What’s New In Tax - Looking Ahead to 2014 · 2016. 6. 2. · Tax “Avoision” • There is a difference between tax minimization or avoidance and tax evasion • Tax avoidance:

What’s New In Tax - Looking Ahead to 2014

Kim G C Moody FCA, TEP Tim Clarke MA, LLB Roy A Berg JD, LLM (US TAX), TEP Greg Gartner MBA, LLB, CA, QC December 9 and 10, 2013

Overview

A.  Macro Forces Affecting Taxpayers

B.  Owner-Manager Remuneration Update

C.  Federal Budget 2013

D.  Case Law and Legislative Update

E.  CRA and IRS Dispute Resolution and Tax Court Appeals

F.  US Update 1

Macro Forces Affecting Taxpayers and Advisors

Macro Forces Affecting Taxpayers

1.  Desire for transparency by tax administrators

2.  Blurring of the line between tax avoidance and tax evasion

3.  Shifting of profits

4.  Regulation of the tax industry

5.  Increasing complexity of tax legislation

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The Desire for Transparency •  Each country has the right to design its tax system in the way it

considers most appropriate; however, OECD encourages increased international co-operation among tax administrators

•  OECD measures to promote transparency by companies to tax authorities and the exchange of information between tax jurisdictions in order to address: –  Base Erosion and Profit Shifting (“BEPS”) –  Aggressive tax planning to avoid or evade taxation –  Overall, improving investment, growth and competitiveness

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OECD Action Plan on Base Erosion and Profit Shifting (released July 19, 2013) Cont’d ACTION 1 – Address the tax challenges of the digital economy

ACTION 2 – Neutralize the effects of hybrid mismatch arrangements

ACTION 3 – Strengthen CFC rules

ACTION 4 – Limit base erosion via interest deductions and other financial payments

ACTION 5 – Counter harmful tax practices more effectively, taking into account transparency and substance

ACTION 6 – Prevent treaty abuse

ACTION 7 – Prevent the artificial avoidance of PE status

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OECD Action Plan on Base Erosion and Profit Shifting (released July 19, 2013)

ACTIONS 8, 9 and 10 – Assure that transfer pricing outcomes are in line with value creation

ACTION 11 – Establish methodologies to collect and analyze data on BEPS and the actions to address it

ACTION 12 – Require taxpayers to disclose their aggressive tax planning arrangements

ACTION 13 – Re-examine transfer pricing documentation

ACTION 14 – Make dispute resolution mechanisms more effective

ACTION 15 – Develop a multilateral instrument

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Tax “Avoision”

•  There is a difference between tax minimization or avoidance and tax evasion

•  Tax avoidance: –  Legal methods of reducing one’s tax liability (e.g. claiming

permissible deductions and credits)

•  Tax evasion: –  Illegal practice of avoiding one’s true tax liability

•  Line between avoidance and evasion is becoming increasingly blurry

7

Tax “Avoision” Cont’d

•  Witness recent voluntary payment by Starbucks to UK – what is that payment? A charitable donation?

•  Google, Starbucks, Apple and many other multinationals under pressure to disclose their tax practices.

8

Regulation of the Tax Industry •  Many countries are starting to regulate tax professionals

–  Examples: ◦  Australia ◦  South Africa ◦  UK ◦  Currently being challenged in US

•  Aim to address gaps in oversight of tax preparers and representatives

•  CRA mused openly at 2012 National Conference that they were considering this

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Complexity of Tax Legislation •  Globalization, e-commerce, and the increasing complexity of

society challenges tax authorities to respond with broad and complex legislation to protect the public purse

•  However, some still argue in favour of “tax simplification”

•  While “tax simplification” may be a good policy objective, it is much more difficult to implement in today’s complex society

•  Witness the UK that has an office devoted to tax simplification

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Owner-Manager Remuneration Update

Owner-Manager (“OM”) Remuneration – Current Trends, Strategies and Challenges

•  Three objectives of remuneration planning: 1.  Determining the amount of the remuneration; 2.  Determining the form of the remuneration; and 3.  Determining when to pay the remuneration.

•  Notable changes in tax landscape since 2000: –  Wholesale reduction of federal and provincial tax rates; –  Introduction of eligible dividend regime; –  “Kiddie tax” rules; and –  Tightening of rules governing popular remuneration vehicles (e.g.

RCAs, HWTs, EPSPs, PSBs). 12

Owner-Manager (“OM”) Remuneration – Current Trends, Strategies and Challenges Cont’d

•  Review of Income Tax Rates –  Dramatic decrease in federal and provincial corporate tax rates

over the last ten years –  As of 2013, the general corporate tax rates in more than half of

the provinces/territories are 27% or below ◦  Substantial change from the pre-2006 years when most provinces/

territories had rates in the 35-plus percentage range

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Top Marginal Combined Federal and Provincial Personal Income Tax Rates on Ordinary Income

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Highest tax 2011 2012 2013 2014 bracket (2013)

Alberta 39.00% 39.00% 39.00% 39.00% 135,055$ BC 43.70% 43.70% 43.70% 45.80% 104,755$ Saskatchewan 44.00% 44.00% 44.00% 44.00% 122,590$ Manitoba 46.40% 46.40% 46.40% 46.40% 67,001$ Ontario 46.41% 47.97% 49.53% 49.53% 500,001$ Quebec 48.22% 48.22% 49.97% 49.97% 100,001$ New Brunswick 43.30% 43.30% 45.07% 46.84% 126,663$ Nova Scotia 50.00% 50.00% 50.00% 50.00% 150,001$ PEI 47.37% 47.37% 47.37% 47.37% 63,970$ Newfoundland and Labrador 42.30% 42.30% 42.30% 42.30% 67,497$ NWT 43.05% 43.05% 43.05% 43.05% 128,287$ Nunavut 40.50% 40.50% 40.50% 40.50% 135,055$ Yukon 42.40% 42.40% 42.40% 42.40% 135,055$


Top Marginal Combined Federal and Provincial Personal Income Tax Rates on Eligible Dividends

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Top Marginal Combined Federal and Provincial Personal Income Tax Rates on Non-Eligible Dividends

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Owner-Manager (“OM”) Remuneration – Current Trends, Strategies and Challenges Cont’d •  OM Remuneration Planning – A Quick Historical Review

–  The “Bonus-down” Strategy –  Income Splitting with Minors –  Retirement Compensation Arrangements –  Employee Profit Sharing Plans –  Health and Welfare Trusts –  Personal Services Businesses

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•  Eligible Dividend Tax Regime and Impact on OM Planning –  General principles

◦  Announced in November 2005 – effective for 2006 and subsequent years

◦  Allows corporations to designate dividends it pays as “eligible dividends” which are taxed at a reduced rate

◦  Canadian controlled private corporations (“CCPCs”) can pay eligible dividends out of its general rate income pool (“GRIP”)

◦  Public companies and other non-CCPCs can generally not pay eligible dividends unless they have a low rate income pool (“LRIP”)

◦  The difference in treatment between an eligible dividend and a non-eligible dividend to the individual recipient is attained through the dividend gross up and dividend tax credit mechanisms

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Bonus down vs. no bonus down

◦  Old rule of thumb: bonus income to small business limit for active CCPC

◦  New rule of thumb: retain income in corporation except as needed personally

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Sale of share vs. sale of assets

◦  Old rule of thumb: sell shares not assets ◦  New rule of thumb: sell assets not shares, if beyond capital gains

exemption limits –  Mathematics need to be calculated in all cases!

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Sale of tangible assets vs. sale of intangible assets

◦  Old rule of thumb: on a sale of assets, allocate as much as possible to capital gain

◦  New rule of thumb: on a sale of assets, allocate as much as possible to goodwill

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Investment income earned personally (or through a CCPC) vs.

investment income earned through non-CCPC ◦  Old rule of thumb: earn investment income personally rather than

through an investment holding company; for CCPC’s, strong preference to earn investment income for RDTOH integration to avoid double tax

◦  New rule of thumb: earn investment income in a corporation that is a non-CCPC and retain funds in the corporation

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Increasing issue of tax on death

◦  Old rule of thumb: tax on death issue minimized due to bonus-down practices

◦  New rule of thumb: tax on death becomes a larger issue due to deliberate accumulation of funds in corporation

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Increased importance of estate freezes and use of trusts

◦  Old rule of thumb: estate freezes and use of trusts somewhat beneficial, but only if corporation appreciates in value

◦  New rule of thumb: estate freezes and use of trusts more important as private corporations will increase in value if funds accumulate

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Increased importance of creditor proofing

◦  Old rule of thumb: creditor proofing is important, bonus and loan-back is an easy way

◦  New rule of thumb: creditor proofing now even more important, consider dividend to holding company and loan-back, or use trust and corporate beneficiary structure

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Owner-Manager (“OM”) Remuneration– Current Trends, Strategies and Challenges Cont’d

•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Increasingly nuanced choice between post-mortem pipeline vs.

subsection 164(6) capital loss carry-back ◦  Old rule of thumb: use post-mortem pipeline to avoid double

taxation unless significant CDA or RDTOH ◦  New rule of thumb: weigh the merits of both the pipeline strategy

and the subsection 164(6) capital loss carry-back strategy and for pipelines, manage subsection 84(2) risk by holding off on distribution for at least one year

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Increased commonality of safe income strip ◦  Old rule of thumb: safe income strip not common as low retained

earnings ◦  New rule of thumb: safe income strip more common as earnings are

accumulated over time

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•  Impact of the eligible dividend regime on OM remuneration planning (the old vs. new rules of thumb) –  Increased importance of insurance

◦  Old rule of thumb: insurance to cover capital gains tax on value of company operations

◦  New rule of thumb: increase in insurance to cover funds accumulated

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Owner-Manager (“OM”) Remuneration – Current Trends, Strategies and Challenges Cont’d •  Other OM Planning Techniques Today

–  Managing shareholder loan debit balances and maximizing cash extractions from corporations ◦  Transfer in illiquid assets ◦  Repatriate arm’s length ACB ◦  Offsets within group

–  Remunerations strategies ◦  Leveraging RDTOH in the corporate group ◦  Remuneration through capital gains or gains on ECP

–  Buyer beware planning: management fees –  Buyer beware planning: trust allocation and deliberate use of

subsection 75(2) –  Buyer beware planning: stock option sidecar

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The Dis-Integration of the Personal Services Business (“PSB”) •  A PSB exists where an individual, who is a specified

shareholder, (or an individual who is related to the specified shareholder) provides services on behalf of a corporation to a client, where if the corporation did not exist, the nature of the relationship between the individual and the client would be that of an employee – employer.

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The Dis-Integration of the PSB Cont’d

•  Prior to the draft legislation of October 31, 2011, PSB’s were provided the “general rate reduction” in the calculation of their taxable income for federal purposes.

•  This resulted in an integrated tax rate for a corporate

shareholder of 39.47% (2012 Alberta rates). •  Could use PSB’s for tax deferral.

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The Dis-Integration of the PSB Cont’d •  Subsequent to the draft legislation, a PSB with a taxation year

commencing after October 31, 2011, will no longer be provided the benefit of the “general rate reduction” (13% in 2012) in the calculation of their taxable income for federal purposes.

•  As a result, the integrated tax rate for a corporate shareholder would be 49.96% (2012 Alberta rates; 54.74% for BC), the highest personal marginal tax rate.

•  As shown in the above example, by removing the benefit of the “general rate reduction” the Government has effectively chastised any PSB that does not flow out profits to its shareholders as salaries, through the measures in the October 31, 2011 draft legislation.

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PSBs – What to Do?

•  Pay out salaries to zero out corporate income. •  Be very aware of risks. •  “Tight” contracts. •  Use trusts instead of corporations? Caution.

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Budget 2013 - Select Owner-Manager Highlights

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A.  Personal tax

B.  Measures Targeting Certain “Tax Products” and Other Perceived Abuses

C.  Strengthening Compliance And Other Measures

D.  Consultation Initiatives

Dividend Tax Credit on Non-Eligible Dividends

•  Non-eligible dividends are paid from corporate retained earnings that were subject to a preferential tax rate

•  Approximately 1% tax savings by operating through a CCPC, assuming all corporate funds are distributed to the shareholders

•  New gross-up and tax credit mechanism removes the savings

•  Applies to non-eligible dividends paid after December 31, 2013

•  Consider paying non-eligible dividends prior to January 1, 2014

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Dividend Tax Credit on Non-Eligible Dividends - Example

Sole Proprietor Non-Eligible Eligible Taxable Income $100.00 $100.00 $100.00 Tax Rate (Federal and Alberta) N/A 14.00% 25.00% Corporate Taxes N/A (14.00) (25.00)

Dividend paid to shareholder N/A 86.00 75.00 Personal tax rate on income 39.00% 27.71% 19.29% Personal Taxes 39.00 23.83 14.47

TOTAL TAXES (PERSONAL/CORPORATE)

$39.00 $37.83 $39.48

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Dividend Tax Credit on Non-Eligible Dividends – Example Cont’d

2013 2014 Non-eligible Dividend $100.00 $100.00 Gross-Up 25% 18% Taxable Dividend (Eligible + Gross-Up) 125.00 118.00 Highest Marginal Tax Rate – Alberta 39% 39% Taxes Payable on Taxable Dividend 48.75 46.02 Federal DTC (16.67) (13.00) Alberta DTC (4.38) (3.15)

Net Taxes Payable $27.71 $29.87

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Dividend Tax Credit on Non-Eligible Dividends – Example Cont’d

Sole Proprietor Non-Eligible Eligible Taxable Income $100.00 $100.00 $100.00 Small Business Tax Rate (AB) N/A 14.00% 25.00% Corporate Taxes N/A (14.00) (25.00)

Dividend paid to shareholder N/A 86.00 75.00 Personal tax rate on income 39.00% 29.87% 19.29% Personal Taxes 39.00 25.69 14.47

TOTAL TAXES (PERSONAL/CORPORATE)

$39.00 $39.69 $39.48

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Capital Gains Deduction

•  Currently, individuals can deduct $750,000 against capital gains realized on the disposition of a “qualified small business corporation share”, a “qualified farm property”, or a “qualified fishing property”

•  The deduction amount was last updated in 2007

•  Deduction is increased to $800,000 for the 2014 taxation year and will be indexed for inflation going forward

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Charitable Donation Tax Shelters

•  Tax shelters promising high tax refunds in excess of what was actually donated – based on dubious technical reasoning

•  CRA is auditing all gifting arrangements, garnering billions of dollars from reassessments

•  Where a taxpayer files an objection to an assessment relating

to credits claimed for charitable donation tax shelters, the CRA will now be able to collect 50% of the tax in dispute

•  A “pay-to-play” mechanism

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Synthetic Disposition Arrangement •  A “synthetic disposition arrangement” means one or more

agreements or arrangements entered into by the taxpayer (or a non-arm’s length person) in respect of a property owned by the taxpayer that: –  has the effect of eliminating all or substantially all of the

taxpayer’s risk of loss and opportunity for gain or profit in respect of the particular property for a period of more than one year;

–  can, in respect of those agreements or arrangements entered into by a non-arm’s length person, reasonably be considered to have been entered into for purpose of obtaining the above effect; and

–  does not cause a disposition within one year

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Synthetic Disposition Arrangement Cont’d

•  Proposed section 80.6, will apply as follows: –  The taxpayer is deemed to have disposed of the subject property

immediately before the arrangement for FMV and to have reacquired it at FMV.

–  Resulting in the recognition of any income, gain or loss accrued up to that point.

–  Applies to an arrangement that is entered into on or after March 21, 2013, or that was entered into before that date but is extended on or after March 21, 2013.

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Restricted Farm Losses – Clarifying Craig

•  Amendment to section 31 will be made to restrict deduction of farming losses to a maximum of $17,500 for taxation years ending on or after March 21, 2013, unless all of the taxpayer’s other sources of income are subordinate to farming

•  These amendments are in response to the Supreme Court of Canada’s decision in Canada v. Craig which overruled Moldowan

•  Will also increase the maximum restricted farm loss to $17,500 (instead of $8,750)

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Extended Reassessment Period Tax Shelters and Reportable Transactions

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•  Normal reassessment period is three years from the date of mailing of the notice of assessment (“NOA”)

•  Budget 2013 extends the normal reassessment period in circumstances where the taxpayer is a participant in a tax shelter or reportable transaction, and the information return for the tax shelter or reportable transaction is not filed on time

•  The normal reassessment period will be extended to three years after the relevant information return is filed

Extended Reassessment Period

Tax Shelters: •  Legislation currently exists requiring Tax Shelters to be

reported and to have an annual return filed by the promoter of the Tax Shelter

•  No extension of the normal reassessment for participants if

information for the Tax Shelter is late filed or not filed by the promoter

•  A delay in filing will effectively reduce the time available for the CRA to obtain the information necessary for a proper audit of the tax shelter

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Extended Reassessment Period Cont’d

Reportable Transaction – section 237.3 A “reportable transaction” is a transaction that results in a tax benefit and to which two of the following applies:

• an advisor or promoter is entitled to a fee based on the amount of tax benefit or the number of participants (or the number of people who have been given advice on the transaction);

• an advisor or promoter has ‘confidential protection’ in respect of the transaction; or

• a participant, advisor or promoter has ‘contractual protection’ in respect of the transaction

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Other Measures Targeting Certain “Tax Products” and Other Perceived Abuses

•  “10/8” Life Insurance and Leveraged Life Insurance Arrangements

•  Trust Loss Trading

•  Corporate Loss Trading

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Other Measures Targeting Certain “Tax Products” and Other Perceived Abuses Cont’d

•  Character Conversion Transactions

•  Non-Resident Trusts

•  Thin Capitalization Rules

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Stop International Tax Evasion Program

•  The CRA will pay rewards to individuals with knowledge of major international tax non-compliance

•  Rewards will be paid for information leading to assessments or reassessments which result in additional federal taxes in excess of $100,000

•  Upon collection of the tax, the individual can receive up to 15% of the federal tax collected

•  Individuals convicted of tax evasion are not eligible •  Reward payments are taxable to the individual •  Similar to the US “whistleblower” program, but more narrow

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Other Measures to Strengthen Compliance

•  Registered Pension Plans: Correcting Contribution Errors

•  Revised Form T1135 and Improvements to Filing Process

•  International Electronic Funds Transfers

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Consultation Initiatives

•  Taxation of Trusts and Estates –  Income of testamentary trust currently taxed at graduated rates

while income of inter vivos trusts taxed at highest marginal rate –  This enables access to multiple graduated rates on death and for

years subsequent to death. –  Budget 2013 announced Finance’s intention to possibly eliminate

the tax benefits that arise.

•  Treaty Shopping

•  Taxation of Corporate Groups

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Highlights of Technical Tax Amendments Act, 2012 (Bill C-48)

•  Section 56.4 – Restrictive Covenants

•  Sections 13, 14 and 20

•  Section 89(1) “capital dividend account”

•  Sections 90-95 – FAPI and NRT

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Restrictive Covenants (New Section 56.4)

•  Any amount receivable in respect of a restrictive covenant as ordinary income for income tax purposes

•  Exception: where proceeds are received in respect of an arm’s length sale of a business and additional proceeds are received for restrictive covenant

•  Legislative response to Fortino and Manrell, which suggested that the receipt of restrictive covenant proceeds were not taxable

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Restrictive Covenants (New Section 56.4) Cont’d

•  Consequential legislative changes

–  Subsection 6(3.1) ◦  In certain circumstances, an employee is required to include in

income for the year receivable in respect of a restrictive covenant

–  Subsection 14(5.1) ◦  Alters the definition of “cumulative eligible capital” in subsection

14(5) as a result of subsection 56.4(2)

–  Subsection 60(f) ◦  Deduction re: bad debt resulting from non-payment of amount

receivable on a restrictive covenant

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Restrictive Covenants (New Section 56.4) Cont’d

•  Consequential legislative changes

–  Section 68(c) ◦  Allocation of amount to restrictive covenant must be reasonable

–  Section 212 ◦  Non-resident withholding tax applies to amounts re: restrictive

covenants

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Section 13 - Special Rules re: Treatment of Depreciable Property

•  Subsection 13(1) –  Provides for the inclusion in a taxpayer’s income of recaptured

CCA when taxpayer’s proceeds of disposition exceed UCC

•  Subsection 13(4) –  Allows a taxpayer to elect to defer tax on recapture where the

taxpayer reinvests the proceeds of disposition in a replacement property within a certain period

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Section 13 - Special Rules re: Treatment of Depreciable Property Cont’d

•  Subsections 13(4.2) and (4.3) – additions –  Added, concurrent with the amendment of the definition "former

business property", to allow a taxpayer (the "transferor") to use the replacement property rules under subsection 13(4) in respect of the disposition or termination of a property that is the subject of a joint election with the purchaser (the "transferee") of the property.

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Section 13 - Special Rules re: Treatment of Depreciable Property Cont’d

•  Subsection 13(21) “undepreciated capital cost” –  Description of E in the definition is amended consequential on

the repeal of subsections 13(22) and (23) of the Act. –  Amendment ensures that the amounts described in those

repealed subsections continue to be included in determining an insurer's undepreciated capital cost despite the repeal of those subsections.

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Section 14 - Eligible Capital Property

•  Subsection 14(3) –  Provides rules regarding non-arm's length transfers of eligible

capital property

•  Subsection 14(5) –  Consequential technical updates to the definitions of “adjustment

time” and “cumulative eligible capital”

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Section 14 - Eligible Capital Property Cont’d

•  Subsection 14(6) –  Amended to accommodate taxation years that are shorter than

12 months. –  Provides that the period for acquiring a replacement property

ends at the later of the end of the subsequent taxation year and the time that is 12 months after the end of the taxation year in which the property was disposed of.

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Section 20 - Deductions

•  Paragraph 20(1)(bb) –  Deductibility of fees paid to investment counsel

•  Subsection 20(16) –  Provides that a terminal loss under subsection 20(16) re: a

"passenger vehicle" costing more than a prescribed amount is not deductible in computing income

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Subsection 89(1) “capital dividend account”

•  Paragraph 89(1)(a) –  Along with the amendments to paragraphs 52(3)(a) and 53(1)(b),

this amendment addresses circumstances in which increases in a corporation’s PUC result in dividends that may be deducted by a corporate shareholder in computing its taxable income under subsection 112(1).

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FAPI

•  Section 90 –  Includes in income of a Canadian resident taxpayer any

dividends received from a non-resident corporation

–  Section is significantly expanding to provide specific rules on dividends (subsections 90(1)-(5)) from foreign affiliates and to address avoidance techniques (subsections 90(6)-(15))

–  Subsection 90(2) and (5), in conjunction, provide a complete definition of a dividend from a foreign affiliate for purposes of the Act

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FAPI Cont’d

•  Subsection 90(2) –  Treats as a dividend, pro rata distributions re: shares of a foreign

affiliate except where they are received ◦  on a liquidation of the affiliate ◦  on a redemption of its shares ◦  on a qualifying return of capital (defined in subsection 90(3))

•  “Qualifying Return of Capital” (“QROC”) –  Intended to allow return of capital treatment to non-corporate

shareholders of a foreign affiliate –  QROC treatment is available where a taxpayer and certain

connected persons or partnerships elect and other conditions are met

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FAPI Cont’d

•  Subsections 90(6)-(15) – deal with so-called “up stream loans” –  Anti-avoidance rules to prevent taxpayers from making synthetic

dividend distributions from foreign affiliates in order to avoid inclusion in income under new subsection 90(1)

–  Subsection 90(6) provides for the inclusion in income of “specified amounts” in Canada where a foreign affiliate (or a partnership of which a foreign affiliate is a member) of a Canadian taxpayer (Canco) makes a loan to a person (or partnership) that is a “specified debtor” in respect of Canco

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FAPI Cont’d

•  Subsection 90(8) –  Provides exceptions to the application of subsection 90(6)

◦  Loan or indebtedness is repaid within two years of date loan made or indebtedness arose

◦  Loan made or indebtedness arose in the ordinary course of the business of the creditor if bona fide arrangements were made for repayment within a reasonable time

◦  Under certain conditions, where loan made or indebtedness arose in the ordinary course of carrying on a life insurance business outside Canada

•  Subsections 90(9) and (10) –  Provides further relief from “upstream loan” rules

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FAPI Cont’d

•  Section 91 –  Sets out rules for determining, among other things, amounts that

a taxpayer resident in Canada is to include in computing its income for a particular year as income from a share of a controlled foreign affiliate of the taxpayer

–  Subsection 91(4) ◦  Provides a deduction when computing the income of taxpayer that

has included an amount under subsection 91(1) re: a share of the capital stock of a controlled foreign affiliate of the taxpayer

◦  Amended to link explicitly the “relevant tax factor” to the taxpayer and the taxation year for which the deduction under this section is claimed

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FAPI Cont’d

•  Subsections 91(4.1) to (4.7) –  Along with section 126, are intended to address tax schemes

established by taxpayers with the intent of creating foreign tax credits and similar deductions for foreign tax, the burden of which is not, in fact, borne by the taxpayer

–  Subsection 91(4.1)

◦  Denies “foreign accrual tax” (“FAT”) re: FAPI of a foreign affiliate in certain circumstances

–  Subsection 91(4.4)

◦  Applies where the FAPI arises as part of a series of transactions or events in which funding is provided by a particular person or partnership

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FAPI Cont’d

•  Subsections 91(4.5) and (4.6) −  Intended to ensure that so-called “hybrid entities” are not caught

by the FAT denial rule where the sole reason for the application of that rule would be that the entities are not characterized the same way under foreign and Canadian law.

•  Section 93 −  Amendments to correct technical deficiencies

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Section 94 - Non-Resident Trusts (“NRTs”)

•  New rules: –  New approach to taxation of non-resident trusts –  Generally, if a Canadian resident contributes property to a non-

resident trust: ◦  The non-resident trust is deemed to be a resident of Canada for a

number of purposes ◦  The contributor, the non-resident trust and certain Canadian

resident beneficiaries of the non-resident trust may all become jointly and severally or solidarily liable to pay Canadian tax on the income of the trust

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Case Law and Other Legal Updates of Note

Daishowa-Marubeni International Ltd. v. The Queen 2013 SCC 29 FACTS: •  TP sold forest tenures in AB •  Subject to statutory reforestation obligations •  Purchaser assumed reforestation obligations •  Estimated by both sides as $11 million on $169 million

purchase price

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Daishowa-Marubeni International Ltd. v. The Queen 2013 SCC 29 Cont’d

ISSUE: •  Whether Daishowa was required to include in its “proceeds of

disposition” for each sale an estimate of the cost of the reforestation obligations that the purchaser assumed

HOLDING: •  The amount associated with the reforestation obligations was

not includable in Daishowa’s sale proceeds •  The reforestation costs were future costs not distinct liabilities

to the transferred assets in the nature of the mortgage but were embedded in the assets

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Daishowa-Marubeni International Ltd. v. The Queen 2013 SCC 29 Cont’d

SIGNIFICANCE: •  Beneficial for vendors in the forestry, mining, pipeline and

petroleum industries as it is common for purchasers of forestry or oil producing assets to assume reforestation or reclamation obligations

•  Any industry with environmental reclamation or extraordinary ongoing obligations to employees

•  Not beneficial for purchasers’ UCC and cost of other assets do not include the estimated siliviculture (or other embedded liability) costs

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Guindon v. The Queen 2013 FCA 153 FACTS: •  Taxpayer provided legal opinion and signed 153 charitable

donation receipts in what the Court characterized as a sham transaction – wearing two hats

•  CRA imposed a penalty of $564,747 under the tax return preparer penalty in subsection 163.2(4) of the Act

ISSUE: •  Whether subsection 163.2(4) created an “offence” for which

the procedural protections of the Criminal Code and the Canadian Charter of Rights and Freedoms should have been granted

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Guindon v. The Queen 2013 FCA 153 Cont’d FCA:

§  FCA reverses TCC -- failure to give notice of constitutional question was fatal

§  TCC had no jurisdiction to hear the Charter issue §  In obiter -- 163.2 imposes a civil penalty not a criminal offence §  TP is seeking leave to SCC §  Curiously the notice question is moot as the TP may give notice in

SCC §  Will argue the $500k penalty is such that it imposes a “true penal

consequence”

77

Birchcliff Energy Ltd. v. The Queen [2013] 3 C.T.C. 2109

FACTS: •  No change of control loss deal •  CRA assesses under several ITA provisions including GAAR •  On discovery TP asks for CRA’s views on object and purpose of

ITA provisions and how they were abused •  CRA refuses – questions of law impermissible on discovery •  TP brings motion to compel

78

Birchcliff Energy Ltd. v. The Queen [2013] 3 C.T.C. 2109 Cont’d TCC •  Reasons for assessing (including legal interpretations) are facts

and must be disclosed •  Paragraph 20: “It is not a reason in answer to the issue, was

there an abuse, by simply stating there was an abuse, which is effectively all the Minister has said in paragraph 25. That is not a reason.”

•  CRA always reserves the right to change their minds

79

MacDonald v. The Queen 2013 FCA 110

FACTS: •  Taxpayer was a doctor who practiced through a

professional corporation •  Taxpayer sold shares of professional corporation to

another in exchange for a promissory note •  Shares resold and dividend declared by new corporation •  Declared dividend was used to off-set the promissory

note (capital gain declared) •  Taxpayer was reassessed on the basis that the amount

received was a deemed dividend under subsection 84(2)

80

MacDonald v. The Queen 2013 FCA 110 ISSUE: •  Whether subsection 84(2) applies to the transaction HOLDING: •  Subsection 84(2) applies to the transaction as the

wording of this provision uses the phrase “in any matter whatever”

81

MacDonald v. The Queen 2013 FCA 110 SIGNIFICANCE: •  Need to carefully consider subsection 84(2) in pipeline

transactions –  Should cash be held for a period of time before distribution? –  Is this period one year or more as the CRA suggests? –  Will it apply when there are high PUC shares used as

consideration instead of a promissory note? –  Will it apply on an amalgamation?

82

Gwartz v. The Queen 2013 TCC 86 FACTS: •  Family trust held all Class C preferred shares in dental

business •  Stock dividend on Class C shares •  Stock dividend shares were sold to dentist and then to a

corporation owned by the dentist’s spouse •  Stock dividend shares redeemed and promissory notes were

off-set •  Trust allocated capital gain to minor beneficiaries •  Minister reassessed minor taxpayers to treat the capital gain

as a deemed dividend 83

Gwartz v. The Queen 2013 TCC 86 ISSUE: •  Whether GAAR applied to re-characterize the capital gains as

dividend income – was 120.4 kiddie tax circumvented? HOLDING: •  GAAR did not apply to re-characterize the gain

–  Tax benefit was conceded –  Existence of an avoidance transaction was conceded –  Transaction was not abusive

•  Section 120.4 has been amended to apply to capital gains

84

Gwartz v. The Queen 2013 TCC 86 SIGNIFICANCE: •  Tax planning is not inherently abusive •  ITA has no broad policy against surplus stripping or

against income splitting •  GAAR is not a legislative gap-filler •  issuing high/low stock dividends is not inherently abusive

85

Rectification

•  Allows documents to be amended to accord with the parties’ intentions

•  Consider using if an appeal fails because a transaction did not meet the requirements of the Act

•  Heard in provincial superior court of the province whose law governs the entities or the transaction

86

McPeake 2012 BCSC 132 – rectification and 75(2)

Facts §  Trust settled to multiply capital gains deduction but 75(2) applied §  TP sued professional advisors after CRA reassessed and sought

rectification on CRA consent in 2009 §  Second rectification needed as trust deed still defective

BCSC §  Based on Juliar and clear tax avoidance intent BCSC rectified §  CRA chose not to cross examine

87

Kanji 2013 ONSC 781 -- rectification and 75(2)

Facts §  Trust settled in 1992 for $5000 §  Trust worth $62 million in 2012 §  Settlor wished to roll property to children to avoid 21 year disposition §  But 75(2) applied so no rollover

ONSC §  Intent to avoid but not defer past 21 years §  Settlor could not clearly recall intention to defer §  Planning memo was ambiguous §  Professional advisors not called §  Court refused to infer intent to defer

88

Sheila Holmes Spousal Trust 2013 ABQB 489

Facts AB spousal trust alleged by CRA to be:

§  Invalid §  Sham §  75(2) trust §  Resident in ON

TPs appeal but also seek declaration of validity and residence in AB

89

Sheila Holmes Spousal Trust

Court declines jurisdiction: §  Court had jurisdiction to consider the issues but refused §  Summary procedures insufficient – full trial necessary §  Declaratory relief is discretionary §  TCC may determine validity, sham, 75(2) and residence §  Specialized court with the ability to make findings incidental to taxation

should decide – judicial efficiency §  Sole purpose of seeking declaration was to circumvent TCC §  Criticisms – Hague Treaty – only ABQB has jurisd to determine validity §  TCC cannot determine provincial residence

90

Inter-Leasing 2013 ONSC 2927 inclusion side of Finco Facts

§  OCTA Ss.2(2) corporation -- incorporated offshore – PE in ON §  taxable on specified sources – business not property income §  Only income was interest from two notes

ON SC

§  Financing activities within the group ruled to be a business §  “to reduce the after tax cost of group financing” §  Outlier decision – under appeal §  Obiter comments on GAAR and “charging provisions”

91

CIBC 2013 FCA 122 no judicial expansion of 18(1)(a) Facts

§  TP alleged to have made fraudulent loans §  Subprime settlement without prejudice §  CRA disallows deduction --“fraud so egregious and repulsive” §  Not incurred for income earning purpose §  Motion to strike

TCC §  Cannot deny deduction as against public policy §  Purpose test is the only test under 18(1)(a) §  Moral evaluation of taxpayer’s conduct is irrelevant §  Anti-judicial activism decision

92

CIBC 2013 FCA 122

FCA §  TCC did not err §  TP should not be required to waste resources to refute

irrelevant assumptions or allegations of fraud or criminal conduct

§  Not open to courts to expand scope of 18(1)(a) §  only test is the purpose test §  Echoes the egg case – 65302 BC Ltd (SCC)

93

D & D Livestock Ltd. 2013 TCC 318 – judicial rewriting

Facts §  Complicated re-org – CRA recharacterizes $500k stock

dividend as capital gain under s.55(2) §  TP concedes 55(2) applies but disputes safe income calc §  CRA says safe income reduced by stock dividend §  TP says safe income may be used twice §  CRA argues the transcation defeats the purpose of 55(2)

but did not assess under GAAR

94

D & D Livestock Ltd. 2013 TCC 318

TCC §  Transaction defeated purpose of 55(2) §  but the court cannot rewrite the provision if it is clear and

the transaction otherwise complies §  Unless GAAR applied §  Court may not deny taxpayer’s desired treatment even if

abusive unless GAAR applies §  GAAR synesthesia

95

Lyrtech RD Inc. 2013 TCC 12 -- de facto control

Facts §  15% SRED investment tax credit only available to CCPC’s §  SRED co under de jure control of trust where officers were trustees §  Lyrtech (pubco’s) subsidiaries were beneficiaries §  Trustees as s/h removed all management powers of directors via

shareholders’ declaration

TCC §  Indirect control in “any manner whatever” means de facto control §  Lyrtech (pubco) exercised dominant economic influence §  Financing, sole customer, common management, allocation of op

exp 96

PWC (trustee of) Bagtech 2013 FCA 164 USA’s and control

Facts §  CDN s/h elected 4 of 7 directors under USA §  Foreign s/h held between 60 and 70% of shares but did not control

board §  CRA reassessed to deny SRED tax credits -- not a CCPC under

125(7) TCC

§  Contrary to CRA policy - USA’s and Duha Printers (SCC 1998) should be ignored --TCC allows appeal

§  No “particular person” controlled research co §  De jure control resided in Canada – was a CCPC

97

PWC (trustee of) Bagtech 2013 FCA 164

FCA §  Agreement was “CBCA compliant” USA §  Duha Printers has been criticized but it is still binding until

overturned §  based on the recent SCC decision in Craig §  Voting restrictions must be considered for control

§  Will provide certainty to CCPC plans if pubco or nonresident shareholders exist

98

Envision Credit Union 2013 SCC 48 unbroken amalgamations Facts

§  TP credit union sought to undertake amalgamation to which s 87 did not apply – a “non-qualifying merger”

§  Primarily to double-claim CCA based on original cost not UCC post amalgamation

§  Under s.87 all property, liabilities and s/h must flow thru §  TP attempted to sell surplus property to subsidiary at the precise

moment of the amalgamation so s.87 would not apply §  Credit unions must undertake amalgamations under CUIAct BC §  s.23 -- amalgamated credit union is “seized of” all properties of its

predecessors

99

Envision 2013 SCC 48

TCC §  Merger non-qualifying but the result is the same as qualifying

merger §  Under corporate law the successor was continuation of predecessor §  Must take previous CCA into consideration

FCA §  Merger was qualifying because TP owned all of the shares of the

subsidiary §  Property owned by predecessors “could be traced” directly to

property owned by successors – looked through subsidiary 100

Envision 2013 SCC 48

SCC §  CUIA s.23 is mandatory – either the successor acquired all

predecessor property or the amalgamation is illegal

§  Cannot contract out of this statutory result

§  Successor is both required and deemed to own all of predecessor’s properties

§  In obiter SCC found that in the absence of an ITA deeming provision a parent cannot hold subsidiaries’ property under corporate law – rejected FCA tracing approach

101

Swirsky 2013 TCC 73 interest deduction/creditor proofing Facts

§  Individual sought to creditor proof by selling private co shares to wife §  And using proceeds to pay down s/h debt §  No history of paying dividends §  Dividends paid 7 years after purchase §  Was the interest paid by the wife deductible under 20(1)(c)?

TCC §  No reasonably buyer would anticipate dividend income §  Purchased to creditor proof §  Interest not deductible – under appeal to FCA

102

Canada Revenue Agency (“CRA”) Collections

•  CRA has undertaken a three year investigation into fraud and tax evasion in the underground economy

•  Cross-country pilot project targeting various groups including: –  145 serving staff in St. Catherines, ON – $1.7 million in unreported tips

and gratuities –  “Curbers” in Burnaby, BC– $185,000 in taxes owing –  Review of 8,400 building permits in Sudbury and Barrie, ON. – 2,700

people who failed to file proper tax returns –  Business servicing the resource industry in BC and the Yukon

•  CRA is still under pressure to collect taxes from wealthy Canadians who have positioned their wealth in offshore tax havens

103

Tax Court of Canada

•  Bill C-60 - An Act to implement certain provisions of the budget –  Received Royal Assent on June 26, 2013 –  Nearly doubles the limits on the amounts in dispute for which a

taxpayer can elect to proceed by the Informal Procedure –  New limits:

◦  Act: ▪  $25,000 of tax in dispute or $50,000 of tax loss in dispute

◦  Excise Tax Act: ▪  $50,000 of GST in dispute

104

Tax Court of Canada Cont’d

•  Practice Notes 17 and 18 –  Where there is an offer to settle that is:

◦  Written and submitted to the Court; ◦  Served at least 90 days before the commencement of the hearing; ◦  Not withdrawn; and ◦  Does not expire earlier than 30 days before the commencement of the

hearing

Example: ◦  An Appellant who makes an offer to settle and then receives a judgment that

is at least as favourable as the offer, will be entitled to party-and-party costs up to the date of service of the offer to settle and solicitor-client costs after that date plus reasonable disbursements and applicable taxes

◦  A Respondent will be entitled to the same costs if the Respondent makes the offer to settle and the Appellant obtains a less favourable judgment

105

Voluntary Disclosure Program (“VDP”)

•  VDP “promotes compliance with Canada’s tax laws by encouraging taxpayers to voluntarily come forward and correct previous omissions in their dealings with the CRA”

•  CRA released new information circular on March 21, 2013

•  No material change to CRA policy or administration of VDP

•  VDP must now be made to one of three intake centres depending on the location of the taxpayer

106

Voluntary Disclosure Program (“VDP”)

•  CRA has implemented new screening process –  Screeners review disclosure packages soon after receipt and

compare the package with a checklist –  The package will be returned to applicant if any items on the

checklist are missing or incomplete

•  No-name VDP submissions are not likely to be successful without disclosure of the amount(s) in issue

107

US Update

Overview

1.  Is Your Client a US Citizen?

2.  Loan At Prescribed Rate with US Person in the Mix

3.  Renouncing US Citizenship

4.  Foreign Account Tax Compliance Act (“FATCA”)

5.  Owning US Real Property

6.  Getting Caught Up with US Filing Obligations

7.  Filing Obligations in Common Circumstances

109

Additional Resources

1. “Renouncing your US citizenship: Failed amendment may signal that now is the time to get out!” July 4, 2013, by Alexander Marino, JD, LLM (US Tax). www.moodystax.com/renouncing-your-us-citizenship-new-law-may-keep-you-out-forever/

2. “Renouncing your US citizenship: Is divorcing Uncle Sam right for you?” March 19, 2013, by Alexander

Marino, JD, LLM (US Tax). www.moodystax.com/renouncing-your-u-s-citizenship-is-divorcing-uncle-sam-right-for-you/

3. “STOP! Know the changes to US tax law before purchasing that US vacation property.” March 13,

2013, by Roy A. Berg, JD, LLM (US Tax). www.moodystax.com/stop-know-the-changes-in-us-tax-law-before-purchasing-that-us-vacation-property/

4. “Beware of the US ‘Snowbird Visa TAX BOMB!” May 13, 2013, by Roy A. Berg, JD, LLM (US Tax).

www.moodystax.com/beware-of-the-us-snowbird-visa-tax-bomb/

110

Additional Resources Cont’d

5. “IRS says hundreds of thousands of US citizens are not reporting Canadian Trusts.” May 9, 2013,by Roy A. Berg, JD, LLM (US Tax). www.moodystax.com/irs-says-hundreds-of-thousands-of-us-citizens-are-not-reporting-canadian-trusts/

6. “IRS hates quite disclosures and they really mean it” June 6, 2013, by Roy A. Berg, JD, LLM (US Tax).

www.moodystax.com/irs-hates-quiet-disclosures-and-they-really-mean-it/

7. “Carefully Consider US tax effects of Canadian ‘prescribed-rate loan’ strategy”. September 11, 2013, by Roy A. Berg, JD, LLM (US Tax). www.moodystax.com/carefully-consider-us-tax-effects-of-canadian-prescribed-rate-loan-strategy/

111

Is Your Client a US Citizen?

Is Your Client a US Citizen?

113

Is Your Client a US Citizen? Cont’d 1.  Born in the US = US Citizen

2.  Born in Canada to two US Citizens = US Citizen

3.  Born in Canada to one US Citizen = US Citizen if: −  Born on or after November 14, 1986:

◦  US Parent resided in US for 5 years ◦  Two of which were after that US parent’s 14th birthday

−  Born between December 25, 1952 through November 14, 1986: ◦  US Parent resided in US for 10 years ◦  Five of which were after that US parent’s 14th birthday

114

Note: It is Illegal for US Citizens to Enter or Leave the US Without a Valid US Passport 22 CFR 53.1

115

Counting Days and Counting Sheep Why 2014 will be a wake up call for all Canadians traveling to the US

117

Counting Days and Counting Sheep: 2014 CHANGES EVERYTHING! Why Counting Days is Important:

1.  US income tax consequences. Residency determined by day count: •  Except: “Closer Connection” •  Except: Treaty tiebreaker rules

2.  US estate tax consequences. Residency determined by: •  Intent; and •  Location at date of death

3.  US immigration tax consequences. Residency determined by: •  Intent; and •  Day count

4.  Canada’s “Departure Tax.” Cessation of residency determined by intent.

5.  Loss of Provincial Health Care. Residency determined by: •  Intent •  Day count

118

Counting Days and Counting Sheep: 2014 CHANGES EVERYTHING! Cont’d Why Have So Few Practitioners Encountered Audit Triggered by Day Count? Historically, Canadian Border Services Agency (CBSA) and US Customs and Immigration Service (USCIS) only keep track of people entering the country In order to obtain an accurate day count must contact both CBSA and USCIS

119

Counting Days and Counting Sheep: 2014 CHANGES EVERYTHING! Cont’d 2011 Canada and the US launched the “Exit/Entry Initiative” •  Enacted in four phases •  Final two phases scheduled to go into effect 6/31/2014 •  Travelers will be required to swipe passports both when:

–  Enter the respective country; AND –  Depart the respective country

BOTH COUNTRIES WILL BE ABLE TO INDEPENDENTLY DETERMINE DAY COUNT FOR TAX AND IMMIGRATION PURPOSES http://www.cbsa-asfc.gc.ca/agency-agence/reports-rapports/pia-efvp/atip-aiprp/ee-es-phase-2-eng.html

120

Counting Days and Counting Sheep: 2014 CHANGES EVERYTHING! Reference Article “Canadian snowbirds beware! Border crossing rules for 2014 increase stakes for ‘day count.’” November 25, 2013, by Roy A. Berg, JD, LLM (US Tax).

http://www.moodysgartner.com/canadian-snowbirds-beware-2014-border-crossing-rules-increase-stakes-for-day-count

121

Tax “Day Count” ≠ Immigration “Day Count”!

Treaty tie-breaker exception may apply

180 Days in Rolling 12 Months – Treaty, “Closer Connection”, and “Substantial Presence” are

irrelevant

File Form 8840 No action required

0 Days 120 Days 182 Days 365 Days

182 Days in the Calendar Year

TAX IMMIGRATION

122

Tax “Day Count” ≠ Immigration “Day Count”! Cont’d

Treaty tie-breaker exception may apply

180 Days in Rolling 12 Months – Treaty, “Closer Connection”, and “Substantial Presence” are

irrelevant

File Form 8840 No action required

0 Days 120 Days 182 Days 365 Days

IMMIGRATION CONSEQUENCES TO “UNLAWFUL PRESENCE”

•  > 180 but < 365 = 3 year bar •  > 365 = 10 year bar

123

Counting Days “SNOWBIRD VISA TAX BOMB” … It’s A Trap!

124

Counting Days “SNOWBIRD VISA TAX BOMB” … It’s A Trap! Cont’d

1.  Allows applicants to reside in the US for 240 days per year if: •  Over the age of 50 •  Spend $500,000 on home •  $250,000 of which is on a principal residence •  MUST reside in the home at least 180 days per year

2.  Trap for the uninformed: •  Guaranteed to satisfy “Substantial Presence Test” – MUST file Form

8840 •  Only a three day window to qualify for “Closer Connection

Exception.” If present in US ≥ 183 days WILL be subject to same reporting obligations as US Citizens

125

To Whom Do Reporting Obligations Apply? “SNOWBIRD VISA TAX BOMB” … It’s A Trap! Reference Article

“Beware of the US ‘Snowbird Visa TAX BOMB!” May 13, 2013, by Roy A. Berg, JD, LLM (US Tax).

www.moodystax.com/beware-of-the-us-snowbird-visa-tax-bomb/

Prescribed Rate Loan Strategy with US Person In Mix

127

Prescribed Rate Loan Strategy with US Person in the Mix Please see article entitled: “Carefully Consider US tax effects of Canadian ‘prescribed-rate loan’ strategy” September 13, 2013 by Roy Berg and Kim G C Moody http://www.moodysgartner.com/carefully-consider-us-tax-effects-of-canadian-prescribed-rate-loan-strategy/

128

Maple Leaf Makes Loan to Bald Eagle

US Tax Consequences US Tax Consequences 1. Note is “US Situs” asset subject to US Estate

Tax. 2401(c)(4). 1. Deductible from US estate only if loan is bona

fide Estate of Derksen

2. NOT “US Situs” asset for Gifting Purposes, exempt from gift tax. 2501(a)(2).

2. Must obtain W-‐8BEN if resident of US when payments are made, and only if interest is “portfolio interest. 871(h).

3. If US citizen is “resident” when payments made then interest is US sourced and possibly subject to US income tax. 871(a)(1). But see Article XI:1 of Treaty

3. Interest is deductible only if “investment interest” and subject to limits as “miscellaneous itemized deduction.” 163(d).

4. Deduct interest payment on later of payment or spouse’s inclusion in income. 267(a)(2).

5. If interest is < Applicable Federal Rate, treat as part gift, part loan. 7872.

6. If interest > Applicable Federal Rate, consider gift tax consequences AND denial of interest deduction

Loan at Prescribed Rate

129

Bald Eagle Makes Loan to Maple Leaf

US Tax Consequences US Tax Consequences 1. If interest is < Applicable Federal Rate interest will be part gift and part loan. 7872

NONE! J

2. Report loan on form 8938. $10,000 penalty for failure to file 8938 per 6038D.

3. Interest received is subject to 3.8% tax per 1411. NOTE, this tax is not eligible for foreign tax credit.


130

Maple Leaf Makes Loan to TRUST

Trustee

Beneficiaries

US Tax Consequences to Maple Leaf

US Tax Consequences to

Bald Eagle

If trust is US domestic trust loan will be “US situs” asset for US estate tax and may have US source income (see 1, 2, and 3 above)

1. Distributions to Bald Eagle may be subject to “throw back tax” per section 665.

2. Reporting obligations on form 3520 per section 6048(c).


to TRUST

131

Bald Eagle Makes Loan to TRUST

Trustee

Beneficiaries

US Tax Consequences to Bald Eagle

US Tax Consequences to

Maple Leaf 1. Triggers obligation to file forms 3520 and 3520-‐A per section 6048.

NONE! J

2. If Bald Eagle is discretionary beneficiary then trust likely to be classified as a “grantor trust” per sections 672-‐679. If Grantor Trust ALL INCOME generated by trust will be taxable to Bald Eagle, which can result in double tax.

Loan at Prescribed Rate to TRUST

Renouncing US Citizenship

Have I Already Renounced My US Citizenship? Expatriating Acts

•  Expatriating Acts must occur concurrently with intent to renounce citizenship: –  Obtaining naturalization in a foreign state –  Taking an oath to a foreign state –  Serving in the armed forces of a foreign state that is engaged in

hostilities with the US –  Accepting employment with a foreign government –  Formally renouncing citizenship before a diplomatic or consular

office –  Conviction of treason

133

Have I Already Renounced My US Citizenship? Effective Date – FOR TAX PURPOSES

•  Expatriation is effective on the earliest of the following dates: –  The date the individual renounces before a diplomatic or consular

office; –  The date the individual delivers to the US State Department a

signed statement of renunciation or confirming an expatriating act;

–  The date the US State Department issues a certificate of loss of nationality; or

–  If a naturalized citizen, the date a US court cancels certificate of naturalization.

Remember the case of John Walker Lindh.

134

Importance of “Effective Date”

John Walker Lindh 21 year old US citizen captured in 2001 while fighting in Afghanistan with the Taliban against the US. Currently serving 20 year prison sentence in federal correctional institute in Terre Haute, Indiana.

135

Expatriation Tax Consequences •  “Exit Tax” may apply to the person who renounces

–  Individual is deemed to have sold all assets, recognize gain, and pay tax on that gain. ◦  RRSPs are deemed to be distributed to the individual

•  To whom does the Exit Tax apply? –  Average tax liability in prior five years >$147,000; or –  Net worth >$2,000,000; or –  Not compliant with tax and reporting obligations for prior five

years. •  Also applies to green card holders if reside in US eight years

during the 15 years ending on the date gave up green card

136

Expatriation Tax Consequences Cont’d

•  Exception to the “Exit Tax” –  At birth the individual was a dual citizen. –  On date renounce citizenship still a dual citizen with same

country. –  Individual did not reside in the US more than 10 years during the

15 year period ending on the expatriation date.

137

Expatriation Tax Consequences Cont’d •  Name and Shame

–  Quarterly IRS publishes the names of individuals who have expatriated. ◦  2Q2011 425 people expatriated

•  Reed Amendment to the Immigration Act of 1952: –  “Any alien who is a former citizen of the United States who officially renounces

United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States is excludable from the United States.”

•  Make Sure Not “Excludable” From US –  Criminal Convictions (college pranks, drug offenses, driving under influence) –  Medical Exclusion (HIV, Hepatitis C) –  http://www.canadianlegal.org/travel_waivers.php –  http://canada.usembassy.gov/visas/visas/criminal-ineligibility.html

138

Foreign Account Tax Compliance Act (“FATCA”)

Foreign Account Tax Compliance Act (“FATCA”) •  Becomes effective July 1, 2014 •  Applies to Foreign Financial Institutions (“FFIs”) and Non-Financial

Foreign Entities (“NFFEs”) –  Every business entity not an FFI is an NFFE

•  Estates and Trusts are FFIs if: –  >50% of gross income is from investing, reinvesting, or trading in listed

or unlisted securities Treas. Reg. 1.1471-5(e)(4)(i)(A); and –  Assets are professionally managed. Treas. Reg. 1.1471-5(e)(4)(i)(B)

•  Virtually ALL Trusts and Estates will be FFIs •  Intergovernmental Agreement may change the foregoing…stay

tuned!

140

Foreign Account Tax Compliance Act (“FATCA”) Cont’d How does FATCA affect Canada…NFFE Reporting?

•  Non-Financial Foreign Entities will be asked to complete form W8-BEN-E –  Nine page form –  Must determine which of 22 categories of NFFE the entity falls into –  Very complex analysis and requires knowledge of US law –  Incorrect completion of which can cause

◦  30% withholding on all payments from US sources AND FFIs ◦  Obligation to report ALL “US Owners” of entity

▪  “US Owners” is determined under US law ▪  If Canadian individual has US spouse, parent, grandparent,

children, or grandchild, HE IS A “US Owner” for reporting purposes.

141

Options for Owning US Vacation Property Cross-Border Real Estate Trust Personal Ownership Joint Tenancy with Right of Survivorship Tenancy in Common Non-recourse Mortgage Canadian Corporation Canadian Partnership Life Insurance

143

“STOP! Know the changes to US tax law before purchasing that US vacation property.” March 13, 2013, by Roy A. Berg, JD, LLM (US Tax).

www.moodystax.com/stop-know-the-changes-in-us-tax-law-before-purchasing-that-us-vacation-property

Options For Owning US Vacation Property Reference Article

144

•  DO NOT own property in either US Limited Liability Company (“LLC”) or Revocable Living Trust (“RLT”) –  Neither LLCs nor RLTs will avoid US estate tax –  LLCs are taxed as partnerships in the US but in Canada are

taxed as corporations. Result can be •  Double tax; AND •  “Taxable Benefit” for Canadian income tax purposes (see

“Corporations” below) •  Higher income tax in US (15% individual versus 35%)

–  RLTs are ignored for US Income tax purposes, but not necessarily for Canadian tax purposes. Result can be double tax.

Options For Owning US Vacation Property WHAT NOT TO DO…avoid common US ownership structures

145

•  DO NOT own property in other types of US hybrid vehicles: –  Limited Liability Limited Partnerships (LLLP) –  Limited Liability Partnerships (LLP) –  Business Trusts (BT)

•  Delaware •  Florida

CRA has not ruled on the Canadian entity classification of these vehicles, so tax uncertainty does not warrant the risk INSTEAD of the foregoing, use a limited partnership (LP)

Options For Owning US Vacation Property WHAT NOT TO DO…avoid common US ownership structures Cont’d

146

•  DO NOT ever make a gift of US property –  Gifts of US real property are not eligible for pro-rata unified

credit •  i.e., subject to gift tax at 40% to extent FMV > $13,000

–  Canadian attribution rules can result in grantor being subject to tax upon sale •  Result is double taxation •  Higher income tax in US (15% individual versus 35%)

–  BEWARE IRS’s “John Doe” summons… this is a big enforcement area for IRS

Options For Owning US Vacation Property WHAT NOT TO DO…avoid common US ownership structures Cont’d

147

•  First Step is to determine the extent of exposure to US estate tax:

(Value of US Assets ÷ Value Worldwide Assets) x Exemption

•  Second Step is to determine which option makes the most economic sense: –  Cost to set up –  Cost to administer –  Canadian and US tax consequences

Options For Owning US Vacation Property Initial Analysis

148

1.  US real property held by Canadian Trust – use extreme caution –  Can be non-US situs asset (therefore excluded from US estate tax) –  Common mistakes using typical CDN discretionary trust to acquire US real

property: •  Drafting errors •  Funding errors •  Titling errors •  Errors in operating the trust •  Foreign tax credit mismatch

2.  Personal Ownership –  Spouse with $0 worldwide assets owns property –  Result is that spouse will enjoy FULL EXEMPTION –  MUST modify wills to avoid double application of US estate tax

Options For Owning US Vacation Property Cross-Border Real Estate Trust Personal Ownership

149

3.  JTWROS (do not use) –  Avoids probate, but little else –  Presumption that spouse dying first furnished 100% consideration to

purchase –  Can result in double application of US estate tax

4. TIC –  Only ½ value of the property included in each spouse’s estate –  Can be eligible for US discounts against value (typically 15%) –  MUST modify wills to avoid double application of US estate tax

5. Non-recourse Mortgage –  Reduces value of property for US estate tax inclusion –  Can be difficult to obtain and expensive to maintain

Options For Owning US Vacation Property Joint Tenancy with Right of Survivorship (“JTWROS”) (do not use) Tenancy In Common (“TIC”) Non-recourse Mortgage

150

6. Canadian Corporation (do not use) –  Not subject to US estate tax –  SIGNIFICANT Canadian income tax consequences on “taxable benefit” of

the shareholders –  Will also result in paying higher income taxes upon disposition of property

(15% rates in the US versus 35% corporate rates)

7. Canadian Partnerships –  Unclear whether will be subject to US estate tax. Can make “check the

box” election, but MUST be timely done 8. Life Insurance

–  Very simple and can be very effective way to provide liquidity for US tax –  Can result in lowering the applicable Exemption

Options For Owning US Vacation Property Canadian Corporation (Do Not Use) Canadian Partnership Life Insurance

•  First Step is to determine the extent of exposure to US estate tax:

(Value of US Assets ÷ Value Worldwide Assets) x Exemption

•  Second Step is to determine which option makes the most economic sense: –  Cost to set up –  Cost to administer –  Canadian and US tax consequences

Options For Owning US Vacation Property Cont’d Initial Analysis

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1.  US real property held by Canadian Trust – use extreme caution –  Can be non-US situs asset (therefore excluded from US estate tax) –  Common mistakes using typical CDN discretionary trust to acquire US

real property: ◦  Drafting errors ◦  Funding errors ◦  Titling errors ◦  Errors in operating the trust ◦  Foreign tax credit mismatch

2.  Personal Ownership –  Spouse with $0 worldwide assets owns property –  Result is that spouse will enjoy FULL EXEMPTION –  MUST modify wills to avoid double application of US estate tax

Options For Owning US Vacation Property Cont’d Cross-Border Real Estate Trust Personal Ownership

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3.  JTWROS (do not use) –  Avoids probate, but little else –  Presumption that spouse dying first furnished 100% consideration to

purchase –  Can result in double application of US estate tax

4. TIC –  Only one-half value of the property included in each spouse’s estate –  Can be eligible for US discounts against value (typically 15%) –  MUST modify wills to avoid double application of US estate tax

5. Non-recourse Mortgage –  Reduces value of property for US estate tax inclusion –  Can be difficult to obtain and expensive to maintain

Options For Owning US Vacation Property Cont’d Joint Tenancy with Right of Survivorship (“JTWROS”) (do not use) Tenancy In Common (“TIC”) Non-recourse Mortgage

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6. Canadian Corporation (do not use) –  Not subject to US estate tax –  SIGNIFICANT Canadian income tax consequences on “taxable benefit” of

the shareholders –  Will also result in paying higher income taxes upon disposition of property

(15% rates in the US versus 35% corporate rates)

7. Canadian Partnerships –  Unclear whether will be subject to US estate tax. Can make “check the

box” election, but MUST be done on a timely basis 8. Life Insurance

–  Very simple and can be very effective way to provide liquidity for US tax –  Can result in lowering the applicable exemption

Options For Owning US Vacation Property Cont’d Canadian Corporation (Do Not Use) Canadian Partnership Life Insurance

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Options for Owning US Rental Property Direct (Personal) Ownership Canadian Corporation US Corporation Canadian Corporation owns US Corporation Canadian Corporation owns US Limited Liability Company (LLC)

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ALWAYS DO THE FOLLOWING

•  FILE ALL RETURNS WHEN DUE –  Canadian Corporation: 1120-F due three months and 15 days from

corporation’s year end –  Individual: 1040-NR. Due 4/15 unless residing outside of US, in

which case 6/15 –  Canadian Partnership: 1065. due three months and 15 days from

Partnership’s year end •  Tax rate on GROSS rental income is 30% per 871(a)

–  Exception if elect ON TIMELY RETURN to be taxed on net rental income per 871(d).

•  File W-8 ECI to eliminate withholding

Advantages •  Flow-through of income/gain (no double tax) •  Preferential US capital gains rate •  Simple structuring Disadvantages •  Personal US filings in each jurisdiction, multiplied

by each investor (e.g. spouse) •  FIRPTA •  No protection from US estate tax •  No protection from liability •  No US entity for financing, banking, operations,

etc.

Options For Owning US Rental Property Individual (Personal) Ownership

Rental: 42% US tax, 0% CDN tax ! ETR 42% Capital gain: 23% US tax, 0% CDN tax ! ETR 23%

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Advantages •  Simplified US filings •  Protection from US estate tax •  Protection from liability Disadvantages •  Double taxation (corporate and personal) •  Not entitled to preferential US capital gains rate •  FIRPTA •  No US entity for financing, banking, operations.

Options For Owning US Rental Property Cont’d Canadian Corporation

Rental: 43% US tax, 16% CDN tax ! ETR 59% Capital gain: 43% US tax, 2% CDN tax ! ETR 45%

Canco

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Options For Owning US Rental Property US Corporation

Advantages •  Simplified US filings •  No FIRPTA •  US entity for financing, banking and operations •  Protection from liability Disadvantages •  No protection from US estate tax •  Double taxation (corporate and personal) •  No tax-free capital dividend from “CDA” •  Not entitled to preferential US capital gains rate •  High US withholding tax •  “FAPI”

Rental: 49% US tax, 14% CDN tax ! ETR 63% Capital gain: 49% US tax, 14% CDN tax ! ETR 63%* *May be reduced if repatriated through liquidation of USco

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Options For Owning US Rental Property Canadian Corporation Owns US Corporation

Advantages •  Corporate US filings only •  Protection from US estate tax •  No FIRPTA •  Low US withholding tax •  US entity for financing, banking and operations •  Protection from liability •  Likely no net “FAPI” Disadvantages •  Double taxation (corporate and personal) •  No tax-free capital dividend from “CDA” •  Not entitled to preferential US capital gains rate •  Complex structuring

Rental: 43% US tax, 11% CDN tax ! ETR 54% Capital gain: 43% US tax, 11% CDN tax ! ETR 54%* *May be reduced if repatriated through liquidation of USco

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Options For Owning US Rental Property Cont’d Canadian Corporation Owns US Limited Liability Company (LLC) •  US LLC:

−  Single-member LLC – disregarded for US tax purposes −  Popular vehicle for holding real estate and other investments

because of its flow-through characteristics •  A good vehicle for Canadian?

−  A corporation under Canadian tax law .. so what could happen…?

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Options For Owning US Rental Property Cont’d Canadian Corporation Owns US Limited Liability Company (LLC)

Why may someone have used such a structure? •  Popularity of LLC as a holding vehicle •  US LLC provides for a US entity for purpose of

financing, banking and operations •  An attempt to reduce US tax return filing

obligations because US LLC is disregarded for US tax purposes

•  Avoidance of US estate tax •  Multiple level of liability protection •  Incorporated professionals using thei r

professional corporations to invest in the US •  And … lack of awareness of the Canadian/US

tax implication!

US LLC

Canco

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Canadian Corporation Owns US Limited Liability Company (LLC) How bad can the tax be??

•  CRA/IRS Quicksand? •  The Cross-Border Black Hole? •  Cross-Border InTAXication? •  The Cross-Border Toilet Bowl?

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Canadian Corporation Owns US Limited Liability Company (LLC) Cont’d

Options For Owning US Rental Property Cont’d Canadian Corporation Owns US Limited Liability Company (LLC)

5th Protocol to Canada-US Tax Treaty denies treaty benefit to hybrid entities in certain situations. Rules came into force in 2010 Rental Income: •  Canco: US tax of 59% + Canadian tax of 45% •  TOTAL: 104% tax rate !! Capital Gain: •  Canco: US tax of 59% + Canadian tax of 13% •  Investor: Canadian tax of 5% •  TOTAL: 77% tax rate !! A hole that you cannot get out of, unless you start over again with a new structure.

US LLC

Canco

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Summary of Tax Rates

Form of Ownership Net US/CDA Tax On Income Net US/CDA Tax On Gains

Personal Ownership 42% 23% Canadian Corporation 59% 45% US Corporation 63% 63% Canadian Corp owns US Corp 54% 54% Canadian Corp owns US LLC 104% 77%

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Which Is The “Best” Structure?

•  No single “best” structure – depends on facts and circumstances

•  Ideas for more sophisticated structures: –  Stacked Canadian-US limited partnerships

◦  Flow-through tax treatment, preferential capital gain rates, liability protection, US entity

–  Canadian reverse hybrid ◦  Simplifies US filing obligations where there are multiple investors,

avoids US estate tax, partial flow-through treatment, qualifies for treaty benefits

–  Leasing vehicle to obtain flow-through on rental income while avoiding US estate tax with corporate ownership structure

We Are Here To Help 167

Getting Caught Up with US Filing Obligations

Getting Caught Up with US Filing Obligations

•  “Offshore Voluntary Disclosure Initiative (“OVDI”)/Offshore Voluntary Disclosure Program (“OVDP”)

•  New “Streamlined Filing” Procedure

•  “Quiet Disclosure”

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Getting Caught Up with US Filing Obligations DO NOT ATTEMPT A “QUIET DISCLOSURE”

QUIET DISCLOSURE: •  Simply filing delinquent returns •  Becoming compliant starting current year IRS is looking out for Quiet Disclosures

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Getting Caught Up with US Filing Obligations “Streamlined Filing” Procedure •  20-factor test to qualify…IRS will NOT pre-qualify

–  Three years of tax returns –  Six years of FBAR filings –  Must reside abroad –  No more than $1500 in US tax in any of the three years

•  If plan to renounce citizenship must complete five years of returns

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Getting Caught Up with US Filing Obligations OVDI And OVDP

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Basic Terms of OVDI and OVDP 1.  File eight years of returns 2.  Pay penalty

–  OVDI/OVDP 5% of non-US financial assets if: ◦  Reside outside of the US ◦  Current on non-US filing and payment obligations ◦ 

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Why Opt Out of OVDI/OVDP? 1.  Under OVDI/OVDP penalties are a certainty

2.  No ability to negotiate for more favorable penalty

3.  “Reasonable Cause” defense to full abatement of penalties is unavailable

4.  If qualify for “Streamlined Procedure” penalties are $0.00

Getting Caught Up with US Filing Obligations OVDI and OVDP Cont’d

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Why Remain in the OVDI/OVDP? 1.  Protection from risk of criminal prosecution

2.  If Opt Out scope of IRS review changes: a.  “Certification” in OVDI/OVDP b.  “Examination” if Opt Out

3.  Opt Out could subject taxpayer to audit of additional years

4.  Closing Letter will be issued at end of procedure


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Why Remain in the OVDI/OVDP? 5.  Ability to efficiently make late election for treaty benefits

afforded to group RRSPs.

6.  Efficient calculation of Passive Foreign Investment Company (PFIC) income.

7. Efficient treatment of inactive or dissolved entities


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Factors to Consider Before Deciding to Opt Out 1.  Incremental cost of Opting Out

2.  IRS burden of proof for “willful” FBAR penalties a.  Preponderance of the evidence US v. Williams (4th Cir. (VA))

3.  IRS position on penalty for “non-willful” FBAR penalties a.  $10,000 per account 31 USC §5321(a)(5), IRM §4.26.16.4(7),(8)

Getting Caught Up with US Filing Obligations OVDI And OVDP Cont’d

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Factors to Consider Before Deciding to Opt Out 4.  Comfort and certainty as to penalty to be imposed

5.  Ability to “test the waters” with Reasonable Cause defense to application of failure to file penalties

6.  Ability to gage whether the taxpayer will qualify for new Streamlined Filing procedure.

7. Opt Out decision is irrevocable.

Getting Caught Up with US Filing Obligations OVDI And OVDP Cont’d

Filing Obligations in Common Circumstances

Filing Obligations In Common Circumstances

1.  Individual Income Tax Return – Form 1040

2.  Signatory authority over or ownership interest in non-US accounts – FBAR

3.  “Specified Foreign Financial Assets” >$200K (>$400K if joint) last day of year; or >$400K ($600K i

Documents

What’s New In Tax - Looking Ahead to 2014 · 2016. 6. 2. · Tax “Avoision” • There is a difference between tax minimization or avoidance and tax evasion • Tax avoidance: