BC Tracking Condo Purchasers

Effective September 18th, 2018, the Ministry of Finance in the province of British Columbia (Canada) has introduced a new version of their property transfer tax return which asks for additional information which could be used by the Ministry of Finance, or the Canada Revenue Agency (CRA) to track condo flippers, or those individuals or businesses who purchase condos and rent them out.

The property tax transfer (PTT) return requires that individuals with a “significant interest” in a corporation or trust that acquires property must be identified, with some exceptions.

If, the purchase is made through a corporation or trust, this new legislation will require property developers to collect a database of pre-sale buyers and remit that list to the BC Government.

The change in the regulations have been implemented to reduce the opportunity for tax evasion and / or money laundering, which are believed to have contributed to the skyrocketing house prices in the province.

The New PTT Return will likely require information on all beneficiaries of certain trusts and corporate interest holders including their name, contact information, tax identifiers (SIN, ITN, BN), and citizenship.

The draft legislation titled the Land Owner Transparency Act is still in the consulting stage and the BC government has stated that the results of the consultations do not affect the new PTT return which came into effect September 17, 2018.

These changes pose real threats to the highly speculative pre-sale condo market in BC, and if successful, will likely be implemented in other large urban centres, such as Toronto, Montreal and then across the country.

In recent years, pre-sale buyers have made out like bandits, securing pre-sale contracts with no proof of funds, without having financing in place, or the ability to secure financing and in many cases these buyers have absolutely no intention of closing upon completion of the condo, instead, flipping the contract to other buyers at a profit, without paying the tax on the gain.

The CRA frowns on buyers who flip condo contracts once a profit has been realized and have cracked down on this process, albeit, not enough, and not just on those who have been taking part.  The CRA has also assessed buyers who have legitimately sold their units and who have met all of the requirements for ownership, however it’s much easier for the CRA to determine everyone is guilty than to have to pull the legitimate from the pile of illegitimate.

These contract flippers have been successful because there is no title registration through BC land titles which means the best that the CRA can do is take the developer to court in order to obtain the list of pre-sale buyers who have flipped their contract, or go to court and seek information through a Requirement for Information, but the CRA must have evidence to support their claim that buyers have flipped condo contracts without declaring the capital gain.

All in all, this is just another area where the CRA is tightening up regulations thanks to the BC Ministry of Finance, and we will soon see this process come to an end.  In the meantime, there will be a whole bunch of taxpayers who will be assessed by the CRA, and there will be a 50% Gross Negligence penalty attached to that assessment.

Taxpayers who have been assessed by the CRA and who have done nothing wrong, should contact inTAXicating Tax Services at info@intaxicating.ca, and discuss our strategy for assisting taxpayers.

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Belgian Tax Authorities Going After Crypto-Currency Investors

It is no surprise, that the Tax authorities in Belgium, the Special Tax Inspectorate (STI) have begun to monitor investments involving Crypto-Currencies.

The STI have started investigating cases where citizens of Belgium have traded in digital currencies on foreign exchanges, and similar to many other countries around the world, the Belgium tax authorities are checking to see if these investors have been claiming their dealings and paying the 33% Capital Gains tax.

This gain would be reported in the “other income” section on a Belgian tax return.

Belgian tax authorities have found the taxation of Crypto-Currency challenging as every other county has, because the management of these assets takes place on foreign trading platforms and there is no jurisdiction around virtual space… Yet.

Likely, the Belgian tax authorities will follow suit of other countries and tax the gains as a commodity based on the location and / or residence of the trader.

The incentive to report will come in the way of significant penalties and interest when the STI finds the taxpayer before the taxpayer reports.

STI opened the investigations after receiving information from a foreign tax authority about the Crypto-Currency dealings of several Belgian citizens.

Information sharing among all tax authorities increased effective January 1, 2018 with the signing of The Multilateral Competent Authority Agreement (MCAA).

The MCAA is a multilateral framework agreement which provides a standardised and efficient mechanism to facilitate the automatic exchange of information in accordance with the Standard for Automatic Exchange of Financial Information in Tax Matters (Standard).

This new framework avoids the need for several bilateral agreements to be concluded, which means each participating country has ultimate control over exactly which exchange relationships it enters into and that each countries’ standards on confidentiality and data protection always apply.

In case you are ready to deem this framework illegal, the legal basis for MCAA rests in Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention) which provides for the automatic exchange of information between Parties to the Convention, where two Parties subsequently agree to do so.

So as it becomes easier to get information on local citizens from international tax regimes, you can expect government tax authorities, like the STI to continue to approach trading platforms, and other governments  directly to obtain more data about Belgian citizens and their transactions related to digital currencies.

In December 2017, the Belgian tax agency, STI, agreed that a 33% withholding amount would be applied to profits and incomes from Belgian citizens who were involved in speculative trading of Bitcoin and other Crypto-Currency.

The tax is imposed on private individuals who trade in digital currencies with the intention of earning profits from the price fluctuations.

When the crypto trading is conducted by a business, or by an individual as a business, the tax rate might be as high as 50%.

Governments believe that Crypto-Currency companies should be obliged to cooperate with tax authorities, or as in the case of the US, where the IRS sent legal requirements to a firm, who were then required to do so by law.

In Belgium, Crypto-Currency are neither legal, nor illegal, however, the government have not announced a comprehensive policy yet, and like other EU Countries, appear to be waiting for a common European policy.

If you have been dabbling in Crypro-Currency, and not reported it on your Canadian Tax return, you should reach out to us at inTAXicating Tax Services, and we can help you amend your return, report the gaims, claim the losses and get filed before the CRA finds you!

info@intaxicating.ca

 

CRA Tax Auditors Target Condo Sellers in Hunt for Flippers – Nothing New!

We, at inTAXicating, came across an article this morning in the Toronto Star newspaper entitled; “Tax Auditors Target Condo Sellers in Hunt for Flippers“, and immediately read through looking for something new or developing in the Canada Revenue Agency (CRA) battle to tax those who should be taxed on taxable transactions.

But there was nothing new here.  While the article does, however, get a very important message across in a somewhat alarming and shocking manner probably meant to draw the attention of those who have no interest in taxation – the truth speaks for itself.

Capital Gains tax or proof, please.
Capital Gains tax or proof, please.

CRA auditors have always been looking at condo sellers and house sellers to determine who are flipping these properties for profit,  If they are, then they have to pay a capital gains tax on the profit they make during the flip.  If they hide it and are found out, then they have to pay the capital gains tax on the flip, plus they get required to pay a penalty plus interest.

For those of you who are unaware of what the article said, it essentially outlined that there are citizens who were not aware that if they buy a property and sell it within 6 months, or if they buy it but never move into it and sell it. they are liable to be taxed by the CRA, in what a Toronto tax lawyer referred to as “abusive audit practices” by the CRA.

The article seems to focus on the fact that the CRA audit group are reviewing condo sales in the two hottest markets – Toronto and Vancouver – for instances where a flip was evident and in doing so are trying to find the truth.  To do that, the CRA follows their usual practices which means some people get phone calls, some get letters, some legal warning letters and some just get assessed.  In the Canadian tax system, the burden of proof is on the taxpayer, so in this case they would have to prove (or explain) why they should not be subjected to a capital gains tax when all evidence points to it being owed.

At issue here is that there are some people who were forced to sell within that 6-month window due to circumstances beyond their control and they have been hit with a massive tax bill – or in the most recent case I successfully defended, a letter from the CRA real estate audit group indicating that the CRA would assess unless other information was provided.

From the article, even the Toronto Real Estate Board (TREB) stated; “the rules are generally clear on the amount of time one has to occupy a unit (as a principal residence) to benefit from a capital gains exemption.”

So what is the problem?

According to this article, the law does not stipulate a specific amount of time so people have been receiving assessments “for at least 50 per cent of any gains made if they’ve sold before living in the property 18 months to two years.”  An assessment like that, I would certainly challenge!

The CRA, however, through their spokesman Sam Papadopoulos, said; “We’ve just been a little more aggressive in sending out questionnaires.”

In addition to keeping an eye on capital gains, the CRA also are seeing an increase in GST/HST housing rebates being claimed, so if a letter is sent your way regarding missing information, it is advisable to provide the information to the CRA, or seek professional help, such as the Tax professionals at Intaxicating Tax Services to make sure the CRA is comfortable with the information provided and that your interests are represented throughout the discussions.

While I would not agree that this is a “full frontal attack on everybody out there who has bought and sold a property”, I would recommend anyone who received a questionnaire or an assessment notice from the CRA but do not fall in the 6-month window, or who were required to sell for reasons beyond their control, to contact us, because we can help.

Recently, we helped out a former Live-in caregiver who came to Canada almost 20 years ago, and worked 2 jobs to buy her dream home.  She purchased a condo which was scheduled to be built in 15 months, and when her floor was ready, she moved in.  When tragedy struck her family back home, she was required to sell the condo and send home money to help her family.

To add insult to injury, the CRA sent her a bill for $45,000.

She had no idea such a tax existed and was an emotional wreck at the time we met.

After 2 weeks of discussions and negotiations with the CRA auditor (some of which surrounded our clients actual ability to pay for a condo based on her income of $350/yr – the auditor was reading the educational expenses, not the income field) our client received a letter from the CRA stating that the CRA would not be raising the assessment.

Problem solved.

So no matter what tips or tricks, or techniques the CRA utilizes, the approach is consistent;  If you have the facts, and you can support them, then do so.  If the CRA disputes your facts, then you can file an objection and you can present your case to an appeals officer.

If you have questions, or don’t know something, then ask.

Contact us today for a free consultation, or to help you resolve your tax problem(s) once and for all.

inTAXicating Tax Services is a full-service boutique tax firm run by actual former CRA staff who over a combined 22 years have learned, applied and taught other CRA staff about the ins and outs of the CRA’s collection and enforcement divisions.

Who better to trust that the people who trained the CRA on how to do their jobs!

Our website is http://www.intaxicating.ca.  Our blog can be found on our website, and here, at http://www.intaxicating.wordpress.com

We can be found on Facebook here, and on Twitter, here.

Our email is info@intaxicating.ca

 

Some basics of Canadian Investing; Mutual Funds, Eligible Dividends and Deferred Tax

Here is a brief introduction to the absolute basics of investing Canada. If you know this, you really just know the basics.  If you do not know much about Mutual funds, Eligible dividends, income trusts, and deferring taxes owing then trust me, this is the tip of the iceberg.  The Investment Fund Institute of Canada (IFIC) has a mutual fund course as probably does the Canadian Securities Institute (CSI).  Both are sought after for entry into the financial sector.

At the very basic, here are the 2 main types of tax-sheltered investments you probably have heard about – RRSP or RRIF.  In both cases, you put money away into these investments which are NOT taxed at year-end.  you pay taxes when you withdraw or remove the funds after certain milestones, such as age 65. 

Investments that generate capital gains or Canadian source dividends are taxed more favourable than interest income because interest income earned from investments such as T-Bills, bonds, and GIC’s are generally taxed at the highest marginal tax rate.
• Dividends earned from a Canadian Corporation are taxed at a lower rate than interest income.  This is because dividends are eligible for a dividend tax credit, which recognizes that the corporation has already paid tax on the income that is being distributed to shareholders.
o This only applies to dividends from a Canadian corporation.
o Dividends paid from a foreign corporation are not eligible for the dividend tax credit.

As of 2006 there are now two types of dividends, eligible and non-eligible dividends, and they are treated differently from a tax perspective.
• Eligible dividends include those received from a public Canadian corporation and certain private, resident corporations that must pay Canadian tax at the general corporation rate. As a result, they have a federal tax credit of 18.97% and are grossed up by 145%.
• Non-eligible dividends include those received from Canadian-controlled private corporations not subject to the general corporate tax rate.  They have federal tax credit of 13.33% and are grossed up by 125%.

This change was introduced by the government of Canada in order to present a more balanced tax treatment between corporations and income trusts as Canadians were investing more and more in income trusts and less and less in corporations and why wouldn’t they, since prior to 2006 income trusts were not taxed on any income allocated to unit holders, whereas dividends paid by a Canadian corporation are paid out of after tax earnings. 

To combat this, many corporations began to restructure their operations to become income trusts.  Something had to be done.

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes.  These deductions reduce the operating entity’s tax to nil.   

The trust “flows” all of its income received from the operating entity out to unitholders.  The distributions paid or payable to unitholders reduces a trust’s taxable income, so the net result is that a trust would also pay little to no income tax, which is never a good thing in the government’s eyes.

So who then gets hit with the tax bill??  The net effect is that the interest, royalty or lease payments are taxed at the unitholder level;
1. A flow-through entity whose income is redirected to unitholders, the trust structure avoids any possible double taxation that comes from combining corporate (T2) income taxation with shareholders’ dividend taxation
2. Where there is no double taxation, there can be the advantage of deferring the payment of tax.  When the distributions are received by a non-taxed entity, like a pension fund, all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
3. Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by tax treaties, that had not considered the forfeiture of tax at the corporate level.
4. The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates.  It’s easier to distribute all the funds out and show nothing being retained that it is to implement strategies to reduce corporate tax owing which is the path most often taken. 

Where can a holder find their dividends reports?  Dividends are usually shown on the following CRA slips:
• T5, Statement of Investment Income
• T4PS, Statement of Employees Profit Sharing Plan Allocations and Payments
• T3, Statement of Trust Income Allocations and Designations
• T5013, Statement of Partnership Income
• T5013A, Statement of Partnership Income for Tax Shelters and Renounced Resource Expenses

When completing a Canadian tax return, where should a holder enter their dividend information?

Enter on Line 180 the taxable amount of dividends (other than eligible dividends) as follows:
• box 11 on T5 slips
• box 25 on T4PS slips
• box 32 on T3 slips
• box 51-1 on your T5013 or T5013A slips.

Enter on Line 120 the taxable amount of all dividends from taxable Canadian corporations, as follows:
• boxes 11 and 25 on T5 slips
• boxes 25 and 31 on T4PS slips
• boxes 32 and 50 on T3 slips
• boxes 51-1 and 52-1 on your T5013 or T5013A slips.

What do I do if I did not receive an information slips?

Ignore it and the CRA will let me off the hook?  No chance.  If you did not receive an information slip, you must calculate the taxable amount of other than eligible dividends by multiplying the actual amount of dividends (other than eligible) you received by 125% and reporting the result on line 180.  You must also calculate the taxable amount of eligible dividends by multiplying the actual amount of eligible dividends you received by 141%. Report the combined total of eligible and other than eligible dividends on line 120.

So what exactly is a capital gain?

Capital gains occur when you sell an asset for more than you paid for it. This gain is offset by any losses and can be further reduced by any expenses that are incurred by the purchase or sale of the asset – resulting in net capital gain.
Taxation of capital gains: 50% of a net gain is taxable at the appropriate federal and provincial rates.

My accountant advised me I need more “Tax deferral”.  What does she mean?   She means contributing the maximum amount to your RRSP which provides an immediate tax deduction and tax sheltered growth as long as the investment(s) remain in the plan.

Other less commonly used strategies include:
• Universal Life Insurance is a policy that combines life insurance coverage with a tax deferred investment component. Premiums paid are first used to ensure life coverage and the balance accumulates in an investment account where it grows tax deferred.
• Registered Educations Savings Plan (RESP) is a plan where contributions are used to fund a child or grandchild’s post secondary education costs.
o initial contributions are not tax-deductible
o any income earned within the plan is only taxable in the hands of the student at the time of withdrawal.

More is coming in the next few days, weeks and months…

Canadian Taxation Back to Basics: What is a T3 return?

Often times with all the complexities that come with International taxation we sometimes lose sight of the basic questions that come our way in the taxation industry.

For example, what is a T3?T3

A T3 slip is a Canadian tax form that reports income from trusts for a tax year.

An individual taxpayer will include the amounts reported on the T3 on his personal tax return.

A corporation will include it as part of its investment income.

A trust (or trustee / intermediary / transfer agent, etc.) is required to provide the T3 slip to investors by the last day of February in the following year.

So what again is a T3 slip?

A T3 slip details the various types of income distributed from the trust for a taxation year.

Why would an individual get a T3 slip?

The most common reason is for distributions or dividend reinvestments in mutual funds or segregated funds.  However, if these funds are held in tax-deferred retirement (RRSP) or education accounts (RESP), no T3 will be generated.  The reason no slips is issued in those cases is because the income in those types of funds is reportable for tax purposes once they are withdrawn from the fund.

The trust is responsible for filing copies of all T3 slips along with a T3 Return to Canada Revenue Agency (CRA) by the end of February in the following year.

What kinds of income can trusts distribute?

Trusts can distribute interest, royalties, business income, pension income and most commonly dividends and capital gains.

Each is recorded on a separate line on the T3 slip.  Each type of income is treated differently for tax purposes and appears in a separate location on the taxpayer’s personal income tax return.  Capital gains may be offset by other capital losses in the year or from prior years.

Filing a T3

A T3 is filed as part of a taxpayer’s T1 personal tax return.

When is a T3 required?

Regardless of the fiscal year-end of the trust, the T3 is generated and reported in the year the income is received.

Mutual Funds Tax Considerations – IRS

So what exactly is a capital gain?

There can be two sources of capital gains for a mutual fund shareholder: 1) Gains from Sales: If you sell or exchange your mutual fund shares, you must pay tax on any gains arising from the sale, just as you would from a sale of individual securities. Shares that are held one year or less are considered short-term and are taxable at the shareholder’s income tax rate. Shares held for more than 12 months are considered long-term and taxable at a reduced rate.
Tax Reporting: Redemptions of mutual fund shares are reported to you on Form 1099-B. Remember that redemptions from municipal bond funds are taxable transactions.
Gains from Distributions – Capital gains realized by the fund on sales of its portfolio securities are “passed through” to shareholders as distributions. These amounts are reported to you by the fund on Form 1099-DIV. Short-term capital gains are included in Box 1a of Form 1099-DIV. Long-term capital gains are identified on Form 1099-DIV, Box 2a.

Now for some Q&A.

Q: Why would I have to pay tax on a capital gain distribution when my fund’s share price has decreased?
A: Capital gain distributions occur independently of price fluctuations in a fund. A mutual fund is required to distribute annual income and/or capital gains to its shareholders. At the same time, changes in financial markets can cause the price of fund shares to go up or down.

Q: Do I pay taxes on reinvested dividends like a DRIP program?
A: Yes, DRIP’s are taxed the same as cash distributions.

Q: How do I report international fund tax information on my tax return?
A: You may be entitled to take either a foreign tax credit or an itemized deduction for the amount of the foreign taxes paid, as reported in IRS Form 1099-DIV, box 6. It is usually more advantageous for you to take the foreign tax credit. To file for the allowable credit, you may be required to complete IRS Form 1116 and attach it to your IRS Form 1040. (Please refer to IRS Form 1040 instructions for exceptions from filing IRS Form 1116 to claim a tax credit.) If you are required to file Form 1116, please refer to the Source of Foreign Gross Income and Taxes Paid table

Use the Foreign Gross Income and Taxes Paid table only if you are required to complete IRS Form 1116 to claim a credit for foreign taxes paid. To compute the per-country gross income for Form 1116, apply the gross income percentage from the table to the amount in box 1a of your IRS Form 1099-DIV. To compute the per-country tax paid for Form 1116, apply the foreign taxes paid percentage to the amount shown in box 6 of your IRS Form 1099-DIV.

Q: I’ve redeemed shares from my account. What do I need to know about calculating my cost basis?
A: First, chose one of the four methods, keep these key points in mind:

You must state on your tax return the cost basis method you have selected.
When no method is stated, the IRS presumes you are using the First-In, First-Out (FIFO) method.
No matter which cost basis method you choose, you may not change to another method without permission from the IRS.
Reinvested dividends or capital gain distributions add to the cost basis of your shares. These dividends purchase shares. Your confirmation statements show you the number of shares purchased and the price of those shares.
Return of capital gain distributions reduces the cost basis of your shares. If the fund distributes a return of capital, it will report this amount to you in Box 3 of Form 1099-DIV at the end of the year.
The average cost methods are available only for mutual funds. They are not acceptable for sales of other investments, such as individual stocks and bonds. Different methods may be used for different funds. However, you must use the same method for the life of the fund.
Transfers of shares due to gifts or inheritance may require different basis calculations. In these situations, please consult your tax advisor before using this cost basis statement.
If you sell shares at a loss and purchased shares in the same fund within 30 days before or after the sale, the IRS considers it a “wash sale” transaction and the loss must be deferred for tax purposes. The rules for wash sales can be very complex. It is recommended that you consult a tax advisor if you suspect you are in this situation.