quadrantadmin, Author at Quadrant

Investing tips for dual citizens of Canada and the U.S.

If you have a dual Canadian/U.S. citizen citizenship, be prepared to be fully taxed like a U.S. citizen by the American government, regardless of whether you’ve lived there or not. Therefore, to stay on the IRS’s good side, you need to be careful about where you’re holding what type of investments. For instance, TFSA accounts will be taxed and should be avoided. In general, a good strategy is to hold for Canadian stocks and bonds in an RRSP, with foreign equities with U.S.-listed ETFs being held in a non-registered account to minimize the taxes. It is also wise to seek professional advice.

Key Takeaways:

The rules affecting U.S. citizens in Canada are complex, and the consequences of non-compliance can be high.
Most experts agree that dual citizens should not open a TFSA at all, because while Canada and the U.S. have a tax treaty to harmonize the way pensions and retirement accounts are taxed, this does not cover Tax-Free Savings Accounts.
A U.S. persons living in Canada needs to be careful when investing in non-registered accounts, as income from most Canadian-domiciled mutual funds and ETFs to be Passive Foreign Investment Companies, or PFICs, may be subject to higher taxes.

“More than any other country, the U.S. keeps its expatriates on a short leash. If you’re a U.S. citizen, you’re generally considered a U.S. person for tax purposes.”

Audit-proof your side hustle

If you are self-employed or run a side hustle for extra income, you need to know what taxes are owed to avoid any penalties or audits. You need to keep very detailed records and file on time. If you use equipment for personal as well as business use, you need to track your usage. Income splitting with family members who you employ must be well documented. Also, be careful claiming losses, they can help you with deductions and refunds but too many could make your side hustle seem like a hobby and you will lose any tax benefits.

“Business owners are responsible for keeping meticulous records of income and expenses, as well as asset purchases.”

What is a ‘related business’ for TOSI purposes?

TOSI (tax on split income) rules aren’t easy to comprehend. A typical TOSI case would be when a business-owner splits income by paying corporation dividends to family-member shareholders. There are instances in which this tax can be legally avoided, such as when under 10 percent of a corporation’s income is derived from a related business. Important CRA interpretations of the law relate to holding companies and operating companies. Also relevant is the fact that TOSI usually doesn’t apply to property income (as opposed to a business income). Ultimately, a tax advisor should be thoroughly familiar with CRA technical interpretations regarding TOSI, in order to best serve one’s clients.

“The Income Tax Act defines a “related business,” which is generally a business in which a Canadian-resident family member is actively involved or has a significant capital interest at any time during the year.”

What you need to know about the costs of appealing a tax decision

Disagreeing with how the Canada Revenue Agency has assessed your return is a right of every Canadian. Everyone is allowed their day in court. Depending on the complexity of your case and whether you take the general or informal procedure will affect how expensive going to court can be. The general route will require a lawyer and formal court procedures are followed.The informal route can be beneficial when the amount involved isn’t cost-effective to hire a lawyer, but be aware that hidden costs like your time and the amount you’re awarded may be significantly less than you were expecting.

Key Takeaways:

There are two options when appealing to the Tax Court of Canada: the “general procedure” or the “informal procedure.”
The informal procedure is limited to cases where the amount of federal tax and penalties in dispute for each taxation year, excluding interest, is $25,000 or less or $50,000 for a loss.
Costs can quickly add up regardless of which route, and in the end, even if you’re successful the awarded costs are often significantly less than what you’ve spent on a lawyer or the perceived value of your time.

“The costs, both out-of-pocket and your time, quickly add up.”

TFSA overcontribution woes continue

A recent Tax Court case demonstrates the costliness of over-contributing to a TFSA. An Ontario taxpayer who owns a roofing company inadvertently deposited $40,000 into a TFSA account instead of his regular chequing account. He was then punished with over $2,000 in penalties. The man had made smaller over-contribution previously receiving a warning letter from the CRA in response. This time, the CRA assessed a penalty tax. Tax Court judges are not allowed to cancel penalty taxes. Only the CRA can do that, which is what the judge in this case urged them to consider.

“It used to be the CRA’s practice to automatically assess the TFSA overcontribution penalty. In response to numerous innocent overcontribution errors, the agency changed its policy in 2016.”

When your investment partners don’t play by the CRA’s rules

A question is raised by a concerned taxpayer who declared rental payments as income as well as capital gains on a condo that was sold while his friends who invested with him plan not to. If you own a residence and don’t live there, you need to report any money made on renting as well as capital gains when sold or you could be assessed with heavy penalties. As long as the taxpayer paid based on his percentage of profit, he should be okay, but his partners could run into trouble and penalties at any time for not doing so.

“The partners who didn’t report the income will be faced with the lesser penalty of 10% of the amount of income they didn’t report, or 50% of the difference between the tax they paid and should have paid.”

Personal Investor: 4 money-saving tax tools for the average investor – BNNBloomberg.ca

If you have investments, expect to pay taxes. Fortunately, there are four ways – almost anyone can use – to can save at tax time. First, as many people know having an RRSP allows you to defer taxes on your contribution, so you can withdraw the money at a future time in retirement at a lower rate. Unlike an RRSP, investments to Tax-Free Savings Accounts Accounts (TFSA) are not deductable, but future returns from investments in a TFSA are not taxed – ever.

Key Takeaways:

Other options for saving money on your taxes (outside an RRSP or TFSA) include choosing tax saving investments that allow you to use the dividend tax credit, or will return capital gains, which are taxed at 50 percent in the year you sell it versus 100 percent from fixed income.
The dividend tax credit is a non-refundable tax credit which applies when Canadian dividends are included in income.
Taxpayers can even benefit from a capital loss by deducting it their capital gains going back three years or forward indefinitely.

“Tax breaks aren’t easy to come by for the average investor. That’s why it’s important to take advantage of whatever is available.”

Albertans pay less into TFSAs than Canadian average

Alberta’s average annual contribution increased by five per cent this year. Albertans hold an average of $28,551 in their TFSA. Canadians are choosing to grow their contributions more often. Alberta residents are more likely to put funds in their investment accounts once a quarter. About half of Canadians save TSFAs for retirement. TFSA contribution is limited to $6000 in 2020, but you can invest more if you have unused contribution room. Some Canadians check their investments on a monthly basis while others check theirs quarterly.

“Albertans contributed more to tax-free savings in 2019, but still less than Canadians on average.”

Lessons from more than five years of battling the taxman

A taxpayer who fought the CRA in court over just a little more than $13,000 finally won his case but the story is a cautionary tale. He sold a condo that he never lived in, the CRA assessed a tax on the profits as well as applied negligence penalties. Luckily, he was able to prove that he intended to live in the condo but could not. A judge ruled that profit from the condo was considered capital gains and not income. Taxpayers should be aware that when selling a property, the CRA will assess penalties if the profits aren’t reported correctly.

“It’s clear from this story that the CRA is focusing a lot of attention on real estate transactions. So, make sure you understand the factors the taxman will consider when determining the tax treatment of any sale.”

The facts of life (insurance)

One-third of Canadians don’t have life insurance. The main reason is that death is hard to talk about; so many people avoid it and thus don’t buy life insurance or adequately plan for what will happen when they’re gone. For instance, one myth is that an employer’s life insurance program is adequate. Generally, it’s a good start, but you may also need individual insurance not tied to an employer to fully cover all your sources of income such as commissions, bonuses and second jobs. About 80% of consumers overestimate the cost of life insurance. Premiums are based on age, overall health, whether you smoke, family history, etc. so depending on these factors it can be quite affordable. Canadians need to be aware that there are lots of options, which can help people plan for and help families through a devastating loss.

Key Takeaways:

The majority of Canadians don’t have life insurance because it is hard to talk about.
Life insurance is important for the primary wage earner, but also for a partner who doesn’t work because of all the household tasks that may need to be hired out.
Life insurance allows people to keep together what they’ve put together, which makes not having life insurance more expensive than any policy.

“Canadians believe that life insurance is important but they put off the buying decision and so it’s not usually top of people’s priorities. It should be.”