Author: Jeff Kirshen

by Jeff Kirshen

COVID-19 and Taxpayer Relief

In certain circumstances, the Minister of National Revenue may grant relief to a taxpayer where they cannot meet their tax obligations. Relief is discretionary. The Minister has broad discretion to provide relief. For instance, The Minister can provide for the waiver or cancellation of all or part of the penalties and interest payable by the taxpayer. The Minister can also allow an extension of the filing-due date for making certain elections or to amend or grant permission to amend or revoke certain elections. Furthermore, the Minister can authorize a reassessment resulting in a refund of tax or a refund of tax alone to an individual (not applicable for trusts) or certain estates even if an income tax return is filed beyond three years.

A taxpayer must apply for relief under the provisions of the Income Tax Act (the “ITA”) or the Excise Tax Act ( the “ETA”). Relief will be determined by a delegated Canada Revenue Agency (“CRA”) official on a case-by-case basis and depends on the relevant facts and circumstances of the taxpayer’s situation.

 

CRA Penalties and Interest

The COVID-19 administrative changes extended the filing of returns, forms, elections, and designations to June 1, 2020. No interest or penalties were applied during the extension period. However, interests and penalties were charged if the new deadlines were not met. Taxpayers who filed past the extended deadline would need to apply to the Minister for a waiver of interest and or penalties.

Subsection 220(3.1) of the ITA and section 281.1 of the ETA allow the Minister, through the discretion of the CRA, to cancel or waive all or a portion of the penalties and interest payable by a taxpayer.

 

CRA Taxpayer Relief – Individuals and Corporations

The ITA and ETA recognize several grounds for relief for individuals. These circumstances include extraordinary factors outside the taxpayer’s control, financial hardship, or actions of the CRA. Applicable extraordinary factors include natural or man-made disasters, disturbances or disruptions in service, serious illness or accident, and or serious mental distress.

Penalties or interest in respect to a failure to file a corporate tax return or to make payment may be waived if the reason was beyond the corporations’ control. These circumstances outside the taxpayer’s control include, floods or fires, civil disturbances, postal strikes, serious illness or accident, the corporation received the incorrect information from the CRA, and natural or human-made disasters. The CRA will also consider relief when a business is experiencing extreme financial difficultly. Where enforcement of penalties would imperil the continuity of operations, result in job loss for employees and significantly impact the community as a whole, the CRA may waive or cancel penalties and or interest even without extraordinary circumstances.

 

CRA Penalties and Interest

Any penalty calculated on an annual rate is compounded daily. For instance, a nominal annual rate of 3% would be an effective annual rate of 3.045326%. Penalties paid under both the GST/HST legislation and the ITA are non-deductible. The Minister can waive any penalty incurred under the ITA, with the exception of penalties that are enacted as taxes such as Part III tax on excessive capital dividends.

The CRA charges compound daily interest on any late payments. The total owing increases each day and the interest rate applies to the increased balance. The rate changes quarterly as prescribed by the Interest Rates Regulations in both the ITA and ETA.

Due to delays surrounding the measures relating to COVID-19, it is expected that processing times for taxpayer relief requests will be extended. In usual times, it takes approximately 6 to 8 months for a reviewing agent to be assigned to the file and to contact the taxpayer for further details in respect of their application. Once an officer is assigned for review, it takes an approximate 1-3 months for a decision to be rendered.

Even when a taxpayer makes a request for relief, the CRA will continue to charge compound daily interest. Given the current circumstances, processing requests may take over a year. Should relief be granted and the penalties and interests cancelled, the CRA will refund the interest on the penalty and interest amounts.

 

CRA Taxpayer Relief – 10 Year Limitation Period

The taxpayer has 10 years from the end of a calendar year in which the tax year ended to request relief from penalties. The 10-year limitation also applies for requests to the Minister to accept a late, amended or revoked income tax election, or to request that the Minister issue a refund or make an adjustment beyond the normal three-year assessment period.

For a request to waive or cancel interest under subsection 220(3.1) of the ITA,  the Minister may grant relief from accrued interest for the 10 years before the year the request is made for any tax year in which the tax liability arose. This legislative amendment, applicable for requests made on or after June 2, 2011, followed the Federal Court of Appeal decision in Bozzer v Cananda, 2011 FCA 186.

Taxpayer relief requests are processed on a priority basis. Processing delays exacerbated by the measures surrounding COVID-19 may mean greater interest and penalties on any unpaid balances that continue to be compounded daily. However, if relief is granted, a refund of the interest will be issued to the taxpayer.

 

If you are feeling overwhelmed by the amount of interest and penalties charged to you by the Canada Revenue Agency, we can help! Call us today to learn how we can get them removed!

 

**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 Jeff Kirshen

Canada Emergency Wage Subsidy Audits

COVID-19 and the Canadian government’s response to lockdown parts of the country has naturally left many businesses struggling to operate. For some businesses, revenue have fallen so sharply that they are faced with the possibility of shutting down if they don’t receive assistance.

 

Canada Emergency Wage Subsidy

In response, the Government of Canada implemented a broad range of emergency benefits to help businesses through these challenging times. Most notably, the federal government enacted the Canadian Emergency Wage Subsidy (CEWS).

The CEWS operates by subsidizing up to 75% (up to a maximum of $847 per week) of the employee wages to Canadian employers who have seen a drop in their revenue due to the pandemic. In other words, the objective of the CEWS is to act as a financial crutch for businesses to re-hire workers, prevent further job losses and ease companies back into normal operations.

It follows that the CEWS program is not intended to help businesses that have not been financially affected by the pandemic.

 

Canada Emergency Wage Subsidy and CRA Audits

To ensure that the CEWS is achieving its objective, the Canada Revenue Agency announced that they will launch an audit pilot project to verify that CEWS applicants were in fact eligible and fraudulent transactions were not being abused.

As of August 25, 2020, it was reported that the CEWS paid out approximately $30 billion dollars to nearly 300,000 applicants.

 

Potential Consequences for Ineligible Applicants

If the CRA audits a Canadian employer/business and subsequently deems them ineligible, there are various potential ramifications.

First, an employer that is determined not to be eligible for the CEWS must repay all amounts paid under the wage subsidy program.

An employer will also have to return or repay all or part of the wage subsidy where:

• It made an error in the calculation of the amount claimed for a period, thereby reducing the amount originally claimed;
• It noticed that it did not qualify for the wage subsidy after submitting the application and receiving the subsidy;
• It noticed that made a data entry error (typo), thereby reducing the amount originally claimed for a period; and
• On a review of its claim by the CRA after it received the subsidy, the claim amount was either rejected or reduced by the CRA.

Furthermore, if the CRA determines that an employer knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in its CEWS claim, the employer is liable to a penalty up to 50% of the difference between the amount of wage subsidy that it claimed in its application and the amount of wage subsidy to which it is actually entitled.

Lastly, if the CRA finds that a CEWS claim was made fraudulently, a criminal investigation and prosecution can be charged in addition to the civil penalties. A person convicted of a criminal offence related to a fraudulent CEWS claim faces the potential of imprisonment.

Examples of inappropriate conduct by the Canadian employer would include underreporting or even intentionally decreasing their business revenue to qualify for the CEWS. Another example would include “hiring” the services of family members and friends to receive the CEWS. As always, the finding of gross negligence and criminal prosecution would be determined on a case-by-case basis and on the specific facts.

 

The Onus is on the Taxpayer

It’s important to be mindful that once an audit is commenced, the onus is solely on the taxpayer (in this case Canadian employer/business) to prove they are eligible for the CEWS. This means that any further requests made by the CRA regarding records and proof of operations of the business must be adhered to in order to prove eligibility.

 

Considering the serious potential risks involved in the CEWS audit, it is critical that applicants understand their obligations to ensure their interests are protected. If you need assistance with the CEWS or any pending audits, professionals at Rosen Kirshen Tax Law have a proven track record fighting against claims by the CRA. Facing against the pandemic and its effects alone is a daunting task. Taxpayers should not have to also worry about the CRA making claims against them. Call us today!

 

**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 Jeff Kirshen

What is the Departure Tax?

COVID-19 has grounded many Canadians from international travel and has created unforeseen tax issues related to residency. As winter approaches, many will find themselves dreaming of relocating to a sunnier destination with fewer confirmed cases. What you should know is that up-and-moving out of the country may have significant tax consequences, one of which is the little-known “departure tax”.

 

What is the Departure Tax?

The departure tax”is a tax levied on the assets of emigrants ceasing to be Canadian residents. For the purposes of section 219.1 of the Income Tax Act, the departure tax can also apply to corporations leaving Canada, usually enlisted to levy a 25% tax on funds that could have been distributed as dividends during the year the corporation ceased to be resident in Canada.

For the individual taxpayer, departure taxes capture gains on the emigrants’ taxable Canadian property that may or may not have been sold prior to emigration. Paragraph 128.1(1)(b) of the Income Tax Act notes the requisite criteria for the application of the departure tax with respect to individuals.

The application of the tax involves the deemed disposition of the assets at their fair market value (FMV). The asset is then deemed by Canada Revenue Agency (CRA) to have been reacquired by the taxpayer at FMV. The result of these artificial transactions is to trigger capital gains payment on the part of the taxpayer, theoretically to protect the Canadian tax base from erosion.

 

Who does the Departure Tax Apply to?

The Departure Tax applies to individuals who CRA deems to be emigrants. To be considered an emigrant for taxation purposes, a taxpayer must meet both of the following criteria:

1. The taxpayer leaves Canada to live in another country; and
2. The taxpayer has severed “residential ties” with Canada, which include
   • a principal residence in Canada;
   • a spouse or common-law partner in Canada;
   • dependants in Canada;
   • membership in social organizations;
   • personal property such as bank accounts, a car or furniture; and
   • documents of Canadian citizenship (driver’s license, passport, health cards, etc.).

If a non-resident Canadian keeps some residential ties to Canada, the non-resident may still be considered an emigrant pursuant to the tax treaty of the non-resident’s new jurisdiction with Canada.

What Kind of Property does the Departure Tax Apply to?

Departure Taxes can capture a wide variety of personal property, such as shares in a corporation, jewellery, artwork and many others. Personal property is a broad category that encompasses many kinds of “personal-use property” as defined by section 54 of the Income Tax Act.

In short, if you are emigrating out of the country, it would be prudent to consider broadly all items of significant value as personal-use property and then identify which of these assets may be captured by the departure tax.

 

Departure Tax – Tips and Tricks

Emigrants with property that had an FMV greater than $25,000 on the date the taxpayer ceased to be a resident of Canada must file a T1161. This form outlines several exclusions to this $25,000 amount, including cash, registered saving plans, certain personal property, and certain real property.

Pursuant to subsections 220(4.5) to 220(4.54) of the Income Tax Act, taxpayers may be eligible to defer payment of departure tax, so long as “adequate security” is provided by using a Form T1244. The Income Tax Act does not define “adequate security” but does provide a formula for calculating the requisite value a security must hold before being considered “adequate”. Deferral may be the best option for taxpayers who do not wish to emigrate from Canada permanently, as when subsection 220(4.5) is used in conjunction with subsection 128.1(6), a taxpayer can retrieve the security intact upon the emigrant’s return to Canada.

Subsection 128.1(6) of the Income Tax Act may also allow emigrated taxpayers who return to Canada to be treated as never having accrued gains, so long as they meet all eligibility requirements of the provision.

 

The Departure Tax and Tax Planning

Taxpayers with significant assets that could be subject to departure tax should ensure compliance with all reporting requirements during the year in which they cease to be Canadian residents. If this cannot be confidently or competently done without assistance, it may be prudent to seek tax planning advice from a legal professional. Subsection 128.1(6) does not insulate a taxpayer from penalties and interest stemming from non-compliance with the departure tax. Since interest is calculated at the compound rate of 5% per annum, this could result in serious debt obligations to CRA upon returning to Canada.

 

If you need assistance with non-resident tax planning, or you’re in doubt about whether your departure tax filing meets CRA’s reporting requirements or if you want to be sure your deferral security is in fact “adequate security”, it may be safer to seek guidance from a legally trained tax professional. Call us today!

 

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 Jeff Kirshen

The Advantages of a Holding Company

There are numerous ways in which holding corporations can be advantageous to taxpayers. As this post illustrates, holding corporations may be used to achieve objectives such as the tax-free movement of funds between related corporations, interest charge deductibility, income splitting, or estate freezing.

 

Holding Companies and the Movement of Funds

Suppose company X (X Co) and company Y (Y Co) are wholly owned by a person (A). Suppose also that X Co has excess funds while Y Co lacks funds. One way by which A could move funds from X Co to Y Co would be to have X Co pay dividends to A, and for A to then move these funds to Y Co. Of course, A would have to claim the dividend received as income and pay tax before moving the funds to Y Co.

In Canada, dividends may flow between corporations on a tax-free basis. If, in the above example, A were to set up a holding corporation (Holdco), A could instead have X Co pay dividends to Holdco and avoid paying tax on the movement of funds. Holdco could then move the funds to Y Co by, for example, entering into a loan agreement or share subscription with Y Co.

 

Holding Companies and Deducting Interest

If Holdco decides to enter into a loan agreement with Y Co that pays interest, Y Co (and its sole owner, A) should be aware of the rule restricting its ability to deduct its interest payments from its income.

Two prominent rules in the Income Tax Act affecting a corporation’s ability to deduct interest charges are found at paragraph 20(1)(c) and subsection 9(3). The former stipulates that a corporation may deduct its interest payments from its income if those payments are incurred to gain or produce business or property income. The latter stipulates that capital gains are not property income.

Suppose Y Co borrows funds to purchase an asset that is expected to generate a significant capital gain but is generating little property income. In this instance, subsection 9(3) is likely to apply to restrict the ability for Y Co to deduct its interest payments on the loan. However, if Holdco borrows these funds instead of Y Co, and if Holdco then transfers these funds to Y Co in exchange for equity, the interest payments may be deductible. The CRA has commented in Interpretation Bulletin IT-533 and in Income Tax Folio SC-F6-C1 that the expectation of a return of funds through the receipt of dividends from a subsidiary may be sufficient for a parent company to deduct the interest it pays on a loan taken out to purchase an asset such as the above.

 

Holding Companies – Income Splitting and Estate Freezes

Holding corporations may also be used to achieve income splitting and estate freezing objectives. For example, family members of a taxpayer may subscribe for common shares of a family-owned holding corporation that holds shares of the taxpayer’s small business corporation. It is possible that subsection 56(2) may apply to attribute back to the taxpayer any dividend payments made through the holding corporation. However, the Supreme Court of Canada in Neuman v. The Queen held that this provision could not apply unless a family member were to have a pre-existing entitlement to dividend income from its common shares. The CRA appears to endorse the Court’s decision in Interpretation Bulletin IT-335R2 at paragraph 9.

 

While the above strategies highlight some of the basic advantages of using a holding corporation, the sophistication of their structures and the legal complexity of their consequences vary with the circumstances and objectives of the taxpayer. If you have questions regarding the uses of a holding corporation, or if you are interested in incorporating a holding corporation, call us today!

 

**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 Jeff Kirshen

The GST/HST Self-Assessment Rules

To self-assess for GST/HST means calculating how much GST/HST should be paid on a good or service where no actual sale has been completed, and to charge yourself that GST/HST. The GST/HST self assessment rules are extremely complex and can lead to a good amount of trouble with the CRA.

 

The GST/HST Self-Assessment Rules

Generally, the self-assessment rules apply to consumers and persons engaged in non-commercial activities who have not been billed for GST/HST by the supplier. Where a person is not a GST/HST registrant, self-assessment for GST/HST will apply in certain circumstances. Goods purchased in a non-HST province or territory and brought into an HST province will require the person to self-assess at the applicable rate for the provincial component of the HST.

Self-assessment is also required for non-registrants where goods are purchased in a province with a lower HST rate and then brought into a province with a higher HST rate. Commercial goods imported into an HST participating province will also require the non-registrant to self-assess. Where a non-resident that is also a non-registrant delivers goods to a person who is also a non-registrant in a participating HST province, the person receiving the goods will also be required to self-assess for HST.

The non-registrant of an HST province is also required to self-assess for HST where the non-registrant uses or consumes or is supplied by significantly (more than 10$%), services and intangible personal property (IPP) (i.e. intellectual property) from a non-HST province or an HST province with a lower HST rate than that person’s province. Although special HST rules apply for imported motor vehicles, generally persons importing motor vehicles from outside Canada are also required to self-assess for HST when those vehicles are brought into an HST province and provincial laws do not require the registration of the vehicle. Non-registrants who are required to self-assess on the provincial part of the HST on goods, services and IPP must declare by filing a Return for Self-assessment of the Provincial Part of the HST.

For HST registrants, self-assessment is required where the provincial component of the HST has not been billed by the supplier for property or services that are not for consumption or use or supply exclusively in the course of their commercial activities. The threshold for a supply to be considered exclusively used in the course of commercial activity is 90% or more. Registrants who self-assess should account for the tax on their GST return for the reporting period in which the tax was payable. Registrants using certain accounting methods are also required to self-assess.

 

The GST/HST Self-Assessment Rules and Real Estate

In the real estate context, a builder where the self-supply rules apply (who is deemed to have sold and repurchased the property), is required to calculate the GST/HST collected on the fair market value of the property. In the case of a multiple unit residential complex (MURC), the builder must account for tax on the fair market value of the entire building and not the individual unit that was deemed to be sold and repurchased.

Certain supplies do not require self-assessment. These include zero-rated goods, services or IPP. No GST or HST applies for zero-rated supplies. No HST is assessable if the supply is exempt from HST. Furthermore, self-assessment is not required when HST has already been paid at the same or higher rate in the province of acquisition. Prizes won abroad, personal and household effects of a deceased, transportation or telecommunication services, and property donated to a charity or a public institution are other circumstances where no self-assessment is required for non-registrants.

 

The GST/HST Self-Assessment Rules – Calculating the GST/HST

In declaring and paying the required HST, the registrant or non-registrant must determine the type of supply and place of supply of the goods or service. Once the type of supply and place of supply are determined, HST can be calculated. The CRA has provided an GST/HST calculator for determining the amount of tax applicable to sales in Canada.

 

The GST/HST Self-Assessment Rules – Type of Supply 

As a value-added sales tax, HST applies to a supply of nearly all goods and services consumed in Canada. For provinces and territories that participate, HST is imposed on a taxable supply of goods and services. A supply is taxable if it is made in the course of commercial activity. However, a supply that is zero-rated (i.e. groceries) will not have HST. A supply of goods or services that are exempt will also not have HST. One difference between zero-rated and exempt supplies is that Input Tax Credits (ITCs) can be claimed for the former but not the later.

 

The GST/HST Self-Assessment Rules – Place of Supply

The HST rates depend on the place of supply. HST applies at the rate of 13% in Ontario, New Brunswick, and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia.

 

The GST/HST consequences surrounding any transaction depend on the unique circumstances of each case. It is recommended to speak with a qualified tax lawyer given the complexity of the HST rules and how they can affect a person’s income tax position. If you have questions regarding the Self-Assessment rules, call us today!

 

**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 Jeff Kirshen

Input Tax Credits – What are they, and Am I Eligible?

Through the help of e-commerce assistance platforms such as Shopify, the barriers to entering and starting a small business have dramatically decreased in recent years.  As a result, more and more Canadians are deciding to open up independent businesses. In order for a business to run its operations smoothly, business owners must ensure that they fulfil their sales tax obligations correctly to prevent intervention from the CRA. Below is a brief summary that provides some mechanics and considerations of the Canadian Sales Tax System.

 

Design of the GST/HST Sales Tax

The HST (for Ontario) Sales Tax is administered and legislated through the Excise Tax Act. Moreover, it is a multi-stage value added tax, imposed on a broad range of goods and services at each stage of the manufacturing and distribution process. Each recipient in the production chain recovers the HST that they paid for the expenses related to their “commercial activities” by claiming input tax credits (ITCs). This ensures that there is no double taxation and that only the final consumer holds the burden of paying the HST tax.

Typically, many businesses incur a lot of expenses related to their commercial activities. For example, a business focusing on producing and selling furniture may pay a lot of HST on the tools they bought to create that furniture. Therefore, it is important that businesses properly redeem their ITCs.

Other common purchases and expenses which may be eligible to claim ITCs include:

• Business start-up costs;
• Legal, accounting, and other professional fees;
• Maintenance and repairs; and
• Business-use-of home expenses.

 

Requirements / Eligibility for Input Tax Credits

First, the business/taxpayer must be a GST/HST registrant. However, for most small and medium-sized businesses in Canada, registration for GST/HST purposes is required.

Specifically, if you provide taxable supplies and not a small supplier, then you must be a GST/HST registrant. The CRA generally considers a business to no longer be a small supplier if total revenues from taxable supplies exceed over $30,000 in a single calendar quarter or over 4 consecutive calendar quarters.

Second, registrants are only allowed to claim ITCs for expenses related to “commercial activities.” The CRA states that commercial activities must be a business or adventure or concern in the nature of trade that has a reasonable expectation of profit, and is not the making of exempt supplies. Alternatively, inputs to activities that are neither part of the supply making process, not related to it, or for personal use are not eligible for ITCs.

The exception to the rule above is for the supply of real property, other than an exempt supply. In this case, any supply of real property, whether or not there is a reasonable expectation of profit is included in the definition of commercial activity. Finally, to claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of the business.

 

Potential Issues to Look Out For

As previously mentioned, the responsibility of charging, collecting and remitting HST falls on each business or chain of the manufacturing process. Similarly, claiming appropriate ITCs for expenses incurred by the business fall on the burden of the business. It is the responsibility of the registrant to keep records and documents to validate any claims under a CRA audit.

 

Issues regarding the “nature of the business” and “relation to commercial activity” have particularly been contentious and challenging for taxpayers to understand. If you need assistance in learning more about ITCs or are already in dispute with the CRA, contact us today. Professionals at Rosen Kirshen Tax Law have a proven track record of helping taxpayers successfully prove the eligibility of their ITCs.

 

**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 Jeff Kirshen

The Basics of Estate Taxation in Canada

In addition to the emotional consequences of losing a loved one, estate administration can be a difficult undertaking, even for those familiar with the affairs of the deceased. The deceased may have passed away with a will (testate) or without a will (intestate). Either way, the personal representative of the estate has rigid obligations with respect to the tax filings of the deceased. These obligations must be discharged in order to avoid tax consequences stemming from prematurely distributing the estate, exemplifying the maxim that the only certainties in life are death and taxes.

 

Is there an Estate Tax in Canada?

In Canada, unlike other jurisdictions, any inheritances stemming from the estate of the deceased are not subject to estate tax. Officially, the only taxes payable by the estate of the deceased are based on the income earned by the deceased. However, it is not conclusive to say that the only taxes payable by the estate of the deceased are derived from the income of the deceased in the year prior to and the year of passing.

For example, if the testator held property in the United States at his or her time of death, the property may be subject to taxation under American estate tax. The same could be true of any other jurisdiction in which the deceased held property, as property laws vary country to country, and even province to province.

 

What is the Proper Filing Procedure for One’s Estate?

The personal representative of the testator must ensure that income tax returns have been properly filed for the year preceding death and that any income earned between January 1^st and the date of passing of the deceased in the same calendar year is accounted for in the last return filed on behalf of the deceased. This final return is dubbed a “terminal return” in Canadian tax law.

The day after the passing of the testator results in the creation of a “new person” in the eyes of Canada Revenue Agency: the estate. Unlike the filings of the year preceding death and the terminal return, the personal representative of the deceased would not file a T1 tax return for the filings of the estate. Instead, the estate is considered to be a trust for the purposes of taxation and consequently, the administrator of the estate must file a T3 trust return. Furthermore, income is deemed to have accrued on a daily basis for the estate, as opposed to on an annual basis for living taxpayers. This subtle variance in accrual periods has the effect of accelerating the taxation of the income of the estate.

 

What are the Consequences for Failure to File?

For personal representatives, planning circumspect compliance with the taxation rules surrounding the administration of estates can be an onerous task. There are various filing deadlines for the respective returns, specific documentation that must be included in the filing, and distinct accrual periods to consider. Personal representatives can also be held personally liable for failing to adequately discharge their obligations with respect to the income tax filings of the estate.

Canada Revenue Agency (CRA) is also statutorily permitted to pursue beneficiaries to recompense any amounts they assess to be owing where disbursements of the estates are deemed to have been made prior to satisfying requisite filing criteria.

 

How can a Personal Representative Protect Himself or Herself from Liability?

Prior to distributing any of the estate property to potential beneficiaries, it would be prudent for a personal representative to determine whether it is necessary to obtain a “clearance certificate”. If a personal representative is required to have a clearance certificate, any disbursement of an estate asset without having first obtained a clearance certificate could put the personal representative at risk of personal liability. Click here to learn more about the requirements and application of clearance certificates.

It is harder than one might think for a personal representative to ensure compliance with each of the CRA’s filing requirements. The obvious answer is to meet every filing deadline, to accurately compile all returns correctly (including any “deemed realizations” pertinent to the estate asset pool), and to retain all requisite documentation. Practically speaking, it is very difficult to ensure compliance with respect to CRA filing requirements and the personal representative and beneficiaries may collectively choose a different path.

There are alternatives available depending on the circumstances of the personal representatives and beneficiaries of the estate. For example, beneficiaries may wish to agree to indemnify the personal representative of an estate from tax liability in order to receive assets from the estate prior to the personal representative receiving a clearance certificate. Similarly, where the personal representative is the sole beneficiary of the estate, the personal representative would be liable regardless of having obtained a clearance certificate. The appropriate method of mitigating tax liability depends on the circumstances of the estate.

 

When to Seek Help?

Many personal representatives seek guidance with respect to estate administration to insulate themselves from personal liability, especially when they are unfamiliar with the affairs of the testator and/or the income tax rules surrounding estate administration. It is also commonplace for testators to seek tax planning advice as tax planning can be an effective means of reducing estate tax liability and passing more of what they have earned onto their loved ones. Depending on the size of the estate, proper tax planning can reduce or delay the amount of taxes payable by the beneficiaries of the estate to better provide for the loved ones of the testator in the short term and long term.

 

If you are considering planning out your affairs to make sure your Estate runs as smoothly as possible, contact us today!

 

**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 Jeff Kirshen

CRA Cyber Attack – Here’s What You Need to Know

On August 14, 2020, the Canada Revenue Agency (“CRA”) website was temporarily shut down following being hit by three cyber-attacks, potentially compromising the personal information and security of all taxpayers with an account in the country.

The first and largest attack compromised thousands of GCKey accounts, which is responsible for providing Canadians with access to services like Employment Insurance (EI), Immigration and Refugee citizenship accounts and veterans programs. It is noted that this attack may have allowed hackers access to over 5,600 CRA My Accounts.

The second attack took place shortly after the first, which allowed hackers to by-pass all security questions and gain access to thousands more My Accounts. Finally, a third attack occurred over the weekend of August 15-16, which finally prompted the CRA to suspend all online activities in order to address these significant security breaches.

While the CRA Portal has now resumed online services as of August 20, many Canadians may be wondering if their account has been hacked, and what to do in order to ensure the security of their personal tax information

 

CRA Cyber Attack – What Should I do?

The government of Canada has updated the public, stating that those who were impacted by these beaches will be notified by the CRA that their account was breached, and what to do to rectify the situation.

While waiting to hear from the CRA, there are measures you can take independently in order to ensure the privacy and security of your account. First, it is important that you change your password, as the current one being used might be recorded by others who are not authorized to access your “My Account”. As always, passwords which include numbers, and capital letters will help secure your account as the password will be harder to guess. It is recommended that you do not use a similar password from other online accounts with your CRA My Account.

In addition to recreating your password, the CRA also recommends people to add email notifications as an added security measure. Through these notifications, you will be informed if someone has accessed your account, which will help confirm whether you or an unknown party may have accessed it. If you suspect there may be suspicious activity going on with your account, you should notify the CRA immediately in order for them to address the situation promptly, which can prevent the potential for any breaches to your account.

Though not required, some people may also choose to get SIN protection where companies monitor your SIN for any attempts to open lines of credit, bank accounts, etc.

 

If you have any questions or want assistance regarding any of your dealings with the CRA, 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 this article. If you have specific legal questions you should consult a lawyer. 

by Jeff Kirshen

The Fine Line between a CRA Tax Audit and a Criminal Tax Investigation

The Canadian income tax system operates through self-reporting, which means that each individual taxpayer is required to file his or her own Canadian tax returns. The CRA is responsible for ensuring that taxpayers are not abusing the self-reporting system and are accurately reporting their income as well associated tax payable.

The Income Tax Act confers a lot of power to the CRA to investigate tax non-compliance, ensuring that taxpayers are filing their taxes correctly and on time. The CRA is able to conduct tax audits, which gives them the far reaching power to examine and inspect the books, records, documents, and even physical locations of businesses and homes. In cases where the CRA auditor finds issues with a taxpayer’s returns, the CRA has the power to proceed with a tax investigation, reassess returns, issue fines, penalties, interest, and even criminally prosecute taxpayers. A taxpayer who is suspected of tax evasion or fraud could be facing up to five years in prison, so criminal tax investigations should be taken seriously.

The main difference between a tax audit and a criminal tax investigation is that a tax audit focuses on determining the accuracy of a taxpayer’s income tax returns, while criminal tax investigations focus on the finding of significant tax fraud and tax evasion. So, when does a tax audit turn into a criminal tax investigation?

 

Tax Audits

The CRA’s power to conduct tax audits is derived from subsection 231.1(1) of the Income Tax Act. During a tax audit, the CRA is able to inspect and examine any records, accounts, and documents, both personal and business records, of the taxpayer. The CRA has wide discretion over how to conduct the audit, meaning that they can even reach out to family members or neighbours to retrieve documents.

The tax audit may even involve a CRA tax auditor visiting the taxpayer’s place of business to examine the property, review inventory, or any other documents and items that they believe will assist them in determining the accuracy of the taxpayer’s returns or records.

Essentially, the CRA is able to require a person to provide any information or document they need if it is used or required for the purpose of relating to the administration or enforcement of the Income Tax Act. This power does not only apply to residents of Canada, but also non-resident taxpayers who are carrying on business in Canada. However, there are some limits to the CRA’s power. For example, a tax auditor cannot examine a taxpayer’s home without the taxpayer’s consent or the authorization from the Courts.

In a way, there is a statutory requirement for Canadian taxpayers to cooperate with tax auditors, with no guaranteed extra constitution or charter protections. In summary, CRA tax auditors have wide discretion and power over how to conduct and proceed with a tax audit, and taxpayers are required to cooperate with the investigation, despite the financial and emotional strains it may pose.

 

Criminal Tax Investigations

In contrast, there are more restrictions on the CRA’s power when it comes to criminal tax investigations. The CRA tax investigator does not have the same level of discretion and freedom over how to conduct the investigation as they do over an audit. If you are the target of a criminal tax investigation, the consequence of being convicted could mean not only fines but also imprisonment under s. 239 of the Income Tax Act and under s.327 of the Excise Tax Act.

The Canadian Charter of Rights and Freedoms guarantees a number of criminal procedural rights for the criminally accused. Given the potential for imprisonment and the loss of liberty involved in a criminal tax investigation, the Charter guarantees certain protections for the taxpayer.  Opposed to a tax audit, when the CRA conducts a criminal tax investigation, it is constitutionally required to respect the taxpayer’s criminal procedural rights.

For instance, the CRA can require individuals to release certain documents and records during a non-criminal tax audit. During a criminal tax investigation, however, the taxpayer has the constitutionally protected right to not self-incriminate. As such, the CRA is not able to freely access the taxpayer’s information, but requires a warrant to have the taxpayer to release information.

Given the sensitivity of a criminal tax investigation, the CRA has a specific department dedicated to handling these types of investigation called the Criminal Investigations Program.

 

When does a Tax Audit become a Tax Investigation?

The tax Criminal Investigations Program usually gets involved when there is something in the investigation that indicates that there is a criminal element involved. As such, many tax evasion investigations begin first as a tax audit, and then develop into a criminal tax evasion investigation.

However, there is a concern that the CRA might not always tell the taxpayer when the tax audit has changed into a criminal tax investigation. So the CRA can use their significant powers of examination and requirement to further build their criminal tax investigation without the taxpayer even knowing that they may be prosecuted.

The information the CRA obtains from the taxpayer during the tax audit can be used by tax investigators, but they are not allowed to use information which was obtained after the tax investigation begins. In reality, there might not always be a clear line of when the tax audit ends and the tax investigation begins.

As such, it is important to determine when a tax investigation begins. The Supreme Court of Canada in the case of R. v Jarvis, [2002] 3 SCR 757 listed 6 factors to help draw the line:

1. Did the authorities have reasonable ground to lay charges?
2. Was the general conduct of the authorities such that it was consistent with the pursuit of an investigation?
3. Had the tax auditor transferred his file and materials to the tax investigators?
4. Was the conduct of the tax auditor such that he was effectively acting as an agent in the collection of evidence?
5. Is the evidence sought relevant to the taxpayer’s tax liability generally? Or was the evidence as to the taxpayer’s mens rea which is only relevant for penal liability
6. Are there any other circumstances or factors that can lead the judge to the conclusions that the compliance tax audit had in reality become a tax investigation?

 

Although these factors do offer some clarity, it may still be difficult to tell which side of the line you stand on. No matter whether it is a tax audit or investigation, the consequences can be severe. Our top Canadian Tax Lawyers at Rosen Kirshen Tax Law are here to help. Call us today to learn more!

 

**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 Jeff Kirshen

Can I Really Get an Apology from the CRA?

The Office of the Taxpayers’ Ombudsman recently claimed in its Annual Report for 2019-2020, Transformation through Disruption, that it recommends the CRA develop a formal guideline for apologizing to Taxpayers.

In the report, the Taxpayer’s Ombudsman highlighted that the absence of a consistent, uniform policy for administering “letters of apology” to Taxpayers has resulted in differential treatment of Taxpayers while dealing with various CRA departments. Currently, the CRA issues letters of apology to Taxpayers who have not received the level of service to which they are entitled on a case-by-case basis.

The report outlines that this recommendation would further protect Taxpayers’ rights under the Taxpayer Bill of Rights, by “improving accountability and treating everyone fairly”.

 

What are your Rights as a Taxpayer under the Taxpayer Bill of Rights?

The Taxpayer Bill of Rights outlines 16 rights to which Taxpayers are entitled when dealing with the CRA.

Notable rights include:

• Article 4 – The right to a formal review and subsequent appeal

See more here: Can I File An Income Tax Objection? ; Rosen Kirshen Tax Law Services –
Objections; Considering a Judicial Review?

• Article 6 – The Right to be Treated Professionally, Courteously, and Fairly

• Article 7 – The right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review

See more here: Revenue Canada Disputes

• Article 9 – The Right to Lodge a Service Complaint and to be Provided with an Explanation [of the CRA’s] findings
• Article 11 – The right to expect [the CRA] to be accountable

 

How do I Complaint about a Violation of my Rights?

Taxpayers who are dissatisfied with the service received from the CRA can submit a service complaint.  You can submit a service complaint about:

• Mistakes;
• Undue delays, outside of normal processing times;
• Incorrect or misleading information; and
• Employee behaviour and other service-related issues.

After submitting your complaint, a service feedback officer may contact you during the review process. The CRA aims to have complaints resolved within 30 business days.

Apart from filing a service complaint to the CRA, you can also submit a complaint to the Office of the Taxpayers’ Ombudsman.

 

Can I Sue the CRA?

The Crown Liability Act allows individuals to sue the federal government for negligence and damages. As such, Taxpayers have a right to sue the CRA for actions caused by its employees. However, Taxpayers must establish the following to be successful:

• The CRA officer owed a duty of care to the taxpayer;
• They breached that duty of care; and
• Damages and losses resulted from that breach.

Further, in Ontario, the Proceedings Against the Crown Act and its relevant provisions apply when suing the CRA.

 

What if I have a Non-Service Related Complaint?

If you believe that the CRA is wrong about your audit or other important tax dispute, you can file an  objection. Rosen Kirshen Tax Law and its experienced team of tax lawyers can help you navigate this complex process.  Call us today!

 

**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.