plus 1 rule) in calculating the exemption. This generally allows for the fact that in a year where someone sells their home, they may own two properties, both of which should qualify for the exemption.

For a non-resident, the plus 1 rule allowed them to claim a portion of their gain as exempt, even though they never qualified since they were non-residents of Canada. Accordingly, for all sales on or after October 3, 2016, the Plus 1 rule will no longer be available to any taxpayer who was a non-resident of Canada in during the year in which he or she acquired the property. There are no transitional rules to this provision.

To Charge Or Not To Charge

In Canadian Income Tax, Goods and Services Tax, Real Property on January 17, 2013 at 9:38 pm

Questions2

The Tax Issue

The place of supply rules that govern the rate at which the GST/HST should be charged contains a specific rule with regard to services performed that relate to real property situated in Canada.

The rule stipulates that the GST/HST rate that applies to services performed with respect to real property is determined by the location of the property.

This begs the question: what type of service is considered to be “in respect of” real property?

More specifically, this question comes from an accountant who performs the service of preparing tax returns on behalf of non-resident owners of real property situated in Canada. Every non-resident who earns rental income from real property in Canada must file a Canadian income tax return on which only income from the Canadian property is reported.

Are the services of an accountant to prepare tax returns on behalf of a non-resident subject to the GST/HST?

The Answer

Generally, services rendered to a non-resident person are considered to be zero-rate (not taxable) under the GST/HST. The rule relating to services in respect of real property is an exception.

The CRA describes a service as being in respect of real property in the following circumstances:

(a) the service is physically performed on the real property (e.g., construction and maintenance);

(b) the direct object of the service is the real property; that is, the service enhances the value of the real property, affects the nature of the real property, relates to preparing the real property for development or redevelopment or affects the management of the real property, or the environment within the limits of the real property (e.g., engineering, surveying, management services);

(c) the purpose of the service is: (i) the transfer or conveyance of the real property or the proposed transfer or conveyance of the real property(ii) related to a mortgage interest or other security interest in the real property; or(iii) the determination of the title to the real property.

The relationship between the service and the real property must be more direct than indirect in order for the service and the property to be considered “in respect of” each other. The direct object of the service is the real property in the sense that the service enhances the value of the property or affects the nature of the property.

Based on the above, the CRA has stated that accounting and tax services relating to the reporting of rental income from real property situated in Canada has an indirect relationship to the property, but is not directly in respect of the property as described above.

Therefore, the provision of these accounting services is zero-rated.

What’s Your Tax Issue?

In Canadian Income Tax, Non-residents, Personal Tax, Principal Residence on March 15, 2011 at 4:10 pm

Tax season is upon us, and here at The Tax Issue, the questions are streaming in at a furious pace. I had a few free minutes this afternoon, so I thought I’d tackle some of the backlog.

The Tax Issue:

My partner and I each have holding companies that have joint ownership of our operating company.  If we wanted to sell a 1/3rd share in the operating company is there a mechanism to utilize our personal capital gains exemption?

The Answer:

The capital gains exemption is a $750,000 lifetime limit available to all Canadian resident individuals. It can be used to shelter capital gains on the sale of either qualified farm property or qualified shares of a small business corporation.

Since the shares of your operating company are held through a holding company, the exemption would not be available in the situation you describe. Your holding company would be the vendor of the shares and the exemption is available to individuals only.

Having said that, there may be some “reorganization” of shares you could perform to get you into a better position. Such planning would go beyond what I could explain here, so I would explore these options with a tax professional.

The Tax Issue:

I am a Canadian living/working in the US and considered non-resident of Canada for tax purposes. I do have a rental property in Canada and looking for an easy way to file my income tax on the rental property. What I have read so far makes me believe that I must file my taxes through an agent in Canada. I am wondering if I can file my taxes without using an agent and what is the process to do that.

The Answer:

The short answer is that you do not need to file a tax return through an agent.

Since you are a non-resident of Canada, the Canadian person who pays you rent must withhold taxes and remit them to the CRA on a regular basis. This person could be your tenant directly, or a Canadian agent who manages the property and collects rent on your behalf. Either way, there has to be a Canadian responsible for withholding and remitting these taxes.

You then have the option of filing a tax return under section 216 of the Income Tax Act. The taxes previously withheld would be treated as a credit against your taxes payable. There are two options for withholding and filing under section 216. I have discussed this mechanism in a previous post. Check it out. Also, the CRA has an extensive section on their web site dealing with the issue.

The Tax Issue:

My mother passed away in 1995 and my father gifted her 50% portion of a house to me, however kept himself on title for the other 50%.   He had another house that he resided in.   He kept his name on solely to protect my interest in case of divorce.    He passed away in May 2010 and now I’m told that I may have to pay capital gains.   I don’t understand why I have to pay capital gains if I’m not selling the property and the property has been my principal residence.   He had nothing to do with the house.   Is there anything I can do to avoid paying this capital gains tax?

The Answer:

Unfortunately, it sounds like your father was the owner of more than one principal residence. Upon the death of an individual, he is deemed to have disposed of all his capital property at fair market value. That includes any real estate he owned. There is an exemption for a principal residence. The definition of “principal residence” includes, not only the house he lived in, but can also include a house occupied by his child. The downside is that his estate can only claim one property as a principal residence.

Your father’s executor will have to determine which of the properties he should claim as his principal residence in order to minimize the taxes on his death. I would call in the help of a good tax accountant to crunch those numbers.

Death of a Non-Resident RRSP Annuitant

In Canadian Income Tax, Non-residents on November 18, 2010 at 3:21 pm

OK everyone, this post gets a little technical, so I’m adding footnotes for the first time ever. If the Income Tax Act (ITA) frightens you, don’t read on.

My good friend and colleague (let’s call him “Shya”) came to me recently with an interesting problem. In 2007, his client, a former resident of Canada, died with a balance remaining in his Canadian RRSP account. At the time, the RRSP funds were transferred to the RRSP of his wife, also a non-resident of Canada. Under the normal rules for Canadian residents, the surviving spouse would simply report the “refund of premiums” on her 2007 tax return, and claim a corresponding deduction[1] for amounts deposited into her RRSP. No tax would have applied.

Unfortunately, the administrator of the RRSP was not on top of the situation. Had they realized that the taxpayers were non-residents of Canada, they would have known that a 25% withholding tax[2] applies to an RRSP that is paid to any non-resident. Further, since the amount was transferred directly to the spouse’s RRSP, filing a prescribed form upon the transfer of funds would have exempted the non-resident spouse from the withholding tax[3].

Unfortunately, the proper form was not filed, and no tax was withheld at the time of death.

Along comes the CRA two years later. Realizing what has happened, the CRA assessed the surviving spouse for the 25% withholding tax. Since the transfer to her RRSP was not done “pursuant to an authorization in prescribed form” as the law states, no exemption from this tax can apply.

Is the taxpayer out of luck? Perhaps.

Let’s go back in time once more. Had the taxpayer discovered this oversight in time, she still could have filed a special Canadian tax return under section 217 of the ITA[4]. The section 217 return is designed to give non-resident taxpayers the option of paying tax at the normal Canadian tax rates as opposed to the flat 25%. For many taxpayers the 217 election is not advantageous, because the Canadian tax rate that applies is based on a complex calculation that takes world income into account. For a non-resident with any substantial amount of total income, the rate usually will exceed 25%.

For our surviving spouse, however, the section 217 election would have resulted in no tax, since she would be allowed to take a deduction under the normal Canadian rules for the amount transferred to her RRSP. This would bring her net Canadian taxable income down to zero, and she could claim a refund of the 25% withholding tax.

There’s just one problem left for Shya’s client. The section 217 return must be filed within six months from the end of the taxation year that income was received. In this case, that would have been June 30, 2008. Since the problem didn’t come to light until the CRA’s assessment in 2009, the taxpayer is not entitled to file the election.

Now, the taxpayer’s only hope is to request that the CRA extend the time and allow her to file a late section 217 return. The CRA has the power at any time to extend the time for filing any return[5]. However, this administrative concession is not given lightly.

The issue has been dealt with in the past with respect to returns under section 216 of the ITA. The CRA has a published policy to give taxpayers “one opportunity” to file a late return where they have neglected to do so through ignorance or inadvertence. Perhaps this concession could be extended to section 217 returns.

If not, the CRA has issued guidelines[6] which presumably could apply in this scenario. In essence, the taxpayer would have to convince the CRA that there were extraordinary circumstances beyond her control (other than ignorance of the law) that prevented her from filing the return on time.

The moral of the story? Always consult a tax professional when dealing with unusual transactions involving non-resident taxpayers.


[1] ITA 60(1)(l)

[2] ITA 212(1)(l)

[3] ITA 212(1)(l)(i)

[4] ITA 217

[5] ITA 220(3)

What’s Your Tax Issue? – Taxable Quebec Property

In Canadian Income Tax, Non-residents on September 21, 2010 at 9:32 am

The Tax Issue:

If I were to be a Canadian non-resident living in the Caribbean and I have rental property in Quebec, besides filing a federal tax return for Electing under Section 216, do I have to file anything for Quebec?

The Answer:

Part XIII of the Canadian Income Tax Act provides for a 25% withholding tax on rents paid to non-residents. As explained in an earlier post, an election under section 216 can be made whereby the non-resident pays tax under Part I, effectively replacing the 25% withholding tax with the normal income tax on rental income, net of expenses.

Quebec, which collects and administers its own income tax, does not levy withholding tax on rents paid to non-residents. Therefore, no Quebec tax return is required during the time you own the property and collect rents.

However, property situated in Quebec is considered to be “Taxable Quebec Property”, and is subject to withholding tax upon the sale of the property. Similar to the rules under section 116 of the Canadian law, the Quebec Taxation Act (Section 1097) provides for a 12.875% withholding tax on gains derived from property situated in Quebec. If a clearance certificate is not obtained (Form TP-1097), the 12.875% is levied on the full sale price.

In the year of sale, you will have to file both federal and Quebec income tax returns in order to report the sale and (possibly) recover a portion of the withholding tax.

What’s You Tax Issue? Non-Resident Providing Services

In Canadian Income Tax, Non-residents on August 23, 2010 at 9:30 am

The Tax Issue:

Can a Canadian Corporation employ a non-resident (Swedish citizen) on its Canadian payroll, directly, take off withholdings etc. This individual resides in Sweden, works with us from there and visits twice yearly for a month at a time. If we can do that, it is beneficial for him as paying his consulting company in Sweden is even more onerous for him.

The Answer:

It is up to you to decide to enter into a contract with a consulting company or with an individual personally. I can’t comment on what the Swedish tax implications would be in either case. Also, whether this person is an employee or is self-employed is another issue that must be addressed. Either way though, if he is performing services in while Canada, his fees are likely subject to Canadian withholding taxes of 15% under Regulation 105 (see my previous post on this topic).

Payroll withholding generally only applies to employees who regularly report to work at an establishment in Canada. A non-resident employee is generally exempt from this withholding, provided he is subject to tax in his country of residence.

Whether he is actually subject to income tax in Canada with respect to services rendered here is another question, and it depends on the total length of time he spends here, and the provisions of the Canada-Sweden tax treaty. He will likely have to file a Canadian income tax return in any case, to recover the withholding taxes.

The Sojourner Rule

In Canadian Income Tax, Non-residents on May 21, 2010 at 12:37 pm

One of the tests for residency in Canada is called the “Sojourner Rule”. This rule is somewhat similar (but less complex) to the U.S. “substantial presence” test. It would deem a person who is otherwise not a resident of Canada to be resident in Canada for tax purposes if he “sojourned” here for a period of 183 days or more. If this test is met, the individual is deemed to be a Canadian resident for the full year and is subject to tax in Canada on his or her world income, subject to any treaty provision that would override the rule.

Now, what does it mean to sojourn? According to the courts, and the CRA, to sojourn means to be “temporarily present”. Days are calculated such that a part of a day in Canada is considered a full day.

In a recent technical interpretation, the CRA was asked whether, in two hypothetical situations, a taxpayer was ‘‘sojourning’’ in Canada. In the first scenario, the taxpayer arrived in Canada by airplane and had a several hour stopover in Toronto before departing for another destination outside Canada. In the second scenario, the taxpayer arrived in Canada by airplane in the morning and departed by return f light in the evening. The CRA stated that ‘‘sojourn’’ means to make a temporary stay in a place, to remain, or reside for a time. The courts have held that arriving in the morning from another country to work in Canada for the day and then departing in the evening is not tantamount to making a temporary stay akin to sojourning.

The CRA stated that, in the current situation, neither of the described scenarios would be tantamount to a temporary stay and thus would not be sojourning for the purpose of the deemed residency rules.

To “sojourn” means to make a temporary stay in the sense of establishing a temporary residence, although the stay may be of very short duration. For example, if an individual is commuting to Canada for his or her employment and returning each night to his or her normal place of residence outside of Canada, the individual is not “sojourning” in Canada. On the other hand, if the same individual were to vacation in Canada, then he or she would be “sojourning” in Canada and each day (or part day) of that particular time period (the length of the vacation) would be counted in determining the application of the rule.

If you need more information on the sojourning rule, you should check out CRA’s interpretation bulletin IT-221R3.

The End Of The Irritants

In Canadian Income Tax, Estates and trusts, Non-residents on April 6, 2010 at 9:18 am

If you are the executor of an estate with non-resident beneficiaries, life just got a bit simpler. The federal budget of 2010 contained amendments to the definition of “taxable Canadian property” that will eliminate the irritating requirement to file requests for clearance certificates.

Until now, any capital interest in a trust or estate resident in Canada fell under the definition of “taxable Canadian property”. As such, the CRA has always taken the position that any distribution of capital by an executor or trustee constitutes a “disposition” by the beneficiary of a capital interest in that trust or estate. Where the beneficiary is a non-resident of Canada,  section 116 of the Income Tax Act requires that a clearance certificate be obtained within 10 days of the disposition. I discussed section 116 certificates in a previous post.

Most of Canada’s tax treaties would generally serve to exempt the beneficiary from any Canadian tax, so the entire process was often just a formality and a pesky irritant to trustees, and especially to unsuspecting estate executors who simply wanted to make even a partial payment of capital to a beneficiary.

New rules that took effect in 2009 served to reduce the compliance burden by eliminating the need for a clearance certificate where the trustee or executor was certain that the beneficiary was protected by a Canadian tax treaty. However, this required work to make the determination of residency of the beneficiary, analyze the relevant treaty and determine whether the beneficiary was related to the estate, and if so, report the distribution to the CRA.

With the budget of 2010, the definition of “taxable Canadian property” has been amended, and trusts and estates no longer fall within the definition at all, unless they owned significant amounts of Canadian real estate at any time within the prior 60 months.

This change will eliminate a major compliance burden for estate executors. The new rules will also eliminate Canadian private corporations and partnerships from the definition of taxable Canadian property in the same fashion as above.

Some work will still be required to ensure that the assets of the estate or trust have not contained significant real estate, but other than that, these rules are a welcome relief to Canadian executors.

Wright is Wrong….Again!!!

In Canadian Income Tax, Non-residents on January 5, 2010 at 4:04 pm

Once again, I am personally forced to swallow a tough court decision, as the case of Pechet v. The Queen (2009 DTC 5189) has been dismissed by the Federal Court of Appeal. This case overturned the informal procedure Tax Court decision of Wright v. The Queen (2001 DTC 437) originally argued  (and won) by yours truly.

The Wright case dealt with interest on unpaid non-resident withholding taxes. Under Part XIII of the Act, anyone paying rent to a non-resident must withhold tax based on the gross amount paid. The rate is 25% unless reduced by treaty. The basis for withholding may be reduced to the net amount after expenses if an undertaking is filed with the CRA and form NR6 is filed. (For more, see my post on Non-resident Real Estate Investors)

If the non-resident recipient files an income tax return under section 216 of the Act by the required deadline, tax under Part I of the Act is applied “in lieu of” the Part XIII tax withheld. In essence, any tax withheld in excess of the Part I liability is refunded.

Where the Part XIII tax is not withheld, but the section 216 is filed, the CRA’s position is to charge interest based on the withholding tax that should have been remitted. The original argument in Wright was that if the filing of the 216 return replaces the Part XIII liability with the Part I liability, then there is no longer any tax upon which an interest calculation may be made. The Tax Court agreed, and a loophole seemed to be exposed.

The Pechet case heard in Tax Court overturned Wright, but there was still a glimmer of hope as it was appealed to the Federal Court of Appeal.

Now, sadly, it appears my own personally victory remains just that. Since decisions in  the informal procedure cannot be appealed, my client’s victory is final and my Tax Court record is still 3-0. However, my legacy as a precedent-setting barrister is over for good.

The Court of Appeal in Pechet upheld the decision of the lower court and concluded that the filing of a return under section 216 of the Act does not retroactively eliminate the requirement to withhold under Part XIII. Rather, the withholding requirements continue to apply, up until the point in time when the tax liability of the non-resident has shifted from Part XIII to Part I. The phrase “in lieu of” does not mean that the Part XIII liability never existed, but that it is replaced, at the time of the filing of the return, with the Part I tax liability. Any interest accruing on unpaid withholding tax up to that point must be paid.

This interpretation, in all fairness, seems to be the correct application of the provisions, given the scheme and intent of the Income Tax Act as it applies to non-resident taxpayers.

What’s Your Tax Issue?: Returning To Canada

In Canadian Income Tax, Non-residents on December 21, 2009 at 6:06 pm

The Tax Issue:

My first question to anyone who wants to move to Canada from the Bahamas: WHY?

My wife and I have been expats for 12 years.  We would like to know if we come back to Canada can we keep our Bahamas IBC corporation that holds all our stock and bonds and pays us a yearly income? We presently only spend about 50% of our income, which is of course tax-free.

Or if we return to Canada, do we have to close the IBC and hold our investments personally,(or even keep the IBC) and still declare and pay taxes on all our annual income?

The Answer:

Well, it’s good that you only spend about 50% of your income, because, you may have to start paying just about that amount to Revenue Canada. From the time that you return to Canada, you will be subject to Canadian income tax on your world income.

There is no requirement to close your IBC when you return to Canada, but it may not be such a bad idea.

If you maintain your ownership of shares in your IBC as a Canadian resident, you will be subject to tax personally on all the income earned by the IBC, regardless of whether it is paid to you or not. This is known as “Foreign Accrual Property Income”, or “FAPI”. FAPI is what prevents a Canadian taxpayer from sheltering investment income through an offshore company.

On the other hand, if you wind up your IBC before entering Canada, all your investments may benefit from a “step-up” in cost, meaning that, for future capital gains purposes, the tax cost of each investment will be equal to its value at the time you enter Canada.

The annual income from your investments will be taxable to you either way as its earned, but holding them personally as a Canadian resident will likely be much simpler and less costly in the long run.

Before doing anything drastic, though, I would strongly recommend that you review your particular situation with a tax advisor.