Tax Strategies to Minimize the Tax Bite

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1 Tax Strategies to Minimize the Tax Bite September 23, 2014 Georgina Tollstam KPMG LLP

2 Taxable Issues affecting the Relocation Industry Temporary Living expenses Home Relocation Loans Housing equity losses Moving expenses Severance Payments 2

3 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) 3

4 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 4

5 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 5

6 Housing Loans Use of loans has diminished over the years and has generally been replaced by fully taxable housing allowances or differentials Taxable benefit to extent the rate on the loan is lower than the Canada Revenue prescribed tax rate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 6

7 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 7

8 Home Relocation Loans EXAMPLE - Employer-provided mortgage Interest Subsidy. Employee responsible for interest at.75%. Home Relocation Loan Interest Subsidy 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 Taxable benefit reportable on T4 (Box 14 & Box 36) $ 1,000 Maximum loan amount for calculation of deduction $25,000 F CRA prescribed rate in effect when mortgage incurred 1.00% G Deduction available to individual (for first 5 years of loan): Deduction reportable on T4 (Box 37) $ 250 Taxable benefit net of deduction $ 750 8

9 Housing Equity Loss Taxable Benefit Eligible Housing Loss Non-Eligible Housing Loss Taxable Benefit = ½ x (Loss reimbursed - $15,000) Taxable Benefit = 100% Loss Reimbursed 9

10 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? 10

11 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 T

12 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 12

13 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% 13

14 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 14

15 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% 15

16 Termination Payments Other Considerations On termination consider the taxability of relocation benefits-taxable vs. non taxable 16

17 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 17

18 Questions? 18

19 Presenter Contact Details Georgina Tollstam Partner, KPMG LLP Toronto

20 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. KPMG s advice is for the sole use of KPMG s client. The advice is based on the specific 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. 20

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