Tax Factor 2012-04

August 16, 2012

The 2012-04 issue of the Tax Factor is available for download. In this issue we cover:

U.S. citizens living in Canada – IRS announces relief for late and non-filers
Postpone your OAS payment start date and increase your monthly pension amount
Changes in partnership reporting
Beware of fraudulent communications when transacting with the CRA

U.S. citizens living in Canada – IRS announces relief for late and non-filers

There has been a lot of press coverage in Canada in the past 18 months regarding the obligation of U.S. citizens living outside the U.S. to continue to file U.S. personal income tax returns, as required under the Internal Revenue Code. For various reasons, some U.S. citizens have not kept up with their U.S. obligations, and many fear that substantial penalties could apply if they brought their U.S. tax filings up to date. The penalty issue was of particular concern for U.S. dual citizens, as many believed that the penalties could be substantial when compared with a relatively low or nonexistent U.S. tax liability (once Canadian taxes and the related foreign tax credit were taken into account).

The Internal Revenue Service (IRS) announced on June 26th that a new procedure for dealing with low-risk U.S. tax filings for U.S. citizens living outside the U.S. will go into effect on September 1st, 2012. Although more details will be forthcoming, the new procedure will be applicable for U.S. citizens who have not filed U.S. tax returns, and who owe less than $1,500 on each of the past three years tax returns. To take advantage of this new process, these individuals will need to file tax returns for the past three years, a Report of Foreign Bank and Financial Accounts (FBAR) for the past six years, and a letter explaining why the returns and FBAR forms were not filed on a timely basis.

Of particular interest to U.S. citizens living in Canada who have RRSP and RRIF accounts, the June 26th announcement also contains relief regarding the required U.S. filings where a U.S. citizen is the contributor to or a beneficiary of an RRSP or RRIF account.

RRSPs and RRIFs are not recognized as tax-deferred accounts under U.S. domestic law, meaning that the income and gains earned inside these accounts are included in the calculation of taxable income for U.S. tax purposes in the year they are earned, rather than when this income is withdrawn from the plan (which is when such income is taxed for Canadian tax purposes). However, an election can be made pursuant to the Canada-U.S. Income Tax Treaty to defer recognition of the income and gains until such time as the income is withdrawn from the RRSP or RRIF. Where this election is made, the timing of the taxation of the accrued RRSP or RRIF income will be the same for both Canadian and U.S. tax purposes. The election must be made in the tax return filed on a timely basis. In addition, a form is required for each RRSP or RRIF. Form 8891 - U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans must be completed and attached to the individual's U.S. tax return if they hold an interest in an RRSP or RRIF.

In the June 26th announcement, the IRS stated that it will allow retroactive relief in low compliance risk situations for failure to timely elect to defer the income tax on income in these plans, and for late-filed forms 8891 for the years in question.

It is important to note that low compliance risk returns will be accepted for the expedited process, which includes relief from interest and penalties. The IRS has promised to release additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission.f

Submissions sent in response to the low compliance risk program and which, upon examination by the IRS, present a higher compliance risk, will be subject to a more thorough review and possibly a full examination. This examination may include a requirement to submit more than three years of income tax returns, and may lead to the assessment of additional taxes, interest and penalties.

This new low compliance risk program is different from the Offshore Voluntary Disclosure Program (OVDP), the most recent of which was announced in January 2012, and is ongoing. The OVDP primarily targets high-net worth U.S. citizens who may reside inside or outside the U.S. and who have not disclosed offshore investments to the IRS.

If you have any questions or believe that you can benefit from these new rules, please contact your BDO advisor

Postpone your OAS payment start date and increase your monthly pension amount

To improve flexibility and choice in the Old Age Security (OAS) program, the federal government introduced the voluntary deferral of the OAS pension in the 2012 budget. Starting July 1st, 2013, you will be able to defer the start of your OAS pension for up to five years. This voluntary deferral will allow you to postpone the receipt of your pension to a later time in exchange for receiving higher benefit payments later.

The adjusted pension will be calculated on an actuarially neutral basis. This means that, on average, individuals will receive the same lifetime OAS pension whether they choose to take it up at the earliest age of eligibility or defer it to a later year. By choosing to defer, you will receive an enhanced monthly benefit of 0.6% per month of deferral (or 7.2% for a full year of deferral). Once you choose to receive your deferred OAS pension, this percentage will be applied to the benefit for the rest of your life.

To illustrate the impact of the deferral, consider the current maximum annual OAS pension amount of $6,481. If you choose to defer OAS by one year, your annual pension will instead be $6,948. If you choose the maximum deferral of five years, the annual OAS pension will be $8,814. (Note that all figures are in 2012 dollars.)

Note that the Guaranteed Income Supplement, the Allowance and the Allowance for the Survivor will not be eligible for actuarial adjustment.

Various factors must be considered in your decision of whether to defer or not. The deferral could benefit you if you continue to work and are in a high tax bracket, as your pension income could be received and taxed in a future year when your taxable income may be lower, or if you can afford to wait to receive the pension. And of course, while we can't predict life expectancy, if you're in good health and your family has a history of longevity, the longer you live, the more you will benefit from receiving an enhanced OAS pension if you choose the deferral.

Changes in partnership reporting

Reporting transactions with partners

The Canada Revenue Agency (CRA) introduced new partnership reporting forms in February 2012, applicable for 2011 reporting. The new package was designed to be more consistent in form to corporate tax returns, and most of the information needed to complete the partnership return has not changed. However, Schedule 50, which was previously called Reconciliation of Partner's Capital Account, has been redesigned and renamed Partner's Ownership and Account Activity. Whereas the previous form captured transactions between each partner and the partnership to build up to each partner's capital account at the end of the partnership fiscal period, the new form builds to the partner's adjusted cost base (ACB) for the partnership interest. In addition, the new form requires a calculation of each partner's at risk amount (ARA) in the partnership. For a simple partnership, with few partners and limited transactions, it may be possible to provide this additional information, but for large commercial partnerships, it is virtually impossible to completely comply because the partnership does not necessarily have access to all of the information that goes into the determination of the ACB of a particular partner's partnership interest. For example, if a partner transferred their partnership interest to a corporation under a section 85 rollover transaction, the ACB of the partnership would be determined in an election that is agreed to by the partner and the corporation; the partnership may have no authority to obtain this election information.

This dilemma started a conversation between tax advisors and the CRA to find an alternative to reporting the information required on the new version of the form. After a period of uncertainty, in late February 2012, the CRA posted a message on the partnership area of their website that indicated that in completing the 2011 partnership tax return, the current or former version of Schedule 50 would be acceptable. They also indicated that they will generally not impose penalties on T5013 returns for 2011 or 2012 fiscal periods as a result of incomplete ACB and ARA information on the Schedule 50 (if the new version of the form is filed). In June, the CRA announced that this administrative position would be extended to apply to taxation years ending in 2012. An unanswered question is whether the CRA will require partnerships to calculate ACB and ARA amounts for years ending after 2012. At a tax practitioner meeting, it was suggested that partnerships could provide information on ACB and ARA components to partners, and leave the final calculation of ACB and ARA amounts to the partners.

If you have any questions regarding your partnership reporting and what information may be required, please contact your BDO advisor.

Special concerns for family farm partnerships

Another partnership issue has recently been raised in respect of the new partnership reporting requirements. This particular issue relates to the filing requirements that came into effect as of January 1st, 2011 which determine when partnerships need to file a partnership return. This change was discussed in detail in Tax Factor 2011-01, in the article New filing requirements for partnership returns.

One of the new requirements is that if, at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million or more than $5 million in assets, a partnership return is required. The CRA had historically used an administrative rule that exempted a partnership from filing a return if it had five or fewer partners. Before this new size test, most farm partnerships were not required to file a partnership return, as the minimum requirement of five partners was not met.

Starting with the requirement to prepare financial statements for partnership operations, there are several ways the partnership return reporting requirement places an additional compliance burden on farm partnerships that meet the size test.

Even where farm partnerships do not meet the size test, but are close to the $2 million transaction threshold, they will have to prepare accurate income statement amounts on an accrual basis to see if the threshold is met — this is an additional reporting burden because the partners who are individuals report taxable income on their personal tax return on a cash basis.

For those that do meet the $2 million threshold, the big issue is the duplication of compliance requirements and the added cost. Currently, a detailed record of income and expenses must be reported on the personal tax schedules for each partner for tax purposes, and depending on the circumstances, for specific farm program purposes (such as the AgriStability and AgriInvest programs). If a requirement to file a partnership return is added, most of the same information will be reported again as part of the partnership return. The deadline for the completion of partnership returns, March 31st of the following year, also causes problems for family farms, as the personal tax returns are not due until June 15th, and the personal circumstances of the partners may mean that elective amounts reported on the partnership return may need to be amended after the original filing of the partnership return.

In response to these concerns, BDO has sent a letter to two federal government departments asking for a partnership return filing exemption for family farm partnerships.

We have just received a response from the government and they confirm that they will thoroughly review the issue, and will contact stakeholders over the coming year, including BDO. You can find a copy of the submission posted on to our Agriculture area.

Beware of fraudulent communications when transacting with the CRA

The Canada Revenue Agency (CRA) has been implementing significant changes to its on-line services in an attempt to make it faster and easier for Canadian businesses to communicate with the CRA and to meet their compliance obligations. However, as they and other government agencies, companies and banks increase their on-line activity and services, phishing scams and other fraudulent activity remain a concern. Now more than ever, it is important to protect yourself and your business from phishing scams and other fraudulent activity and perhaps the best way to do so is to have a good understanding of the safeguards used by the CRA to protect taxpayers.

Does the CRA issue warnings to taxpayers?

To help protect taxpayers, the CRA regularly issues warnings of fraudulent communications from criminals and fraudsters who will go to great lengths to retrieve personal and financial information and even money. These warnings are in response to communications received by taxpayers by telephone, mail or email that claim to be from the CRA and are actually not.

The CRA specifically cautions taxpayers from responding to communications that request personal information so that the taxpayer can receive a refund or benefit payment. The CRA also cautions taxpayers to be aware of links to fraudulent websites resembling the CRA's website where taxpayers are asked to verify their identity by entering personal and financial information. To help taxpayers identify fraudulent communications the CRA has stated that they do not do the following:

  • The CRA will not request personal information of any kind from a taxpayer by email.
  • The CRA will not divulge taxpayer information to another person unless formal authorization is provided by the taxpayer.
  • The CRA will not leave any personal information on an answering machine.

The CRA also suggests that taxpayers use common sense when in doubt and provides examples of fraudulent letters, emails and online refund forms on their website

How safe are the CRA's on-line services?

As outlined on the CRA's website, sophisticated security techniques used to protect their site and taxpayers' privacy include encryption technology and security procedures. The CRA uses specially configured computer web servers and corporate firewalls to protect web servers from unauthorized access. As well, the CRA confirms that access to web servers is limited to web browsers that meet their security standards of encryption when personal information is transmitted. In this regard, they state that all personal and financial information is encrypted—or scrambled—when it is transmitted.

My Account for individuals and My Business Account are regarded by the CRA as secure and convenient ways for individuals and businesses to access their CRA accounts on-line and to perform certain transactions. In order to complete the registration process for both of these services, a CRA security code is required and mailed separately as an added security measure.

What's new at the CRA?

The CRA has made several enhancements to the online My Business Account service, including their Enquiries Service. This new service allows taxpayers to request certain financial transactions and communication items for their business account, such as the following:

  • request an interest review,
  • transfer a credit,
  • request a refund (except GST/HST accounts), and
  • initiate a payment search.

As well, taxpayers can submit a question relating to a GST/HST return, GST/HST rebate, corporation return or other levies account. The CRA has introduced a new service standard for certain tax related questions that it receives through My Business Account — it will provide a response within 10 business days, on-line and in writing, and stand behind each written reply.

Through My Business Account, taxpayers with GST/HST accounts can now view expected and filed returns, file a rebate request, view a Public Service Body's (PSB) rebate, adjust a PSB rebate and file an election on-line. Similarly, corporate accounts registrants can now view the closing balance for refundable dividend tax on hand (RDTOH) balances, general rate income pool (GRIP) balances and non-capital loss balances, all from My Business Account.

When performing any transaction on the internet, it is always a good idea to be actively engaged in your own security by using common sense and exercising caution. If you receive a communication purporting to be from the CRA that you suspect may be fraudulent, contact your BDO advisor.

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The information in this publication is current as of August 1, 2012.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.


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