More on the T5008

The purpose of the T5008 information slip is to report the amount paid or credited to an investor for securities disposed of or redeemed during the year.

Firms that issue T5008 slips generally report only the “proceeds of disposition” (box 21) and not the “cost or book value” (box 20) on the slips since the cost is often either not known or tracked by many brokerage firms. Therefore the onus is on the investor — perhaps with your assistance — to track their own tax cost or adjusted cost base of the securities held, in order to accurately report the capital gain or loss on his or her tax return.

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IRS – Treasury Regulation §301.6212-2: Definition of Last Known Address

I came across this IRS definition of “Last Known Address” which is very important as it outlines how the IRS views your address in their systems and the impact on you if you move and fail to notify the IRS, or if you send back your government mail marked “moved” yet you still live at that address.

I picked out the important parts and the whole document is available if you follow the URL as well.

The IRS and the CRA both view the last known address the same way.  If you do not update them with a new address when you move, then the last known address on file is the notice where they will send all government notices including monthly statements, refund cheques and collection / information notices. 

It is absolutely in your best interest to keep your address up to date and notify the government if you move.  The IRS takes it one step further than the CRA in that the IRS also checks with the US Postal Service to see if you have updated your address, while the CRA follows up returned mail in collection cases with a visit from your local field office to see if you have moved and talk to your neighbours and new owner / tenant for any forwarding information.

If you cannot be located after that, the CRA usually pulls a property search to see if you sold your property and a credit search to see if you moved (you always let your bank know!).  The enquiry on your credit report from the CRA should be enough to make you want to update them all by itself.

Here is the IRS regulation;

IRS – Treasury Regulation §301.6212-2: Definition of Last Known Address

This revenue procedure explains how the Internal Revenue Service is informed of a change of address. When so informed, the IRS will update the taxpayer’s address of record to the new address. The IRS uses the taxpayer’s address of record for the various documents that are required to be sent to a taxpayer’s “last known address” under the Internal Revenue Code and for refunds of overpayments of tax. Rev. Proc. 2001-18, 2001-1 C.B. 708, is superseded by this Revenue Procedure.

The Code sections listed in section 3.01 of this revenue procedure use the phrase “last known address.”

The meaning of the phrase “last known address” is important, and taxpayers should be aware of their need to update their address with the IRS in order to receive refunds of tax as well as the notices and documents listed in section 3.01 of this revenue procedure.  When a notice or document is sent to a taxpayer’s “last known address,” it is legally effective even if the taxpayer never receives it.

A taxpayer’s “last known address” is defined in Treas. Reg. § 301.6212-2(a) as the address on the taxpayer’s most recently filed and properly processed return, unless the IRS has been given clear and concise notification of a different address.

A taxpayer should take appropriate steps to ensure that his or her address is correct in accordance with the addressing standards of the United States Postal Service

(USPS) and, when providing the IRS with an address, should include all required addressing information, including apartment/suite number, street name and number, city, state, and zip code.

The IRS generally will use the address on the most recently filed and properly processed return as the address of record for all the notices and documents set forth in section 3.01 above. The IRS will, however, automatically update a taxpayer’s address of record based on a new address that the taxpayer provides the USPS that is retained in USPS’s National Change of Address database (NCOA database). See Treas. Reg. § 301.6212-2(b)(2). If a taxpayer wishes to change the address of record, the taxpayer must give clear and concise notification as provided by this revenue procedure. The terms “return,” “properly processed,” “address on return,” and “clear and concise notification” are defined in section 5 below.

If a taxpayer files a return with new address information, the proper processing of the return will update the taxpayer’s address of record. With the exception of the returns listed in section 4.04, a taxpayer’s address of record will be updated for the name and taxpayer identification number (the employer identification number, individual taxpayer identification number, or social security number) under which the return is filed.

If a taxpayer no longer wishes the address of record to be the one shown on the most recently filed return (for example, because the taxpayer moved after the return was filed), clear and concise notification of a change of address as defined in section

5.04 below should be provided to the Service.

If, after a joint return is filed, either taxpayer establishes a separate residence, each taxpayer should provide clear and concise notification of a current address to the Service as provided in section 4.02 above.

The IRS maintains address records for gift, estate, and generationskipping transfer tax returns (Forms 706, 706-A, 706-NA, 709, and 709-A) separate from the address records for individual income tax returns (Forms 1040, 1040-A, 1040-EZ, 1040 (NR), 1040 (PR), 1040-SS, and 1040-X). Thus, an individual taxpayer’s notification of a change of address should identify whether any gift, estate, or generation-skipping transfer tax returns are affected by the notification.

A taxpayer should notify the USPS facility serving the taxpayer’s old address of the taxpayer’s new address so that mail from the Service can be forwarded to the new address. The Service will also automatically update a taxpayer’s address of record based on a new address that the taxpayer provides to the USPS and that the USPS retains in its National Change of Address database. See Treas. Reg. § 301.6212-2(b)(2).  Taxpayers are nonetheless advised to notify the Service directly of a change of address to ensure a timely and accurate update of the Service’s address of record for the taxpayer.

If the taxpayer’s last known address is altered due to address reorganization or standardization measures taken by the USPS or a legislative body, the Service will treat the altered address as the taxpayer’s new address of record. Examples of an address reorganization or standardization measures include the redesignation of rural route addresses as street addresses or changes to zip code boundaries. Any clear and concise notification of a different address provided by the taxpayer to the Service subsequent to an address standardization or reorganization shall control over any address changes made pursuant to this section 4.06.

This revenue procedure is effective June 1, 2010.

http://www.irs.gov/pub/irs-drop/rp-10-16.pdf

Tax Treaty signed between Canada and the Republic of Namibia

The Department of Finance has announced that a tax treaty between Canada and the Republic of Namibia for the avoidance of double taxation and the prevention of fiscal evasion was signed on March 25, 2010, in Windhoek.

The treaty limits the rate of withholding tax to 5% for dividends between affiliated companies and 15% for dividends in all other cases, and 10% for interest and royalties.

The treaty will enter into force once both countries have taken the necessary ratification measures and have notified each other of such ratification.

The full text of the treaty can be found on the Department of finance website.

http://www.fin.gc.ca/treaties-conventions/namibia-eng.asp

This treaty is NOT in full force yet.

Mailing to Supressed Holders – CRA and MRQ.

Have you ever wondered if you are required by law to mail out a tax slip to an individual / entity even though in doing so you know it will be returned by the post office marked as “undeliverable”.

These Q&A’s below may help you get a cleared picture of your legal requirements;

Q1: Is there a requirement to mail tax forms to suppressed holders?

A1: Yes. There is no statutory exception to this requirement. The forms specifically mentioned included; the T5, T5008, T4, T4PS, T4RSP, T4RIF, RSPR, T3, NR4, T5013 and T101.

Q2: Will the government excuse you from mailing to suppressed holders if the issuer/client advises you not to mail them / their clients?

A2: No, the obligation to mail is yours, because you make the payment (e.g. dividend or interest). In fact, if there were a penalty charged for failing to provide a tax slip, it would be on you, not the entity or person advising you.

The Income Tax Act does not specifically say “you must mail to suppressed holders”.  Rather, it states that if you make a payment, you have to send out a tax form.   The Income Tax Act does not make a distinction between suppressed holders and other holders. (Note, even though we do not actually “make a payment” – in that we do not send out a cheque to a suppressed holder – the analysis is the same.)

Q3: Is the requirement to mail absolute regardless of the dollar amount, or is there a dollar amount threshold? For example, don’t have to mail unless the aggregate amount paid to a holder is greater than $50.00.

A3: There is a $50 threshold for T5 reporting (that is, the CRA does not require that a T5 be prepared if the amount of the payment was less than $50).  For the other tax forms, there is no threshold.

Q4: What about prior tax years?  Do we have to mail these prior years’ tax forms if requested?

A4: There is nothing in the Income Tax Act which would alleviate the responsibility to provide prior year forms and failing to provide one may result in a complaint and subsequent audit.

Q5: What is the situation with respect to suppressed holders under the Quebec income tax regime, the MRQ?

A5: Similar to the Federal Income Tax Act, under the Quebec income tax regime (a) there is a requirement to mail the tax forms and (b) you are not excused from mailing if the issuer/client advises you not to mail.

Bottom line… Mail!

T5008. Box 20. Adjusted Cost Base.

If you have disposed of securities you will receive either a T5008 slip, a Statement of Securities Transactions, or a customized statement from your dealer, broker or fund company detailing a list of all your dispositions in that year.

The purpose of the T5008 information slip is to report the amount paid or credited to you (an investor) for securities disposed of or redeemed during the year.

Firms that issue T5008 slips generally report only the “proceeds of disposition” (box 21) and not the “cost or book value” (box 20) on the slips since the cost is often either not known or tracked by many brokerage firms. Therefore the onus is on the investor — perhaps with your assistance — to track their own tax cost or adjusted cost base of the securities held, in order to accurately report the capital gain or loss on his or her tax return.

You should also report all non-registered securities dispositions in that year on Schedule 3 of your personal tax return, even if you don’t get a formal T5008 slip and instead just get a customized capital gains summary from your dealer or fund company.

I recall a case from CRA days which relates to the 5008. Rajah v The Queen, 2005 TCC 637. In this case, it is made very clear that the CRA has the ability, where warranted, to use the information obtained from T5008 filings to audit, reassess and even charge penalties to non-compliant taxpayers.

A little about the case. During 1995, 1996 and 1997, Sahadevan E. Rajah bought and sold “a considerable number” of securities through various securities dealers. Rajah failed to disclose any of his securities dealings on his tax returns for those years, despite certifying in writing that the returns were “correct and complete.”

The CRA was able to obtain information from the T5008 filings that initially reported total proceeds of disposition as $66,766 in 1995, $1,991,811 in 1996 and $228,682 in 1997 (the 1996 amount was later reduced by $432,665 to eliminate a duplication). The CRA then wrote to Rajah asking him to provide supporting monthly brokerage statements, trading slips and his calculations of the ACB for each disposition.

Having received no response, the CRA advised Rajah that they would reassess his filed returns and include the full amount of proceeds in his income for each respective year, without having any evidence as to the appropriate ACB to be used.

The judge was somewhat critical of CRA’s approach, saying that “it must have been obvious… that Rajah] had not obtained the securities sold at no cost. Even a novice assessor must know that… the Income Tax] Act provides [that] ‘a taxpayer’s income for a taxation year… is the taxpayer’s profit… for the year.’ Yet, Revenue made no effort to determine cost or allow for it except by way of demand to Rajah] for documented proof. If this was an attempt to mete out an extra-legal penalty it can hardly be justified.”

After the CRA reassessed Rajah, he filed a notice of objection with the appeals division and submitted to the CRA various brokerage slips establishing the ACB of some, but not all, of the securities that were disposed of in the years in question. The CRA reassessed those years for which they had proof of ACB.

The judge concluded that the onus was on Rajah to establish “on the balance of probabilities that he incurred costs in excess of those allowed” by the CRA’s reassessment. Since Rajah did not provide any additional ACB evidence, the CRA’s reassessments were upheld.

The CRA also imposed gross negligence penalties. Under the Income Tax Act, a gross negligence penalty can be imposed on a taxpayer who has either “knowingly” or “under circumstances amounting to gross negligence” made a false statement or omission in a return.

Given that Rajah’s tax returns failed to disclose any income from the sale of securities, the Judge found that the “failure to refer to the transactions when made by a person with the [Rajah’s] education and experience in the business world can only have been made in circumstances amounting to gross negligence.”

The bottom line… Report all taxable dispositions on your tax return each year or risk being subject to gross negligence penalties on top of the tax and arrears interest that will be owing and ensure you keep meticulous records of your ACB so that you can prove it to the CRA if they ever come knocking.

Five Facts You Need to Know about Suspicious E-mails. IRS and CRA.

This press release came out from the IRS…

There are many e-mail scams circulating that fraudulently use the Internal Revenue Service name or logo as a lure. The goal of the scam – known as phishing – is to trick you into revealing personal and financial information. The scammers can then use your personal information – such as your Social Security number, bank account or credit card numbers – to commit identity theft and steal your money.

Here are five things the IRS wants you to know about phishing scams.

1.  The IRS does not send unsolicited e-mails about a person’s tax account or ask for detailed personal and financial information via e-mail.

2. The IRS never asks taxpayers for their PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

3. If you receive an e-mail from someone claiming to be the IRS or directing you to an IRS site,

  • Do not reply to the message.
  • Do not open any attachments. Attachments may contain malicious code that will infect your computer.
  • Do not click on any links. If you clicked on links in a suspicious e-mail or phishing Web site and entered confidential information, visit IRS.gov and enter the search term ‘identity theft’ for more information and resources to help.

4. You can help shut down these schemes and prevent others from being victimized. If you receive a suspicious e-mail that claims to come from the IRS, you can forward that e-mail to a special IRS mailbox, phishing@irs.gov. You can forward the message as received or provide the Internet header of the e-mail. The Internet header has additional information to help us locate the sender.

5. Remember, the official IRS Web site is http://www.irs.gov/. Do not be confused or misled by sites claiming to be the IRS but end in .com, .net, .org or other designations instead of .gov.

And here is how the CRA deals with phishing from my own personal experience working there. 

The CRA does not allow their staff to communicate via email unless you specifically ask for it because the emails are not encrypted and they worry that sensitive data can be hijacked.  As a result of this policy, no one from the CRA will ever ask you for any confidential data.  Even if you get asked for something from the CRA and you are worried it is a scan, you can ask for them to send you a legal document called a request, or requirement, for information which will contain the name of the collector and their manager or the director of the tax office on it for verification purposes. 

Information going or coming to the CRA will always end in @cra.gc.ca or cra-arc.gc.ca (french version).

Cancel or Authorize a Representative with the CRA

If you would like to add a representative to speak to the Canada Revenue Agency on your behalf to discuss your taxes or make changes, all you need to do is complete and sign this handy form, the T1013.

http://www.cra-arc.gc.ca/E/pbg/tf/t1013/README.html

If you follow this link to the CRA website you will find a fillable copy of the form – so you can enter information in the form and print it, NOT, save it – and a form that you can just print and fill in after.

Send this to the CRA and viola… Someone else can speak on your behalf.

If you need someone to get information for the CRA and you only want them to have access for a day, you can set that up through this form to.  Cool, eh?

Of course you will still get the odd Call Services Agent who will not allow you to speak and make you fax the form again, but all in all, this is one handy form to have.