Tax + Estate Planning Blog

On January 9, 2012 the Internal Revenue Service (“IRS”) issued a statement that contains two very important announcements for Canadian residents who have US tax and filing obligations: first, it will shortly issue new instructions to bring unfiled returns current for taxpayers who owe no US tax; and second, it indefinitely extends the basic terms of the 2011 Offshore Voluntary Disclosure Initiative (“OVDI” or “IRS amnesty program”), which allowed taxpayers to file delinquent returns and pay a reduced penalty. Thus, it appears Mr. Flaherty’s promise of relief for Canadian residents made on December 2 of last year is coming to fruition.

St. Michael Trust Corp. v. The Queen is the first appeal where the Supreme Court of Canada has considered the test for residency of a trust for tax purposes. The appeal was heard merely four weeks ago. We were surprised when printing out the Court's judgment that its pages could be bound by a standard staple, which is exceedingly rare for a complex tax appeal. The importance of residency status is that a Canadian-resident taxpayer, including a trust, is taxable in Canada on worldwide income.

On March 29, 2012, The Honourable Jim Flaherty, Minister of Finance released the 2012 Federal Budget. This blog discusses some of the more important tax proposals that will affect our clients and friends. Our blog of February 21, 2012 had some predictions as to what the Federal Budget would contain and certainly some of our predictions have come true as highlighted below.

The Canada Revenue Agency (“CRA”) recently lost in Tax Court against a taxpayer that had structured their operations to minimize Canadian tax. The case, Velcro Canada Inc. v. The Queen, (“Velcro Canada”) is the first case since the FCA decision of Prevost Car Inc. v. the Queen (“Prevost Car”), (see blog on March 18, 2009) that deals with the concept of “beneficial ownership” in a treaty shopping context. The purpose of this blog is to outline how treaty shopping works and how the CRA has tried to assess against this practice.

As mentioned in an earlier post, the Federal Budget is usually the place where most tax proposals arise. Accordingly, tax practitioners are keenly interested in the detailed Budget proposals that get released. However, as we have mentioned in earlier posts, there are also many income tax amendments / proposals and comfort letters released by the Department of Finance throughout the year. In addition, there are hundreds of cases released by the Courts every year in Canada that affect the practice of tax. Accordingly, while it has long been the tradition by many of our peers to race to release a Federal Budget summary, our approach at Moodys is purposefully different. We will, of course, release a Budget summary but we instead, strive for thoughtful analysis and the timely release of tax information throughout the year; not just once a year.

On February 08, 2012 the IRS issued IR 2012-15, which contains proposed regulations that clarify the manner in which non-US financial institutions will find and report US persons to the IRS, which is required by the Foreign Account Tax Compliance Act (FATCA), enacted by the US Congress in 2010. The new regulations set forth: a) the type of information the financial institution will search for; and b) the manner in which it will search for that information.

The study and practice of tax is tough. I have said it before and I'll say it again, I believe that tax is one of the most difficult areas of practice in existence.

In my many years of being a tax specialist, there have been no shortages of "tax myths" that I have run across and dealt with in practice.

RRSPs are an extremely popular investment vehicle for Canadians. With the mild weather, it may be easy to forget it is February and the RRSP deadline is February 29th. (The deadline is usually March 1, but with 2012 being a leap year it will be the last day of February.) This RRSP season, taxpayers and their advisors should be aware of a change in the RRSP rules enacted as a result of the 2011 Federal Budget. These new "advantage rules" target tax avoidance schemes and other structures that most taxpayers would not be involved in, but these rules also set a trap for the unwary. If the advantage rules apply, the Canada Revenue Agency ("CRA") may impose a penalty tax of 100%. In general terms, this 100% tax is on the amount of the "advantage", which may be the entire value of the investment.

This is not a new topic. However, it is one that we deal with time and time again....especially in recent years.

Tax policy and the implementation of tax legislation in Canada is under the purview of The Department of Finance. Much of Canada's new tax legislation arises from the annual Federal Budget. However, there are also technical amendments released in draft form (often for public comment) throughout the year. Such draft or proposed legislation may be further amended to correct for errors, provide clarification and address public submissions before it is finally released into a Bill. The Bill is then put before Canada's House of Commons and the Senate for debate and eventually receives Royal Assent and becomes law (unless for some reason the Bill fails to pass). The proposed legislation will often contain detailed “coming into force” provisions that establish the date from which a specific proposed provision will have legal application. Often, but not always, the application of the proposed legislation will be effective from a date earlier (i.e. retroactive effect) than the date that the provision is actually passed into law. The process to convert draft legislation to law can often take a long time.

Firstly, this is my list not yours. It is very subjective and is a reflection of my many years of experience of being a tax specialist and building a “tax only” advisory practice. Most of the practitioners that are clients and friends of our firm know their tax limitations. However, there are other practitioners whose work we often trip across that do not know their limitations. The simple fact is that tax is tough. I would venture to say that it is one of the most challenging professions in existence. Unfortunately, there is no tax specialist designation in Canada to help the public identify professionals who have credible knowledge and experience in tax. I'm hopeful that will change soon.

With the above in mind, here are the top five mistakes we often see.

On January 9, 2012 the IRS issued IR 2012-5, which makes two very important announcements: First, it promises new procedures to bring unfiled returns current for taxpayers who have not filed, but owe no tax. Second, it indefinitely extends the basic terms of the 2011 Offshore Voluntary Disclosure Initiative (OVDI).

Copthorne Holdings Ltd. v. Canada, 2011 SCC 63 (CanLII) is a recent decision from the Supreme Court of Canada regarding the general anti-avoidance rule (“GAAR”)^[1] and provides the much-anticipated interpretation and confirmation of these rules.  While the “main event” was whether the transactions undertaken by the taxpayer resulted in abusive tax avoidance to which the GAAR applies, this blog focuses on the Court’s analysis of the meaning of “series of transactions”.  The “series of transactions” concept was critical to the outcome of this appeal.  The Court provided guidance on how past, present and future transactions are “contemplated”, thereby confirming the framework by which a “series of transactions” would be identified for the application of the GAAR.

On December 15^th and 16^th I attended the International Taxation conference sponsored by the IRS and held in Washington DC.  There were more than 700 people in attendance and the lunchtime speaker on the first day was Douglas Shulman, the Commissioner of the IRS.  At the end of his prepared remarks he answered only three questions posed by the audience.

Now that the OVDI Program is over and the IRS has released its Fact Sheet on US citizens or dual citizens residing outside of the US, this is a good time to reflect on some common circumstances when US citizens resident in Canada may have additional US tax to pay.

Late on December 7, 2011 the IRS issued Fact Sheet 2011-13 ("Information for U.S. Citizens or Dual Citizens Residing Outside the U.S."), which provides important guidance on two matters for taxpayers residing outside of the U.S.: first it gives insight into the type of facts that would support a "reasonable cause" argument for the abatement of penalties. Second, it clarifies the procedure to bring current unfiled returns, thereby confirming the IRS’s disdain for “quiet disclosures.” The guidance provided by the Fact Sheet makes clear the importance of engaging a professional who is experienced in these matters.

On December 2, 2011 Canada’s Globe and Mail reported, after an interview with US Ambassador to Canada Jacobsen, that US citizens living in Canada will be able to avoid the punitive penalties that result from the failure to file US income tax returns and other forms.

In the tax profession, there are a number of issues that bug me.  For example, the absence of a tax specialist designation in Canada to help the public distinguish between non-tax specialists and tax specialists bugs me.  I first wrote about this issue in our July 11, 2011 blog.  The fact is that I've held this view for well over a decade ... it's important to ensure that the public is better served.

As many regular readers of our blog or our Twitter feeds (@RoyBerg1, @Moodystax) already know, applications for the 2011 US OVDI ended on September 9, 2011.  However, there has been no shortage of activity regarding non-compliant US citizens.  Yesterday, our firm received some news from a highly-placed source regarding some further activity.  Apparently, a very influential US body has drafted a letter that should be made public later this week.  The letter advocates lenient tax treatment for US Citizens residing in Canada who are not current with their filing obligations.

On October 31, 2011 (on the fifth anniversary of the income trust amendments) the Department of Finance released a package of income tax and sales and excise tax technical amendments.  While most practitioners, including our firm, are still working through the package there are two proposed amendments that are worthy of an early comment.

Have you or your clients ever sold an intangible property like a client list?  A recent Tax Court of Canada case, George Smith v. Her Majesty the Queen, highlights the tax implications that can arise on the sale of such a property.

By now many US Citizens (and holders of US green cards) living in Canada are aware that they must file US income tax returns and other forms because of their citizenship status; and that the failure to comply can have ruinous financial consequences.  What many don’t know, however, is that the same individuals must also file another annual form or risk losing the tax-free growth in their registered retirement savings accounts (RRSPs).

Mr. Roy Berg of Moodys interviewed regarding the Internal Revenue Service amnesty program for US Citizens and green card holders that expires August 31, 2011.

With much fanfare, the “kiddie tax” was introduced into Canadian tax law effective January 1, 2000.  My, how time flies.  It does not seem like it was 11.5 years ago that such a tax was introduced to prevent income splitting mischief.

Before we proceed the reader needs to know that the views expressed below are mine only and do not necessarily represent the views of all the accounting professionals in our firm.

In my many years of practice, it never fails to amaze me how many people rely on non-qualified persons for advice in one of the most complex topics there is – tax planning.

IRS Grants Significant Penalty Relief and Extensions Under the 2011 OVDI in Certain Circumstances.