Melissa La Venia
Senior Manager | B.A., J.D. | Tax

TFSAs have been a favoured investment option for Canadians since they were introduced in 2009. However, they are not a golden opportunity for everyone, particularly U.S. citizens residing in Canada.

Americans are one of the only populations taxed under a system based on citizenship, and not tax residency. Accordingly, their investment decisions must always take into consideration potential U.S. tax impacts. The choice of investment accounts is particularly critical for Americans living in Canada.

Tax-free Savings Accounts (TFSAs) were introduced in the 2008 Canadian federal budget and have been gaining in popularity ever since. With a TFSA, an individual can invest funds with future returns being earned tax-free. Unlike an RRSP, a TFSA is not a retirement savings plan and individuals of all ages can use it.

The U.S. “TFSA”

TFSAs resemble the U.S. tax-free retirement investment vehicle known as a Roth IRA. Nevertheless, the TFSA does not benefit from the same tax treatment in the U.S. as the Roth IRA.

Under the Internal Revenue Code, Section 408A, a Roth IRA must be a retirement savings plan to qualify for tax-free treatment, which is not the case for a TFSA. U.S. tax legislation therefore does not recognize a TFSA as a tax-free account.

TFSAs were introduced after the last update of the Canada-U.S. Tax Treaty and do not benefit from the new provisions applicable to RRSPs. In other words, income earned in a TFSA held by a U.S. citizen residing in Canada will be taxed in the United States.

Note that the Treaty allows the deferral of U.S. income tax with respect to income accrued in RRSPs until such time as a distribution is made.

Tax Uncertainty

The Internal Revenue Service has not adopted an official position on the taxation of TFSAs. U.S. tax specialists therefore are attempting to navigate the grey area by referring to the IRS policy regarding an RRSP, which is considered a foreign trust that is protected under the Tax Treaty.

This protection does not apply to TFSAs and experts may instead refer to the historical RRSP tax treatment only as a guide.

U.S. tax specialists therefore are advising U.S. citizens who have a TFSA to file a U.S. foreign trust return. Taxpayers who forget or chose not to file such a return may be liable for an annual penalty of $10,000 USD.

Despite the many benefits of TFSAs in Canada, there may be more problems than benefits for a U.S. citizen owning such an account. Until TFSAs fall within the scope of the Canada-U.S. Tax Treaty, tax specialists generally advise against Americans owning such investment vehicles.


Note: this text was originally published (in French) on www.conseiller.ca.

16 Sep 2016  |  Written by :

Mrs. La Venia is a Manager at RCGT. She is your expert in US and International Taxation for the...

See the profile

Next article

Emilio B. Imbriglio
President and Chief Executive Officer | FCPA, FCA, MBA, CFE, ICD.D.

The news that a large Quebec company was being sold rekindled the debate on the protection of our head offices. This is both an emotional and economic issue.

We discuss, we document, we question, and rightly so. It’s awkward for a government to get involved in an international and local economic situation where caution is usually de rigueur.

In the context of multinationals, protecting head offices proves to be complex.

Implementing protective mechanisms, such as giving more power to directors in a hostile takeover or limiting the voting rights of “travelling” shareholders, could be efficient solutions to discourage foreign investors. However, knowingly erecting obstacles to transactions could make Quebec businesses less attractive, thereby decreasing their value.

Delicate succession situation

While it’s essential for us to ponder such issues, they shouldn’t overshadow our responsibility concerning the delicate situation of our entrepreneurial succession. With the thousands of SMEs that must find a buyer, without which they’ll be forced to close, the issue of protecting Quebec head offices takes on another dimension we’d be remiss to ignore.

Quebec needs to take a two-pronged approach and tackle both the aspects impacting Quebec company takeovers and the under-investment in modernization that occurs in the years preceding a business transfer. These two issues are threatening a large number of organizations.

The baby-boomers who gave Quebec an unprecedented entrepreneurial edge are approaching 60. They may not be as well-known as Serge Godin or Alain Bouchard, but the 98,000 business owners who are planning on retiring by 2020—with only 60,000 to fill their ranks—will have a huge impact on the economy of Quebec and its regions.

The thousands of business transfers are an opportunity to promote the implementation of strategic initiatives by buyers based on innovation, global marketing, digitization and the modernization of facilities, to be even more competitive.

How to support passing the torch

The Quebec government has the flexibility and tools needed to make passing the torch easier and to support the efficient pursuit of business for buyers. It could implement a fair tax incentive for entrepreneurs to enable their children to take over the family business or provide the proper resources to efficiently plan the transition to the next generation.
It’s also necessary to implement tax treatment to enhance the capital gains exemption on business transfers by promoting sustainable and intergenerational businesses. We need to double down on our efforts to reduce the weight of administrative constraints that make businesses less competitive by adding costs that don’t necessarily create value.

A financial services firm, caterer, construction company and dry cleaning chain are small head offices that play big a role in revitalizing Quebec’s many regions. As big decision-making centres, they use professional services, take out advertising, buy locally, train and hire staff, and get involved in the community on their own scale. End to end, the contribution of such businesses is just as significant as large international head offices, and we need to take notice with as much passion.

Open letter published in La Presse + (May 29, 2016 issue)

03 Jun 2016  |  Written by :

Mr. Imbriglio is partner and the President & CEO of Raymond Chabot Grant Thornton. He is in charge...

See the profile

Next article

Emilio B. Imbriglio
President and Chief Executive Officer | FCPA, FCA, MBA, CFE, ICD.D.

For Canadian companies to become increasingly competitive, a major review needs to take place. And not just any review: that of the Canadian tax system.

According to Emilio B. Imbriglio, President and Chief Executive Officer of Raymond Chabot Grant Thornton, “It’s time for our tax system to align with current entrepreneurial dynamics, since it’s become obsolete in many respects. The taxation of SMEs must be fair and efficient so that they can perform better, and it needs to foster innovation by more efficiently meeting the needs of 21st century businesses. Furthermore, why should our SMEs still pay income tax?”

Tax system adapted to globalization and business families

These days, countries and organizations do much to ensure that multinational taxation is competitive on an international scale. “While the effective tax rate of SMEs is higher now than that of certain Canadian multinationals, it’s essential to perform a thorough review of SME taxation to ensure that it’s competitive and allows today’s SMEs to become the major companies of tomorrow,” asserts Jean-François Thuot, firm Partner and Tax Leader.

The firm is calling for the total elimination of the business tax for SMEs with annual revenues below $500,000, provided that the amounts saved will be reinvested into productivity, employment and innovation.

Year after year, Raymond Chabot Grant Thornton does a great deal to ensure that SMEs benefit from a fair and efficient tax system that is competitive. “The firm supports CPA Canada’s recommendation to undertake a comprehensive review of the country’s tax system to reduce its complexities and inefficiencies,” adds Imbriglio. Such a review would clearly make the Canadian tax system more efficient. In his opinion, “tax incentives can only be achieved by reviewing the current system. We need to act quickly. And, in Quebec, why are we waiting to apply the Godbout Commission’s measures?” While this strategic exercise has proved to be extremely relevant, we are still waiting for more structuring measures to be applied.

A total overhaul is necessary. Currently, laws encourage our entrepreneurs to sell their business to the highest bidder rather than their children. Serge Godin, founder and Executive Chairman of CGI Group, recently challenged this issue publically. Jean-François Thuot, Partner, was quoted in this major La Presse article which detailed Mr. Godin’s appeal.

Tax unfairness in intergenerational business transfers needs to become a thing of the past

Raymond Chabot Grant Thornton is keenly interested in intergenerational transfer tax unfairness. The firm has been calling for changes to the Income Tax Act with respect to intergenerational business transfers since 2010, the year in which it sent a detailed report regarding this issue with possible solutions to the Canadian and Quebec Ministers of Finance. Since then, the firm has been regularly holding presentations with the governments so that they will quickly take action.

Emilio Imbriglio recently reiterated his call for the federal government to take action to support local business sustainability. In the pre-budget notice sent in February 2016 to Canadian Finance Minister, Bill Morneau, he mentioned specifically:

“In its 2015-2016 budget, the Government of Quebec adopted measures that would largely address this issue. As you know, in Quebec, business owners will benefit from the capital gains exemption [note: as of the tabling of the 2016-2017 budget, instead of January 1, 2017, as originally planned] if they sell their primary sector or manufacturing business to a company held by their children. In our opinion, this tax equity must also extend to all companies from the range of Quebec’s economic sectors. We believe it’s the federal government’s turn now to act quickly in this respect so that tax measures across Canada can generate a significant and durable impact.”

According to Raymond Chabot Grant Thornton, it’s apparent that the federal government needs to reach consensus with the Quebec government so that tax legislation regarding this issue can be quickly harmonized. Canadian business owners need to stop being penalized for selling their business to their son or daughter rather than a stranger.

This transaction type causes the seller to lose out on the capital gains deduction, representing nearly $825,000, which is not the case for third party transactions. “We will continue to hold the required presentations to encourage family business transfers and foster the success of our dynamic businesses from all economic sectors,” stated the firm’s President and Chief Executive Officer.

24 May 2016  |  Written by :

Mr. Imbriglio is partner and the President & CEO of Raymond Chabot Grant Thornton. He is in charge...

See the profile

Next article

April 2016

Overview

The Grant Thornton International Ltd IFRS Team has published Telling your story: Making your financial statements an effective communication tool.

The average length of financial statements prepared under IFRS has been growing for many years as a result of new standards and amendments published by the IASB. In the coming years, new standards on revenue, financial instruments and leasing will add even more disclosures.

All this increases the burden on you when preparing financial statements. Disclosures are added for good reasons – they enable investors to understand complex transactions within the Financial statements. However, as a result financial statements are becoming cluttered, making truly important information hard to find.

The standards are only one issue – companies are struggling to apply the materiality concept to their disclosures. This lack of clarity on how to apply materiality to financial statements is perceived as one of the main reasons for overloaded financial statements.

With support from regulators and standard setters, many companies are revising their approach to Financial statement preparation – and looking for innovative ways to improve the look and feel of their financial statements. Companies are recognizing that financial statements are not merely a compliance document but also a critical means for communicating with investors.

This publication explains and illustrates four key tools you can use to make your financial statements an effective communication tool.