Top 5 Canadian & International Income Tax Stories of 2016 - Canadian Income Tax Lawyer Pick
While a retrospective on the 2016 year shows that there are numerous Canadian income tax developments and changes the biggest tax stories of the year have an international connection. In deciding on the 2016 top income tax news our Canadian income tax law firm looked for income tax related developments that have the potential to affect a large number of Canadian taxpayers but we also had to take into consideration international tax headline news. So here are our Canadian income tax lawyer picks for top income tax stories for 2016.
Panama Papers and Bahamas Leaks
Without question the most important tax story of the 2016 year is the Panama Papers leak of early in the year followed by the Bahamas leak, both of which were a result of investigations by the International Consortium of Investigative Journalists. The Panama Papers leak was unprecedented in size & scope and consisted of data and secret papers demonstrating murky and in some cases illegal offshore financial transactions of celebrities, financiers, prominent politicians and ordinary citizens from Canada and all over the world. Information was disclosed over a year before the disclosure by an anonymous whistleblower who contacted Süddeutsche Zeitung, a German newspaper, and provided them with encrypted internal documents from Mossack Fonseca a law firm based in Panama consisting of some 11.5 million documents, 2.6 terabytes of data, detailing more than 210,000 companies, foundations and trusts.
While the big news was about the 29 Forbes listed billionaires and high profile entertainment and sports celebrities, politicians including 12 current and former heads of state, 61 of their associates, 128 current and former politicians and public officials, as well as the co-operating network of global law firms, international banks and accounting firms that market and profit from offshore financial secrecy, some Canadians have been caught in the spotlight. Passport details of 350 Canadians were revealed in the Panama Papers and the Royal Bank of Canada was fingered as having used the Mossack Fonseca firm in Panama to set up offshore corporations on behalf of some of its Canadian clients.
The Bahamian leak later in the year consisted of information from leaked internal records from the official corporate registry of the Bahamas, a known Caribbean tax haven. The information was added to the same searchable data base and added details of some 175,000 Bahamian corporations, trusts and foundations set up over the past 25 years.
CRA has not been silent either. At the time of the leak Canadian Revenue Minister Diane Lebouthillier announced that the Canada Revenue Agency would investigate whether some Canadians used Mossack Fonseca to set up offshore corporations and offshore bank accounts to evade their Canadian income tax liabilities. CRA has since revealed that it is investigating dozens of Canadians for possible income tax evasion. The documents were released on a searchable database and CRA said it went through the 11.5 million documents and identified 2,600 with a Canadian link. From those, it commenced tax investigations into 85 Canadians, and has launched 60 income tax audits.
Fraudsters Impersonating CRA Collections Officers
An ongoing story from last year is the Canada wide plague of scam phone calls from fraudsters claiming to be CRA collections officers.
Many thousands of Canadians have been contacted by these fake callers, and hundreds of Canadians have been victimized into making payments to these crooks in 2016. Numerous warnings have been issued by all authorities including the Canada Revenue Agency and local and provincial police forces and the RCMP. While numerous payment methods were used, the latest and most common was prepaid itunes cards. The good news is that in October Indian authorities raided several call centers near Mumbai, seized computers, arrested 70 people and are questioning some 600 other people, some of whom may still be charged. It appears that a very sophisticated and large call center operations was used. The scam operated in the US as well, and was probably a larger part of the operation. The US Department of Justice was involved in a 3 year investigation and indicted 56 people in the US and is seeking the extradition of the Indian suspects.
Ever since the arrests the volume of fraudulent phone calls in Canada (and the US) has diminished significantly.
Changes to the Principal Residence Exemption
The most important tax break for the Canadian middle class is the principal residence exemption that allows a principal residence to be sold free of capital gains tax. However the system has been abused by house flippers, people who purchase a house or condo and sell it. To fight this abuse, and perceived non-resident vendor issues, new principal residence exemption rules are being put into place. Under the old tax rules there is no requirement that Canadians report the disposition of property where the full principal residence exemption applies in other words where no tax is payable. This has been changed for all dispositions of real estate that occur on or after January 1, 2016. Taxpayers will have to report the disposition of any residence even if the principal residence exemption is being claimed for all of the years that the residence was owned. Furthermore the new changes will also allow the CRA to extend the reassessment period indefinitely where the taxpayer does not report a disposition of real estate. Generally CRA has 3 years to reassess individuals after they issue the initial notice of assessment but this is being changed.
The formula for calculating the years of a taxpayer’s principal residence adds one additional year due to the possibility that the taxpayer owned two homes in a year where one principal residence is disposed and another one acquired. This rule previously applied to taxpayers who were Canadian non-residents for tax purposes. As a result a Canadian non-resident would still be able to claim a principal residence exemption for 1 additional year even if they were never a Canadian resident for tax purposes. As a result of the proposed new rules, the additional year is no longer applicable to non-residents.
Changes to the Eligible Capital Property (Goodwill) Tax Rules
While the principal residence exemption change affects all home owing Canadians, the most significant change for business owners was the more than doubling of tax on the sale of goodwill. New tax changes as of January 1, 2017 will result in higher taxes on the sale of goodwill and the end of the ability to defer income (and there for taxes) from the sale of a business using a corporation.
Under the new tax rules the sale of Eligible Capital Property (ECP) after January 1, 2017 will still be treated similar to a capital gain. So 50% of the gain will be non-taxable and eligible for tax free capital dividend treatment, while the remaining 50% will be characterized as income from investment, or passive income. Passive income will be subject to Part IV tax and will be subject to income tax at the high corporate rate of 50.67% in any holding corporation. Previously the taxable portion of the sale of Goodwill would be treated as from active business and as such taxed at either the Small-Business Deduction rate of 13.5% or the general corporate tax rate of 27%.
European Union Ruling about €13bn Apple Tax Debt to Ireland
While the final top tax story of 2016 has no direct Canadian element, it is so significant that we judged it worthy of inclusion. The European Union has ordered Apple to repay up to €13bn in taxes to Ireland in a ruling challenged by both Ireland and Apple. The EU claims that Apple paid a tax rate on European profits of between 0.005% and 1%. EU competition officials said that a tax ruling granted by Ireland years ago amounted to unlawful state aid under EU rules in effect enabling Apple to move up to two-thirds of its global profits Irish-registered companies that generally paid less than 1% tax for some 20 years. This tax ruling is the biggest the EU has ever made regarding a single company. Ireland disagreed with the position of the EU and said it will appeal the decision and that Apple paid what all of the taxes that it owed.
It has been reported that Apple has well over $200 billion in foreign cash that it is not repatriating to the US due to the high (35%) US taxes that would have to be paid on any transfers into the US.