by Jason RosenHow Real Estate Agents can Incorporate a Company
On October 1, 2020, the Real Estate and Broker’s Act includes regulations which permit the use of Personal Real Estate Corporations (PRECs).
Based on the regulations, PRECs must have the following attributes:
- They must be incorporated under the Ontario Business Corporations Act;
- They must have one controlling shareholder who owns all equity and voting shares;
- The sole shareholder must be president, sole director and sole officer of the corporation;
- The shareholder must be a registered broker;
- Any non-equity (non-voting) shares must be owned directly or indirectly by family;
- No agreement restricting the authority of directors to supervise the affairs of the corporation can exist; and
- There must be an agreement governing the relationship between the broker (yourself), the PREC, and the brokerage. This agreement should also include clauses that prevent the PREC from hindering the provision of services of the broker on behalf of the brokerage.
After incorporating a PREC, for it to remain valid the agent must remain an associate of the brokerage and must have all remuneration flow through the PREC. There can be no advertising done by the PREC for provision of real estate services that are not supplied by the brokerage. Lastly, the broker is responsible for evaluating the legitimacy of a PREC before making payment to it.
Ownership Requirements in a PREC
The legislation requires that all the equity shares of the corporation be legally and beneficially owned, directly or indirectly, by the controlling shareholder. It is possible for a holding corporation to own equity shares of a PREC, legal advice should be sought to confirm the best structure for you.
It also states that all the non-equity shares must be owned directly or indirectly by a family member. A family member is a spouse, child, parent, or a trust for a minor child. Whether shares will be held directly or indirectly by the controlling shareholder or a family member is a business decision to be made by the registrant setting up the PREC. Of course, legal advice should be sought to ensure compliance with the law.
Tax Benefits for Real Estate Agents who Incorporate
The passing of Trust in Real Estate Services Act carries significant tax benefits for real estate agents who decide to incorporate. As real estate agents are sole proprietors, their businesses have been subject to the same marginal tax rates as the personal incomes of Ontarians. However, as a PREC, real estate agents will be able to enjoy the much lower Ontario small business tax rate, and potentially the Canadian Controlled Private Corporations tax rate. The incorporation route promises huge tax savings for real estate agents.
Reporting Requirements for Real Estate Corporations
Of course, with incorporation comes new challenges. Requirements for filing and record keeping for corporations are far more onerous than for individuals. There are also indirect taxes like employer health tax, WSIB, taxes for payroll and GST/HST on commissions that can add expenses. In essence, while the power to incorporate would give real estate agents far more power to file their income strategically and enjoy small business tax rates, it also requires a far more complicated tax filing process with more costly obligations.
If you are a real estate agent and would like to discuss the implications of incorporating your business in the near future, contact our firm for a free consultation. We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenCryptocurrency Mining and the CRA
This tax season brings many hot topics, however one that carries a high degree of complexity is the taxation of cryptocurrency. As the cryptocurrency market rebounds, and Bitcoin surges towards $12,000-mark, Taxpayer’s should be weary of how they report their income, what counts as income, and what must be reported.
Specifically, a looming question is, does a taxpayer who mines cryptocurrency include the value of “mined” currency in income at the time it is received? For more information on cryptocurrencies and the CRA in general, please see our prior blog post on cryptocurrencies and the CRA.
Cryptocurrency Mining and the CRA
Cryptocurrencies are entirely decentralized and therefore exist separate from a central bank. With this decentralization comes a notoriety of security, and in modern times they are often used as a method of payment for goods and services. However, unlike traditional currency cryptocurrency must be mined.
The mining of these cryptocurrencies is a very complex and digitally demanding matter. It requires the use highly specialized computers which must solve intricate mathematical problems. Upon the solution of these problems, the cryptocurrency transactions are complete, and the digital version of a currency is mined. Miners then group cryptocurrency transactions into blocks and try to guess a number that will create a valid block. A valid block is accepted by the corresponding cryptocurrency’s network and becomes part of a public ledger, known as a blockchain. By mining, a miner is monitoring and validating transactions occurring on the network.
Successful miners will receive two types of payments. One payment represents the creation of new cryptocurrency on the network and the other payment represents the fees from transactions included in the newly validated block. Both types of payments should be disclosed on the taxpayer’s returns.
Cryptocurrency Mining and the CRA – How is it Taxed?
Ultimately for taxation purposes, if you perform the mining processes, you are paid with the cryptocurrency you are validating. In the CRA’s view, this is a barter transaction.
A barter transaction occurs when two parties agree to exchange goods or services and carry out that exchange without using legal tender. Cryptocurrencies are not legal tender, therefore, when a cryptocurrency is used to pay for, or is received as payment for, goods or services, this is treated as a barter transaction. Thus, if you or your corporation are in the business of mining cryptocurrency, the currency received must be included as income at the time it is earned under section 3 and section 9 of the Income Tax Act.
As a result, taxpayers who receive cryptocurrency as proceeds from their mining activities, must bring into income the value of the services rendered or the value of the cryptocurrency received. The value to be included depends on whichever is more readily valued. In most cases, this should be the value of the cryptocurrency received and this is the amount to be brought into income.
If you have ever been involved with mining of cryptocurrencies or cryptocurrency transactions in general, and are being audited by the CRA or have questions, contact our office today. As well, if you believe you have not properly disclosed this income on your tax returns in the past, the Voluntary Disclosures Program may be available to correct your past errors or omissions. Call us today, we can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.
by Jason RosenWhat is an Allowable Business Investment Loss?
When a capital loss satisfies certain criteria, it can be reported to the CRA as an Allowable Business Investment Loss (“ABIL”), which is subject to preferential tax treatment.
For a loss to be an “allowable business investment loss”, it first must be a “business investment loss”. An ABIL is simply the portion of a business investment loss that is deductible (thus the word “allowable” in ABIL). Of your total business investment losses of tax year, 50% qualify as ABILs and are therefore deductible. However, unlike other sources of income like capital gains which can only be applied to reduce capital losses, the Canadian tax authorities have decided to give taxpayers greater privileges when applying ABILs.
For instance, taxpayers can apply ABILs to any source of income, to reduce their overall taxable income. If your ABIL is higher than your income, you could effectively reduce your income to zero and pay no income tax for that year. Additionally, if you have ABILs that you do not wish to apply to your income earned this year, it can optionally be carried back three years or forward ten years to offset any amount of income from any source in those years.
What are the Requirements to claim an ABIL?
There are four questions taxpayers must ask themselves before determining whether their capital loss qualifies as an ABIL:
- Did the Taxpayer invest in shares or debt of a Corporation?
The taxpayer would have had to purchase shares or have made a loan to a corporation.
- Has the debt been established to be a bad debt?
A “bad debt” is an expense owed to a creditor that is unlikely to be paid. For a debt to be claimable as an ABIL, it must be a bad debt; uncollectible.
- Was the property issued by a “Small Business Corporation”?
An ABIL can only be claimed on a loss from a stock in a small business corporation (“SBC”) or a debt owing to the taxpayer by an SBC. Meeting the definition of an SBC in Section 248 of the ITA is an important element of an ABIL claim:
- It must be a Canadian-controlled private corporation (“CCPC”)
- All or substantially all of the fair market value of the assets is carried on primarily in Canada
- Was the property acquired for the purpose of earning income?
The investment must have been made to an active business. Taxpayers are sometimes faced with the argument that the business was not being carried on because it never commenced or because it had already ceased. The question comes down to whether the taxpayer can prove they were investing in a business that was active; that it had indicia of an active business. Indicia can include an organizational structure, employees, market research, cost benefit analysis, etc.
Are there any Limitations to Claiming an ABIL?
The amount of ABIL you can claim is reduced by the amount you have previously claimed under the lifetime capital gains deduction. The capital gains exemption has a top limit, exempting you from paying tax on the first $424,126.00 (as of 2018) of taxable capital gains (half of $848,252.00 in capital gains) in your lifetime. If your capital gains exempt income from the past in addition to your ABIL reach that threshold, then the remainder can only be used to reduce capital gains.
If you have questions about the above, have attempted to claim a business investment loss, or an allowable business investment loss and the Canada Revenue Agency is auditing your loss claim, give us a call today to see how we can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenEdge Highshare Updates and Recent Correspondence
This blog will provide those who purchased a Franchise in any year with an update in respect of our ongoing Edge related dispute with the CRA. If you require an overview of the Edge program dispute in general please review our previous Edge Highshare Blog.
Below, please find a summary for the stage of the dispute resolution process that each franchise year is currently in, along with what will be happening in the near future.
2012 Franchisees
Some Franchisees, who invested in this year, are already in Tax Court. However, others are a few months into the appeals process but have elected to hold their position in order to join the 2013 Franchisees, which consists of a much larger group and allows us to split fees amongst more people.
If you are in the appeals process and looking to join our group for tax court, please contact Rosen Kirshen Tax Law.
2013 Franchisees
If you are a 2013 Franchisee, the CRA’s review of your previously submitted objection representations will take a significant amount of time.
It is our understanding that the completion of this dispute could take years to complete at the CRA appeals division (similar to the 4-5 years consumed by Audit). As well, the CRA has advised that they have not yet designated a team of appeal officers to focus on the Edge/Highshare matter.
As such it is our recommendation that franchisees in this predicament proceed straight to Tax Court.
2014 Franchisees
The CRA’s audit of the 2014 Franchisees has been completed for all of our clients. They have received final letters which outline the adjustments that the audit division made to their previous returns. After the CRA issues a final audit letter, a notice of reassessment for each taxation year will be issued creating the alleged tax liability, some of our clients have already received these reassessments.
Once these reassessments are issued, we can proceed to either:
(a) file a Notice of Objection and remain in the queue at CRA; or
(b) file a Notice Objection to start the 91-day clock allowing us to by-pass the anticipated delay inherent with the CRA appeals process and proceed to defend our position in the Tax Court.
As with the 2013 Franchisees, it is our recommendation that franchisees at this junction bypass CRA appeals and proceed to Tax Court. Furthermore, the CRA has not provided personalized audit responses but rather grouped their position into one final letter applicable to all of our clients. This blatant disregard for the taxpayer’s rights solidifies our recommendation of disputing these matters in Tax Court.
2015 Franchisees
The audit of 2015 Franchisees has begun. Many of our clients have received proposal letters already. This outlines the adjustments that the CRA is intending to make along with a brief explanation of their ill-founded reasons.
The deadline to respond to the proposal letters is usually 30 days from when they are issued. However, we have a working relationship with the designated team and they have afforded us the opportunity to negotiate extensions. If you have received an audit proposal letter from the CRA for your 2015 Franchise do not hesitate contact Rosen Kirshen Tax Law for assistance.
Moving forward, we anticipate the CRA will not issue a final audit position for several months. This is because, following the final audit letter being issued, it will likely take them several weeks to process the results and issue a Notice of Reassessment.
If you have bought into the Edge/Highshare franchise agreements, and are being audited by the CRA, contact our office today. Call us today for more information about this potential action and about how we can help.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.
by Jason RosenWhen You Need A Tax Lawyer vs. When You Need An Accountant
There are clear distinctions to be made between tax lawyers and accountants. Understanding these differences will make it easier to decide what you are in need of.
The most important distinction is between legal tax issues and non-legal tax procedures. For example, if you want to file an objection to a Notice of Reassessment, you will want to solicit the skills of a lawyer. It is within the practical knowledge of a tax lawyer to be consulted on any legal procedures appropriate to your position, whether it’s individual audit issues, company tax claims, tax planning structures, will drafting, tax appeals, or tax opinion letters to back up your case. In these situations – and many more – an individual has a legal avenue to challenge what they deem to be incorrect tax assessment from the CRA. An accountant simply does not have the depth of training a tax lawyer does to navigate the complex judicial system on your behalf.
On the other hand, if have questions about filing a tax return, accountants are the ones to work with. Accountants are trained to deal with all manner of paperwork pertaining to tax returns. Accountants will help ensure you file all income, expenses, investments, and other costs pertaining to your financial state. Unlike a tax lawyer, whose job it is to interpret the complexities of tax law, accountants strictly follow the law and manage the practical side of income tax filing for their clients.
Overlap does exist between a lawyer and accountant, particularly in the realm of tax audits. Both professionals are trained in dealing with the completion of tax audits. However, if you are subject to a CRA audit, your best option is to work with a tax lawyer because they are trained in legal interpretation as well as proper filing of paperwork pertaining to an audit.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenCan I File An Income Tax Objection?
If you feel as though the CRA has not interpreted the law correctly in their tax audit, it is within your rights to challenge it through the Income Tax Objection process. An objection of an audit can be filed either online at your ‘My Account’ portal on the CRA website, or by mail. There are three levels of complexity objections, ranging from low (individual tax credits, Disability Tax Credit), medium (business expenses), to high (international business transactions). A tax lawyer will be able to assess the validity of your objection and ensure you follow through with it correctly, no matter what category of objection you fall under.
You must be careful to follow the guidelines for each specific tax bracket, as the procedure is different for an individual or business account. For example, an individual or a corporation can file an objection on whichever date is later: one year following the deadline of the tax return itself, or 90 days following the Notice of Assessment being sent.
It is also imperative that your objection is specific. Provide clear details about what part of your tax return has been interpreted incorrectly in the audit, as well as documents to support your claim. You might, for example, claim that the expenses the CRA disallowed were actually legitimate expenses and should thus not be taxed. In any case, the documents must show conclusively that you were either guilty of an honest mistake or the CRA simply miss-understood your financial movements as a violation of Canadian tax law. A firm grounding in either of these camps is usually enough to convince the CRA that you were in the wrong – but a tax lawyer is needed to get you there.
If the CRA does not accept the objection, you still have an option: discuss the logistics with your tax lawyer and bring your case to the Tax Court of Canada.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenWhat To Do If Your Disagree With The CRA On Your Tax Return
There are a number of steps you can take if you suspect the CRA has made a mistake in their audit regarding the legitimacy of your tax return. It might be an issue with a personal tax-free savings account (TFSA), a misunderstanding in your GST/HST paperwork, or a consecutive run of business losses for your company. Whatever the issue is, there is legal rout for you to file an appeal.
The first step you must take is to become fully informed about the rules of the Income Tax Act. You must remember that the CRA does not set the law – they follow the Income Tax Act to the best of their ability, and in some cases they get it wrong. It’s your responsibility to hold them accountable if they have made a mistake in your tax audit. You must be informed of the law before you can hold them accountable, of course.
The second step is to seek advice from a tax lawyer or an accountant. Both professionals will be able to offer advice on the legitimacy of your claim, and appropriate next steps. Only a lawyer will be able to take your case to court pursue a resolution. A tax lawyer will be able to represent your case in court and ensure all proper legal procedures are followed. It is up to you and your position whether court is an appropriate step, but you should always wait until your objection has been deliberated on by the CRA.
The third step is to file a notice of objection within 90 days of you receiving the tax return. Perhaps the evidence and rationale you provide is sufficient enough for the CRA to change their position.
At this point you have done all you can to make a formal complaint to the CRA. The final step involves an internal hearing by an Appeals Officer in the CRA that has no familiarity with your case history. This objectivity gives them proper distance to adjudicate the situation. The officer is responsible for deciding whether your case should be vacated, varied, or confirmed. If the Appeals Officer rejects your objection, it is still within your rights to bring the case to the Tax Court of Canada within 90 days of the CRA reassessment.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenI’m Being Audited By The CRA, What Should I Do?
Depending on your employment position, it should not be a surprise to find yourself the target of a CRA audit. If you are self-employed, the owner of a small business, managing a successful TSFA, or have an income that does not match your postal code, your tax return is going to be looked at under a microscope by the Canada Revenue Agency.
If you do receive an audit, there are a number of steps you should take to ensure it runs smoothly. Contact a law firm specializing in tax law to ensure you follow instructions regarding income tax returns.
The first thing you should do is read the CRA letter carefully so that you understand exactly what the audit is asking for. If you have not familiarized yourself with the Taxpayers Bill of Rights or the purview of the CRA, now’s a good time to do so.
The second thing you should do is provide the CRA with the exact documents they ask for. In most cases, the CRA is looking to make a rudimentary comparison of your tax return to confirm your receipt records match your income (taking into account your expenses and investments). Other documents you should have on hand include: invoices, cancelled checks, bank statements, tax cancellations, plus access any accounting program or booking system you use. If you do some banking or bookkeeping electronically, download and share the files with your appointed CRA agent to avoid hold ups in the auditing procedure.
The onus is on you to prove the accuracy of your income and tax returns. If you are feeling overwhelmed by the procedure, request all information in writing and contact a tax lawyer who specializes in audits. A tax lawyer will inform you of best procedure and remind you of your rights – especially if the auditor is asking for any documentation outside the strict purview of your tax return information.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenWhat Happens If You Forget To Report Income On Your Tax Returns
Forgetting to report income is a common issue pertaining to tax returns and audits. If you are reporting numerous employment incomes, have a plethora of stocks that have done well, and are putting a percentage of your income into an RRSP – that’s a lot of T slips to account for. The Canadian Revenue Agency operates on the honour system, which means they expect you will follow through with your tax obligations each year.
Hard penalties will be levied for negligence if the CRA finds you have not reported taxes on time. First time offenders are hit with a fee of 5% of the outstanding balance, plus a monthly 1% payment of the balance owed until it is paid off.
The second time you forget to report income (within a four-year period), the CRA will charge you a 10% additional tax on the unreported income. So if you do not file a $2,000 freelance video gig as income, and the CRA takes notice in an audit, they will tax you for $200. Tack onto this fee a provincial tax of 10% on the same income, and you are down $400 out of your $2,000 income. The CRA will go to great lengths to get taxes from you and your business, but at least there are tax lawyers who will take your side.
The CRA does offer a voluntary disclosure program, in which you can let them know about your forgotten income amounts. It’s a great opportunity to avoid paying an excessive penalty. It can be done by mail or via your portal on the CRA website. There is also a taxpayer relief program for those who cannot afford the excessive penalties. Like the voluntary disclosure program, the taxpayer relief program should be looked over with a tax lawyer.
If you are unsure about your tax status and have yet to be audited, it’s advisable to contact a tax lawyer to ensure all earnings are properly reported.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenConsidering Judicial Review?
The Canada Revenue Agency (“CRA”), like all other government decision-making bodies, are accountable for their actions. The Income Tax Act (“Act”) places upon the Minister of National Revenue the duty of administering and enforcing the Act. This includes quasi-judicial and purely administrative functions.
There are many instances where the CRA renders a decision that may be considered unreasonable in the circumstances. It is these situations where it may be necessary to invoke the Court’s supervisory jurisdiction over an administrative action. This is known as Judicial Review.
Decisions of the CRA that can warrant a judicial review application pursuant to section 18 and 18.1 of the Federal Courts Act, include, but are not limited to:
- Failing to waiver or reduce interest and penalties;
- Denying your acceptance into the voluntary disclosure program;
- Not exercising the Minister’s discretion to process tax returns or adjustments that are more than 3 years late; and
- Enforcing legal action against a director when there should be no personal liability.
When reviewing a decision on the standard of reasonableness, the analysis will be concerned with the existence of justification, transparency and an ability to understand the decision making process and whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.
This application should be made within 30 days after the time the decision was first communicated to the taxpayer.
There has been a recent trend for taxpayers to seek judicial review from the CRA’s decision not to grant relief from penalties and/or interest under subsection 220(3) of the Act, in addition to reviewing decisions regarding whether a voluntary disclosure is indeed voluntary or not.
In our experience, the Department of Justice (lawyers for CRA) have been settling these cases, as they recognize the inadequate decisions currently being made by the CRA.
Here at Rosen Kirshen Tax Law, we have the expertise and the knowledge to commence Judicial Review applications of any and all CRA decisions. If you think the CRA made an unreasonable decision on your file, give us a call today to see how we can help!
Case Law
Worsfold v. MNR, 2012 CarswellNat 2218 (FC) – The Voluntary Disclosures Program and Judicial Review
Grundy v. Canada, 5 CTC 13 – Taxpayer Relief and Judicial Review (unsuccessful application)
Singh v. Canada, 2005 FC 1457 – Taxpayer Relief and Judicial Review (successful application)
Dunsmuir v. New Brunswick, 2008 SCC 9 – Reasonableness Standard in Judicial Review
Additional Resources:
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.