Prepare clients for OAS and tax changes

There’s a bigger issue behind the new OAS rules than rising life expectancy of Canadians.

It’s the problem with the ratio of working Canadians to seniors, said Jamie Golombek, managing director, tax and estate planning, CIBC Private Wealth Management at an event hosted Tuesday by Renaissance Investments.

“Right now that ratio is 4.5 to 1, but in 50 years that ratio will drop to 2 to 1,” he says. “Which means only two people will be paying taxes for each person collecting OAS. This is not feasible.”

However, the government has incentivized waiting until age 67 to draw OAS.

Read: OAS changes may lead to $10 billion annual savings

“Starting next July there’s going to be an option to defer OAS,” says Golombek. “You [may] choose to defer for up to five years and there’ll be an actuarial adjustment upwards if OAS is collected later.”

For example, if a person turns 65 next September and defers claiming OAS by one year, the annual amount received under OAS will increase from $6,400 to $6,900, which will additionally be adjusted for inflation. The amount, says Golombek, jumps to $8,800 a year if the person waits a full five years.

However, these take-it-later rules only apply if your client is in a reasonably good health, he warns.

“If they’re dying or are not in a good health, they should collect OAS as soon as possible even if there’s a clawback,” he says.

The maximum OAS monthly benefit is about $540 for 2012. The OAS clawback threshold is $69,562.

Pro-active OAS enrollment

Under the current rules, eligible Canadians have to apply to get OAS. If they’re late, they will only get payments for the previous 11 months plus the month of application, says Golombek.

“But that has changed [and] starting next year the government is introducing a pro-active enrollment regime” in which eligible Canadians will receive forms requesting them to enroll in or defer OAS.

U.S. tax issues

There’s has been a number of tax-related developments this year with implication for the estimated million Americans living in Canada.

Read: IRS issues guidelines for tax compliance

One of them, Golombek says, is they must file income tax returns every year reporting their worldwide incomes. They must also file the Foreign Bank Account Reporting form, or FBAR, if they have more than $10,000 of foreign (including Canadian) assets.

Those holding TFSAs or RESPs must file form 3520 or 3520-A. Finally, those who have an RRSP or RRIF account have to annually file form 8891 to defer U.S. income tax on the income being created in these accounts.

“Obviously not all [Americans living in Canada] have been compliant with this for the last four years,” says Golombek.

Luckily, the U.S. government has launched some programs to help these people.

The Offshore Voluntary Disclosure Program was announced in January and doesn’t have an expiry date. It obliges non-resident Americans to file eight years of returns, eight years of FBAR, and “all kinds of returns.”

However, under pressure from its Canadian counterpart, the U.S. government announced a new rule in June for “low-risk” dual citizens.

“Low-risk taxpayers [are] non-resident U.S. tax payers who have lived outside the U.S. and have not filed tax returns since January 1, 2009 and hold under $1,500 of U.S. tax every year,” explains Golombek. “If this applies to you, you have to file three years of returns, six years of FBARs, pay any related taxes and interests — and the IRS says ‘no penalties or follow-up actions’.”

Other than wealthy clients or those with U.S. dealings, “many of your non-filing U.S. citizen clients would fall in this area.”

Read: Common U.S. tax troubles

That said, not everyone will qualify for this procedure. The IRS makes it clear that applicants may not be eligible if:

• they’re claiming a refund;
• have material activity in the U.S.;
• have undeclared income in the country of residence;
• are under audit or investigation by the IRS;
• have already received a penalty or warning letter on FBARs;
• have U.S.-source income; or
• there’s an indication of sophisticated tax planning or avoidance.

If none of those conditions apply, “now is a great time to file these forms,” says Golombek. “The IRS is taking this very seriously, especially the FBAR forms.”

FATCA

There may be those tempted to ignore the new rules in the belief the IRS is never going to find out. Golombek warns it would be a mistake to not comply because they now have the U.S. Foreign Account Tax and Compliance Act, or FATCA, to deal with.

Starting 2014, FATCA obliges Canadians financial institutions to disclose information about U.S. persons directly to the IRS which will impose severe penalties for noncompliance.

FATCA, which resulted from a major revamp of the U.S. withholding tax code, proposes a 30% withholding tax on certain payments made to foreign financial institutions and non-financial foreign entities that refuse to identify U.S. account holders and investors.

As of 2014, Canadian financial institutions will likely start providing information to the U.S. government regarding Canadian accounts held by U.S. persons, says Golombek.

Read: IFIC seeks changes to FATCA