Canada Revenue Agency Phone Scams

Scam artists, posing over the phone as Canada Revenue Agency officials, have been very active recently.  They are very skilled at preying on fears and can appear very convincing.  They may even have your social insurance number.

Typically, the scam artist starts off by advising that the CRA is about to start legal action for unpaid tax – that your bank accounts are being frozen and that someone is on the way to your home to arrest you.  This is a sure sign of a scam.  Any actual legal action has to go through proper administrative and court procedures.  If the CRA was actually starting collection action against you, you would have already received notice of an amount owing.

In our system, you do not get arrested for owing back taxes.  The CRA issues a notice of assessment and you have at least 90 days to dispute the amount in question.  Nobody swoops down out of the blue to arrest you.  Debtor’s prison was abolished a long time ago.

The caller will usually supply a phony name and a made-up badge number.  If you ask to speak to a supervisor, the caller will have an accomplice to play that role.  As noted, the caller may also have your social insurance number.  Because many Canadians supply their social insurance numbers freely on numerous forms, it is relatively easy for a scammer to know your correct social insurance number.  

The scammer will provide very specific instructions for you to follow at your bank.  You will be told to drive to your bank – alone – and not to speak to anyone because time is of the essence, (remember, the arresting officer is on his way).  In Canada, however, you always have the right to speak to someone.  We do not live in a Franz Kafka novel.  Magna Carta has its 800^th anniversary this year.

The scam artists are very convincing if you allow fear and emotion to take over.  A scammer recently even caused doubts to arise in the mind of an individual who had recently retired from a senior position in a financial institution.  Fortunately, however, that retiree took the time to think about what was going on and hung up on the scammer.

Remember that you have the extreme good fortune to live in a free and democratic society – a society that is governed by the rule of law.  The Canada Revenue Agency – like any arm of the government – has to follow due process.  Anyone who threatens to swoop down on you out of the blue is a scam artist.  Simply hang up the phone.  If you have any concerns, look in the telephone directory and telephone someone at the real office of the Canada Revenue Agency to confirm that you have indeed paid your taxes.

For more information on these and other scams, visit the Canadian Anti-Fraud Centre at http://www.antifraudcentre-centreantifraude.ca/index-eng.htm (a legitimate website).

Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Canadian Tax Primer 10: Making Attributions

As noted in Tax Primer 9 (click here if you haven’t read it yet), spouses can transfer assets to each other without triggering capital gains tax.  However, attribution rules can apply after the transfer.  The attribution rules tax future income and capital gains on the transferred asset as if no transfer had occurred.  If the attribution rules apply, income and capital gains realized by the recipient spouse after the date of the transfer are “attributed” back for income tax purposes to the transferring spouse.

For example, assume that you have very significant income and pay income tax at the top marginal rate.  In contrast, your spouse has very little or no income and either pays no income tax at all or pays income tax at a very low rate.  If you can decrease your income and increase your spouse’s income, you can have some of your high-rate income taxed at your spouse’s lower rate.  In order to accomplish this, you gift some mutual funds to your spouse (which you can do without triggering any capital gains tax).  However, the attribution rules will apply to those transferred mutual funds.

(a)        If the mutual fund distributes $100 in dividend income to your spouse, the dividend income will belong to your spouse.  However, you will have to pay the income tax on that dividend at your tax rate (as if you were still the owner of the mutual fund).

(b)        If your spouse sells the mutual fund and realizes a capital gain, the proceeds of sale will belong to your spouse.  However, you will have to pay the income tax on that capital gain at your tax rate (as if you were still the owner of the mutual fund).

In other words, income and capital gains realized after the date of transfer are all attributed back to you for income tax purposes – even though your spouse is the actual owner of the income and the capital gains.  The attribution rules override reality for income tax purposes.

These attribution provisions do not apply if the transferring spouse elects to transfer the asset at fair market value and pays tax on the capital gain that arises on the transfer to the low-income spouse.  In addition, the low-income spouse must actually pay fair market value for the asset.

Attribution rules apply in a similar fashion to loans made from a high-income spouse to a low-income spouse (unless a fair market value rate of interest is actually paid on the loan).  Assume that you lend $100 to your low-income spouse on an interest-free basis and your spouse invests the money.  You will have to pay income tax at your tax rate on any income or capital gain realized by your spouse in respect of that investment.

As suggested in Tax Primer 3 (click here if you haven’t read it yet), one can avoid these attribution rules by having the high-income spouse to lend funds to the low-income spouse at a fair market value interest rate.  The interest rate has to be at least equal to the Canada Revenue Agency prescribed rate of interest in effect at the time of the loan.  As of the June 15, 2015, this prescribed rate of interest is a mere 1%.  If the low-income spouse invests the loaned funds and earns a 4% return, the low-income spouse pays tax on a 3% return (after deducting the 1% interest paid to the high-income spouse).  While the high-income spouse pays tax on the 1% interest received, the high-income spouse avoids paying tax on the other 3%.

The loan has to be carefully documented and the low-income spouse has to actually pay the interest to the high-income spouse within 30 days of the end of each calendar year.  With proper structuring of the loan, the current 1% interest rate can be locked in for a considerable period of time (up to 20 or 25 years).  Over time, the low-income spouse can build up a significant investment portfolio.

Other ways around the attribution rules follow.  These are not as effective as the loan method but – for those who like technical details – illustrate how the attribution rules work.

The attribution rules do not apply on attributed income.  For example, assume that you gift units of a mutual fund to your low-income spouse.  After you make this gift, the mutual fund distributes a $100 dividend to your spouse.  As discussed above, you will have to pay income tax at your rate on that $100 dividend (as if you were still the owner of the mutual fund).  However, assume your spouse likes the investment game and re-invests that $100 dividend in shares of Bell Canada Enterprises.  If Bell Canada then pays a $5 dividend to your spouse, attribution will not apply to the $5 dividend.  Instead, your spouse will pay the income tax on the $5 dividend at your spouse’s tax rate.  Attribution does not apply to the $5 because your spouse bought the Bell Canada shares with “fresh” money rather than money that had been supplied by you. 

While the process is long and slow and requires some bookkeeping work, there is a long-term benefit to paying the tax on attributed income so that your spouse gets to invest the attributed income and build up an investment portfolio that will be taxed in your spouse’ hands.  The tortoise does sometimes win the race.  In order to benefit from income splitting, it is not necessary to make your spouse a millionaire.  It is sufficient to shift enough income so that your spouse uses up those lower tax brackets.  The benefits of income splitting disappear once your spouse’ income reaches the top marginal tax rate levels.

The exception for investments purchased with “fresh” income does not apply to investments purchased with substituted property.  For example, assume that you gifted an investment to your spouse and your spouse later sold the investment.  The proceeds of sale received by your spouse constitute “substituted property”.  In essence, the investment increased in value and was sold.  On the sale, the investment changed its form from an investment to cash.  That cash is not “fresh” money; it is just a different form of the property that you transferred to your spouse.  Even if your spouse re-invests the cash, income earned on the re-invested cash will still be subject to the attribution rules.

If you are the high-income earner and your spouse has some income, it is always possible to have your spouse build up an investment portfolio by having your spouse save all that income.  You would become the “spending spouse” and use your income to cover all the family expenses.  Meanwhile, your spouse would become the “saving spouse”, cover none of the family expenses and instead save and invest every cent of the spouse’ income.  The attribution rules would not apply because you would have made no transfer of any property to your spouse and you would have lent no money to your spouse.  Your spouse simply would have no obligation to cover any household or personal expenses, thereby keeping all his or her income and investing it.  Consequently, your spouse’s investment earnings would be taxed at your spouse’s tax rate.

If you are attempting to increase the investment assets of a low-income spouse, segregation of those assets in a separate account is critical.  You and your spouse need to be able to show that the attribution rules do not apply in respect of your spouse’ assets.  This could be difficult to prove if all your assets have been co-mingled in a single bank or investment account.  If everything is mixed together, it becomes virtually impossible to show that your spouse made investments with his or her own independent funds (rather than funds that are traceable to you).

Segregation of accounts merely means that the low-income spouse puts all his or her independently-earned income into a separate account.  This does not mean that the spouses cannot have joint accounts.  Joint accounts are often convenient, as they allow either spouse to access funds in the account.  For example, the high-income spouse could deposit his or her income into a joint bank account in respect of which each spouse was an authorized signatory for the purpose of withdrawing funds.  It does not matter which spouse can access the funds in the account, as long as it is possible to clearly identify the source of the funds that went into the account.

Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Canadian Tax Primer 9: Transfers Between Spouses

In general, the deemed disposition rules (click here to learn more about deemed dispositions) do not apply to transfers between spouses.

Assume that you bought shares of a major Canadian bank in 1972 for $100.  Since 1972, those shares have increased in value to $1,000.  You can transfer the shares to your spouse without triggering any capital gains tax.  In this case, your spouse would step into your shoes as far as ultimate tax liability is concerned.  The spouse would be considered to have paid $100 for the shares.  If the spouse later sells the shares for $1,500, the capital gain will be equal to $1,400 (a combination of the increase in value during the time that you owned the shares and the increase in value during the time that your spouse owned the shares).

The above rule is sometimes referred to as the “spousal rollover” rule because the transferred asset “rolls over” to the spouse without any immediate income tax consequences.  The term has nothing to do with other spousal activities and can be used in polite company.

An asset transfer between spouses can be effected on a tax-free basis in the sense that no income tax is payable at the time of the transfer.  However, it is important to remember that this is just a tax deferral.  No tax saving results – just a postponement of the tax liability to a point further down the road.

A similar “spousal rollover” rule applies on death.  If you die and your spouse survives you, you can leave all your property to your spouse without triggering a deemed disposition of that property.  Your spouse then steps into your shoes:  capital gains tax will apply when your spouse sells or gifts the property or on the death of your spouse (whichever occurs earliest).  That capital gains tax will include tax on any increase in value that occurred while you owned the property.  Again, this is merely a deferral of tax and not a saving of tax because the surviving spouse will eventually die.

Actually, it is possible to defer capital gains tax indefinitely if the surviving spouse always remarries a much younger individual and leaves property to that much younger spouse, who then remarries on the death of the older spouse and so on ad infinitum.  However, this strategy has never actually fit into anyone’s long-term estate plan.  The children might have objections.

Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Canadian Tax Primer 8: Deemed Dispositions

As noted in Tax Primer 7, Tax is triggered by specific events (such as the sale of an asset).  Some events, while seemingly innocuous in real life, can trigger a deemed disposition of an asset – a disposition that occurs without an actual sale of the asset.

A deemed disposition is a bit of income tax make-believe.  In certain circumstances, income tax legislation will deem you to have sold assets for fair market value proceeds (even though you did not in fact sell the asset and even though you have not actually received any money).

The most common deemed disposition events are gifts and death.  Giving up Canadian residence can also result in a deemed disposition of assets, but that will be discussed in a separate article.

Gifts

You may have heard that Canada does not have a gift tax.  Technically, that is a true statement.  What Canada has, however, is a deemed disposition of a gifted asset.  For example, assume that you own a painting by A.J. Casson, one of the Group of Seven painters.  Assume that you paid $10,000 for the painting and that it is now worth $100,000.  If you decide to give it to your son for his 40^th birthday, the Income Tax Act will deem you to have sold the painting for $100,000.  You will have a capital gain of $90,000 and will have to pay the government for the privilege of being generous to your son.  In other words, the gift to your son also results in a forced “gift” to the government.

This is technically not a gift tax because the tax applies only to the gain and not to the entire value of the gift.  In the case of an asset with a very low cost and a very significant gain, however, this distinction has no substantive difference.  A tax is a tax is a tax.

Of course, a gift of Canadian cash will not attract any tax.  If you have $100 in Canadian cash, you have already paid tax when you earned that cash.  Accordingly, you can gift the $100 in Canadian cash to your son without having to pay tax.  The deemed disposition rules trigger tax only in respect of assets that have increased in value.  The tax applies to the increase in value since the date on which the asset was acquired.  If the asset was acquired before 1972, the Income Tax Act taxes only the increase in value since 1972.

Death

Nothing is surer than death and taxes.  In Canada, death and taxes go together.

On death, the deceased is deemed to dispose of all assets for fair market value.  An exception applies in respect of assets transferred to a surviving spouse of the deceased, but this merely defers the deemed disposition to the death of the surviving spouse.

The deemed disposition on death may well produce very significant capital gains tax.  For example, assume that you decide that your 40-year-old son is too young to have a Casson painting and you decide to keep the painting until your death.  In your will, you bequeath the painting to your son.  On your death, you will be deemed to have disposed of the painting for its fair market value (measured at the time of your death).  If the painting has increased in value to $200,000 by the time of your death, you will now have a deemed capital gain of $190,000.  As well, you may have a capital gain on other assets that you own at the date of your death.

While the Canada Revenue Agency would not be able to come after you personally for the taxes – there is no taxation beyond death (yet) – the executor of your estate would have to pay this tax bill before distributing assets to your heirs.  Taxes are a major cause of estate shrinkage.  The heirs receive only what is left after the payment of taxes.

Technically, Canada does not have an estate tax.  However, the deemed disposition on death provisions are a form of estate tax in everything but name.

It is usually advisable to take steps to manage the amount of tax that will arise on death so that you heirs are not forced to sell valuable investment assets in order to pay tax.

Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.