Canadians Moving to the US – Tax Concerns

Canadians looking to move to the United States must consider a number of tax issues as some significant differences, noted below, must be properly planned for to avoid paying significantly higher cumulative taxes.

Income Tax Residency: U.S. persons, which includes citizens and resident aliens, are subject to tax in the United States on their worldwide income. A resident alien is a person who (1) is lawfully admitted for permanent residence; (2) meets the substantial presence test; or (3) satisfies the requirements and makes an election to be treated as a resident. Many Canadians moving to the U.S. are likely to be taxed on their worldwide income.

RRSP: Periodic withdrawals will be subject to 15% Canadian withholding tax but the cost amount of the RRSP investments as calculated on the day Canadians take up residence in the U.S. can be withdrawn tax free.

TFSA: Emigrants can continue to hold a TFSA and pay no Canadian tax on TFSA income. There is tax in the U.S. on any income earned each year in the TFSA as the tax treaty does not protect a TFSA as it does an RRSP.

RESP: Although emigrants can continue to be the subscribers on the plan after they move to the U.S, the annual income earned in the RESP plus any grant or bond money received annually would be taxable in their hands in the U.S. since the RESP is considered to be a foreign trust for U.S. tax purposes.

Capital Dividends: Under U.S. law, dividends follow a certain order of distributions so Canadian capital dividend may become taxable in the U.S.

Canadian Estate Freezes: A typical Canadian estate freeze is exchanging common stock for fixed value preferred stock to freeze the current value of the company for the founder, and pass future growth to the subscriber of new common shares. This technique may not work in the U.S. because preferred stocks are not considered stock in these transactions. The exchange will be taxable in the U.S.

Capital Gain Exemption: The U.S. does not recognize the capital gain exemption.

Allowable Business Investment Losses (ABIL): An ABIL remains a capital loss for U.S. tax purposes.

Principal Residence Exemption: Property must have been used as the principal residence for at least 2 years in the 5 year period ending on the date of sale. The exemption is only up to $250,000.

Stock Options: Benefits from an employee stock-option are taxed at different time in Canada and U.S. Double taxation may occur due to a potential mismatch of foreign taxes for foreign tax-credit purposes.

Flow-through shares: In Canada, flow-through shares allow for the “flow-through” of exploration expenses from resource companies to individual investors. The U.S does not recognize the flow through characteristic of these shares and will disallow the deduction of resource expense.

Pension Income Splitting: Canadian residents can elect to split eligible pension between spouses to reduce total taxes but the U.S. does not recognize the deduction for pension split.

Lottery winning and gambling: Lottery and gambling winnings are taxable in the U.S. Losses, however, may be deductible subject to certain limits.

The taxation of residents moving between Canada and the United States is a complex area, and is likely to remain so. Negative tax consequences can be alleviated (at least to some degree) with proper planning. If you have any questions, please contact our office.

If you have questions regarding provincial residency, please contact us and visit us on the web:

Rosenswig McRae Thorpe LLP
Toronto, Ontario

Provincial Residency

Provincial Taxation of Individuals

There is a difference in tax rates between Ontario and Alberta. The salary difference is 6% (Alberta at 48% while Ontario 54%) while the difference on dividends received from public company’s is 7% (Alberta 32% while Ontario 39%) and the difference on dividend received from a private corporation is generally 5% (Alberta 40% while Ontario 45%). Becoming a resident of Alberta is appealing to high-income Ontario residents particularly when they are about to receive large amount of dividends, or compensation payments.

Generally speaking, where a person lives on December 31st determines what province he pays tax in for the entire year. Where an individual has residential ties to more than one province at the end of year, he will be deemed to be resident only in that province which may reasonably be regarded as his principal place of residence. The determination of a principal place of residence will be dependent on the strength of ties to each province, including where the individual has a permanent residence, where the individual’s family lives, attends school, where the individual works, and where the day-to day activities occur.

We recommend the following actions concerning provincial residency change from the perspective of an individual who is moving from Ontario to Alberta:

  • Sell Ontario residential properties, or list it for sale; a long-term lease with an arm’s length third party if a sale is not desirable;
  • Ship all of your belongings to Alberta residential address;
  • Purchase/lease residential property suitable for you and your family in Alberta;
  • Ensure that family members relocate to Alberta;
  • Notify the CRA and any other persons who send correspondence to you of your new address in Alberta;
  • Discontinue, or place on a non-resident status, your memberships or associations in Ontario, including social, community, religious and professional organizations;
  • Any subscription of newspapers, periodicals and magazines currently sent to you at an Ontario address should be cancelled or redirected to your Alberta residential address;
  • Discontinue rental of any Ontario safe deposit box or post office box;
  • Terminate Ontario government health insurance and apply for coverage under Alberta government health insurance;
  • Do not maintain a personal mailing address or telephone listing in Ontario, and have your cell phone number updated;
  • Discontinue use of stationery, including business cards, showing and Ontario address;
  • Bank account currently maintained through Ontario bank branches should be moved to Alberta bank branches;
  • Cancel any Ontario driver’s licence and obtain an Alberta driver licence;
  • Ensure your vehicles are register in Alberta;
  • All federal and provincial income tax returns and other filings should be prepared on the basis that you are resident in Alberta as at December 1, 201X and thereafter, assuming that appropriate steps have been taken in 201X;
  • Limit the time you spend in Ontario as much as possible.

The foregoing facts are in no particular order of importance. Specific personal situations could affect the actions needed.

If you have questions regarding provincial residency, please contact us and visit us on the web:

Rosenswig McRae Thorpe LLP
Toronto, Ontario

Taxation of Investment Holding Companies

Our goal in this presentation is to focus on the following questions:

Why are holding companies so common among higher net worth individuals?

How is investment income taxed in a corporation and how does this compare to taxation of individuals? Is it better or worse to hold investments corporately rather than personally?

How do we help with estate planning for individuals who have corporations that will cause significant capital gains tax at death?

To click on the full presentation, please click on the link below:

Taxation of Investment Holding Companies presentation

For more information, visit us on the web:

Rosenswig McRae Thorpe LLP
Toronto, Ontario

2016 Federal Budget Highlights

The much anticipated 2016 Federal budget was presented today by Finance Minister Bill Morneau. For most of our clients, the tax changes were insignificant, with the major change being the new personal high tax bracket introduced in January. Below are some tax highlights.

Corporate Tax

  •  Restricting Small Business Rate Multiplication – The budget introduces measures that eliminate the small business deduction for corporations that provide services to a partnership during the year, where at any time, the corporation or shareholder of the corporation is a member of the partnership. This impacts professional service firms with complex structures, however it does not impact the structures used by most of our clients.
  • Increased Personal Service Business Rate – Effective for 2016 and later years, the federal tax rate on such corporations is increased 5% from 28% to 33% making the rates on such a business much worse off than earning the income as a self employed individual. This increases the downside for individuals who might be considered employees rather than independent contractors.
  • Life Insurance Transfers – Effective March 22, 2016, measures were passed to ensure that life insurance
    policies transferred into a corporation do not result in amounts that can be extracted by the shareholder tax
    free. This change was expected for several years.
  • Eligible Capital Property replaced – A new amortization (CCA) class with 5% amortization rate is being introduced eliminating eligible capital pools with the transition effective January 1, 2017. Current balances will transfer to the new CCA class. Future sales of goodwill and other former eligible capital property will result in recapture and capital gains. This effects clients who are selling their business and may make a share sale more attractive than an asset sale.

Personal Tax

  • Canada Child Benefit – Effective July 2016, this replaces the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). The benefit is as much as $6,400 for children under the age of 6 and $5,400 per child aged 6 through 17. The benefit is tax free however the amount received is income tested.
  • Child related credits removed – The arts and fitness tax credits are being halved in 2016 and completely eliminated in 2017.
  • Income Splitting – The budget introduced measures to remove income splitting through the family tax cut which previously saved families up to $2,000 per year. This is eliminated effective for 2016 and future years.
  • Eliminating the Education and Textbook tax credits – Effective January 1, 2017, there will be no credits for education and textbooks, however a credit will remain for the tuition itself.
  • OAS – The changes which were put in place to move the Old Age Security application age to 67 are eliminated, accordingly OAS application remains at age 65.

Other Matters

  • Increased audit and collection activity – The budget earmarks money and concerted effort in the area of increasing CRA audit activity and CRA collections.
  • Making Post-Secondary Education More Affordable – Through increases to Canada Student Grants (effective for the 2016-2017 year), increasing repayment income thresholds and other similar measures.
  • Labour Sponsored Venture Capital Corporation (LSVCC) Tax Credit – The budget restores to 15% such credits effective for the 2016 tax year for provincially registered LSVCCs.

If you have questions regarding provincial residency, please contact us and visit us on the web:

Rosenswig McRae Thorpe LLP
Toronto, Ontario

Expensing Meals and Entertainment in Your Corporation

Meals and entertainment expenses incurred for business purposes can be written off in your company. So whether you are entertaining existing clients, potential clients, vendors or employees, these may be considered valid business expenses. Some of these are only 50% deductible for tax purposes while others could be 100%. It is important to distinguish between the two.

What meals and entertainment expenses are limited to a 50% deduction?

• Meals at restaurants where all employees are not invited;
• Tickets for a theatre, concert, athletic event or other performance;
• Private boxes at sports facilities;
• Fee paid for attendance to a conference, convention, seminar or similar event where meals are included, other than incidental items such as coffee and muffins, $50 per day is deemed to be paid for meals and entertainment and is subject to the 50% limitation.

What meals and entertainment expenses are 100% deductible?

• Meal and entertainment expenses of providing a holiday party or similar event where all the employees from a particular location are invited. Up to 6 such events are allowed in the year. Corporate clients can be included although expenses related to the clients are subject to the 50% limitation.
• Food/meals if it is part of the cost of goods sold for the business for example a restaurant, airline or hotel
• Meal pertaining to work by employees at remote work sites
• Meal and entertainment expenses incurred for a fund-raising event that was mainly for the benefit of the registered charity.

Other exceptions:

– Keep in mind there are specific rules pertaining to long haul truckers which are not covered in the above
– Also, self employed couriers and rickshaw drivers have allowable flat rate deductible amounts which may be taken

If you have questions regarding provincial residency, please contact us and visit us on the web:

Rosenswig McRae Thorpe LLP
Toronto, Ontario

E-mails That Are Too Good To Be True

Beware of e-mails you receive that seem to come from Canada Revenue Agency (CRA) wanting to give you an increased refund through INTERAC or other means. These e-mails are NOT from CRA and are schemes to get personal information from individuals for nefarious use (identity theft, withdrawing funds from accounts, etc).

E-mails from CRA will be in both languages and will never be in only English or French. CRA is very clear that they do not send e-mails containing links (typical in e-mails requesting an INTERAC acceptance) and will not request personal information of any kind through e-mails.

If you would like more guidance, CRA has provided more information here, including examples of fraudulent e-mails, texts, letters and other materials that are circulating so you can better spot if something is fraudulent or not. If you are ever in doubt, contact CRA by phone directly so that they can confirm if a communication is legitimate.

If it seems too good to be true – unfortunately – it probably is.

For more information, visit us on the web:

Rosenswig McRae Thorpe LLP
Toronto, Ontario

SR&ED For Medical Professionals

Many companies, especially those in the manufacturing and technological space, take advantage of the Scientific Research & Experimental Development (“SR&ED”) tax credit program offered by the federal government in order to benefit from the funding on eligible research projects. Medical professional corporations (MPCs) may also perform work in the space of research which may qualify. Many practitioners with their own MPC work closely with hospitals, universities, or other such organizations to perform this work.

The SR&ED program allows materials and a portion of the salary for the individuals related to eligible research activities to be claimed for the credit. Where refundable, the credit can result in a current year reduction of taxes of about 60% of the actual SR&ED expenses – for example $1,000 of eligible salary expense creating a reduction/refund of up to about $600 of tax in the current year.

SR&ED claims can be filed up to 18 months after an MPCs year end. Therefore there may be an opportunity to make a claim for the last two taxation years. It is also an important factor in current and future remuneration planning.

If you would like to discuss how this opportunity may be applicable to yourself and your practice, please contact our office.

For more information, visit us on the web:

Rosenswig McRae Thorpe LLP
Toronto, Ontario