Flying South for the Winter - Income Tax Considerations for Canadians

Every year, thousands of Canadians escape our winter by traveling south, usually to the U.S., for a few weeks or months, or even the whole winter. While recent fluctuations in the value of the Canadian dollar relative to the U.S. greenback might mean that a stay in the U.S. will be more expensive this year, the lure of warm temperatures and no snow will still win out for many.
The thoughts of such snowbirds, intent on escaping the Canadian winter, are typically on improving their golf game or enjoying the sunshine, and not on the tax implications of their whereabouts. Notwithstanding, there are tax consequences and costs which can result from spending an extended period of time outside of the country.
The following information pertains to Canadians who will be spending a few weeks or months south of the border on an annual vacation, and staying in a rental property or hotel. The situation changes where the actual purchase of a property located in the U.S. is contemplated, as the rules governing the purchase and ownership of such property by Canadians are complex. The 2008 mortgage lending debacle in the U.S. has put residential real estate on the market in places like Florida and Arizona at prices which can be hard to resist. A double caveat is, however, in order. Professional tax advice is a necessity whenever a purchase of real estate in another jurisdiction is being contemplated. And additional caution is warranted where the contemplated purchase is of a property which has been foreclosed on or is being sold under power of sale. There have been instances where Canadians have purchased such property in the U.S. only to later find out that the foreclosure was not properly carried out and title to the property which they have purchased is in dispute. That’s not a situation any new property owner wants to find themselves in, especially when it’s all happening in a foreign country.
Tax 101 for snowbirds
Typically, snowbirds who go south for the winter remain what is called, in tax parlance, “factual residents of Canada”. In practical terms, the income of such taxpayers is treated, for Canadian tax purposes, as though they had never left Canada. Factual residence is determined by the Canada Revenue Agency (CRA) on the basis of whether a taxpayer has maintained “residential ties” to Canada. Such residential ties could include continuing to own a home in Canada, having a spouse or dependants who remain in Canada while the snowbird is out of the country, having personal property (like a car) in Canada, and continuing to hold a Canadian driver’s licence and medical insurance.
The vast majority of snowbirds who winter down south do maintain sufficient residential ties to Canada to be considered factual residents. Consequently, when they file their tax returns for the year, they follow all the same rules as year-round Canadian residents. They report all income received during the year from both inside and outside Canada and claim all available deductions and credits. Income tax is paid to the federal government and to the province with which their residential ties are kept. Finally, snowbirds who remain factual residents of Canada remain eligible for the goods and services tax credit, which may be paid to recipients outside of Canada.
Health care coverage
One of the biggest concerns of many snowbirds is maintaining health care insurance coverage while out of the country. In all cases, the availability and degree of coverage will depend on the health care plan in effect for the province or territory of which the snowbird is a resident, and it’s necessary to confirm in advance the coverage which will be made available for out-of-Canada medical expenses. Most snowbirds end up obtaining supplementary health-care coverage, and the premiums paid for such coverage can usually be claimed as a medical expense on the Canada tax return. As well, any out-of-pocket costs incurred for eligible medical expenses while out of Canada (whether for the individual or his or her spouse) can be claimed as a medical expense on that year’s tax return.
Old Age Security and Canada Pension Plan payments
Both Old Age Security (OAS) and Canada Pension Plan (CPP) benefits can be paid to benefit recipients who are living outside Canada, and there is no change in the amount of the benefits. As well, such payments can be made by direct deposit, and in US dollars.
Both OAS and CPP benefits received will, of course, be subject to Canadian income tax and OAS payments will be subject to the OAS “recovery tax” (clawback), if the recipient’s income for the 2011 tax year is more than $67,668.
Application of U.S. tax laws
The application of U.S. tax laws to snowbirds can, unfortunately, be a good deal more complex than the equivalent Canadian laws, and any snowbird who thinks he or she may have a U.S. tax filing or payment obligation should certainly seek professional advice. That said, it is possible to summarize in a general way the basic rules which govern the application of U.S. tax laws to snowbirds.
Canadian residents who spend part of the year in the U.S. are classified as either resident aliens or non-resident aliens. Resident aliens are generally taxed in the U.S. on income from all sources worldwide and non-resident aliens are generally taxed in the U.S. only on income from U.S. sources. The classification depends, in the first instance, on the amount of time the person spends in the U.S. during a given calendar year. A person who was in the U.S. for 183 days or more (i.e., more than half the year) during the calendar year is considered to have met the “substantial presence” test and is classified as a resident alien of the U.S. At the other end of the spectrum, a person who was in the U.S. for less than 31 days during the calendar year is considered a non-resident alien. Those who fall in the middle (which would include most snowbirds who spend, for instance, the months of January and February in Florida or Arizona) may meet the substantial presence test, depending on the application of a complex formula which uses a weighted average of the number of days of residence in the current and two previous calendar years.
Recognizing that the tax consequences of spending extended periods of time south of the border will affect thousands of Canadian taxpayers, the CRA has published an information booklet on the subject, which is available on its Web site at http://www.cra-arc.gc.ca/E/pub/tg/p151/p151-10e.pdf. The Agency has also devoted a section of its Web site to issues affecting Canadians who vacation out of the country, and that information can be found at http://www.cra-arc.gc.ca/tx/nnrsdnts/sth-eng.html.
 
Even this brief summary is sufficient to illustrate the complexity of the U.S. tax laws as they may apply to snowbirds. The best advice for those whose plans include an extended stay south of the border, particularly if they are contemplating repeat visits on an annual basis, and certainly if they are contemplating the purchase of a U.S. vacation home, is to obtain professional advice in advance on the U.S. and Canadian tax consequences. Doing so can ensure that what was intended to be a relaxing vacation doesn’t end up causing a major tax headache.

Barter transactions may have income tax and HST implications!

Do you trade goods or services which you would normally sell in the course of your businessIf a transaction would have tax implications if money changes hands, it will have the same tax implications if it is a barter transaction.  These transactions may result in taxable income or tax-deductible expenses.  They may be considered dispositions of capital property, eligible capital property, personal-use property, listed personal property, or inventory, each of which has a different tax treatment.

A barter transaction occurs when two people or entities agree to trade goods or services without any money changing hands.  When this occurs between people dealing with each other at arm's length, the value of the goods or services is deemed to be the value that would have been obtained for those goods or services in a regular cash transaction.

When a person provides bartered goods or services which would normally be sold by him in the course of his business or profession, the value of those services must be included in income.  If the person is a GST registrant, then GST would have to be remitted on the income.  The value of the bartered services is included in income when determining if the person has reached the threshold of income where he must become a GST registrant.

When a person receives bartered goods or services which would normally be purchased in the course of his business or profession, the value of those services can be claimed as costs to the business.  If the person is a GST registrant, then an input tax credit could be claimed, if the provider of the goods or services is a GST registrant.

Let Discovery Management Services clear your desk!!

Every year, Discovery Management Services Inc., provide effective and efficient tax and bookkeeping solutions to small businesses across Hastings and Prince-Edward County - but our commitment doesn't stop there. We also offer a wide range of small business bookkeeping services, all delivered by experienced small business accounting, bookkeeping and tax preparation specialists and certified accountants.

Paperwork often gets in the way of managing and expanding your business. With Discovery Management Services Inc., you can leave that paperwork to one of our tax accountants... and focus on what's really important. We'll take care of all your small business bookkeeping, accounting and tax needs, such as:

• Government grant applications
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Drop in to discuss your small business bookkeeping and accounting needs, or income tax preparation requirements.

2011 Federal Budget—RESPs: Asset Sharing Among Siblings

The federal Budget tabled on June 6, 2011 included no changes to the income tax measures originally announced in the Budget of March 22, 2011.

The Income Tax Act imposes a penalty tax that applies to over-contributions to registered education savings plans (“RESPs”). There is an exception that generally applies to transfers from one RESP to another RESP, where a beneficiary under the transferor plan is a sibling of a beneficiary under the transferee plan, provided that the beneficiary under the transferee plan is under 21 years of age. The budget proposes to extend the exception for such transfers between individual RESPs for siblings, provided that either the transferee plan allows more than one beneficiary under the plan, or the beneficiary of the transferee plan had not attained 21 years of age when the plan was entered into. The proposed change applies to transfers of property after 2010.

A little tax break for summer children programs...

As June arrives and the end of the school year is in sight, families that do not have a stay-at-home parent have to make plans for keeping the kids busy and supervised over their summer vacation. There is no shortage of options—at this time of year, advertisements for summer camps and summer activities abound—but nearly all the available options have one thing in common, and that’s a price tag. Some choices, like day camps provided by the local recreation authority can be relatively inexpensive, while the cost of others, like summer-long residential camps or elite-level sports or arts camps, can run into the thousands of dollars.
Whatever the cost, all parents would welcome some assistance with meeting those costs. Until recently, the only tax “break” which could be claimed to help offset such costs was the general child care expense deduction. In 2007, however, the federal government introduced the Children’s Fitness Tax Credit. While the child care deduction is available (within set parameters) for most child care arrangements, the Children’s Fitness Tax Credit may be claimed only for activities or camps which involve a minimum degree of physical activity. Specifically, when claiming the Credit, parents are entitled to claim a non-refundable credit equal to 15% of the first $500 in qualifying costs per child per year. So, in other words, a camp which would have cost parents $500 per child will instead have a net cost of $425 ($500 minus 15%, or $75.), after the credit is claimed on the parent’s tax return for the year.
Parents whose children’s interests run to less active pursuits, like art, music, theatre, or writing may have felt, with some justification, that such activities were getting short shrift from our tax system. Perhaps in response to the perceived inequity, the federal government introduced, as part of the 2011 Budget, the Children’s Arts Tax Credit. Very similar in structure to the Children’s Fitness Tax Credit, the Arts Credit provides, beginning with the 2011 tax year, a non-refundable 15% tax credit on up to $500 in eligible expenses per child per year.
Given the enormous range of activities available for children, it’s not surprising that the federal government has found it necessary to provide detailed rules on what types of activities will and will not qualify for the two credits. And, while the possibility of a tax benefit should never drive the decision on which program or activity a child should be enrolled in, the availability of the credit might tip the balance between similar programs, or might make a program, camp, or activity which seemed financially out of reach more feasible.
In assessing whether a particular camp or program might qualify for either of the two credits, the first thing to note is that both credits are available only in respect of fees paid for children who are under the age of 16 at the beginning of the year. In other words, the last year for which the credit can be claimed is the year in which the child turns 16, assuming that all other criteria are met. Those criteria are as follows:
the program must last for a minimum of 8 weeks, with at least one session per week or, in the case of children’s camps, must run for 5 consecutive days;

the program or activity must be supervised;

the program or activity must be suitable for children; and

more than 50% of activities offered must include a significant amount of eligible activities or, in the case of a program, camp, or membership in which participants can choose from a variety of activities, more than 50% of those activities must include a significant amount of eligible activities or more than 50% of the available program time must be devoted to eligible activities.
 It’s clear from the foregoing that the concept of “eligible activities” looms large in the determination of whether a particular cost may be claimed under either of the credits. For both credits, the rules provide a specific definition of eligible activities, as follows:
For purposes of the Children’s Fitness Tax Credit, eligible activities are limited to those that require a significant amount of physical activity that contributes to cardiorespiratory endurance, plus one or more of: muscular strength, muscular endurance, flexibility, and balance.
Information provided on the Canada Revenue Agency (CRA) Web site indicates that “[p]hysical activity includes strenuous games like hockey or soccer, activities such as golf lessons, horse-back riding, sailing and bowling as well as others that require a similar level of physical activity.”
Similar rules are provided for the purpose of defining eligibility for the Children’s Arts Tax Credit. Those rules are quite broad and extend to activities like academic tutoring or the development of interpersonal skills. As outlined in the Federal Budget Papers, to be eligible for the credit, such activities must:
contribute to the development of creative skills or expertise in an artistic or cultural activity (creative skills or expertise involve a child’s ability to improve dexterity or co-ordination, or acquire and apply knowledge in the pursuit of artistic or cultural activities and artistic and cultural activities include the literary arts, visual arts, performing arts, music, media, languages, customs and heritage);

provide a substantial focus on wilderness and the natural environment;

help children develop and use particular intellectual skills;

include structured interaction among children where supervisors teach or help children develop interpersonal skills; or

provide enrichment or tutoring in academic subjects.
Often, particularly in the case of residential camps or sports or arts camps, charges are levied for such costs as accommodation, travel or food, or parents must incur costs to outfit the child with required equipment to use at camps. Costs paid by parents for non-activity related charges, like food, travel, and accommodation do not qualify for either of the credits and must be subtracted from the total fee paid. As well, the cost of equipment purchased by parents from third-party suppliers is not a qualifying cost for purposes of the credits.
Qualifying child care expenses are claimed as a deduction from income, rather than a credit, meaning that the entire amount of qualifying expenses is effectively not taxed as income in the hands of the parents. There are limits imposed on the maximum weekly cost of a residential camp (ranging from $100 to $250), as well as restrictions on the total amount of child care expenses which may be deducted in a year. However, the overall annual limits, which range from $4,000 to $10,000, depending on the age and health of the child, with an overall cap of two-thirds of the parent’s income for the year, are much higher than the allowable amount for the Children’s Fitness or Arts Tax Credit. It is not, however, possible to double or triple dip when it comes to expenses related to children’s activities. Expenses which are claimed under any of the three possible categories (child care expenses, Children’s Fitness Tax Credit, and Children’s Arts Tax Credit) can be claimed only once, even if they might, by definition, qualify under more than one provision.\
It’s possible that the same expenditure will qualify for both the child care expense deduction and the Children’s Fitness or Arts Tax Credit. In such cases, the CRA requires that the parent first claim that amount as a child care expense. Any part of the expenditure which is not claimed as a child care expense (perhaps because the maximum limit for such expense claim has been reached) can be claimed for the Children’s Fitness or Arts Tax Credit, as long as the usual requirements for the particular Credit are met.
While both the Children’s Fitness Tax Credit and the Children’s Art Tax Credit are relatively simple in concept, the criteria imposed for an activity to qualify and the number and variety of possible qualifying programs and activities can be confusing. The alleviate some of that confusion, for both parents and sponsoring organizations, the CRA has provided detailed information about the requirements of the Fitness Tax Credit on its Web site. That information can be found at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns360-390/365/menu-eng.html.
There is, as yet, no corresponding section on the CRA Web site dealing with the Children’s Art Credit, since the legislation enacting that credit has not yet been passed by Parliament. The credit was announced as part of the Federal Budget brought down on March 22 by Minister of Finance Jim Flaherty but not passed prior to the general election. The Minister has announced, however, that the same budgetary provisions will be re-introduced on June 6 and it is expected that the budget will be passed and its provisions, including the Children’s Art Tax Credit, implemented as planned.

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The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Property Tax Services

Discovery Management Services is working with Cushman & Wakefield Ltd to offer property tax services to Eastern Ontario. Discovery Management Services is a consulting firm with locations in Belleville, Picton and Bancroft. We offer controllership services, strategic planning, government loan and grant applications, property tax services and more. Cushman & Wakefield Ltd is a global firm, offering commercial property and real estate solutions. Discovery Management Services and Cushman & Wakefield Ltd are working together, to provide expertise in property valuations, and property taxation. We believe that each tax paying entity should pay its fair share of property taxes and no more. Commercial, Industrial and specialty real estate owners are often shouldering more than their fair share of that property tax burden.

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