In this issue…

Beware - New CRAScams are BeingInvented Daily

Abating Penalties with the IRS

Corporate Owned Life Insurance and the Impact of 2017

Tax Changes

Don’t Pay to Stay -U.S. Residency Rules

Beware – New CRA Scams areBeing Invented Daily

By Adrienne Barclay CPA, CA, CPA (New Hampshire) – Tax Manager, Taylor Leibow LLP

The latest scam that the Canada Rev-enue Agency (“CRA”) is warning thepublic against involves the use ofiTunes gift cards to pay a fictitious taxbalance.

There have been many victims offraudsters convincing them that theyowe back taxes and advising themthat in order to avoid RCMP officersarresting them, they should purchaseiTunes gift cards. They claim that thevictim owes “back taxes” as a result ofan audit and that an arrest warrantcan be avoided if payment is madepromptly. The victim is instructed to purchaseand activate iTunes gift cards and provide thecodes to the fraudsters, allowing them to drainthe gift cards of their balances.

The fraudsters in this scam are very convincingby calling or texting your personal phone andidentifying themselves as CRA employees andproviding the victim with their employee num-ber.

There is little recourse for these victims to gettheir money back. Credit card companies havesaid they cannot help as the original purchasewas from a legitimate business. Apple has ad-vised that the iTunes gift cards are drained oftheir funds immediately. The police have beenable to track the iTunes gift card redemptions toaccounts in China.

Police are actively investigating this current scamand say it has become so widespread that allacross Canada they are receiving thousands ofcalls about similar scams. In addition, the Cana-dian Anti-Fraud Centre reports that to date they

have received 46 complaints involving the iTunesgift cards with total losses of $85,041.

It is important to keep in mind that the CRA willnever ask a taxpayer to give personal informa-tion of any kind by email, text message, or byclicking on a link. Nor will they ever ask for a taxbalance to be paid through the use of any formof pre-paid credit card. In addition, the CRA willnever threaten to lay criminal charges or haveanyone put in jail if taxes are not paid.

If you receive an unexpected call from a “CRArepresentative” you should ask for the name andemployee number plus a call back number. Youcan then call the CRA at their general line at 1-800-959-8281 to confirm whether you owe backtaxes and to confirm the legitimacy of the CRArepresentative’s request.

There are many known scams, pitches and fraudtypes, with new ones being invented daily. Be-ware of any unexpected communication fromthe CRA so you don’t become a victim too.

Tax NewsleTTerSummer 2016 An Independent Member firm of

DFK Canada Inc. and DFK International

The information provided in this publication is in-tended for general purposes only. Care has beentaken to ensure the information herein is accurate;however, no representation is made as to the ac-curacy thereof. The information should not be re-lied upon to replace specific professional advice.

— Tax NewsleTTer — Summer 2016 • 2

The American tax system involves some ofthe most complex and onerous reporting inthe world. It is of little surprise then thatmany taxpayers will eventually find them-selves facing harsh penalties associatedwith failing to adequately comply with theirreporting requirements.

When faced with a penalty, the Taxpayerhas three main options to get the IRS toabate the penalty:

1) The First-Time Abatement (FTA)The FTA gives the Taxpayer an opportunityto have the penalty waived without havingto justify their conduct. It is a one-time op-tion and can usually only be used againstone year of penalties, so the taxpayershould be tactical in its application. In se-lecting the appropriate year to apply theFTA, caution should be taken to ensure thatthe following requirements for its applica-tion are met:• The Taxpayer is up-to-date on filingtheir returns

• The Taxpayer has arranged to pay orhas paid any tax due

• The Taxpayer has had no penalties forthe 3 years prior to the year being abated

2) The Reasonable Cause AbatementThe Reasonable Cause Abatement providesTaxpayers with an opportunity to arguewhy they should not be assessed thepenalty. While the abatement can be re-quested over the phone, certain dollar lim-its exist where the IRS agent requires therequest to be submitted in writing.

In order to achieve consistent results, theIRS has mandated that its agents employthe use of the “Reasonable Cause Assis-tant” (RCA), an artificial intelligence system,in assessing whether the penalties are eli-gible for abatement. Because the processis automated, the tax professional mustcarefully frame the abatement requestwithin the parameters of the system to pre-vent the request from being disallowed.Arguing the abatement on grounds notcited in the Internal Revenue Manual (IRM)will often require that the request forpenalty abatement advance to the appealsstage.

Acceptable reasons for the abatement ofpenalties as set out in the IRM include (butare not limited to) ordinary business careand prudence, death, illness, disaster, anderrors.

3) Appealing the Denial of YourAbatement

If your argument for the abatement ofpenalties didn’t fall within the basic “yes orno” logic utilized by the RCA, you will needto request an appeal of the denial. It is atthis stage that you will have the opportu-nity to present your argument outside ofthe constraints of the RCA and to draw spe-cific attention to the facts that may nothave been considered by the agents at ear-lier stages of the abatement process.

This discussion aims to provide a generalunderstanding of the process for abatingpenalties and is not intended to be an ex-haustive list of the Taxpayer’s options. Inthe case of large penalties it is recom-mended that a qualified US tax practitionerbe contacted to assist with the abatementprocess.

Abating Penalties with the IRS

By Justin K. Hoffman, CPA, CA, CPA (Illinois), CFP, TEP, BCommTax Manager, Davis Martindale LLP

— Tax NewsleTTer — Summer 2016 • 3

Corporate owned life insurance on the lifeof an owner-manager can be an effectiveplanning tool for Canadian Controlled Pri-vate Corporations. The receipt of life insur-ance proceeds by a corporation can beused to: fund the buy out of a deceasedshareholder’s interest; fund the tax liabilityowed by a deceased shareholder’s estate;or offset the economic loss as a result ofthe death of a key employee. In addition,corporate owned life insurance may assistin securing bank financing.

As corporate income tax rates are signifi-cantly lower than personal tax rates, usingcorporate after tax dollars to pay for life in-surance premiums is more favourable.Where the life insurance policy and cover-age is a requirement imposed by a bank forfinancing, the premiums may also be de-ductible for income tax purposes to the ex-tent of the amount borrowed relative tothe amount of insurance coverage.

Changes to various tax rules with respect tolife insurance have been under review forseveral years. In the 2012 Federal Budget,the Department of Finance indicated itwould introduce legislation to modernizelife insurance rules and these proposedrules were modified in Bill C-43 which re-ceived Royal Assent on December 16, 2014.

These new rules will be in effect on January1, 2017 and for the most part will onlyapply to new policies issued. Policies issuedprior to January 1, 2017 will be grandfa-thered provided no medical underwriting isadded to the policies on or after January 1,2017 or the policy is not converted into an-other type of policy.

Changes to the Capital DividendAccount Balances

The death benefit received by a corpora-tion on the death of an insured less the ad-

justed cost basis (“ACB”) of the life insur-ance policy is added to a corporation’s Cap-ital Dividend Account (“CDA”). The balanceof the CDA can be paid out to a shareholderas a capital dividend which is received on atax free basis by the shareholder.

The ACB of a policy is equal to the total pre-miums paid with respect to that policy lessthe total Net Cost of Pure Insurance(“NCPI”).

As a result of the increased life expectancyof Canadians, newly updated mortality ta-bles will be used to calculate the NCPI re-sulting in lower NCPI rates andconsequently higher ACB of policies goingforward. As a result of the higher ACB of lifeinsurance policies, the amount of life insur-ance proceeds received on the death of aninsured that is added to the capital divi-dend account will be reduced. As always,in order for a shareholder to receive theproceeds of life insurance policies that arenot added to capital dividend account, theshareholder will now have to receive a tax-able dividend.

New Exempt Test Rules

Life insurance provides protection butsome policies also allow for the accumula-

tion of savings on a tax de-ferred basis. This preferentialtreatment is available for cer-tain “exempt” insurance poli-cies.

Under the exempt test, pro-vided the investment incomeaccumulation in the policydoes not exceed a definedamount, the investment in-come is not subject to annualaccrual taxation.

Several changes to the ex-empt test will become effective on January1, 2017. The exempt test changes will ma-terially reduce the maximum accumulationamounts which can remain tax exemptwithin a policy. The exempt test comparesthe savings component of the actual life in-surance policy to the savings component ofa theoretical benchmark policy.

The key changes to the exempt test include:• a revised definition of the benchmarkpolicy;

• new prescribed assumptions with re-spect to calculating the savings ele-ment;

• new prescribed assumptions with re-spect to reserves;

• revisions to the rate at which deathbenefits can be increased; and

• revisions to the amount of funding re-quired for policies.

The new life insurance rules will diminishsome of the tax advantages available withlife insurance products. However, corporateowned life insurance remains an effectivetax and estate planning tool. Individualsand corporation’s considering life insuranceplanning or changing their current life in-surance plans may want to take action bythe end of this year to ensure they lock-inthe benefits under the existing rules.

Corporate Owned Life Insurance and the Impact of 2017 Tax Changes

By Enzo Morini, CPA, CA, TEP. Williams and Partners Chartered Professional Accountants, LLP

— Tax NewsleTTer — Summer 2016 • 4

Canada’s increasingly harsh winters andshorter summers have resulted in moreCanadian citizens crossing the border to va-cation with our neighbours to the south. Butwhile you’re packing your sunscreen andwarm-weather clothing, are you also takingnote of how this trip might affect your taxes?

A lot of people go by the ‘183-day rule’ butit’s actually a little more complicated thanthat. You could be in the U.S. for as little asfour months and still get caught up in theirresidency rules.

Under current U.S. law, the rule is called theSubstantial Presence Test. So how do youknow where you fall?

Have you been in the U.S. for at least 31(consecutive or non-consecutive) days in thecurrent calendar year, either for business ORpleasure? If so, the IRS will calculate:• All of your U.S.-based days in the cur-rent year,

• 1/3 of your U.S.-based days in the pre-ceding year,

• 1/6 of your U.S.-based days in the sec-ond preceding year.

(The IRS generally counts any part of a dayspent in the U.S. as one day for this calcula-tion).

If that totals up to fewer than 183 days, thenyou are not considered a U.S. resident, andat most, will only have to file a U.S. non-res-ident tax return for any U.S.-sourced in-come. Or, if you have U.S.-sourced incomebut have not visited the U.S. at all (such aswith many freelancers or contract workerswho work remotely), then you may not haveto pay U.S. taxes at all.

If, however, your total time is 183 days ormore, then you are considered a U.S. resi-dent for taxation purposes, and will have tofile tax returns with both the IRS and CRA.

Not all hope is lost, however. If every otheraspect of your life is located in Canada, youmay be able to file a ‘closer connection’ form,which is form 8840. This form is to claim thatyou’re a Canadian resident, with closer tiesto Canada, and you should therefore betaxed as a Canadian resident, not a U.S. one.

The “closer connection” form isn’t applica-ble if you’ve spent more than 183 days inthe U.S. in the current year: however, thereis still one last chance: the “tie-breaker rule”.This is a Canada-U.S. Tax Treaty exemption,requiring you to provide substantial proofthat Canada is your permanent home andthe location of your personal and economicrelations.

Don’t Pay to Stay –U.S. Residency Rules

By Krysta Adamski, CPA, CA, WBLI Chartered Professional Accountants

Please note that this article is not appropriatefor US citizens or green card holders.

U.S./Canadian tax implicationscan be complicated, so here isthe bottom-line takeaway:

First of all, if traveling to the U.S., for anyreason, make sure you track how manydays you spend there.

Secondly, if you have any travel to or fi-nancial dealings with the U.S., either forbusiness or pleasure, it’s always best togive your accountant a ‘heads-up’, sothat we (as accountants) can make sureyou’re well-informed. It’s better to becautious and ask those questions in ad-vance – instead of assuming you’re fineand getting a nasty surprise at tax time.