By David J. Rotfleisch, CPA, CA, JD
Special to the Financial Independence Hub
Some of the biggest Canadian income tax stories this year have an international connection. Here are my top five picks for income tax stories for 2016:
1.) Panama Papers and Bahamas Leaks
The top tax story of 2016 is the Panama Papers leak in March followed by the Bahamas leak in September, both a result of investigations by the International Consortium of Investigative Journalists (ICJ).
The leak was unprecedented in size and scope and consisted of data and secret papers demonstrating murky and in some cases illegal offshore financial transactions of celebrities, financiers, politicians and ordinary citizens from Canada and all over the world. Encrypted internal documents from Mossack Fonseca, a law firm based in Panama, were released to the ICJ by an anonymous whistleblower.
While headlines mentioned billionaires, entertainment and sports celebrities, politicians, public officials, as well as the network of global law firms, banks and accounting firms that sell and profit from offshore financial secrecy, ordinary Canadians have been caught in the web as well.
Passport information of about 350 Canadians was revealed. And the Royal Bank of Canada used Mossack Fonseca to organize offshore corporations on behalf of its Canadian clients.
The Bahamian leak added yet more information from internal records from the official registry of the Bahamas, a known Caribbean tax haven. Information was added to the same searchable data base as well as details of some 175,000 Bahamian corporations, trusts and foundations set up over the past 25 years.
Canadian Revenue Minister Diane Lebouthillier announced that CRA would carry out an investigation to determine how many Canadians set up offshore corporations and bank accounts to evade taxes.
CRA has indicated that it reviewed the searchable database, identified 2,600 records with a Canadian link and undertook tax investigations into 85 Canadians. To-date, CRA has executed search warrants and launched 60 income tax audits.
2.) Fraudsters Impersonating CRA Collections Officers
A continuing top story from 2015 is the Canada-wide epidemic of bogus phone calls from scam artists claiming to be CRA collections officers and threatening Canadians with jail time for alleged unpaid taxes.
Thousands of Canadians have been contacted by these call centre fraudsters and hundreds have been victimized into making payments to these criminals for taxes not owing. While a number of payment methods were used by the fraudsters, the most common payment was via iTunes cards.
In October, Indian authorities raided call centres near Mumbai, seized computers, arrested 70 people, and were questioning 600 more. A large sophisticated call centre operation was being used to perpetrate the frauds. The largest fraud was in the US. The US Department of Justice carried out a 3-year investigation, indicted 56 people in the US, and is seeking the extradition of Indian suspects.
Ever since the arrests, the number of phony phone calls in Canada (and the US) has been significantly reduced.
For the record, CRA issues written notices (usually a Notice of Assessment or a Statement of Account) to Canadian taxpayers for any taxes owing. Further, Canadians are never jailed for unpaid taxes.
3.) Changes to the Principal Residence Exemption
The most important tax break for the Canadian middle class is the principal residence exemption that allows a home to be sold without any capital gains. The system has been abused by house flippers who purchase a home and sell it for substantial profit.
Canadians did not have to report the disposition of property where the full principal residence exemption applied, so no tax was payable. As of January 1, 2016 taxpayers had to report the disposition of any home even if the principal residence exemption was being claimed for all of the years.
These new rules allow CRA to extend the reassessment period indefinitely where the taxpayer does not report a disposition of real estate instead of the three years reassessment period generally applying.
The formula for calculating the years of a taxpayer’s principal residence adds one year due to the possibility that the taxpayer owned two homes in a year where one residence was disposed of and another acquired. Previously, a Canadian non-resident would be able to claim a principal residence exemption for one additional year, the additional year is no longer applicable.
4.) Changes to the Eligible Capital Property (Goodwill) Tax Rules
The biggest change for business owners was the more than doubling of tax on the sale of goodwill. Changes as of January 1, 2017, will result in higher taxes on the sale of goodwill and end the ability to defer income (and taxes) from the sale of a business using a corporation.
New tax rules mean the sale of Eligible Capital Property (ECP) after January 1, 2017 will still be similar to a capital gain.
Fifty per cent of the gain will be non-taxable and eligible for tax free capital dividend treatment, while the remaining 50% will be characterized as passive income from investments. Passive income is subject to Part IV tax and subject to income tax at the high corporate rate of 50.67% in any holding corporation. The taxable portion of the sale of Goodwill was previously treated as active business and taxed at either the Small-Business Deduction rate of 13.5% or the general corporate tax rate of 27%.
5.) €13bn Apple Tax Debt to Ireland, from European Union Ruling
The European Union has required Apple to repay €13bn in taxes to Ireland in a ruling disputed by both Apple and Ireland.
The EU claims that Apple paid a tax rate on European profits of between 0.005% and 1%. EU competition officials said that a tax ruling previously issued by Ireland was unlawful state aid under EU rules. They claim Apple was able to transfer some two-thirds of its worldwide profits to Irish-registered companies that paid less than 1% tax for some 20 years.
Ireland disputed the position of the EU and said it will appeal the decision and that Apple properly paid its taxes owing.
David J Rotfleisch, CPA, CA, JD is the founding tax lawyer of Rotfleisch & Samulovitch P.C., a Toronto-based boutique tax law firm. With over 30 years of experience as both a lawyer and chartered professional accountant, he has helped start-up businesses, resident and non-resident business owners and corporations with their tax planning, with will and estate planning, voluntary disclosures and tax litigation. www.Taxpage.com and firstname.lastname@example.org.