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UWO Faculty Income Tax Presentation Presented by: Julia Klann Stephanie Sinclair Diane Wood

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Title: UWO Faculty Income Tax Presentation Presented by: Julia Klann Stephanie Sinclair Diane Wood


1
UWO Faculty Income Tax PresentationPresented
byJulia KlannStephanie SinclairDiane Wood
  • March 21, 2014

2
Overview
  • 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

3
Basis 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

4
Residency 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

5
Income 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

6
Scholarships, 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

7
Scholarships, 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.

8
Research 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

9
Motor 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

10
Dues 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

11
Registered 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

12
Moving 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

13
Moving 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

14
2014 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

15
2014 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

16
Charitable 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

17
First-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

19
Business 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

20
Business 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

21
Incorporation 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
22
Incorporation 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

23
Incorporation 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

25
Overview 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
26
Americans 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
27
Relief 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

28
Relief 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

29
Relief 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

30
Americans 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

31
Americans 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

32
Taxation 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

33
Consulting/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
34
Americans 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

35
Americans 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

36
Americans 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

37
Americans 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

38
Americans 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

39
Form 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

40
New 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)

41
Americans 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

42
Expatriation 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

43
Canadian 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

44
Canadian 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

45
Roth 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

46
Transfer 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
  • Questions?

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
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