US Internet Tax debates

US consumers may have to pay an Internet access tax if the US decides on Nov 1 to lift the federal ban.

Currently the lines that provide Internet access in the US are virtually tax-free but this could change soon if local government has anything to say about it.

Within the industry the idea of imposing additional taxes on Internet access is extremely unpopular and organizations like Google, AT&T and Timer Warner have banded together to form a group called “Don’t Tax our Internet”.

Changing Internet usage has complicated the issue, threatening to derail an extension and raising the specter of local officials engaging in a land-rush-like race to enact new taxes for surfing the Web.

In the forthcoming weeks it will be interesting to see how this matter plays in the US and who will win out – US government or the industry players

Are you in the top 5?

An annual income of $89,000 was enough to place a Canadian among the top five per cent of individual tax-filers in 2004, according to the most recent data released Monday by Statistics Canada.


The top one per cent of earners was limited to those who raked in $181,000 a year, while membership in the super-elite club consisting of the richest 0.01 per cent of Canadians required an annual paycheque of $2.8 million.


Three-quarters of the top five per cent of earners were men, StatsCan reports, even though men comprise a minority (48 per cent) of individual income tax-filers. The group becomes even more male-heavy at the top end of the income spectrum: just one in nine of the top 0.01 per cent of earners was a woman.


Though their membership in the very highest-earning group hasn’t increased over the last two decades, women made gains among the top five per cent, with their ranks increasing by 10 per cent since 1982.


Almost half (48 per cent) of the top five per cent of taxpayers live in Ontario, followed distantly by Quebec (18 per cent), Alberta (15 per cent) and British Columbia (13). Three out of 10 families with incomes above $250,000 lived in Toronto, followed by Montreal (11 per cent), Vancouver and Calgary (both eight per cent).


Differences between Canada and the U.S. are most striking at the upper end of the income scale, StatsCan found. In Canada, the top five per cent of earners made at least $89,000 in 2004, while the cut-off for that group in the U.S. was $165,000. The threshold for the top 0.01 pr cent in Canada was $2.8 million, but an American would need to make $9.4 million to belong to that same club. With Canadian dollar reached parity with US dollar, the gap may be narrowed a little now.


The study used tax returns and survey data to trace the characteristics of the richest Canadians.

Foreclosure Tax Relief Available to Many

The IRS unveiled a new section of their website today that is dedicated to Foreclosure Tax Planning those who have lost their homes due to foreclosure. They are also reassuring homeowners that there are special relief provisions which can often reduce or eliminate the tax bite for financially strapped borrowers who lose their home. As you may be aware of, some mortgage workouts and foreclosures can have tax consequences and these provisions will help keep the burden to a minimum.


The section includes a worksheet designed to help borrowers determine whether or not any foreclosure related relief provisions apply to them. If a homeowner finds they owe additional tax, it also includes a form they can use to request a payment agreement with the IRS or even settle their tax debt for pennies on the dollar using an offer-in-compromise.


Under tax law, any debt that is wiped out through foreclosure (or a short sale) that exceeds the value of the property, the difference in considered taxable income. The IRS urges homeowners to consider their options carefully before giving up their homes.


There is a special rule that allows insolvent borrowers to offset income to the extent their liabilities exceed their assets. However, under tax law, relief may be limited or unavailable due in some situations such as using part or all of a home for business or rented out.


Homeowners who have debt reduced or eliminated will receive a From 1099-C from their lender. By law, the form will show the amount of debt forgiven and the fair market value of the property. Keep in mind that the winning bid at a foreclosure auction may not reflect the true value of the property.


If you receive a 1099-C, review it carefully and notify the lender immediately of any incorrect information. Pat particular attention to Boxes 2 and 7 as they are the amounts forgiven and fair market value.


Also, if you are facing foreclosure or have already been foreclosed upon, don't wait until the end of the year to start tax planning. Visit the www.irs.gov now or consult an accounting professional and start researching your options.

Canada, U.S. to scrap cross-border tax in treaty

OTTAWA, Sept 18 (Reuters) - Canada and the United States are expected to sign a new tax treaty this month that could increase Canadian companies' access to U.S. financing, experts said on Tuesday.

The two governments will eliminate the 10 percent withholding tax on interest payments made by borrowers in one country to lenders in the other.

The measure would mainly benefit Canadian companies that borrow from U.S. banks. Ottawa estimates it will cost the federal government an estimated C$250 million ($245 million) in the 2007-08 and 2008-09 fiscal years.

Finance Minister Jim Flaherty said in a speech on Sunday that the signing of a revised Canada-U.S. tax treaty would be "soon." Finance officials would not give details.

Tax lawyers who consulted with the Department of Finance said they had been told the revised treaty would be signed by the end of September.

Nancy Hughes Anthony, president of the Canadian Bankers Association, also believes an announcement is imminent.

"We understand that they are on the verge of being able to actually sign the tax treaty, which would be tremendous," she said.

The withholding tax is applied to the interest income of nonresident lenders. Canadian law obliges the Canadian borrower to withhold the tax from its interest payment to a U.S. lender and remit it directly to Ottawa.

In practice, the tax becomes a premium on capital because most sophisticated U.S. lenders require clients to "gross up" their payment so that they pay the full interest plus the tax.

"There's a very keen interest in this," said Michael Friedman, a tax lawyer with McMillan Binch Mendelsohn LLP. "The cost of obtaining capital will be reduced because borrowers won't face the demands to gross up and the ability to borrow capital will be increased."

He added: "It also reduces the legal complexity of borrowing transactions."

The 2007 federal budget said the withholding tax on arm's-length debt -- where borrower and lender are unrelated entities -- with the United States would be eliminated in the first year after the new treaty goes into effect. For non-arm's-length debt, the tax will be phased out over three years.

Ottawa also said it would then unilaterally extend the exemption to arm's-length debt with lenders in all countries.

The risk to Canadian banks is that they lose their competitive edge. But bankers have been pushing for the policy change for years and see more benefits than pitfalls.

"Anything that loosens up the free flow of capital between the two countries will be good for banks because it will be good for their customers," she said. "We hope it will result in increased foreign investment and other things that will be good for the bottom line."

Donations and Tax-Exempt Organizations: US version

Taxpayers who make donations to tax-exempt organizations, such as charities and churches, have some new rules to follow regarding the deductibility of their donations. And, tax-exempt organizations themselves are faced with sweeping changes that affect donations as well as filing and record-keeping requirements. Here is some information to help you learn more about how the new rules may affect you:

Q. What do I need to do in order to claim a deduction for money I donate to charity?
A. For any cash contribution – which includes donations made via cash, check, electronic fund transfer or credit card – you must obtain and keep either a written communication from the charity or a bank record (such as a bank statement, cancelled check or credit card statement) that includes the date, the amount of the donation, and the name of the charity.

Q. How about donations of used clothing or household goods? How do I make sure I can claim a deduction when I donate these items?
A. In order to qualify for a tax deduction, the clothing or household goods you donate to a tax-exempt organization must be in good used condition. The exception to this rule is an item for which a deduction of more than $500 is claimed if you submit a qualified appraisal of the item along with your tax return.

Q. When do I need a “qualified appraisal” for an item I donate?
A. For a contribution of property with a claimed value over $5,000, a qualified appraisal is required. Under the new tax laws, a qualified appraisal must be conducted in accordance with generally accepted appraisal standards, by a qualified appraiser who has either earned an appraisal designation from a recognized professional appraisal organization or has minimum education experience. The appraiser must also have experience in appraising the type of property in question.

Q. I am responsible for a small charity run by a handful of volunteers. In past years, we had no federal filing requirement. Has that changed?
A. Yes. Now, all tax-exempt organizations except churches are required to file some version of Form 990 annually. Small charities may only have to file the e-postcard version of this form. Keep in mind that the penalty for non-filing can be serious: a tax-exempt organization that fails to file for three years can have its tax-exempt status revoked.



Remember, a professional accountant can help you with this and other tax issues you may encounter. Just give us a call or email us at tax@yyconsulting.com.

Reduce Tax By Donation

Do you know...

That you may be able to reduce your income tax by donating to a registered charity? You can verify whether a charity is registered by searching for it in the CRA Charities Listings.

In 2006, the first $200 you donate is eligible for a federal tax credit of 15.25% of the donation amount. After the first $200 of charitable donations, the federal tax credit increases to 29% of the amount donated over $200. You may also be eligible for provincial or territorial tax credits based on the applicable provincial or territorial rates.

You do not have to claim all of the donations you made this year on your current-year return. You can carry forward any donations you do not claim in the current year and claim them on your return for any of the next five years. Married couples or common-law partners can pool their donations and claim them on one return.

Please talk to your accountant if you need help on your income tax return.

China’s new corporate tax code to spur foreign investments

Tax rate to be cut to 25% from 33%

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China to offer industry-based incentives against the location-based system.

15% I-T rate will be applicable for high-tech, advanced tech enterprises.

Withholding tax exemption on dividends repatriated to foreign investors likely to go.

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China is set to strengthen its position as an attractive destination for foreign investments, including from India, with the country carrying out tax reforms and formulating a new corporate income tax code that comes into effect from January 1 next year.

China Foreign investment Tax information:

There are 14 kinds of taxes currently applicable to the enterprises with foreign investment, foreign enterprises and/or foreigners, namely: Value Added Tax, Consumption Tax, Business Tax, Income Tax on Enterprises with Foreign Investment and Foreign Enterprises, Individual Income Tax, Resource Tax, Land Appreciation Tax, Urban Real Estate Tax, Vehicle and Vessel Usage License Plate Tax, Stamp Tax, Deed Tax, Slaughter Tax, Agriculture Tax, and Customs Duties.

Compatriots from Hong Kong, Macao and Taiwan and overseas Chinese and the enterprises with their investment are taxed in reference to the taxation on foreigners, enterprises with foreign investment and/or foreign enterprises. In order better to encourage inward flow of funds, technology and intelligence, China provides numerous preferential treatments in foreign taxation, and has successively concluded tax treaties with 60 countries (by July, 1999): Japan, the USA, France, UK, Belgium, Germany, Malaysia, Norway, Denmark, Singapore, Finland, Canada, Sweden, New Zealand, Thailand, Italy, the Netherlands, former Czechoslovakia, Poland, Australia, Bulgaria, Pakistan, Kuwait, Switzerland, Cyprus, Spain, Romania, Austria, Brazil, Mongolia, Hungary, Malta, the United Emirates of Arab, Luxembourg, South Korea, Russia, Papua New Guinea, India, Mauritius, Croatia, Belarus, Slovenia, Israel, Viet-Nam, Turkey, Ukraine, Armenia, Jamaica, Iceland, Lithuania, Latvia, Uzbekistan, Bangladesh, Yugoslavia, Sudan, Macedonia, Egypt, Portugal, Estonia, and Laos, 51 of which have been in force.

Foreign currency tax tips

Both businesses and individual taxpayers may find themselves in situations where foreign currency transactions are required to be converted into Canadian dollars. This may be an almost daily occurrence for businesses involved in cross-border work. Individual taxpayers may have to take into account foreign currency rates on such diverse situations as the calculation of a gain or loss on an investment or the receipt of regular payments, such as pensions, from a foreign country.

You need not use the Bank of Canada rate in determining the conversion rates. There is both a current and historic converter from scores of other currencies to Canadian dollars at http://www.bankofcanada.ca/en/ rates/converter.html.

There is nothing in the Income Tax Act or the CRA's published material that requires you to use the Bank of Canada annual average exchange rate to convert your pension and investment income to Canadian dollars.


Page 14 of the 2006 General Income Tax and Benefit Guide indicates that you may use the exchange rate that was in effect on the day you received the foreign income. Interpretation Bulletin IT-270R3, Foreign Tax Credit, also indicates that investment income may be converted at the exchange rate that applied on the date it was received. Pension income may also be converted at that exchange rate.

However, if the amounts were paid at various times throughout the year, you may use the Bank of Canada annual average exchange rate as a convenience.

Of course, as we have pointed out in the past, there is nothing to stop one from trying each rate on for size and only after determining what produces the best result, making a choice. In the worst-case scenario, all that can happen is that you might be called upon to justify that decision.

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On a different aspect of foreign exchange, we have been finding more foreign hotels have been asking us, when we tender our credit card, whether we would like to pay in local currency or Canadian dollars. This generally is a huge trap for the unwary.

In August in London, our hotel would have converted the bill to Canadian dollars at a rate of $2.40 to the pound. We insisted in paying in pounds sterling and the subsequent VISA statement showed the conversion by our bank at $2.19!

An offer of the convenience of having your credit card debited based on Canadian dollars is just one more way hotels can rip off unwary travellers.

Copied from: Arthur Drache, Financial Post

The Role of Appeals in Resolving Federal Tax Disputes

Internal Revenue Service (IRS) provides a formal process – Appeals – to help resolve tax disputes without proceeding to court. Appeals officials will review all available information, viewpoints and perspectives to come to a resolution on which the IRS and the taxpayer agree.

Q. I disagree with the action the IRS is taking on my case. If I go to Appeals, will I really get a fair review?

A. Yes, you will. The Appeals Division of the IRS is designed as an independent forum that provides a fresh look at your tax dispute.

Q. Are there any advantages to going to Appeals, or is it better to just go to court?

A. The Appeals Division is charged with reviewing your case in a way that is impartial and fair. And, unlike a judge, the Appeals Division has a more flexible viewpoint and can offer compromises instead of simply ruling on the point of law. Appeals can recognize that there are gray areas.

Q. I have a case currently in Appeals, but I think that the Appeals official has been communicating with the IRS’ examination division behind my back. Is that allowed? What can I do?

A. By law, Appeals cannot conduct “ex parte communication,” or communication with other parts of the IRS about your Appeals case, without your knowledge. The ex parte rule is intended to help maintain the integrity of the Appeals process. If you believe that the ex parte rule has been violated, you need to bring it to the attention of the Appeals officer’s supervisor. If ex parte communication has occurred, you will receive complete information on the communication that took place, and your case may be reassigned.

Q. If I take my case to court, can I change my mind and go to Appeals instead?

A. No. Once your case is in the courts, Appeals cannot help you. In most instances, you should exhaust all of your other options before proceeding with a court case.

Q. Is the standard Appeals process my only option for resolution of my dispute, other than court?

A. Other than the standard Appeals process, other options for dispute resolution are available. These include fast-track settlements, post-appeals mediation and arbitration.

Q. What are my options for authorizing other people to represent me with the IRS?

A. There is a wide range of third-party authorizations available to help you with representation in all sorts of federal tax issues. To highlight just a few of these options, you can authorize your tax practitioner in writing using the Power of Attorney, Tax Information Authorization or Third-Party Designation, or via telephone using the Oral Tax Information Authorization or Oral Disclosure Consent. Each authorization has its own unique requirements and limitations, and several publications are available for more complete information. Check out the IRS Web site at www.IRS.gov for details, or talk to your tax practitioner.

Remember, an accounting professional can help you with this and other tax issues you may encounter. Just email us at tax@yyconsulting.com.