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VOICEOVER:
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DERREN JOSEPH:
Good morning, or good afternoon, depending on where you are. Welcome to HTJ.Tax, this is a podcast or a video. If you’re watching us on YouTube. What we try to do is have these conversations with thought leaders in an effort to demystify the sometimes confusing world of cross-border tax and international tax compliance. While we may be tax professionals, we are not your tax professionals. So what does that mean? That means that nothing we are saying here should be construed as advice.
We hope to equip you guys of whether you are watching or listening with the key ideas of the conceptual tools you would use to engage your preferred advisors. So it’s not advice, general conversation, or general principles. So HTJ.tax, we do these live streams every week, have a look at it. HTJ.tax/events. We also publish videos daily on our various platforms. So we have over a thousand videos, over a thousand audio clips, and interesting key points on international tax.
And we have over 2000 articles on our website, all available free of charge. So thank you for joining us and without further ado, I introduce our two very distinguished guests here to talk about taxes in Canada. Gentlemen, introduce yourselves.
BALCHANDER PUDUKKOTAI:
Good morning everyone. It is morning in Canada. Good afternoon and good evening, wherever you are from. My name is Balachander Pudukkotai and I’m a partner at CQK LLP Chartered Accountants. In addition to doing the regular audit review and the complete CPA firm services that are being provided, we also provide tax advice, focus on tax audit management, and deal with the Canada Revenue agencies.
So before starting my career at the firm, I worked with the Canada Revenue Agency, both as a tax auditor as well as an appeals officer. So we get, we get involved in a lot of dispute resolutions as well, and able to do some of the administrative practices. That’s where we add value to our clients. So that’s basically what my background is. And we also focus on sales tax as well in addition to just corporate income taxes. So Kul, do you wanna go ahead?
KUL MAKKAR:
Sure. Well, hello everyone. My name is Kul Makkar and I’m a CPA and a chartered accountant. I’m based in Toronto in Canada and we provide international tax advisory services as well as transfer pricing. So I’ll be glad to answer any questions that you have and happy to be here this morning at this webcast.
DERREN JOSEPH:
Fantastic, thank you very much. So I guess we get the best of both worlds, both the private sector client-facing experience as well as role of thee tax office or the c r A as well. So we get, you know, that varied background coming to bear on these, on these, on these questions. So yes, thank you to those who did submit your questions in advance. We have them here with us. If you still wanna ask some questions, if we have time, please feel free to type your questions in the box below.
We get to them in the order in which we received them. So the first one is, and I’m gonna paraphrase it because it’s perhaps a bit too specific and I, I don’t want to, you know, be too specific. Okay, so someone is selling a digital product in an online streaming app in Canada. I’ll keep it vague so you don’t know who it is cuz I think it’s a very popular platform. Taxes are high in Canada. So I’ve been thinking about opening an LLC in the US I was wondering since I’m selling digital products, how would Taxes work and do I have to charge my customers Taxes for buying digital products? I know that’s a bit vague, but perhaps we can speak to the issues that are raised, gentlemen.
BALCHANDER PUDUKKOTAI:
Okay, what, what this couple of things to consider right here. When we are looking at non-resident providing selling products into Canada or providing services, this two-pronged approach that we do have to take, one is the corporate tax application where we look at the permanent residents or the permanent establishment to see if they’re carrying on business. But when we look at the sales tax or what we call the value-added tax, which is the goods and services tax of the harmonized sales tax, the rules are very different.
You may not have a permanent establishment per se in Canada, but because you’re soliciting orders and you’re selling into Canada, you would have to register for sales tax purposes, which basically leads you to a different situation altogether. So you have a perm, you do not have a permanent establishment. So from a corporate tax standpoint, you don’t have to worry about it or at least initially you don’t have to worry about it depending on what, how your business grows. But from a sales tax perspective, it is very important that you do have to register for GST or HST purposes.
Now, depending now they’ll come up with lot of new rules, especially the digital products. And it also depends on the software, the platform, and where it is located and all those things are to be considered. But in a nutshell or at at a very top level, you should consider registering your company for GST and HST purposes. Cole, you wanna add something?
KUL MAKKAR:
Yeah, sure, absolutely. Yeah, sure. Thanks. So yeah, from, I’ll touch it from very briefly from our corporate tax perspective. So as BAA said, you, you may not have a permanent establishment but still some of the Canadian tax reg regulations apply in case you’re considered to be doing business in Canada. So doing business in Canada per is not defined, but c r has certain criteria. They have I think listed seven or eight different things.
So if you are kind of doing one of those activities in Canada, then you may be deemed to be doing business in Canada in, even if you don’t have a permanent establishment, you still, you still may have to register your business number in Canada and may have to file and have to file a tax return. Of course knowing that, you know, under the treaty you may still not have to pay Taxes but that compliance would be there.
So some of the criteria I can read out whatever mean the one which ha is at the top of my mind is that in case you’re soliciting clients or business within Canada, even if you don’t have a permanent establishment, even if you don’t have, you know, physical presence in Canada, so that is considered one if you’re selling your goods and products through any agents in Canada. So that is another thing. So we don’t have too much of specific information to your case, but yes, when you are looking at your sales in Canada, you, you, you should be aware that there could be, you know, your tax filing requirements in Canada and sales tax.
BALCHANDER PUDUKKOTAI:
I’d like to add one other thing as well because depending on where you’re selling one we had the goods and services tax, which is the federal tax and then the harmonized sales tax because there are provinces like Ontario and New Brunswick, no Scotia, these provinces are harmonized sales tax when you pay tax at a different rate but they’re harmonized with the federal. Then you also have to consider, depending on if you’re selling into Alberta for example, where you’d have only the goods and services tax at 5%, but if you sell in Ontario you’re gonna have 13% tax rate.
Quebec has its own tax, which is partially harmonized, but still, you’d have to file the Quebec sales tax. So what happens is depending on which province of Canada you’re selling the products to, you would have to register in that province as well for sales tax purposes. Just, just something to think about.
DERREN JOSEPH:
Thanks a lot for that gentleman. So, so, so the person who asked the question, if it is you are thinking about leaving Canada and somehow of course legally avoiding Taxes, I think what the gentleman have explained is that it may not necessarily be the case that you would avoid. Of course, you know, what you’d want to do perhaps is engage either these professionals or so or others suitably qualified and perhaps what you want to do is some sort of analysis that shows okay, if I do stay in Canada and I continue my activity, this is obviously the as is the steady state.
But if I were to move to the US and operate from the US what would the savings be considering that you would still have sales tax liabilities and potentially still have corporate tax liabilities, plus you have to deal with the Americans? So as to whether that’s a good move, I’d say you probably want to do some deeper analysis. Okay, thank you very much, gentlemen. Moving on to the next question and again, if you just joined us, feel free to add your questions by just typing in the BAS below.
We get to them in the order which they received. So the second question is, yeah, this is a popular question is, you know, there’s a, a trend towards remote work or becoming a nomad. So if it is that you leave Canada and you go wherever else, under what conditions or under what, what are the steps to properly sever tax residents with Canada if possible?
BALCHANDER PUDUKKOTAI:
That’s a, it’s a loaded question actually. Especially when we are looking at the Nomads right now, people working outside of Canada now they’re actually working outside of Canada, but they’re employed by the Canadian company. So all of a sudden you do fall within the employment standards and with the services being provided in along those lines. Now from what I understand is they are looking into remote work locations and they’ve come up with certain rules, but it’s still up in the air.
It’s a gray area that people are considering what has to be done. But to put it in general perspective, the way for personal Taxes is for filing the taxes, whether you’re a resident Canadian resident or a non-resident. If you’re a non-resident, then you’re going to be taxed only on the services and the earnings that you have in Canada, it’s not on the worldwide income, but if you’re a resident then it becomes a worldwide income. One of the thoughts that they’re having is saying that the way they want to look at it is based on your residency because Canada, based on your residency if you’re a Canadian resident then you’d be paying Taxes no matter which part of the world that you’re working in. That’s one of the things that’s coming up. So Kul, any additional insights you do?
BALCHANDER PUDUKKOTAI:
Sure Bal. So I would like to add that there are again certain factors that we read as tiebreaker rules and one of the most important ones is the, the residential status, not the tax residential status, but the other residency. If the person is a permanent resident of Canada or a citizen of Canada, then their income, they have to, you know, report a worldwide income in Canada.
Yes, there could be some potential, you know, areas where a person who wants to severe the tax residency has to can look at one of them is has to, you know, the CRA is going to evaluate where the person has stronger ties in terms of say banking relationships in terms of his or her family in terms of where the employment is.
So even if the employment is within Canada, but the person is physically living outside of Canada fairly from a salary earning perspective, we can say that, you know, the salary becomes, say the person moves out of Canada to some other location, say in the US hypothetically. So that person living in the US would get taxed under the cred, the tax would be in the US but under the Canadian domestic regulations the person would get taxed in Canada as well on his or her worldwide income.
So you have to be really clear on, you know, the ties that you are in a position to break more specifically, you know, renouncing your Canadian PR or citizenship because if your ties are still with Canada, it’ll be very difficult because a lot of people actually come with this question specifically moving to tax-free countries in, in the Middle East when they moved there. So this question has come up in the past as well and you know, I would strongly advise that your specific situation has to be looked at and see how connected you are with Canada and how we can, you know, potentially break those ties so that you become a nonresident a tax non-resident in Canada.
BALCHANDER PUDUKKOTAI:
Just to add a couple of things is also that when we are talking, talking about trying to make a clean break is key. So you, if you have a bank account here and if you have your family and you have all your community here, then it’s kind of difficult to explain that it’s gonna be a clean break kind of thing. That’s one of the things to consider. Now what some of the employers have also done is within Canada itself, they’ve limited the employees working out of the province and that is also for tax purposes because your deductions and the different provinces change at the provincial tax level. So that’s one of the reasons. So they will be looking into that very closely.
DERREN JOSEPH:
Thank you for that. So in other words it’s, it’s not really a black-and-white issue. You need to look at the specific fat pattern and basically what you’re saying is the more you have, I guess it’s almost like a center of life test like in like in the European countries. So the more ties and economic personnel that you have in a community that you still maintain in Canada, the greater the chances you’ll still be a tax resident and the more that you can sever and you know basically s scotch earth cut everything off and become a bonafide resident of somewhere else, right?
Then that strengthens the case. And of course, if it is that you are one of those perpetual Nomads people who keep moving, then you can’t be a bonafide resident of anywhere else. So therefore the fallback rule would be you’re still a Canadian tax resident, potentially,
BALCHANDER PUDUKKOTAI:
Potentially, and if you’re staying in Canada for over 183 days, then you’re deemed to be a Canadian resident anyways.
DERREN JOSEPH:
Okay, all great, thank you. Thank you for that gentlemen. So that kinda leads us to the next question and I think you’ve kind of answered it. So in this case, this person is saying, and it’s quite a common scenario as you guys have already commented, that someone is living and working elsewhere for an employer outside of Canada, but their family is still in Canada, they visit them three times a year. Are they still tax residents in Canada?
BALCHANDER PUDUKKOTAI:
Visiting family is just one of the criteria that they’ll be looking at. They’ll be looking at the entire facts of the situation and if you’re going to be working outside of Canada and you have a contract for more than five years or something, then there could be arguments made to say that, you know what my only tie is because my wife and kids are home here in Canada. I do come and visit them, but other than that, everything else I’m, I’m generating the revenues outside so there, there is a possibility but again it’s a gray area until we look at the detailed facts, we wouldn’t be able to answer that. You’d like to consider that too.
DERREN JOSEPH:
Kul, do you wanna comment or add anything?
KUL MAKKAR:
Yeah, Derren I think what Bal mentioned is all that I have to say here as well. So there are, you know, a number of factors that have to be evaluated. I in fact did mention in answering the previous question a couple of them like you know, the family or the bank accounts, but there are others as well, like where you have a, have a house like a property or where you, you know, have a driver’s license your health card. So, and yes, having an employer outside of Canada definitely shifts the, even the pendulum, slightly towards being considered a nonresident from a tax perspective. But it is not the only criteria and so I would suggest that it has to be looked more closely for anyone to kind of be able to kind of real answer here.
DERREN JOSEPH:
Okay, perfect. Thank you very much, gentlemen. Next question. So for us, Expats living in Canada, what w tax w2, so this will be this is as they pay as they earn taxes in the US so the W2 taxes paid qualifies for the foreign tax credit calculations. So they went on to say federal income tax withheld, social security, taxes withheld, I know Medicare Taxes are withheld in the US would that qualify for the foreign tax credit calculations on the Canadian returns?
BALCHANDER PUDUKKOTAI:
As a matter of fact, yes, it would qualify for it because what happens is you pay, you are filing your US tax filings and then when we actually file the Canadian Taxes right here, we do have to consider the Taxes paid. And within that, we look at the w2. But, but what the, what c r has done right now is they don’t, there was a time when we would just take the tax return because of the timing of it, we would take the W2 provided by our clients and we would file the Canadian tax return based on the information on w2.
They come back to us and say, no, we actually want to see the tax return that has been filed to actually know the total amount, the actual tax that has been paid in the US for us, for us to give the foreign tax credit. So it becomes a circular calculation because of its timing of it. So invariably what happens is I tell my clients that you’re providing this information, but we informed that six months down the road you’re going to get a notice of assessment that is going to change these numbers because of the new information that they, they will be getting. Kul, do wanna add?
KUL MAKKAR:
Sure. Well, I think you know, CRA looks at how the tax term Taxes is defined in the US the definition does cover I think Medicare and the other Taxes you mentioned. Sometimes there is, and I have faced that question in the past as well where the state Taxes sometimes CRA pushes back saying that the state tax that you pay would not be given a foreign tax credit because that’s not defined within the definition of the taxes, the way they are defined within the treaty. So, but you know, mostly I have seen that these are accepted for foreign tax credit purposes. But yes, as ball said, it is not what is there on w2, it is what you file in your tax return that would eventually be considered by CRA.
DERREN JOSEPH:
That is interesting. And the point that you made earlier, I’ve seen that as well. We have a few clients that are s exposed to both jurisdictions Canada and the US and historically, yeah, I mean it was simple when whoever it is in Canada is doing the returns, but within recent times, like the last couple of years or so, we’ve seen the C R A pushback and they wanna see both the original documents of the W2 plus the tax return as you said. So yeah, it does seem to be increased vigilance on the part of the C.
Now as you mentioned that the issues at the state level, what are the, what about the client, the person who asked the question, the analysis, but it just triggered my thinking. What about at the provincial level? Do the provinces give tax credits for Taxes paid in the US or no, no foreign tax credits?
BALCHANDER PUDUKKOTAI:
To the best of my understanding, I have not seen them giving that credit. Okay, okay. Because okay now, yeah, and one of the reasons that these changes happened is because of data sharing between IRS and CRA. It’s, it’s got very significant and now they’re also going globally. So I’ve had clients who they had some interest income and other info income from Lloyd’s Bank and they did not report it and it was caught because of the exchange of information. So the net is big global.
DERREN JOSEPH:
Absolutely. Absolutely. There’s, there’s no more hiding secrecy is dead. Okay, moving on to the next question posed for US Expats living in Canada, what options are available when the CRA denies the foreign tax credit edit?
BALCHANDER PUDUKKOTAI:
Okay, now the options available is because one of the things is if they’ve denied it, we need to understand the basis for it. So that’s where we get into, we can file a notice of objection as well for the assessment that you have received. And based on that we had to, the devil is in the detail, so we gotta do a lot of digging to make sure and understand the basis why C R A would deny the foreign tax credit and the basis for that. And I’ve seen a couple of situations where they have denied it and we were able to turn that around by explaining to c the base why the foreign tax credit is it’s an intent element and they should be getting that. Kul, anything?
KUL MAKKAR:
No, I think you mentioned it, you know, well that has to be based on the facts need to understand. Usually, on a more practical scenario, we just reach out to the CRA auditor, try and find out, you know, why they have denied it. Sometimes they just explain it more than what is there on the notice of assessment. And then you can definitely, you know, if you have more documents to support it, you can provide and file a notice of objection. But, you know, I believe that CRA has been, you know, has been receptive on these things and if the documentation is adequate, I think we, we should be able to turn it around.
DERREN JOSEPH:
Right. So I guess this is one of the important times when a taxpayer may want to consider getting a qualified tax professional to represent them because navigating a situation like this could be, could be quite challenging if someone is doing it on their own. Okay, fair enough. Moving on to the next question, and again, if you’ve just joined us, feel free to type your questions in the box below, we get to them in the order in which they receive. So this is a US tax question.
So if US Expats living in Canada seeking to become IRS compliant, so for whatever reason, you’re living in Canada and you haven’t been keeping up with your US taxes for the, generally speaking, there are two programs available. If it is that your non-compliance is deemed to have been non-willful, then there’ll be streamlined compliance procedures. If your non-compliance is deemed to have been willful, you have what was formally known as voluntary disclosure or basically referring to the, the options available in the original IRS manual.
So the difference between that, that concept of willfulness of course is not properly really explained in an IRS code, but we refer to case law and case law tells us that it’s deemed, it’s something as willful when you intentionally ignore a, a known legal duty. So you knew that you had to file your Taxes and you intentionally did not. Whereas if you are nonwillful then you, you know, you weren’t, you didn’t in intend to evade or avoid that known legal responsibility.
So since we’re getting into the nuances of the law, I think the first thing we do when we get clients in that gray area is we reach out to one of the IRS, one of the tax lawyers that we work with because a key part of your submission would be a, a statement, basically, a statement explaining a reasonable cause as much as possible. Of course, you have to understand the facts and circumstances around your case and see whether there’s a reasonable cause position to be taken, which will hopefully minimize some of the penalties and the interests and the penalties side.
The penalties can be quite aggressive because the penalties for non-compliance for international tax responsibilities from a US point of view can not, can be not just civil but criminal as well. So you’d really wanna work with a team of both accountants and lawyers to cover both sides of it. So whoever asks this question, please feel free to reach out to us. We are a team of both accountants and lawyers who can help you navigate what could be a tricky and, and dangerous process if not dealt with properly. So I hope that helps.
BALCHANDER PUDUKKOTAI:
So Derren, there is a difference between repeat offenders and first-time offenders for non-compliance? Or do they look at it on a case-by-case basis?
DERREN JOSEPH:
They look at it on a case-by-case basis. Unfortunately, we have seen people being repeat offenders for streamlined, so they, fall behind, and then they fall behind again. But you know, their facts and circumstances tend to suggest that their world is non-willful, they’re just being careless or life gets better of them. Family emergencies, covid divorce, illness, or whatever. But in terms of those who are deemed to be willful, those would be rare because they expense and they, it it is emotional.
It is emotional having to go through because there’s a lot of uncertainty with the, with you know, with the criminal penalties apply and so on and so forth. In our, in my, in our practice, we have yet to see someone being a repeat offender on the willful side. But so far, so far so good. But after going through that trauma the first time they learned their lesson.
BALCHANDER PUDUKKOTAI:
That’s right. Yeah.
DERREN JOSEPH:
Okay. Moving on to the next question. Okay, what’s the most tax-efficient way to structure the purchase of Canadian real estate? If I am not Canadian, I know again, that’s a bit general, but many thoughts.
BALCHANDER PUDUKKOTAI:
Okay, if you’re not Canadian and you are purchasing real estate right here. Yeah. One of the things is normally what people do is they do set up a Canadian corporation entity so that it’s contained within that. And the reason for that is that the moment you’re operating some of these real estate transactions if there is an audit at a later date, your books and records are limited to the company records right here.
If you set it up as a branch or you personally own or you have a business and you’re setting it up as a branch or the US corporation is purchasing real estate, then you’re opening up your US books as well. That’s one of the reasons, practical reasons why people normally would go setting up a corporation right here and they take the money out as dividends from, from the corporate, from the Canadian corporation call. Any additional thoughts to,
KUL MAKKAR:
Well not on this one, but just to let you let the audience know that Canada has actually banned foreigners from buying property in Canada for the next two years. Your rules are because of various factors. Yeah, inflation and poverty prices going, you know, high out of the roof previously as well. And this thing came in at the start of January, I think the fourth or 5th of January, that’s when they started. But previously as well there are some additional Taxes as well if a nonresident, sorry, if a non-Canadian wants to buy a property in Canada. So what Bal said that you know, if they are in a position to set up a corporation and buy it through the corporation, that is still possible and that’ll make sense
BALCHANDER PUDUKKOTAI:
Because previously they, previously they, what they’ve done is they to reduce the foreign investments or foreigners buying real estate in Canada, they had the additional taxes that was applied on the transaction. But even with that they could not stop the investments. So now they decided to just balance
DERREN JOSEPH:
And, is there a sense of how long this ban is gonna remain in place? Is it a one-year, two years or they’ll kind of wait and see how it goes?
BALCHANDER PUDUKKOTAI:
My understanding is two years, right Kul?
KUL MAKKAR:
Two years, yes, they proposed it for two years unless they extend or reduce it, but for now, it’s two years.
DERREN JOSEPH:
Okay. So that is interesting to know. But going back to, you know, once, once it’s again permitted to do so in, in the US again, you know, typically, I mean there are exceptions, but they are one of the key reasons for using a structure to buy real estate would be to, to limit liability because the US is quite litigious and you know, if the tenant slips and falls, if there’s some mishap, you know, the foreign owner could be exposed personally to, to whatever the liability of the dispute would be. Is is that also a common way of thinking through the process? Is it Canada litigious as well or not really? That’s not really a concern.
BALCHANDER PUDUKKOTAI:
Not the same as the US though. It’s not along the same lines, but still, that is a consideration when they set up this structure.
DERREN JOSEPH:
Right. And, and also in the US we also coach our clients on not being, not only being conscious of income taxes but also estate taxes. So we help clients create what we call estate tax blockers, which would, you know, not just help with asset protection but with probative avoidance or succession planning. Yeah. Is there similar structures and considerations from a Canadian point of view? Is there an estate tax that you’re conscious of?
BALCHANDER PUDUKKOTAI:
So, so what we do is we, we get into, like both Covid and I, when we’ve dealt with our clients, we get into proactive tax planning. Compliance is one side of it, but when thinking of proactive tax planning, then we go through a generational succession of making sure that the younger generation gets the business assets as well as the assets of the company as well as the family wealth is passed on to the next generation. As part of doing that, yes, we do get into the structure.
DERREN JOSEPH:
Okay, great. And look at opportunities to minimize taxes and we also use some insurance products to make sure that funds are available for them to actually pay the Taxes when the time comes. Understood, that’s great.
KUL MAKKAR:
There has been, yeah, sorry, Derren just to add, since again we, you know, connected to real estate. So there has been, you know, more tightening on this sector and there has been a vacancy tax which is added again via many municipalities. So if you purchase a house but you’re not able to, you know, occupy it or even rent it, then there would be a vacancy tax as well. So any of the or audience who want to buy a property in Canada, they should be aware of this as well.
DERREN JOSEPH:
Okay, great. Thanks for that gentlemen. Next, next question, what’s the most tax-efficient way to structure the purchase of Canadian investment property? If I am Canadian, so from the inside.
BALCHANDER PUDUKKOTAI:
Okay. Yeah, okay. If you’re a Canadian, there are two, two approaches that people do take depending on the amount of properties. Like if someone is investing in one rental property, two or three, then we go, you’re better of going personally because what happens is the, in most cases what ha given the mortgage and the interest rates and the property tax and everything, your net revenue from the rental property would, would be zero. So you don’t have any tax implication, but as you as and, and it also benefits from getting your bank financing and everything along those lines when you do it as an individual.
So for the first few properties, two or three, once clients say that we want to get lot more and it reaches about five or six or something, then we say put it through a corporation. It’s a real estate corporation. The key thing to remember when we talk about putting money into the real estate corporation and renting investment property through a corporation is that because it’s considered passive income, so the tax rates are, the corporation is taxed at a higher rate. So the corporation does not benefit with the lower tax rates that normally it would be benefiting back. Okay, so Kul, your insight, please.
KUL MAKKAR:
Yeah, I mean from a tax perspective, that’s what it is. So a mortgage is an important factor. Derren and the tax rate, the mortgage, the interest rates offer to individuals are generally lower than what they offer to corporations. So that is one of the factors. Not only the from when we have to advise, we look at it from, you know, not only purely from a tax perspective, but from, you know, other perspectives as well.
And as Bal mentioned, if there are five, six properties, then you might then you may want to consider it buying it through the corporation, but if it’s one or two, you know, then it’ll, so for, for if, if the person, so you know, the capital gains are exempt for, for for what property which the person claims as their personal primary residence. So if you, you know, if you’re buying one or two and then you are, you know, interchanging between primary, primary residence between one or the other property.
So with a corporation that again would not be there. So a thumb rule would be that if you have number of properties more than four or five, then you should do, you may consider buying it through a corporation. But if there are lesser than that, I think you shouldn’t really mind about, you know, a corporation personal under the personal name is a better option there.
BALCHANDER PUDUKKOTAI:
There’s something else also to consider because when you’re having more than five properties, it helps in succession planning when you’re putting it to the corporation, that’s one thing. And second thing also from if the property is purchased from a builder, then there is HSG or the GSG that’s applicable on the property because a builder is selling the property. So there is a rebate mechanism that can be used.
So if you are renting, if you’re buying the property for your own purposes, then you get a rebate for it if you’re living in there. But also for rental properties, you get a rebate, GST rebate that can be filed for now if that is going to go through a corporation, then you lose out on the repeat. So these are various considerations that people have. So you gotta almost look at the cost-benefit analysis. Does it make sense?
DERREN JOSEPH:
Absolutely. Thanks a lot for that gentlemen. Next question and we a, again, this is a question that perhaps was answered in one of your, earlier comments, but still, if I’m a perpetual nomad, i.e. someone who’s moving around constantly internationally, but you’re also a Canadian citizen, would the CRA still tax me? I think we answered it, but just briefly gentlemen, if you wanna comment briefly.
BALCHANDER PUDUKKOTAI:
If you’re a Canadian citizen, then all of a sudden I think it’ll be difficult for us to prove that you’re filing the taxes in a non-resident. So we had to go through the process of the clean break versus, now having said that, I do, we do have one client, a very successful gentleman who lives all over the world and pays zero Taxes in every part because he makes sure that he’s not in any place more than the, to make him a deemed resident and he takes all precautions to make sure that there’s no connection and he has bank accounts and tax payments. So it is possible, but it becomes very complex and it’s not an easy thing to do.
DERREN JOSEPH:
I also have a client oh who does that? He moves from country to country. He stays in nice hotels cuz he’s done well for himself. Yeah, yeah. And you know, very, very careful. It is a lot more effort than one would’ve thought to make sure that trigger rules in any jurisdiction. And then there’s another one who lives on a yacht, he’s just constantly moving, but, you know, so things are interesting lifestyle nonetheless. Anyway. Cool. Do you wanna make any comments before we move on?
KUL MAKKAR:
No, I think, well I covered it well yeah.
DERREN JOSEPH:
Okay. If I’m a Canadian who’s working temporarily in the US what tax planning should I be doing? That’s a very general question, but just general points gentlemen,
BALCHANDER PUDUKKOTAI:
I think we are kind of limited to the best of my knowledge because first of all, you’re there temporarily so you’re not having a clean break. So the tax would be filed on a, being a Canadian resident then I’m not sure, like in the US probably they’re filing tax on the earnings in the US not on the worldwide income because they don’t have the green card. So then you make use of the foreign tax credit mechanism and try to minimize the Taxes between the two. But I’ll ask to add a lot more to this one.
KUL MAKKAR:
Yeah, in fact I’d be, you know, I’d be more comfortable if I know what kind of, what source of income are we discussing here? Is it an employment income, business income or some kind of a passive income? But, but yes, you know, all that I would want to suggest here is that if it is possible based on your facts and circumstances, that the income that you earn in the US doesn’t come back and get taxed again in Canada at a higher rate.
If you can avoid that, that would be, you know, the best thing. Although again, as we discuss in answered in the first question, there are factors and they are not easier to kind of comply with. But you know, the tax planning, again, this is, this is definitely a very wide question and you know, commenting on it may not be possible, but you know, as Paula said, there are a few things that you can do based on whatever we know about this question.
BALCHANDER PUDUKKOTAI:
See, what I find is conceptually at a top level, we know the answers from what the tax rules are and conceptually what we can do, what we cannot do. But the devil is in the detail as we keep digging through and then you go, oh, this doesn’t make sense, this is not, it does not qualify, doesn’t meet the condition. That’s where I think the facts become very, very critical. So I’m sure you know that Derren, that’s how it works.
DERREN JOSEPH:
Absolutely. The double is absolutely in detail. So what is the nature of your income? What’s the nature of, of your, of your employment or how much time you need to spend in the US Maybe you can minimize the time, you don’t trigger substantial presence. So yowon’t’t only be taxed in a US source income and keep your worldwide income out of the US or maybe you do have to spend by the nature of whatever it is you’re doing, you do have to spend the time in that case, could we take a treaty position? Yep. Or maybe we cannot. And you know, so again, there are a lot of moving pieces.
So I guess whoever ask this question, you probably wanna sit with a team of professionals to, to help you walk through this. But hopefully you get some of the key concepts that you need to keep in mind as you engage your chosen professional. So, okay, moving on the other way, now if I’m an an American who’s working temporarily in Canada, what tax planning should I be doing?
BALCHANDER PUDUKKOTAI:
Okay, if you’re an American, first of all, I’m assuming that it’s a non, you’re a non-resident and you’re just working here in Canada. So the Canadian taxes, it would be only on the earnings right here in Canada. But the US side of it I guess would be the worldwide income. So you’d have to consider that. So the same concept would apply again. Kul, any other additional things that we can think of in that area?
KUL MAKKAR:
Yeah, we consider that, you know, that working means employment then the employment clause that dependent services clause in the treaty has, has some relief. If you are here for less than 60 days and you know the salary income is born by the employer in the US, then probably you would be able to avoid Canadian Taxes. But it’s, again, it’s not a tax planning that I’m suggesting, it’s just, you know, what is there under the law for tax planning.
There are limited, I use, I would not suggest you do, you know, registered retirement saving plans that most of the Canadians use, what is called is RSP because then there are more issues when you go back to the US how that would be taxed. So, but you know, if we have more facts and there could be, you know, certain things that can be planned here, but we need more details to be, to be able to answer some, you know, more specifically in this situation.
DERREN JOSEPH:
Hmm. Yeah. But generally speaking for Americans working outside of the US, that is definitely what you’ve just said. That’s one of the first things we get into avoiding investment products in another jurisdiction until we’re absolutely sure how would be treated both by that jurisdiction and back in the US because a lot of things that are tax advantage in another jurisdiction, they’ll be tax penalties for it back in the US. And speaking specifically about the PFIX, the Passive foreign investment companies and it is unfavorable depending on the situation, which can be the unfavorable attached treatment of collective investment vehicles or mutual funds unit trust in other jurisdictions.
So something to consider. There’s, I wanna hop over the next question to another question I was posed but some, it seems connected to the one that we just discussed, so it’s good to do them in tandem. So, all is asking for us expats living in Canada, are there any reporting requirements for the CRA when the expat has a US LLC back in the US.
BALCHANDER PUDUKKOTAI:
Okay, just can you repeat that again because I wanna make sure I understand. Sure,
DERREN JOSEPH:
Absolutely. So, at the bottom of the list for US expats living in Canada, are there any reporting requirements to the CRA when this US expat in Canada has a US LLC back in the US? He says it’s in the startup phase, but he has a company outside of Canada.
BALCHANDER PUDUKKOTAI:
Okay. One of the things that are required right now is basically if, if the Canadian taxpayer has income or assets, anything over a hundred thousand dollars Canadian, they’re supposed to be reporting the foreign investments and foreign businesses as well. So that reporting requirement is there. And again, given the data sharing and information, there was a time when people, it was not enforced.
That’s strictly now they are actually looking at it. So one of the questions that we do have for most of our, for all our clients is do you have any assets that’s over a hundred thousand dollars outside of Canada? If so, we need to get details. This could include having bank balances, investments and shares in businesses outside and there are certain exceptions. So we just go through that and say what has to be reported in that would be reported under what we call the four one thirty-five.
KUL MAKKAR:
Yes, Paula, I would also wanna add that since that person owns the LLC, LLC in Canada or in the US also is like treated as a disregarded entity and that adds to complications when, how to report that. I’m assuming that the person is a Canadian tax resident and if that person is then there is, they could be an additional reporting requirement on what is called a form T 1 1 34 where that person has an interest or ownership in a corporation outside of Canada.
Yeah. So the reason I’m highlighting LLC here is that you know, so whether it’ll be a T1134 or T1135 would depend on how that disregarded entity LLC is, you know, reported in Canada. But there are reporting requirements, and if it is T134, then it is, it has been since last year. The reporting has become very complex and very detailed.
Again, I would suggest that if you know that this person should, should seek some advice based on how to report that ownership in l c it is significant reporting now and there are penalties attached to it.
DERREN JOSEPH:
Hmm. So is it reporting only or are there potential tax implications like taxes may be payable as well?
KUL MAKKAR:
No, Taxes this a T3 four specifically is a reporting return, it’s an information return only. The Taxes would be, you know, dependent on, again, certain other factors that if he is, you know, if it is a disregarded entity, entity and that person is a tax resident, whether his global income would be, you know, taxable in Canada, that has to be looked at again. Bal, you wanted to add something?
BALCHANDER PUDUKKOTAI:
So, so one of the things is the reason that they’re enforcing this 1, 1 35 reporting of the assets outside the country. There’s no tax implication when you report it, but every year you’re supposed to be reporting the interest income, the other information that’s coming through. Plus also what happens is if you have, let’s say land building and other assets outside, outside Canada, when you dispose that off, there is a capital gain and they want to make sure that they pick up on that as well.
So in year one you reported you had a million dollars in assets outside of Canada and that asset today in year five is worth 5 million. So give us tax on the 4 million. I think it’s, it’s just the information gathering, it seems like very harmless information gathering to start off with, but there could be implications in the future. Mm. So and, and then, and then they’re very strict on like if we don’t file that form on time, the penalty is very steep. Something like $2,500 for not filing it.
DERREN JOSEPH:
Wow. And are there, so..
BALCHANDER PUDUKKOTAI:
We run into those issues, sorry, we run into those issues when we have people immigrating into the country and coming into Canada and they go, we don’t have any property. Okay fine. They walk, they think that we don’t know about it, we just want them upfront saying that if you do, this is going to be an implication because for you to bring money at a later date, you’re gonna have some issues.
DERREN JOSEPH:
Right. These CFC rules as well controlled foreign corporal rules.
BALCHANDER PUDUKKOTAI:
Sorry. Yeah, yeah, go ahead, go.
KUL MAKKAR:
Ahead. Yes, there are, and T1 34 is actually, you know, to collect information in that direction only.
DERREN JOSEPH:
Mm, okay. Understood. Very, very interesting. And then, you know, added to that, I, I throw in, you know, again, we, we, these are the concepts that you’d want to use all during when you’re engaging with your preferred advisors, but then you’d also wanna speak to your advisors as to whether management and control would be exercised from within Canada or is it that you are just a, a passive investor and you have yes, there’s a ceo, there’s everyone doing a thing back in the US nothing to do. Do you just collect checks then that might be a different situation from if you, you have operational responsibilities as well see, maybe have some sort of conversation around that and when there’s, so that has implications as to how the distributions, if any, will be treated, right?
Yes. Because if it is you’re actively engaged in that distribution, yeah. You can shoot as a salary as opposed to dividends. So, you know, it’s an as, as an as cool was saying at the beginning, it’s a pass-through, so it is in a sort of gray area and the facts and circumstances would govern how it’s treated. So. Okay. Scrolling back up to the last question, which is crypto. Crypto and NFTs, how does, and again, I know it’s a super broad topic, but generally speaking, how does the c r look at crypto and NFTs?
BALCHANDER PUDUKKOTAI:
I think right now the way they, they’re doing lot of their own research and trying to see what’s the best way to tax it, but I think they’re kind of considering that as property, if I’m not mistaken, and saying that it’s a property that you own and there’s a increase in the value and if you’re disposing of that property, then they should be, now we are not clear at this point whether they treat it as a capital gain or as a business income or what they’re going to be treating it as. So other than in general terms saying that they’re looking at it as a property and taxing it on that basis. Right. That’s what I can comment on. Kul, any insight on or anything else?
KUL MAKKAR:
No. Well, in fact, I read it sometime back and, and it, you know, it, CI did mention as Azure, I pointed out that it will be treated as a property and you know, has to be reported if there are any gains on that. But I think there is more clarifications, there are more, you know, more details are expected from c on this export. I think still a lot of, you know, nonclarity.
In fact people, some of our clients, do come to us and ask about how to report that. So we’ve, you know, that’s still a territory that has to be understood a little more before we can give some.
DERREN JOSEPH:
Okay. Gentlemen, thank you very much. I appreciate you sharing your time, expertise, and insight. If someone wanted to follow up on some of these issues and reach out to you guys directly, what’s the best way to reach here?
BALCHANDER PUDUKKOTAI:
They can reach me through my email, which is bkca or they can, I have clients using WhatsApp and calling me and letting me know can you set up a meeting as well, so, okay. As long as they have the phone number, my phone number, just which I can share with you then afterward. So that’s yeah. Fantastic. And cool.
KUL MAKKAR:
Yeah, I would say the same thing. In fact, I would suggest that if, you know, they can reach out to Derren has all the details about
BALCHANDER PUDUKKOTAI:
Me, exactly
KUL MAKKAR:
My email and phone number. And I’ll be very happy to answer the questions and if they need any consultancy, if they need any advice, we’d be happy to provide to us that as well.
DERREN JOSEPH:
Okay, wonderful. Thank you very much. Have a great day ahead. See you next time. Thank
BALCHANDER PUDUKKOTAI:
So much. Thank you.
KUL MAKKAR:
Thank you. Take care.
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