Monday, June 28, 2010

What is FAPI?


Canadian residents are taxed on their worldwide income, but corporations are separate entities so normally one taxpayer will not be taxed in Canada for income earned from a company in another jurisdiction . . . unless that income is FAPI.

FAPI, which stands for Foreign Accrual Property Income is when you own a foreign corporation that is earning passive income.  The section of the Income Tax Act that applies to FAPI is very complicated but in general can be thought of this way:

If you want to create a company someplace nice and warm and open up a bar selling those drinks with umbrellas, Canada has no problem with that - the income earned in that company belongs in the place with the beaches.

On the other hand, if you are opening up that company only to earn income from interest and dividends at a lower tax rate than you would have paid in Canada in a place where Canada does not have a tax treaty - you are going to end up being taxed on that income in Canada.

FAPI brings into income the foreign passive income earned in a foreign corporation.  There are mechanisms to reduce that income to allow for taxes you have paid in that other country - so if you're paying taxes at the same rate as Canada, you won't pay tax on FAPI income in Canada. 

Sometimes it is a timing issue because if you are receiving dividends from that foreign corporation, you will pay taxes when you receive the dividends.  So, if and when you do earn dividends, there is a adjustment to reduce the dividends you report to account for the FAPI income previously reported.

FAPI is only reported on income earned by "controlled foreign affiliates" but the definition of control is different for FAPI purposes than it is for regular income tax purposes.  More on that next week.

Monday, June 21, 2010

How to get overpaid tax back

If you are a non-resident of Canada and have had tax withheld that you have now discovered was too much because of a treaty, how do you get it back?

Well, that depends on the type of income the withholding was related to.

If it was employment income or business income you earned as a sole proprietor, you file a T1 individual income tax return and claim the refund.

If it was business income  earned through a corporation you file a T2 Corporate tax return (be sure to include forms T2SCH91 Information Concerning Claims for Treaty Based Exemptions and T2SCH97 Additional Information on Non-resident corporations in Canada).

If it was withholding on passive income such as interest, dividends or rent, you file a NR7-R Application for Refund of Non-Resident Part XIII Tax Withheld.

In all cases you will need to provide documentation that you are resident in the country where you are claiming treaty exemption.  In the US, use IRS form 8802.  

Many countries (such as Canada) do not have a specific form and you must write to your tax authority and request confirmation. 

Be sure to claim any refund within the refund deadline or you will no longer be eligible to receive it.

Monday, June 14, 2010

Domicile

As well as applying to residents of Canada and the UK, the Canada-UK treaty applies to a person who is domiciled in the UK and subject to tax there.

So…..what is domicile.

There is no precise or agreed definition and the argument is often taken to court.  The UK revenue and customs office defines a number of definitions of domicile:

When you are born, you have the domicile that your parents did at that time (not necessarily where you are born) this is called the domicile of origin.

A child under the age of 16 has the domicile of their parent

You can be domiciled where you have a permanent home where you are planning on returning.  Notice there is no requirement for years here.  One court case decided that although a man had lived in the UK for 40 years he always planned on returning to Canada and therefore his domicile was Canada.

If you plan to live permanently in another country you can have a domicile of choice.

If you leave your domicile of choice and do not decide to live somewhere else permanently then your domicile returns to your domicile of origin.

Despite all the different definitions, you may only have one domicile at a time.

Many of the court cases on domicile use the same rules as Canada for residence - basing the decision on the ties that a person keeps with the country he leaves.  These ties often include things like bank accounts, social groups and driver's license.

Wednesday, June 9, 2010

New Form for employer/employer joint waiver for non-resident employees

CRA recently announced a new form R02J Regulation 102 Treaty Based Waiver Application - Joint Employer/Employee.

You need to use this form if your employee will not be subject to final tax in Canada under a treaty (for the US normally less than $10,000 per year, for other countries $5,000).

Remember that this is an application, not yet an approval.  Until CRA approves a treaty waiver the regular withholdings for tax, EI and CPP must be withheld from your employees paycheque.

For more details on US residents working in Canada, see my E-publication "Who gets my tax dollars?" link on this page.

ETUG Workshop

Attended the Educational Technology Users Group (ETUG) Spring Workshop  this week.  Great workshops and networking opportunities.

The highlights of the workshop for me were:
 - the overall energy that was there - so many educators and instructional designers interested in technology
 - hearing Tony Bates at the keynote session tell everyone they should be looking at activity based costing to define their costs of technology in teaching (being an accountant hearing someone from outside the field talk about ABC made my heart warm)
 - being in the same workshop with Tony Bates as a participant (he was great as a keynote speaker as well but it was just so neat to be in the same workshop)
- seeing fellow MDE students making presentations on OER's (Open Educational Resources)
 - the iPad