Canada’s banks resist mortgage rate war

 

Loan rate drops to as low as 2.84 per cent

 

BY ALLISON LAMPERT, THE GAZETTE JULY 28, 2012

 

 

 

Mortgage rates in Canada have dropped to as low as 2.84 per cent.

Photograph by: Brent Foster , National Post files

MONTREAL – Five-year closed mortgage rates are descending to record lows, stirring up a rate war that Canada’s major banks appear to be avoiding.

Less than a month after the introduction of tigher rules governing insured mortgages, lenders are beginning to offer five-year fixed rates below the once unheard-of 2.99 per cent. On Thursday, True North Mortgage, which has offices across the country, including Montreal, dropped its best five-year rate to 2.89 per cent, with Xceed Mortgage Corp. advertising a 2.84 per cent rate to customers with top credit, under certain conditions.

The rates are dropping so quickly that the online financial products comparison site Ratesupermarket.ca had to update a Thursday press release advertising an “historic low” 2.94 per cent.

“We expect 2.89 to become the norm by the end of next week,” said Dan Eisner, CEO of Calgary-based True North.

The rate wars are linked to plummeting bond yields. Usually, a drop in bond yields lowers banks’ costs, which in turn leads to a reduction in mortgage rates.

Yet for now, Canada’s major banks don’t seem to be wading in for Round 2 of the very public rate war they initiated in March.

“Interestingly, we still haven’t seen major banks publicly announce aggressive pricing,” wrote Rob McLister, editor of Canadian Mortgage Trends, in an email on Thursday. “You still have the majors advertising five-year rates like 3.94 per cent or 3.99 per cent.”

Some industry observers suggest that the banks are staying out – at least publicly – to please the federal Department of Finance, which has been faced with growing concerns over rising consumer debt and the spectre of condo overbuilding in major cities like Vancouver, Toronto and Montreal. This week, ratings agency Standard & Poor’s cut its outlook on seven Canadian banks, including Toronto-Dominion Bank, the National Bank of Canada and the Royal Bank of Canada, over unsustainable home prices that have roughly doubled in the last decade and consumer debt.

alampert@montrealgazette.com

Using Life Insurance To Extract Corporate Funds Tax-Free

For a shareholder of a private corporation, the transfer of a personally owned life insurance policy to the corporation can offer a way to extract value from the corporation without triggering immediate taxation. The strategy works best if the policy has, relative to its face value, a high fair market value (FMV) and a low cash surrender value (CSV)--the amount that the life insurance company will pay if the policy is cancelled.

A high FMV is important because it determines the maximum amount that the corporation can pay for the policy without creating a taxable benefit. This might occur, for example, if the person whose life is insured has a reduced life expectancy (perhaps due to high blood pressure or a heart condition) relative to what is normal for his or her age. In the extreme, the FMV could approach the policy's face value (its death benefit) if the insured person has a terminal illness or has been critically injured and is not expected to recover (Interpretation Bulletin IT-416R3, "Valuation of Shares of a Corporation Receiving Life Insurance Proceeds on Death of a Shareholder," July 10, 1987). A lower but still substantial FMV could exist if the insured person is elderly and has had the policy for many years. In either case, an actuary would have to determine the policy's FMV.

A low CSV is important because on a non-arm's-length transfer (as in this case) the policyholder will be taxed on the amount, if any, by which the CSV exceeds the adjusted cost base (ACB) of the policy (see subsections 148(7) and 148(9)). Thus, term policies (including term-to-100 policies) are particularly suitable for this planning technique, since they have no CSV.

Consider, for example, an individual (Mr. A) who is the sole owner of a private corporation (A Co). Mr. A is 65 years old and has recently been diagnosed with some health probleMs. Mr. A had purchased a $1 million life insurance policy at age 40, when he was in good health. At the time the policy was purchased, its FMV would have been nominal; because of the change in Mr. A's health, it is worth $500,000 now. In this situation, Mr. A can have A Co purchase the life insurance policy for $500,000, thus extracting that amount from the corporation on a tax-free basis (provided that the policy's CSV does not exceed its ACB).

An additional benefit of corporate ownership is that the policy premiums, although they are generally not tax-deductible, can be paid out of corporate funds, which are taxed at a lower rate than income earned by Mr. A.

The CRA is aware of this type of planning and has indicated that such transactions may not be consistent with the intention of the legislation (see, for example, CRA document nos. 2002-0127455, 2003-0040145, and 2008-0303971E5). However, there have been no further indications that this planning is considered abusive or otherwise problematic.

The immediate tax benefits should be weighed against a number of other factors:

• the loss of creditor protection that would generally otherwise exist with personal ownership;
• the difficulty of removing the policy or its proceeds from the corporation in the future (one reason being that the policy will have a low ACB--the amount of the CSV); and
• the potential loss of the capital gains exemption in cases where owning the policy could cause the corporation to fail the 50 percent or 90 percent active business asset test.

Nathan Wright
Cadesky and Associates LLP
nwright@cadesky.com

Americans in Canada: An Amnesty with Broad Appeal

On June 26, 2012, the IRS announced new filing compliance (NFC) procedures for non-resident US taxpayers (IR-2012-65). Starting on September 1, 2012, there will be a new program for US persons who are non-compliant with US law but do not owe substantial US tax. This will greatly benefit the many US persons (US citizens, green-card holders, and resident aliens) living in Canada who are not up to date in the filing of their US tax returns and foreign bank and financial account report (FBAR) information forms (see "Americans in Canada: The End of the Amnesty," Canadian Tax Focus, November 2011). The rules seem to be close to what tax practitioners have been seeking for some time.

To qualify under the NFC procedures, the taxpayer must present a low compliance risk. Generally, this means that the taxpayer's returns are simple, with less than $1,500 of US tax due for each of the three most recent years. Indicia that may move taxpayers out of the low-compliance-risk category are higher levels of income and assets, use of sophisticated tax planning, material activity in the United States, a history of US tax non-compliance (other than what is being reported in the present application), and the amount and character of US-source income. Higher-risk submissions made under the NFC procedures may be subject to greater scrutiny and additional filing requirements. Specific details and further clarifications are expected to be released prior to the procedures' September 1 effective date. In some situations, taxpayers may be required to submit a statement signed on penalty of perjury explaining why there was reasonable cause for previous failures to file in order to eliminate or reduce penalties.

Individuals intending to use the NFC procedures will be required to file tax and related information returns for the past three years, FBARs for the past six years, and information regarding compliance-risk factors. The IRS has released a statement ("New Filing Compliance Procedures for Non-Resident US Taxpayers") indicating that for "taxpayers presenting [a] low compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions."

Individuals who choose not to use the NFC procedures have several additional options, including "quiet disclosures," "noisy disclosures," and participation in the 2012 offshore voluntary disclosure program (OVDP). Choosing none of these (that is, doing nothing at all) is increasingly risky as US enforcement efforts increase and technology improves (see the Canadian Tax Focus article cited above). A quiet disclosure--addressing current-year filing obligations and liabilities without addressing past non-compliance--is not much better: "Those taxpayers making 'quiet disclosures' should be aware of the risk of being examined and potentially criminally prosecuted for all applicable years" (question 15, 2012 OVDP FAQs). Noisy disclosures--which generally consist of the submission of six years of returns and a request for abatement of penalties on the basis of reasonable cause--will likely be used only by taxpayers who are not far outside the simple, low-risk threshold of the NFC procedures.

An option for those in riskier situations is the 2012 OVDP. This program, which was announced on January 9, has no predetermined duration, and may be cancelled or modified at any time. It offers more program structure, waiver of criminal prosecution, and predetermined penalties. To participate in the 2012 OVDP program, taxpayers (which can include business entities) must

• file eight years of US income tax returns, FBAR forms, and other information returns;
• pay any tax due, a 20 percent understatement penalty, penalties for failure to file and failure to pay, and interest; and
• pay an offshore penalty of 27.5 percent imposed on the highest FMV of the taxpayer's foreign assets and the highest balances in all foreign financial accounts. However, US citizens residing in Canada (or other foreign countries) for each of the years covered by the 2012 OVDP may qualify for a reduced offshore penalty of 5 percent, which will be imposed only on the taxpayer's foreign financial accounts.

Both the NFC procedures and the 2012 OVDP allow taxpayers with RRSP and RRIF accounts to file forms 8891 on a late basis so as to make an election under article VIII(7)of the Canada-US tax treaty. The election will not only defer US income taxation of the investment income earned by the RRSP and RRIF accounts, but it will also exclude the balances in those accounts from the base on which the offshore penalty is computed. Thus, the advantages of the election are that it makes it more likely that a taxpayer who uses the NFC procedures will have less than $1,500 of US tax due, and it reduces the amount of the offshore penalty for a taxpayer participating in the 2012 OVDP. In order to make the election, a taxpayer must submit a statement requesting an extension of time to make the election, along with forms 8891 for each of the tax years and type of plan covered and a statement dated and signed by the taxpayer, on penalty of perjury, which describes

• the events that resulted in the failure to make the election;
• the events that resulted in the discovery of that failure; and
• whether the taxpayer relied on a professional adviser and, if so, the nature of the professional adviser's engagement and responsibilities.

The relief provided for RRSP and RRIF accounts may also be available for other pension and retirement plan accounts.

Joseph Devaney
Video Tax News, Edmonton
joe@videotax.com

Robert E. Ward
Robert E. Ward & Associates PC
Vancouver and Bethesda, MD
rward@robertewardassociates.com

What the new IRS rules mean for US Citizens living in Canada from National Post by Jamie Golombek

What the new IRS rules mean for US Citizens living in Canada from National Post by Jamie Golombek

An estimated one million U.S. citizens living in Canada now have an extra reason to celebrate this Canada Day long weekend. The Internal Revenue Service announced new rules and procedures this week to help dual citizens with their U.S. filing obligations. 

“We told the U.S. government that the vast majority of Canadians targeted were honest, hard-working and law-abiding individuals and they listened,” said Finance Minister Jim Flaherty. “The only transgression of these dual citizens has been failing to file IRS paperwork that they were unaware they were required to file.” 

The softer IRS approach relaxes the filing requirements for taxpayers outside of the U.S. and provides additional relief for those who have contributed to Registered Retirement Savings Plans or Registered Retirement Income Funds in Canada. 
“These are positive developments,” Mr. Flaherty said in a news release. 

Under U.S. law, its citizens are required to file a federal income tax return as well as Reports of Foreign Bank and Financial Accounts (FBARs) every year no matter where they reside. Most countries, including Canada, have a residency-based taxation system rather than a citizenship-based system. 

In the majority of cases, U.S. citizens don’t actually end up owing U.S. federal tax due to offsetting foreign tax credits. 

For many, however, the fear of being assessed harsh penalties on late-filed FBARs (Form TD F 90-22.1), which could range from a “willful” failure to file penalty starting at $100,000 to non-willful failure to file penalty of $10,000 per violation, was enough to keep many dual citizens or U.S. citizens residing in other countries from coming forward. 

But under new IRS rules, taxpayers will only be required to file delinquent tax and information returns for the past three years, instead of six, and to file delinquent FBARs for the past six years. And the IRS indicated that taxpayers presenting “low compliance risk” won’t be hit with penalties. The IRS has defined “low risk” as those who generally file returns with less than $1,500 in tax owing. 

In general, the “risk” level rises as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include a history of noncompliance with United States tax law and the amount and type of United States income. 

“For taxpayers in the grey zone — the small business owner, the high income earner, the wealthy grandmother with assets in a holding company — the news release may be less comforting,” said Christine Perry, a cross border tax specialist with Keel Cottrelle LLP. 

“Until we get some indication of who is a compliance risk and who isn’t I think there will be a continued reluctance to come forward.” 

"The Week Ahead" - July 23-27

"The Week Ahead" - July 23-27

Key Highlights

The Fed may well do further QE, but progress on a fiscal deal that avoids excessive tightening in both the USand Europe will be far more critical in shaping 2013 growth.  While we may get a side deal on US dividend tax treatment, a broader step to put off the “fiscal cliff” isn’t likely in the cards until after the election, andEurope doesn’t seem to be rushing to provide support for the beleaguered Spanish bond market. While we are bulls in waiting, investors in “risk on” assets don’t need to rush in just yet.

Key Numbers to watch this week:

·         Canada – Retail Trade – May (Tuesday – 8:30 AM ) –  While underlying prospects for consumers should remain weak due to slow growth and weaker credit accumulation, May retail sales may have actually sprung back to life.

·         US – GDP – Q2 (Friday – 8:30 AM ) –  The US economy was already stuck in low gear, but a further down-shift could well have been seen in Q2.  Consumer spending is tracking around a 1.5% rate—a notable deceleration from 2.5% in Q1—and weakness towards the end of the quarter suggests little momentum heading into Q3

                                                                                    

Equity Insights:

·         Declines of 21% and 12% on the year in the energy and materials sectors and a pullback in tech profits could see index earnings retreat by about 10% on the year.  Bright spots may include utilities, health care and industrials.

·         Renewed “risk on” sentiment and sector specific developments have seen active lumber futures rebound handily from June’s yearly lows.  The recent slew of positive data and support from low-mortgage rates suggest the worst is now over for the long-ailing US housing sector.

·         Fiscal “train wreck” fears are fuelling renewed talk in political circles stateside about a “grand bargain” on deficit reduction.  A recent proposal by Democratic senators aimed at drawing bipartisan support would cap the tax rate on dividends and capital gains for upper income households at 20%.

Currency Currents:

·         The BoC in its latest MPR, ruled out any near-term rate hikes, slashing its growth outlook for here and abroad.  But C$ bears shouldn’t read too much into the downgrade, as it’s still the case that rate cuts would be off base.

·         A deteriorating US growth pace is tilting the odds higher for another round of QE by the Fed.  Although dollar depreciation would be one channel to help America’s economy, it’s not likely to work this time.  The reason: everybody else looks even worse.

·         After mainly exceeding expectations throughout the post-recession period, UK inflation is, for the first time, surprising to the downside more often than not. While recent declines in unemployment are encouraging, forward looking indicators suggest hiring is still very weak and joblessness could well rise again. Therefore, we still expect further sterling weakness against theUS$.

http://research.cibcwm.com/res/Eco/ArEcoWAF.html

Hire Spouse to Work in a Family Business

Summary

“Hire a Spouse to Work in a Family Business” is an example of articles found in TheTaxBook Planning Strategies Edition. TheTaxBook Planning Strategies Edition contains over 120 in-depth planning articles. By taking a few extra minutes at the end of a tax interview to speak with your client about pros and cons of a tax planning strategy, your client will appreciate the added value of your service, and you will see an increase in customer loyalty. Most articles include the following features: 1. Issue. A description of a problem or issue that could be solved with the correct planning strategy. The description is designed to help the tax professional fit a planning strategy to a particular client’s situation. 2. Applicable Tax Law. A list of applicable rules, including authoritative citations to assist the tax professional in further research. The applicable tax law helps identify circumstances in which a planning strategy can be applied to a specific client’s situation. 3. Tax Planning Strategy. A possible course of action to achieve a desired tax result. 4. Examples. One or more examples are given to illustrate how the strategy works. The examples are written in plain English to help the client understand the value of implementing a particular plan of action. 5. Possible Risks. A list of circumstances that could reduce or eliminate the intended goal of the planning strategy, or result in unintended negative consequences. The tax professional may find this information useful to show a misinformed client why his or her desired strategy will not work. 6. Court Cases. Issues related to applicable tax law are examined in court case summaries involving taxpayers in situations that relate to the intended strategy. Court case summaries assist in making a more informed decision about whether to implement the suggested strategy. Enjoy the article!

Print Version: Hire a Spouse to Work in a Family Business

New Help for U.S. Citizens Overseas

Summary

Cross References • IR-2012-65, June 26, 2012 The Internal Revenue Service has announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues. “Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues,” said IRS Commissioner Doug Shulman. Shulman announced the IRS will provide a new option to help some U.S. citizens and others residing abroad who haven’t been filing tax returns and provide them a chance to catch up with their tax filing obligations if they owe little or no back taxes. The new procedure will go into effect on September 1, 2012. The IRS is aware that some U.S. taxpayers living abroad have failed to timely file U.S. federal income tax returns or Reports of Foreign Bank and Financial Accounts (FBARs). Some of these taxpayers have recently become aware of their filing requirements and want to comply with the law. To help these taxpayers, the new procedures will allow taxpayers who are low-compliance risks to get current with their tax requirements without facing penalties or additional enforcement action. These people generally will have simple tax returns and owe $1,500 or less in tax for any of the covered years. The new procedures will also allow resolution of certain issues related to certain foreign retirement plans (such as Canadian Registered Retirement Savings Plans). In some circumstances, tax treaties allow for income deferral under U.S. tax law, but only if an election is made on a timely basis. The streamlined procedures will be made available to resolve low-compliance risk situations even though this election was not made on a timely basis. Description of proposed new procedure. Taxpayers utilizing the new procedure are required to file delinquent tax returns, with appropriate related information returns, for the past three years and to file delinquent FBARs for the past six years. All submissions will be reviewed, but the intensity of review will vary according to the level of compliance risk presented by the submission. For those taxpayers presenting low-compliance risk, the review will be expedited and the IRS will not assert penalties or pursue follow-up actions. Submissions that present higher compliance risk are not eligible for the procedure and will be subject to a more thorough review, and possibly a full examination, which in some cases may include more than three years, in a manner similar to opting out of the Offshore Voluntary Disclosure Program. Tax, interest and penalties, if appropriate, will be imposed in accordance with U.S. federal tax laws based on a review of the submission. In addition, retroactive relief for failure to timely elect income deferral on certain retirement and savings plans, where deferral is permitted by relevant treaty, will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission. See printable version for the remainder of the article.

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