Tax Letters: Current Developments – August 2013 – Budget 2013 – New Form T1135

Date: August 2013

BUDGET 2013 – NEW FORM T1135

On June 25, 2013, the Canada Revenue Agency (CRA) released its new Foreign Income Verification Statement Form T1135.

For taxation years ending after June 30, 2013, Canadians who hold foreign property with a total cost greater than $100,000 will be required to provide additional information to the CRA. The criteria for those who must file has not changed; however, unlike the previous form which required only dollar thresholds for different categories of foreign assets, the new form has been revised to include more detailed information for each specified foreign property.

Increased reporting requirements include:

  • Name of the specific foreign institution or other entity holding funds outside Canada;
  • Specific country to which the foreign property relates;
  • Income generated from the foreign property.

Tax preparers will be required to include much more information in the revised T1135 than existed previously.

T3/T5 Exemption

Relief is provided where the reporting taxpayer has received a T3 or T5 slip from a Canadian issuer in respect of a specified foreign property for a taxation year. This property is excluded from the T1135 detailed reporting requirement. The taxpayer will still be required to file the new T1135 form and indicate the exclusion applies.

BUDGET 2013 – PROPOSED FEDERAL MEASURES FOR THE TAXATION OF TRUSTS

The Department of Finance has proposed significant changes to the taxation of Trusts.

The following are some of the measures proposed:

The Government proposes to amend the income tax rules to apply a flat top-rate (presumably the highest marginal tax rate) to grandfathered inter vivos trusts and trusts created by will. The Government proposes that the flat top-rate also apply to estates after a 36-month period following the death of the individual. This proposed measure would thus limit an estate’s access to the graduated rates to the first 3 years after death. These measures would apply to existing and new arrangements for the 2016 and later taxation years.

The proposed measures will not apply to trusts, created for disabled persons or minor children, that benefit from special rules of the Income Tax Act which allow the trusts to suspend or reduce the effects of high flat rate taxation on income.

Testamentary trusts are presently allowed to choose off-calendar year taxation years and fiscal periods. The proposed measures will require trusts created by will and estates, that continue to exist after the 36-month period following the individual’s death, to use a calendar year taxation year and require their fiscal periods to end in the calendar year in which the periods began.

More details about these proposed measures should be available in the near future.

U.S. ESTATE TAX FOLLOWING THE AMERICAN TAXPAYER RELIEF ACT OF 2012

The American Taxpayer Relief Act of 2012 enacted on January 2, 2013 has permanently extended the estate and gift tax provisions in effect in 2012. These provisions include the gift, estate, and generation-skipping transfer tax exemption amount of $5 million per person, indexed for the years 2012 and following. Among the extended provisions is the possibility of transferring unused exemptions to a surviving spouse at death. Newly enacted is a top tax rate of 40% for taxable amounts over $1 million as well as two new brackets: 37% for taxable amounts over for the 2012 taxation year. The new measures replaced the top tax rate of 55% and the exempted amount of $1 million.

What do these recent changes mean to Canadian residents?

It is important to be aware that even though an individual may not be a U.S. resident or citizen, his or her estate can, upon death, be subject to U.S. estate taxes. The U.S. imposes estate tax on the value of a deceased non-resident’s assets located in the U.S. These “U.S. properties” include, but are not limited to, real property in the U.S., tangible property in the U.S., as well as shares of U.S. corporations. Of particular interest are RRSPs, which are considered grantor trusts under U.S. law. The RRSP may include U.S. situs property. The total value of these properties net of the related liabilities (e.g., a non-recourse mortgage on a cottage) is the taxable estate of the deceased.

To determine the U.S. tax liability of the deceased, a number of tax credits should be considered. Non-residents can benefit from a $13,000 basic exemption. Under the Canada-U.S. Tax Convention, a $5 million global credit prorated to the value of the estate’s U.S. property and the value of its world assets, i.e. $5 million x U.S. situs assets / World assets, is available to Canadian residents. Another credit may also be claimed for assets transferred to a surviving spouse under the Canada-U.S. Tax Convention.

In addition to the U.S. estate tax, probate fees must also be considered depending on which state the property is located in.

The total cost of U.S. Estate taxes and probate fees can be quite onerous. Tax planning options can alleviate some of this financial burden. For example, setting up a “qualified domestic trust”, a QDOT, which is a trust for the benefit of the surviving spouse, would result in a tax deferral until the death of the surviving spouse. The Canada-U.S. Tax Convention allows similar benefits for a QDOT in the U.S. by recognizing the QDOT as a spousal trust in Canada.

For further information or for tax planning ideas, please do not hesitate to contact the BGK Tax Group.

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CURRENT DEVELOPMENTS is issued periodically by Bessner Gallay Kreisman LLP Chartered Professional Accountants to clients, staff and other interested parties to provide information of interest to the reader.   The comments are of a general nature and are not intended to cover all aspects of the subject matter.   Prior to implementing any planning based upon information in the attached commentary, the specific facts pertaining to any particular situation should be carefully considered.   Our firm will be pleased to assist in this regard and to provide further details pertaining to the matters discussed herein.

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