Canadian Capitalist » Taxes

Tax Treatment of Restricted Stock Unit (RSU) Benefits

Canadian Capitalist — Tue, 22 May 2012 03:27:38 +0000

If you work for a large company, chances are Employee Stock Option benefits (ESOPs) have been replaced with Restricted Stock Units (RSUs). There are significant differences between tax treatment of ESOPs and RSUs. In this post, we will look at how RSUs are taxed for Canadian residents. Restricted Stock Units are simply a promise to issue stock at some future vesting date(s) provided some condition(s) (often just being an employee of the company on the vesting date) are met. It is important here to distinguish RSUs from Restricted Stock Awards (RSAs). RSAs are stock grants in which employees may not sell or transfer the shares until they vest but are entitled to dividend payments. RSAs are unpopular in Canada due to their tax treatment: the FMV of the the RSA grant is taxed as employment income at grant but employees will receive the cash from the sale after the grants vest, which may be many years later.

Like stock options, there are no tax implications when RSUs are granted to an employee. At the time of vesting, the FMV of the RSU grants that vested is considered as employment income. Starting in 2011, the Canada Revenue Agency requires employers to withhold taxes on employee stock benefits, including RSUs. Therefore, your employer will likely sell a portion of vested restricted stock and remit it to the CRA. The FMV of restricted stock and taxes withheld will be added to the Employment Income (Line 101) and Income Tax Deducted (Line 437) of the T4 slip for the financial year.

The employee has to keep track of restricted stock FMV at the time of vesting. If there are multiple vesting events, the adjusted cost base of the stock must be calculated. When the stocks are eventually sold, the difference between the proceeds of the sale and the adjusted cost base of the shares should be reported in Schedule 3 Capital Gains (or Losses).

Let’s take an example. Sue works for ABC Corp. and was awarded 600 RSUs on May 1, 2011. ⅙th of the award will vest every 6 months provided Sue is employed on the vesting date. Sue’s first batch of 50 units of restricted stock vested on November 1, 2011. ABC was trading at $10 and Sue’s employer sold 23 shares and remitted the withholding tax to CRA. Sue’s second batch of 50 units of restricted stock vested on May 1, 2012. ABC was trading at $12 and Sue’s employer again sold 23 shares and remitted the withholding tax to CRA. In both cases, her employer included $500 and $600 in employment income and $230 and $276 in income tax deducted in Sue’s T4 for 2011 and 2012 respectively. Note that, unlike stock options which are eligible for the stock option deduction and hence are taxed at 50 percent, there is no favourable tax treatment accorded to RSUs.

On May 15, 2012, ABC hit $15 and Sue sold the 54 shares of ABC Corp. that she holds. Sue’s adjusted cost base is $11 (27 shares acquired at $10 and 27 shares acquired at $12). Since she sold for $15, her capital gains are $216, which she would declare when filing her 2012 tax return in Schedule 3.

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Own Foreign Stocks or ETFs? You may have to File Form T1135

Canadian Capitalist — Wed, 28 Mar 2012 04:14:40 +0000

As I am preparing my income taxes, I am reminded yet again of the trap that the Canada Revenue Agency has set for taxpayers in the T1 General form with this innocuous question:

“Did you own or hold foreign property at any time in 2011 with a total cost of more than CAN$100,000? (See “Foreign Income” in help for details)”

An unsuspecting taxpayer might reasonably infer “foreign property” to mean a condominium in Florida or a not-so-secret-these-days Swiss bank account and owning nothing of the kind might answer “No” to the question. The General Income Tax and Benefit Guide put out by the CRA does not shed much light on the question either.

To find out the details of what constitutes “specified foreign property” in CRA’s eyes, one has to turn to the information provided in Form T1135 Foreign Income Verification Statement. In it, CRA defines “shares of non-resident corporations held by the resident filer or on deposit with a Canadian or foreign broker” and “interests in mutual funds that are organized in a foreign jurisdiction” as specified foreign property. In other words, if our taxpayer held US stocks or ETFs with a cost of more than $100,000 in a Canadian investment brokerage account, she must answer “Yes” to the question in T1 General and file Form T1135.

Curiously, a Canadian taxpayer owning what one would reasonably consider “foreign property”, say a condo in Miami purchased for $250,000, strictly for personal use, does not have to file T1135! The taxpayer, who simply assumed that foreign stocks held in taxable Canadian brokerage accounts for which trading summaries are filed annually with the CRA and income taxes are paid, has to file T1135 if the cost of foreign stock holdings exceeds $100,000.

The penalties for failing to complete and file T1135 by the due date (April 30) are severe. The penalty for filing late is $25 per day for up to 100 days (maximum of $2,500). Since the penalty is levied for each year, a taxpayer could face penalties running into the tens of thousands of dollars.

Some notes about Form T1135:

- If you own foreign stocks in joint investment accounts, you should file Form T1135 only if the cost of your share of the investments exceeds $100,000.

- Canadian mutual funds and ETFs that own foreign stocks or ETFs are not considered “specified foreign property”.

- Foreign stocks and ETFs held in registered accounts such as RRSPs and TFSAs are also not considered “foreign property”.

- As already mentioned, real estate owned in foreign countries and held strictly for personal use are not considered “foreign property”.

It is entirely appropriate to levy strict penalties on taxpayers trying to hide income in foreign jurisdictions. It does not seem reasonable to levy stiff penalties on taxpayers who are reporting and paying taxes on investments held in Canadian accounts but inadvertently missed filing paperwork. In fact, the punishment strikes me as cruel and unjust.

NB: This post is of an informational nature and should not be construed as tax advice.

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Which TurboTax Edition is Right for you?

Canadian Capitalist — Mon, 05 Mar 2012 04:51:03 +0000

Canadians who file their taxes with TurboTax are often confused by the different product choices available. Intuit, the maker of TurboTax, sells the product in five different flavours: Basic, which retails for $19.99, Standard, which sells for $39.99, Premier ($69.99), Home & Business ($99.99) and TurboTax 20 ($129.99). Intuit’s website comparing the features available in the different flavours recommends that the Premier edition is the right choice for someone who has rental and investment income to include in their tax return.

The TurboTax website also says that the the Home & Business edition is right for you if you are “a contract worker or self-employed & want to file personal & business taxes in one place”. A TurboTax customer who typically purchases the Standard version and had some business income in 2011 might reasonably infer that she will need the more expensive edition to complete her 2011 taxes.

But, that’s not quite accurate. All flavours of TurboTax will allow you to complete your taxes if you only use the forms method for preparing your taxes. The difference between the various TurboTax editions occurs in the extra help in the interview questions and in the number of returns (8 in Standard, 12 in Premier and Home & Business and 20 in TurboTax 20). So, if you are a TurboTax customer and are comfortable preparing Schedule 3 (Capital Gains or Losses in 2011) or T2125 (Statement of Business or Professional Activities), Standard can do the job for you.

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Filing Taxes is a Snap with SnapTax

Canadian Capitalist — Thu, 01 Mar 2012 03:32:38 +0000

Intuit has just launched a new tax filing product in Canada that literally makes filing taxes a snap. If you have an iPhone and a very simple tax situation (just T4 slips), you can download an app from Apple’s iTunes store that will allow you to take a photo of a T4 slip with iPhone’s built-in camera, walk you through a couple of questions such as Name, Date of birth, Province of residence etc. and generate a tax file. You can then pay $9.99 and NETFILE your tax return right from your iPhone. If the app determines that your tax situation is a more complicated than it can handle, it will offer to transfer your data to TurboTax Online and you’ll be able to complete your taxes through the website.

I saw a demo of the product last week and one of the questions I had was around security. What happens when you lose your phone? Intuit says that since it stores data on its servers and the data is password protected, a loss of the phone will not compromise important personal information such as your SIN number.

Currently, SnapTax is only available on the iPhone. It is not available on the iPad or on phones running Android. I was told that the app works on the iPod Touch but though I was able to download, install and run the app, it wouldn’t let me progress beyond the first couple of screens.

I have a much more complicated tax situation, so I won’t be filing with SnapTax anytime soon. However, as SnapTax adds more capability and starts to cover more tax situations in future years (tuition slips, charitable receipts, RRSP contribution statements etc.), it will make tax filing a breeze for a very large number of Canadians.

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Claim the Ontario Children’s Activity Tax Credit

Canadian Capitalist — Mon, 25 Apr 2011 05:21:04 +0000

If you are an Ontario resident and have enrolled your kids in music or dance lessons, you might want to take advantage of the Ontario Children’s Activity Tax Credit (CATC) when preparing your income taxes. The CATC, which was introduced late last year, allows parents to claim up to $500 of eligible expenses per child. The refundable credit is worth $50 per child under 16 years of age and $100 for a child with disability under 18 years of age.

The CATC applies to a wider range of activities than the Federal Children’s Fitness Tax Credit. In addition to sports, arts, music, language and even tutoring expenses qualify for the credit. Check this page for the list of activities eligible for the credit. You have to claim the CATC on Form ON479 “Ontario Credits” in Line 6309.

It is not clear to me if taxpayers can claim the same activity for both the Children’s Fitness Amount as well as under the CATC. As the wording on the Ontario Ministry of Revenue page does not explicitly forbid claiming both tax credits for the same activity, I’m assuming taxpayers are allowed to do so. If you are preparing taxes with software, you may have to manually update Line 6309. While claiming our kids’ music lessons, I found that TurboTax did not automatically include the swimming fees claimed under the Federal fitness amounts for the CATC.

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Ways to Reduce the Tax Hit from the Family Cottage

Canadian Capitalist — Wed, 20 Apr 2011 00:38:06 +0000

Mark Goodfield, the accountant behind The Blunt Bean Blog concludes the series on transferring the family cottage by outlining some ways to reduce the tax hit. Thank you for the excellent series, Mark. I sure learned a lot.

In today’s final blog in my three part series (Part 1 of the series is available here and Part 2 here) on transferring the family cottage, I will discuss some of the alternatives available to mitigate and defer the income taxes that may arise on the transfer of a family cottage.

Life Insurance

Life insurance may prevent a forced sale of a family cottage where there is a large income tax liability upon the death of a parent and the estate will not have sufficient liquid assets to cover the income tax liability. The downside to insurance is the cost over the years, which can be substantial. The cost of insurance over decades of potentially increasing premiums, all the while ensuring the insurance policy is large enough to cover the income tax liability, is problematic (alternatively one can wait until later in life to insure and take a chance on whether they can still obtain insurance). I would suggest very few people imagined the quantum of the capital gains they would have on their cottages when they initially purchased them, so guessing at the adequate quantum of life insurance required is difficult at best. Purchasing a large last to die insurance policy may do the trick; however, the ultimate insurance cost over time has to be balanced against taking those funds and investing them to cover off the future income tax liability.

Gift or Sale to Your Children

As discussed in the second blog, this option is challenging as it will create a deemed capital gain and will result in an immediate income tax liability in the year of transfer if there is an inherent capital gain on the cottage. The upside to this strategy is that if the gift or sale is undertaken at a time when there is only a small unrealized capital gain and the cottage increases in value after the transfer, most of the income tax liability is passed on to the second generation. This strategy does not eliminate the income tax issue; rather it defers it, which in turn can create even a larger income tax liability for the next generation.

If you decide to sell the cottage to your children, be advised the Income Tax Act provides for a five year capital gains reserve and thus, consideration should be given to having the terms of repayment spread out over at least over five years.

Transfer to a Trust

A transfer of a cottage to a trust generally results in a deemed capital gain at the time of transfer. An insidious feature of a family trust (check out this post another way to use the family trust to reduce income taxes) is that while the trust may be able to claim the principal residence exemption (“PRE”), in doing so, it can effectively preclude the beneficiaries (typically the children) of the trust from claiming the PRE on their own city homes for the period the trust designates the cottage as a principal residence.

If a parent is 65 years or older, transferring the cottage to an Alter Ego Trust or a Joint Partner Trust is another alternative. These trusts are more effective than a standard trust, since there is no deemed disposition and no capital gain is created on the transfer. The downside is that upon the death of the parent, the cottage is deemed to be sold and any capital gain is taxed at the highest personal income tax rate, which could result in even more income tax owing.

The use of a trust can be an effective means of sheltering the cottage from probate taxes. Caution is advised if you are considering a non-Alter Ego or Joint Partner Trust as on the 21st anniversary date of the creation of the trust, the cottage must either be transferred to a beneficiary (should be tax-free) or the trust must pay income taxes on the property’s accrued gain.

Transfer to a Corporation

A cottage can be transferred to a corporation on a tax-free basis using the rollover provisions of the Income Tax Act. This would avoid the deemed capital gain issue upon transfer. However, subsequent to the transfer the parents would own shares in the corporation that will result in a deemed disposition and most likely a capital gain upon the death of the last surviving parent. An “estate freeze” can be undertaken concurrently which would fix the parents income tax liability at death and allow future growth to accrue to the children; however that is beyond the scope of this blog.

In addition, holding a cottage in a corporation may result in a taxable benefit for personal use and will eliminate any chance of claiming the PRE on the cottage for the parent and children in the future.

In summary, where there is a large unrealized capital gain on a family cottage, there will be no income tax panacea. However, one of the alternatives noted above may assist in mitigating the income tax issue and allow for the orderly transfer of the property.

Readers are strongly encouraged to seek professional advice when dealing with this issue. There are numerous pitfalls and issues as noted above and the advice above is general in nature and should not be relied upon for specific circumstances.

[Note: See Mark's comment in response to Earl about the concept of legal and beneficial ownership in the context of joint ownership with a right of survivorship. As Mark states, this area is a minefield, so please ensure you obtain proper legal advice before attempting to transfer a cottage into joint ownership with a right of survivorship.]

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Transferring the Family Cottage: Tax Issues

Canadian Capitalist — Tue, 19 Apr 2011 02:11:06 +0000

In today’s post Mark Goodfield, a professional accountant and the writer behind the excellent Blunt Bean Blog, continues the series on estate planning issues surrounding the family cottage. Click here for Part 1 of the series.

In my first blog in this three part series on transferring the family cottage, I discussed the fact you can only designate one property as a principal residence per family after 1981. In order to explore the income tax implications associated with transferring ownership of a cottage, I will assume both a city residence and a cottage have been purchased subsequent to 1981 and I will assume that the principal residence exemption has been fully allocated to your city home and the cottage will be the taxable property.

Many parents want to transfer their cottage to their children while they are alive, however, any gift or sale to their children will result in a deemed capital gain equal to the fair market value (“FMV”) of the cottage less the original cost of the cottage, plus any renovations to the cottage. Consequently, a transfer while the owner-parent(s) is/ are alive will create an income tax liability where there is an unrealized capital gain.

Alternatively, where a cottage is not transferred during one of the parent’s lifetime and the cottage is left to the surviving spouse or common-law partner; there are no income tax issues until the death of the surviving spouse/partner. However, upon the death of the surviving spouse/partner, there will be a deemed capital gain, calculated exactly as noted above. This deemed capital gain must be reported on the terminal (final) tax return of the deceased spouse/partner.

Whether a gift or transfer of the cottage is made during your lifetime, or the property transfers to your children through your will, you will have the same income tax issue, a deemed disposition with a capital gain equal to the FMV of the cottage less its cost.

It is my understanding that all provinces with the exception of Alberta, Saskatchewan and parts of rural Nova Scotia have land transfer taxes that would be applicable on any type of cottage transfer. You should confirm whether land transfer tax is applicable in your province with your real estate lawyer

So, are there any strategies to mitigate or alleviate the income tax issue noted above? In my opinion, other than buying life insurance to cover the income tax liability, most strategies are essentially ineffectual income tax wise as they only defer or partially mitigate the income tax issue. In my final blog installment of this series, I will summarize the income tax planning options available to transfer the family cottage.

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Transferring the Family Cottage: There is No Panacea

Canadian Capitalist — Sun, 17 Apr 2011 22:00:56 +0000

Today’s guest post is Part 1 of a 3-part series on estate planning issues surrounding the family cottage, courtesy of Mark Goodfield, a professional accountant who writes the The Blunt Bean Counter Blog. Mark covers accounting, tax and wealth management issues on his blog and if you haven’t checked out his site, please do so. It is excellent. Now, over to Mark…

This is the first blog in a three part series on transferring the family cottage. Today’s blog will deal with the historical nature of the income tax rules, while the second blog will deal with the income tax implications of transferring or gifting a cottage and finally in the third blog, I will discuss alternative income tax planning opportunities that may mitigate or defer income tax upon the transfer of a family cottage.

Canadians love their cottages. They are willing to put up with three hour drives, traffic jams, never ending repairs and maintenance and constant hosting duties for their piece of tranquility by the lake. However, I would suggest the family cottage is one of the most problematic assets for income tax planning purposes, let alone the inherent family politics that are sure to arise.

For purposes of this blog, I will just assume away the family politics issue. I will assume the children will each grab a beer, sit down at a table and work out a cottage sharing schedule to everyone’s satisfaction and while they are at it, agree on how they will share the future ownership of the cottage when their parents transfer the cottage or pass away. I would say a very realistic situation in Canada, not!!!

Let’s also dismiss any illusions some may harbor that they can plan around the taxation issues related to cottages or even avoid them entirely. I can tell you outright, there is no magical solution to solving the income tax issues in regards to a family cottage, just ways to mitigate or defer the issues. Many cottages were purchased years ago and have large unrealized capital gains.

So let’s start by taking a step back in time. Prior to 1981, each spouse could designate their own principal residence (“PR”) which, in most cases, made the income tax implications of disposing or gifting a family cottage a null and void issue. The principal residence exemption (“PRE”) in the Income Tax Act essentially eliminated any capital gain realized when a personal use property was sold or transferred. Families that had a home in the city and a cottage in the country typically did not have to pay tax on any capital gains realized on either property when sold or gifted.

However, for any year after 1981, a family unit (generally considered to be the taxpayer, his or his spouse or common-law partner and unmarried minor children) can only designate one property between them for purposes of the PRE. Although the designation of a property as a PR is a yearly designation, it is only made when there is an actual disposition of a home. For example, if you owned and lived in both a cottage and a house between 2001 and 2011 and sold them both in 2011, you could choose to designate your cottage as your PR for 2001 to 2003 and your house from 2004 to 2011 or any other permutation plus one year (the CRA provides a bonus year because they are just a giving agency ).

In order to decide which property to designate for which years after 1981, it is always necessary to determine whether there is a larger gain per year on your cottage or your home in the city. Once that determination is made, in most cases it makes sense to designate the property with the larger gain per year as your personal residence for purposes of the PRE.

Click here to continue to the next post in the series on income tax issues surrounding the transfer of a cottage.

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Jack Mintz on Family Taxation

Canadian Capitalist — Thu, 31 Mar 2011 04:23:54 +0000

In an article titled Taxing Families: Does the System Need an Overhaul? that appeared in a publication put out by the Institute of Marriage and Family Canada, Prof. Jack Mintz of the University of Calgary argues that our current tax system is unfair to families with one working parent. Prof. Mintz addresses the criticism that one-income families don’t incur some significant expenses that two-income families do such as childcare. He acknowledges that the criticism has some merit but can be addressed by making adjustments to the tax system. One suggestion he makes is to adjust the personal exemption downwards for the stay-at-home spouse and better recognizing the costs incurred in earning a living.

None of the problems associated with family taxation are insurmountable. The basic aim is to achieve efﬁciency and fairness under the tax system. It is impossible to see how limiting taxation to individual taxation supports these principles.

Nine industrial countries apply the family taxation principle. The French and Portuguese systems aggregate family income but explicitly allow for family size to reduce tax payments. The Czech Republic, Germany, Ireland, Luxembourg, Poland, Switzerland and the United States allow family members to ﬁle jointly and split income. Other industrialized countries rely primarily on individual taxation but often allow for family tax principles such as the transferability of deductions and credits or joint ﬁling or splitting of income of some sort.

Prof. Mintz goes on to propose three ideas for implementing a system of taxing families. Income splitting is one of them but Prof. Mintz says that while it may be the simplest, it does not address criticisms about equitable treatment of families.

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Family Tax Cut: A Tax Cut for the Rich

Canadian Capitalist — Wed, 30 Mar 2011 04:22:21 +0000

The Family Tax Cut that the Conservatives say makes “the tax system fairer” disproportionately benefits one-income families with very high household incomes. I ran some numbers using the excellent Income Tax Estimator available here to find out how much benefit accrues to a one-income household with two children at various income levels. If you look at dollar amounts, families with incomes of $50K or less will save little to nothing under the Tory income-splitting proposal. But, as you can see in the following graphic, families with household income exceeding $100,000 will save substantial amounts on their income taxes.

One could argue that, of course, higher income families would save more because they pay more in taxes. So, let’s look at the percentage of income tax a household could save when the Family Tax Cut is implemented. Ideally, what we’d like to see is lower income households saving a higher percentage on their income taxes than a household with a higher income. But, as the following graphic shows, that’s not the case with the Family Tax Cut. A household earning $50K will save 13% on their federal income taxes, which is less than the 16% that a household earning $200K would save. Single-income households with a household income of $90K will save a stunning 29% on their federal taxes.

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