Monthly Archives: April 2021

“Where do we pay income tax if we retire abroad?”

As originally posted on Money Sense. Click the link to see the original article.

There are tax implications in both countries if Marianna moves to Mexico full-time.

Photo by Mikhail Nilov from Pexels

Q. We’re thinking about moving to Mexico full-time when we retire. Where would we pay income tax on our monthly Canadian pensions?
–Marianna

A. Many Canadians dream of a retirement that includes travel abroad. Some even move abroad part of the year, most of the year, or give up their Canadian residency entirely. 

In the case of Mexico, Marianna, a taxpayer is considered a resident of Mexico if they have a permanent home available to them in Mexico. If they have homes in both Mexico and Canada, the location of their centre of vital interests—their personal and economic ties—must be considered. 

The courts typically refer to the residence article of the OECD Model Tax Convention when defining centre of vital interests:

“If the individual has a permanent home in both Contracting States, it is necessary to look at the facts in order to ascertain with which of the two States his personal and economic relations are closer. Thus, regard will be had to his family and social relations, his occupations, his political, cultural, or other activities, his place of business, the place from which he administers his property, etc. The circumstances must be examined as a whole, but it is nevertheless obvious that considerations based on the personal acts of the individual must receive special attention. If a person who has a home in one State sets up a second in the other State while retaining the first, the fact that he retains the first in the environment where he has always lived, where he has worked, and where he has his family and possessions, can, together with other elements, go to demonstrate that he has retained his centre of vital interests in the first State.”

If you sell or rent out your home in Canada, and establish closer ties to Mexico, you will likely become a non-resident of Canada. There may be tax implications for assets you own when you leave. Assets like non-registered investments will be subject to a deemed disposition (sale) and this may trigger capital gains tax. Other assets, like pensions and investments, will be subject to withholding tax after you leave. 

You ask specifically about monthly pensions, Marianna. Registered pension plan (RPP) periodic payments like a defined benefit (DB) pension are subject to 15% Canadian withholding tax for a Mexican resident. The same 15% rate applies to Canada Pension Plan (CPP), Old Age Security (OAS) and registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) periodic payments. A lump sum payment is subject to 25% withholding tax. 

Tax on non-registered investments is limited to dividends or trust distributions (mutual fund or exchange-traded funds/ETFs). The rate is 15%. Most Canadian interest earned by a Mexican resident is tax-free. 

Capital gains on non-registered investments earned by a non-resident are not subject to Canadian withholding tax. 

If your Canadian income is relatively low, you may benefit from electing under section 217 of the Income Tax Act to file a Canadian tax return voluntarily. The tax would be calculated on your qualifying Canadian income. Qualifying income includes CPP, OAS, pensions, RRSP/RRIF withdrawals, and a few other sources of Canadian income. If you owe less tax than the tax withheld, you can get a refund. 

Canadian tax is only part of the story though, Marianna. Mexican residents pay tax on their worldwide income. Tax rates on low and moderate levels of income are comparable to Canadian rates. The top tax rate on income over about $245,000 Canadian (at current exchange rates) is only 35%, compared to over 50% in most Canadian provinces.  

Canadian withholding tax can generally be claimed as a foreign tax credit in Mexico to reduce the Mexican tax payable on that foreign income. This generally avoids double taxation. 

According to International Living, a comfortable retirement in Mexico, including private health insurance, could cost about US$2,500 per month. 

Good luck with your retirement plans! 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Five ways the federal budget could affect your taxes

As Seen on the National Post website. Click the link to see the original post.

Thinking of buy a new sports car, yacht or private jet in the near future? Better do it before Dec. 31.

The Liberals today unveiled its mammoth 724-page federal budget, the first one in over two years, which contained a variety of tax measures affecting individual taxpayers. Here’s some of the highlights.

Additional weeks of COVID benefits

Five ways the federal budget could affect your taxes

When the Canada Emergency Response Benefit (CERB) ended last year, it was replaced with a trio of new benefits: the Canada Recovery Benefit (CRB), the Canada Recovery Caregiving Benefit (CRCB), and the Canada Recovery Sickness Benefit (CRSB). In March 2021, about 3.5 million Canadians received income support through the recovery benefits and EI.

In Feb. 2021, the government increased the number of weeks available under the CRB and the CRCB by 12 weeks to a total of 38 weeks, and the number of weeks of EI regular benefits available by 24 weeks up to a maximum of 50 weeks. It also doubled the number of weeks available under the CRSB to four weeks from two weeks.

In today’s budget, the government proposed to provide up to 12 additional weeks of CRB, to a maximum of 50 weeks, the first four of which will be paid at $500 per week, and the remaining eight weeks to be paid at a lower amount of $300 per week for recipients who have claimed the full 42 weeks at $500, as well as for new claimants. The budget also proposed to extend the CRCB by an additional four weeks, to a maximum of 42 weeks, at $500 per week, in the event that caregiving options, particularly for those supporting children, are not available.

Tax treatment of COVID benefit repayments

In late 2020, the CRA sent out 441,000 “educational letters” warning individuals that they may not be eligible for the CERB. The letters were sent out to individuals whom the CRA said it was “unable to confirm … employment and/or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application.”

Individuals who needed to repay the CERB were encouraged to return it in 2020 (vs. in 2021) since the CERB amounts are taxable and would be reported on the T4A tax information slip for inclusion in the year they were received. If the CERB wasn’t returned until 2021, CERB recipients were to have paid tax on the full CERB amount received in 2020, and then claimed a deduction for this amount on their 2021 tax return. While for many, this is simply a cash flow or timing difference, for others, who may not have enough income in 2021 to benefit from the deduction, this could have resulted in many Canadians effectively paying tax on CERB funds they ultimately had to return.

Fortunately, the government realized that this harsh treatment would be unfair to many Canadians and as a result, today’s budget proposed a change in the law to allow individuals the option of claiming a deduction for the repayment of a COVID benefit amount for the year in which the benefit amount was received, rather than the year in which the repayment was made. This option will be available for benefit amounts repaid at any time before 2023.

For these purposes, COVID-19 benefits would include: the CERB, EI emergency response benefits, the Canada Emergency Student Benefits, the CRB, CRSB and the CRCB.

If you recently made a repayment, but already filed your 2020 return for the year in which you received the benefit, you can ask the CRA to adjust your return for that year.

Increasing OAS for Canadians 75+

Older seniors may be getting some additional cash this summer as a result of Monday’s budget. The government announced it will be providing a one-time payment of $500 in August 2021 to Old Age Security (OAS) pensioners who will be 75 or over as of June 2022. It also proposes to increase regular OAS payments for pensioners 75 and over by 10 per cent on an ongoing basis as of July 2022. This would increase the benefits for approximately 3.3 million seniors, providing additional benefits of $766 to full pensioners in the first year, and indexed to inflation going forward.

Improving access to the disability tax credit

The disability tax credit (DTC) is a non-refundable tax credit intended to recognize the impact of various non-itemizable disability-related costs. For 2021, the value of the federal credit is $1,299. Provincial and territorial credits are also available. To be eligible for the DTC, an individual must have a certificate confirming that they have a “severe and prolonged impairment in physical or mental functions.”

Earlier this month, the CRA’s Disability Advisory Committee released its second report which contained a variety of recommendations towards improving the eligibility criteria for the DTC in the areas of mental functions and life-sustaining therapy. To help more families and people living with disabilities access the benefits of the DTC, including the ability to open up a Registered Disability Savings Plan (RDSP), the budget proposes to update the list of mental functions of everyday life that is used for assessment for the DTC.

Under current rules, mental functions necessary for everyday life include: memory, problem-solving, goal-setting and judgement (taken together), and adaptive functioning. The budget proposes to expand this list to include a wider array of mental functions necessary for everyday life, including: attention, concentration, memory, judgment, perception of reality, problem-solving, goal-setting, regulation of behaviour and emotions, verbal and non-verbal comprehension and adaptive functioning.

In addition, the budget proposes to recognize more activities in determining time spent on life-sustaining therapy and to reduce the minimum required frequency of therapy to qualify for the DTC.

New luxury tax on cars, boats and aircraft

Thinking of buying a new sports car, yacht or private jet in the near future? If so, you best make your purchase by Dec. 31, 2021 to avoid the new luxury tax.

“If you’ve been lucky enough, or smart enough, or hard-working enough, to afford to spend $100,000 on a car, or $250,000 on a boat — congratulations!” reads Monday’s budget document introducing the new luxury tax. “Thank you for contributing a little bit of that good fortune to help heal the wounds of COVID and invest in our future collective prosperity… Those who can afford to buy luxury goods can afford to pay a bit more.”

The new tax kicks in on Jan. 1, 2022 and applies to sales of luxury cars and personal aircraft with a retail sales price over $100,000, and boats, with a price over $250,000. The tax will be calculated at the lesser of 20 per cent of the value above those thresholds, or 10 per cent of the full value of the luxury car, boat, or personal aircraft.

Upon purchase or lease of the car, boat or plane, the seller or lessor will be responsible for remitting the full amount of the federal tax owing, regardless of whether the good was purchased outright, financed, or leased over a period of time.

And, by the way, the GST/HST applies to the total sales price, inclusive of the new luxury tax.

Jamie.Golombek@cibc.com

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.

File your 2020 taxes or risk waiting up to two months to receive any COVID-19 financial aid, warns the CRA

Click the link to go directly to the original published article on the National Post website.

It is essential that you file your 2020 personal income tax and benefit return by April 30, 2021, warns the Canada Revenue Agency Author of the article: Christopher Nardi Publishing date: Apr 16, 2021

OTTAWA – If you were hoping to apply for one of many COVID-19 financial aid benefits on May 1, the federal government has one warning: file your 2020 taxes by the end of the month, or risk a long wait before you get your money (and even being cut off).

“It is essential that you file your 2020 personal income tax and benefit return by April 30, 2021,” warns the Canada Revenue Agency from the get-go in a “tax tip” published Wednesday.

Though one could argue that it’s always important to file ones taxes on time, it’s of particular importance to do it before the deadline this year for anyone who thinks they will claim either the Canada Recovery Benefit (CRB), the Canada Recovery Caregiving Benefit (CRCB) or the Canada Recovery Sickness Benefit (CRSB) beginning in May.

That’s because the federal government generally pays benefits to people based on their previous year’s tax filings, which allows the CRA to determine if the individual is eligible for them (such as the Canada Child Benefit).

The eligibility criteria for the CRM, CRCB and CRSB varies, but all three notably require the applicant to have earned at least $5,000 in 2019, 2020 or in the 12 months preceding the request.

So whereas an eligible applicant who has filed their taxes by the end of the month can expect money in their bank account within three to five business days, the CRA warns that those who don’t can expect the agency to request more documentation before paying out.

That process can take up to eight weeks if the documentation is in order, but can logically also result in your application being flat-out refused if you can’t prove your eligibility.

“The CRA is committed to having validation and security measures in place, to ensure that we deliver benefit payments only to people who are entitled to receive them. Where eligibility is in question, a review will be conducted to ensure that recipients were only paid amounts they were entitled to,” agency spokesperson Sylvie Branch said in a statement.

The significant delay for non-tax filers is new compared to the application process for the government’s first COVID-19 aid program launched last spring, the $2,000 per month Canada Emergency Response Benefit.

At the time, CRA approved most applications from Canadians who hadn’t filed their 2019 taxes because the program was launched months after the beginning of 2020. That meant that applicants could have made the minimum amount of money to be eligible during that period if even they didn’t in 2019.

Back in November, the CRA revealed that 800,000 recipients of CRB’s predecessor, the Canada Emergency Response Benefit, had not filed taxes in the year leading up to the pandemic.

For the CRA, the 2020 tax season will also be critical in the monumental task its facing to recoup any COVID-19 benefit overpayments to Canadians. Since those programs were designed to delivery money quickly when the pandemic struck, many of the usual pre-payment verifications were cast aside at the time.

As of now, the agency doesn’t quite know how many ineligible people or companies (via the Canada Emergency Wage Subsidy) received money it will have to claw back. But with crucial employment and revenue information now flowing in from likely millions of COVID-19 aid program recipients via their tax filings, the CRA says it will be in a better position to determine how much money it will have to recoup over the next years from ineligible or illegal claims.

Already, the auditor general revealed last month that the government had paid $500 million to CERB double-dippers that it now had to reclaim. That doesn’t even include any fraudulent, erroneous or ineligible CERB claims.

“What we are trying to do in terms of controlling fraud, where we see cases where it looks like there’s something suspicious, we do block accounts, and prevent the money from going out. So we are taking actions along the way, but we’re really going to get a big swath of information in the coming weeks that will help us determine what happened,” CRA commissioner Bob Hamilton told a parliamentary committee Thursday.

Difference between current and capital expenses has big tax consequences for rental property owners

Please go the this Financial Post article to view.

Canadian tax news and COVID-19 updates

Please go to the www.cpacanada.ca website to view current news.