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Potential for massive IRS tax penalties still hangs over U.S. citizens living in Canada

Most people are unaware that the U.S. is the only country that imposes citizenship-based taxation on it’s citizens no matter where they live or where they earned the money. That means that U.S. citizens living in Canada pay taxes to both Canada and the U.S. They are required to disclose all financial accounts in foreign countries where that are more than $10,000. Failure to report these accounts comes with a penalty of $10,000 per account if not disclosing them was not a deliberate act and $100,000 for 50 percent of the value of all accounts not disclosed.

“While most U.S. citizens who are resident in Canada find that no U.S. income tax is actually owing due to offsetting foreign tax credits, the investment restrictions, compliance burden and costs of filing U.S. tax and information returns can be severe.”

These are the tax changes you need to know about for 2020

With a new year comes new changes to the tax laws. There will still be five federal income tax brackets and each will adjust for a 1.9 percent inflation rate. The Basic Personal Amount, money the government allows to not be taxed to allow for basic needs, will be increased more than expected. This allotment is also being removed for wealthy individuals. Pension plan contributions are expected to increase while employment insurance premiums for employees are expected to decrease.

“For one, there’s an increase to the basic personal amount Canadians can earn before facing federal income tax.”

Tackling debt Canadians’ top resolution for 2020: CIBC poll – BNNBloomberg.ca

For the 10th consecutive year, Canadians have voted getting out of debt as their top financial priority. A CIBC survey showed paying bills (18 percent) and growing wealth (13 percent) to be the next highest goals, with retirement savings being low on the list. More than a quarter of Canadians borrowed money in 2019, and over three in four said that paying off debts is more important than increasing savings. The poll also shows that a slight majority of Canadians is concerned about a recession in the new year.

“According to a poll, 21 per cent of Canadians put debt repayment as their top financial priority — the 10th straight year that has led the rankings.”

CRA found more than $1B auditing smaller businesses last year

Audits of small and medium sized businesses for the 2018-2019 fiscal year has yielded over a billion dollars owed to the CRA, with an average of 137,000 per small business owed and 338,000 per medium business. The amount owed included back taxes, penalties and interest. The CRA is more diligent in identifying businesses requiring an audit due to it’s use of identifying cases of indirect verification of income. The CRA is continuing to scrutinize how businesses report income and audits will likely increase in the upcoming years.

“The most recent common audit issues or areas of concern were unreported income, capital transactions, corporate reorganizations and restructurings, ineligible expense claims, and related-party transactions.”

Paying RRSP, TFSA investment fees from outside the accounts not an advantage, Finance says

There has been some confusion over the tax implications of paying RRSP and TFSA account management fees from outside those accounts. The confusion began when the CRA told attendees at the November 2016 Canadian Tax Foundation Conference that starting Jan. 1, 2018, paying registered plan fees from non-registered, or open, accounts would incur a tax penalty equivalent to the fee. However, a recent letter from The Department of Finance will recommend that the minister amend the Income Tax Act’s definition of “advantage” to exclude the practice of paying for investment management fees from funds outside of registered plans (including TFSAs). While the Income Act has not yet been amended, the letter is encouraging and will hopefully end the tax uncertainty.

“In the letter, the Department of Finance acknowledged that investors are generally not tax-motivated when paying registered plans from outside the accounts, noting that doing so can even result in a net loss. Finance also specified that the fees paid cannot exceed a reasonable amount.“

What are the tax implications of donating land?

If you are a Canadian landowner with a commitment to the land, you may be considering making a private land gift to preserve Canada’s ecological diversity. Before you call a charity, check out these how-to tips on different ways to make land donations or to arrange for conservation agreements on land you may want to preserve for future beneficiaries. There are ways to decrease your tax obligations, including capital gains taxes. If you are unfamiliar with the federal Ecogift program, this article gives you a primer on how it works, and presents useful links to find out more about tax incentives to landowners who want to preserve and earn certification for property which is ecologically sensitive.

“Donating eligible land to a charity can help you avoid capital gains tax, as well as qualify for a charitable donation tax credit.”

If you’re thinking of putting assets into joint ownership with your children, read this first

There are some things you should be aware of before you set up joint accounts with your adult children to protect your assets from being subject to probate fees upon your death. Firstly, understand that probate fees or taxes are different in every province and territory. In Alberta, there is a flat probate fee, which caps out at a maximum of $525. In addition, there are risks, such as triggering the deemed disposition of your share of the asset when adding a joint beneficial owner. Furthermore, family squabbles may still occur and result in your assets not being distributed as you wish. Plus, the money could be taken if your children have any outstanding credit as a recent court case demonstrated. Use of multiple wills and trusts, among other strategies, will likely be a better way to handle your assets and still save money.

“While there may be a variety of reasons Canadians seek to put an asset into joint names with right of survivorship, for most, the primary motivation is the potential savings of probate fees (or tax) upon death.”

“Should I loan investments or money to my spouse?”

In order to save on taxes, a spouse can legally loan money to their spouse if he or she makes less money. This plan could backfire however if the money loaned is attributed back to the higher income spouse and taxed in their name. If you do a spousal loan, set up the loan in a way that avoids attribution by investing the money in longer term accounts. Income splitting can also be achieved using a family trust to decrease taxes.

“The idea behind a spousal loan is to lend money from a high-income spouse to a low-income spouse. If the subsequent return on the investments exceeds the loan rate prescribed by the Canada Revenue Agency, the general result is that income is effectively moved from one spouse to the other, and the family may pay less tax overall.”

Canada Revenue Agency: 8.1 Million Canadians Are Making This TFSA Mistake

Most investors are warned not to over contribute to their TFSAs but there is another more common mistake many don’t know about. In fact more than 8 million Canadians owning these accounts don’t do it. If you aren’t investing the funds in your account, you won’t make money or benefit from the tax advantage these accounts provide. Holding stocks in your account, such as high yielding ones, allows you to increase your funds while avoiding capital gains and dividend taxes.

“Apart from the fact that not investing your money means you’re missing out on returns, there’s the fact that there’s no tax benefit to holding cash in a TFSA.”

Gifting real estate to your adult children

Gifts have real, and often expensive, tax implications when it’s not just a little something that can fit under the tree at Christmas time. Substantial assets, such as houses for example, carry serious ramifications for both your taxes as well as the taxes of the recipient of the gift. If you’re intending to gift assets to someone, you should do some financial planning before going through with the transaction. Speaking with an accountant, can help you determine what taxes are involved, how they can be structured, and whether or not the transaction can be handled in a way that makes the taxes more manageable. And remember, once you gift something, it’s not yours anymore. Giving away a trust fund, or a house, means you have no control over that asset in the future.

“If the tax payable to you today is modest, it may not be that costly to make the transfer. And it means future growth in the property value, which would otherwise trigger more capital gains tax on your death, would instead take place in your daughter’s name.”