Tax Strategies to Minimize the Tax Bite

September 23, 2014

Georgina TollstamKPMG LLP

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Taxable Issues affecting the Relocation Industry• 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• Use of loans has diminished over the years and has generally been replaced by fully taxable housing allowances or differentials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

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

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Housing Equity LossTaxable Benefit

Eligible Housing LossNon-Eligible Housing

Loss

Taxable Benefit =

½ x (Loss reimbursed - $15,000)

Taxable Benefit =

100% Loss Reimbursed

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• 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?

Moving 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 ExpensesTax Deductions vs. CRA Administrative

PositionDeduction 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 TollstamPartner, KPMG LLP

Toronto416-777-8735

gtollstam@kpmg.ca

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