Hot or Not

An Interesting observation from Google trend on tax searches. Not surprisingly, we see peak traffic every year from February to April. Then there is an interesting spike around June and July.

Top Ten US Tax Mistakes by those with Canadian Cross-Border Issues

People with income from both the United States and Canada often find that their Canadian income items were not reported properly on their U.S. income tax return. The following are common errors we find when reviewing returns:

1. Having the incorrect amount of withholding - the US/Canada Tax Treaty specifies the rate of withholding on various types of income. If the correct withholding did not take place, a return must be filed to pay or to receive a refund of the difference in tax.
2. Rental property in Canada - NR6's should be filed at the start of each year to allow withholding on the net income rather than gross. Actual results are reported to Canada via a T1 filed under Section 216. The U.S. return requires a longer period of depreciation on property when located outside of the U.S.
3. Ownership in foreign partnerships and corporations -may require additional filings to be attached to the U.S. return. Passive income realized within the corporation is treated as received by the shareholders or partners whether a dividend has been paid or not.
4. Not reporting worldwide income - citizens and residents of the U.S. are required to report their worldwide income from all sources, foreign and domestic.
5. Disclosure of foreign bank and brokerage accounts - Treasury form TDF 90.22 is used to report the ownership of and balances in any bank or brokerage account that you may have outside the U.S. This includes RRSPs and RRIFs.
6. Not disclosing a treaty-based return position - when contributing to a Canadian charity, disclosure must be made on Form 8833. Also, elections to defer the income within an RRSP or RRIF need to be completed on Form 8833.
7. Foreign Tax Credits - these are often misclassified and carryovers are left to expire. Proper planning can save taxes in future years. Under certain circumstances it may be better to take foreign taxes paid as a deduction rather than a credit. Only proper analysis results in the correct answer.
8. Incorrect reporting of OAS and CPP - as U.S. residents, those payments are taxed in the same way as U.S. Social Security on the Federal return. Adjustments are often necessary for the State returns. Canadian residents receiving U.S. Social Security are taxed differently than on their OAS and CPP. Proper reporting insures the 15% adjustment.
9. Incorrect reporting of RRSPs and RRIFs - if not deferred by a treaty election, the income within the RRSP and RRIF is fully taxable in the U.S. Again, some states do not recognize the treaty deferrals and tax the income regardless of treatment on the Federal return.
10. Not having an experienced cross border tax specialist prepare the return. If the client has foreign income, they need someone familiar with these issues. Penalties for improper reporting or failure to report run as high as $10,000.

US citizen in Canada Tax Tips

The United States taxes its citizens on their worldwide income, whether or not they live in the United States. As a result, if you are a U.S. citizen living in Canada you are required to file a tax return under both systems.

Watch out for tax liabilities

Although there are several mechanisms to prevent double taxation, there are still many differences between the two income tax systems that can lead to unexpected tax liabilities. One of the most glaring differences between the two systems is in the area of capital gains. For this reason, you should always obtain professional tax advice if you have sold, or are considering selling, capital property.

If your income is high enough you may also have to pay a certain amount of U.S. alternative minimum tax even though your income is fully taxed in Canada. Be aware of this potential liability when planning your income.

Filing your returns

For Canadian tax purposes, each taxpayer must file a separate return. For U.S. tax purposes, you have the option of filing a joint return with your spouse. If your spouse has little or no income but you are paying tax to the U.S., filing a joint election will generally be beneficial. If your spouse is not a U.S. citizen, the decision to file jointly can only be made once. This election applies automatically to all subsequent years unless it is revoked. Once revoked, the election cannot be reinstated.

If you are a U.S. citizen, you may be required to file a U.S. tax return even if no U.S. tax is owing. On October 1, 1992, the Internal Revenue Service (IRS) launched a "non-filer program" in an attempt to bring back into the U.S. tax system taxpayers who have not been filing returns. Substantial resources are being devoted to finding non-filers who are likely to owe a significant amount of tax. An IRS information return must now be completed in conjunction with the processing of all passport applications. If you have not been filing a U.S. return, you should obtain professional advice.

As well as filing a tax return, you may also be required to disclose a substantial amount of other financial information to the U.S. government. Contact your professional adviser for further details.

End the ICBC Monopoly

From Taxpayer.com:

TO THE LEGISLATURE:

As taxpayers in British Columbia, we already insure our homes, our property, and our lives from a choice of various insurance providers.

ICBC's monopoly robs consumers of open competition and choice.

86% of Canadian Taxpayers Federation supporters want ICBC to face competition--they want the choice of who will insure their automobile.

We the undersigned also want the freedom of choice on auto insurance.

We the undersigned petition the Legislature to provide for free and open competition in auto insurance - and an end to the ICBC monopoly we want a choice!

https://secure.lexi.net/ctf/petitions.php?petition_id=19

Tax Overseas Canadians

From Globe and Mail:
Tax overseas Canadians, Ottawa told

Critics urge special tax for overseas Canadians
Government must demand more in return for generous passport policy, observers say

Some call the Canadian passport an $87 get-out-of-jail-free card. Others see it as emergency evacuation insurance.

As Ottawa finally begins to review Canada's citizenship policy -- one of the most generous in the world -- critics are calling for a special tax for overseas Canadians.

"People want all the benefits of being Canadian, but none of the burden," said Richard Kurland, a lawyer and immigration policy analyst. "Non-resident citizens should not have a free ride -- business class -- at taxpayers' expense, by flashing a Canadian passport."

Added Don DeVoretz, an economist at Vancouver's Simon Fraser University: "The time has come to look at the citizenship policy and ask, does it serve Canada's interests?"

This summer's $94-million evacuation of 15,000 Lebanese-Canadians from war-torn Lebanon finally prompted Ottawa to announce a review of Canada's citizenship policy. Immigration Minister Monte Solberg won't divulge details about the review, but he has said it is time to review the obligations of citizens who live abroad while drawing on Canada's social programs.

Kurland advocates the introduction of a special new tax for non-resident citizens. Canadians who have been living overseas for more than five years should pay $500 for a passport, he said.

This idea has also been endorsed by John Chant, a retired Simon Fraser University economist, in a study titled the Passport Package, released this month by the C.D. Howe Institute.

"The costs of the non-resident passport package should be shifted from resident Canadians who pay taxes to non-resident citizens who benefit but pay no taxes," Prof. Chant said in an interview.

Such a tax would raise about $200-million a year, based on the estimate that 80% of the 2.7 million overseas Canadians would choose to maintain their citizenship.

The policy would be less cumbersome and bureaucratic than requiring Canadians living abroad to pay income taxes.

"I have spoken to non-governmental organizations who work with South Asians, and they all think this is very fair," Kurland said. "Call it the insurance passport."

There has been a recent rush on applications for passports, as the Jan. 23 deadline approaches for new U.S. rules requiring Canadians to show passports when they fly south.

Canada's current policy, designed to attract newcomers, allows immigrants to become citizens after just three years of residency -- with no requirement to relinquish previous passports.

Non-resident Canadians do not have to pay income tax. Babies born to tourists are also entitled to full citizenship. People can acquire citizenship through ancestry as well, qualifying if a parent was Canadian -- even if this parent never lived in Canada.

This generous policy, meant to lure newcomers, has in many cases actually served to accelerate their departure. Today, an estimated 8% of all Canadians (2.7 million) live outside the country, 1.7 million of them permanent residents elsewhere, according to the Asia Pacific Foundation of Canada. Forty-four% live in the United States; 24% in Asia and 18% in Europe. There are currently 300,000 Canadians in Hong Kong alone.

In his study, Prof. Chant notes that overseas Canadians have a range of government benefits that he calls the "passport package."

The package includes not just one-time evacuations, but a whole list of benefits:

* They pay resident tuition fees and receive university financial assistance;
* Their dependents can become Canadian citizens;
* They have health-care benefits;
* They are eligible for the prisoner transfer program;
* They receive consular services, free entrance into Canada and visa exemptions to travel to many other countries.

Kurland added that if there was political upheaval in Taiwan, Hong Kong or mainland China, the impact on Canada could be enormous in terms of evacuation and resettlement costs. "Those evacuated from Lebanon this summer were given return tickets and within two months, half had returned," he pointed out. "It's time they shared the cost of this."

John Kirton, a University of Toronto political scientist, believes the Canadian diaspora should be considered an asset, not a financial drain. "They are ambassadors promoting Canadian culture and values abroad and also fostering family business networks," he said. "It is the quintessential Canadian experience to carry more than one passport."

Others, however, would like to see overseas Canadians become more politically engaged. Prof. DeVoretz suggests they be encouraged to vote, and serve jury duty. "I'd like to see more political awareness among non-resident Canadians," he said.

Prof. DeVoretz recently returned from Nashan, China, where he interviewed 500 Canadians of Chinese origin about why they decided to return to their country of origin. He discovered that most never intended to stay in Canada. "They just wanted the passports," he said.

"They were fairly successful in Canada but they are more successful in Hong Kong. The conditions had to be right for their return."

They cannot be faulted for taking advantage of a liberal citizenship policy, but the example proves the point, he said: Ottawa needs to ask whether the current citizenship policy is in the interests of tax-paying Canadians.

Around the world

* 150 countries allow dual citizenship.
* China, Cuba and South Korea do not.
* Germany allows dual citizenship, but makes people choose loyalty to one country by the age of 19.
* The United States requires non-resident Americans to file income-tax returns.
* Denmark does not automatically grant citizenship to children of Danish immigrants.
* In India, dual citizens may not vote, and non-resident citizens must file income-tax returns.

Tax tips for home businesses

From Toronto Star:
By Linda A. Fox

If you operate a small, home-based business, you are trying to get the most out of every dollar you bring in. Figuring out how to maximize tax deductions is one very important aspect of the business's financial plan.

Small, home-based businesses present a number of opportunities for income tax planning that, if not dealt with properly, can cost the owner money.

Many such businesses are operated out of the owner's home, for reasons of cost as well as avoiding a commute and being able to care for small children while still working.

The Income Tax Act specifically provides that expenses incurred for the purpose of earning income may be deducted for tax purposes, so the owner must remain on top of all the costs that are being incurred. Getting good financial advice is the key.

Chartered accountant and small-business specialist Jerry Paskowitz, a partner in Sloan Partners LLP of Thornhill, warns that many home-business costs are hidden.

"For example, rent paid for a residential apartment or the mortgage interest paid on a house may be deductible," said Paskowitz. "The criterion would be whether there is space dedicated to the operation of the business."

Paskowitz cites the example of a person selling giftware from her home.

"Let's say the proprietor has inventory stored in a third bedroom and is also using that space to keep the business records. Customers also go to that room to see the merchandise and place orders," Paskowitz explains. "In that case, the owner would determine the portion of the home being used for business purposes as a percentage of the total space, and apply that proportion to the mortgage interest to determine the allowable expense. The same rationale would be used for other related expenses, such as maintenance costs and utilities."

Other allowable deductions would be the expense of stationery and supplies, as well as the business use of a vehicle.

"One question that arises quite often is whether a business owner can employ his or her spouse," said Paskowitz. "The short answer is that any person who provides services to the business, whether related or not, can be paid. That also includes children. The consideration is that services provided should be documented and paid for at a reasonable rate. There is terrific opportunity for the unaware to miss out on legitimate claims by forgetting to compensate spouses for work performed."

When paying a family member or spouse, no tax is paid on income up to $8,000, and those who receive the money can make RRSP contributions, which can benefit the family.

Other allowable expenses include travel, if your trip is deemed for business purposes; insurance; cellphone and land line telephone bills. Meals and entertainment expenses are restricted to 50 per cent of the amounts paid.

If the business acquires capital assets such as computer equipment, furniture and fixtures, depreciation — "capital cost allowance" in tax-speak — is deducted at rates determined by the Canada Revenue Agency, or CRA.

Some types of expenses, such as those incurred in acquiring advanced knowledge, may be treated as business expenses while some may be deemed tuition, depending on the circumstances, said Paskowitz.

"For instance, attending a certification course required by a manufacturer before being allowed to sell a particular product will be treated as a business expense, but attending a college night course to gain advanced knowledge of a software program is most probably tuition," he says. "In either case, they would be allowable deductions in the computing of taxable income."

A final word of advice from Paskowitz is to read the related tax paperwork. "To assist in the planning, business owners and prospective owners should look at tax forms T2032 (for service businesses) and T2124 (for product-based businesses) and read the CRA guides to these forms to get an understanding of the tax treatment of home-based and small businesses."

If you are unsure of what to do, get help. Most initial consulting visits to accountancy firms are free. Do your homework, choose someone with a recognized accounting designation for assistance, and put all your questions in writing.

Just take a quick look around your home. If you have a room set aside as an office; if you have furniture and equipment, computers, phones, a car and employee relatives, chances are you have things you can write off to maximize business tax deductions.

Late Filing for Canadians

There may be a good reason you have not yet filed your tax return:
You were self-employed. If you or your spouse or common-law partner carried on a business in a tax year (other than a business whose expenditures are primarily in connection with a tax shelter) your return for that tax year has to be filed on or before June 15 of the following year. However, if you have a balance owing for the tax year and you have not paid it on or before April 30 of the following year, you will be subject to penalties.

You thought that you were owed a refund. However, if the CRA later reassesses you and determines that you have a balance due, they will charge interest and late-filing penalties (compounded daily) back to the original due date for the tax year.

You are filing a return for a deceased individual. If the person died in November or December of the tax year, his or her return for that tax year must be filed within six months following the date of death or, if business income is being reported, by June 15 of the following year. If the person died in the first four months of the year following the tax year, his or her return must be filed within six months following the date of death. Note that you cannot use NETFILE to file for a deceased individual.

Do you have to file a tax return?
You must file a tax return for a tax year if any of the following applies:

You owe tax for that tax year.
The Canada Revenue Agency sent you a request to file a return.
You have a taxable capital gain or disposed of capital property (such as real estate or shares) in the tax year, or you claimed a capital gains reserve on your previous year's return.
You have to pay back any of your Old Age Security or Employment Insurance benefits.
You have not repaid all of the amounts you withdrew from your RRSP under the Home Buyers' Plan or the Lifelong Learning Plan.
You have to contribute to the Canada Pension Plan (CPP). This can apply if the total of your net self-employment income and pensionable employment income for the tax year is more than $3,500. Even if none of these requirements applies, you may want to file a return if any of the following applies:
You want to claim a refund.
You want to apply for the goods and services tax/harmonized sales tax (GST/HST) credit.
You or your spouse or common-law partner wants to begin or continue receiving Canada Child Tax Benefit payments.
You want to carry forward the unused portion of your tuition and education amounts.
You received income for which you could contribute to a registered retirement savings plan (RRSP). To keep your RRSP deduction limit up to date, you must to file a return.
You have incurred a non-capital loss in the tax year that you want to be able to apply in other years.

Tax Rate For BC Residence

Canada Federal tax rates for 2007 are:
15.5% on the first $37,178 of taxable income, +
22% on the next $37,179 of taxable income (on the portion of taxable income between $37,178 and $74,357), +
26% on the next $46,530 of taxable income (on the portion of taxable income between $74,357 and $120,887), +
29% of taxable income over $120,887.

British Columbin Provincial Tax rate for 2007 are:
5.7% on the first $34,397 of taxable income, +8.65% on the next $34,397, +11.1% on the next $10,190, +13% on the next $16,925, +14.7% on the amount over $95,909

GST refund elimination passes quietly

Very quietly, with little local notice, Canada's policy of refunding General Services Tax (GST) to non-residents passed by the boards on April 1.The Canadian federal tax of six percent is applied to almost all purchases in Canada. The refund for non-residents was originally intended to encourage cross-border purchasing principally from the US.A feature of the 2007 Canadian federal budget, elimination of the GST refund passed virtually unnoticed on the US side of the border. With elimination of the GST refund, US residents must pay a total of 14 percent in combined federal and provincial taxes on purchases made in Canada.

Nice move! Harper. Really good strategy to encourage more US travellers to Canada by taxing them!