Seniors – Doug Carroll

Hello new retiree, it’s CRA calling

Beginning tax payments by instalment

We look forward to our lives being simpler in retirement. But when it comes to income taxes, there is a wrinkle that most retirees will not have experienced before – instalment payments.

Reminders for instalment payments are sent from the Canada Revenue Agency (CRA) semi-annually in February regarding March and June due dates, and in August for September and December.

While receiving unexpected correspondence from the CRA may be a bit of a shock, there’s no need to panic. Paying taxes by instalment is not a matter of being unfairly targeted. No, it is simply an extension of employers’ payroll withholding and remittance during working years, which responsibility later rests upon retirees personally through quarterly instalments.

Who has to pay?

A standing feature of our tax system is the requirement for payers of certain amounts subject to tax to withhold and remit a portion to the CRA. Where an insufficient amount has been withheld (usually because the payer has limited information about the payee), the obligation then falls upon that payee.

Common situations include income from rent, non-registered investments, self-employment, multiple employers and – for our purposes – pension payments of various sorts.

The obligation is triggered if a person’s net tax owing was more than $3,000 in either of the two preceding years, and is expected to exceed $3,000 in the current year. (In Quebec, the threshold is $1,800.)

Calculating the instalment amount

There are three options available for calculating the amount of the quarterly instalment payments:

Non-calculation option – By default, the instalment amount is based on the two preceding years’ income. The CRA will calculate this figure based on your tax records and include it in your semi-annual reminder correspondence. This option is most appropriate when income, deductions and tax credits are consistent from year to year.
Prior-year option – If the current year is expected to be much like the prior year but significantly different from two years ago, this option is a better choice. In this case, it is up to you to calculate the instalment amount yourself. With your prior year’s Notice of Assessment or tax return in hand, you can fill in the required data on a calculation chart available through the CRA website.
Current-year option – If the current year is unlike either of the two prior years, you can calculate the instalment amount using an estimate of your current year’s tax owing. For pensioners, this is likely most applicable in the first year or two of full retirement. As in option 2, the calculation chart can be used, though in this case as more of a guide in coming up with your estimate.

For options 2 and 3, any Canada Pension Plan (CPP) contributions for self-employment and voluntary employment insurance (EI) premiums must be added to the calculated tax owing. Of course, these will not apply to a full-time retiree.

The point of this exercise is not to come up with the least payment possible. Rather you are looking for the option that best estimates your actual/eventual tax liability. In fact, if you choose either option 2 or 3 and the instalment amounts are too low, CRA may charge interest and even levy penalties. (See Interest and penalties below.)

Making the payment

Payment can be made through online banking, by debit to CRA through My Account or My Payment, by mail or in person at your financial institution.

The mailed reminder from CRA will include Form INNS3, Instalment Remittance Voucher. This form is not required for online payment types, but should be stamped when paying at your financial institution and enclosed when making payment by mail (though a cover note with your Social Insurance Number may be sufficient to assist in proper processing of mail payments).

Instalments are due the 15th of March, June, September and December. If any of those dates fall on a weekend or public holiday, the due date moves to the next business day.

Mailed instalments are considered paid on the postmarked date, in-person payments at your financial institution on the date stamped on your INNS3 and online payments on the date the amount is credited to the CRA. If payment by any method is post-dated, it is the later negotiable date that applies.

Interest and penalties

Making a mistake on a calculation or remittance date could be costly. Instalment interest is charged on late and insufficient payments from the respective due date, compounded daily.

The prescribed interest rate for overdue income tax is 5% for January to March 2015, and additional instalment penalties apply if interest charges exceed $1,000. Prescribed rates are adjusted quarterly, based on economic conditions.

Snowbirds, your days are numbered – New border monitoring on the horizon

Heading south for the winter is a common way for many Canadians to spend their retirement years. Those who have already been at it a while may even recall a time when all that was needed to cross the border was a driver’s licence and a smile.

Well, the times they are a-changing, and not just because a passport is now a must.

It has long been the case that overstaying one’s time south of the 49th could lead to tax and other complications in both countries. Despite this concern, snowbirds may have flown under the radar, as cross-border tracking historically relies – at least in part – upon self-reporting. Soon enough, it appears that will no longer be the case.

Canada-US entry/exit initiative

In 2011 as part of a broader program addressing mutual border security and economic flows, Prime Minister Harper and President Obama agreed to explore the feasibility of exchanging border crossing data. One country’s entry data would effectively serve as the other’s exit data, assisting in monitoring periods of admission, immigration qualification and other policy needs.

A pilot project to test the technology began in 2012, tracking non-citizen movements at four land ports of entry in British Columbia/Washington State and Ontario/New York. This was extended in 2013 to all major land border crossings, though again not applying to either country’s citizens.

The collected data covers first name, middle name, last name, date of birth, nationality, gender, and document type, number and country of issuance. In addition to the biographic information, the date, time and port of entry is also shared.

The next phase is to extend coverage to citizens, and to add airports. However, due to concerns expressed by our federal privacy commissioner, the planned July 1, 2014 launch was delayed pending legislative and regulatory amendments. Once these requirements are satisfied and the next phase is implemented, authorities in both countries will know which side of the border snowbirds may be on, and for how long – and all in real time.

Tax implications

US income tax reporting

The US taxes its citizens and residents on their worldwide income. Snowbirds found to have exceeded their allowed time in the US could be exposed to taxation as US residents.

It is a common misconception that US tax reporting obligations arise only after a person has hit 183 days in the US. In fact, the “substantial presence test” applies once a person exceeds 31 days in a current year, and has been resident for 183 days total according to the formula:

All days in the current calendar year, plus
One-third of the days in the preceding calendar year, plus
One-sixth of the days in the 2nd preceding calendar year

That comes out to a maximum of about 4 months a year, or a consistent average of 121 days to be just below the limit. As a part-day is considered a full-day in this calculation, careful attention should be paid to travel days, and potentially even time of day for those cutting it really fine.

Those who meet the substantial presence test but have been present less than 183 days in the current year may file IRS Form 8840 “Closer Connection Exception Statement for Aliens”. This allows the person to claim non-resident status (and therefore no US reporting obligation) if another jurisdiction is proven as home.

If the person has exceeded 183 days in the current year, a nil non-resident 1040NR return may be filed, attaching Form 8833 to claim Canada-US treaty benefits. Further information filing requirements may apply, despite making these timely filings.

Generally these forms will be due June 15 the year following the taxation year.

US estate tax

The definition of US resident is different (and more complicated) for estate tax purposes from what it is for income tax purposes. Regardless, the more robust entry/exit reporting will potentially expose estates of snowbirds to estate tax scrutiny, to the potential detriment of heirs.

Canadian taxes

Less likely, but not outside the realm of possibility, is the potential that the Canada Revenue Agency will deem the snowbird to have become a non-resident. This would give rise to departure related taxes based on the deemed disposition of capital assets (with some exceptions). While not entirely determinative, day count is an important factor in this analysis.

Lengthy US travel bans

Beyond privacy and tax concerns, the new entry/exit initiative could expose snowbirds to the “unlawful presence” rules under US immigration laws.

A 3-year travel ban is imposed on someone who exceeds 180 days of unlawful presence, or a 10-year ban if the offending time exceeds a year. This is not limited to calendar years, and multiple periods of unlawful presence could be added together.

For snowbirds who had planned a life of leisure in sunnier climes during their golden years, this could leave them with anything but a smile on their faces.

Adding an adult child to a joint account

At issue

The two most common ways people choose to own property together are tenancy-in-common and joint ownership. For estate purposes, the key distinction here is that a tenant-in-common interest falls into a deceased owner’s estate, whereas a joint interest bypasses the estate and instead passes to surviving joint owners.

Thus, joint ownership can assist in avoiding probate tax otherwise applying on estate assets. However, a transfer into joint ownership is prima facie a taxable event. That’s not generally a problem for spouses, but the addition of a non-spouse – including an adult child – could mean tax on capital gains is triggered, not to mention potential exposure to creditor risk and matrimonial claims.

The key issue is if and when beneficial interest in the property passes. Recent cases have explored grey areas, signaling a warning to ill-advised efforts and shedding a light on expanded planning opportunities.

2007 SCC 17 Pecore v. Pecore, 2007 SCC 18 Madsen Estate v. Saylor

These concurrently-heard Supreme Court of Canada (SCC) cases involved claims following the death of an aging father who had added an adult daughter as joint account owner. In each case, the respective father maintained control of the accounts, used the funds for his own sole benefit, and paid all associated taxes.

The SCC held that the law of resulting trust applied where there is a transfer to an adult child with no consideration given in exchange. This means that the transferee child has the burden of proof to prove that it was the parent’s intention at the time of transfer to pass a beneficial interest.

The daughter succeeded in Pecore where it was held that a joint interest was established at the time of opening the account. However, the interest was not outright, but rather it was the transfer of the right of survivorship in what might remain in the account at the father’s death.

In Madsen, the daughter was unsuccessful, and was thus determined to be holding the remaining account value at the father’s death, for the benefit of the estate beneficiaries.

2014 ONCA 101 Sawdon Estate v. Sawdon

After experiencing frustration in dealing with his wife’s bank accounts after her death, Arthur Sawdon transferred all his financial accounts into joint ownership with two of his five adult children. He stated to them his intention that all five should receive equal entitlements.

The passing of the estate trustee’s accounts was challenged by a charity that was the residual beneficiary of Arthur’s estate. The charity sought to have the jointly held assets of about $1 million included in the distribution, presumably on the basis of a resulting trust in favour of the estate.

Rather than being a resulting trust, the appeal court found that there was an express trust at the time of the transfer into joint names. In the judge’s words, “from the time that the Bank Accounts were opened, those holding the legal title to the Bank Accounts held the beneficial right of survivorship in trust for the Children in equal shares.”

Practice points

Though the executor may have broad authority pursuant to provincial law, this is not absolute in nature. There remain a number of obligations under common law that an executor must bear in mind when exercising the authority, the nuances of which can be discussed with a lawyer if problems appear to be arising:

Absent evidence to the contrary, the addition of an adult child as a joint owner immediately transfers property rights. In theory the transferee could immediately access and use the funds for his or her personal benefit.
Under a resulting trust, the adult child will be entitled to the account proceeds at the parent’s death, to be distributed among the estate beneficiaries.
An adult child who rebuts the presumption of resulting trust is beneficially entitled to the account proceeds at the parent’s death.
It may be that a trust is created at the point of transfer for which the beneficiaries are other than the estate, though the point of entitlement is again at the parent’s death.
Given the multiple potential outcomes, it may be advisable to create a record of the parent’s intentions at the time of transfer. While the financial institution’s forms and the parent’s later actions may have some evidentiary value, a written statement made contemporaneous with the transfer would provide greater certainty.