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Aliyah Mega Events, Toronto and Montreal, March 2-3

Join Nefesh B’Nefesh staff, and professionals from various fields for a range of Aliyah related seminars and information tables, including:

  • Careers in Israel
  • The Benefits of Aliyah
  • Retiring in Israel
  • Building Your Small Business in Israel
  • The Israeli Healthcare System
  • Buying & Renting Your First Home In Israel
  • Your Taxes
  • Financial Planning
  • You and the IDF
  • Higher Education Opportunities

All participants are entered to win a free pilot trip to Israel

We are proud to bring you this program in conjunction with our partners, the Jewish Agency for Israel and the Ministry of Immigrant Absorption.

Sun, March 02, 201412:30 PM – 5:45 PM (EST) Novotel North York 3 Park Home Avenue North York, Ontario M2N 6L3

British Bankers’ Association Preliminary Response – Regulations on Foreign Reporting

British Bankers’ Association Preliminary Response to the ‘Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Foreign Entities’

1. The British Bankers’ Association (“BBA”) is the leading association for banking and financial services in the United Kingdom (“UK”). We represent 230 banking organisations from 60 countries and have 40 professional service firms within our associate membership.
2. The BBA welcomes the opportunity to comment on the proposed regulations under chapter 4 of Subtitle A (section 1471 through 1474) of the Internal Revenue Code of 1986 (Code) regarding information reporting by foreign financial institutions (“FFIs”) with respect to U.S. accounts and withholding on certain payments to FFIs and other foreign entities.
3. The BBA re-affirms its commitment to transparency and openness in its dealings with the U.S. Authorities and the observations and comments that follow are provided in that light. Priority Issues of the British Bankers’ Association

Partnership Agreements

4. The BBA welcomes the intergovernmental approach to the Foreign Account Tax Compliance Act (“FATCA”) implementation that was announced on 8 February 2012 and which sets out to overcome some of the existing legal impediments to compliance. We appreciate the understanding, in paragraph 6 of the Joint Statement regarding an Intergovernmental Approach to Improving International Tax Compliance and Implementing FATCA (“Joint Statement”), of the recognition to keep compliance costs as low as possible, and achieve common reporting and due diligence standards, via a common approach. The intergovernmental approach proposed in the Joint Statement is a necessary development that we hope will form the basis of a universal model agreement to implement FATCA, to be adopted by other jurisdictions.
5. To achieve the successful worldwide implementation of FATCA, it is an essential requirement that the conclusion of the EUG5 and future partnership agreements deliver consistent data requirements and reporting frameworks. In recognition of different legal regimes and financial products, where there is a need to accommodate jurisdictional variations, we would propose that this is achieved by means of a country specific attachment as established with the partnership Government.
6. There is a lack of clarity regarding the interaction of partnership agreements and the requirement, or otherwise, for an FFI to enter into a direct agreement with the Internal Revenue Service (“IRS”). In order to provide certainty for FFIs, the BBA’s preferred approach would be as follows:
i.The single model partnership agreement, as developed by the Joint Statement negotiations, is adopted by the partner Government, thereby establishing an inter-governmental relationship between the U.S. and the adopting partner country.
ii. Upon publication of a joint Memorandum of Understanding (“MoU”) between the U.S. and a partner Government, FFIs operating in these territories would then be required under local law to obtain an FFI Employer Identification Number (“EIN”) from the IRS. As a consequence, these FFIs would be immediately treated as deemed compliant under FATCA.
iii. A country specific attachment could then be established if required with the partnership Government which would deal with any jurisdictional variations.
iv. The IRS will build and maintain a central FFI register, identifying participating FFIs (“PFFIs”) and deemed compliant FFIs.
v. Obtaining an FFI EIN from the IRS will establish a relationship between the FFI and IRS which will ensure the requirements of the responsible officer sign off are consistent across multiple partner jurisdictions.
We envisage that this process would provide clarity and certainty for FFIs, withholding agents, foreign governments and the IRS while the FATCA intergovernmental and legislative framework is finalised.
7. Additionally, there is a lack of clarity regarding the interaction of partnership agreements and the impact on the Qualified Intermediary (“QI”) regime as the draft regulations propose that existing QIs become PFFIs1 whereas they also refer to the discretion of the Secretary of the Treasury2. The BBA’s preference would be for QIs within a partnership territory to be automatically recognised as deemed compliant under the partnership agreement.

Limited FFIs

8. FFI groups operating in partner countries which have Limited Affiliates3 in jurisdictions not covered by partnership agreements face an untenable and substantial risk of non-compliance if the legal challenges in these jurisdictions are not resolved. If this is not addressed by the end of 2015, this would pose a major risk to the compliance of the entire FFI group and would jeopardise the FATCA status of all the partnership territories.
9. The BBA also recognises the challenge of concluding the partnership agreements in the timescale envisaged. The partnership agreement forms the legal basis on which FFIs can adopt and comply with FATCA reporting requirements. In the event of any unexpected delay in implementing the legislative changes, we would request that transitional arrangements are extended for FFIs in affected jurisdictions.
10. In view of the issues raised above, the BBA would request that consideration is given to further transitional relief arrangements regarding the envisaged withholding requirements in order to provide the necessary level of certainty for FFIs operating in these jurisdictions.
11. We would welcome clarification on the interaction of the Joint Statement and the proposed regulations as to the FATCA compliance status of the expanded affiliate group. It is our view that:
i. An FFI operating in a partnership territory should not experience withholding and its status should not be affected by the FATCA status of any other expanded affiliate group member, including foreign branches.
1 Regulations relating to information reporting by foreign financial institutions and withholding on certain payments to foreign financial institutions and other foreign entities, Section 1.1471-2(a)(2)(iii)
2 Hiring Incentives to Restore Employment (HIRE) Act, Section 1474(d) and 1474(f)
3 Regulations relating to information reporting by foreign financial institutions and withholding on certain payments to foreign financial institutions and other foreign entities, Section 1.1471-4(b)(1)
ii. A PFFI operating in a territory where a partnership agreement is not necessary for compliance with FATCA should not experience withholding and its status should not be affected by the Limited FATCA status of any other expanded affiliate group member.
iii. Only a NPFFI within the expanded affiliate group operating in a territory without a partnership agreement, or who could otherwise comply, should face an appropriate sanction.
12. bThe BBA would also propose that the transition period for limited affiliate status should be extended where FFIs are in territories which are engaged in active discussions about achieving FATCA partner status.

Draft FFI Agreement

13. As the draft FFI agreement and revised W-8/W-9 forms have not yet been published, the BBA trusts that its comments will be taken into consideration during the drafting of these documents, insofar as this is possible.
14. Notwithstanding the Joint Statement approach, there remains a problem with the current FFI agreement, as envisaged in the proposed regulations. As passthru has been ‘reserved’ in the proposed regulations, FFIs would be unable to sign an FFI agreement in the absence of a legal resolution to the withholding issue and data protection concerns.
15. The BBA would recommend that passthru withholding is removed from the proposed regulations and not included in the FFI agreement.
16. We believe that the goals of FATCA are best addressed by an effective reporting regime. Until this is established, and its effectiveness can be assessed, passthru provisions should be excluded from any FFI agreement currently envisaged.

Documentation and Due Diligence

17. The proposed regulations align the requirements for FATCA compliance with the procedures that financial institutions currently follow for AML/KYC rules. The BBA welcomes that the U.S. has agreed to reliance on domestic standards, as endorsed by the Financial Action Task Force (“FATF”).
18. The proposed FATCA regulations are generally in line with existing AML/KYC procedures. However, there remain certain cases where the proposed regulations impose significant, additional actions by participating FFIs, and in these cases we would urge that the regulations are modified to allow implementation as follows:
i. The classification and verification standards for entities are currently overly complex, requiring over thirty pages of description in the proposed regulations. As a result, there is currently no consistent view within the industry, or professional advisory firms, as to the definitive list of classifications. The current multiple classifications and documentation requirements will be burdensome to administer for FFIs, increasing the complexity for all in the FATCA regime, including U.S. withholding agents. This is likely to lead to the erroneous application of withholding and a high volume of potential reclaims. The current approach requires FFIs to classify and exclude entities and individuals who are not reportable; however a more proportionate and targeted approach focusing on entities which pose a real risk would be simpler and more effective. The BBA would propose that an FFI should be able to rely on existing AML/KYC information where this is sufficient to establish the classification of entities. Where further information is required FFIs should be able to place reliance on the self-certification of entities and collect their documentation, signed under penalty of perjury, unless there is a reason to know the classification is inappropriate. Where no certification is received the presumption rules will apply. We also believe that an FFI should be able to rely on self-verification for individuals signed under penalties of perjury. Furthermore, and specifically in regard to PFFIs, we would propose that where the IRS has established a register of PFFIs and issued EINs, an FFI or withholding agent should be able to place reliance on this without the need for further documentation.
ii. Monitoring the expiry of documentation, and requiring renewal, would not identify additional U.S. persons beyond those currently identified by existing AML/KYC processes and is an overly burdensome additional requirement. Customers are already required under existing AML/KYC to notify an FFI about any changes in circumstance which would trigger a change in their classification for FATCA purposes; these requirements are generally included within the product terms and conditions.
iii. Assessing actively trading by the 50% income and balance sheet statement standard is not a current AML requirement and would require annual, substantial manual intervention. For example, this would involve obtaining and analysing the financial statements of these entities in addition to significant further questioning and documentation to enable a robust classification. The BBA believes that this analysis would be burdensome and potentially inconclusive because of the scope for subjective interpretation and insufficient granularity of account information. The BBA would propose that an FFI should be able to rely on existing AML/KYC information where this is sufficient to establish the classification of entities. Where further information is required, FFIs should be able to place reliance on the self-certification of entities and collect their documentation, signed under penalty of perjury, unless there is a reason to know the classification is inappropriate.
iv. The requirement outlined in the proposed regulations to search for U.S. telephone numbers as U.S. indicia poses logistical and system issues. A telephone number in itself is an unreliable indicator and there is currently no database against which an FFI can validate these numbers.
v. FFIs should have the option to document an account at the customer or the account level so that for a customer opening a new account an FFI can use existing AML/KYC information. Documentation should be at customer level where it is within an FFIs ability to consolidate information. Documenting accounts individually should be restricted to cases where it is not possible or practical to document the customer. KYC/AML documentation establishes the identity of a person and is normally relied upon when the same customer opens new accounts with a bank; accordingly, therefore, the BBA proposes that the regulations be modified to require documentation only when a new customer to the bank establishes a new account. In cases where an existing customer opens a new account, FFIs should rely on existing documentation.
vi. The BBA would be grateful for confirmation that in accordance with existing AML/KYC procedures that FFIs are able to rely upon third party due diligence processes. For example those undertaken by certain regulated entities such as solicitors, health care providers and Independent Financial Advisors (IFAs) for their customers.
vii. The proposed regulations provide an exception for documenting offshore obligations whereby foreign status can be established with government-issued identification and where none of the documentation associated with such status contains U.S. indicia. The BBA would be grateful for confirmation that this exception also applies to new accounts and therefore a PFFI would not be required to obtain Form W-8 to establish foreign status unless U.S. indicia is found within any documentation associated with such a new account.

Withholding Requirements

19. The BBA welcomes the expressed intention to “eliminate U.S. withholding under FATCA on payments to FFIs established in the FATCA partner [country]”4, which acknowledges that all FFIs operating in the territory will be PFFIs and that no withholding should be required domestically. The BBA considers that the FFI withholding requirements for FFIs established in the FATCA partner countries have not been fully eliminated, as outlined below.
20. First, FFIs operating in the partner countries would still be subject to the application of U.S. source FDAP withholding, and be required to apply it to other FFIs, from January 1 2014 if acting as an intermediary in respect of a transaction involving a non-partner jurisdiction.
21. Second, FFIs operating in the partner countries would be obliged to withhold on payments made to NPFFIs in non-partner countries requiring the development, build and operation of withholding engines. Applying the withholding also potentially violates local legal regimes.
22. As noted above, the BBA recognises the challenge of concluding partnership agreements in the timescale envisaged. We are concerned that as a consequence of any delay, FFIs in partner countries could be subject to and responsible for passthru withholding.
23. The BBA is further concerned that FFIs operating in jurisdictions that are endeavouring to conclude partnership agreements would be required to withhold, perhaps in the absence of a legal power to do so, and where so empowered would have insufficient time to build the withholding engines required at the stage where it becomes evident the agreement would not be concluded in time. We would further recommend that a reporting solution is adopted in place of withholding, with a review period to assess the effectiveness of reporting and any residual need for the future introduction of targeted withholding requirements.

FATCA Scope

24. The BBA welcomes the move towards a risk based approach in the proposed draft regulations. We believe that the underlying principles of FATCA can be achieved more effectively by focusing on those entities and products which pose the greatest risk of tax evasion. As currently drafted, the proposed regulations do not exclude products and entities which pose a low risk of tax evasion from the scope of FATCA reporting.
25. Within each jurisdiction there are a variety of products and entities which are regulated, often tax exempt and subject to additional controls which pose a low risk of tax evasion. To ensure consistency between partner jurisdictions, the BBA would propose that the regulations are modified to include the following non-exhaustive examples:
i. Broad categories of low-risk entities such as charities, savings clubs, quasi-government entities and associations.
4 ibid, Section 1.1471-4(b)(1)
ii. Broad categories of low-risk products such as Government sponsored savings accounts and retirement products.
Including these broad categories would minimise the amount of detailed exclusions contained in the country specific attachment to the single model agreement. Any additional clarification or classification could be provided within a country specific attachment to the partner agreement envisaged by the Joint Statement.
26. As the BBA has previously advised, it is uncertain whether UK sited trusts should be treated as FFI or NFFE as, depending on the trust, either status may be appropriate and it may also change through the lifetime of the trust, adding further operational complexity and burdens for the FFI holding the trust account. We are aware that there are similar problems in other jurisdictions. Absent a better definition of trusts eligible for exclusion, we propose that a residency-based carve out be made available in the regulations. For example, trusts should be classified as exempt NFFEs where they are organised in a partner country and where the trust is required to file annual tax returns. In non-partnership countries or where trusts may not be subject to tax, a de minimis rule of $1 million, which is in line with the current de minimis rule for high value accounts, would be appropriate.

Self-Verification

27. The BBA welcomes the approach to self-verification outlined in paragraph 1471-4(a)(6) of the proposed regulations. We suggest the verification procedures in partner countries should be risk based, rely on internal controls, internal testing, internal audit, and certification of compliance.
28. The proposed regulations envisage that where a material deficiency in an FFIs verification processes is identified an FFI could engage an external auditor to assess and report on the problem area. The BBA believes that in this situation, under the FATCA partnership agreement, an external auditor will be appointed and provide a report to the IRS. The tax authority in the partner country will not be involved in the assurance process.
29. As described above at Paragraph 18. i., the classification and verification standards for entities are currently overly complex, requiring over thirty pages of description in the proposed regulations and multiple forms of documentation. The BBA believes that the Responsible Officer Certification could be extended to cover classification of entities allowing other FFIs to rely on these classifications without further validation.
30. The BBA welcomes the proposed self-verification model for Chapter 4 compliance and would propose that this is also extended to cover the existing Chapter 3 requirement to undergo external audit, and that this requirement under Chapter 3 is removed. The responsible officer sign off envisaged for Chapter 4 could be extended to include compliance with the requirements of Chapter 3 reporting.

U.S. Financial Institution obligations

31. The BBA notes that the timeline for the requirements imposed on U.S. financial institutions differ from those for FFIs. FFIs are required to enter into an agreement with the IRS effective from July 2013 and as such responsible officers of these organisations would also expect the U.S. financial institution requirements to commence from July 2013 at the earliest. We would propose that these are aligned so that international financial institutions operating in the U.S. are able to align systems and process modifications to a single timetable.

British Bankers’ Association
Tuesday 17th April 2012

Your UK pension is likely subject to a 55% flat tax

Virtually all UK residents will have a pension scheme of one sort or another. There are a few facts about your UK pension scheme that are worth noting namely:

1. All income that is withdrawn from the scheme is taxable in the UK

2. You are restricted in the type of investments allowed in the scheme

3. You are restricted to the currency of your investments

4. You cannot withdraw from the scheme until age 55 (or sometimes older depending on the rules of the specific scheme) but you must begin withdrawing by age 75.

5. Any residual capital that you want to pass on to your spouse or children is subject to a scheme death charge – which is a 55% flat tax.

6. If you made Aliyah and you are within your 10 year Israeli tax holiday, the UK government may refuse to allow gross basis withdrawals from your UK pension scheme and will deduct tax at source (at the highest marginal rates – up to 50%) for all such withdrawals.

It should also be noted that if you die before age 75 and you have not taken any withdrawals from your pension scheme, you will not be subject to the 55% scheme death charge. However, life expectancy for the average male or female is 80/81 years of age and most of us will need to use our pension funds during retirement. Which means, for most of us, the 55% scheme death charge is a reality.

For those making aliyah (even if you made Aliyah many years ago, we can still help you achieve many of the benefits outlined below), you can arrange your UK Pension so that you can accomplish the following:

1. All income that is withdrawn from the scheme is NOT taxable in the UK
2. You are LESS restricted in the type of investments allowed in the scheme
3. You are LESS restricted to the currency of your investments
4. You cannot withdraw from the scheme until age 55 but you must begin withdrawing by age 75.
5. Any residual capital that you want to pass on to your spouse or children is subject NOT to a scheme death charge – which is a 55% flat tax
6. Numerous pension schemes can be combined into one scheme for ease of administration and lower costs
7. You are not required to purchase an annuity when you begin withdrawals
8. If you qualify for the 10 year Israeli tax holiday, within that period you will be permitted to:
 Make a 25%-30% lump sum withdrawal tax free AND
 Take payments out– tax free.

For more information please contact us at 054-309-1867 or hcc31@hallmarkcc.com

US Tax Evasion: No Silva Lining

Posted on KYC360 on 18 February 2010 by Naomi Cohen

Tax investigators widen their search for tax evaders in America in a case involving a Dr Andrew Silva who pleaded guilty to criminal tax evasion Tuesday this week.

In 1997 Dr Silva had inherited a sum of money from his mother that was held in an undeclared bank account held in the name of a sham Liechtenstein Trust in Switzerland. He was repeatedly advised to keep the account quiet by his Swiss lawyers and to send coded letters should he wish to meet with them.

In August 2009 as the UBS case unravelled the bank told him it was closing offshore undeclared accounts of Americans. The lawyer advised against sending a wire transfer of the full sum $268,000, as ‘it would create a trail for US authorities’. Instead he was told to send the money to the US by post over a few weeks so the flurry of mail didn’t look suspicious. He also carried the mail in packages of less than $10,000 to Dulles International Airport in an attempt to avoid the reporting threshold. “Failing to report the transportation of more than $10,000 into or out of the United States is smuggling,” said Scot R. Rittenberg, Deputy Special Agent in Charge for U.S. Immigration and Customs Enforcement (ICE) in Washington, D.C. “ICE continues to work closely with it federal partners to ensure smugglers are held accountable for their crimes.”

In total he sent over 26 packages by post most of which were intercepted. However when questioned by customs officers he falsely declared the reasons for his trips abroad and lied about mailing the money from Switzerland.  He had also failed to report the accounts and the income earned on them . He has since forfeited the $211,200 that was seized from the packages mailed from Switzerland as part of his plea but he could now face up to ten years in jail and further fines of up to $500,000. He will be sentenced on 7 May, 2010.

“Today’s plea shows the continued efforts of the Justice Department to investigate and prosecute those citizens who use offshore accounts to hide income and assets,” said John A. DiCicco, Acting Assistant Attorney General of the Justice Department’s Tax Division. “American taxpayers should rest assured that those who do not file accurate tax returns and who utilize offshore accounts to hide money will be investigated, and when appropriate, prosecuted and sent to jail.”

The UBS case now looks like it may be just the tip of the iceberg.

Residence of a Trust (Canada)

In order to protect its tax base, the Canadian government taxes foreign trusts on the disposition of taxable Canadian property, and taxes certain foreign trusts on their income as if the trusts were resident in Canada. By taxing foreign trusts, Canada frustrates those tax planning strategies that move capital offshore to escape Canadian taxation. By imposing tax on the disposition of taxable Canadian property, Canada is able to tax capital growth realized in Canada.

In order for an offshore trust to fall within the tax net of Canada, the following two conditions must be present:

• a beneficiary is a Canadian resident, a corporation or trust that deals at non-arm’s-length with a Canadian resident, or a controlled foreign affiliate of a Canadian resident, at any time in the taxation year, and

• the trust acquired the property from that beneficiary (or individual at non-arm’s length to the beneficiary) who was resident in Canada at any time during the 18 month period before the trust’s taxation year-end, and, in the case of an individual, who was resident in Canada for any period(s) of more than 60 months.

This deeming rule catches most tax strategies that entail Canadians simply placing capital into an offshore trust while retaining access to the capital by naming Canadian beneficiaries. While there are a few exceptions, they are generally somewhat remote and beyond the scope of this article.

In a recent court decision, the Canadian tax net was extended to two foreign trusts that were established to avoid the conditions listed above. The taxpayers’ strategy was unsuccessful because the decision-making and control over the trust assets was exercised from Canada. A summary of the relevant facts is as follows:

• Two Canadian individuals (unrelated but shareholders of the same company) settled two offshore trusts in Barbados to hold the common shares of the company issued as part of an estate freeze. St Michael Trust Corporation acted as trustee for the Fundy Settlement and the Summersby Settlement.

• The underlying operating company grew in value and was eventually sold. The two offshore trusts realized substantial capital gains, claimed that the capital gains were exempt from taxation in Canada (as disposition of taxable Canadian property) pursuant to the Canada – Barbados Tax Treaty, and claimed refunds of tax withheld and remitted by the purchaser of the company.

The Canada Revenue Agency (CRA) assessed the trusts as being liable for income tax in Canada on the basis that the trusts were resident in Canada. The CRA took the position that irrespective of the factual residency of the trustees, the mind and management of the trusts was in Canada because all of the important decisions with respect to the disposition of the company were made in Canada.

The taxpayer appealed the CRA’s assessment to the Tax Court of Canada, who affirmed the assessment, stating that the responsibility for the trust’s decisions was carried out not by the Barbados-resident trustee, but by two of the trust’s beneficiaries who were resident in Canada. The taxpayer appealed the Tax Court’s decision to the Federal Court of Appeal who affirmed the lower court’s decision. The Federal Court of Appeal stated that the residence of a trust may not always be determined by the residence of its trustees and the test of central management and control should be applied. Finally, in April of 2012, the Supreme Court of Canada heard an appeal of the case and again affirmed that the residence of a trust should be determined based on the central management and control test.

This case has important implications to all trust planning. No longer will a simple test of trustee residence be applied, but rather the location of mind and control will be a factor to be considered. This applies to offshore trusts as well as interprovincial planning involving locating trusts in other provinces.

Principal Residence (Canada)

The family home is one of the very few potentially tax-free investments available to Canadians. This is achieved through the “principal residence exemption” (PRE), a valuable provision in the Canadian income tax system that ensures that the sale of the family home, plus a reasonable amount of the land on which it stands, does not generally create a tax liability.

While the concept of the principal residence exemption is simple, there are many rules in the Income Tax Act designed to ensure that the basic concept is not abused.

There can only be one principal residence per family unit at any given time, at least since 1981. A family is generally defined as the spouses (or common-law partners) plus their minor children. Each spouse can claim his or her own PRE in respect of separate properties, for periods of ownership prior to 1982.

Almost any type of housing unit can qualify as a principal residence. The general definition is any property that is ordinarily inhabited by the taxpayer, such as a house, cottage, condominium unit, trailer, house boat or mobile home. The period of occupancy can be quite short, such as a summer vacation home that the family visits for a few weeks each summer.

The PRE shelters a capital gain from taxation but only on one property in any year. As such, it often makes sense to claim the exemption against the “home” with the biggest gain. Contrary to popular belief, the disposition of the family home is a reportable transaction and could
generate a capital gain. Fifty percent of the capital gain is reportable as a taxable capital gain on the individual’s tax return. However, claiming the PRE can offset part or all of the capital gain, to reduce or
eliminate any income tax on the sale. As taxpayers are sometimes under the impression that the gain on the sale of their home is simply a non-taxable item,many do not file the appropriate forms with their tax
returns.

The appropriate form should be filed with the tax return in the year the family home is sold. The Canada Revenue Agency (CRA) takes the administrative position that if the forms are not filed, the taxpayer is considered to have designated the property as the principal residence and to have elected to claim the principal residence exemption for that property for the years it was owned. This may create issues when the family has more than one home that potentially qualifies as the principal residence during any taxation year. A presumed election on the sale of one home precludes the ability to elect, for those same years, on the other home, which could create a larger tax liability if that second home had a larger capital gain accrued over the years in question.

Any time a family owns more than one property that could be classified as a principal residence, such as a home and cottage, the tax implications should be examined when the first property is disposed of.
The capital gain that is reportable on the sale of a principal residence is determined by the following formula: A – ( A x B/C ) – D
where:
– A is the amount of capital gain otherwise determined
– B is the number of years the property is declared as the principal residence, plus 1
– C is the number of years of ownership (after 1971)
– D is a factor to pick up any 1994 capital gains exemption election claimed in respect of the property

The CRA sets out its administrative position with respect to principal residences in an Interpretation Bulletin IT120R6 – Principal Residence.
It addresses homes outside of Canada that may qualify as the taxpayer’s principal residence. However, the foreign tax exposure and the foreign tax credits would have to be carefully reviewed in order to determine whether the principal residence exemption would be of value to the taxpayer.

Lastly, it should be noted that any losses realized on the sale of the family home are never tax-deductible because it is considered personal-use property. The tax-free accumulation of value within the family home is an important financial component of many wealth accumulation and wealth transfer plans. However, it is important to keep the detailed rules in mind in order to ensure that tax is minimized
wherever possible. And considering the long time frame involved, the importance of keeping records of all capital costs cannot be overemphasized.

Can aliyah affect (Canadian) life insurance?

Since your RRSP has a long-term role in your overall planning, it is important to know how Canada and Israel will tax it after Aliyah. The same is true for life insurance policies.
When leaving Canada, it is likely that you will still need insurance for your estate. Although the purpose of the policy may change over time, there is usually a long-term role for life insurance in estate planning.

For those policies owned personally, leaving Canada generally does not trigger a tax event. However, for company-owned policies, the cash value of the policy may have an effect on the value of the shares of the company. This will be relevant when, upon departure, you are deemed to have disposed all your assets including shares of a company.

Life insurance plays many roles in estate planning and is likely to be among the assets you will maintain when you leave Canada. For example, life insurance policies may be purchased to fund: capital gains tax; estate equalization planning; emergency expenses or for children/grandchildren; pay for final expenses such as funeral costs; a buy/sell agreement; wealth used for deferred departure tax payments of the estate, and investment funds that grow on a tax-deferred basis.

There are many different types of life insurance policies available in Canada. For example: yearly renewable term, term-100, whole life and universal life policies. The latter three are often referred to as “permanent insurance” policies. Policies that are not referred to as permanent insurance policies generally expire, lapse, are cancelled or are converted to permanent policies as an insured reaches life expectancy and beyond.

Israel does not market permanent insurance policies.In Canada and in Israel, insurance proceeds received on the death of the life insured are generally not taxable. Similarly, the premiums you pay for your life insurance policy are typically not tax deductible.

It is important to ensure that the terms of your policies are not affected by ceasing to be a resident of Canada. A similar review should be conducted for your critical illness policies as sometimes insurance carriers will not provide coverage when a person ceases to be a resident of Canada.

Other types of insurance, like disability insurance and critical illness insurance, may not cover you after making Aliyah. For example, disability insurance policies cover individuals from loss of income in case they are incapacitated by illness or physical disability. Disability insurance is a policy that pays benefits to a beneficiary when the policy holder suffers a disability that impacts his or her ability to work.

Critical illness insurance is where the insurer is contracted to typically make a lump-sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed in the insurance policy. Generally, benefits are not payable for a covered condition resulting from commission of a criminal offence; operation of a motor vehicle while intoxicated; self-inflicted injuries; use of alcohol, drugs or toxic substances; or acts of war.

For all types of insurance policies, seek guidance from a professional and refer to your policy for further details of the Covered Conditions, Exclusions and Limitations, and the coverage period.

Israeli tax rates: higher than Canadian?

Are Israeli tax rates higher than Canadian tax rates? Does Israel tax on worldwide income similar to Canada?

Before 2003, Israel taxed its residents on a territorial basis. That is, an Israeli resident was taxed only on income earned in Israel. For olim, that meant they could continue to earn income outside of Israel without being subject to Israeli taxes. That included both active and passive income.

However, as of Jan. 1, 2003, Israel began taxing its residents on a worldwide basis – much like how Canada taxes its residents. That is, regardless of where the income is earned, the Israeli resident is required to report and pay taxes on all the income (subject to treaty relief). Many economists claim that this adjustment was necessary if Israel was to survive the fiscal challenges faced by a developing democracy.

The new regulation had a major impact on olim who had come before that date. Israel introduced many interim rules to give olim a period to adjust, but after the adjustment period, olim, like all Israelis, became subject to worldwide taxation rules.
The 10-year tax exemption given to qualified olim who arrived after Dec. 31, 2006 taxed them using the old territorial approach. That is, they are taxed only on income earned while in Israel.

Most new olim will be looking for a job in Israel once they arrive. Some will continue to work abroad but many will find Israeli sourced income. So what are local Israeli tax rates like? Many of us were under the impression that Israeli tax rates were higher than Canadian tax rates. In some cases that is true, but in many, it is not. In fact, overall, tax rates are similar.

In particular:

• Regular company tax rate: 25 per cent
• Regular dividend tax rate: 30-32 per cent for 10 per-cent-or-more shareholders, 25-27 per cent for other shareholders
• Personal income tax rates: 10-50 per cent: individuals taxed on a graduated basis
• Personal national insurance tax rates: up to 16.23 per cent on 42,435 shekels per month; none on dividends or capital gains
• VAT (HST equivalent) standard rate 17 per cent
• Real estate acquisition tax rates now range up to 7 per cent generally (but olim do get a discount on their first purchase)
• Deadline for 2013 income tax returns: companies – May 31, 2013; most other taxpayers – April 30, 2013

One difference is that in addition to income taxes (which are not dissimilar to Canadian tax rates), an Israeli resident has to pay National Insurance taxes. The combination of the two taxes can, for certain income levels, make the Israeli tax regime more “taxing.”
Another interesting difference relates to the reporting requirements of employees.

If you are an employee of an Israeli company, you are not required to file a tax return if your only income is from employment income. That is, every Canadian employee must file a Canadian tax return where he/she reconciles the income earned with the taxes withheld at source. In Israel, the employer is responsible for withholding the correct amount of income taxes and dues for national insurance (and pension fund payments as applicable). That takes the individual off the hook and he/she is not required to file a tax return. However, one is required to file a tax return and/or Declaration of Assets form for various reasons including earning self-employment income and/or income levels above 630,000 shekels per year.

Needless to say, making Aliyah with the possibility of earning income abroad, invites opportunities for significant tax savings and simpler reporting requirements.

Chaim Wigoda made Aliyah from Canada in 2002. He is the managing director of HCC International Services Ltd. – an Israeli company that specializes in tax and financial planning for olim. He can be reached at (416) 512-9707 or at hcc31@hallmarkcc.com. Chaim will be speaking about Aliyah Tax Planning at Aliyah fairs hosted by Nefesh b’Nefesh/The Jewish Agency on March 3 in Toronto (Novotel North York, 3 Park Home Ave., North York, ON, M2N 6L3) and March 4 in Montreal (Hôtel Ruby Foo’s, 7655 Decarie Boulevard Montreal, QC, H4P 2H2).

Proposed changes to QROPS

In an earlier article, we wrote about the option for UK non-residents to transfer their UK-based pensions to a Qualified Recognized Overseas Pension Scheme (QROPS). QROPS were introduced in 2006 to allow for a tax-free transfer of UK-based pensions to another jurisdiction (sometimes an “offshore” jurisdiction) for non-UK-residents. This type of transfer often offers significant tax planning benefits.

The flexibility afforded by a QROPS in some cases prompted certain QROPS providers to extend beyond the original intentions of HM Revenue and Customs (HMRC). In fact, HMRC believes that some QROPS providers have abused QROPS legislation and while a QROP may legitimately offer tax benefits (depending on where the QROPS is located and where the beneficiary is a tax resident), they are certainly not intended to be tax avoidance vehicles.

HMRC point out that QROPS are meant to provide an income in retirement for beneficiaries. For example, when QROPS providers give members the option to withdraw significant — if not all — funds in a QROPS, HMRC perceives this option to be an abuse. And in turn, HMRC has announced draft legislation changes to QROPS through their ‘The Overseas Pension Schemes (Miscellaneous Amendments) Regulations 2012’ document. “Guernsey is the principal target of anti-avoidance legislation to be enacted by the UK next April, ostensibly to prevent abuse of a scheme designed to allow British expatriates to move their pension funds abroad.”

The draft legislation can make QROP schemes potentially far less attractive for anyone wanting to move their pension abroad from April 6th, 2012 onwards. David Erhard, managing director of STM Fidecs is not surprised. “QROPS providers have been promoting QROPS as legitimate tax avoidance vehicle and assisting retirees to access their entire pensions as a lump sum. This was never intended and is contrary to the spirit of a pension scheme.”

The three more significant proposed changes are:

1. Those transferring their pensions to a QROPS will be required to sign an acknowledgment that they understand they may be subject to tax charges if QROPS rules are breached. HMRC wants those considering a transfer to a QROPS to take the best advice and work with reputable brokerages only.

2. QROPS providers are currently required to report all payments made from pension funds to HMRC for the first five years after a member becomes a UK-non-resident. HMRC is now proposing to require providers to report to HMRC for 10 years from the date the pension is transferred overseas. This is HMRC’s attempt to mitigate the abusive practices of certain providers.

3. HMRC is proposing that a member (beneficiary) of a QROPS be taxed as if they were a resident of the country in which the QROPS is located. This will ensure that if the member is a resident of a country other than the country in which the QROPS is held, he/she will not be able to receive more tax relief than members resident in the nation where the QROPS is held.

Some have interpreted the last point as a direct hit to QROPS providers in Guernsey. That is because Guernsey (as well as some other jurisdictions) does not tax pension income paid to non-resident members from a QROPS held in Guernsey. But Guernsey does tax local residents 20% on pension income. To adjust, Guernsey will either have to charge non-resident QROPS holders 20% for all pension withdrawals or not tax withdrawals from pensions for local residents. The problem is if Guernsey chooses the former approach, a recipient of pension payments may be double taxed. If the recipient’s country of residence does not have a tax treaty with Guernsey that is exactly what could happen.

As always the case, the QROPS providers that have maintained the spirit of a pension scheme will also have to bear the consequences of changes. In some cases that could mean that the benefits of a QROPS will be reduced and/or the options of QROPS jurisdictions will be narrowed. If the proposals are passed into law in their current form, it will be even more important to seek out a recognized QROPS provider who has not only stuck to the rules, but has also abided by the spirit of the rules.

1) http://www.stepjournal.org/news/news/main_story/britain_tries_to_freeze_guerns.aspx?link=news_headline

Thinking about making Aliyah?

The following article was printed in the Jewish Tribune

While it could be a wonderful decision, you must be prepared! Moving around the corner can be difficult and stressful, but it is no match for moving to a new country; particularly a country with a different climate, currency, culture and language. There are many factors that will contribute to your ultimate success. One of the most important considerations will be your financial well-being.

The number one reason Aliyah fails is because of financial constraints. In the coming months this column will discuss many of the financial issues that will help you prepare for a financially sound and successful Aliyah.

The Israeli government has recognized the financial challenges for olim and has introduced new legislation to help. In May 2008 the ministries of finance and absorption introduced a new law that provided for a 10-year tax holiday on both active and passive income earned outside of Israel for qualified olim.

Qualified olim are “new immigrants” and “long absent returning residents.” A long-absent returning resident is an Israeli who was a non-Israeli resident for at least 10 consecutive years before returning to Israel.

But what does this 10-year tax exemption mean?

First it means full exemption on foreign sourced income – both active and passive income earned outside of Israel.

Next, the tax holiday relieves qualified olim from their reporting obligations. Yes, those who qualified are not required to file reports with the Israeli Tax Authorities for their foreign income or assets for a period of 10 years from the time they became Israeli residents.

One can also choose to “acclimatize” and not be considered an Israeli resident for a period of one year from the date of arrival. However, if one chooses to stay, the acclimatization year is included as part of the tax holiday.

And finally, for the tax holiday period, foreign companies operated by new olim will not be categorized as Israeli companies even if “management and control” shifts to Israel with the new oleh. This allows qualified olim to generate foreign corporate income exempt from Israeli taxes as long as the income isn’t generated in Israel.

Once the tax holiday expires your worldwide income will be subject to Israeli taxes. However, the tax convention between Israel and Canada will reduce the risk of double taxation.

So making Aliyah could be highly advantageous from a tax perspective. But it is not simple to capitalize on the Israeli tax holiday – and there are costs too: Canadian departure taxes and ongoing withholding taxes, and Israel’s comprehensive income tax rules.

To qualify for the Israeli tax holiday, you first have to cease to be a Canadian resident and become an Israeli resident. In the coming articles, we will discuss what you have to do attain the status of a Canadian non-resident and Israeli resident.

Chaim Wigoda made Aliyah from Canada in 2002. He is the Managing Director of HCC International Services Ltd. – an Israeli company that specializes in tax and financial planning for olim. hcc31@hallmarkcc.com
Last Updated ( Wednesday, 30 November 2011 )