Category Archives: News

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

Category:News

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

Category:News

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.

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

Category:News

Please go the this Financial Post article to view.

CRA updates principal residence folio

Category:News

With the price of real estate skyrocketing, Ottawa is concerned that Canadians are accessing the PRE inappropriately

By: Rudy Mezzetta Source : Investment Executive August 23, 2019 00:27

The Canada revenue Agency’s (CRA) revised principal residence exemption (PRE) reporting rules, introduced three years ago, are changing the way Canadians think about a tax benefit that homeowners tend to take for granted, tax experts say.

Now that the CRA has more information about each property sold, many Canadians recognize that they need to understand the rules governing the PRE better in order to avoid paying tax on the sale of their home.

“People realize they have to fill out this paperwork now when they sell [their property] to claim the PRE,” says Debbie Pearl-Weinberg, executive director of tax and estate planning in Toronto-based Canadian Imperial Bank of Commerce’s financial planning and advice group. “We’re seeing

questions on what constitutes a principal residence: ‘Does the property qualify; what if a portion is rented out; what about change of use?’ Things like that.”

Says Mariska Loeppky, director of tax and estate planning with Investors Group Inc. in Winnipeg: “There are lots of people who will rent out their home for a while and not give a second thought to it, but that’s a taxable event.”

The CRA issued in July an updated Income Tax Folio S1-F3-C2, Principal Residence to help Canadians navigate the rules governing the PRE. The document includes information about the revised reporting requirements and key technical changes made to the PRE rules over the past few years, as well as a comprehensive explanation of how the rules work.

In October 2016, the federal government announced that beginning with the 2016 tax year, taxpayers must report basic information, such as proceeds of sale, description of property and date of acquisition, at the time the principal residence is sold in order to claim the full PRE. Previously, homeowners didn’t have to report the sale of a property if they were designating it as their principal residence for every tax year they owned it.

Under the revised reporting rules, taxpayers provide information about the sale on Schedule 3 of their tax return, and by filing Form T2091, Designation of a Property as a Principal Residence by an Individual. Late filing the form comes with a penalty of $100 per month, to a maximum of $8,000 – although the CRA did indicate, when it introduced the revised rules, that it would exercise leniency in applying the penalties. “That discretion is probably going to end at some point,” Loeppky says.

The CRA now has the right to reassess a tax return, beyond the normal three-year reassessment window, if a taxpayer fails to report the sale of a home. “That’s really a big step,” Pearl-Weinberg says, because it thwarts taxpayers who may hope the CRA won’t “discover [the sale] within the normal reassessment period.”

For many homeowners, the revised reporting rules will not hinder their ability to access the PRE, says Wilmot George, vice president of tax, retirement and estate planning with Toronto-based CI Investments Inc. The basic rules haven’t changed: if a Canadian resident (and/or the Canadian resident’s family unit) owns an eligible home – and “ordinarily inhabits” it – he or she will be able to designate the property as his or her principal residence and not pay tax on the capital gain realized on the sale.

“The message isn’t that you’re not entitled to the PRE, for the large majority of Canadians,” George says. Rather, if the property is eligible for the PRE, the message is “be sure to report it.”

The government’s motivation for tightening the reporting rules is to increase compliance in the real estate sector in general. With the price of real estate skyrocketing in recent years, Ottawa is concerned that Canadians are accessing the PRE inappropriately. In the 2019 budget, the federal government proposed giving the CRA $50 million over five years, and $10 million ongoing, to fund a task force with a mandate to ensure people are paying their fair share of taxes in relation to real estate transactions.

The government is concerned about situations in which taxpayers are repeatedly purchasing, renovating and reselling properties for profit – a.k.a. “flipping” – and claiming the PRE when they are not eligible.

“If there’s a habit of buying and selling in relatively short periods, then that might speak to the generation of business income as opposed to capital gains,” George says. Among other factors, the CRA will look at how long the property was owned, the owner’s recent transactions and whether renovations were made to determine whether profits from the sale would be considered taxable business income, George says.

The revised reporting rules also will help the CRA ensure taxpayers claim the PRE for only one property per tax year. If an individual owns multiple eligible properties – say, a city home and a vacation home – he or she can claim the PRE for one property for some years and for the other property in other years, but not for both properties in same tax year.

Individuals who own multiple eligible properties now must be more careful when deciding whether to claim the PRE at the time they sell their first home or to “save” the PRE for a second home. A formula is used to determine what percentage of the capital gain on the sale of a home the individual can shelter with the PRE.

“It can be a very complicated comparative analysis,” Pearl-Weinberg says. “You have to look at what the consequences would be right now [and] what percentage of the gain would be covered right now versus what might happen in the future.”

Loeppky advises that homeowners keep all receipts documenting the cost of the home and all improvements to it – for all properties owned. When the time comes to sell a home for which the PRE will not be claimed, the cost of the improvements can be added to the property’s adjusted cost base, lowering the capital gain that will have to be reported for that home.

“You don’t know which house will have a bigger gain,” Loeppky says. Sometimes taxpayers won’t keep receipts for their city home, but do so for their vacation home, thinking that the PRE will cover the gain in their city home – only to discover that their vacation home has incurred more of a gain. “You want to put yourself in the position of maximizing the use of the PRE when it comes time to sell,” Loeppky says.

The considerations become even more complex for a rental property when the PRE is concerned.

If a taxpayer owns a property for the sole purpose of renting it out, he or she will pay taxes on the income earned annually and, when the property is eventually sold, the capital gains on the proceeds of the sale would be taxable at the capital gains inclusion rate of 50%.

On the other hand, if a taxpayer lives in a principal residence, but rents out part of the property, the PRE still could be available if certain conditions are met, including that no structural changes are made to the property for rental purposes, and the rental use is ancillary to the property’s main use as a primary residence.

Much will depend on the facts of each case. “If you have [modified] your principal residence in some significant way, then you may have an issue as to whether you can claim the PRE,” says Doug Carroll, practice lead for tax, estate and financial planning with St. Catharines, Ont.-based Meridian Credit Union. “For people who are renting out a room, [claiming the PRE] may not be a problem if [the rental use] is not a major part of the reason that they own the house.”

Sometimes a person will own a primary residence, but wants to turn it into a rental property. Conversely, an individual may own a rental property, but wants to turn it into their primary residence. Both of these scenarios would be regarded as a “change of use” by the CRA, and be treated as a deemed disposition.

In either scenario, the taxpayer can elect to opt out of the deemed disposition, thus extending the number of years that the property can be designated a principal residence by up to four years (subject to certain conditions). These “change of use” special elections may give taxpayers more flexibility in determining when and for which property they can claim a PRE.

A proposal included in Budget 2019 would allow taxpayers to elect not to incur a deemed disposition when there has been a change in use to just a part of a property. This change to the tax rules is not yet law, and is not reflected in the updated tax folio for principal residences.