Changes to the Reporting of the Principal Residence Exemption and How This Affects All Residential Real Estate Sales for the 2016 Year
One of the greatest tax saving incentives offered by Canada Revenue Agency (CRA) is the principal residence exemption (PRE). The basics behind this exemption is that whenever an individual or a family sells their principal place of residence in Canada, any gain they incur on this sale is tax sheltered. For example, say you originally purchase a property for $500,000. 5 years later when you sell the property, it sells for $600,000, net of expenses. Using the PRE, this $100,000 gain from the sale is 100% sheltered from tax.
As this exemption offers such a large tax saving, it is no surprise that there is a lot of misinformation surrounding it, such as the following myths:
1. The sale of any residential property is sheltered from tax, even if I own more than one residence (such as a cottage and a house in town).
2. I can claim multiple principal residence exemptions per year.
3. I don’t have to report the sale of my principal residence
All of these statements are false.
Due to the large amount of sales that took place in the hot real-estate markets this year, such as Vancouver, and the past abuse of the exemption, CRA has made it their personal objective to crack down on the reporting of this exemption moving forward to ensure all real estate transactions are properly reported.
For the 2016 personal tax year, and all years subsequent, all sales of residential properties must be reported on your client’s personal tax return, regardless as to whether or not there is a tax implication on the sale. As well, if a property is sold and it qualifies for the principal residence exemption the tax payer is required to file a specific form to claim this exemption.
CRA has warned that if you fail to report the sale of your principal residence on your tax return and are assessed, you will be subject to a penalty of the lessor of $8,000 or $100 / month for each complete month from the original due date of the election. This penalty will also not include any professional fees incurred to file the amended return, and the exemption election form.
The effective date for this change is January 1, 2016, meaning that any sale that took place during the 2016 calendar year must be reported. Also, they have noted that although most tax returns become barred by statute after 3 year from the date of reassessment, CRA, has waived this restriction, and can go back as far as they want in future years to ensure that this reporting requirement is met and that the abuse of this exemption comes to a halt.
If you would like more information
on the above changes to the principal residence exemption, information on tax
planning opportunities using the principal residence exemption, or know of an
individual who would like assistance in filing their 2016 personal tax return
to report the sale of their principal residence, please do not hesitate to have
them contact our firm.
Alberta Carbon Levy
Starting January 1, 2017 a carbon levy will be included in the price of all fuels that emit greenhouse gases when combusted at a rate of $20/tonne in 2017 and $30/tonne in 2018.
These include transportation and heating fuels such as diesel, gasoline, natural gas and propane. Certain fuels, such as marked gas and diesel used on farms, will be exempt from the levy.
The levy doesn't apply directly to consumer purchases of electricity but it will to fuel purchases. The chart below indicates the carbon levy rate.
Type of Fuel
January 1, 2017 $20/tonne
January 1, 2018 $30/tonne
Marked farm fuels
The indirect costs of the carbon levy on every household are estimated to range between:
- $50 to $70 per household in 2017
- $70 to $105 per household in 2018
The rebate is solely tied to income and not energy use. You don't need to apply. You'll automatically receive a rebate if you file a tax return and meet the income criteria.
The rebate (if you qualify) is: $200 for an adult, $100 for a spouse and $30 for each child under 18 (up to four children). Single parents can claim the spouse amount for one child, and the child amount for up to 4 more children.
Full rebates will be provided to single Albertans who earn $47,500 or less, and couples and families who earn $95,000 or less. The maximum income to receive a partial rebates is $51,250 for an adult, $100,000 for a family of 2 adults and $103,000 for a family of 2 adults and 4 children.
Payments will be mailed or direct deposited according to the amount you’re eligible to receive:
- $400 or more delivered in 4 payments (Jan, Apr, Jul, Oct)
- $200-$399 delivered in 2 payments (Jan, Jul)
- $100-$199 delivered in 1 payment (Jan)
For questions about the rebate, please contact the Canada Revenue Agency (CRA), as CRA is administering the program on the province's behalf: 1-800-959-2809.
For additional information, also see www.alberta.ca/climate-carbon-pricing.aspx#p184s3
Small Business Support
To help businesses adjust to the carbon levy, Alberta’s small business corporate income tax rate is being reduced by one third, from 3% to 2% effective Jan 1, 2017. With the tax relief, Alberta is now tied with Saskatchewan for the second-lowest provincial small business tax rate. While Manitoba has a lower rate, Alberta small business owners pay lower taxes when they take money out of their business for personal use. Alberta maintains the lowest overall tax regime in Canada, with no provincial sales tax, health premium or payroll tax.
For more information about government support for small businesses, please visit Alberta Jobs Plan.
OHS Rules for Farmers
New Occupational Health and Safety (OHS) rules require that all farms that employ paid employees (other than family members) have a safety program that includes training of employees. OHS should only inspect your farm if a serious accident or a death occurs at your worksite. If the OHS inspector finds that you have not complied you may be fined.
Some typical issues found with farming operations are:
- Inadequate guarding
- No auto shut down of equipment
- No lock out programs so that children or inexperienced operations cannot start the equipment
- Falls from heights and
- No railings or harness used when working more than 3 meters from the ground or platform
Typical training available for a farming operation includes:
- ATV and UTV training
- Skid steer and forklift training
- Confined space & Hazardous atmosphere training
- Working with heights training
You can hire consultants to provide you with a safety program handbook and training sessions that are appropriate to your farming operation. A basic program will be in the range of $1200. If you require a more extensive program and staff training the fee will be higher.
Canadian Residents or “Snowbirds”:
The term snowbirds is used to describe Canadians who spend a fair amount of time in the U.S. usually to vacation and escape our winters. The number of days you spend in the U.S. will have an impact on the determination of your residency for tax purposes.
The U.S. Internal Revenue Service (IRS) applies a test known as the “substantial presence test” to determine whether or not an individual will be considered a U.S. resident for income tax purposes. This test uses the number of days spent in the U.S. and looks at a weighted average of total number of days in the U.S. over the past 3 years. When you reach 183 days/year, you are also a U.S. resident for tax purposes.
If you travel or vacation substantially in the U.S., but are still there less than 183 days/year, there still may be some filing that should be done to help solidify your case of U.S. non-residency. We would like to sit down with you to determine the options available if you are in this situation or plan to be in the future.
Ownership of U.S. Rental Property:
Regardless of days spent in the U.S., if you own a rental property in the U.S. you will most likely have U.S. tax filing requirements as well. There are many options for reporting your income on rental properties to the IRS.
The default option on foreign rent is for your property manager to withhold 30% of the gross rents received and remit that to the IRS. Another option, which is often more beneficial, is to file a U.S. tax return for the net rental income.
The process to get to that point involves many steps. We could meet with you to discuss your situation and provide advice on the appropriate steps and filing obligations that are required for your property.
U.S. Tax Issues for both Canadian and U.S. Citizens:
The tax implications involved in cross-border activities are complex and can apply to many situations that face both Canadian and U.S. citizens. Each individual’s personal scenario will be unique when dealing with either business, employment, retirement, or even vacationing across borders. Below are a few highlights to be aware of.
Tax Differences between Canada and the U.S.
Income tax in Canada is based on residence which has a rather broad and flexible definition. The U.S. bases taxation on both residence and citizenship.
This difference is important on many fronts but as a bottom line, a U.S. citizen will most likely file a U.S. tax return each year, regardless of place of residency.
Canada and the U.S. have a tax treaty that will help to reduce the potential and the amount of double taxation. However, using the exemption and treaty is driven by proper filing of both a US 1040 return and Canadian T1. Failure to file these returns accurately and on time may lead to double taxation, denial of expenses and exemptions, and interest charges or penalties. The deadline for filing US 1040 return is April 15, compared to April 30 for a Canadian T1.
United States Citizens:
If you are a U.S. citizen residing in Canada, there is most likely an obligation for you to file a U.S. return and applicable schedules.
The U.S. tax obligation is on worldwide income, regardless of where you live. However, you may qualify for an exemption from income up to an amount of your foreign earnings (i.e. earnings outside of the U.S.) that is adjusted annually for inflation. The amount for 2016 is $101,300 (US), up from $100,800 (US) in 2015.
Requirement for filing the report of Foreign Bank and Financial Accounts (FBAR):
What is it?
FBAR is an information return that summarizes details of a U.S. person’s non-U.S. bank and financial accounts. There is no tax to pay with the return, but as discussed below there can be significant penalties assessed for failure to file on time. Non-U.S. accounts that U.S. person’s can have a financial interest in can include, but are not limited to:
Chequing and savings accounts;
- Investment accounts (both non-registered investment accounts and Tax Free Savings Accounts);
- Pension accounts (a Registered Retirement Savings Plan and a Registered Pension Plan account);
- Accounts in Canadian corporations controlled by U.S. persons;
- Insurance policies with a cash surrender value;
- Registered Education Savings Plan accounts.
- Non-U.S. accounts for which U.S. persons have signature authority, including but not limited to:
- Joint accounts with their family members;
- Employer bank accounts;
- Volunteer organization bank accounts.
Last year, the IRS announced changes to the filing deadline of the FBAR Form. The due date of the form will now be April 15 instead of June 30. Extension requests will now be allowed to extend the time to file the form. These changes will be in effect for the 2016 tax year.
Who Must File an FBAR?
U.S. persons are required to file an FBAR if:
- The U.S. person had a financial interest in or signature authority over at least one financial account located outside of the U.S.; and
- The aggregate value of all foreign financial accounts exceeded $10,000 (US) at any time during the calendar year reported.
Importance of filing the FBAR:
Those required to file an FBAR who fail to properly file a complete and correct FBAR may be subject to a civil penalty not to exceed $10,000 per violation for non-willful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50% of the balance in the account at the time of the violation, for each violation.
As you can see, the penalties for non-compliance can be substantial. It is also easy to fall into one of the categories above for a U.S. person. There are however, some exclusions that can be made to certain individuals that we can discuss with you further. Each individual’s scenario is unique and we can go through your specific situation to determine any filing obligations that may apply.
Feedlot Auditor – It’s coming whether you want it or not
“You can’t manage what you don’t measure.”
Starting this spring, the National Cattle Feeders Association is unveiling the culmination of its last few years of work to present a brand new, voluntary audit tool that allows feedlot operators the ability to prove they are maintaining their beef cattle according to safe and humane standards.
The Canadian Feedlot Animal Care Assessment Program is a proactive tool designed to beat the inevitable auditing by packers and retailers at feedlots. The program, the first animal audit system certified by the Professional Animal Auditor Certification Organization (PAACO), is not intended to add additional burden to feedlot operators but primarily to support the systems already in place. The biggest challenge for the smaller operations is likely going to be better documentation. However, the Association will be creating generic templates that are quick to fill out and only need to be completed once.
Animal welfare practices are under more and more scrutiny by consumers and it will ultimately be up to the feedlots to prove they are abiding by the requirements set out by accredited organizations such as PAACO.
The program is designed to be realistic, practical and easily implementable. It will focus on the feedlot’s transportation practices, feedlot facilities, cattle handling, nutrition and feeding, environment, animal health management, euthanasia and salvage, care of other working feedlot animals, egregious acts of neglect and willful acts of abuse.
The audit checklist provides a very structured way for a feedlot owner to measure whether they are doing what they think they are doing, and welfare costs producers money. It is expected that this program will help producers manage and measure their processes more effectively.
Aware of the need to walk before they run, the National Cattle Feeders Association is aiming to provide both communication and training tools to producers to ensure they are fully trained and comfortable using the audit tool. Implementing these systems do not ensure an auditor will show up on your doorstep tomorrow, but it will ensure that when they eventually do, they will be looking at the same requirements no matter who is auditing, recognized by multiple packers and retailers.
Embracing these changes will ensure you are on-side when they inevitably become mandatory.
Program documents and supporting materials are available through NCFA’s password protected website. For access, contact your provincial cattle feeder association of NFCA at 403-769-1519 / firstname.lastname@example.org
Year End Preparation
What do we need and why?
- A copy of bookkeeping records whether it be manual synoptic, Sage Simply Accounting, Quickbooks etc.
- All bank statements for the year and reconciliation reports
- Asset listings
- Receipts for purchases of depreciable assets greater than $500
- Investment statements and any T-Slips received
- Accounts Receivable listing
- Inventory listing (Including quantities, unit cost, totals)
- Credit card statements
- Bank Loan statements ensure interest rate and payments are present
- CRA Statements for the fiscal year inclusive
- Corporate Tax
- Provincial Notice of Assessment.
- Charitable donation receipts
- Statement of equity in name of Co-Operative
- T4A’s from Co-Operative
- Annual AgriInvest account statements
Additional Information needed for farms
Grain Farmer Agristability Information
- Grain tickets for fiscal year
- Post-harvest crop insurance reports
- Fixed price purchase contracts
- Fixed price sales contract
- Information on purchases in USD approximate numbers of purchase sales and dollar amount of those purchases and sales
Livestock Agristability Information
- Cattle tickets for fiscal year
- Number of calves born
- Feed inventory
- Number of acres seeded to each crop (including grain, pulse, hay, greenfeed, and silage crops)
- Quantity of each crop produced
- Quantity of each crop purchased (including seed for grain, hay, pulse, greenfeed and silage)
- Quantity of each crop sold
- Quantity of each crop used for seed
- Quantity of each crop fed to livestock
- Fixed crop and livestock purchase contracts
- Fixed crop and livestock sales contacts
- Information on purchases in US funds approximate number of purchases and sales
Responding quickly to our requests for information will ensure efficiency and effectiveness in the completion of your yearend.
If you have any questions as to whether we will need it or won’t need it for your yearend please call us at 403-527-8114.
Proposed changes to the Small Business Deduction from the recent budget:
What is the Small Business Deduction “SBD”?
The Small Business Deduction provides a reduced rate of tax on the first $500,000 of active business income for any Canadian Controlled Private Corporation “CCPC” in Canada.
What changes are proposed?
The proposed changes in the recent federal budget could have a substantial impact on the availability of the SBD for many CCPC’s that are controlled, partially controlled, or even nominally invested in by related family members that also have their own CCPC’s. The changes are proposed to apply to taxation years beginning on or after March 22, 2016.
Essentially the proposed changes will be referring to Specified Corporate Income “SCI” to determine if income received from another CCPC will be eligible for the SBD. If revenue your CCPC received from another CCPC (that is owned even nominally by a related family member) is more than 9.9% of your total gross revenue it will no longer be allowed to be applied to the SBD. In the past it would be subject to the SBD and therefore a lower rate of tax would be applied.
How does this affect the business owner?
As you can see above, in corporate structures with multiple CCPC’s involved and ownership through related parties, the allocation of income between CCPC’s will become more complex. In situations where related individuals currently hold different CCPC’s that provide services to each other there is a potentially significant tax impact if those services are considered SCI and no longer eligible for the SBD. In short, the proposed changes will make the availability of the SBD more restrictive and could cause additional tax within your company.
The changes noted above are complex and will have different outcomes for each company’s situation. We would be happy to discuss how these changes could affect your business or any other concerns you may have.