Taxable Benefit - Canadian Employee Relocation Council

Report
Tax Strategies to Minimize the
Tax Bite
September 23, 2014
Georgina Tollstam
KPMG LLP
Taxable Issues affecting the Relocation Industry
•
•
•
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Temporary Living expenses
Home Relocation Loans
Housing equity losses
Moving expenses
Severance Payments
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Temporary Living Expenses
Purpose: Special work site exemption allows you to
structure relocation and travel expenses to minimize taxes
Subsection 6(6) of the Canadian Income Tax Act excludes
from the income of an employee, the value of the
following items or a reasonable allowance for:
• Board and lodging
• Per diem amounts
• Transportation (from home to special work site only)
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Special Work Site Exemption
Requires the following:
1. Work location is away from their principal place of
residence
2. The assignment is “temporary” (not defined)
3. Maintain a self-contained domestic establishment
(home) at another location which is available for use
at all times
4. Because of the distance between two areas, the
employee is not expected to return daily from the
worksite to their principal residence
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Special Work Site Exemption
• This exemption applies to both Canadian residents on
assignment and foreign employees working in Canada
• Both employer and employee must complete Form TD4
and keep in the employee’s payroll file
• Disclose the non taxable amounts on the employee T4
in Box 31
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Housing Loans
• Use of loans has diminished over the years and has
generally been replaced by fully taxable housing
allowances or differentials
• Taxable benefit to extent the rate on the loan is lower
than the Canada Revenue prescribed tax rate
– Prescribed rate is set quarterly and currently 1%
• Home purchase loan or home relocation loan- imputed
benefit based on CRA prescribed rate at inception of loan
for a maximum 5 year term
• May exclude the imputed benefit on the first $25,000 of
a home relocation loan
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Home Relocation Loans
• Traditional employer provided loan
• Requires corporate capital
• Employee pays mortgage payments
• Alternative approach
• Employee obtains mortgage from financial institution as
part of a relocation
• Employer must be involved in the initial loan
negotiation with the third party lender
• Employer funds their portion of the interest directly or
reimburses the employee
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Home Relocation Loans
“Home Relocation
Loan”
Interest Subsidy
EXAMPLE - Employer-provided mortgage Interest Subsidy. Employee responsible for
interest at .75%.
Annual Interest
Mortgage principal
$400,000
A
Mortgage interest rate (market rate for fixed 5 year mortgage)
5.00%
B
$
20,000
Less: employer-provided mortgage interest subsidy rate
4.25%
C
$
17,000
Interest paid by employee
0.75%
D
$
3,000
CRA prescribed rate in effect when mortgage incurred
1.00%
E
$
4,000
$
1,000
Deduction reportable on T4 (Box 37)
$
250
Taxable benefit net of deduction
$
750
Taxable benefit reportable on T4 (Box 14 & Box 36)
Maximum loan amount for calculation of deduction
CRA prescribed rate in effect when mortgage incurred
$25,000
F
1.00%
G
Deduction available to individual (for first 5 years of loan):
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Housing Equity Loss
Taxable Benefit
Eligible Housing Loss
Non-Eligible Housing
Loss
Taxable Benefit =
Taxable Benefit =
½ x (Loss reimbursed - $15,000)
100% Loss Reimbursed
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Moving Expenses
• Employee moves
– within Canada
– to Canada from a foreign country
• What is the most beneficial method of reimbursing the
employee for their moving costs?
– Taxable lump sum allowance with employee deducting the
eligible moving expenses on their return?
– Company reimburses actual expenses?
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Moving Expenses
• Non accountable allowance fully taxable except
– Federal - tax-free treatment on first $650
– Quebec - equal to two weeks of an employee’s salary
• Reimbursed expenses generally not taxable in a company
sponsored move based on Canada Revenue administrative
policy
– No legislative basis except position that the move was
primarily for the employer's benefit
– Canada Revenue lists non taxable items in the Employer
Guide T4130
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Moving Expenses
Tax Deductions vs. CRA Administrative
Position
Deduction
Reimbursement
Former Home Carrying Costs
Limited to $5,000
Unlimited but “Reasonable”
Household Moving Costs
Household effects
Household effects plus autos, pets,
boats
Temporary Living Costs
15 days
Reasonable costs
Selling Costs
Commission on sale
Commissions plus mortgage
discharge penalties
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Termination Payments
Purpose: To structure a retirement or severance payment
to minimize taxes
Resident vs. Non-Resident of Canada
•
Resident – taxable at marginal tax rates
•
Non resident – subject to withholding tax at 25%
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Termination Payments
Other Considerations
• Timing of payment and residency
• Payments to residents are subject to a required
withholding rate at 30% and taxed at full marginal
rates on actual tax return
• Need to consider taxability in other foreign
jurisdictions
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Termination Payments
Example
$300,000 retiring allowance; earned while in British Columbia
Resident
Non Resident
Amount of tax
liability
$137,000 *
$75,000
Tax differential
N/A
$62,000
* 2014 top marginal tax rate in British Columbia = 45.8%
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Termination Payments
Other Considerations
•
On termination consider the taxability of relocation
benefits-taxable vs. non taxable
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Summary
•
Temporary Living Expenses
‒ Exclude certain payments from income as special work
site exemption
•
Home relocation loans
‒ Lower tax impact from employer subsidized mortgage
•
Housing equity losses
‒ Tax savings if meet the conditions
•
Moving expenses
‒ Reimbursements are generally non taxable
•
Severance Payments
‒ Tax advantages to timing of such payments
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Questions?
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Presenter Contact Details
Georgina Tollstam
Partner, KPMG LLP
Toronto
416-777-8735
[email protected]
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Restrictions and Limitations
•
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON
OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE
IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
•
The information contained herein is of a general nature and is not intended to address
the circumstances of any particular individual or entity. Although we endeavor to
provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be
accurate in the future. No one should act on such information without appropriate
professional advice after a thorough examination of the particular situation.
•
Any advice herein is based on the facts provided to us and on current tax law including
judicial and administrative interpretation. Tax law is subject to continual change, at
times on a retroactive basis and may result in incremental taxes, interest, or penalties.
Should the facts provided to us be incorrect or incomplete or should the law or its
interpretation change, our advice may be inappropriate. We are not responsible for
updating our advice for changes in law or interpretation after the date hereof.
•
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facts and circumstances and the scope of KPMG’s engagement and is not intended to
be relied upon by any other person. KPMG disclaims any responsibility or liability for
any reliance that any person other than the client may place on this advice.
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