Recent regulatory changes could impact the tax filings of some Canadians. Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, discusses some of the new rules and their potential impact with MoneyTalk’s Greg Bonnell.
*On Oct. 31, the Government of Canada announced that owners affected by the Underused Housing Tax will have until April 30, 2024 to file their returns for the 2022 calendar year without being charged penalties or interest.
We are talking personal finance today. A couple of important changes and deadlines you may want to be aware of, depending on your situation. Joining us now with more, Nicole Ewing, Director of Tax and Estate Planning at TD Wealth. Nicole, always a pleasure to have you on the show.
Great to be here.
All right, you got a lot of things you want to share with us right now. I know you want to raise awareness about the underused housing tax deadline. First, walk us through, for some of us who may have forgotten some of the details, the underused housing tax, and then tell us about this deadline.
So the underused housing tax is essentially a tax on property that's, as it sounds, underused or vacant. And it generally applies to those who are non-resident, non-Canadian, foreign investors sort of thing.
And so a lot of people may have looked over this and thought that it didn't apply to them. But what's missing from that conversation and a lot of the coverage about it is that there are people-- if you hold this property in a corporation or in a trust, you are going to be subject to these rules.
Now it doesn't mean you're going to have to pay tax. But you do have to file this return. And the failure to file the return is a minimum of $5,000. So this is a pretty hefty issue that people want to be thinking about. I'd like to flag for people that this is really applying to, as I said, if it's owned in a trust.
What that means, it isn't just a family trust. But if your name is on title to a property that you don't live in or have a beneficial interest in, you may be caught by these rules. So for example, if I'm an elderly person and I've added my children on title, just so that on my death the property would pass to them without much effort, that means that your children could be regarded as holding the interest in trust for you and for your estate. And they should be filing an underused housing tax return.
Similarly, if we have parents who may have added their names on title to help their children if there's a mortgage on the property or a guarantee, they may have added their names. And so if their name is on there as a legal owner but they don't have a beneficial interest in the property, that's regarded as a bare trust subject to these rules.
So caution, caution. It's really important to understand whether these rules apply to you. Now a lot of confusion about this because it was new last year. And so we extended-- or the government extended-- the 2022 filing year to allow people to file by October 31, 2023.
So Halloween is the due date where if you don't have this return filed, you may be subject to these very significant penalties.
Significant penalties. All right, and obviously, we're talking about Halloween. It's right on our doorstep. What should people do? If they've heard this conversation up to this point and said, "I'm a little bit concerned about this," I mean, obviously they would need to speak with someone?
Well, I would recommend speaking certainly with any financial advisor that you're working with or your accountant. If you don't have access to that on this short notice, I would recommend just going online to canada.ca and looking at the information that they provide.
And it actually has a very useful tool which you can put in your personal circumstances. And it will tell you whether or not you have a filing obligation. And again, it does not mean that you need to pay tax. It just means that you might have a filing obligation. If you have to pay tax, that's a second consideration. But there is a tool available on canada.ca that might help people navigate this.
OK, that's the first issue you wanted to bring to our audience's attention. What about beneficial trust reporting rules? What's going on there.
So similarly, there are these new rules that will require people to file a trust return. Now in the past, trust returns only needed to be filed by certain types of trusts in relatively narrow circumstances-- so if they had income or they got rid of or disposed of a capital interest.
But the rules have changed so that now, really essentially any trust is subject to these filing obligations. There's exceptions for a graduated rate estate or a qualified disability trust or a very small under-$50,000 trust which only really owns cash or securities, so not real property.
But those are really the only exceptions. There's a few more, so you want to check into it. But for the regular folks, if you have a family trust, again, if you are on joint accounts, if your name is on an account, if your name is on a property, trust reporting rules require that you file a T3. And that's going to be applicable for this year. So if you currently have a trust, these rules do apply to you. And you will have an obligation to file that in your return for next year. So again, many people not realizing that these rules apply to what we call bare trusts. Again, that is simply where you have your legal ownership but don't have a beneficial interest in the property. That is going to be caught by these rules as well. And people will have a filing requirement perhaps that they've not had in the past.
Based on this conversation and conversations I've had with you in the past, Nicole, there were certain things that fall into that bucket of what a trust is that I had no idea that's what a trust is. It seems a bit of a tricky area.
It is a very tricky area, and particularly when we talk about these rules. The reporting obligations that the trustee now has, they must provide certain information on the trustees, the settler of the trust, the beneficiaries of the trust, anybody who is deemed to have influence over decisions that are made in a trust.
And when I say beneficiaries as well, it's not just the named person. But if upon their death it would go to contingent beneficiaries, those people are also considered beneficiaries for whom the trust reporting must be done.
So I'll say, a very complex area that is probably not well understood at this point. So I would encourage people to be reaching out to their tax professional, their financial professional to help them figure out whether these rules apply.
It might be that having a joint account is no longer the appropriate solution for you, or having your name on a property is not going to be as beneficial as it may have been, given these filing obligations that now might apply.
So if you have a real property, for example, and you're on there as a legal owner but not a beneficial owner, you may have the underused housing tax obligation as well as the new trust reporting obligation.
So being mindful, it's not just as easy as adding a name onto an account. There are other legal implications of doing that.
Quickly, let's add one more thing to the list. I know this has been in the headlines lately. Alternative minimum tax changes as well. A lot of changes to be aware of.
There are a lot of changes. There have been a lot of changes for a number of years. So it's a bit of a challenge to stay up to date on what your obligations are and maybe some of the planning strategies that you have utilized in the past.
Really for the alternative minimum tax, again, this is a tax that's intended to prevent high-income earners from paying little or no tax. And so the intent is there's this alternative calculation, or a parallel calculation, that includes or excludes certain types of deductions, credits. Certain inclusion rates are different.
If you owe money under the alternative minimum tax calculation that is higher than what you would have owed under your federal tax owing, you'll have to pay AMT. These rules are changing. We're looking at an increase in the rate from 15% to 20.5%. But we're seeing a huge change in the exemption amount, or the amount that you can earn without these rules applying to you.
So it's going from $40,000 to $173.000. But with certain types of planning, there's going to be different impacts. And so we see many of the credits and deductions, the inclusion rates will change for those. So some of that math will look a little bit different for those either who have paid alternative minimum tax in the past or might have strategies that make themselves vulnerable to those sorts of things.
So a big one that people are missing when it comes to trusts-- so again, trusts topic of the day is that there is no exemption amount for a trust. And so that $173,000 will not get somebody-- if you have a certain type of income in your trust, you may be subject to these alternative minimum tax rules. And you won't get the benefit of that much larger exemption amount that has changed in the rules.
So again, lots of math needs to change. We need to look at our strategies holistically again and see whether these tax changes have offset maybe a little bit of the balance of how people are weighting different variables when we come to our planning. [AUDIO LOGO]