Director’s Liability Overview, Plus A Due Diligence Defense We Are Unlikely To See Used Again

Director’s Liability Overview, Plus A Due Diligence Defense We Are Unlikely To See Used Again.

 

Great view of the way the Canada Revenue Agency handled Director’s Liability Assessments from a former CRA resource officer who was responsible for these assessments for 2-years.

Director’s Liability Overview, Plus A Due Diligence Defense We Are Unlikely To See Used Again

I had a nice long conversation with a client the other day regarding the potential that either the Canada Revenue Agency (CRA) or the Provincial government (in Ontario) were going to pursue a Director’s Liability assessment against him for the debts of his now-deceased corporation.  Part of the discussion surrounded how the Canada Revenue Agency and the former Ontario Retail Sales Tax (RST) group handled assessments, and the criteria they used when reviewing whether or not to pierce the corporate shield, plus the importance of a due diligence defense.

Director's Liability Section from the Income Tax Act and Excise Tax Act.
Director’s Liability Section from the Income Tax Act and Excise Tax Act.

During my employment at the Canada Revenue Agency (CRA), I felt I needed to gain a more thorough understanding of Director’s Liability and figure out why there were so few assessments raised in our office compared to other offices.   I personally had not raised any Director’s Liability assessments mainly because I was effective on the phone and combined with meetings, was able to resolve many debts prior to the assessment stage.  Still, Senior Management encourage the Collections staff to utilize this collection tool more, so as the Resource and Complex Case Officer, I asked for, and was given, the Director’s Liability inventory to control.

By controlling the Director’s Liability inventory, that meant I needed to know the ins and outs of Director’s Liability – section 227.1 of the Income Tax Act and section 323 of the Excise Tax Act, because if anyone in our office wanted to raise an assessment, I would have to review their account, ensure all of the much-needed grunt work had been completed, then ensure they had spoken to the Director(s), given them sufficient notice, provided them time for a Due Diligence Defense, at which point I could sign off and begin to track the file.

After organizing that inventory and rolling out the new procedures, I began to scour the accounts in our office for potential Director’s Liability assessments, then, in addition to my other inventories, provide recommendations and suggestions to the staff on how to proceed if I felt there was a possibility for an assessment.  Management decided instead of burdening the staff, I should just take those accounts I felt were ready for Director’s Liability assessments and work them, plus all of the other accounts I was tracking where assessments were raised too.

It was a fair amount of work, but more importantly, it was very enlightening, to review the government’s policies on Director’s Liabilities plus review the procedures in place, compare that to how other office’s handled their files and really tighten up the process.  If an account was a sure-fire Director’s Liability assessment, it was raised, and if there was no chance, or not the right time, the file was returned to active collections.

I found the first common misconception around Director’s Liability was that the issuance of the Director’s Liability Pre-Assessment Proposal Letter (which notifies director’s that we are reviewing them for Director’s Liability) was being used as just another letter by the Collections staff to remind directors of their obligations, when in fact the CRA intended on using this letter to notify Directors’ that an assessment was beginning.  Internally, the Canada Revenue Agency was actually starting to investigate the personal ability to pay of the director(s) at the time this letter was issued.

Going forward, that letter was not to be used lightly, and it was not to be sent to the Director(s) numerous times.  A Director would then have the assessment raised against them and wonder why it was raised this time, and not earlier when one of those letters went out, so in order to prevent a possible loss in Tax Court, the decision was made to send it once, and then follow-up with the Due Diligence defense letter before raising the assessment.

Ignoring the Due Diligence defense letter (which happens often) meant the one opportunity a Director had to start their case on the record was lost, and with the CRA building their case in the permanent diary, the Director(s) stood little chance of preventing the Canada Revenue Agency from raising the Director’s Liability.

Once that waiting period passes, the file usually gets very quiet…

From the Director’s point of view, either the assessment is raised and they receive a letter from the CRA stating that, or the assessment is raised and the letter gets lost in the mail (tossed out), or the assessment is raised and before the Director is notified, their personal assets come under fire.  There is of course, the possibility that nothing happens and the Director(s) are left in limbo, but without having a dialogue with the CRA, or experience around the policies and procedures, there is no way that the Director(s) will know when and if the CRA is coming – if at all.

Once raised, the Director(s) have quite limited options.

A recent court case, which I will highlight below demonstrates a situation where an assessment was raised, and in Tax Court, the decision was turned over and the assessment cancelled.  I guarantee it won’t happen again, as the CRA will ensure their processes are tightened even more to close this loophole.

The case was Bekesinski V The Queen.

The link to the case on the website for the Tax Court of Canada, is here.

In this case, Bekesinski was the Director of a corporation who was personally assessed by the Minister of National Revenue (CRA) in the amount $477,546.08 for the corporation’s unremitted income tax (T2) and employer contributions of CPP and EI for payroll (source deductions) plus penalties and interest for the 2001, 2002 and 2003 fiscal years.

Under Director’s Liability, the CRA can assess directors for payroll and for GST/HST, but not Corporate Tax liabilities.

The Tax Court of Canada held that since the taxpayer had resigned as a director of the corporation more than two years after the CRA’s assessment, the CRA was statue barred from raising the Director’s Liability assessment.

This was something the CRA should have known before raising the assessment and something that the director (or his representatives) should have mentioned at any point during the pre-assessment proposal period, especially at the due diligence defense stage, but was never mentioned.

Brief Overview of the Facts

In 1992 the taxpayer purchased D.W. Stewart Cartage Ltd., a general cartage, trucking and warehousing company where he served as a Director of the corporation.

When the corporation fell behind on filing obligations and as the balance owing to the CRA began to grow, the Director began to receive numerous letters from the CRA warning him that he could be held personally liable for the corporation’s tax debts as a Director of the corporation.  He did not notify the CRA at any time that he had resigned as a Director of the corporation.

On October 15, 2010 the CRA raised Director’s Liability and issued a Notice of Assessment (NOA) to the taxpayer for unremitted income tax, employer contributions plus penalties and interest in the amount of $477,546.08.

The Director then argued that he should not have been assessed as a Director because he resigned as Director of the corporation on July 20, 2006 by way of a Notice of Resignation which would have made the raising of the assessment statute barred.

The CRA argued that the taxpayer was in fact a director and that the taxpayer had backdated the resignation to qualify for the exception, which happens more than you could imagine, and to counter this trick, the CRA often requests an “ink date test” to determine the authenticity of the Notice of Resignation.

Unfortunately for the CRA, the results from the ink date test was excluded by the Tax Court because the CRA did not advise the Court that they felt the Notice of Resignation was back-dated.  Even the judge felt the Notice of Resignation was backdated, however since the CRA failed to mention it, it was not open for review in the Court.

In summation, Bekesinski avoided Director’s Liability for the corporate tax debts due to a litigation misstep on the part of the CRA, a mistake they are unlikely to be repeat.

It is highly advisable for corporate directors to carefully document their resignations so as to avoid potential future Director’s Liability assessments, because I guarantee, the CRA will challenges to the authenticity of backdated resignations on each and every case going forward.

Can You Describe What You Do To A Stranger? Tell People What You Do!

If you have been reading my posts on The Urban Daddy, or on inTAXicating, you will know that I sometimes put on my MBA-hat and question everything about the way we do business.

One of the questions I have had for a long time has to do with how businesses choose to identify themselves to the public. We all know that keeping customers is much easier and much cheaper than getting new ones – so they say – which makes the next example even that much more puzzling to me.storefront without sign

Storefronts, in particular, have very limited space to let potential customers / clients know a whole lot about what they do, so that you will use their goods and services, yet many businesses continue to put their brand name on the store, or use an unreadable font which limits their ability to get new customers who are not walking by the store and who have the time to look in the window and walk in.

As I question this, I think back to one of the more complex collections cases that I handled while working at Canada Revenue Agency (CRA) and how after years of being unable to get a cent out of this establishment, I had much different results.  This case had to do with a very large restaurant just North of Toronto which had fantastic food, very positive reviews, incredible decor, and $3,000,000.00 owing in taxes, without a single payment made to arrears in years.

The owners of this restaurant were perplexed at the spiralling debt and their bleak prospects for operating in the future because what started off as a very profitable business venture went south, quickly and at massive costs – both personal and professional.  When their debt grew, they started to cut costs, but it was the wrong costs – like having fresh food on the premises daily, reducing the variety and portion size on their menu and by running out of options at meal time.

Regular patrons became frustrated with the frozen additions or the cutting out of their favourite meal choices and as their clientele dwindled to handfuls of patrons during the day and at night, it only made matters worse.

With their personal assets fully leveraged to keep the business running, they were steps away from bankruptcy and losing everything.  They also were not paying their tax debts, but they were staying current on their filing obligations, and between the threats from previous collectors and their power being turned off all the time, they knew the end was near.  After hearing this, I thought I would need to see it myself, so I took my newly earned MBA and headed out to have a conversation with them about what they had intended to do with these debts.

But I could not find the restaurant.

It was supposed to be 15,000 square feet, and I knew the intersection quite well, but could not for the life of me find their establishment.  I called the owner and while I was circling the plaza on the corner he was frazzled about how I could not see their fantastic place, which I found to be very bizarre.

I ended up parking on the plaza on the corner and walked past a couple of stores before finally seeing what I had been circling for the better part of 20 minutes.  Their restaurant.

The outside of the building looked run-down and there was no name on the building.  I could not even tell where the front door was, and once I got to the door, I didn’t even know if it was open.  There was no sign that even said “Restaurant” or specified the type of food that was in there. There was some very hard to read script writing near the top of the building and near the door, but it looked more like graffiti than it did, a brand name.

Having been there a couple of years, locals knew about them, ate there but to an onlooker, there was no way of knowing there was a restaurant there.  I started to see a pattern emerge.

Upon sitting down with the owners I immediately suggested they perform a search on the business on the Internet (Alta Vista, I believe) and there right in front of their eyes, were people commenting about how they had made reservations but could not find the building, so did not go, or that they arrived but could not tell if the place was open, or where the front door was.  There was obvious frustration.

To me, it was common sense, that this building needed a sign that read “Italian Restaurant”, so at least people would know where they were going, or people who drove by or walked in the plaza would know there was something there.  On a more obvious scale a giant arrow pointing at the building would have been better but this was a very classy place, and that would cheapen the brand, they felt.

Needless to say, I spent 3-4 hours there, we talked about everything relating to their business, their debts – business and personal, and at the end of the day I decided to give them a couple of months to sort things out, reduce some costs, and try to attract more business which they knew they needed.

All of this effort was rewarded when they sent in a cheque for $250,000 at the end of the following month to the CRA.  By the end of the year, they had paid off $1.8 million dollars of their debt, and by the end of the next year, they were fully paid up (including penalties and interest) and business was booming.

Is it 100% a result of something I said? Probably not. Did I afford them the time to make money and pay off the debt, yes I did, but I also went through their options should they have chosen bankruptcy, a proposal, or to ignore the CRA completely and wait for their assets to seized and the directors assessed.

With all that information they were able to make an informed decision, the most obvious to me being that they improved their signage, cleaned up the outside, and put a neon sign which flashed “OPEN” on a very visible spot near the sign and near the door (with a classy arrow pointing towards the door).

But how does this apply to you and to me?

I recently took part in a challenge on LinkedIn to say what I do for a living in one sentence. I thought how hard could it be, and I wanted to check out what others had written before me. With over 300 respondents, I would have plenty of samples to review before taking the plunge, but I was shocked by what I saw.

I saw people – people I do not know – in businesses I did not know who wrote things like this;

“I solve all of your problems.”
“I get you want you need at the price you want.”
“I’m what you need.”
Even, “We’ve got you covered.”

I looked further at their business profile to see if I could tell what they did, however their business name, or description was equally as vague.

I read and read and read, almost 100 of them by now, and when I came to a comment by a lawyer, I was dumbfounded when I saw this; “I practice law.”

I immediately thought about what I would do if I came to this networking group for a professional to hire in a very specific area and I saw “I practice law” as someone’s description… Would I contact them to find out what kind of law? Or would I go to the next person.

I went to the next person.

Then the next and the next and the next.

Then I posted challenging people to go back and edit their posts. Be proud of who you are and the services you offer. Tell everyone what you do, be clear, but be brief, and if someone has more questions or wants information, they will reach out to you.

So what about my post?

Now I had a lot to live up to, because I called out the patrons of the group and if my post sucked, boy would I be the biggest hypocrite in the world.

So I posted this;

“My expertise is with the Canada Revenue Agency (CRA), and their Collections / Enforcement division and I use this knowledge to help people and business understand taxes and pay only what they owe, on their terms.

Then I said, “please read this and if you do not know what I do, or if there is feedback – positive and negative – please provide it. I too would love the perfect pitch and I appreciate any input from this fantastic group.

So next time you are looking for a restaurant to take your family and you drive by one which only has a name and not a type of food, think about how much business they could be losing by placing their focus on themselves and not on the service or product their offer.

#Tax

CRA Form T1135 Foreign Information Verification Statement (Info plus FAQ).

In June 2013, the Canada Revenue Agency (CRA) issued a revised version of form T1135, the Foreign Income Verification Statement, which applies to tax years ending after June 30, 2013.

In order to combat off-shore tax evasion, the revised Form T1135 asks for more detailed information, including the names of specific foreign institutions and countries where offshore assets are located, the foreign income earned on those assets and the maximum cost amount of those assets during the year.

For 2013, The CRA is permitting taxpayers who held specified foreign property in an account with a Canadian registered securities dealer (as defined in subsection 248(1) of the Income Tax Act) to report the combined value of all such property at the end of the tax year, rather than reporting the details of each property.

This combined value should be included in Category 6 of Form T1135, “Other property outside of Canada.”

If a taxpayer chooses to use the 2013 transitional reporting method, the taxpayer must use this reporting method for all accounts with Canadian registered securities dealers.

In addition, unit trusts (as defined in subsection 108(2) of the Income Tax Act) now have the option to report the combined value of all of their specified foreign property in the same manner for their 2013 tax year.

The CRA is also extending the filing deadline for Form T1135 for the 2013 tax year to July 31, 2014, for all taxpayers, in order to provide further assistance in the transition to the new reporting requirements.

Going forward, however, Form T1135 must be filed by most Canadian-resident individuals, corporations or trusts that, at any time during a year, owned specified foreign property (including most types of income-earning property held outside of Canada, other than personal property and property used in carrying on an active business) costing in total more than $100,000.

Form T1135 must also be filed by partnerships that hold more than $100,000 in foreign investment property and whose non-resident members’ share of income or loss is less than 90% during the reporting period.

The new form T1135 calls for more detailed information requirements for each specified foreign property including:

  • The name of the specific foreign institution, investment or other entity holding funds outside Canada.
  • The specific country to which the foreign property relates.
  • The cost of the property at the end of the year, the highest cost amount during the year and the income or gains generated from the foreign property, on a property by property basis.

Foreign property held through Canadian brokerage and investment accounts:

The new Form T1135 states that “where the reporting taxpayer has received a T3 or T5 from a Canadian issuer in respect of a specified foreign property for a taxation year, that specified foreign property is excluded from the T1135 reporting requirement for that taxation year”, however, the form includes a box that must be checked where such property is held, so it would appear that the form still does have to be filed even if all of the property is subject to T3/T5 reporting.

There is mention by the CRA that a taxpayer must have actually received income in respect of the investment that is included in the T3 or T5, so confirmation is necessary before submitting the form.

For the 2013 taxation year only:

Under the CRA transitional relief, a taxpayer who held specified foreign property in an account with a Canadian registered securities dealer (which is a defined term that would cover most if not all Canadian brokers) may now report the combined value of all such property at the end of the tax year, rather than reporting the details of each property.

This combined value should be included in “Other property outside of Canada” in Category 6 of Form T1135.

If a taxpayer chooses to use the 2013 transitional reporting method, the taxpayer must use this reporting method for all accounts with Canadian registered securities dealers.

It is important to note that this transitional relief Does NOT apply for taxpayers who use a securities dealer outside Canada that is not a registered securities dealer, so for those taxpayers, specific details will have to be disclosed on an investment by investment basis.

Old Form vs New Form:

The old form just asked for cost amount ranges for each class of foreign property, and it was often possible to do an accurate estimate without a detailed review of a taxpayer’s records.

Summary:

The T1135 can be completed, validated, and saved on your computer. Alternatively, you can print this form and complete it manually.  In either case, additional rows can be inserted in any of the specified foreign property categories, as necessary.

Currently, this form cannot be electronically filed.  A paper copy of this form must be filed at the following address:

Ottawa Technology Centre
Data Assessment and Evaluations Program
Verification and Validation
Other Programs Unit
875 Heron Road
Ottawa ON K1A 1A2

 

Frequently Asked Questions

1. Can I file the information requested on form T1135 on schedules attached to the form instead?

No.  The online version of the form contains several features that ensure data integrity. Schedules attached to the form do not have these features.  If you need more space, attach another T1135 form to the first completed form or attach a schedule to the prescribed form.  The schedule must be in the identical format as the tables on form T1135.  The CRA will not accept other methods of providing the required T1135 information.

2. Do I have to report foreign personal-use property on form T1135?

No.  You do not have to report personal-use property. This includes vacation property that you use primarily as a personal residence (see real property questions below), and listed personal property such as works of art, jewelry, rare folios, rare manuscripts, rare books, stamps, and coins.

3. If I have an investment in a U.S. mutual fund trust that holds portfolio investments in several corporations that are resident in Europe and Asia, what country code should I use on form T1135?

Your investment is an interest in a U.S. mutual fund trust and not in the underlying investments of the trust. Report the country code of the residence of the trust, in this case, the USA.

4. If I hold shares of a U.S. corporation in a United Kingdom brokerage account, should the country code of the shares beUSA or GBR?

For the purposes of form T1135, the country code for shares of a non-resident corporation is the country of residence of the corporation. Therefore, code these shares as USA.

5. Is the $100,000 threshold based on the fair market value (FMV) of the property?

No.  The $100,000 threshold is based on the cost amount as defined in subsection 248(1) of the Income Tax Act (ITA) and generally is the adjusted cost base and not the FMV.

6. Assume that in 2013 I held shares in a non-resident corporation with a cost amount of $75,000 and, at the same time, I had a bank account in the U.S. with $35,000 on deposit. Am I exempt from filing form T1135 since neither of the foreign properties has a cost amount greater than $100,000?

No. You must file form T1135 since the total cost amount of all specified foreign property exceeds the $100,000 threshold ($75,000 + $35,000 = $110,000).

7. Assume I held specified foreign property during the year with a cost amount of more than $100,000, but held less than$100,000 at the end of the year (or no longer held the property). Do I still have to file form T1135?

Yes. As long as you met the reporting requirement threshold of $100,000 at any time in the year, you must report on form T1135 all specified foreign properties held during the year, even if you sold any or all of the property before the end of the year.

8. How do I determine the cost amount of foreign property acquired by way of gift, bequest, or inheritance?

The cost amount of foreign property acquired by way of gift, bequest, or inheritance is its fair market value at the time the gift, bequest, or inheritance was received.

9. Are shares of non-resident corporations held through a broker (Canadian or foreign) specified foreign property?

Yes. Shares of non-resident corporations are specified foreign property and should be reported, regardless of whether the shares are held through a broker.

There are different streamlined methods available for reporting specified foreign property held in certain Canadian accounts for 2013 and 2014 and later tax years. Refer to the frequently asked questions specific to the 2013 and 2014 and later tax years for further details.

10. Are shares of a Canadian resident corporation held by a non-resident agent for the benefit of a Canadian reporting entity considered a specified foreign property for purposes of form T1135?

Yes.  Shares of a corporation are intangible property and will be specified foreign property if they are situated, deposited or held outside Canada. As a result, the shares of a Canadian resident corporation that are held by on deposit with a foreign agent constitute specified foreign property and would be reported in category 6, Other property outside Canada, with the country code indicating the location of the agent.

11. Does specified foreign property include property that does not produce income (for example, vacant land)?

Yes.  Specified foreign property includes property that does not produce income.

12. Does specified foreign property include shares or indebtedness denominated in a foreign currency issued by a Canadian resident corporation?

No.  Specified foreign property does not include shares or indebtedness issued by a Canadian resident corporation.

13. Does a life insurance policy issued by a foreign issuer meet the definition of specified foreign property? If yes, how is the cost amount of a foreign insurance policy determined?

Yes.  A life insurance policy issued by a foreign issuer meets the definition of specified foreign property. The adjusted cost basis of an interest in a life insurance policy is defined in subsection 148(9) of the Income Tax Act. This amount can be considered as a reasonable approximation of the cost amount of the property for the purpose of form T1135.

14. Canadian residents must file form T1135 when the cost amount of their foreign property exceeds $100,000 at any time during the year. Does this mean that a person does not have to report income from foreign property where the cost amount of that property is below $100,000?

Canadian resident taxpayers must report and include in their income for Canadian tax purposes all the income they earn from foreign property, regardless of the cost amount of the foreign property, and if the cost amount of the taxpayer’s foreign property exceeds $100,000, the taxpayer must also file form T1135.

15. Do I report the gross income or the net income?

Yes.  You must report gross income from the specified foreign property on form T1135.

16. Is the “gain (loss) on disposition” the capital gain (capital loss) or the taxable capital gain (allowable capital loss) on the disposition of a specified foreign property?

The “gain (loss) on disposition” is the capital gain (capital loss) and not the taxable capital gain (allowable capital loss).

17. Where a taxpayer’s specified foreign property is an interest in a partnership that realizes a capital gain (loss), should this be reported as a “gain (loss) on disposition” or “income (loss)”?

The taxable portion of a capital gain realized on disposition of the underlying assets of a partnership that is a specified foreign property should be reported as income. Only the gain (loss) on the disposition of the partnership interest itself should be reported as a “gain (loss) on disposition.”

18. Can capital losses from the disposition of Canadian property be netted against capital gains realized on the disposition of specified foreign property in completing form T1135?

No.  The income (loss) and the gain (loss) on the disposition of each particular specified foreign property have to be reported separately on form T1135.  You cannot offset Canadian capital losses against foreign capital gains on form T1135.  The form T1135 is used to identify foreign property, not to calculate taxable income.

19. A joint venture has property outside Canada with a cost amount in excess of $100,000 and the property is not used in an active business. Should the joint venture file form T1135 or should each party to the joint venture agreement file the information return, based on the cost amount of the property owned by each of them?

No.  A joint venture does not have to file form T1135, however, each party to the joint venture that is a specified Canadian entity may have to file form T1135, based on the cost amount of the property owned by each of them.

20. Does a non-resident who has employment income earned in Canada have to file form T1135?

No.  Only taxpayers resident in Canada have to file form T1135, although a non-resident still may be taxable on employment income earned in Canada.

21. If a partnership holds specified foreign property, who has to file form T1135, the partnership or the Canadian partner(s)?

A partnership has to file a form T1135 if it is a specified Canadian entity and, at any time during the reporting period, the total cost amount of all specified foreign property it held was more than $100,000.  A partnership will be a specified Canadian entity where the total of all amounts, each of which is the income (or loss) attributable to non-resident partners, is less than 90% of the partnership’s total income (or loss).

If a Canadian resident taxpayer holds an interest in a partnership that is a specified Canadian entity, the taxpayer is not required to report their interest in the partnership on form T1135.

If a Canadian resident taxpayer holds an interest in a partnership that is not a specified Canadian entity, a taxpayer is required to report their interest in the partnership on form T1135 if the partnership holds specified foreign property. The taxpayer should provide the details of their partnership interest in category 6, “Other property outside Canada.”

22. What are the implications to the partners if a partnership, that is a specified Canadian entity, does not file form T1135 on time or accurately?

If a partnership that is required to file form T1135, but does not file the form on time or accurately, and a partner fails to report income from a specified foreign property on their tax return, the normal reassessment period for that Canadian resident partner will be extended by three years.

23. Does a day trader have to file form T1135?

Property that is used or held exclusively in the course of carrying on an active business is not required to be reported on form T1135.

The determination of whether the activities of day trader constitute carrying on an active business is a question of fact that can only be determined on a case by case basis.

24. Does specified foreign property held in registered plans, such as registered retirement savings plans (RRSPs) or tax-free saving accounts (TFSAs), have to be reported on form T1135?

No.  Specified foreign property held in an RRSP or a TFSA is excluded from form T1135 reporting requirements.

25. Does specified foreign property held in a Canadian mutual fund trust have to be reported on form T1135?

No.  A Canadian mutual fund trust, and Canadian mutual fund corporation (as defined in the ITA) are excluded from the definition of “specified Canadian entity,” so they do not have to file form T1135 and the investor does not have to report their investment in a Canadian mutual fund trust (or Canadian mutual fund corporation) because they are not a “specified foreign property.”

26. Does specified foreign property held by a non-resident mutual fund (trust or corporation) have to be reported on form T1135?

Generally, the investment in a non-resident mutual fund, not the underlying property, would be a specified foreign property to the investors, therefore, the investors only have to report their investment in the mutual fund on form T1135.

27. What is the reporting requirement for new immigrants? How is the cost amount determined for property that was owned at the time of immigration to Canada?

An individual does not have to file form T1135 for the tax year in which he or she first became resident in Canada. For a new resident, the cost amount of foreign property is its fair market value at the time he or she first became resident in Canada.  Use this fair market value in determining the new resident’s form T1135 filing requirement in future years.

28. If an individual owns a condominium in Florida that has a cost amount of $120,000, is the property specified foreign property for the purposes of form T1135 if the condominium is:

  1. used exclusively by the taxpayer as a vacation property?
  2. rented out for eight months of the year with a reasonable expectation of profit and kept for personal use the other four months?
  3. rented out for part of the year without a reasonable expectation of profit for the purpose of recovering a portion of condominium expenses?

Specified foreign property does not include personal-use property. Personal-use property is generally defined as property owned by the taxpayer that he or she or a related party uses primarily for personal and enjoyment purposes.  The CRA takes the view that “primarily” means more than 50%. Whether a particular property is primarily for personal use and enjoyment is a question of fact that is determined on a case-by-case basis.

In situation (a), the individual does not need to report the condominium since it is held primarily for personal use and enjoyment.

In situation (b), the property is not held primarily for personal use and enjoyment. As a result, it is a specified foreign property and has to be reported on form T1135.

In situation (c), if there is no reasonable expectation of profit and the individual is merely recovering part of the condominium expenses, the CRA will consider it a personal-use property. As such, the property is not a specified foreign property and is excluded from the reporting requirements of form T1135.

29. A taxpayer owns a four-unit property located outside of Canada. One unit is personal-use property of the taxpayer and the other three units are rented out with a reasonable expectation of profit. What are the form T1135 reporting requirements? Assume the taxpayer owns other specified foreign property with a total cost amount in excess of the $100,000 reporting threshold.

If all of the units have roughly the same size and value, the property would be a specified foreign property and the taxpayer would have to report the entire cost amount of the property on form T1135. Since 75% of the property is rented out for profit, it is not considered to be personal-use property.

30. If a Canadian corporation has a warehouse in England with a cost amount of $900,000 used to store business inventory, is the warehouse a specified foreign property?

A property that is used or held exclusively in the course of carrying on an active business is excluded from the definition of specified foreign property. If the warehouse is used only for storing inventory used in the corporation’s business, it does not have to be reported on form T1135.

31. If a taxpayer acquires a specified foreign property for $500,000 with a down payment of $50,000 and the balance financed through a mortgage, does the taxpayer have to file form T1135 if the property is his or her only foreign property?

Yes.  The taxpayer has to file form T1135, because eventhough they only made a down payment is $50,000, the cost amount of the property in this case is $500,000 which exceeds the $100,000 reporting threshold.

32. If a taxpayer enters into a purchase contract to buy a $500,000 specified foreign property that will be built and completed in two years, but has made a down payment of $50,000, does the taxpayer have to report it if it is his or her only foreign property?

The purchase contract should be reviewed to determine when the taxpayer acquires the property. If the title of the property has not passed to the taxpayer, the taxpayer does not have to report this foreign property.

33. Are there penalties for failure to file form T1135 or for omitting any information on the form?

Certain penalties apply for failing to file form T1135 by the reporting deadline and for making a false statement or omission about the required information.  For more information, go to the CRA’s Table of penalties.

Relief can be granted from these penalties under the taxpayer relief provisions upon written request from the taxpayer.  Each request is considered on its own merit and circumstances.  See the Request for Taxpayer Relief form.

34. Under what circumstances is the normal reassessment period extended as a result of not filing form T1135 correctly?

For the 2013 and later tax years, the period within which the CRA can reassess a taxpayer’s tax return is extended by three (3) years if both of the following conditions have been satisfied:

  • the taxpayer has failed to report income from a specified foreign property on their income tax return; and
  • form T1135 was not filed, was not filed on time, or was filed inaccurately.

Note that for the 2013 tax year, the CRA has extended the filing deadline to July 31, 2014 for all taxpayers.

35. Is the Voluntary Disclosures Program available to form T1135 filers?

Yes.  The Voluntary Disclosures Program is available if certain conditions have been met.  Taxpayers who have provided incomplete information, omitted information, or who have not filed form T1135 are encouraged to come forward and correct their tax affairs through the program.  To qualify for the program, a taxpayer must file a valid, full and complete, disclosure and have not been contacted by the CRA first.

36. There are two versions of form T1135 available on the CRA website. Which version can I use?

The CRA encourages taxpayers to use the 2014 version of form T1135 for all tax years. However the CRA will accept the 2013 version of the form (and the use of the related reporting methods and exceptions):

  • for the 2013 tax year; and
  • for the 2014 tax year if filed prior to July 31, 2014.

The 2014 version of the form must be used for 2014 and later tax years if filed after July 31, 2014.

37. How do I report specified foreign property held through a Canadian broker after 2014?

Taxpayers can provide the details of each specified foreign property in the appropriate category, however, if the property is held with a Canadian registered securities dealer (as defined in subsection 248(1) of the Income Tax Act) or with a Canadian trust company as determined under paragraph (b) of the definition of a restricted financial institution in subsection 248(1)), taxpayers are permitted to report the aggregate amount of all specified foreign property on a country-by-country basis in Category 7, “Property held in an account with a Canadian registered securities dealer or a Canadian trust company”.

38. How do I know if my securities are held by a Canadian registered securities dealer or a Canadian trust company?

The organization or person holding your securities will be able to confirm if they are a Canadian registered securities dealer (as defined in subsection 248(1) of the Income Tax Act) or a Canadian trust company (as determined under paragraph (b) of the definition of a restricted financial institution in subsection 248(1)).

39. How do I report specified foreign property held through a Canadian broker for 2013 only?

Taxpayers can provide the details of each specified foreign property in the appropriate category however, for certain property the taxpayer may have the option to use the T3/T5 Reporting Exception or the 2013 Transitional Reporting Method.

40. Form T1135 states that where a taxpayer has received a T3 or T5 from a Canadian issuer for a specified foreign property for a tax year, that property is excluded from T1135 reporting for that year. Does that mean the property is also excluded from the calculation of the $100,000 threshold?

If this exception applies to you, you do not have to complete the detailed reporting requirements of form T1135 for that property. However, you still have to take the property into account in determining whether the total cost amount of all specified foreign property you held at any time in the year exceeds $100,000, and whether or not you need to submit a form T1135. For more information, go to Foreign Income Verification Statement.

41. How does the reporting exception apply for a taxpayer who has a non-calendar tax year, given that T3 and T5 information slips are prepared on a calendar-year basis?

If a T3 or T5 has been received, or will be received, from a Canadian issuer for all of the income earned on a particular property in the reporting period, the reporting exception is considered to be satisfied.

42. How does the reporting exception apply when a specified foreign property was held by a foreign broker for part of the year and held by a Canadian broker for the remainder of the year?

The reporting exception will apply where all of the income for a specified foreign property in the reporting period is subject to T3 or T5 reporting by a Canadian issuer. If a Canadian issuer has not reported on a T3 or T5 all of the income earned in the particular year on a foreign property, the reporting exception does not apply.

43. How does the reporting exception apply where, in a particular tax year, a taxpayer owns shares of 20 non-resident corporations and has received dividends from 15 of these corporations for which a T5 has been received from a Canadian issuer?

When the taxpayer has received a T3 or T5 from a Canadian issuer for a particular specified foreign property, the details of that particular specified foreign property do not have to be disclosed on form T1135. Therefore, the reporting exception applies to the shares of the 15 dividend-paying non-resident corporations, however, the details of the shares for the other five non-resident corporations must be provided on form T1135.

Note that the shares of all 20 non-resident corporations must be taken into account in determining whether the T1135 reporting threshold has been met; that is whether the total cost amount of all specified foreign property held by the taxpayer at any time in the year exceeds $100,000.

44. How does the reporting exception apply when a taxpayer owns shares of a foreign corporation through a Canadian broker that paid dividends in a particular tax year, for example 2014, but no dividends are paid in the 2015 tax year?

Whether the reporting exception applies must be determined for each specified foreign property and for each tax year during which the property was held. A specific property may be subject to the reporting exception in one year and not in another year, depending on whether it earned income for which a T3 or T5 was received from a Canadian issuer.

In this case, the reporting exception would apply to the 2014 tax year but not to the 2015 tax year.

45. How does the reporting exception apply when a specified foreign property is jointly owned and a T5 is issued to only one person who represents all of the owners?

When the T5 has been received from a Canadian issuer, all of the owners will be considered to have satisfied the reporting exception for that particular specified foreign property.

46. If I have an account with a Canadian registered securities dealer, can I file form T1135 using the T3/T5 reporting exception?

You have the option to use either the T3/T5 reporting exception or the 2013 transitional reporting method.  If you choose to use the 2013 transitional reporting method in respect of any account with a Canadian registered securities dealer, you must use this method for reporting all other accounts with Canadian registered securities dealers.

If you opt to use the T3/T5 reporting exception you are required to report the details of all those securities that are specified foreign property for which you have not received a T3 or T5.

47. If I have already filed the current form T1135 can I file an amended information return applying the 2013 transitional reporting method?

Yes, you may choose to file an amended return using the 2013 transitional reporting method for the 2013 tax year, even if you have previously completed the form T1135 using the T3/T5 reporting exception.

The 2014 version of the form can be viewed here.

Reminder: If Extreme Weather Conditions Affected your Ability to File or Pay Taxes, the CRA wants you to apply for Taxpayer Relief.

If the recent extreme weather conditions affected your ability to file or pay taxes, the Canada Revenue Agency (CRA) wants you to remember about the Taxpayer Relief program.

From the CRA website, Dated June 27th, 2014.

“The Honourable Kerry-Lynne D. Findlay, P.C., Q.C., M.P., Minister of National Revenue, today reminded taxpayers affected by recent extreme weather conditions, as has been seen in recent days in Alberta and Ontario, that the taxpayer relief provisions of the Canada Revenue Agency (CRA) are available to them if they are unable to meet their tax obligations.”

Corporations who are unable to file their T2 returns by the filing deadline of June 30, 2014, due to flooding or other circumstances beyond their control can apply to have interest and/or penalties waived or cancelled using Form RC4288, Request for Taxpayer Relief.

Business owners and self‑employed individuals who are unable to meet their filing and payment obligations may also be eligible for relief.  The CRA understands that natural disasters may cause great difficulties for affected taxpayers whose primary concerns during this time are their families, homes, and communities.

The taxpayer relief provisions provide a balanced approach to assist taxpayers in resolving tax issues that arise due to circumstances beyond their control.   Under these provisions, taxpayers can apply to the CRA to have interest and/or penalties waived or cancelled in situations where they are unable to file a tax return and/or make payments on time because of a natural disaster, such as tornadoes, floods, landslides, hurricanes, or forest fires, or as a result of other extraordinary circumstances.

The CRA will consider these requests on a case-by-case basis and during the time it takes for the CRA to review the application, it is likely that there will be notices sent to the taxpayer / organizations which have a penalty / interest balance.  It is always recommended where possible to pay these amounts owing as soon as possible as doing so stops the interest from continuing to accumulate on the balance.

Paying off the penalty and interest balance does NOT impact the decision made by the Taxpayer Relief group.

Also keep in mind that it can take the CRA upwards of 9 months to complete a review under the Taxpayer Relief program and that full relief of penalties and / or interest are not guaranteed.

If the initial request is denied, the CRA will send a letter indicating why, and what information is missing.  Taxpayers have another opportunity to apply for relief before considering whether a 3rd review – judicial review – is required.

 

For all your tax needs, contact inTAXicating at info@intaxicating.ca.

CRA Press Release: London Restaurateur Fined $43,070 for Tax Evasion

I cannot stress enough the importance of opening mail from the government, all governments, especially the Canada Revenue Agency (CRA).  Of more importance, if the CRA is looking for information, or tax returns, or if the notices are getting progressively more threatening, it’s a very good sign that you may need to speak to a professional to determine how to best proceed.

The CRA regularly issues press releases regarding tax evasion, and they have a link on their website related to convictions, here; http://www.cra.gc.ca/convictions.

The Canada Revenue Agency (CRA) announced today that on July 2, 2014, Jamil Barakat and 1441126 Ontario Inc. both of London, Ontario, were sentenced in the Ontario Court of Justice in London to a fine of $43,070.  On November 8, 2013, Barakat and 1441126 Ontario Inc. pleaded guilty, in the same court, to two counts of income tax evasion each.  1441126 Ontario Inc. also pleaded guilty to three counts of evading GST/HST. The fine represents 100% of the total taxes evaded. The fine has since been paid in full.

A CRA investigation revealed that 1441126 Ontario Inc., operating as Barakat Restaurant, failed to report $259,624 in taxable income on its 2007 and 2008 returns, which resulted in the evasion of $27,054 in federal corporate taxes. The corporation also understated its net GST payable for three quarterly periods in 2007, thereby evading an additional $2,976 in GST. The investigation also revealed that Jamil Barakat, in his role as director of 1441126 Ontario Inc., failed to report on his 2007 and 2008 personal tax returns $51,678 he appropriated from the restaurant.  By doing so Barakat evaded an additional $13,040 in federal income taxes.

The preceding information was obtained from the court records.

When individuals are convicted of income tax and GST/HST evasion, they must still repay the full amount of taxes owing, plus interest and any civil penalties that may be assessed by the CRA.  In addition, the court may fine them up to 200% of the taxes evaded and impose a jail term of up to five years.

If you have ever made a tax mistake or omission, the CRA is offering you a second chance to make things right through its Voluntary Disclosures Program (VDP). If you make a valid disclosure before you become aware that the CRA is taking action against you, you may only have to pay the taxes owing plus interest.  More information on the VDP can be found on the CRA’s website at http://www.cra.gc.ca/voluntarydisclosures.

For a free 15-minute consultation, call or email inTAXicating Tax Services at info@intaxicatingtaxservices@gmail.com.  We can be reached at 416.833.1581.

 

The Elevator Pitch! How Important Is It?

The elevator pitch, otherwise known as your ability to tell someone what you do for a living in 15-20 seconds without leaving out any critical details.

Wikipedia calls it this; “An elevator pitchelevator speech, or elevator statement is a short summary used to quickly and simply define a person, profession, product, service, organization or event and its value proposition.”

The name “elevator pitch” reflects the idea that it should be possible to deliver the summary in the time span of an elevator ride of around 30 seconds.

The term originates from a scenario of an accidental meeting with someone important in the elevator where after the brief pitch, the other party is interested in learning more. thus continuing the conversation after the elevator ride or through en exchange of a business card or smart phone details.

As a tax consultant, I thought I had the perfect elevator pitch that went something like this; “I help people who have problems with the Canada Revenue Agency (CRA).  I worked in the CRA for over 10-years – pretty much out of university – and worked my way up through the collections division until leaving for the private sector.”

I found it to be too long, and open for interruption so much that I would add details, such as that I completed 3-years of my accounting (CGA) designation and a 3-year MBA before leaving, or that I spent a significant part of my time at the CRA training the staff, handling the most complex accounts in the office and helping improve processes.

Then it became an elevator pitch for a 65-story building ride… To the top and all the way back down to the bottom.

Then I found an article in Forbes magazine which provided 6 alternatives to the elevator pitch so I tried them out to see if they worked better for me.  The list is below:

1. The One-word pitch – for me, it is “TAX”.  Then I watch their eyes gloss over.

2. The Question pitch – “Have you ever had (or have clients who had) problems with the Canada Revenue Agency (or Revenu Quebec, or the IRS, or WSIB, or the CRTC?)

3. The Rhyming pitch – Could not even try this.

4. The Subject line pitch – like sending an email to someone – mine would read something like “Former CRA collections officer helping people with CRA problems.”

5. The Story form pitch – I have thousands of stories… Literally.  I usually break into one of these after my introduction.

6. The Twitter or 140 character or less pitch #WhatIAmAllAbout.   I like this because it’s like using Twitter except that you really cannot tell someone that you “hashtag” Help People.  But it does give you the opportunity to state your case in a brief number of words.

So practice your pitch – no matter which method you choose – and practice them out on people to see if it gets across the message you want it to.  If not, maybe you would benefit from a different pitch or by adding or removing information to your existing pitch.

As for me… “I’m a former CRA officer who knows the CRA collections process, policy and procedures better than they do.  I help people with a variety of tax issues including but not limited to negotiation, payment arrangements, liens, RTP’s assessments, and getting them current and out of debt.  If there is a CRA issue, I have already seen it, and I know how to fix the problem.”

#x-taxer

Others make promises.  I fix problems.

If the conversation continues I explain my services are for individuals, businesses, and professional organizations who cannot proceed further with a client due to their tax issues – ie/ getting a bank loan, renewing a mortgage, confirmation of actual amounts owing before filing for bankruptcy, wage garnishments on employees, or cleaning up past tax issues for separation agreements or divorce.

#inTAXicating

Free consultation.

info@intaxicating.ca

416.833.1581