It was a big year on the tax front and our reporters and expert contributors covered all the key developments. Here are the top 10 tax changes of 2014:
#1. Goodbye, tax-advantaged testamentary trusts
Major changes to CRA’s treatment of testamentary trusts will take effect in January 2016. Graduated-rate taxation will no longer apply to these trusts (as well as grandfathered inter vivos trusts created prior to June 18, 1971). Instead, they’ll be taxed at the top rate.
This cross-border tax behemoth took effect this year and impacts all U.S. persons living outside the U.S. Here’s what you need to do to stay on-side with Uncle Sam:
#3. New T1135
CRA’s revised Form T1135 requires taxpayers to provide significantly more information about their foreign property. Here’s what you need to know:
#4. New income-splitting rules
Prime Minister Stephen Harper unveiled new income-splitting tax breaks and benefits for families this October. But they were watered down from the plan promised by the Conservatives during the 2011 election.
#5. IRS reduces RRSP reporting burden
The IRS has made it easier for taxpayers with RRSPs or RRIFs to get favorable U.S. tax treatment; it’s also taken steps to simplify procedures for U.S. taxpayers with these plans.
#6. New kiddie tax
Budget 2014 expanded the Kiddie Tax, making it more challenging to split business income with minor children. The new rules apply to the 2014 taxation year onward.
#7. Update to tax benefits for donations made in wills
Budget 2014 makes it easier for executors to ensure maximum tax benefits from donations made by will.
#8. Feds phase out immigration trusts
Budget 2014 eliminated immigration trusts, effective immediately. This means Canadian newcomers will no longer get a 60-month tax exemption for foreign assets.
#9. IRS streamlines its Streamlined Program
Americans who haven’t filed U.S. tax returns or reported foreign assets can make good with the IRS through the Streamlined Program. Practitioners and taxpayers have pleaded with the agency to make the process simpler, and the IRS announced changes in June to help achieve this goal.
#10. Court limits use of charity to avoid tax
Donation tax-shelter schemes have suffered another setback with a court ruling against leveraged donation tax credits.
Always take a multi-jurisdictional perspective when evaluating your clients’ tax position, says Dean Smith, a partner at Cadesky and Associates LLP.
For example, assume your client received $100 of investment income from a U.S.-based ETF held in his non-registered/taxable account. For most Canadian tax purposes, foreign-source investment income is treated as ordinary income and is therefore taxed at the client’s marginal tax rate.
“If the investor is in the top marginal rate in Alberta (39%) he would have Canadian tax of $39 on that $100 of investment income. However, if he also paid a U.S. non-resident withholding tax of $15 (setting aside any foreign exchange issues), then he would only have to pay $24 ($39 – $15) to the CRA after claiming a foreign tax credit for the U.S. taxes paid.
“His total tax position has not changed but now the tax is being shared between the two jurisdictions.”
U.S.-based investments held within clients’ RRSPs are not subject to withholding tax (the U.S. recently renewed this exemption), while those held within TFSAs and RESPs are. For TFSAs and RESPs, there are no credits to offset the U.S. tax.