uwo faculty income tax presentation presented by: julia klann stephanie sinclair diane wood

UWO Faculty Income Tax Presentation

Presented by:Julia KlannStephanie SinclairDiane Wood

March 21, 2014

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Overview

• Canadian Tax Considerations– Residency Status For Individuals

– Income Inclusions & Tax Deductions

– Tax Credits

– Consulting Income and Incorporation

• US Tax Considerations– Filing Requirements & Overview of US Tax System

– Income Inclusions & Tax Deductions

– Foreign Reporting Requirements for US Citizens in Canada

– Expatriation Provisions

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• Resident of Canada– Taxed on world wide income from all sources– Entitled to foreign tax credits for non-Canadian source

income – Files a T1 Individual Tax Return

• Non-Resident of Canada– Taxed on Canadian source income– Entitled to utilize provisions of Canada – United States

Income Tax Convention (1980) to determine Canadian income tax liability

– Files a T1 NR Individual Tax Return

Basis of Canadian Taxation

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1. Deemed full-time residency– sojourned in Canada for 183 or more days

2. Full-time residency – based on continuing relationship with Canada based on

surrounding facts

3. Part-time residency– severing or creating ties to Canada in departure or arrival

4. Non-resident– Not resident under 1 – 3 above

Residency Status For Individuals

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• Employment Income– Includes remuneration and taxable benefits reported on T-4

• Property Income – Includes interest, dividends, royalties and rental income

• Business Income– Includes self employment income such as consulting

• Taxable Capital Gains– Includes 50% of capital gains in excess of capital losses

• Other Sources – Includes items such as pensions, RRSP and alimony

Income Inclusions

Scholarships, Fellowships and Bursaries

• Taxable to the recipient net of available exemption

– amounts received from the employer of a parent are included in the child’s income

– amount received by an employee from his/her employer are taxable as employment income and not eligible for the exemption

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Scholarships, Fellowships and Bursaries

• Exemption calculated as the aggregate of:i. Scholarships, fellowships and bursaries received for

enrollment in:• a program for which the education deduction can be claimed;

or• an elementary or secondary school educational program

ii. The lesser of: • scholarships, fellowships, bursaries and prizes received to be

used in production of literary, dramatic, musical or artistic work; and

• amounts expended to produce the work

iii. Lesser of: • $500; and • amounts received in excess of exemption claimed in i. and ii.

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Research Grants

• amount “received” in excess of “allowable expenses” is taxable in year of receipt

• an amount is not considered received if all the following conditions are met:– funds are available to individual who has an academic

appointment to university;– funds are paid directly to university;– funds are to be used solely for costs of research; and– funds were not used or otherwise available for personal benefit of

individual

• allowable expenses include cost of equipment, fees, laboratory, charges, etc and exclude:– personal living expenses;– unreasonable amounts; and– amounts otherwise deductible or paid/reimbursed by University

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Motor Vehicle Expenses

• Deductible if:– ordinarily required to carry on duties away from place of

employment– required to pay expenses under employment contract– not in receipt of non-taxable allowance for motor vehicle

expenses– Form T2200 signed by employer

• Amount of expenses not limited but amounts must be reasonable and substantiated by receipts and records

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Dues and Other Expenses of Performing Duties

• Amounts paid in year as:– Annual professional dues necessary to maintain

professional status– Office rent, salary of assistant or substitute if required by

employment contract– Cost of supplies consumed in duties if required by

employment contract– Annual union dues

• Require a Form T2200 signed by employer

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• Annual limit calculated as the lesser of:– 18% of prior year’s earned income, and– Annual dollar limit (see below)

reduced by pension adjustment for prior year

• Annual dollar limits: 2013 2014

– Current $23,820 $24,270– Indexed based on increases in average wage levels

• Pension adjustment is value of pension earned in prior year

Registered Retirement Savings Plan Contributions

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Moving Expenses

• Moving expenses incurred in respect of a move originating outside Canada are not deductible

• Moving expenses deductible in respect of a move to a new business or employment in Canada if:– Both the old residence and new residence are in Canada; and

– Distance between new residence and new work is at least 40 km closer than old residence

• Deduction is limited to business or employment income at new location and undeducted amounts may be carried forward

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• Deductible moving expenses include:– Travel costs for family members– Transportation and storage of household effects– Cost of meals and accommodations for up to 15 days during

the move– Lease cancellation costs in respect of old residence– Selling costs of old residence– Legal fees, transfer taxes in respect of new residence if old

residence was sold– Up to $5,000 related to mortgage interest, property taxes,

insurance, heat and power on vacant old residence during period reasonable efforts made to sell

– Utility connection and disconnection fees and costs related to revising legal documents to reflect new address

Moving Expenses

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2014 Personal Tax Credits

Federal Ontario

Tax rate applied 15.00% 5.05%

Basic personal $11,138 $9,670

Spousal/partner 11,138 8,211 - income threshold nil 821

Child 2,255 nil

Children’s fitness / artistic 500 $55 refundable credit

Adoption 11,774 11,797

Disability 7,766 7,812

Medical ------Amount paid------- -income threshold (see footnote) 2,171 2,189

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2014 Personal Tax Credits

Federal Ontario

Tax rate applied 15.00% 5.05%

CPP (max) $2,426 $2,426

EI (max) 914 914

Education - Full time – per month 465 520

- Part time – per month 140 156

Tuition -------Amount paid--------

Interest on student loan --------Amount paid-------

• Medical credit is for eligible medical expenses exceeding lesser of :–3% of net income–Threshold amount

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Charitable Donations Tax Credit

• Gifts to:– Registered charity – Registered Canadian amateur athletic association– An exempt housing corporation– A Canadian municipality– The United Nations or an agency of UN– A prescribed university o/s Canada– A charitable organization o/s Canada to which Canada made a gift in

year or preceding year

• May claim gifts made in year and preceding five years

• Federal and Ontario credit of 15% on first $200 and 29% on remainder to of 75% of net income

• Foreign donations may be used to reduce Canadian tax on foreign source income from the same jurisdiction

First-Time Donor’s Super Credit

• For first-time donors, a federal tax credit of 25% is available for the first $1,000 of monetary charitable contributions.

• First-time donors are those who:– Have not claimed a donation tax credit between the 2008

and 2012 taxation years

– Do not have a spouse who has claimed a donation tax credit between the 2008 and 2012 taxation years

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Consulting Income / Business Income

• consulting income is included in the calculation of business income on Form T2125

• an unincorporated business must have a December 31 year end

• required to register for GST purposes if taxable sales exceed $30,000 in a fiscal period

• business income is calculated on an “accrual basis” and not on a “cash basis”– accounts receivable at year end included in income

– accounts payable at year end deducted from income

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The ITA prohibits deduction of:

• an outlay unless incurred for purpose of earning business or property income

• an outlay of a capital nature

• an outlay incurred to earn exempt income nature

• a reserve for contingent liability, unless otherwise allowed

• a personal or living expense

• club or recreational facilities dues and amounts incurred for use or maintenance a yacht, a camp, a lodge, or a golf course

Business Expense Limitations

• one-half the cost of meals and entertainment subject to exceptions for office functions and work at remote work locations

• home office expense unless:– principal place of business; or– used on regular and continuous basis for meeting clients,

customers or patients

• remuneration unpaid within 179 days of taxation year

Business Expense Limitations

Incorporation of Consulting Income

Consulting Company

Unincorporated Business

Incorporated Business

Income

$100,000Proprietorship

Mr. BMr. A

Corporate

Income Tax

Personal

Total Tax

$15,500 $0

$30,441

$45,941

$49,530

$49,530

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Advantages:• 11% tax rate on first $500,000 of taxable income

from business sources• Capital gains exemption

– Only applies to sale of shares– $750,000 for qualified small business corporation shares

• Ability to split income with family members• Flexibility in remuneration package and in timing of

receipts


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Disadvantages:

• Shareholder benefits– can apply if corporation pays personal expenditures or has a

loan receivable from the shareholder

• Complexity– additional reporting requirements

– have to maintain separation between corporation and individual

• Set-up costs and annual carrying costs

International Income Tax Conventions

Select Non-Resident Withholding Tax Rates Interest Dividends Royalties Pensions

• Australia 10% 5/15% 10% 15/25%

• China, People’s Rep 10% 10/15% 10% 25%

• France 10% 5/15% 0/10% 25%

• Germany 10% 5/15% 0/10% 15/25%

• India 15% 15/25% 10/15/20% 25%

• Pakistan 15% 15% 0/15% 25%

• United Kingdom 10% 5/15% 0/10% 0/10/25%

• United States 0% 5/15% 0/10% 15/25%

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Overview of the US Tax System

• The United States taxes the following individuals on their worldwide income:– US Citizens– US Permanent Residents (Greencard holders)– US Residents

• Citizens are taxed on their worldwide income even if not physically present or resident in the US

• Entitled to foreign tax credits for non-US source income

• File a 1040 Tax Return

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Americans in Canada:General Filing Requirements

• All US citizens are required to file Form 1040 annually– Form 1040 is due on April 15th but an automatic extension is granted to

June 15th for Americans who live abroad– Extension does not extend the time to pay but late payment penalties

are not imposed until after June 15th

• US citizens are taxed on worldwide income, regardless of their country of residence– Therefore US citizens living in Canada must file a Canadian return

reporting their worldwide income and a US return reporting their worldwide income

• Potential for double tax exists, but several provisions of the Act/Code/Treaty help mitigate this exposure

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Relief from Double Taxation:Foreign Earned Income Exclusion

• Qualified individuals may elect to exclude up to $97,600 US of foreign earned income from taxable income– Reported on Form 2555

• Income is reported on the return and then the exclusion is reported as a subtraction from gross income

• Business income can also qualify for the foreign earned income exclusion

• Foreign taxes paid on excluded income do not qualify for the foreign tax credit– Therefore proration of taxes required

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Relief from Double Taxation:Foreign Earned Income Exclusion

• An individual generally qualifies for the exclusion if his tax home is in a foreign country and one of the following tests are met:

– Bona Fide Residence Test – must be a resident of the foreign country for an uninterrupted period that includes an entire tax year

– Physical Presence Test – must be physically present in a foreign country for 330 full days during a period of 12 consecutive months

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Relief from Double Taxation:Foreign Tax Credit

• Foreign tax credit may be claimed for foreign taxes paid on foreign source income

• Separate “baskets” for sources of income– Passive Basket: generally includes interest, dividends, rents, royalties

and capital gains– General Limitation Basket: all other types of income

• Foreign taxes eligible for credit include Canadian income taxes, EI premiums and Canadian/other foreign withholding taxes paid– Note that the top Canadian tax rate is 49.53% vs. top US federal rate of

39.6% therefore the FTC usually eliminates all US tax on Canadian source income

• Note that Canada also allows a FTC for US taxes paid on US source income taxable in Canada

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Americans in Canada:Taxation of Income

• Employment Income– Cannot deduct RRSP– RPP contributions are deductible under the new Treaty protocol– Sourcing depends on where the services are performed

• Dividend Income– Qualified vs. Ordinary dividends are taxed at different rates– Dividends from Canadian corporations may qualify for the reduced rate– Dividends are sourced to the country of the payer– Holding Canadian mutual funds can create issues for US citizens

• Capital Gains– Tax rate depends on whether the gain is short term or long term– Sales of stock are sourced to the country of the taxpayer’s residence– FTC issues can arise depending on the period of time the stock was held,

as well as foreign exchange

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Americans in Canada:Taxation of Income

• Pensions

– Treaty provides for matching treatment of US pension plans in Canada. Therefore if a distribution from a plan is not taxable in the US, Canada will not tax the pension income either

– Roth IRAs are also granted Treaty benefits provided that the taxpayer does not make any contributions to the plan while resident of Canada

– This includes conversion from traditional IRA to Roth IRA

Taxation of Income Cont’d

• Scholarships– Amounts received as a qualified Scholarship by an individual

who is a candidate for a degree at a qualified educational organization are excluded from income

– This does not apply to any amounts received which represent payments for teaching, research or other services as a condition for receiving the scholarship

- Sabbatical Leaves– Expenses can be deductible on Schedule A as other

itemized deductions limited to 2% of AGI– Expenses must be directed related to the Sabbatical– Should write a sabbatical proposal outlining the research

projects you plan to pursue, establish a formal visiting arrangement with the host institution and keep good records

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Consulting/Business Income

• Tax treatment the same if treated as business income earned personally– Taxable on both the Canadian and US return– Eligible for FTC

• Corporations– Can be a CFC if a Canadian corporation or a controlled foreign

affiliate if a US corporation– Therefore additional filing requirements exist– Can trigger additional deemed income inclusions

• LLC or S-Corps are not recommended since the tax treatment differs in Canada and the US– Canada does not provide for the flow through of income to the

shareholder– Results in mismatch of income inclusion/foreign tax credits

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Americans in Canada:Other Filing Requirements

• Registered Retirement Savings Plans (RRSP)– IRS treats RRSPs the same as regular investment accounts

therefore there is no deferral of income tax– Income earned in RRSPs is not taxed in Canada until

withdrawn from plan– Canada-US Tax Treaty allows for a resident of the US to

defer inclusion of income currently earned in an RRSP until such time that the income is taxed in Canada

• Must disclose Treaty election on Form 8891– Separate Form 8891 required for each RRSP

• This election cannot be made on a late filed return

• Must also disclose RRSP account on FinCEN 114 and Form 8938


• Registered Education Savings Plans (RESP)

– Plan allows for individuals to make contributions for the future post-secondary education of beneficiaries

• Contributions cannot exceed $50,000 per beneficiary

– Earnings are not taxable in Canada until received by the beneficiaries

– US treats RESP account as a grantor trust• Income in the account must be included on the

taxpayer’s US return annually• Must be reported to the US on Form 3520/3520A


• Tax Free Savings Account (TFSA)– Plan allows for individuals to earn investment income

in Canada tax-free• Contributions cannot exceed $5,500 per year

– US treats TFSA account as a grantor trust• Income in the account must be included on the

taxpayer’s US return annually• Must be reported to the US on Form 3520/3520A

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• Reporting may be required for investments in non-US entities:– 5471 “Information Return of US Persons with Respect to

Certain Foreign Corporation”• Disclosure form for all US persons who have investments in certain

foreign corporations (includes investments in Canadian corporations)• Special reporting rules when foreign corporation is a considered a

controlled foreign corporation (CFC)• Potential for deemed income inclusions in the US which could result

in a timing difference in income/taxes between Canada and the US• Most common deemed income inclusions are for passive income and

shareholder loans, as well as personal services income

– Form 8865 – Required to report investments in certain foreign partnerships

– Form 8858 – Required to report investments in foreign disregarded entities


• FinCEN Form 114, “Report of Foreign Bank and Financial Accounts (FBAR)”

– Separate filing from the tax return

– US persons who have a financial interest in or signature authority over foreign bank, securities, or other financial accounts, both business and personal, whose total value exceeds $10,000 are required to file annually

– Must disclose details of each account held, including the highest monthly balance of the account in the year

– Due date is June 30th of each year

– Significant penalties for failure to file can be imposed

– Must be electronically filed

Form 8938: Statement of Foreign Financial Assets

• Any individual that holds in aggregate more than $400K (MFJ residents of Canada) in reportable financial assets must report information about these interests on their return

– Does not replace FBAR requirement

• Specified foreign assets that must be disclosed on the return include:

– Foreign financial accounts– Foreign brokerage accounts– Interests in foreign entities– Foreign pensions, retirement plans, etc

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New for 2013:Medicare Tax on Investment Income

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•Medicare Tax on Investment Income

3.8% tax imposed on the lesser of

(a) Net investment income

Interest, dividends, capital gains

Royalties, rents (unless ordinary course of business)

(b) Modified adjusted gross income in excess of

$250,000 (joint filers)

$125,000 (separate filers)

Americans Should Avoid Canadian Mutual Funds

• US considers foreign mutual fund to be a passive foreign investment company (“PFIC”)– Highest tax rate on excess distribution and gains– Interest charged on deemed deferred tax amount– No problem if held by RRSP if election made

• Also be cautious if investing in Canadian Income Funds– Distributions may not qualify for reduced US tax rate

on dividends– Return of capital for US purposes is likely different

from Canadian return of capital

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Expatriation Provisions

• Imposed on certain individuals who renounce US citizenship or relinquish a greencard

• New rules involve a deemed disposition of all property held by the taxpayer at expatriation

– The covered expatriate is deemed to have sold nearly all his worldwide assets at FMV on the day before the expatriation and is taxed on the accrued gains above the threshold amount

– Gain is taxed as ordinary income

• Covered Expatriates are those taxpayers who meet any one of the following:

– Average net income tax for the previous 5 years exceeds $155,000

– Net worth exceeds $2M at the time of expatriation

– Fails to certify under penalty of perjury that he/she has met the requirements of the US tax code for the 5 preceding tax years

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Canadian Tax Treatment of US Pension Plans

• Canadian law requires a taxpayer to include in income amounts received from a foreign retirement arrangement (FRA)– Payments out of a FRA are not taxable in Canada to the

extent that they would not be taxable in the other country to a resident of that country

– FRA definition includes an IRA

• Intention of FRA designation is to provide matching for Canadian residents with IRA plans

• Allows payments to be transferred from one IRA to another without triggering Canadian tax

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Canadian Tax Treatment: Roth IRA

• A Roth IRA is not a FRA– Therefore a Roth IRA is not treated the same way as a traditional

IRA

• Treaty discusses the treatment of Roth IRA plans and includes Roth IRA in the definition of pension

• Under 3(b) of Article XVIII a Roth IRA will be treated as a pension as long as no contributions are made to the Roth IRA after December 31, 2008 while the taxpayer is resident of Canada– Therefore income can accrue in the plan without being subject to

US tax.– Distributions are not taxable in the US; therefore they should not

be taxable in Canada

• Contributions do not include rollover contributions from a different Roth IRA or Roth 401(k) but do include a conversion from an employer plan or traditional IRA into a Roth IRA

Roth IRA as “Pension”

• If a contribution is not made into the Roth IRA the taxpayer can elect to defer Canadian taxation with respect to the income accrued in the Roth IRA

• Under paragraph 1, pension income arising in one country and paid to a resident of the other country may be taxable in the other country but if the pension income would be excluded from income in the first country, income cannot be taxed in the other country– Roth IRA distributions are not taxable in the US,

therefore should also not be taxable in Canada

Transfer of Plans to Canada

• Lump-sum payments out of a IRA would be taxable in Canada (because it would be taxable in the US)– Therefore US tax applies to transfers of IRA plans to Canada

• Eligible for contribution to a RPP or RRSP plan if derived from contributions made to the IRA by the Canadian taxpayer– The transfer must be made within 60 days following the end

of the year in which the payment from the IRA is received

• The lump sum payment is treated as income and then the taxpayer claims a deduction for the contribution of the lump sum into the RRSP

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Questions?

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Julia Klann, CA, CPA (Illinois)(519) 747-8295

[email protected]

Stephanie Sinclair, CA, CPA (Illinois)(519) 747-8201

[email protected]

Diane Wood(519) 660-2123

[email protected]

uwo faculty income tax presentation presented by: julia klann stephanie sinclair diane wood

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