Canadian Tax Podcast 014: TFSA; US Contractor; Inter-corporate Loans;

Canadian Tax Podcast for the week of June 14th, 2021. This week we cover:

[INTRO]:

“This is the Canadian Tax Podcast, Episode # 014, hosted by me, Cameron Ware. Good morning”

“Happy Monday, it is the week of June 14th, 2021. We’ll start with the news.

Last week the US outfit ProPublica released an analysis contrasting the wealthiest Americans against the tax they paid;
Simple calculation: Take the person’s tax paid, and compare it to their net worth as stated in Forbes Magazine.
Received the tax information via a leak.
This is a complicated issue, and it ultimately hinges on the technical difference between earned income vs. unrealized gains
[explain unrealized gains.]
I don’t know what the right answer is here. I certainly have opinions, and agree that the system only works insofar as citizens believe that everyone is paying their own fair share. However, taxing wealth is very difficult.
https://www.propublica.org/article/the-secret-irs-files-trove-of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-tax

CRA has put out an advisory related to a TFSA scheme
Specifically the scheme involves the creation of a mortgage investment company, that then issues two classes of shares: one that pays low rate dividends, and one that pays high rate
The participants buys the low rate shares via their RRSP’s, and the high rate’s via TFSA.
The mortgage corp then lends the money from the share purchase back to the participant (interest deduction) and the participant then invests the proceeds with the promoter, and earns investment income
Participant then makes annual RRSP/RRIF withdrawals, and claims the interest deduction against the tax that the RRSP draw triggers.
Over time, the participant can supposedly shift their entire RRSP over to their TFSA, without ever actually paying tax.
Confused? I am. Main thing here is CRA says this whole thing is nonsense. (And it is.) You’re essentially loaning money to yourself at inflated interest rates. Sham.
https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2021/warning-watch-out-for-tfsa-maximizer-schemes.html

G7 tax proposals (discussed last week.) This is the proposed 15% tax on the profits it earns inside of a country
Pay this tax in every jurisdiction it operates in.
However, this is assessed on the basis that the corp isn’t paying tax
“Ottawa will get 15 per cent of profits net of foreign corporate and withholding taxes paid to that country. If other countries already take 15 per cent or more, Ottawa gets nothing.”
To put this a less confusing way (steal another quote): “A Canadian firm paying 12.5 per cent on its profits in a more lightly taxed country will have to pay another 2.5 per cent to Ottawa to get up to 15 per cent.”
This type of thing attracts problems. Tax is never “absorbed” – It’s passed on to consumers. Second, in practice the net effect is zero. Charge 15% tax, but then give rebates/incentives that create a lower effective tax rate net of the credits…
Conclusion: these things are hard. No one-size fits all solution
https://financialpost.com/opinion/jack-m-mintz-biden-tax-cartel-isnt-good-for-canada

New Bill C-208 is out (well was out in May) but it’s up for the 3^rd reading.
This bill is supposed to streamline the sale of a family business to another family member.
Right now the sale of a small business to a family member is not eligible for the QSBC capital gains exemption.
Specifically 84.1 triggers a deemed dividend – Instead of capital gain/gains exemption
Good news: this has bi-partisan support, so let’s hope it gets through and isn’t stalled going into parliament’s summer recess.
Good legislation (generally).
https://parl.ca/DocumentViewer/en/43-2/bill/C-208/third-reading

TN Visa + Move + TFSA
- Question
- Easy answer: get rid of your TFSA prior to the move.
- For those who don’t know: US treats TFSA as foreign trust (Form 3520 disclosures). Expensive
- Second, no tax deferral.
Contractor doing work for US Client
- Question
- You’re a Canadian, in Canada, rendering the work on-site in Canada
- Based on this, you don’t have US tax exposure.
- However, fill out a W8-BEN (or BEN-E) and this eliminates any requirement for withholding on the part of your US client.
Inter-corporate loans
- [quote]
- What you’ve described here is a standard inter-corporate loan (sorry, no loophole)
- You see this frequently with opco/holdco arrangements. Strip assets out of opco for creditor-proofing, leads to big interco AR/AP
- Pro-tip: paper these things correctly, especially with interest-free loans. Don’t give CRA any wiggle-room to get their fingers into things.

That will wrap things up for today. Like always, if you have any questions, send them to questions@canadiantaxpodcast.ca, or find us on twitter: https://twitter.com/cdntaxpodcast

This is Canadian Tax Podcast, thanks for listening.