ReportWire

Tag: withholding tax

  • Moving abroad? Think about the tax consequences – MoneySense

    [ad_1]

    Changing your tax residency

    Canadian residents must report their “world income” in Canadian funds. When they become non-residents, they must file a final tax return as of the date of emigration to report income for the period of residency in Canada and, in some cases, pay a departure tax.

    Tax form filing requirements

    To begin, if the fair market value (FMV) of all property owned as of the date of emigration is more than $25,000, you’ll need to fill out and submit form T1161 List of Property of an Emigrant to Canada. This document must be attached to your T1 return. In fact, even if you don’t file a T1, failure to file this form by your tax filing due date will attract penalties.  

    To calculate a capital gain or loss on your deemed disposition, complete form T1243, Deemed Disposition of Property by an Emigrant of Canada and attach it to your T1 return. Some exceptions apply in both these cases, discussed below. 

    Should you owe money upon departure, but can’t pay because you haven’t sold your property or don’t want to, there is another important form: T1244, Election, under Subsection 220(4.5) of the Income Tax Act, to Defer the Payment of Tax on Income Relating to the Deemed Disposition of Property. Expect to post security in these cases if the capital gain exceeds $100,000.

    Exceptions to reporting requirements

    You don’t have to report the following assets when you leave Canada:

    Note that in the case of your Canadian pensions, non-residents are subject to a 25% withholding tax on the income paid, which is withheld at source by the pension fund. Non-residents can apply to reduce the withholding tax every five years, using form NR5. There may be tax treaty variations, but this would normally be a final tax owed to Canada with no further tax filing obligations on this income source.  

    Note that filing a tax return annually is a prerequisite to receive Old Age Security (OAS) when living abroad. Recipients must meet two other criteria. They must have:

    • Been a Canadian citizen or a legal resident of Canada on the day before they left Canada
    • Resided in Canada for at least 20 years since the age of 18

    Income Tax Guide for Canadians

    Deadlines, tax tips and more

    If you hold the following taxable properties when you leave Canada, you won’t need to report them before you leave. The future disposition of these “taxable Canadian properties” will require filing when these assets are actually disposed of:

    Article Continues Below Advertisement


    • Canadian real or immovable property, Canadian resource property, and timber resource property 
    • Canadian business property (including inventory) if the business is carried on through a permanent establishment in Canada

    You can elect to report the FMV of these properties on departure by filing form T2061. This is known as an Election By An Emigrant To Report Deemed Dispositions Of Property And Any Resulting Capital Gain Or Loss.  

    That leaves the non-registered financial assets in investment accounts on your balance sheet to consider. They must be reported on the final return at their FMV, so choose your departure date carefully. Remember, you won’t need to file your T1 return until April 30 of the year after you leave.

    Even if you don’t have investments or real estate or business assets to report, you may not be off the hook: personal-use property with a fair market value of more than $10,000 must be reported on exit. That includes cars, boats, jewelry, antiques, collections, and family heirlooms if together these items are worth more than $10,000 in value.  

    Different rules for immigrants

    The rules are different rules for immigrants who now wish to move on. It is not necessary to pay departure tax on property owned when the person last became a resident of Canada (or property inherited afterward) if residency in Canada was 60 months or less during the 10-year period before emigration. This rule doesn’t apply, however, if the person is a trust, and the property is not “taxable Canadian property.” 

    Penalties for failure to file forms

    You’ll be subject to a penalty if you miss filing a final T1 return. Form T1161—your asset list—attracts its own penalties, too. Whether you file a T1 or not, the T1161 must be filed on or before your filing due date. The penalty for failing to file is $25 for each day it’s late, with a minimum of $100 and a maximum penalty of $2,500. Interest on the balance due and penalties is extra. 

    What about provincial taxes?  

    Remember, the Canadian tax filing system is based on residency, not citizenship. That means you report all your worldwide income in Canadian funds on your Canadian tax return. Your provincial share is normally based on where you lived on December 31 of the tax year. But this also changes to your date of emigration when you leave the country, for the purpose of determining provincial tax residency.  

    Coming back to live in Canada

    If you ultimately change your mind about emigrating or a foreign job opportunity runs its course, it is possible to unwind your departure tax when you become a resident of Canada again, as long as you still own the property you previously reported at FMV when you left Canada. The Canada Revenue Agency (CRA) notes that if you make this election for taxable Canadian property previously reported, you can reduce the gain up to the amount of the gain that you reported.

    For other properties, reduce the amount of the proceeds of disposition that you reported on your tax return by the least of the amount of the gain reported on your final T1 on departure, the FMV of the property when you returned, or any other amount up to the lesser of those two amounts. At this point your tax situation has become complex, so you’ll probably need professional help to get it right. Dealing with the CRA on these compliance issues can be very time-consuming. 

    [ad_2]

    Evelyn Jacks, RWM, MFA, MFA-P, FDFS

    Source link

  • Why Canadian investors should avoid MLPs  – MoneySense

    [ad_1]

    Common examples include American mortgage real estate investment trusts (mREITs) and business development companies (BDCs). Both tend to be highly leveraged and structurally complex, and the headline yield rarely tells the full story. The same applies to Master Limited Partnerships, or MLPs.

    What is a master limited partnership?

    MLPs occupy the midstream segment of the energy sector. This part of the industry focuses on transporting, storing, and processing oil and gas rather than producing or retailing it. Canadian investors are already familiar with midstream businesses through TSX-listed companies like TC Energy and Enbridge. The difference is that these Canadian firms are conventional corporations, not partnerships.

    An MLP is a U.S.-specific pass-through structure designed to generate income from energy-related assets. By operating as a partnership rather than a corporation, an MLP avoids corporate-level tax and distributes most of its cash flow directly to unitholders. That structure is the reason for the eye-catching yields. It is also why MLPs have long been popular with income-focused investors stateside.

    From a distance, it is easy for Canadians to assume these investments should translate well across the border. Capital markets are similar, the businesses are familiar, and the income looks appealing. 

    The sticking point is taxation. Differences between Canadian and U.S. tax rules turn MLP ownership into a complicated exercise for Canadian investors, often reducing after-tax returns and creating ongoing administrative headaches. Those frictions matter more than most investors realize.

    Here is what Canadian investors need to know about U.S. MLPs, why they are usually best avoided, and which alternatives offer exposure to similar businesses without the same tax complications.

    The tax headaches of MLPs for Canadian investors

    For Canadian investors, the problems with U.S. master limited partnerships come down to two main issues: withholding tax and reporting requirements.

    Most Canadians are already familiar with how U.S. withholding works. When you own U.S.-domiciled stocks or exchange traded funds (ETFs), 15% of dividends are typically withheld at source. That withholding can be avoided by holding those securities inside a Registered Retirement Savings Plan (RRSP), thanks to the Canada-U.S. tax treaty.

    Article Continues Below Advertisement


    MLPs are treated very differently. They do not benefit from that treaty treatment. Distributions from MLPs are fully subject to U.S. withholding tax. Worse, the rate is not 15%. It is up to 37%. This withholding applies even inside registered accounts, including RRSPs.

    Source: r/CanadianInvestor

    That means more than one third of each distribution can disappear before it ever reaches your account. This is especially damaging because most of the long-term return from MLPs comes from reinvested distributions rather than price appreciation. 

    It does not stop there. When you sell an MLP, there is an additional 10% withholding tax applied to the gross proceeds by the Internal Revenue Service (IRS), because MLPs are classified as publicly traded partnerships. This is not a capital gains tax. It is withheld regardless of whether you are selling at a gain or a loss.

    There are numerous real-world examples of Canadian investors discovering this the hard way. Some have bought and sold the same MLP multiple times, only to find that 10% was withheld on each transaction.

    Source: r/PersonalFinanceCanada

    The final complication is tax reporting requirements. When you own a typical U.S. stock, you receive a 1099-DIV form that summarizes your income. With an MLP, you are not a shareholder. You are a partner. That means you receive a Schedule K-1.

    A K-1 reports your share of the partnership’s income, deductions, and credits. It is far more complex than a standard dividend slip, and it creates a U.S. tax filing obligation. In theory, you are required to file a U.S. tax return to properly report this income to the IRS.

    [ad_2]

    Tony Dong, MSc, CETF

    Source link

  • How to report foreign income in Canada – MoneySense

    How to report foreign income in Canada – MoneySense

    [ad_1]

    This form is typically used for foreign bank accounts, foreign investment accounts or foreign rental properties, but it can include other foreign assets. Foreign investments, including U.S. stocks, must be reported even if they are held in Canadian investment accounts. Foreign personal-use properties, like a snowbird’s condo that is not earning rental income, may be exempt.

    Foreign asset disclosure applies to taxable investments, so assets held in tax-sheltered accounts like registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), pensions and other non-taxable accounts are generally exempt.

    U.S. persons in Canada

    U.S. citizens or green card holders must generally file U.S. tax returns despite living in Canada. The United States is one of the few countries in the world that has this requirement for non-residents. As a result, you may have to report both Canadian and U.S. income, deductions, credits and foreign tax payable.

    Adding to the complexity is that certain types of income are taxable in one country but not the other, and some deductions or credits may only apply on one tax return.

    Voluntary disclosure for previous years

    If you have not reported foreign income or declared foreign assets in the past and you should have done so, you may be able to file a voluntary disclosure with the CRA. This program may allow relief on a case-by-case basis for taxpayers who contact the CRA to fix errors or omissions for past tax returns.

    There are five conditions to apply:

    1. You must submit your application voluntarily and before the CRA takes any enforcement action against you or a third party related to you.
    2. You must include all relevant information and documentation (including all returns, forms and schedules needed to correct the error or omission).
    3. Your information involves an application or potential application of a penalty.
    4. Your information is at least one year or one reporting period past due.
    5. You must include payment of the estimated tax owing, or request a payment arrangement (subject to CRA approval).

    Before pursuing a voluntary disclosure, you should seek professional advice. The CRA also offers a pre-disclosure discussion service that is informal and non-binding, and it does not require the disclosure of your identity.

    Bottom line

    When you are a Canadian tax resident, whether you are a citizen or not, you have worldwide income and asset disclosure requirements on your tax return. Some Canadian residents, despite living abroad, may still be considered factual residents or deemed residents of Canada with ongoing tax-filing requirements.

    [ad_2]

    Jason Heath, CFP

    Source link

  • How to plan for taxes in retirement in Canada – MoneySense

    How to plan for taxes in retirement in Canada – MoneySense

    [ad_1]

    The impact of your marginal tax rate

    It’s important to clarify, Ken, that if you have a minimum RRIF withdrawal with no tax withheld, that does not mean that income is tax-free. When you report your RRIF and other income sources on your tax return for the year, you may still owe tax.

    Canada has progressive tax rates so that higher levels of income are taxed at higher rates. For example, in Ontario, the first $12,000 or so you earn has no tax. The next roughly $3,000 has 15% tax. And the next $36,000 of income after that has about 20% tax. The type of income you earn may change these rates, as will tax deductions and credits. But if we kept going to higher incomes, there would be incremental increases in tax rates.

    If you have a higher income, your entire income is not taxed at the higher tax rate. Incremental tax rates lead to income being taxed at different rates as you move up through the tax brackets.

    This is why retirees tend to have tax owing. If you have a $10,000 pension, you may have no tax withheld at source. But if you have $60,000 of other income, you might owe 30% tax on that pension income.

    Getting ahead of tax installment requests

    If you owe more than $3,000 of tax in two consecutive years (or $1,800 in tax for two years in Quebec), the Canada Revenue Agency (CRA) (or Revenu Quebec) will start asking you to prepay your tax for the following year. This is called a quarterly income tax installment request.

    Installments—along with OAS clawbacks—tend to be the two cursed tax issues for retirees.

    You can reduce your installments by requesting higher withholding tax on your CPP, OAS, pension or RRSP/RRIF withdrawals, Ken. This optional tax withholding might be preferable if you would rather not owe tax or prefer to limit your installment requirements. If you can get your withholding tax rate estimated accurately, you may be able to better spend money coming into your bank account because it is all yours, and not accruing a tax liability.

    The choice is yours

    Many retirees do not have sufficient tax withheld by default. So, quarterly tax installments are common at that stage of life. But owing tax does not have to be a given if you prefer to increase your optional withholding tax.

    [ad_2]

    Jason Heath, CFP

    Source link

  • When are TFSAs and RRSPs actually taxable? – MoneySense

    When are TFSAs and RRSPs actually taxable? – MoneySense

    [ad_1]

    TFSA day trading: Do you pay tax?

    Tax-free savings accounts (TFSAs) are mostly tax-free. When you buy and sell an investment for a profit, that is generally tax-free inside a TFSA, regardless of the type of investment. 

    One exception could be if you are day trading in your TFSA. If you are engaging in frequent trading activity, there is a risk your profits could become taxable as business income. For most long-term, buy-and-hold investors, this is not an issue. There’s no specific guideline about what constitutes day trading in your TFSA, but factors like the frequency of trades or the holding periods, for example, could indicate you are using the account this way.

    Taxes on U.S. stocks in a TFSA

    U.S. stocks held in a TFSA are subject to 15% withholding tax on U.S. dividend income. Withholding tax would apply to other foreign stocks held in a TFSA, with rates starting at 15%, depending on the country. Only Canadian stocks are not subject to withholding tax on their dividends inside a TFSA. 

    Does this mean you should only hold Canadian stocks in your TFSA? Not necessarily. If your TFSA is your primary investment account, or a big part of your overall investments, you may need to hold non-Canadian stocks to have proper diversification. If it is a small part of your overall portfolio, you may be able to have a bias towards Canadian stocks in your TFSA, but that may or may not be the best investment strategy depending on the value and type of your other investment accounts. Canada is a small part of the global stock market and has little exposure to sectors like technology and health care, so foreign stocks help diversify and can increase risk-adjusted returns. 

    Can you avoid foreign withholding tax by holding Canadian mutual funds or exchange traded funds (ETFs) in your TFSA, Tawheeda? Unfortunately, no. They, too, are subject to withholding tax on foreign dividend income, so even though you will not see withholding tax on your TFSA statement, the mutual fund or ETF itself would have withholding tax before receiving dividends from foreign stocks. 

    TFSA withdrawals are always tax-free. However, if you overcontribute to your TFSA, in excess of your TFSA limit, you may be subject to a monthly penalty tax, plus interest. A similar penalty applies if you overcontribute to your registered retirement savings plan (RRSP).

    When do you pay tax on an RRSP?

    When you buy and sell for a profit in your RRSP, the proceeds are not generally subject to tax. RRSPs are generally only taxable when you make withdrawals. Unlike your TFSA, business income treatment does not generally apply to day trading in your RRSP. One exception could be if you are trading non-qualified investments in your RRSP, which would be uncommon. Qualified RRSP investments include things like cash, guaranteed investment certifications (GICs), bonds, qualifying mortgages, stocks, mutual funds, ETFs, warrants and options, annuity contracts, gold and silver, and certain small business investments.

    How are dividends taxed in an RRSP?

    U.S. dividends may or may not have withholding tax in your RRSP, Tawheeda. If you own U.S. stocks directly in your RRSP, there will be no withholding tax. If you own U.S. stocks through a U.S. ETF, you will not have withholding tax, either. However, if you own U.S. stocks indirectly through a mutual fund or an ETF listed on a Canadian stock exchange, that mutual fund or ETF will be subject to U.S. withholding tax on any dividends before it receives them, even though you will not notice any withholding tax on the dividends or distributions you personally receive from the fund. You see, a Canadian mutual fund or ETF is itself considered a non-resident of the U.S., subject to 15% withholding tax. The account the fund is held in does not matter. The withholding tax will still apply.  

    [ad_2]

    Jason Heath, CFP

    Source link

  • U.S. withholding tax in an RRSP for Canadians – MoneySense

    U.S. withholding tax in an RRSP for Canadians – MoneySense

    [ad_1]

    First, U.S. stocks are generally subject to 30% withholding tax on dividends for non-residents. It does not matter where the firm is located that offers and holds the brokerage account. Foreign withholding tax is determined based on residency of the payor and the recipient.

    Many countries, including Canada, have tax treaties with the U.S. to ensure a reduced rate of withholding tax. For qualifying Canadian residents, the tax can be reduced to 15%. In a registered retirement savings plan (RRSP), the tax may be reduced to 0%. 

    Qualifying to reclaim U.S. withholding tax

    In order to qualify for the lower rate, an investor has to fill out the Form W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) and provide it to their investment firm. These forms are generally valid until the end of the third calendar year after signing, so need to be re-signed every three years.

    U.S. stock dividends paid into an RRSP, registered retirement income fund (RRIF) or a similar registered retirement account are generally free from withholding tax for Canadian residents, as the U.S. recognizes the tax-deferred status of the accounts. In non-registered and tax-free savings accounts (TFSAs), the reduced 15% rate generally applies. 

    If excess tax is withheld, it can be recovered by filing a U.S. tax return. However, the time and cost may be more than the potential refund unless the withholding tax is significant.

    An important point is that Canadian mutual funds and exchange-traded funds (ETFs) that own U.S. stocks are considered Canadian residents and are subject to 15% withholding tax. If you own these in your RRSP, they will not qualify for the 0% withholding tax rate. This is because the mutual fund or ETF is considered the shareholder of the U.S. stocks, not you or your RRSP. (Try MoneySense’s ETF screener tool.) 

    EDP dividends for Canadians

    In your case, Wanda, you own shares of Enterprise Products Partners, which is a master limited partnership trading on the New York Stock Exchange (NYSE). Based on the current quarterly dividend and stock price, the annual dividend yield is about 7.6%. 

    A master limited partnership (MLP) is a U.S. publicly traded entity that is taxed as a partnership, rather than a corporation. Most stocks on U.S. exchanges are corporations paying dividends. 

    [ad_2]

    Jason Heath, CFP

    Source link