Tax filing – Page 4 – Doug Carroll

Filing your 2013 taxes – What’s new, what’s noteworthy

It’s just about time for your annual reacquaintance with the Canada Revenue Agency (CRA). Circle Wednesday, April 30 to get your return and tax payment in, though if you or your spouse run a business, the return itself may not be due until Monday, June 16.

Apart from the usual indexation of brackets and tax credit amounts, there are few broad-based measures for 2013.

The most substantial change is arguably the foreign asset reporting requirements. Though obviously only relevant to a small subset of the population, it will have a large compliance impact on those affected taxpayers.

Apart from that, the following summary mostly touches on the items the CRA itself has drawn attention to as we head into tax-filing season.

Foreign income reporting

Announced in the 2013 Federal Budget, the T1135 Foreign Income Verification Statement has been revised to require more detailed information, including the names of specific foreign institutions and countries where offshore assets are located, the foreign income earned on those assets and the maximum cost amount of those assets during the year.

Since the initial June 2013 release, the form and process have been adjusted somewhat, now allowing a streamlined transitional reporting method for the 2013 tax year only. The filing deadline is generally the same as for one’s tax return, but in February 2014 the deadline for the 2013 form was extended to Thursday, July 31, 2014.

Pension items

Canada Pension Plan (CPP) – Post-retirement benefit

As of January 1, 2013, the new post-retirement benefit began to be paid. Credits to this pension arise when someone between 60 and 70 has made CPP contributions while already collecting a CPP retirement pension.

Old Age Security (OAS)

As of March 1, 2013, an OAS pensioner in the first six months of payments may pay back received amounts, and reapply for an increased pension at a later time. As of July 1, 2013, an otherwise qualified 65-year-old has the option to defer the OAS pension for up to five years, with a 0.6% monthly premium applying to the deferred period.

Pooled registered pension plans (PRPP)

PRPP contributions are now included in the same line previously used to record RRSP-deductible amounts. Similarly, PRPP payments are also now included as a type of pension payment alongside RRIF payments and other similar receipts.

Retirement compensation arrangements

Beginning in 2013, payments from a retirement compensation arrangement may be included as eligible pension income to be split with a spouse. The payments must be in the form of a life annuity that supplements a registered pension plan (but not an individual pension plan). This is subject to an annual maximum, which for 2013 is $94,383 less other eligible pension income.

First-Time Donor’s Super Credit

A first-time donor will be allowed an additional 25% credit on charitable donations made in cash up to $1,000. This applies to the federal credit only. To qualify, neither the taxpayer nor his/her spouse or common-law partner may have claimed any amount of the charitable donation tax credit in any of the five preceding tax years. This is a temporary credit that can only be claimed once from 2013 to 2017.

Family matters

Family caregiver tax credit

This credit, for 2013 and subsequent years, may be available for a taxpayer who personally attends to the needs of someone else; for example, to drive that person to doctor’s appointments. The dependency must be due to physical or mental impairment, generally confirmed by a statement from a medical practitioner. The credit is calculated based on an amount of $2,040 that augments one or more of the spouse or common-law partner amount, amount for an eligible dependant, amount for children born in 1996 or later, and the caregiver amount.

Adoption expenses

For adoptions finalized in 2013 or later, the qualifying adoption period is extended back to when an application was made to the appropriate provincial ministry, licensed agency or Canadian court. Previously, expenses only became qualified after a child was matched with his or her adoptive family.

Grants to parents of missing children

A parent may be entitled to a new federal grant where a child is missing or has died as a result of a criminal offence. This grant must be reported as “other income.”

Business matters

Restriction on farming losses

The amount that may be claimed under the restricted farm loss rules has been capped at $8,750 since 1998. For 2013 and following years, the amount has been doubled to $17,500: 100% of the first $2,500 of net farming loss plus 50% of the next $30,000 net farming loss. However, also for 2013 and following years, other sources of income must be subordinate to farming income in order for the farming losses to be deductible against those other sources.

Earnings on the Web

Individuals are now required to report websites and Web pages from which they generate income. This is a very broad provision that includes creating an online profile on someone else’s website, including blogs, auctions, directories or other marketplaces.

Want to “PAD” your tax payments?

And speaking of online activity, the CRA is encouraging taxpayers to sign up for its new pre-authorized debit (PAD) payment option. The service attaches to the My Account service.

Among the suggested benefits, it can simplify (and assure) the process for those who make their tax payments by instalments, and enable a taxpayer to file an income tax return early while scheduling payment closer to the required deadline.

More information can be found on the CRA website at
http://www.cra-arc.gc.ca/prthrzddbt-eng.html.

Tax treatment of crowdfunding receipts

At issue

You don’t have to be a resident of Toronto to be familiar with the media scrums surrounding its current mayor. Worldwide interest was piqued midyear 2013 when a gossip website sought to gather funds from the public to purchase an alleged video purportedly showing his worship engaged in compromising activities. No video purchase ultimately resulted, and the gathered funds are apparently headed to charity.

Politics and voyeurism aside, this has brought to the public consciousness an emerging mode of sourcing funds for projects ranging from innovative product ideas to movies and music, known as “crowdsourcing” or “crowdfunding”. The idea is to collect relatively small amounts from a large number of contributors, generally through social media and the internet.

On the regulatory side, the Ontario Securities Commission conducted a consultation ending in early 2013 to determine how to approach this fast-developing field.

Until recently there has been little guidance on the tax implications of this activity, but by the end of 2013, the Canada Revenue Agency (CRA) had waded in to provide a bit more clarity.

2013-0484941E5 (E) – Crowdfunding

Issued in August, 2013, this CRA technical letter considered a project such as a recording by a musical group or a project relating to developing a product for market. Each contributor would receive an incentive gift such as a copy of the finished product (for example, a musical recording) or a promotional item such as a T-shirt. Contributors would not receive any equity.

The author opined that amounts received in this manner would likely be considered business income under ITA s.9(1). Reference is also made to paragraph 4 of Interpretation Bulletin IT-334R2 Miscellaneous Payments, which states CRA’s view that voluntary payments are taxable when received while carrying on a business.

As quid pro quo, expenses related to crowdfunding efforts, including those incentive gifts, may (depending on the facts) be deductible under ITA s.18(1)(a).

2013-0508971E5 (E) – Crowdfunding, 2013-0509101E5 (E) – Crowdfunding

These two CRA letters, issued within days of one another in October 2013, were penned by the same official with virtually identical content.

The content recounts the nature of crowdfunding, including reference to the fact that some Canadian securities regulators are considering changes to existing rules that may better facilitate the raising of equity funds by way of crowdfunding. As a given arrangement could represent a loan, capital contribution, gift, income, or a combination thereof, the author states that the CRA would have to review the facts, circumstances and documentation to provide an opinion.

Still, some insight is offered into the (un)likelihood that crowdfunding receipts would be treated as non-taxable windfalls. Per IT-334R2, a windfall requires at least (1) that the recipient has made no organized effort to receive the payment and (2) that the recipient has neither sought nor solicited the payment.

Practice points

As securities regulators have not yet provided a clear set of rules for crowdfunding, would-be money-raisers should be aware that their actions could at some point be subject to review and possibly sanctions. This applies doubly-so for investment professionals licensed through some of those same regulatory bodies.
As the general principles approach outlined in the CRA letters suggest, it is likely that many types of receipts obtained through crowdfunding activities will be taxable. Good records will assist in identifying those sources when required, and in reinforcing claims for associated expense deductions.
There do not appear to be tax issues of any substance for crowdfunding contributors, at least not at this point. Enjoy the T-shirt.

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.