Tag: Foreign

Estate and capacity planning for vacation properties across borders

When I was a boy, we had a modest cottage a couple of hours out of the city.  Just getting there was an adventure, as my parents piled six kids and a dog into a Datsun 510 — with no air conditioning.  

These days, it is not uncommon to have a vacation property in another province or outside the country altogether.  Whether that’s a family getaway, a snowbird retreat, or a new Canadian continuing to hold property ‘back home’, our society lives across borders like never before.  

With this modern mode of living comes complexity, particularly when it comes to estate and capacity planning.  

Wills and estate transfers

Generally a Canadian Will is effective to deal with a person’s real property (real estate) in the home province, and personal property wherever it may be.  In order to deal with real estate elsewhere, the Will would have be proven to the satisfaction of the courts/law in that other jurisdiction. While this is not an impossible task, it presents some additional cost, time and potential uncertainty.

With that in mind, it may be desirable to plan ahead by executing a second Will in that other jurisdiction.  In so doing, it is crucial that the second Will doesn’t inadvertently revoke the person’s main Will, or otherwise alter distribution.  Accordingly, there must be an open dialogue between the lawyers in the two jurisdictions.  

Discussions with the foreign lawyer should include gaining an understanding of tax obligations (currently and for the estate), and legal responsibilities of the executor.  This may necessitate adjustments in the home Will, or at least some informal guidance.   Alternatively, it could lead to naming a distinct second executor, with appropriate allocation of powers and constraints between the two.  This knowledge may even affect the owner’s longer term intentions for the property.

Incapacity while owning or being abroad

Arguably, the estate transfer is the easy situation as compared to having to respond to a crisis while an owner is living.  While an estate transfer is a property matter, there are both property and personal issues that can come up while a person is living, with attendant greater urgency.

Powers of attorney (POAs) and powers of attorney for personal care (PAPCs) have been a recommended part of the estate planning process for decades now.  And while it is usually intended that the power may be exercised wherever the grantor or property may be, challenges can crop up when foreign jurisdictions are involved. 

Some jurisdictions require these documents to be executed in a prescribed form, include specific language or otherwise be constrained in some manner that may be at odds with the home jurisdiction’s rules.  Even if there are no such formal impediments, there can be delays (and associated costs) as individuals, health care workers and businesses assure themselves of their obligations — perhaps even requiring them to seek their own legal advice before being able to take instructions. 

As with Wills, it may be desirable to have parallel documents drawn up in the foreign jurisdiction in order to expedite action at critical times.  In addition to the provisos about guarding against revocation and having open communications, some further questions should be canvassed: 

  • Can the same person be named in both jurisdictions?  Are there practical/logistical/linguistic concerns that may lean toward naming a different person in the foreign jurisdiction?  
  • What events may cause an appointment to be revoked (eg., marriage, separation, bankruptcy)?  If such rules differ between the jurisdictions, how will that be reconciled?  
  • What is the scope of the attorney’s activity for each of the jurisdictions?  Where there is a gap, how will this be handled?
  • If it is intended that the home jurisdiction attorney have ‘final say’, is this possible under the foreign jurisdiction’s rules?  How can an attorney be removed?
  • Is compensation allowed/required/prohibited, and do the planning documents together guard against double compensation?  
  • What checks are there to assure appropriate accounting and accountability for each attorney’s actions? 

Cross-border developments

These concerns have been attracting greater interest in recent years, with two major developments worth noting.

In the summer of 2015, the Uniform Law Conference of Canada tentatively approved a uniform law on cross-border recognition of powers of attorney for both property and health care, health care instructions and similar documents.  The Uniform Law Commission in the United States approved its draft in 2014.  Provinces and states that incorporate the recommendations into their domestic law will enable their residents’ documents to be effective in all reciprocating jurisdictions.

In the area of estates, as of August 17, 2015, a new cross-border succession regulation is in force in the European Union (except Denmark, the U.K. and Ireland).  It affects European citizens and residents, and European property held by non-residents.  Canadians should consult with their lawyer whether any action is required on their part.  

Bringing a foreign pension to Canada – A two-step technique

Our nation was born through immigration, and it continues to welcome new arrivals in a steady stream. While some newcomers will be at the start of their careers, many will be arriving in the midst of their working lives.

Frequently, immigrants have significant tax-sheltered savings in foreign pension plans, and may wish to bring those funds over to their new home in Canada. They may be shocked, however, to learn that our system does not allow tax-free transfer of foreign pensions to Canadian registered retirement or pension plans. However, all is not lost.

If appropriate steps are taken – on a timely basis – the net result can be continued tax-sheltering of their retirement savings.

No direct transfers

While it may seem harsh to not allow direct tax-free transfers, it’s simply not practical for our tax system to be so intimately intertwined with foreign tax systems.

Instead, our system makes allowance within the domestic tax rules once the person has collapsed the foreign pension. As this “deregistration” of the foreign pension is likely irreversible, at minimum the person will want to be certain:

  • what gross and net-of-tax amounts are involved,
  • that the particular plan and transactions qualify, and
  • whether the actions can be completed in the required time frame.

Step 1 – Foreign tax procedure

Generally, the pension administrator will be required to withhold taxes according to the foreign jurisdiction’s laws. This may include the administrator evaluating the nature of the transaction to determine whether it has a withholding obligation at all and, if so, for what amount. The amount of withholding tax may in turn be reduced if there is an applicable provision in the tax treaty Canada has entered into with the foreign state.

Some jurisdictions also impose penalties on some withdrawals, for example when taken below a specified age. It is highly unlikely that treaty relief will apply to these additional penalties.

The Canadian resident will receive a payment denominated in the foreign jurisdiction’s currency, net of all withheld amounts. Unless there is a continuing connection, this withholding will usually satisfy the person’s final tax obligation on the pension to the foreign jurisdiction.

Step 2 – Canadian tax calculation

Income inclusion

Canadian residents are taxable on worldwide income. Accordingly, the gross amount received from the foreign pension, converted to Canadian dollars, must initially be included in calculating Canadian tax liability.

The withheld foreign taxes entitle the person to claim a foreign tax credit when calculating this initial Canadian tax due. Depending on the circumstances, however, the credit may be less than the withheld amounts (see provisos below).

Special RRSP/RPP deduction

A special deduction will be allowed if the pension satisfies the Canadian definition of superannuation, pension benefit or foreign retirement arrangement. Additionally, the payment must be a lump sum and specifically not be part of a series of periodic payments.

The deduction is in the form of an allocation of contribution room toward either a registered pension plan (RPP) or registered retirement savings plan (RRSP). Though not obligated, the person may make an RPP or RRSP contribution up to the amount taken as income as a result of collapsing the foreign pension. This does not require or affect existing contribution room.

The special deduction must be used in the same taxation year as the income inclusion or within the first 60 days of the following year. To be clear, any unused room from this allocation cannot be carried forward.

Some practical provisos

Bear in mind that the actual payment received from the foreign plan will be net of withheld amounts. If the person wishes to take advantage of the full contribution/deduction, other cash will be required for that top-up. On the other hand, if the amount is not topped up, then Canadian tax will still be due on the difference between the gross income amount and the chosen contribution.

The foreign tax credit is limited to the lesser of the actual foreign tax paid/withheld (up to a maximum of 15%) and the Canadian tax due on the foreign-sourced income. The credit may thus be less than the withheld amount. Furthermore, this type of credit cannot be carried forward for use in future years.

As you’ve likely come to realize, determining how to deal with a foreign pension can be a complicated matter. As a starting point, the person should obtain a clear statement from the pension administrator as to the procedure and amounts from that end. The statement can then be analyzed with the person’s tax advisor to determine how best to proceed.

Revised CRA Form T1135 for Canadian residents holding foreign securities and other interests

The 2013 Federal Budget introduced significant revisions to the form, procedure and penalties associated with the reporting of foreign investments held by Canadian-resident taxpayers. Generally, a greater degree of detail is being required than in the past. The $100,000 cost threshold remains the same in principle, though its application has necessarily been modified to align with the more detailed reporting requirements.

The new Form T1135 Foreign Income Verification Statement (“Form T1135”) is available on the Canada Revenue Agency (CRA) website, either as a printable PDF or a fillable/saveable PDF. The form may be attached to the relevant tax return or information return (see “Filing deadline” within), or be sent separately.

To be clear, Form T1135 must be paper-filed with the CRA. The ability to electronically file the form is being developed and will be announced by the CRA when this becomes available.

Who must report?

All Canadian-resident taxpayers –- individuals, corporations, partnerships and trusts (including non-resident trusts deemed to be Canadian-resident) – are required to file the revised Form T1135 if, at any time in the year, the total cost amount of all “specified foreign property” to the taxpayer was more than $100,000.

“Specified foreign property”

While not an exhaustive list, the scope of property subject to reporting includes:

  • funds held outside Canada;
  • shares of non-resident corporations (other than foreign affiliates);
  • indebtedness owed by non-residents (other than from foreign affiliates);
  • interests in certain non-resident trusts;
  • real property situated outside Canada (other than personal-use property and real property used in an active business); and
  • other types of foreign property, such as intangible property not used in a business and certain rights under contract.

Where the taxpayer has received a T3 or T5 slip from a Canadian issuer, that particular property is excluded from the T1135 reporting requirement for that taxation year.

Canadian mutual funds

Taxpayers will not have to report with respect to holdings in Canadian mutual funds, whether in the form of a trust, corporation or ETF trust. This is explicitly addressed in the CRA’s Q&A Web page:

Q. Does Form T1135 have to be filed if the cost amount of the units in a mutual-fund trust is $150,000 and if the mutual-fund trust invests entirely in foreign securities?

A. If the mutual-fund trust is resident in Canada, you do not have to file Form T1135. Residency status is not determined by the type of investments held by a mutual fund trust or mutual fund corporation.

The use of a U.S.-dollar-denominated account with a qualified Canadian issuer will not expose a taxpayer to the T1135 reporting requirement. Per the CRA’s Q&A Web page:

Q. Does foreign property include Canadian-issued term or equity products denominated in non-Canadian dollars (for example, a Government of Canada Treasury bill denominated in American dollars)?

A. Foreign property that must be reported on Form T1135 does not include term or equity products denominated in a foreign currency if the issuer is a resident of Canada.

As well, whereas directly held U.S. securities, U.S. mutual funds and U.S.-listed ETFs may contribute to U.S. estate tax costs, there is no exposure for U.S. securities held in Canadian mutual funds or Canadian-listed ETFs.

The $100,000 threshold

The requirement to report is based on the cost amount of each specified foreign property. If at any point in the year the total of those costs exceeded $100,000, the taxpayer must report all of the holdings even if year-end values have fallen below this threshold or a property is no longer owned at year-end.

Where ownership is shared, it is the taxpayer’s pro-rata share that is relevant, even in the case of spouses. For example, if the only relevant property had a $180,000 cost base and was jointly owned, neither spouse would have to report. However, if either of them had contributed over $100,000 to that cost, that spouse would have to file the Form T1135.

Potential penalties:

  • Failure to comply – $25/day up to 100 days
  • Failure to furnish foreign-based information – $500/month up to 24 months, or $1,000/month up to 24 months once a demand is issued
  • Additional penalty – After 24 months, 5% of adjusted cost base (ACB) or fair market value (FMV), as applicable
  • False statements and omissions – Greater of $24,000 or 5% of ACB or FMV, as applicable

If the T1135 is not filed in a timely manner, a reassessment may be made up to three years past the normal reassessment period.

Filing deadline

In the case of a T1, T2 or T3 return, Form T1135 must be filed with the CRA on or before the filing due date of the related tax return or, in the case of a partnership, the filing due date of the T5013 – Partnership Information Return.

Beginning this year, a reminder of the T1135 reporting obligation will be included on the Notice of Assessment for taxpayers who have ticked the “Yes” box on their tax returns indicating specified foreign property with a total cost of more than $100,000.