Monday, May 31, 2010

US S Corporations

Article XXIX (Miscellaneous Rules) Paragraph 5 of the Canada-US Treaty discusses the special situation of S Corporations.  

Canadian resident shareholders of US S Corporations do not have the option of the new flow-through rules the same as US resident shareholders of those same corporations.  However, they do have the option of applying to the Competent Authority of Canada to have their income to be taxed similar to the US rules to eliminate the timing rules.  Basically what the rules will do is as follows.
- the S Corporation will be a considered controlled foreign affiliate
- all income will be foreign accrual property income (FAPI)
- the separate deduction from income for foreign property taxes paid will not be permitted (they will calculated under the FAPI rules instead of separately)
- dividends will be excluded from income and adjusted to the cost base of the shares

In many cases, it is a good idea to take this option.  But, you need to look at this option carefully before jumping in with both feet.  

There can be some unintended consequences such as the designation that "all income" will be FAPI.  Normally in Canada you pay taxes on ½ of the capital gain but if you select this option, 100% of the gain will be taxed.  (I'll write more about FAPI in another post).

Taking advantage of the special treaty rules for an S Corporation can be beneficial but be sure to look at the whole situation before making a final decision.  You may want to think about long term decisions and apply for the special designation only for those years where you are fairly sure of your type of income.

Monday, May 24, 2010

Treaties stop you from paying tax twice on the same income

One of the purposes of treaties is to ensure that you do not end up in a situation where you are taxed in both countries.  They do this by the countries negotiating which one gets to keep your tax dollars.

Two important things to remember:

One, most treaties do not relieve withholding tax (that tax you have to pay before you file a tax return to calculate the actual amount owing).  But most countries have a mechanism to reduce that amount of withholding if you are not going to owe tax in that country.

Two, if you have paid tax that under the treaty you should not have paid you cannot claim a foreign tax credit for that amount.  You need to go back to the first country and request a refund of overpayment.

Wednesday, May 19, 2010

Tax on Wages Canada vs US

Canada and the US are very close on taxes on wages according the the OECD in their latest publication on Taxing Wages.  The calculations for taxes on wages includes both income taxes and social security.

A single person making average wage pays 30.8% of their wages in Canada, whereas in the US that same person would pay 29.4% of their wages out which isn't too great of a difference.

A one-earner family with 2 children earning the average wage pays 13.7% in taxes in the US and 18.3% in Canada.

On the other hand, if you earn lots (167% of average), the tax bite in the US is 34.6% and only 32.9% in Canada.

So I guess the lesson here is that you it's okay to be a resident of Canada if your wages are high enough:J

Tuesday, May 11, 2010

New Proposed HST Place of Supply Rules

I am not a fan of GST.  Not because I don't like tax - but because it is not logical.  How and when you charge GST does not always make sense - you have to confirm everything to be sure.

Well, now BC and Ontario are moving to the HST on July 1, 2010 (which will likely happen regardless of Mr. VanderZalm's efforts).

So the Minister of Finance has come out with some tentative rules on place of supply for HST to make things "easier" for GST registrants.

Remember that these rules are tentative - MOF is awaiting comments. . . but here's what at stake so far for consulting services.

If the supplier of the services has obtained a recipient's address in Canada, the supply will be considered to be at that address.

If there is no address in Canada, it will be where the services are primarily (more than 50%) performed.  If performed equally in two or more provinces it will be considered to be in the one with the higher rate of HST.

If the services are location specific (i.e. at a convention centre) - then they will be considered to be supplied at that location.

Of course, computer-related services are slightly different.  Those are considered to be supplied where the person who acquires the service is ordinarily located.

The main thing that was removed in all of the proposed new rules is the negotiation aspect.  That is good news  - if these rules go forward, it is the services themselves that matter not where the contract was signed.


And, of course, all of the above might be overridden if the services are supplied with tangible or intangible personal property - this is why the GST/HST drives me crazy.






Thursday, May 6, 2010

My first e-publication!!

Yahoo!

My book "Who gets my tax dollars?" has just been published as an e-publicaiton on Smashwords.com for 5.99.  See my book page to the left or jump straight to my book page.

Monday, May 3, 2010

Entertainers and Sportsmen - OECD changes

They used to be called Athletes and Artistes (and still are in several treaties). The OECD now refers to them as entertainers and sportsmen. The OECD recently released a discussion draft to propose some changes to their commentary.

The change that most twigged my interest is the fact that a one-time amateur sports winner of a race could now be considered in this category. So, if the running race has a cash prize - it could be subject to tax withholding.