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Personal Taxes

Foreign Income Verification

T1135-Foreign Income Verification Statement

All Canadians are required to report their worldwide income as well as any assets outside Canada over $100,000 by using form T1135. But this is the most common mistakes new immigrants are doing by not declaring the foreign income or assets each year. It increases their hassle when they decide to bring back the proceeds of the income or assets from the foreign country. Because if T1135 is not filed each year then CRA considers all the money received as income on the year of receipt and are subject to tax in Canada. These foreign reporting forms provide information to CRA about foreign assets as well as income on foreign assets. This also ensures CRA that the Canadian residents are paying taxes on income earned on foreign assets.




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How to avoid double taxation in Canada?

Foreign Tax Credit

Canadian resident for tax purposes or deemed Canadian residents who were present in Canada for 183 days or more in a taxation year is taxed on their worldwide income. So, they have to report their foreign income on their tax return in Canada and may be subject to double tax on foreign income. In almost all the countries except some places in the middle east, there are taxes on income generated by anyone. So, foreign income may have been subject to foreign taxes, accordingly, in order to avoid double taxation on the same income, a foreign tax credit is available to Canadian taxpayers who have paid foreign income taxes. Taxpayer gets the credit for the foreign taxes they paid in the foreign country and it reduces their overall tax payable in Canada. By granting a foreign tax credit, double taxation is avoided. Foreign business income tax credit if not needed in the current year then it can be carried back 3 years or carried forward for 10 years.




Tax Treaties

The Canadian government has signed tax treaties with several countries to avoid double taxation. Treaties are very specific to a particular country. So, use the provisions of the tax treaty whenever it is favourable to reduce overall taxes.

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Becoming a Non-Resident of Canada

Corporation

A corporation ceases to be a resident of Canada:

  • If they are incorporated – when they file articles of continuance to change the jurisdiction of the corporation.
  • If they are not incorporated – then by moving the central management of the corporation to outside Canada.

Impact on Tax

When they cease to become resident of Canada for income tax purposes then there will be deemed year-end immediately prior to ceasing residence and corporation has to complete financial books of accounts and has to file the income tax return for the deemed year-end date.

 

Trust

Trust ceases to be a resident of Canada:

  • When they change Canadian resident trustee and appoint non-resident trustee
  • By holding all the trust meeting outside Canada

 




Individual

Individual ceases to be a resident of Canada:

  • When they sold the home or canceled the lease for the house for his/her dwelling in Canada
  • When his/her immediate family moved out of Canada
  • When he/she becomes the resident of another country for tax purposes

Impact on Tax

  • When an individual ceases to become resident of Canada for income tax purposes, then the taxpayer is deemed to have disposed of all properties, immediately prior to ceasing residence for proceeds equal to fair market value. These dispositions will trigger any gains and losses and the taxpayer has to pay taxes on the gains. Any gains or losses after the deemed disposition will not be subject to tax in Canada.
  • Personal Tax Credit will be prorated for the part of the year based on his/her presence in Canada.
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Residence of Corporation for tax purposes in Canada

Corporation Incorporated in Canada

Corporation registered in Canada after April 26, 1965 are deemed to be resident in Canada for tax purposes.

 




Corporation Not Incorporated in Canada

Corporation not incorporated in Canada is deemed to be resident of Canada for tax purposes if their central management and control of the corporation are in Canada. Central management and control rest with the members of the board of directors and where they meet and hold their meetings.

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Becoming a Canadian Resident for Individual

Once a taxpayer (i.e., individual, corporation or trust) becomes a Canadian resident, then they are subject to tax on their worldwide income.

Individual

Individuals are entitled to a personal tax credit, which is based on his/her presence in Canada. Their basic personal tax credit amount will be prorated for the part of the year for their presence in Canada. Following tax credits are not prorated, such as:

  • Dividend Tax Credits
  • Medical Expenses Tax Credits
  • Foreign Tax Credits
  • Canada Pension Plan (CPP) Tax Credits
  • Employment Insurance (EI) Tax Credits

An individual will become resident of Canada once they purchased or rented house to live in or when their immediate family members moved to Canada.

Federal personal tax credit for 2019 is $12,069 whereas for 2018 it is $11,635. Alberta personal tax credit for 2019 is $19,369 and for 2018 is $18,690.




Deemed Disposition and Reacquisition of Property one day before the acquisition of Canadian residency

When a taxpayer becomes a Canadian Resident it is deemed that the taxpayer has disposed of all property except Canadian taxable property immediately before acquiring Canadian residency and proceeds of disposition is equal to fair market value. The taxpayer reacquires each asset deemed to have been disposed of at fair market value at a cost equal to its proceeds of disposition. These deemed dispositions and reacquisition rules ensure that all the capital gains and losses are triggered on all the property except Canadian taxable property on disposition. After that, if there are any gains, then it will be subject to taxation in Canada.

Example

Mr. A was formerly a resident of India for income tax purposes. Mr. A’s family moved to Canada on March 15, 2017. Mr. A owns a house worth of $500,000 which was acquired by Mr. A for $400,000. So, due to this disposition and reacquisition rules, it is deemed that the house of Mr. A is disposed of for $500,000 and reacquired for $500,000 on March 14, 2017. After that, any gains on the property over $500,000 (ACB, i.e., Adjusted Cost Base) will be subject to Canadian Taxation. Personal Tax Credits will be prorated for 320 days in 2017 tax return.

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Uses of financial reports

Financial statements may be used by different stakeholders for a multitude of purposes. Owners and managers require financial statements to make important business decisions affecting its continued operations. Financial analysis is then performed on these statements, providing management with a more detailed understanding of the figures.

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Separate Entities for Tax Purposes

Understanding the legal entities for the purpose of income taxation is very important. Separate legal entities can enter into contracts, buy assets, borrow money, and sue or be sued in court.

Individual

An individual is a separate legal entity because they can do all of these things and must file a return and pay taxes. An individual must file their return and pay taxes before April 30 for the last fiscal year. For example, for the fiscal year-end on Dec 31, 2017, the due date for the return filing will be April 30th, 2018.

Corporation

A corporation is a separate legal entity because it can do all of these things and must file a return and pay taxes. A corporation can choose any fiscal year-end as long as the does not exceed 53 weeks. Corporate can file their tax return within six months from the end of the fiscal year. For example, for the fiscal year-end on Dec 31, 2017, the due date for the return filing will be June 30th, 2018.




Partnership

A partnership can be considered a legal entity because it can enter into a contract, buy assets, borrow money and sue or be sued in court. However, for tax purpose, a partnership is not a person and hence not subject to tax. A partnership firm does not file a tax return, instead, the profit and losses of the partnership are allocated to partners based on their share and partners pay the tax.

General partners (i.e., not limited partners) are personally liable for the losses or liabilities of the partnership firm. Because of this reason partnership is not fully a separate legal entity. General partners unlimited liabilities is the reason to prefer corporations over the partnership to conduct business operations. A partnership must have Dec 31 year-end if any of the partners are individuals.

Trusts

Trusts are not separate legal entity because the trust property is owned by the trustee (i.e., not the trust). But for tax purposes trust is a taxpayer and must file a tax return. Trust must have calendar year-end and are taxed as individuals. Trust must file their return within 90 days after the trust’s year-end.

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Fundamental concepts in accounting

Financial statements are prepared according to agreed upon guidelines. In order to understand these guidelines, it helps to understand the objectives of financial reporting.

To prepare the financial statements, it is important to adhere to certain fundamental accounting concepts. Going Concern, unless there is evidence to the contrary, it is assumed that a business will continue to trade normally for the foreseeable future.

Accruals and Matching

Revenue earned must be matched against expenditure when it was incurred

Prudence

If there are two acceptable accounting procedures, choose the one that gives the less optimistic view of profitability and asset values.

Consistency

Similar items should be accorded similar accounting treatments.

Entity

A business is an entity distinct from its owners.

Money Measurement

Accounts only deal with items to which monetary values can be attributed. This helps existing investors, potential investors, creditors, and other users to assess the amounts, timing, and uncertainty of prospective net cash inflows to the enterprise. Separate valuation of each asset or liability must be valued separately.




Materiality

Only items material in amount or in their nature will affect the true and fair view given by a set of accounts.

Historical Cost

Transactions are recorded at the cost when they occurred.

Realization

Revenue and profits are recognized when realized. Every transaction has dual effects.

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Residence of individuals for income tax purposes in Canada

According to the income tax law, residency is very important. Residence for tax and immigration are different. One person can be a resident of Canada but may not be a resident of Canada for tax purposes. An individual is taxed on worldwide income for the full year if he/she resides in Canada.

An individual can be a resident of Canada for the purpose of income taxes if he meets the following conditions:

Primary indicators

  • Having a residence (i.e, owned or rented) that is available in Canada to live in
  • Having immediate family members living in Canada such as a spouse and/or minor children.




Secondary indicators

  • Maintaining social ties and personal property in Canada such as memberships in a Canadian organization, having a driver license, provincial health card, bank accounts, principal residence, etc.

Secondary indicators are less important when determining residence for tax purposes.

Deemed full-year resident of Canada

A non-resident can be a resident for tax purposes if he/she physically present in Canada for 183 days or more in a taxation year and will be taxed on worldwide income. For the purpose of counting the number of days, even a part of the day is considered as a full day.

A part-year resident of Canada

A person that starts fresh in Canada or makes a clean break from Canada is taxed on the worldwide income for a part of the year. All deductions will be applicable for the part of the year in which he/she was present in Canada. All non-refundable tax credits are pro-rated and only allowed for the period of residence in Canada.

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