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How does FATCA work?

The Foreign Account Tax Compliance Act (FATCA) launched in 2010. This bill created new rules for Americans with financial accounts in another country. This includes bank accounts, investment accounts, partnership interests, and trust funds. Americans need to report the value of these foreign accounts to the IRS every year so the IRS can keep track. The government launched this rule to prevent Americans from avoiding taxes by moving their money overseas.

Reporting rules for Americans

Every year, Americans and American permanent residents could need to fill out Form 8938 for the IRS. This Form lets them list the information on all their foreign financial accounts as well as the amount of money they have in each account. Now, the IRS is only interested in accounts over a certain size. You only need to report accounts that either were worth at least $50,000 at the end of the tax year or were worth $75,000 or more at some point during the year. If none of your foreign accounts are over this threshold, you don’t need to file under FATCA.

If you do have accounts that need to be reported, you need to submit Form 8938 along with your American tax return. If you were supposed to file and don’t, the IRS could charge a penalty up to $10,000 for a failure to file plus an extra $10,000 for every 30 days you are late up to a maximum of $60,000. Criminal penalties can also apply.

Reporting rules for foreign banks and financial institutions

Foreign banks and financial institutions also need to report to the IRS. Their main responsibility is to show the IRS that they are keeping track of the tax status of their account holders so that Americans aren’t using their accounts to avoid taxes.

If you’re an American and have a foreign account, the financial institution might ask you to fill out a W-9. This form reports your tax status as an American for the foreign account. Most people will be filing as an individual and will need to report their Social Security Number. If you own your foreign account through a corporation or trust, you’ll need to report the entity’s Taxpayer Identification Number.

Your bank might have other requirements like they need to see your company’s articles of incorporation. Check with your institution to make sure you’ve handled everything properly for FATCA.

Reporting rules for non-Americans

Non-Americans have some very basic reporting requirements as well. This has confused some non-Americans who wonder why they have to fill out paperwork with the IRS while not having anything to do with the United States. They just need to report to their bank or financial institution that they are not American so FATCA doesn’t apply to them.

If you need to fill out any paperwork, you’ll likely need to file a W-8. By filing this form, you are claiming an exemption from US reporting requirements because you aren’t American. Once again, your bank might have some more basic requirements, like you need to show your passport, but it shouldn’t take much to handle FATCA.

Unfortunately, FATCA is just one more tax responsibility for people around the World. The good news is that the requirements aren’t too bad for most people and with a little planning you should be able to handle everything without any trouble.

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Changes were made to both the Offshore Voluntary Disclosure Program (OVDP) and the streamlined filing compliance procedures. The streamlined procedures require a taxpayer to file a statement declaring their failure to disclose offshore assets was non-willful.

Some of the major changes to the streamlined procedures include:

1. Requiring taxpayers to declare that previous failures to disclose income, pay tax, and submit required information returns, including FBARs and offshore assets was due to non-willful conduct.
2. Eligible taxpayers who declare non-willful conduct can avoid the offshore penalty all together if they live overseas; residents of the U.S. face a 5% penalty.
3. Eliminating a requirement that taxpayers have $1,500 or less of unpaid tax per year.
4. Eliminating the required risk questionnaire.

Major changes to the OVDP were:

1. Requiring additional information from taxpayers applying to the program.
2. Requiring taxpayers to submit all account statements, pay all of the taxes, penalties, and interest at the time of submission.
3. Enabling taxpayers to submit voluminous records electronically rather than on paper
4. Increasing the offshore penalty percentage from 27.5% to 50% if, before the taxpayer’s OVDPpre-clearance request is submitted, it becomes public that a financial institution where the taxpayer holds an account or another party facilitating the taxpayer’s offshore arrangement is under investigation by the IRS or DOJ.

As part of the Foreign Account Tax Compliance Act (FACTA) reporting regime, foreign financial institutions will start to report to the IRS foreign accounts and assets held by U.S. citizens, who can end up paying a 50% miscellaneous offshore penalty. This list of foreign financial institutions will continue to expand as time passes. We strongly urge you to comply with the new OVDP regulations and streamlined procedures to avoid hefty civil penalties, largely eliminate the risk of criminal prosecution relating to tax noncompliance, and be able to have peace of mind.

Our firm can assist you with your OVDP and streamlined procedure filings. Please contact us if you are interested or have any questions regarding the new OVDP and streamlined procedures.

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A Global Reach

Indeed, Canada is not the only country pursuing such methods. In fact, the Foreign Income Verification Statement (Form T1135) is in line with the steps defined by the Organization for Economic Cooperation and Development (OECD) and their protocols to fight tax fraud and evasion.

This is on the heels of the recent action of the United States in relation to the exposure of over 4,000 nationals that had significant holdings in the Swiss banking giant UBS. In fact, Canada has recently taken similar steps when it uncovered no less than 180 individuals that had holdings in Liechtenstein. To put the figures into a bit of perspective, it was found that no less than 130,000 individuals had holdings in offshore havens and 450 of those identified were of Canadian nationality. Of course, having such accounts is by no means illegal. On the contrary, it is only those who openly or covertly flout tax laws that need to be investigated. So, the CRA launched a tax evasion hotline in 2013. Part of the taxes collected from a successful outcome would be given to the informants themselves.

Completing the T1135

Recall that this form actually dates from the 1990s and is therefore nothing new to the taxpayer. Any taxpayer with a foreign holding of more than $100,000 Canadian dollars will need to fill in and submit this form. This property includes funds in foreign bank accounts, interest from foreign trusts, bonds or share issued abroad and indeed any form of taxable foreign income.

However, the levels of disclosure that have been implemented since 2013 are the major difference in reporting methods. Again, this is seen as one step that the Canada Revenue Agency has taken to allow for a higher level of transparency  while simultaneously discouraging fraud. Unfortunately, some of the information that is required may be difficult to come by (such as a detailed analysis of investment activity within a foreign account). Other details are also required. These will include the name of any property held outside of Canada as well as the country in which it is located. The maximum cost is also required as is any related gain (or loss) that may have resulted from the sale of one of these properties. Recall that this is in contrast to the previous requirements that only asked for general information such as year-end costs, the total income earned and the classification of the country itself.

Compliance Issues

The CRA is also taking certain steps to ensure that this information is reported. If one fails to fill in form T1135, does so late or reports incorrect data, he or she can be investigated for a total of six previous years. Obviously, this would place all income and deductions under a great deal of scrutiny. Finally, a penalty of up to $2,500 Canadian dollars may be levied in some cases. All in all, these are excellent ways to motivate an individual to comply with such new legislation.

Slight Leeway

This has obviously caused a certain amount of confusion and consternation amongst those who hold foreign investments. For this reason, the deadline for filing form T1135 has been extended until July 31st 30th or June 16th). Also, the CRA has allowed a more streamlined reporting service for those individuals who may have their holdings in an account that is a securities dealer registered with the Canada Revenue Agency. In other words, individuals will be able to report any combined values of their properties for the 2013 tax year by July 31st  year.

Remember that for the 2014 tax year, you must report all of the aforementioned information on the T1135 tax form. It is only this first year that the CRA has offered  a bit of leeway. So, it is better to put together any foreign property details sooner as opposed to later. This can help prevent a good deal of frustration and even the possibility of stiff penalties further down the line.

The actions taken by CRA are but one example of the global crackdown on foreign tax evasion and fraud that we have witnessed in recent years. Whether individuals choose to agree with these measures or not, it is no secret that form T1135 and other such regulations are indeed a permanent fixture of the CRA’s reporting policies. Thus, it is best to become acclimated to how such logistics operate by speaking with a professional financial adviser or tax professional.

Contact us for more information.

The post The CRA and Foreign Holdings: Points to Keep in Mind appeared first on International Tax Services.

A Home Office

Those who work from home can actually claim a home office on their returns. Still, there are two considerations that need to be taken into account. First, this office must be regularly used as a standalone place for business. Secondly, you must also meet with clients or customers in this office.

Personal Health Insurance

A good amount of savings can arise from health insurance premiums for those who are self-employed. In general, you will able to write these premiums off so that they will meet or rise above any profits that were generated by your business during the tax year. Still, it is important to recall that this would be in the form of a reduction of your adjusted gross income as opposed to against the income from your business.

Retirement

Believe it or not, you will also be able to claim credits against your self-employed retirement plan (SEP). Once again, the same principle will be involved that we have just seen in personal health insurance; the deduction would arise from your gross income as opposed to your business income.

Travel Mileage

Another frequently overlooked deduction arises from the mileage that you may have driven for business purposes during the previous tax year. For this year, you can claim 56 cents for every mile you have driven. As you may have suspected, you would need to have kept an accurate log to claim this deduction.

Educational Write-Offs

If you can prove that any educational courses have helped you to advance in your business, these can also be claimed. These can include (but may not be limited to) books, classes, online courses, e-books and even travel expenses to and from a certain school or seminar.

Entertainment or Meals

This write-off should be taken with caution, as you will only be able to deduct these expenses if they can be proven to have benefited your business. So, an example of this could be meeting a client for a business lunch. However, taking yourself out for drinks on a Friday evening will not qualify.

Supplies for your Office

You may already be aware that all expenses that are directly related to the day-to-day functioning of your office can be written off. These can include paper, pens, computers, furniture and even cleaning supplies. However, electronic devices such as a laptop will only qualify if they are used at least 70% for work-related activities.

Utility Bills

You will be able to write off a utility such as a landline, but it must be proven that the line was solely dedicated for business use. Another example would be the Internet supplied to your home office. Still, this may be tricky and the CRA may indeed ask for proof of this case. So, be ready to have records available upon request.

Additional Travel Expenses

Although we have already seen that mileage can be deducted to a point, there are other expenses that can likewise be mitigated. These include parking fees, plane tickets, train reservations and tolls. As always, it must be proven that these were work-related.

Marketing and Advertising

Any item that is related to the promotion or exposure of your business can likewise be counted as a write-off. These can include business cards, newspaper adverts, trade events, online paid platforms and website expenses. As always, you will need to prove that these expenses were directly related to the performance of your business.

Finally, you will also be able to utilize a massive write-off through your payroll. This will entirely depend on the size and scope of your business. For instance, you may be involved in the manufacturing industry. In this case, it is likely that the cost of the goods and their shipment will be the main source of your write-offs.

It should also be made clear that unless you have detailed proof of the aforementioned expenses and their relation to your business, it is not worthwhile claiming any write-offs through them. Keeping a spreadsheet and accurate files is critical should the CRA require any further documentation.

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The Possibility of a Lower Taxed Income

There are many countries around the world that will obligate you to pay less taxes into their system than the CRA. This is one of the reasons why it may be worthwhile considering to sever your Canadian ties. Obviously, you will be no longer taxed on any subsequent income that you will make by doing so. One important aspect to note is that while this decision needs to be carefully examined, severing your tax status will NOT affect your Canadian citizenship or domestic status; this is ONLY for tax purposes.

Do you plan to return to Canada in the future? Do you currently hold a good amount of tangible assets in the country (such as a house or property)? These are some of the main questions that you need to ask. Also, remember that there is no definite time frame that you will be seen as a non-resident. So, it is always wise to seek the advice of a professional to determine your individual situation.

Residential Ties

There are two types of Canadian ties: primary and secondary. These aforementioned variables (property, substantial financial interests, a spouse, a home, etc.) are seen as primary ties. These will be important to negate, for the CRA may otherwise view you as a current resident.

Secondary ties will be looked at as an entire group. In other words, no single tie will cause you to be viewed as a resident. Still, you should make an effort to do away with these variables as well. Examples of secondary ties include Canadian bank accounts, credit cards and even regional memberships to clubs and organizations.

Also, do not forget that you should also let others know that you are attempting to sever your residential status for tax purposes. This is critical for those who are sending or handling your funds. So, banks, lending institutions and credit card agencies should be notified. This will accomplish two purposes. First and foremost, it will allow the CRA to view evidence that you are indeed intending to ablate your residential ties. Secondly, the institutions that are sending you money will be able to enact the correct non-resident withholding taxes. If this is not done, you may very well be responsible for this remuneration even after your have departed.

Documentation

You may be required to submit a form that is known as an NR73 to the Canada Revenue Agency. This is otherwise known as a Determination of Residency Status (Leaving Canada). Still, you should not need to submit this form (or your tax adviser) unless it is made clear that the CRA needs to determine your tax status.

A Departure Tax?

When you decide to become a non-resident of Canada, you will need to file what is known as a final departure tax form. This will need to be submitted to the Canada Revenue Agency by the 30^th of April on the year AFTER you completely sever your taxable ties.

There are several outcomes that can take place. The most frequent is that you may be reassessed of the fair market value of the assets that you currently own. Also, your personal tax credits may be pro-rationed. Any properties (such as rentals) that are owned will likewise have certain taxation obligations that must be met. This will still need to occur on an annual basis, even if you have left the country.

Of course, many of these and other conditions will depend upon your individual situation. As each case is unique in its very nature, your best option is to consult with a qualified tax attorney. This will help to guarantee that any departure tax variables can be adequately addressed before you leave; thus saving potential problems further afield.

If You Decide to Maintain Your Domestic Canadian Residency

There may be times when it will prove wise to instead retain your Canadian tax status. This can be due to a spouse, a dependent or a substantial amount of equity that you hold in the country. Should this be the case, it is critical that you remember that you will need to file a Canadian tax return each and every year you are abroad. Most importantly, you will still need to show your earnings; even if they come from a foreign country.

However, the good news is that in the majority of cases, the Canada Revenue Agency will allot you a foreign tax credit for the taxes that you have already paid to the country abroad. Still, this does not exempt you from legally filing a tax return with the Canadian authorities. If you fail to do so, there is a chance that you may be contacted by the CRA in the future and file such a return.

Of course, this is not common knowledge to most people. Foreign tax obligations in relation to Canadian requirements can be complicated and these will vary depending on your unique situation. It is for this reason that you would be wise to seek the advice of a qualified tax professional.

The post Canadians Abroad: Tax Basics You Need to Know appeared first on International Tax Services.

Public Transit Credit

If you live in a major metropolitan area, you may very well have purchased travel passes for a subway, bus or train. You can claim this back by referring the Public Transit Amount on any Canada Revenue Agency tax return. Still, remember that you will have needed to apply for a transit pass that had given you unlimited journeys to claim this credit. You can find out further information in regards to this credit by directly visiting the CRA online portal.

Tax Credit for First-Time Home Buyers

Did you purchase a home during the 2013 tax year? If you, you may be eligible for up to $5,000 Canadian dollars in tax credit. There are some criteria that should be met, however. First, the home that was purchased would have to have qualified for this credit (you may wish to check with the CRA for this stipulation) and the house will need to be the first home that you have resided in during the past five years. For example, if you have bought your first home after having lived in an apartment for the past decade, this type of credit is worth having a look into. This is also simply abbreviated as HBTC.

Children’s Fitness

You may be able to claim up to five hundred dollars with this tax credit opportunity. Perhaps your daughter of fifteen years went to regular dance classes or you had enrolled your sun into a sports programme. If your child was under sixteen (eighteen if he or she had a disability), you could be eligible for this credit. In fact, children with disabilities can be able to receive an even greater amount. Once again, consult the CRA website for more details.

Children’s Arts

If makes sense to mention this opportunity alongside the children’s fitness category. As with the Children’s Fitness, the child must be under sixteen years of age (or eighteen for a disabled child). The CRA defines this type of credit as a “prescribed program of artistic, cultural, recreational or developmental activity).

Any Medical Expenses?

You have the ability to claim a variety of medical costs for yourself, your partner, a common-law partner and any children that are dependent (17 years of age or younger). Some of the most common costs that you can claim will include (but are not necessarily limited to) psychologists, assisted care, prescription drugs, dental treatments, physiotherapy and any at-home care that has been given by a professional. Also, it is important to note that these expenses can be claimed if they are found to have exceeded 3% of your income or they total more than $2,152 dollars. The best way to determine this credit will be to pool all expenses together and thereafter, to file them on an individual tax return. A good tip is to file these costs on the return of whichever person earns the lowest income. If the expenses do not equate to the aforementioned amounts, it is best to hold off filing. Keep all of the receipts and you will be able to subsequently file at the end of the 2014 tax year.

Donations

First and foremost, you should realize that if you have been making donations for several years, you will be unable to apply for this type of credit. Still, you can enjoy other benefits from these actions. This is due to the fact that in Ontario, the credit that any individual will receive when donating over $200 dollars is exactly 40.16%. As with the medical expenses, all donations should be grouped together and filed at once if you and your spouse have both contributed (it is not important whose name will appear on the donation receipts). It is best to claim this credit on the return of the person that is paying the highest tax rate. Also, keep in mind that the maximum amount for this limit is 75% of total income. Again, you can always “roll over” these donations to the 2014 tax year if you are unable to claim for the 2013 return. Make certain that the charities that you have donated to are certified by the CRA. You can also take a look on the CRA website to learn more about how to file and which situations will qualify for tax credits.

Above all, remember to keep your documentation updated and available. This will make the entire process of claiming tax credits easy and streamlined. You can always refer to the website of the Canada Revenue Agency or speak with us for more details at www.capitaltaxltd.com

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