Title: UWO Faculty Income Tax Presentation Presented by: Julia Klann Stephanie Sinclair Diane Wood
1UWO Faculty Income Tax PresentationPresented
byJulia KlannStephanie SinclairDiane Wood
2Overview
- Canadian Tax Considerations
- Residency Status For Individuals
- Income Inclusions Tax Deductions
- Tax Credits
- Consulting Income and Incorporation
- US Tax Considerations
- Filing Requirements Overview of US Tax System
- Income Inclusions Tax Deductions
- Foreign Reporting Requirements for US Citizens in
Canada - Expatriation Provisions
3Basis of Canadian Taxation
- Resident of Canada
- Taxed on world wide income from all sources
- Entitled to foreign tax credits for non-Canadian
source income - Files a T1 Individual Tax Return
- Non-Resident of Canada
- Taxed on Canadian source income
- Entitled to utilize provisions of Canada United
States Income Tax Convention (1980) to determine
Canadian income tax liability - Files a T1 NR Individual Tax Return
4Residency Status For Individuals
- Deemed full-time residency
- sojourned in Canada for 183 or more days
- Full-time residency
- based on continuing relationship with Canada
based on surrounding facts - Part-time residency
- severing or creating ties to Canada in departure
or arrival - Non-resident
- Not resident under 1 3 above
5Income Inclusions
- Employment Income
- Includes remuneration and taxable benefits
reported on T-4 - Property Income
- Includes interest, dividends, royalties and
rental income - Business Income
- Includes self employment income such as
consulting - Taxable Capital Gains
- Includes 50 of capital gains in excess of
capital losses - Other Sources
- Includes items such as pensions, RRSP and alimony
6Scholarships, Fellowships and Bursaries
- Taxable to the recipient net of available
exemption - amounts received from the employer of a parent
are included in the childs income - amount received by an employee from his/her
employer are taxable as employment income and not
eligible for the exemption
7Scholarships, Fellowships and Bursaries
- Exemption calculated as the aggregate of
- Scholarships, fellowships and bursaries received
for enrollment in - a program for which the education deduction can
be claimed or - an elementary or secondary school educational
program - The lesser of
- scholarships, fellowships, bursaries and prizes
received to be used in production of literary,
dramatic, musical or artistic work and - amounts expended to produce the work
- Lesser of
- 500 and
- amounts received in excess of exemption claimed
in i. and ii.
8Research Grants
- amount received in excess of allowable
expenses is taxable in year of receipt - an amount is not considered received if all the
following conditions are met - funds are available to individual who has an
academic appointment to university - funds are paid directly to university
- funds are to be used solely for costs of
research and - funds were not used or otherwise available for
personal benefit of individual - allowable expenses include cost of equipment,
fees, laboratory, charges, etc and exclude - personal living expenses
- unreasonable amounts and
- amounts otherwise deductible or paid/reimbursed
by University
9Motor Vehicle Expenses
- Deductible if
- ordinarily required to carry on duties away from
place of employment - required to pay expenses under employment
contract - not in receipt of non-taxable allowance for motor
vehicle expenses - Form T2200 signed by employer
- Amount of expenses not limited but amounts must
be reasonable and substantiated by receipts and
records
10Dues and Other Expenses of Performing Duties
- Amounts paid in year as
- Annual professional dues necessary to maintain
professional status - Office rent, salary of assistant or substitute if
required by employment contract - Cost of supplies consumed in duties if required
by employment contract - Annual union dues
- Require a Form T2200 signed by employer
11Registered Retirement Savings Plan Contributions
- Annual limit calculated as the lesser of
- 18 of prior years earned income, and
- Annual dollar limit (see below)
- reduced by pension adjustment for prior year
- Annual dollar limits
- 2013 2014
- Current 23,820 24,270
- Indexed based on increases in average wage levels
- Pension adjustment is value of pension earned in
prior year
12Moving Expenses
- Moving expenses incurred in respect of a move
originating outside Canada are not deductible - Moving expenses deductible in respect of a move
to a new business or employment in Canada if - Both the old residence and new residence are in
Canada and - Distance between new residence and new work is at
least 40 km closer than old residence - Deduction is limited to business or employment
income at new location and undeducted amounts may
be carried forward
13Moving Expenses
- Deductible moving expenses include
- Travel costs for family members
- Transportation and storage of household effects
- Cost of meals and accommodations for up to 15
days during the move - Lease cancellation costs in respect of old
residence - Selling costs of old residence
- Legal fees, transfer taxes in respect of new
residence if old residence was sold - Up to 5,000 related to mortgage interest,
property taxes, insurance, heat and power on
vacant old residence during period reasonable
efforts made to sell - Utility connection and disconnection fees and
costs related to revising legal documents to
reflect new address
142014 Personal Tax Credits
- Federal Ontario
- Tax rate applied 15.00 5.05
- Basic personal 11,138 9,670
- Spousal/partner 11,138 8,211
- - income threshold nil 821
- Child 2,255 nil
- Childrens fitness / artistic 500 55 refundable
credit - Adoption 11,774 11,797
- Disability 7,766 7,812
- Medical
------Amount paid------- - -income threshold (see footnote) 2,171 2,189
152014 Personal Tax Credits
- Federal Ontario
-
- Tax rate applied 15.00 5.05
- CPP (max) 2,426 2,426
- EI (max) 914 914
- Education
- - Full time per month 465 520
- - Part time per month 140 156
- Tuition
-------Amount paid-------- - Interest on student loan
--------Amount paid------- - Medical credit is for eligible medical expenses
exceeding lesser of - 3 of net income
- Threshold amount
16Charitable Donations Tax Credit
- Gifts to
- Registered charity
- Registered Canadian amateur athletic association
- An exempt housing corporation
- A Canadian municipality
- The United Nations or an agency of UN
- A prescribed university o/s Canada
- A charitable organization o/s Canada to which
Canada made a gift in year or preceding year - May claim gifts made in year and preceding five
years - Federal and Ontario credit of 15 on first 200
and 29 on remainder to of 75 of net income - Foreign donations may be used to reduce Canadian
tax on foreign source income from the same
jurisdiction
17First-Time Donors Super Credit
- For first-time donors, a federal tax credit of
25 is available for the first 1,000 of monetary
charitable contributions. - First-time donors are those who
- Have not claimed a donation tax credit between
the 2008 and 2012 taxation years - Do not have a spouse who has claimed a donation
tax credit between the 2008 and 2012 taxation
years
18 Consulting Income / Business Income
- consulting income is included in the calculation
of business income on Form T2125 - an unincorporated business must have a December
31 year end - required to register for GST purposes if taxable
sales exceed 30,000 in a fiscal period - business income is calculated on an accrual
basis and not on a cash basis - accounts receivable at year end included in
income - accounts payable at year end deducted from income
19Business Expense Limitations
- The ITA prohibits deduction of
- an outlay unless incurred for purpose of earning
business or property income - an outlay of a capital nature
- an outlay incurred to earn exempt income nature
- a reserve for contingent liability, unless
otherwise allowed - a personal or living expense
- club or recreational facilities dues and amounts
incurred for use or maintenance a yacht, a camp,
a lodge, or a golf course
20Business Expense Limitations
- one-half the cost of meals and entertainment
subject to exceptions for office functions and
work at remote work locations - home office expense unless
- principal place of business or
- used on regular and continuous basis for meeting
clients, customers or patients - remuneration unpaid within 179 days of taxation
year
21Incorporation of Consulting Income
Incorporated Business
Unincorporated Business
Income 100,000
Consulting Company
Proprietorship
Income Tax
Corporate
0
15,500
Personal
49,530
30,441
Mr. B
Mr. A
Total Tax
45,941
49,530
22Incorporation of Consulting Income
- Advantages
- 11 tax rate on first 500,000 of taxable income
from business sources - Capital gains exemption
- Only applies to sale of shares
- 750,000 for qualified small business corporation
shares - Ability to split income with family members
- Flexibility in remuneration package and in timing
of receipts
23Incorporation of Consulting Income
- Disadvantages
- Shareholder benefits
- can apply if corporation pays personal
expenditures or has a loan receivable from the
shareholder - Complexity
- additional reporting requirements
- have to maintain separation between corporation
and individual - Set-up costs and annual carrying costs
24 International Income Tax Conventions
- Select Non-Resident
- Withholding Tax Rates Interest Dividends Royaltie
s Pensions - Australia 10 5/15 10 15/25
- China, Peoples Rep 10 10/15 10 25
- France 10 5/15 0/10 25
- Germany 10 5/15 0/10 15/25
- India 15 15/25 10/15/20 25
- Pakistan 15 15 0/15 25
- United Kingdom 10 5/15 0/10 0/10/25
- United States 0 5/15 0/10 15/25
25Overview of the US Tax System
- The United States taxes the following individuals
on their worldwide income - US Citizens
- US Permanent Residents (Greencard holders)
- US Residents
- Citizens are taxed on their worldwide income even
if not physically present or resident in the US - Entitled to foreign tax credits for non-US source
income - File a 1040 Tax Return
25
26Americans in CanadaGeneral Filing Requirements
- All US citizens are required to file Form 1040
annually - Form 1040 is due on April 15th but an automatic
extension is granted to June 15th for Americans
who live abroad - Extension does not extend the time to pay but
late payment penalties are not imposed until
after June 15th - US citizens are taxed on worldwide income,
regardless of their country of residence - Therefore US citizens living in Canada must file
a Canadian return reporting their worldwide
income and a US return reporting their worldwide
income - Potential for double tax exists, but several
provisions of the Act/Code/Treaty help mitigate
this exposure
26
27Relief from Double TaxationForeign Earned
Income Exclusion
- Qualified individuals may elect to exclude up to
97,600 US of foreign earned income from taxable
income - Reported on Form 2555
- Income is reported on the return and then the
exclusion is reported as a subtraction from gross
income - Business income can also qualify for the foreign
earned income exclusion - Foreign taxes paid on excluded income do not
qualify for the foreign tax credit - Therefore proration of taxes required
28Relief from Double TaxationForeign Earned
Income Exclusion
- An individual generally qualifies for the
exclusion if his tax home is in a foreign country
and one of the following tests are met - Bona Fide Residence Test must be a resident of
the foreign country for an uninterrupted period
that includes an entire tax year - Physical Presence Test must be physically
present in a foreign country for 330 full days
during a period of 12 consecutive months
29Relief from Double TaxationForeign Tax Credit
- Foreign tax credit may be claimed for foreign
taxes paid on foreign source income - Separate baskets for sources of income
- Passive Basket generally includes interest,
dividends, rents, royalties and capital gains - General Limitation Basket all other types of
income - Foreign taxes eligible for credit include
Canadian income taxes, EI premiums and
Canadian/other foreign withholding taxes paid - Note that the top Canadian tax rate is 49.53 vs.
top US federal rate of 39.6 therefore the FTC
usually eliminates all US tax on Canadian source
income - Note that Canada also allows a FTC for US taxes
paid on US source income taxable in Canada
30Americans in CanadaTaxation of Income
- Employment Income
- Cannot deduct RRSP
- RPP contributions are deductible under the new
Treaty protocol - Sourcing depends on where the services are
performed - Dividend Income
- Qualified vs. Ordinary dividends are taxed at
different rates - Dividends from Canadian corporations may qualify
for the reduced rate - Dividends are sourced to the country of the payer
- Holding Canadian mutual funds can create issues
for US citizens - Capital Gains
- Tax rate depends on whether the gain is short
term or long term - Sales of stock are sourced to the country of the
taxpayers residence - FTC issues can arise depending on the period of
time the stock was held, as well as foreign
exchange
31Americans in CanadaTaxation of Income
- Pensions
- Treaty provides for matching treatment of US
pension plans in Canada. Therefore if a
distribution from a plan is not taxable in the
US, Canada will not tax the pension income either - Roth IRAs are also granted Treaty benefits
provided that the taxpayer does not make any
contributions to the plan while resident of
Canada - This includes conversion from traditional IRA to
Roth IRA
32Taxation of Income Contd
- Scholarships
- Amounts received as a qualified Scholarship by an
individual who is a candidate for a degree at a
qualified educational organization are excluded
from income - This does not apply to any amounts received which
represent payments for teaching, research or
other services as a condition for receiving the
scholarship - Sabbatical Leaves
- Expenses can be deductible on Schedule A as other
itemized deductions limited to 2 of AGI - Expenses must be directed related to the
Sabbatical - Should write a sabbatical proposal outlining the
research projects you plan to pursue, establish a
formal visiting arrangement with the host
institution and keep good records
33Consulting/Business Income
- Tax treatment the same if treated as business
income earned personally - Taxable on both the Canadian and US return
- Eligible for FTC
- Corporations
- Can be a CFC if a Canadian corporation or a
controlled foreign affiliate if a US corporation - Therefore additional filing requirements exist
- Can trigger additional deemed income inclusions
- LLC or S-Corps are not recommended since the tax
treatment differs in Canada and the US - Canada does not provide for the flow through of
income to the shareholder - Results in mismatch of income inclusion/foreign
tax credits
33
34Americans in CanadaOther Filing Requirements
- Registered Retirement Savings Plans (RRSP)
- IRS treats RRSPs the same as regular investment
accounts therefore there is no deferral of income
tax - Income earned in RRSPs is not taxed in Canada
until withdrawn from plan - Canada-US Tax Treaty allows for a resident of the
US to defer inclusion of income currently earned
in an RRSP until such time that the income is
taxed in Canada - Must disclose Treaty election on Form 8891
- Separate Form 8891 required for each RRSP
- This election cannot be made on a late filed
return - Must also disclose RRSP account on FinCEN 114 and
Form 8938
35Americans in CanadaOther Filing Requirements
- Registered Education Savings Plans (RESP)
- Plan allows for individuals to make contributions
for the future post-secondary education of
beneficiaries - Contributions cannot exceed 50,000 per
beneficiary - Earnings are not taxable in Canada until received
by the beneficiaries - US treats RESP account as a grantor trust
- Income in the account must be included on the
taxpayers US return annually - Must be reported to the US on Form 3520/3520A
36Americans in CanadaOther Filing Requirements
- Tax Free Savings Account (TFSA)
- Plan allows for individuals to earn investment
income in Canada tax-free - Contributions cannot exceed 5,500 per year
- US treats TFSA account as a grantor trust
- Income in the account must be included on the
taxpayers US return annually - Must be reported to the US on Form 3520/3520A
37Americans in CanadaOther Filing Requirements
- Reporting may be required for investments in
non-US entities - 5471 Information Return of US Persons with
Respect to Certain Foreign Corporation - Disclosure form for all US persons who have
investments in certain foreign corporations
(includes investments in Canadian corporations) - Special reporting rules when foreign corporation
is a considered a controlled foreign corporation
(CFC) - Potential for deemed income inclusions in the US
which could result in a timing difference in
income/taxes between Canada and the US - Most common deemed income inclusions are for
passive income and shareholder loans, as well as
personal services income - Form 8865 Required to report investments in
certain foreign partnerships - Form 8858 Required to report investments in
foreign disregarded entities
38Americans in CanadaOther Filing Requirements
- FinCEN Form 114, Report of Foreign Bank and
Financial Accounts (FBAR) - Separate filing from the tax return
- US persons who have a financial interest in or
signature authority over foreign bank,
securities, or other financial accounts, both
business and personal, whose total value exceeds
10,000 are required to file annually - Must disclose details of each account held,
including the highest monthly balance of the
account in the year - Due date is June 30th of each year
- Significant penalties for failure to file can be
imposed - Must be electronically filed
39Form 8938 Statement of Foreign Financial Assets
- Any individual that holds in aggregate more than
400K (MFJ residents of Canada) in reportable
financial assets must report information about
these interests on their return - Does not replace FBAR requirement
- Specified foreign assets that must be disclosed
on the return include - Foreign financial accounts
- Foreign brokerage accounts
- Interests in foreign entities
- Foreign pensions, retirement plans, etc
40New for 2013Medicare Tax on Investment Income
- Medicare Tax on Investment Income
- 3.8 tax imposed on the lesser of
- (a) Net investment income
- Interest, dividends, capital gains
- Royalties, rents (unless ordinary course of
business) - (b) Modified adjusted gross income in excess of
- 250,000 (joint filers)
- 125,000 (separate filers)
41Americans Should Avoid Canadian Mutual Funds
- US considers foreign mutual fund to be a passive
foreign investment company (PFIC) - Highest tax rate on excess distribution and gains
- Interest charged on deemed deferred tax amount
- No problem if held by RRSP if election made
- Also be cautious if investing in Canadian Income
Funds - Distributions may not qualify for reduced US tax
rate on dividends - Return of capital for US purposes is likely
different from Canadian return of capital
42Expatriation Provisions
- Imposed on certain individuals who renounce US
citizenship or relinquish a greencard - New rules involve a deemed disposition of all
property held by the taxpayer at expatriation - The covered expatriate is deemed to have sold
nearly all his worldwide assets at FMV on the day
before the expatriation and is taxed on the
accrued gains above the threshold amount - Gain is taxed as ordinary income
- Covered Expatriates are those taxpayers who meet
any one of the following - Average net income tax for the previous 5 years
exceeds 155,000 - Net worth exceeds 2M at the time of expatriation
- Fails to certify under penalty of perjury that
he/she has met the requirements of the US tax
code for the 5 preceding tax years
43Canadian Tax Treatment of US Pension Plans
- Canadian law requires a taxpayer to include in
income amounts received from a foreign retirement
arrangement (FRA) - Payments out of a FRA are not taxable in Canada
to the extent that they would not be taxable in
the other country to a resident of that country - FRA definition includes an IRA
- Intention of FRA designation is to provide
matching for Canadian residents with IRA plans - Allows payments to be transferred from one IRA to
another without triggering Canadian tax
44Canadian Tax Treatment Roth IRA
- A Roth IRA is not a FRA
- Therefore a Roth IRA is not treated the same way
as a traditional IRA - Treaty discusses the treatment of Roth IRA plans
and includes Roth IRA in the definition of
pension - Under 3(b) of Article XVIII a Roth IRA will be
treated as a pension as long as no contributions
are made to the Roth IRA after December 31, 2008
while the taxpayer is resident of Canada - Therefore income can accrue in the plan without
being subject to US tax. - Distributions are not taxable in the US
therefore they should not be taxable in Canada - Contributions do not include rollover
contributions from a different Roth IRA or Roth
401(k) but do include a conversion from an
employer plan or traditional IRA into a Roth IRA
45Roth IRA as Pension
- If a contribution is not made into the Roth IRA
the taxpayer can elect to defer Canadian taxation
with respect to the income accrued in the Roth
IRA - Under paragraph 1, pension income arising in one
country and paid to a resident of the other
country may be taxable in the other country but
if the pension income would be excluded from
income in the first country, income cannot be
taxed in the other country - Roth IRA distributions are not taxable in the US,
therefore should also not be taxable in Canada
46Transfer of Plans to Canada
- Lump-sum payments out of a IRA would be taxable
in Canada (because it would be taxable in the US) - Therefore US tax applies to transfers of IRA
plans to Canada - Eligible for contribution to a RPP or RRSP plan
if derived from contributions made to the IRA by
the Canadian taxpayer - The transfer must be made within 60 days
following the end of the year in which the
payment from the IRA is received - The lump sum payment is treated as income and
then the taxpayer claims a deduction for the
contribution of the lump sum into the RRSP
47 48- Julia Klann, CA, CPA (Illinois)
- (519) 747-8295jklann_at_kpmg.ca
- Stephanie Sinclair, CA, CPA (Illinois)
- (519) 747-8201ssinclair_at_kpmg.ca
- Diane Wood
- (519) 660-2123
- dianejwood_at_kpmg.ca