by Jeff KirshenAssigning Property and the Income Tax Implications
Assignment is when you purchase a pre-construction home or property, and sell the property before it is built and before you gain title to it. In other words, you are assigning your purchased rights to a home to another person.
Property Assignment and the Income Tax Implications
When you assign a property, you typically earn a profit from the difference in the amount that you originally purchased the property for and the amount that you sold your rights to the property for. This profit needs to be reported to the Canada Revenue Agency (CRA). This is done by including the profit as income for the year in which the assignment occurred.
Property Assignment – Income or Capital Gains?
Most people assume that the income earned from property assignment should be reported as capital gains and therefore only 50% of the profit is taxable. However, there are circumstances under which the CRA considers the profits as business income and therefore 100% of the profit is taxable.
It is the intent of the buyer, and not the nature of the property the determines whether the property was capital or inventory. If the CRA concludes that the property is capital, then its assignment (or disposition) would result in a capital gain. If the CRA concludes that the property is inventory, then the disposition of that inventory would result in business income.
The intent of the buyer is the key factor because if the CRA determines that the intention of the taxpayer at the time of purchase was to resell the property for a profit (or “flip it”), then they will classify the transaction as a business transaction and the profit as business income.
Property Assignment – What Factors does the CRA Consider?
There is no specific provision in the Income Tax Act that outlines the circumstances under which the proceeds from a sale of property must be reported as either business income or capital gain.
However, a review of court decisions shows that the courts have historically focused on several key factors in determining how to classify sales of property.
These are some of the factors that the courts have looked at:
- Individuals’ stated or deduced intention with respect to the property at the time of purchase and the feasibility of those intentions;
- Extent to which this intention was actively carried out by the seller;
- Geographical location and zoning restrictions of the property;
- Nature of the business/profession that the seller is involved in;
- The extent to which borrowed money was used to finance the real estate acquisition, including the terms of the financing;
- The length of time the property was held by the seller;
- Whether or not there were other individuals who shared an interest in the property;
- The factors involved in the sale of the property; and
- Evidence that the individual and/or their associates have previously dealt with real estate.
Taken together, these factors are used by the courts to determine whether the intention at the time of purchase was to resell the property for a profit.
Property Assignment and Other Tax Implications
Property assignment can also result in GST/HST implications. For more information on those implications, please review this article.
The principle residence exemption can also result in tax implications upon the purchase or sale of property.
The CRA has been actively pursuing and investigating real estate transactions due to the fact that this is a significant area of non-compliance.
If you have recently assigned a property, or have been assessed for the assignment or sale of a home/property in the course of a business, contact our firm for a free consultation. We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenWhat is an Allowable Business Investment Loss?
When a capital loss satisfies certain criteria, it can be reported to the CRA as an Allowable Business Investment Loss (“ABIL”), which is subject to preferential tax treatment.
For a loss to be an “allowable business investment loss”, it first must be a “business investment loss”. An ABIL is simply the portion of a business investment loss that is deductible (thus the word “allowable” in ABIL). Of your total business investment losses of tax year, 50% qualify as ABILs and are therefore deductible. However, unlike other sources of income like capital gains which can only be applied to reduce capital losses, the Canadian tax authorities have decided to give taxpayers greater privileges when applying ABILs.
For instance, taxpayers can apply ABILs to any source of income, to reduce their overall taxable income. If your ABIL is higher than your income, you could effectively reduce your income to zero and pay no income tax for that year. Additionally, if you have ABILs that you do not wish to apply to your income earned this year, it can optionally be carried back three years or forward ten years to offset any amount of income from any source in those years.
What are the Requirements to claim an ABIL?
There are four questions taxpayers must ask themselves before determining whether their capital loss qualifies as an ABIL:
- Did the Taxpayer invest in shares or debt of a Corporation?
The taxpayer would have had to purchase shares or have made a loan to a corporation.
- Has the debt been established to be a bad debt?
A “bad debt” is an expense owed to a creditor that is unlikely to be paid. For a debt to be claimable as an ABIL, it must be a bad debt; uncollectible.
- Was the property issued by a “Small Business Corporation”?
An ABIL can only be claimed on a loss from a stock in a small business corporation (“SBC”) or a debt owing to the taxpayer by an SBC. Meeting the definition of an SBC in Section 248 of the ITA is an important element of an ABIL claim:
- It must be a Canadian-controlled private corporation (“CCPC”)
- All or substantially all of the fair market value of the assets is carried on primarily in Canada
- Was the property acquired for the purpose of earning income?
The investment must have been made to an active business. Taxpayers are sometimes faced with the argument that the business was not being carried on because it never commenced or because it had already ceased. The question comes down to whether the taxpayer can prove they were investing in a business that was active; that it had indicia of an active business. Indicia can include an organizational structure, employees, market research, cost benefit analysis, etc.
Are there any Limitations to Claiming an ABIL?
The amount of ABIL you can claim is reduced by the amount you have previously claimed under the lifetime capital gains deduction. The capital gains exemption has a top limit, exempting you from paying tax on the first $424,126.00 (as of 2018) of taxable capital gains (half of $848,252.00 in capital gains) in your lifetime. If your capital gains exempt income from the past in addition to your ABIL reach that threshold, then the remainder can only be used to reduce capital gains.
If you have questions about the above, have attempted to claim a business investment loss, or an allowable business investment loss and the Canada Revenue Agency is auditing your loss claim, give us a call today to see how we can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenPossible Taxes on the Sale of a Principal Residence
When you sell your home, you may realize a capital gain. A capital gain is a profit earned on the sale of property. However, there is an exception to this rule if your home is a principal residence which would allow you to pay no taxes on the sale.
What is the Principal Residence Exemption
The principal residence exemption allows homeowners to avoid paying taxes on the capital gains realized from the sale of their primary residence. If a property qualifies as a taxpayer’s principal residence, he or she can use the principal residence exemption to reduce or eliminate any capital gain otherwise occurring, for income tax purposes, on the disposition (or deemed disposition) of the property.
The Principal Residence Exemption and the 2016 Changes
Prior to 2016, for every year you have owned your property, it was your sole residence, you did not have to report any income tax on the profits from the sale of your home, or to report the sale of a principal residence at all. However, in an effort to ensure only eligible homeowners benefit from the exemption, the federal government now requires that taxpayers report information such as the proceeds of sale, and details of the transaction to claim the principal residence exemption. See our other article regarding designating your property here: How do I designate a Property as my Principal Residence – T2091 Form
For 2016 and onwards, this information is provided by the taxpayer on Schedule 3 of their income tax return, and by filing Form T2091, Designation of a Property as a Principal Residence by an Individual, for the year the property is sold. It is important to note that only one home is eligible for a principal tax exemption for any given tax year.
If you have sold your home and not reported it in your income tax return, it may be appropriate to submit an application through the Voluntary Disclosures Program to avoid significant penalties.
The Principal Residence Exemption and Possible Taxes
If you sell your principal residence, normally the profits are tax free. However, the Canada Revenue Agency (CRA) may claim that you are in the business of buying and selling homes. If this is the case, then your profit could actually be termed business income. You would have to include 100% of the profit as income, and you don’t even get to claim it as a capital gain which would have cut the taxes in half.
Additionally, if you are found to be in the business of buying and selling homes, the CRA may come in and say you should have charged GST/HST on the sale of the property. If this occurs, all of a sudden 13% (in Ontario) of the total purchase price actually counts as GST/HST. Which means you might owe hundreds of thousands of dollars in GST/HST which may remove your entire profit margin.
If either of the above happen to you, it is likely that the CRA will charge you their worst possible penalty known as gross negligence. This adds 50% of the amount owing as a penalty. So if you now owe $100,000, you will actually owe $150,000 before they even start calculating any interest charges.
If you have recently sold your principal residence, and you are worried about the above, call us today! Or if you are being audited for the sale of your principal residence and you need professional assistance, we are here to help! Contact us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenBusiness Use of the Home
Every year, more and more Canadians are opting to work from home. It saves the cost of renting/buying an additional space in an increasingly inaccessible property market, as well as travel costs. Technology has also made it possible to use a workspace at home on a regular basis with access to the same resources as would be provided in an exclusive office space.
The Canada Revenue Agency (CRA) enables Canadians who make business use of a work space in their homes to deduct expenses that flow from that use. However, the CRA often scrutinizes taxpayers for how they may draw the line between business and home expenses. It is important to understand the rules and conditions they set to avoid unnecessary audits and reassessments.
What is Required to Deduct Business Use of the Home Expenses
The CRA says that you can deduct expenses for the business use of a work space in the home, as long as you meet one of the following conditions:
- It is your principal place of business; or
- You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers or patients.
In essence, your home office must be your main office. It must be your home base. Individuals who, say, work from home for a couple days each week, but their work still centres around a workspace outside the home would not be eligible. This is an important distinction because individuals are increasingly working from home, but that does not mean that their home office would be their principal place of business.
Or, you use the space in your home exclusively to produce business income. This is very relevant when it comes to deducting expenses incurred for upkeep and maintaining the work space. For instance, one could not claim their kitchen as their home office, and deduct expenses for buying a new kitchen table they work on. It must be a space used exclusively for deriving business income.
How do I Deduct Home Office Expenses?
If you satisfy one of the conditions mentioned above, you can deduct part of your home costs such as heat, home insurance, and electricity. You can even deduct part of your property taxes, mortgage interest, and CCA. However, you can only deduct the work space’s proportion of the total expenses. This attracts much scrutiny by the CRA: what proportion of the home’s expenses are incurred due to the home office?
The CRA advises that if you use part of your home for both business and personal living, you should calculate how many hours a day you use the rooms for business, and then divide that amount by 24 hours, and then multiply that by your total home expenses.
The amount of expenses you deduct cannot be more than your net income from the business before you deduct these expenses. Basically, the CRA does not allow you to use expenses to increase a business loss.
If you are being audited for your home office, or you have questions about what expenses are eligible, give us a call today! We’re here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T2200 Declaration of Conditions of Employment Form?
A T2200 Declaration of Conditions of Employment is a form that allows certain employees to deduct specific expenses that are incurred for the purpose of earning employment income.
Generally, the Canada Revenue Agency (CRA) does not allow employees to claim deductions from their employment related expenses. Most employees cannot claim employment expenses, which means that taxpayers are unable to deduct expenses such as the cost of travel to and from work, or other the purchase of most tools and clothing. Although, there are a variety of employment arrangements that allow for employees to deduct employment costs.
What is a T2200 Declaration of Conditions of Employment Form?
However, in order to be able to claim employment expenses, a T2200 Declaration of Conditions of Employment must be completed by your employer. The purpose of this form is to certify an employee’s eligibility for deductions that can be claimed to reduce your overall income which would reduce the amount of taxes you are required to pay. This T2200 form allows you to deduct certain expenses (including any GST/HST) that you paid to earn employment income. However, this can only be done if your employment contract required you to pay the expenses and you did not receive an allowance for them, or the allowance received was included in your income. A T2200 form helps employees maximize their tax deductions for unreimbursed employment expenses.
What is on a T2200 Form?
The T2200 form details the employee’s day to day conditions of employment. These conditions help determine which deductions the employee may qualify for based on their type of employment. There are different deductions and eligibility requirements based on type of employment. For instance, the Income Tax Act makes a distinction between employees earning a commission and those earning a salary, and provides distinct rules for transportation employees, employees working in forestry operations, tradespeople, and artists.
If you have more than one employer, each employer must complete and sign separate forms for each year the employee intends to claim the deductions. An employer completing this form is required to complete the form truthfully and return it to the employee.
Do I need to keep the T2200 Form and Proof of my Expenses?
Though the CRA does not require the T2200 to be filed with the tax return, it is best practice for both the employee and employer to keep a copy in the event the CRA asks to see it. If you are audited, the CRA will require a copy to determine what expenses you are eligible to deduct, and which you are not.
It is important to remember that while a signed T2200 form enables an employee to claim employment related expenses, it does not guarantee that the expenses will be deducted. In order to maximize the chance of deductions, it is essential to keep detailed records of all expenses incurred. In a recent Tax Court of Canada decision, the Judge reaffirmed the notion that in a self-reporting tax system, “the burden of proof for deductions and claims rests with the taxpayer.” As such, it is imperative that a taxpayer keep detailed documentation in support of all claims being made.
If you are being audited by the Canada Revenue Agency for your T2200 form, or you have been audited and your expenses have been denied, call us today! We can help you get all of your employment expenses to which you are entitled!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWho Can be Claimed as a Dependent?
Eligible dependents are normally your closest relatives. As much as we love to care for our loved ones, it can be expensive, so it’s nice to know that there are a number of credits and deductions that you can claim for your qualifying dependants in order to help you out.
When thinking of who qualifies as a dependant, people usually think of children, but other relatives can also qualify! In general, if a person lives with you and relies on you for either physical or financial support you may be able to claim them as a dependant for income tax purposes.
Who is an Eligible Dependent?
Whoever qualifies as a dependant will vary based on the credit or deduction that you wish to claim. Different people can qualify as dependants, and someone who qualifies as a dependant for one credit may not always qualify as a dependant for another credit, so you need to know the rules.
The most common types of dependants are:
- Children and grandchildren (either biological, adopted or stepchildren);
- Parents and grandparents;
- Brothers or sisters (including brothers-in-law and sisters-in-law); and
- Nieces, nephews, aunts or uncles.
How Does Claiming an Eligible Dependent Work?
If you claim a qualifying dependant on your tax return, you will have access to tax credits and deductions that can reduce what you owe to the Canada Revenue Agency. Different credits are based on different things, some are based on the age of the dependant or their relationship with you, while some are based on the dependant’s health or even income level. That is why it is important to know all the ways that you can claim a dependant, and to make sure that you are doing it correctly.
Eligible Dependent Credit
This credit is designed for single parents who are not claiming spousal/ common-law partner credits and are responsible for the financial care of a relative. Single or separated parents who are not supported by or living with the other parent of the child may also claim this credit. It is important to know the rules for when you can and when you cannot claim this credit.
To claim this credit, the dependant must live in your home and you must maintain this home yourself. For example, if you have a dependant but you live in a home maintained by your parents you cannot claim this credit. You also cannot claim this credit for someone who is merely visiting you. Only one person per household is permitted to take this credit, regardless of the number of dependants living in the house. If you and your partner share custody of the child, you must agree on who should take this credit. If you cannot agree, then neither of you are permitted to claim it.
Can Children Over 18 Still be Claimed as Eligible Dependents?
Despite the reality that many parents continue to financially support their children after they turn 18, you are generally are not allowed to claim them as a dependant. However, there are still some ways you may be able to claim your children on your taxes. The following are helpful rules to remember to save some money on your next return:
- If your child was 17 at some point during the tax year, they are considered dependants and can be claimed for the entire year;
- Mental or Physical Impairment – if your child is unwell and older than 18, you’ll require a letter from a doctor describing their condition before you will be permitted to claim them as a dependant;
- If you’re a single parent and claiming the amount for an eligible dependant, you need to deduct the income that your child earned from the amount that you are claiming;
- Although most post-secondary students are over 18 and therefore cannot be claimed as dependants, it is important to know that they can transfer up to $5000 in tuition and education credits to you if they do not use all of them on their own tax return; and
- If your child is over 18 but you continue to pay for their medical expenses you may be able to claim these depending on your child’s net income.
The Canada Caregiver Amount
The Canada Caregiver Amount helps people that care for family members who are elderly or are impaired. You may qualify for this credit if you support a relative who Is over the age of 18 and who at some point during the year in question was dependant on you due to a physical or mental impairment.
So if you have people in your life that rely on you for support, make sure that you know if they qualify as a dependant for your taxes. If you want help with that, contact our firm for a free consultation so that we can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T2125 Statement of Business or Professional Activities?
A T2125 form is a schedule that goes along with a tax return, and it lists income, and expenses where taxpayers operate certain types of businesses. The Canada Revenue Agency (CRA) requires all resident taxpayers who generate business income or losses in a given calendar year to complete and submit a separate T2125 for each respective source of business income. The T2125 form is a filing requirement for many Canadians each year—whether they know it or not!
What is a T2125 Statement of Business or Professional Activities?
The T2125 form is a versatile reporting tool that allows taxpayers to disclose many facets of their enterprise to the CRA including, but not limited to their business income, their purported capital cost allowances, and elections with respect to losses and work in-progress.
Who Needs to File a T2125 Form?
Anyone who has business income of any kind is required to fill out a T2125. This includes sole proprietors, members of a partnership, and even unincorporated individuals who have non-registered business income.
Even someone who partakes in an adventure or concern in the nature of trade must complete a Form T2125. For example, if a taxpayer starts making jewellery and selling it casually, that taxpayer must file a T2125 to record and report the income earned from “business”, even though the “business” may be somewhat disorganized and an inconsistent source of income. As another example, if you are an artist such as a painter, the non-registered income should be recorded and filed on a Form T2125.
Taxpayers who did not earn any Canadian income as a part of their business income still have to record and report their foreign income on their Form T2125. This income may subsequently be eligible for foreign tax credits.
Even if you did not accept financial consideration in exchange for the goods or services that you rendered, the value of what you received in return for your goods or services must be recorded on the T2125.
What if I have Different Sources of Income?
For each source of business income earned in a given taxation year, the taxpayer must fill out a separate T2125 form. Even if you operate in the same field or have the same type of revenue, if there are different business entities earning the income, there must be a separate Form T2125 filled out for each.
Why does the CRA require a T2125 Form?
The CRA primarily references T2125s when assessing the aggregate value of business income earned by the taxpayer in a given taxation year and the available losses for carry-forward or carry-back. The CRA also uses these forms to discern the allowable capital cost deductions for capital outlays incurred to produce income for the taxpayer’s taxation year.
Many businesses incur expenses that do not fall under the “Current Expense” category, and consequently cannot be deducted from the income of the taxpayer. Capital cost deductions are not just for businesses, many taxpayers who generate income from other sources, such as rental properties, may also be eligible for capital cost deductions in a given year. These taxpayers would have to record this information on their Form T2125.
If have questions about the T2125 form, if the CRA doesn’t agree with your income / expenses, or if you are being audited for failing to complete the form, call us today, we can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenAre Maternity Leave Payments Taxable?
Maternity and Parental benefits are a form of Employment Insurance (EI) which provide financial assistance to people who are away from work because they are pregnant, have recently given birth, or because they are caring for their newborn or newly adopted child.
Maternity benefits are only available to those who are away from work because they are pregnant or recently gave birth. Qualifying individuals can claim a maximum of 15 weeks of maternity benefits. The benefits can start up to eight weeks prior to due date and receivable up to 17 weeks after birth. The current benefit rate is 55% up to $562.00 per week or maximum yearly income of $53,100.00 as of January 2019. Therefore, an eligible taxpayer who receives an annual salary of $100,000.00 will receive the same maximum payment every two weeks of an eligible taxpayer who receives an annual salary of $65,000.00.
Parental benefits are available to people who are away from work because they are caring for a newborn or newly adopted child. The individual can receive up to 35 weeks of benefits. The person receiving maternity benefits may also be allowed parental benefits. For instance, if a mother has claimed the maximum 25 weeks of maternity benefits, she can also claim an additional 35 weeks for the care of her newborn.
EI benefits are taxable and these federal, provincial or territorial taxes are automatically deducted from your benefits. A T4E slip is issued to individuals who have received maternity or paternal befits during the past tax year, detailing benefits received, and taxes paid. The amounts of benefits paid on box 14 of the T4E slip can be declared on line 119 of your Income Tax and Benefit return. The amount of tax paid on benefits on box 22 can be added to line 437 of your tax return, in which the amount lowers your taxes due.
These employment benefits are available to taxpayers who have insurable employment. If the taxpayer is employed, the employer will deduct EI premiums from the taxpayer’s wages or salary. For self-employed taxpayers who qualify, EI registration is required to apply for these benefits. Furthermore residents of Quebec must apply to the Quebec Parental Insurance Plan (QPIP) in lieu of maternity and parental benefits available through Employment Insurance.
Applying for Maternal and Paternal Benefits
To maximize payments, eligible taxpayers can apply for maternal benefits either before birth or as soon as possible to the date of birth, since maternity benefits must end 17 weeks after the week of birth. Following this time, parental benefits may begin.
As of March 17, 2019, eligible taxpayers can receive extra weeks of parental benefits through the new Parental Sharing Benefit. Parents can split their leave for up to 40 weeks with neither parent taking more than 35 weeks or 69 weeks with neither parent taking more than 61 weeks, for the respective standard or extended options.
If you have questions or need help with any benefits, call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenCanada Tax Return Deadlines for 2019
In Canada, personal tax returns for employees must be filed on or before April 30. Business tax returns must be filed on or before June 15 if a taxpayer, taxpayer’s spouse, or taxpayer’s common-law partner carries on a business. It is important to note that all personal tax and business tax balances owing from the previous tax year must be paid on or before April 30.
When a due date falls on a Saturday, Sunday, or public holiday recognized by the CRA, tax returns are filed on time if received or postmarked on the next business day. CRA-recognized statutory holidays are listed here.
Failing to tax file returns on time may result in delayed or stopped provincial/territorial and/or federal GST/HST credits, childcare benefit payments, old age security benefit payments, and/or late-filing penalties.
Estate Taxes and Deadline
If a taxpayer is the legal representative (the executor, administrator, or liquidator) of an estate for a taxpayer who died in the tax year in question, the taxpayer may have to file a tax return for the deceased for that tax year. If there are no documents assigning the taxpayer as the deceased’s legal representative, the taxpayer may request to be the representative by completing an Affidavit form for intestate situations. For more information, see T4011, Preparing Returns for Deceased Persons and Information Sheet RC4111, Canada Revenue Agency – What to Do Following a Death.
Tax Deadline – Where to get information?
Taxpayers may retrieve the guides, schedules, and forms required to file their tax returns here. Non-residents and deemed residents of Canada may retrieve the same here. This documentation is also available in formats accessible to those with visual impairments. For information about these formats and accessibility, see About multiple formats. Taxpayers may also complete an online order form to receive printed copies of the Income Tax Package and any other forms and publications. Taxpayers filing tax returns on paper should receive their Income Tax Packages in the mail. A limited quantity of Tax Packages will be available in both official languages at Canada Post, Service Canada, and most Caisse populaire Desjardins outlets starting in February. Immigrants, emigrants, and non-resident Canadians may consult Individuals – Leaving or entering Canada and non-residents for assistance in completing their tax returns.
Tax return preparation may require reference to still other guides, schedules, and forms. See Other guides, schedules and forms you may need to complete your income tax and benefit return for assistance.
Tax Return Deadline – Payments and Interest
Interest on balances owing for previous tax years compounds daily from the day following the April 30 deadline. Balances owing include those resulting from CRA reassessments. Amounts owing from previous years will continue to compound daily interest. Any payments towards balances owing will first apply to any amounts owing from previous years. Taxpayers are charged interest on any penalties assigned for late filing.
The rate of interest changes every three months. The late-filing penalty for 2018 is 5% of the balance owing plus 1% of the balance owing for each full month after which the balance remains unpaid. Interest may compound for a maximum of 12 months. Taxpayers charged a late-filing penalty for 2015, 2016, or 2017, may be liable to pay a late-filing penalty of 10% of any balance owing for 2018 plus 2% of this balance owing for each full month the tax return is late. Interest may compound for a maximum of 20 months.
The CRA retains legislative discretion to cancel or waive penalties or interest when taxpayers are unable to meet their tax obligations due to circumstances beyond their control. Taxpayers are only eligible for penalty or interest cancellation or waiver if they apply for taxpayer relief. The CRA considers applications only for tax years or fiscal periods ending in any of the 10 calendar years before the year in which the request is made. For example, a request made in 2019 must relate to a penalty for a tax year or fiscal period ending in 2009 or later.
If you have any questions about how to fill out Form RC4288, Request for Taxpayer Relief – Cancel or Waive Penalties or Interest, how to apply for taxpayer relief, or how to file your tax returns up to date, call us today! We can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T1135 Tax Form: Foreign Income Verification
A T1135 Tax Form: Foreign Income Verification Statement reports all required foreign property owned by a Canadian resident taxpayer. If a taxpayer in Canada owns specified foreign property with a total cost of more than $100,000, they must fill out Form T1135, the Foreign Income Verification Statement in addition to their annual income tax return.
Presently, the T1135 Form has been redesigned to have the following two-tier information reporting structure for specific foreign property:
- Part A – Simplified Reporting method
- Part B – Detailed Reporting method
T1135: Do I Fill Out the Simplified or Detailed Reporting Method?
Taxpayers can fill out the Simplified Reporting method if they own specified foreign property which collectively costs $100,000, but less than $250,000 at any time of the year. Alternatively, if the foreign specified property is valued at more than $250,000, then the taxpayer must fill out the Detailed Reporting Method.
The distinguishing factor between the two forms is that the Simplified Reporting method allows the taxpayer to report the gross income from all specified foreign property they held during the year. For the Detailed Reporting Method, the taxpayer must provide the gross income from each type of foreign property. In other words, as the name says, the Detailed Reporting Method requires the taxpayer to give a more detailed response regarding the quantum and type of specified foreign property held. Categories in the Detailed Reporting method include:
- Funds held outside of Canada;
- Shares of non-resident corporations;
- Indebtedness owed by non-resident;
- Interests in non-resident trusts;
- Real property outside Canada;
- Other property outside Canada; and
- Property held in an account with a Canadian registered securities dealer or a Canadian trust company.
T1135: What is Specified Foreign Property?
When the term “foreign property” is used, rental property owned outside of Canada immediately comes to mind. However, the categories in the Foreign Reporting Method show that specified foreign property encapsulates a much broader term. For instance, a common mistake made by taxpayers is failing to realize that foreign stocks held in Canadian registered securities dealers must be reported. As such, if you invest in classic blue-chip stocks such as Apple, Disney, Microsoft or any other companies based in American stock exchanges, they must be reported (Over $100,000).
Regarding “specified foreign property” the term also includes but are not limited to the following:
- Foreign bank account balances;
- Shares of Canadian corporations on deposit with a foreign broker;
- Shares of foreign corporations;
- Foreign land and buildings;
- Interests in foreign mutual funds;
- Debts owed by non-residents and
- Interests or rights in specified foreign property.
T1135 Penalties
Failure to file T1135 forms can result in harsh penalties for the taxpayer. Specifically, taxpayers are charged a penalty of $25 per day for up to 100 days for failing to file the T1135 Form. The minimum penalty for failure to file is $100 and the maximum is capped at $2,500 per year. So if you have missed multiple years the penalty and interest amounts can be steep!
What if I have not Filed my T1135 Form?
Taxpayers who have not filed the T1135 form or otherwise have provided inadequate information can file a Voluntary Disclosure. The CRA encourages taxpayers who have provided incomplete information, omitted information, or who have not filled Form T1135 to come forward and correct their tax affairs through the program.
It is important to note that the period within which the CRA can reassess a taxpayer’s tax return is extended by three years if both of the following conditions have been satisfied:
- The taxpayer has failed to report income form a specified foreign property on their income tax return; and
- Form T1135 was not filed, was not filed on time, or was filed inaccurately.
Taxes involving foreign property always involve an added layer of complexity. If you have any questions about how to file a T1135 form or apply for a voluntary disclosure, call us today! We can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.