If you’re holding your breath in fear, you can stop for the moment since you still have time to make things right. Turns out the IRS has yet to start referring unpaid tax debt to the U.S. State Department, at least not at this very moment…

Bye, Bye Passport

With the power vested under USC-7345, (“Revocation or denial of passport in case of certain tax delinquencies”), the IRS can, (and word is will), begin notification of the U.S. State Department about delinquent tax-payers in just a matter of weeks.

This leaves very little time to set things right and to avoid the horror of revocation or non-renewal of your passport. Of course there is the exception for return travel to the U.S., but would you really want to return home feeling like a fugitive? Not to mention dealing with the added hassles of not being authorized to open a bank account, to stay at a hotel, get a rental car or open a new smart phone plan- And the list goes on…

“But I didn’t know!”

The potential problem here is that many might be in this harrowing position and not even be aware of it. Don’t think that because you never got that letter from the IRS that you’re free and clear or can plead a lack of knowledge. The IRS doesn’t play well with others when it comes to being ignored or having tax delinquents declare ignorance. As a matter of fact, it’s not uncommon that expats come home and finally getting around to filing returns only to discover that they had already been sent a letter about a pending audit. (The “dog ate it” or “it got lost in the mail” will not work; you are expected, by law, to stay on top of all your financial responsibilities to the government.)

There is Hope

The best thing you can do is file your taxes now if you haven’t already done so. Don’t delay as the repercussions could be, using the Halloween metaphor, horrifying… With new laws now in effect, including transnational ones such as FATCA, bilateral tax treaties, and the now activated OECD Automatic Exchange of Information (AEOI), you shouldn’t be taking any chances.

What to do

The IRS is getting pretty tough with some new initiatives designed to procure unpaid taxes. We realize that tax filing itself is overwhelming but can be even worse if you are not familiar with the ins and outs of expat income tax requirements for both the U.S. and your host country.

Get in touch NOW by contacting us at info@capitaltaxltd.com

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The Sober Truth…
Sometimes what seems too good to be true can indeed be just that (or, at least, it will come with some red flags). Unfortunately, many people erroneously believe that they can simultaneously shed any responsibility for tax obligations back in Canada along with their dream retirement or exotic new job, etc., in a new locale…
Should you be one of the aforementioned, (or seriously in contemplation of joining them), it is important to ask yourself if you are prepared to also cut ties with your home country. Pretty much all the evidence points to a rather sobering conclusion: There is really only one single path to truly (legally) freeing yourself from the obligation of paying Canadian income tax and that is to absolutely renounce Canadian residency and become a permanent resident in one of these tax haven countries. You would be wise in first asking yourself: “Am I truly prepared to make such a drastic transition?”

Love of Home
Remember, paying taxes and living in a developed country like Canada also means that you are availed to certain valuable privileges and rights, things such as top-quality and comprehensive healthcare coverage, the excellent (and safe) Canadian banking system, unequalled transportation infrastructure, your many long-established social links and the ability to support a loved one and any dependent children to a degree perhaps not even nearly matched elsewhere, to name just a few of the pluses. In short, there are trade-offs due to the sobering fact that you cannot eliminate or even mitigate your tax burden as a Canadian who is living and/or working in a foreign country without renouncing your legal residency. And don’t get caught in the lie that many seem to embrace as a truth, namely that you can avoid payment of taxes to the Canadian treasury simply by living outside the country for more than a year. I don’t know where this fallacy was birthed, but it is patently false. There will always be domestic tax implications unless, again, you take the drastic step of severing ties…

The Details
Expats who choose to retain their ties with Canada are mandated to file tax forms every year and to pay their Canadian taxes on any and all world income. (The good news is that there is credit applied for taxes paid to the almost 100 countries that maintain tax treaties with Canada, this to prevent any dreaded double-taxation.)
With today’s advanced technology, one can no longer slip under the proverbial “radar.” Electronic records now move seamlessly between governments and this is making it almost impossible to get away with avoiding taxes on worldwide-sourced income. Canadian law now also mandates that the government be made aware of any transfers of funds between foreign and Canadian bank accounts. In short, the net is being tightened and any holes being stitched.

What It Means
Remarkably, these laws have driven many Canadians to indeed sever their ties with Canada. According to the statistics, most of these folks tend to be older, higher-income types looking to replant themselves in a tax-free or low-tax haven, often in the Caribbean or even the Middle East. The savings can be significant…
For example, someone making $200,000 a year would only pay approximately 15% in Hong Kong vs. 33% in Canada after changing their residency from Canada to this tax-friendly haven. Of course, these savings would be hugely less attractive after relocating to the U.S. or Europe where tax rates are not that different from Canada’s. (It is important to mention that EU law can allow Canadian passport-holders to work without permits, and NAFTA also provides permission for certain professionals to work in the U.S. and Mexico.)
The CRA (Canada Revenue Agency) states that around 20,000 people annually ask for a “determination of residency”, with almost 75% being those leaving Canada for some of these other countries. And establishing permanent residency in one of the treaty countries can be relatively easy as the CRA will usually not be inclined to throw up any roadblocks. It is important to note, however, that the bureaucratic process is not an easy one. Many experts suggest obtaining the help of a tax professional to avoid any traps into which a foreign worker can easily fall. Also, a worker seeking to be transferred by their company would be wise to ask for monetary help in obtaining the proper tax advice in such cases. In short, making such a transition should not be taken lightly.

The post Can Canadians Live Tax-Free Abroad? appeared first on International Tax Services.

Many older homeowners in Canada rely on the equity they’ve built up over the years to help fund their retirements. This is made all the more possible due to a sale’s surprisingly generous tax-free status from Canada’s principal residence exemption. Of course, many simply aim to take advantage of this tax opportunity for other reasons, such as “flipping” properties.

It is important to note, however, that this exemption applies only to one’s principal residence. Though it might seem to be straight forward on the face of it, in reality it is not so simple to determine what might count as a principal residence.

It becomes less than a walk in the park when one considers the many possibilities in which such a sale might not make the cut. A case in point are those who think getting into flipping properties can earn them a tidy, tax-free profit. Should the sale result in zero taxes then the possibility of coming out ahead is seemingly in the bag. The concept of buying a home, living there for a while and putting some sweat equity into it to achieve a profitable sale is for some a perfectly reasonable proposition. These folks have no qualms about claiming tax free status after they’ve spilt blood, sweat and tears turning a shack into a showplace. They understandably feel strongly that the one place they’ve lived in while also enduring what was in effect a construction zone should certainly qualify as a principal residence via the principal residence exemption. Many would assert, at the least, that the profit should be taxed at capital gain rates and not as business income. Well, hit the brakes as all this, unfortunately, is not the case.

If you are intending to flip a property for a profit and think you can enjoy the principal residence exemption bonus there are some things to keep in mind. First off, the property cannot be considered as business inventory and must qualify as a capital property. In other words, if the home is bought purely to flip, it will not meet the standard of being a capital property. For example, a rental property would be considered a capital property since you seek to earn income from the use of it as opposed to turning a profit from selling it. Secondly, as already mentioned, the dwelling must also be your primary residence in which you live in order for it to qualify for the PRE.

Here are the legal questions that would be referenced when attempting to determine the principal residence exemption  eligibility: What is the nature of the property being sold and how long has the individual owned it?

What is the frequency of similar transactions made by the taxpayer over the years? What is the level of work and expense put into the property to make it more attractive to potential buyers? Also, what are the circumstances around the sale of the property and what was the taxpayer’s intention in buying the property in the first place?

In light of all this the courts have created what is called the doctrine of “secondary intention.” In other words, they will put a lot of weight on what was the main intention in acquiring the property. Under this doctrine it may mean that a court would rule that the profit is not eligible for the principal residence exemption and should even be taxed as business income rather than as a capital gain. Oops…

So, in conclusion, if you are betting on the principal residence exemption to assist you in making a profit after buying a property to flip, you might want to think again. You would be wise to investigate all the aforementioned criteria that the courts and the CRA will consider when determining how you should be taxed. If you still think you can be a TV home improvement reality star, go for it. But if you’re counting on a tax break to help you along the way to stardom, you best forget about it.

The post Selling Homes Tax-Free in Canada? appeared first on International Tax Services.

This month the U.S. Congress is putting into effect a new law that empowers the government to revoke passports of citizens who refuse (or somehow neglect) to pay their taxes. According to various sources, this law also gives the U.S. State Department the right to deny tax scofflaws new passports.

If you are in arrears to the tune of $50,000 or more, (including penalties and interest), then your passport may soon be rendered meaningless. The law basically allows for the denial or, as mentioned, the actual revocation of passports for taxpayers who owe Uncle Sam.

The law officially takes effect in January and is a rider to the overall highway funding bill. It is estimated that getting tough with tax delinquents will bring in an additional $398 million over the next decade.

If you are an American who is living and working abroad, this may be particularly troublesome as you, likely, would prefer to someday return home. However, in 2014 there were almost 900,000 notices sent by the U.S. Internal Revenue Service to U.S. citizens living abroad and, should you be one of them, you might find yourself stuck in a legal limbo. Didn’t get any such notice? Well, you’re not off the hook. If you have not received a letter or some kind of notification you are still accountable. Citizens living abroad often may not get the IRS letter as the system does not allow for the best of communication with expats.

This issue will potentially affect so much of an expats life. Expats need their passports for such normal activities as banking, reserving a hotel room and even registering a kid for his or her school. This is not something to ignore as the long arm of U.S. law is extending ever further into the lives of those, who in the past, have managed to avoid paying their taxes.

There are some small exceptions. For example, if you are an American who is venturing forth for humanitarian service, you may be able to receive an exception even if you are behind on tax payments. This new rule is also not applicable to those who are on an IRS payment plan or who are in court contesting a tax case.

The bottom line: You, as an expat citizen living and working abroad, are fully responsible for and accountable to the timely and full payment of taxes owed. There are few hiding place in this increasingly interconnected world, (mail from the IRS notwithstanding)…

The post Pay Your Taxes or Lose Your Passport! appeared first on International Tax Services.

The Canadian taxation system is based on residence. Residents are taxed on any and all income from around the world, while those who are deemed non-residents are only taxed on certain kinds of income that is sourced from Canada. When someone decides to no longer be a Canadian resident, authorities are empowered to tax the individual on all income received up to the date that his or her resident status has ended, which is usually determined by the date of departure and by the disposition of all capital properties at fair market value prior to said departure. This “shakedown” generally applies to any and all income that will no longer be taxable once the person attains non-resident status. This tax is known as the “departure tax”. (This is why it always hurts to say goodbye, I guess…)
Note that “Taxable Canadian Property” such as real estate, non-listed shares of corporations, resource property or trusts are often unlikely to be disposed of by one’s departure date and are thus subject to non-resident withholding. Should a person decide that the American dream is more of a nightmare and wish to return, any capital property that was not actually disposed of while they were away from Canada may be reconciled if he or she comes back to Canada as a resident within five years of departure.
If all this is now as clear to you as a Beijing sky, then you are not alone. This is exactly why professionals such as me exist in the first place, namely to help clients wade through the morass of convoluted global tax law. We are here to help you with any and all international tax law issues and to assist in removing the burden and stress of conducting business on an international scale. Feel free to contact us today for more information on our many services.

The post Tax Considerations for Canadians Moving South of the Border appeared first on International Tax Services.

Importantly, especially for most of my readers, this also includes the FBAR form or, as it is more officially known, the “Report of Foreign Bank and Financial Accounts,” (also classified as “Form 114”). Any individual from the United States who has a financial interest in or authority over a foreign financial account is mandated to file the FBAR should the cumulative value of any and all foreign accounts exceed 10,000 U.S. Dollars.

Many of you may remember when the FBAR first came on the financial radar screen in the aftermath of the Great Recession in 2008. This was when UBS capitulated to American pressure to disclose the personal information of thousands of U.S. Swiss account holders- Uncle Sam, as to be expected, wanted his share of the action.

For those who think they can avoid Uncle Sam’s long arm should take note that failure to file the FBAR form could result in an eye-popping penalty starting at $10,000 for negligence and climbing all the way up to the nose-bleeding altitude of $100,000 (or 50 percent of the violator’s account balance) should they be breaking the law knowingly… OUCH!

Even the simple neglect of filing can result in a separate $500 fine. Keep in mind that Obama’s new law does not change the mandate that the FBAR be filed electronically along with the Bank Secrecy Act form. And it does not change the requirement to file Form 8938 with any tax return that shows certain foreign holdings. Talk to your tax professional for more clarity as this is not something to ignore if you’re working outside the U.S.

Getting down to the nitty-gritty, the law now makes clear that the due date for the FBAR is April 15. There is an allowance for an extension, the maximum of which is for a 6-month period that would end October 15. (Please note that this is decidedly not the FUBAR act though many might feel it to be…)

In all seriousness, this is actually a step forward toward a more logically integrated system. For the relevant folks living in America, this all now coordinates the timing of an FBAR submission with one’s normal income tax return. Again, the FBAR deadline will be April 15, (including the Form 1040). If one takes the offered extension beyond the so-called deadline, then they have an extra six months, (until October 15), for both the FBAR and the normal tax return to be filed.

It is important to emphasize that this extension will only be in effect starting with the 2016 FBAR (due on April 15, 2017). It will not apply to taxpayers who missed their June 30, 2015 filing deadlines for the 2014 FBAR.

The post The FBAR Filing Deadline has Changed! appeared first on International Tax Services.

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April 28th, 2015 –With Canadians enmeshed in hockey playoffs, there is little time for the bother of tax preparation. For the first time in years 5 Canadian teams have actually made the playoffs! Falling behind on something so trivial as tax filing is perfectly understandable given that if hell freezes over Canadian fans will be playing hockey there too. And now, thanks to a big blunder by the Canadian Revenue Agency (CRA), we can all turn the TVs back on or head straight to the pubs!

Filing forms after the traditional deadline of April 30, (and before May 5), won’t result in a penalty. This is a last minute, welcome reprieve to many. But what of those sterling citizens who dutifully sweated it out and managed to get it all done on time? This must feel like slashing to some.

Kerry-Lynne Findlay, the Canadian Revenue Minister is quoted as saying that this is all “unacceptable.” Thank you for the tea and sympathy. Apparently a factually challenged notice was sent out to accountants “due to human error.” People make mistakes, right? (Though maybe not as consistently as the CRA.) In the future any late filings (or even traffic violations) can be ascribed to “human error” and penalties thus will be forgiven. Watch for that to happen…

Mind you, this is not the first time the CRA has made such a brutal blunder! Just last year the agency extended the tax deadline to May 5 after a computer bug somehow managed to muck up the Canadian E-File system. During last year’s debacle, the minster also made it clear then that “incorrect information is unacceptable.” With a bold stroke of her finger she then “directed officials to ensure no Canadians are penalized for the CRA’s error‎.”

Now this: Monday the CRA put out yet another new notice announcing that, as usual, returns were once more due by midnight, April 30. But, with all the ensuing confusion, the agency quickly retracted that and declared there would be no penalties if taxes were filed by the now incorrect extension date of May 5. Huh? So hooped!

The post CANADIAN REVENUE AGENCY MAKES BIG “BOO-BOO” –TAX FILERS GIVEN AN EXTRA 5 DAYS! appeared first on International Tax Services.

You need to take heed of two technical interpretations on moving expenses The Canada Revenue Agency released this month to see if they apply to your particular situation or not.

The first interpretation related to a situation of a taxpayer completing a full-time employment contract; subsequently, that contract was renewed by the employer. The worker was offered a permanent position in that same occupation, which she accepted. She then moved 40 kilometers closer to the work place. This brings up the question of whether she could write off the moving expenses on her tax return.

It’s important to note that there are some instances where the employer and/or work location remain the same, yet the employee can write off the moving expenses on his/her tax return. It comes down to whether the employee would have been unable to assume the new job responsibilities without moving; if he/she could not, then it’s likely that he/she could write off the moving expenses.

In this specific case, however, the employee could still have assumed the new job responsibilities without moving from her old residence to her new one; thus, she likely cannot write off her moving expenses.

The second interpretation related to a situation involving a taxpayer who still works for the same company, but who accepted a job transfer to another city in Canada. Before he transferred, he, his wife, and their child lived in a leased apartment.

Due to the lease agreement, the lease could not be broken before the end of the period; thus, the taxpayer still had to make payments on the apartment even after he and his family had relocated out of that apartment to their new home.

Via the Tax Act’s definition of moving expenses, if all other conditions are met, “the cost to the taxpayer of cancelling the lease” can be claimed as a deductible expense. However, the Tax Act does not specifically define the phrase, “cancelling the lease.” As a result, the CRA uses the common meaning of the word “cancel” and case law on a case-by-case basis to determine if the cost of cancelling the lease can be written off as a “moving expense.”

Even though the taxpayer had to continue paying for the apartment after he and his family moved out of it, the payments did not cancel the lease before the end of its agreed-upon term. Thus, the CRA would likely rule that those payments cannot be written off as moving expenses on his tax return.

The post Moving Expenses: Are They A Tax Deduction Or Not? appeared first on International Tax Services.

Managing rental property

 When you’re collecting Canadian rental income as a non-resident, you need an agent or representative in the country to collect the money on your behalf. If this is all you set up, under the Canadian tax code 25% of your gross rental income would need to go to the Canadian Revenue Agency each month. Gross rental income is the money you take in from your tenants without any sort of adjustment from your monthly expenses.

 Instead, if you file Form NR6 at the start of the year, your agent would only need to send off 25% of your net rental income. This is your gross monthly rental income minus your monthly expenses. With this approach, your agent will pay significantly less to the CRA each month so more money will go to you.

Tax benefit of planning

 Let’s say you’re renting your Canadian house for $2,000 a month while you’re living abroad and you have $1,600 worth of monthly expenses for maintaining the property. Your gross income is $2,000 a month while your net income is $400 a month ($2,000 – $1,600).

 Without filing Form NR6, your representative would have to submit $500 a month to the CRA (2,000 x .25) and would pay $6,000 throughout the year. By filing Form NR6, your representative would only have to submit $100 a month ($400x.25) and would pay only $1,200 throughout the year. You’d avoid $4,800 in unnecessary tax payment by filing this form.

Preparing Form NR6

You need to file Form NR6 at the start of your tax year for the rental property. This would be the first month you start renting your property or January for properties that were rented the year before.

 On this form, you need to fill out your property’s address, your estimated gross rental income, your rental expenses, and your net income after expenses. If you own multiple rental properties, you’ll need to record this for each one. After you fill in this information, both you and your agent/representative need to sign the form.  

The post How To Minimize Taxes On Your Canadian Rental Income While Living Abroad appeared first on International Tax Services.