by Jeff KirshenBusiness Emergency Subsidies (CEWS, CERS, and CHRP)
The Federal Government announced changes to the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”) programs and established the new Canada Recovery Hiring Program (“CRHP”).
Canada Emergency Wage Subsidy (“CEWS”)
The Covid-19 pandemic took the world by storm and placed many businesses, especially small ones, in a precarious position of both losing revenue and potential long-term closures. To alleviate some of the pressure on businesses, the government introduced the CEWS to help businesses by covering part of their employee’s wages due to drops in business revenue. The subsidy was designed to help employers re-hire workers, prevent further job loss, and ease their business back into normal operations.
As of July 2021, changes have been introduced to the CEWS. These changes include:
- Extending the eligibility period for the Canada Emergency Wage Subsidy until October 23, 2021, and increasing the rate of support employers and organizations can receive during the period between August 29 and September 25, 2021.
- The rate of CEWS will now remain the same for claim period 20 as for period 19, declining in period 21.
- Eligible employers that were not operating on March 1, 2019, may now choose to use the alternative approach to calculate their revenue drop for claim periods 14 to 17.
The next deadline to apply for CEWS is October 7, 2021.
Canada Emergency Rent Subsidy (“CERS”)
CERS provides support directly to qualifying commercial Tenants and Property owners who are adversely impacted by the Covid-19 pandemic. The subsidy will cover part of qualifying entity’s commercial rent or property expenses, starting on September 27, 2020, until October 23, 2021.
The amount you can claim of your expenses (your rent subsidy rate) is based on the revenue drop you experienced between the claim period you are applying for and a prior reference period. You have options for choosing which prior reference period you will use.
The rate of the subsidy will be calculated as set out in the table below.
| Calculate your rent subsidy rate for periods 1 to 10 | |
| Revenue Decline (%) | Base Subsidy rate |
| 70% or more | 65% subsidy rate |
| 50 to 69.99% | (Your revenue drop – 50%) x 1.25 + 40% |
| Less than 50% | 0.8 x your revenue drop |
Eligible expenses to be subsidized under the program include:
- Gross rent;
- Percentage rent;
- Minimum rent and other amounts required to be paid under a new lease to the Landlord or a third party such as operating expenses; and
- Property taxes.
Eligible entities include individuals, taxable corporations, trusts, non-profit organizations, registered charities, and partnerships that are up to 50% owed by non-eligible members.
Eligible entitles must have a payroll account as of March 15, 2020, or have a CRA business number as of September 27, 2020, and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim. The deadline to apply is October 7, 2021.
Similarly, the government is extending the eligibility period for the CERS until October 23, 2021, and increasing the rate of support employers and organizations can receive during the period between August 29 and September 25, 2021.
Canada Recovery Hiring Program (“CRHP”)
This new program is designed to help businesses grow and recover through the hiring of more employees by providing a subsidy. The subsidy will help offset a portion of reopening costs for businesses caused by increased employee wages and hours.
To qualify for the CRHP, there needs to be a revenue decline of more than 0 percent in period 17 and more than 10 percent between periods 18 to 22. Most of the eligibility criteria for the CRHP and CEWS are similar. The maximum eligible remuneration per employee that qualifies for the CRHP is $1,129 per week. The next deadline to apply for CRHP is December 30, 2021.
If you have any questions or concerns, speak with a tax lawyer or tax specialist to discuss if these benefits apply to your particular circumstances. 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 the articles. If you have specific legal questions you should consult a lawyer.
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by Jeff KirshenThe Tax Court of Canada – Settlement Conferences
Hearings are expensive. Not only is it expensive for the taxpayers but it also consumes an immense amount of court time and resources. This is why the Tax Court of Canada (the “TCC”) strongly encourages taxpayers to settle their disputes with the Canada Revenue Agency (the “CRA”) before the issue makes it to a hearing. At the TCC, disputes may be settled through settlement conferences. Settlement conferences have been increasingly popular as the TCC has sought to encourage disputing parties to reach an agreement without a hearing.
The TCC may require parties to attend a settlement conference through its authority under Rule 126.2(1) of the Tax Court of Canada Rules (General Procedure). The TCC may compel parties to consider the possibility of settling any or all of the issues, either under the court’s own initiative or at the request of a party.
How to Prepare for a Settlement Conference
Prior to the settlement conference, both parties must confirm that a written offer of settlement has been made and that a written reply has been provided.
At least 14 days before a settlement conference, each party is required to submit a settlement conference brief to the court. The brief should be less than 10 pages, unless the parties apply for and obtain permission from the court by informal communication with the Registry.
The settlement conference brief must contain:
- An explanation of the party’s theory of the case;
- A statement of the material facts that the party expects to establish at the hearing of the appeal and how they will be established;
- A statement of the issues to be determined at the hearing; and
- A statement of how the law and authorities that the party will rely on at the hearing of the appeal.
The purpose of the brief is to present a concise summary of a party’s case. The brief is provided to the opposing party and the TCC to review.
A substantial amount of preparation is required prior to attending a settlement conference. Not only do settlement offers have to be presented, but the offer must be grounded in a correct application of the law to the facts and within a reasonable degree of compromise. More importantly, a party walking away from a favourable settlement offer may face greater cost consequences in certain circumstances. Therefore, it is very important for taxpayers to dedicate a significant amount of time to prepare for settlement conferences.
Attending the Settlement Conference
There are no standard processes for settlement conferences. Judges are often free to dictate the process how they see fit.
During the settlement conference, parties will discuss the relevant facts and law and seek to reach a compromise. In some instances, the settlement judge will provide an opinion on the legal issue and present views on the relative strengths and weaknesses of each party’s case. Furthermore, the judge may offer a settlement proposal for the parties to consider.
It is very important that parties be willing to compromise during the settlement conference. Otherwise, the TCC may impose adverse cost awards on a party where it deems that the conduct of the party to have impeded on the efficient functioning of the settlement conference.
The Pros of Settlement Conferences
The primary purpose of settlement conferences is to encourage parties to reach an agreement to settle their dispute without incurring further legal costs, draining judicial resources, and clogging up the significant backlog of cases after the COVID-19 pandemic.
However, there are also benefits to attending settlement conferences even when the parties do not reach an agreement.
A settlement conference can help parties obtain an objective, independent view of their case from the presiding judge. Often, what one side may think to be a winning case is far different in the eyes of a neutral party. Similarly, the settlement conference can also validate and reinforce one side’s position. Regardless of the results of the settlement conference, parties can be confident that they’ll walk out of the negotiations with a better understanding of the case.
Even if a full settlement is not reached, the case can often be expedited through the TCC by clarifying the issue and reducing the number of issues in dispute. This is favourable for all parties, including the justice system, because the case would require less documents to review, less witnesses to interview, and less time spent in trial.
At Rosen Kirshen Tax Law, we have represented countless clients during and after settlement conferences. If you have a file in the Tax Court of Canada, we can help negotiate a favourable settlement for your case. Contact us today to schedule an appointment with our team of experts. 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 the articles. If you have specific legal questions, you should consult a lawyer.
by Jeff KirshenWhy you Should Keep your Receipts
Keeping your receipts, regardless of the field it pertains to, is a prudent and highly advisable practice. In the area of tax, this practice becomes even more important. In the event you should be audited, reassessed, or be the subject of a processing review, the Canada Revenue Agency (“CRA”) will request (and frankly demand) that the appropriate receipts be provided to verify the information you filed on your tax return is accurate. Keeping your record books accurate will help to ensure the process is as painless as possible.
Where do I Keep my Records?
The CRA has stated that you must keep your records at either your place of business (for any business records) or at your residence, unless the CRA has given you express permission to keep them elsewhere. If you would like to obtain the CRA’s permission to keep your records elsewhere, you will need to write to your local tax services office.
How long do I have to keep records for?
The record keeping requirement stems from paragraph 230(4)(b) of the Income Tax Act. This section states that every person carrying on business and/or every person who is required to pay taxes shall keep all records and books that are necessary to verify the information until the expiration of six years from the end of the last taxation year. In theory, if you are filing your 2020 return, you should keep the documents until 2026. However, this rule does have some caveats. The six-year requirement for keeping documents relates not only to the original tax year in which you file, but also relates to the tax year in which you are claiming a certain expense/deduction, etc.
Looking at our previous example, when filing your 2020 tax return, the minimum requirement for keeping the relevant documents is 2026. However, if you plan on carrying a business loss forward to use in a future year (say 2030), then the relevant documents to prove the business loss must be kept until 2036. The six-year requirement not only relates to the original year the return was filed, but more importantly, it relates to the year in which the taxpayer plans to use that document.
Can I Destroy the Records before the Six-year period Expires?
If you want to destroy the records prior to the retention period expiring, you must request permission from the CRA to do so. In order to obtain this written permission, either yourself or your authorized representative must do one of two things:
- Complete the Form T137 (Request for Destruction of Records); or
- Apply in writing to your local Tax Services Office.
In what Situations does the Six-year limitation Period not Apply?
The six-year limitation period does not apply to all possible situations. Some situations in which a different limitation period applies includes:
- When your records and supporting documents concern long-term acquisitions and disposal of property, the share registry, or other historical information that would have an effect on the sale, liquidation or wind‑up of the business, you have to keep them indefinitely.
- If the CRA wants you to keep records for a period longer than six years, a CRA official will let you know how long to keep them either in person or by registered mail.
- If you file an income tax return late, you must keep your records for six years from the date you file that return.
- If you filed an objection or an appeal, you must keep all necessary records until the latest of the following dates:
- the date the objection or appeal is resolved;
- the date for filing any further appeal has passed; or
- the six-year record keeping period has passed.
What if I don’t have my Receipts?
All is not lost if you did not keep all of your receipts. That being said, it does make proving your expenses much more challenging. You may attempt to use other methods of proving the expenses, such as bank and credit card statements. The CRA, however, will likely have a hard time accepting your expenses claims. In these types of situations, you should seek the assistance of a professional.
Overall, the CRA requirements for record keeping seem simple, but are quite complex. Failure to retain your records for the appropriate period can have a detrimental impact on the successful defence of any audit, processing review, etc. If you are going through a CRA review, and you need assistance with proving your receipts and expenses, 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 KirshenBill C-208 – New Rules for Intergenerational Wealth Transfers
On June 29, 2021, Bill C-208 received Royal Assent. It represents a significant change to the Income Tax Act (“ITA”) for intergenerational wealth transfers. The private member’s bill amended sections 84.1 and 55 of the ITA, providing more flexibility to intergenerational transfers of small businesses, family farms or fishing corporations. For business owners, Bill C-208 may allow access to new tax-efficient strategies when the time comes to pass down the torch to the next generation.
Basics of Wealth Transfer
There are two main ways for business owners to pay themselves out: by selling equity (capital gains) or issuing dividends. In Canada, taxpayers may obtain more favourable tax treatment on capital gains than on dividends. They may also be eligible to claim the lifetime capital gains exemption to reduce some or all the tax payable on the sale of qualified businesses.
Section 84.1
Section 84.1 of the ITA is a specific anti-avoidance rule intended to prevent surplus stripping, a tax strategy where business owners pull out their earnings as capital gains rather than dividends. The law deems certain transactions involving related parties (a non-arm’s length transaction) as a dividend instead of a capital gain.
One popular method of passing on a business is through the use of a holding corporation. For example, parents sell their shares of a qualified small business corporation to a holding corporation owned by a child or a grandchild. Under the old rules, the transaction would be classified as a non-arm’s length transaction and would be captured by the s.84.1 anti-avoidance provision. The parents would have to pay dividends tax and lose the advantages associated with capital gains. In contrast, had the parents sold to a holding company owned by third parties, the sale would’ve been classified as an arm’s length (unrelated) transaction and deemed a capital gain.
The amendments in Bill C-208 intended to address the application of s. 84.1 on transactions between parents and their children or grandchildren. It effectively provides an exemption to section 84.1 of the ITA where three criteria are met:
- The business is a qualified small business corporation or a family farm or fishing corporation within the meaning of s. 110.6(1) of the ITA;
- The purchaser corporation is controlled by one or more children or grandchildren of the taxpayer who are 19 years of age or older; and
- The purchaser corporation does not dispose of the subject shares within 60 months of the transaction (other than for reasons due to death).
If the transaction meets the three criteria, the transaction would be assessed as a capital gain rather than a dividend and allow the parents to tap into significant tax savings.
Bill C-208 also include additional rules such as limiting a business owner’s access to the lifetime capital gains deductions for corporations with taxable capital employed in Canada over $10 million. Furthermore, the rules also require the business owner to obtain an independent assessment of the business’s fair market value. In the end, there remain many uncertainties in the wording of the new bill, and taxpayers should be vigilant when planning the sale of their family business.
Section 55
Subsection 55(2) of the ITA is a specific anti-avoidance rule that would apply to certain transactions involving the transfer of a corporation’s cash or property. Before the amendment, the rule converts tax-free inter-corporate dividends into a capital gain in some circumstances. There were exceptions to this rule for related persons, but it did not apply to siblings. However, Bill C-208 effectively expanded the related person exception to provide additional tax savings to transactions involving siblings.
Summary
Bill C-208 introduced new amendments to the ITA to provide small business owners with new tax-efficient strategies for passing on their business to the next generation. Under the new rules, parents may be eligible to report the transaction as a capital gain, as opposed to the transaction being deemed a dividend under the old rules. Furthermore, the amendments relaxed transactions between siblings, adding greater flexibility for transactions within the family.
However, on July 29, 2021, the Department of Finance also indicated its intentions to release further legislative amendments that “honour the spirit of Bill C-208 while safeguarding against any unintended tax avoidance loopholes”. Taxpayers should be wary as these new amendments may change the applicability of Bill C-208.
Are you seeking to transfer your small business to your children? Contact us today to schedule an appointment with our team of experts! Rosen Kirshen Tax Law will provide you with the expert advice you need to minimize your tax exposure!
**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 KirshenAn Update Regarding John Scholz
Previously, we wrote about the Canada Revenue Agency (CRA) auditing certain taxpayers who were involved with John Scholz in alleged “strips” of RRSP registered plans resulting in an “advantage”. In essence, the CRA was assessing for “advantages” received from the transfer of taxpayer’s registered plans to Western Pacific Company, the subsequent purchase of Red Hill Capital Inc., and the direct repayment of the value of their registered plan from John Scholz of Northland Services Inc. following the purchase of the shares. Please review our earlier blog post on Joern (John) Scholz and the related audit for a deeper analysis of “advantages” and “Registered Plan Strips” here.
Conditional Prison Sentence and Fine for Tax Fraud
On September 26, 2019, the CRA announced that Joern (John) Scholz, a financial advisor based in Port Carling (and the advisor related to the registered plan strip scheme above) was found guilty of one count of fraud over $5,000 under the Criminal Code. Specifically, Mr. Scholz was convicted for the evasion of federal income tax and goods and services tax/harmonized sales (GST/HST) and subsequently sentenced to a conditional jail sentence of two years less a day.
A CRA investigation revealed that Mr. Scholz operated an investment counselling business where in which he did not report any of the commission fees received from his clients on his individual tax returns for the 2011 to 2013 taxation years.
By failing to report his commission fees, Mr. Scholz did not to report/pay the following amounts:
- Failed to report taxable income totalling $2,149,730 (2011 -2013);
- Failed to pay and evaded $605,355 in federal income (2011 – 2013);
- Failed to file GST/HST returns (2011 – 2015); and
- Failed to remit GST/HST totalling $445,789.
CRA Appeal of Sentence Successful
On July 13, 2021, the CRA announced that it was successful in overturning the conditional sentence imposed on John Scholz. Instead, John would be sentenced to three years imprisonment. This recent prison sentence determined at the Court of Appeal for Ontario overturns the initial conditional sentence issued on September 26, 2019. Mr. Scholz was initially sentenced to a conditional jail sentence of two years less a day, including 200 hours of community service and 12 months of house arrest. However, it was determined at the Court of Appeal that a prison sentence was warranted as Mr. Scholz’s fraud and tax evasion constituted a large-scale fraud on the taxpayers of Canada.
Additionally, Justice Ian V.B Nordheimer, the judge presiding over the appeal found that the trial judge made the following two errors when handing down the conditional sentence:
- Imposing a sentence “outside the range” for major frauds; and
- “Failed to follow the necessary and analytical proceeds and consider all of the factors required”.
Tax Evasion can be a Criminal Offence and Result in Heavy Fines
Mr. Scholz prison sentence is a stark reminder that tax evasion is a criminal offence. Falsifying records and claims, willfully not reporting income, or inflating expenses can result in prosecution and jail time. Furthermore, if a taxpayer is found guilty of tax evasion, both the Income Tax Act and Excise Tax Act have court fines ranging from 50% to 200% of the taxes evaded and up to five years in prison. A conviction for tax fraud under the Criminal Code can result in up to 14 years in prison.
As such, it is critical that taxpayers understand the difference between tax avoidance and tax evasion. Generally, if the arrangement is consistent with the intent of the law, then it is tax avoidance. Alternatively, if the arrangement is inconsistent with the intent of the law, then it is tax evasion. More importantly, it is critical that taxpayers are aware that the CRA will investigate individuals for tax evasion even if they unknowingly relied on dishonest accountants or advisors.
The CRA states that they remain focused on maintaining the integrity of Canada’s tax system and aggressively cracking down on tax evasion and false claims. Unfortunately, this may result in innocent taxpayers who were deceived by their advisors being caught in the cross – fire. Professionals at Rosen Kirshen Tax Law have significant experience representing taxpayers in such cases in front of the CRA and the Tax Court. If you have recently dealt with John Sholz and/or concerned that you may be audited, call us today! 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 Jeff KirshenExporting Vehicles and the Agency-Principal Relationship
The cost to purchase vehicles (especially luxury vehicles) is frequently much cheaper for Canadian consumers than consumers in other countries. Sometimes vehicles in Canada retail for between just 25%-50% of what the exact same make and model would cost in another jurisdiction. While there are various reasons that contribute to this price discrepancy (known in market terms as a “grey market”), this variance creates an opportunity for Canadian businesses to export these vehicles at a profit.
However, recently an increasing number of Canadian vehicle exporters have been subjected to audits by the Canada Revenue Agency (CRA) for one specific reason: the CRA has alleged the Canadian vehicle exporter to be an “agent” for a foreign “principal”. Where the CRA is successful in establishing agent/principal relationship between the vehicle exporter and its foreign buyers, the vehicle exporter can lose entitlement to Input Tax Credits (ITCs) claimed on the purchase of the exporter’s inventory.
The difference in a business’ characterization as a legitimate business or an agent/principal relationship is a legal distinction that depends on a factual analysis of key components of the relationship between a vehicle exporter and its buyers. Though nuanced, for a Canadian vehicle exporter this distinction can be the difference between operating a lucrative, profitable business and the loss of all (or substantially all) profits earned.
This blog entry will discuss how the CRA conducts factual analyses of a principal/agent relationships and what is necessary for Canadian vehicle exporters to establish to avoid this designation.
What is an Agent/Principal Relationship?
If the CRA alleges that your business amounts to an agent/principal relationship, they are essentially saying that your business (the “agent”) exists only to serve the interests of an off-shore party (the “principal”) and does not offer legitimate services of its own.
The effect of this designation is to disallow the exporter’s claims to ITCs, or credits issued by the Canadian government to offset the incurrence of HST on the vehicles purchased in Canada for international export. In many cases, this would greatly reduce (or negate) the profits earned by the exporter.
Hallmarks of an Agent/Principal Relationship
In order to evaluate whether an exporter is a legitimate business or merely an agent to a foreign principal, the CRA must conduct an analysis into the nature of the relationship between the exporter and its buyer(s). The analysis considers two main sets of criteria in evaluating the relationship:
- the “essential qualities” of a principal/agent relationship; and
- other “indicators” of a principal/agent relationship.
“Essential qualities” of a principal/agent relationship are: (i) whether the parties have consented to having the agent act on behalf of the principal; (ii) whether the agent has the authority to act on behalf of the principal in a legally binding manner; and (iii) whether the principal exerts some degree of control over the actions of the agent.
If these qualities are determined to be present in the relationship between an exporter and a foreign buyer, it is likely that the CRA would determine that a principal/agent relationship exists. This would have the effect of barring any claim to ITCs on the part of the exporter.
Other “indicators” of a principal/agent relationship include:
- if there is limited assumption of business risk on the part of the exporter;
- whether the accounting practices of the exporter suggest a principal/agent relationship;
- the payment history between the parties;
- if the exporter makes any alterations to the vehicles;
- whether the exporter uses the vehicles prior to export;
- the substance of the contractual payment relationship between the exporter and buyer; and
- the nature of the vehicles’ ownership.
The CRA uses these two sets of criteria conjunctively to issue a factual determination as to whether an exporter is in substance just the agent of a foreign principal.
What do I do if my Business gets Audited?
As outlined above, if your vehicle exporting business is selected for audit, the CRA will be conducting an in-depth factual analysis into all aspects of your business to issue its determination. As the CRA’s audit powers are only increasing, it is imperative that if your business is audited, you prepare a complete and circumspect defense and/or rebuttal to the CRA’s position.
Any single misstatement or missed deadline could be the difference between an entirely successful defence and the loss of all profits during the audit period. As principal/agent relationships are factual determinations based on nuanced legal arguments, it is often a prudent decision to retain a tax lawyer to defend yourself during the audit process or to carefully plan your business affairs prior to being audited to mitigate the risk of the CRA determining that your business is nothing more than a principal/agent relationship.
If you would like to know more about how a lawyer can assist you through the audit process or with planning your business in general, contact a tax professional at Rosen Kirshen Tax Law today! 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 Jeff KirshenThe Canada Revenue Agency Post-Pandemic
With Canada’s vaccination rates on the rise, many taxpayers are wondering when the Canada Revenue Agency (“CRA”) will get back to its regular business. Currently, almost all audits were halted before they even started though high risk audits were allowed to continue. CRA collections released all legal action against taxpayers and has not yet restarted going full force in its collections activities. The Tax Court of Canada just reopened its doors and has started setting down hearings beginning in September.
So the question becomes, when will CRA restart their audit program in full, and when will they start collecting the billions in taxes they are owed that remains unpaid?
The Canada Revenue Agency Post-Pandemic
Though there has been no official guidance, it is likely that the CRA beings to resume its normal operations in September. Barring another deadly wave in the pandemic of course. What this will mean is that all audits that were previously scheduled or cancelled will resume. Hundreds of thousands of taxpayers will be subject to new audits, and CRA auditors will be under pressure to achieve results. These upcoming audits will likely be more difficult to deal with since the auditors will have a set result in mind because the CRA sorely lacks funds.
CRA collections will also likely reopen their offices and will begin contacting taxpayers to arrange for payment of their tax debts. They will also start to take legal action to collect the debts. They will seize bank accounts, garnish wages, issue requirements to pay, and potentially lien property or other assets of value. It is imperative to be in contact with CRA collections to ensure that you can get yourself on a payment plan so that your business is not interrupted by their legal action.
The CRA appeals section will also likely reopen in full force. They have been operating at an extremely reduced capacity, but that should change come September. They will also be under pressure to resolve their files quickly knowing that the audit section will be making tough decisions that taxpayers will likely not agree with. So there will be a large amount of objections coming following the resumption of CRA audit activities.
The Tax Court of Canada Post-Pandemic
The Tax Court of Canada has announced that they are scheduling in person hearings in September of 2021. So absent another deadly wave of the pandemic, the Tax Court of Canada should be back to normal operations soon. If you have an ongoing Tax Court of Canada appeal, and were waiting for the resumption to seek assistance, now is the time.
The Voluntary Disclosure Program Post-Pandemic
The Voluntary Disclosure Program has been experiencing delays even before the pandemic started. Their normal processing times have slowed from one year to more than two years. We are hopeful that they will return to their normal operations and will review and make decisions quicker than the current two year timeline. However, it will likely take additional CRA resources in order to achieve something like this.
The positive of the lengthy delay is that taxpayers have more time to pay their estimated amounts owing. The negative is that the taxpayer is essentially in limbo for years. Their financial lives are on the line, and they have no idea what the result will be.
COVID-19 Benefits Post-Pandemic
A major area that the CRA will focus on post-pandemic is auditing COVID-19 benefit programs. The CRA has created groups and task forces specifically to review the pandemic benefits claimed by individuals and corporations, and verify whether they were entitled to those benefits. We can already see this happening with CERB and CRB.
If your audit was put on hold, or you have CRA issues that need assistance once they get back to business, call us today! Rosen Kirshen Tax Law is here to assist everyone who has a CRA problem.
**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 KirshenThe CRA’s New Audit Powers
In the new Budget 2021, there are changes to Canada’s taxation regime regarding the expansion of the authority of Canada Revenue Agency (CRA) auditors during the audit process. In theory, increasing the scope and degree of the powers of auditors will enhance the capabilities of auditors to collect the information they require to make fully thought out decisions. However, in practice, these new additions to the auditor’s arsenal may create unintended consequences for taxpayers who do not understand the gravity of hastily answering seemingly innocuous questions.
Following our previous blog entry that covered “Budget 2021” in broad strokes, this article will examine in greater detail the implications of the new CRA audit powers and what it could mean for the Canadian taxpayer.
What are the Existing Powers of CRA Auditors
Participating in the CRA audit process can be a significant inconvenience to a Canadian taxpayer. An audit is essentially the process by which a CRA agent reviews the records of a taxpayer for a specified period and asks clarifying questions to the taxpayers to determine the legitimacy of said taxpayer’s CRA filings.
The audit process can take years to complete, and auditors have many tools to review and evaluate the reported filings of taxpayers. Typically, auditors will send “queries” or questionnaires that request answers to pointed questions regarding certain aspects of returns for which the CRA requires further clarification. A taxpayer’s answers to those questions can bear significant weight on the scope and outcome of the audit. For example, the answers to audit queries will often open the door for the auditor to request documentation related to the taxpayer’s answers. The answers and documentation provided by taxpayers during the course of an audit could result in significant changes to the amount of taxes payable by the taxpayer for the period covered by the audit.
The audit query process forms the basis of the auditor’s decision-making process. Presently, auditors only have the authority to request certain responses from taxpayers. However, the proposed changes to auditor powers under Budget 2021 could expand this authority to require certain responses from taxpayers instead.
What New Powers would Auditors have under Budget 2021?
As alluded to above, the newly proclaimed rules under Budget 2021 would allow for auditors to have greater authority with respect to the types of answers they receive from taxpayers and from whom they may require answers.
As of now, taxpayers are not bound to answer audit queries under a specific method or form, but this may be changing very soon. The new powers vested in auditors would allow for auditors to require taxpayers to answer CRA queries and to govern the form of the answer (for example, mandating that the taxpayer respond orally or in writing).
The consequence of these additional powers would be the potential for auditors to request for oral or written answers from specific agents of a taxpayer. In the corporate context, for example, an auditor may request oral answers from not only from the directing minds of the corporation, but also from employees.
Additionally, it is likely that the audit division will be receiving an increase to their bottom line, which could increase the number of audits conducted and/or impact the types of taxpayers subject to audit.
What are the Implications of these New Audit Powers?
The implications for Canadian taxpayers stemming from the new powers proposed by Budget 2021 will primarily affect the correspondence between auditors and taxpayers at critical stages of the audit process. This will profoundly change the level of preparedness necessary for taxpayers who are under audit, as any answer that has the potential to mischaracterize or elicit a misapprehension of nefarious conduct on the part of the taxpayer could result in a significant change to the taxpayer’s taxes payable for the audit period.
Additionally, forcing taxpayers to answer questions orally will create stress and a high level of frustration for taxpayers. Many people do not know the answers to these questions offhand, and normally respond in writing because it gives them time to gather their thoughts and provide a detailed response. CRA auditors will compel taxpayers to respond to their questions orally, and by doing so, they will try to get taxpayers to say or admit things that they may not understand which will have an extremely negative effect on their audit. The CRA will hold what was said against the taxpayer through the audit stage, the objection stage, and all the way through Tax Court. A few wrong words might mean the difference between settling an audit with no issues, and having to fight for years.
Many tax professionals are now recommending that if a taxpayer has the means to involve a third party tax professional (such as a tax lawyer or accountant) during the audit stage of the CRA appeals process to do so. Providing unreviewed answers to the CRA that fail to properly represent the taxpayer’s rights and interests could turn an unpleasant experience into a fiscal nightmare. For the most part, the potential danger of an audit to a taxpayer’s bottom line can be mitigated (if not remedied entirely) by the interposition of a tax professional.
If you would like to know more about how a lawyer can assist you through the audit process in general, contact a tax professional at Rosen Kirshen Tax Law today! 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 Jeff KirshenThe Canada Digital Services Tax
On April 19th, 2021, the Deputy Prime Minister and Minister of Finance, the Honourable Chrystia Freeland presented “Budget 2021”, the first budget seen from Parliament in nearly two years. One of the standout new additions to the Canadian income tax regime is the Digital Services Tax (DST). The DST will be an entirely new tax implemented to garner previously uncaptured tax revenue from major tech players with a Canadian consumer base.
Following our previous blog entry that covered “Budget 2021” in broad strokes, this article will examine in greater detail the implications of the DST for consumers, corporations and stakeholders alike.
What is the Digital Services Tax (DST)?
The DST is a new tax implemented in response to the exponential growth of tech industries in Canada. The tax will target the revenue of large corporations who offer digital services currently offered and offered in the future within Canada’s borders. This will allow the federal government to capitalize on the revenue earned by major tech companies from the consumption of digital products and services where previously no taxes were levied. The DST will be levied at a flat rate of 3% on all revenue that exceeds Parliament’s prescribed revenue benchmarks.
The federal government’s consultations with stakeholders ran from April 19th to June 18th, 2021 and provided an opportunity for stakeholders to submit their written observations and insights regarding the new DST. Consultations have now ended, and the DST is scheduled to take effect as of January 1st, 2022. The DST is part of a broader initiative from the international community to collect taxes on major players in the digital services sector.
Who Will be Charged the Digital Services Tax (DST)?
Companies that will be charged DST beginning in 2021 are from a wide range of larger digital service providers who have both domestic and international reach. Only companies that have:
- More than approximately $1.125 billion (CAD) in global revenue; or
- More than $20 million (CAD) in domestic revenue (from Canadian users)
will be subject to the DST on their revenue from products and services to sold to Canadian consumers.
In order to be subject to the DST, tech companies will also have to fall into one of Parliament’s prescribed tech business models to fall under the purview of the DST. These business models will include social media corporations, online marketplaces and advertisers and companies that compile the data of users of major digital platforms.
Consumers may be affected by the implementation of this tax, as it is likely that companies such as Uber and Amazon will be subject to paying substantial Digital Services Taxes on their revenues. Corporations may wish to offset these revenue losses by increasing the costs to consumers.
Why Implement the Digital Services Tax (DST) at All?
With consumption of digital services on a steady incline and with no signs of stopping, the DST is projected to net the federal government billions in tax revenues in the coming years ($2.72 billion – $3.4 billion CAD is the current projection for 2022-2027).
Additionally, the DST is in line with the ambitions of the Organization for Economic Cooperation and Development (OECD) to better capture taxes that have traditionally been hard to garner due to the international reach of major tech conglomerates. The DST will allow for revenue to be collected prior to the enactment of cooperative international agreements between member nations of the OECD.
What Challenges will be Faced by the Digital Services Tax (DST)?
Whenever there are novel implementation of new taxes or modifications to existing elements of a taxation regime, tax planning is typically one avenue of frustrating the intentions of Parliament to collect revenues. It is possible that companies near the threshold could organize their affairs in such a way to limit the impact of the DST on their revenue streams. However, with the tax levied being just 3% and only on earnings exceeding high values, the effectiveness of corporate tax planning around the DST will be circumstantial.
Any time international organizations attempt to implement cooperative legislative measures, the context of international politics and the complexities surrounding enforcement of said legislation come into play. As of now, the DST is domestic legislation, but when agreements are signed between OECD member nations, new challenges pertaining to the enforcement of the DST could become apparent.
If you would like to know more about the DST or corporate tax planning in general, contact a tax professional at Rosen Kirshen Tax Law 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 KirshenRRSPs Explained
The Registered Retirement Saving’s Plan, also known as an RRSP, is a retirement account that was introduced by the Government of Canada in 1957. The primary purpose of the RRSP is to promote and incentive taxpayers to save for retirement by providing specific tax benefits to those who contribute to their account. Indeed, having many Canadians reach old age with no savings, no ability to work and relying on government assistance to make ends meet would be a national concern. As such, the RRSP was designed to prevent the same by promoting a lifestyle that financially rewards saving during a taxpayer’s working years.
This blog post will briefly examine the various advantages and functions of the Registered Retirement Saving’s Plan.
How Does it Work?
As mentioned earlier, the RRSP is a retirement savings account where taxpayers can contribute funds into and hold various investments including cash, GIC’s, stocks (equities), bonds, ETF’s and others. The primary tax advantage of the RRSP is that any contributions are made pre-tax and are allowed to grow tax free until withdrawal. In other words, any money you contribute to the RRSP will be deducted from your taxable income for that year, and will only be taxed in whichever later year the funds are ultimately withdrawn.
RRSP Tax Advantages
RRSPs present a tremendous opportunity for savings via tax-deferral. For one, we know that the Canadian tax system operates under progressive rates meaning that higher earned income pays a higher tax (for every dollar earned in that bracket) than the lower-earned income. The idea of the RRSP is to deduct as much taxable income as possible during your working years, presumably when you would be earning in the highest tax bracket, and subsequently pay the deferred tax during your retirement years when you would likely be in the lowest tax bracket.
For example, if Taxpayer A earns $100,000 but contributes $18,000 to their RRSP, his/her taxable income would effectively be $82,000 for that year. If the Taxpayer subsequently withdraws the same amount years later after they retired (assuming $0 income), they would be paying 15% on that amount as opposed to the higher 20.5% and 29% tax brackets.
More importantly, the taxpayer gets to immediately recognize the tax advantage of decreasing their tax burden at present and deferring payment until years later. This is arguably the key differentiating factor between RRSP’s and the Tax-Free Savings Account (“TFSA”), another savings account promoted by the Government of Canada. Despite TFSA withdrawals being ultimately tax free, any contributions made to the TFSA do not reduce the taxpayer’s income by the same amount. Alternatively, RRSP’s withdrawals are considered taxable income, but contributions are considered a tax deduction and effectively will lower the taxpayer’s income.
The other main tax advantage of the RRSP is that investments can grow tax-free until withdrawal. Using the example above, if the taxpayer purchases $18,000 worth of equites which issue quarterly dividends, both the capital gain and dividend income will not be taxed until the withdrawal date. This means that the taxpayer can capture the whole dividend income and use it to purchase more equities or other growth-type investments rather than pay a portion to the CRA. Indeed, by allowing the gains to be tax-deferred, this allows investments inside the RRSP to compound and grow at a much faster compared to just investing in a normal brokerage account.
RRSP Contribution and Deduction Limits
Naturally, there is a limit to how much a taxpayer can contribute to the RRSP annually. The Canada Revenue Agency (“CRA”) typically calculates a taxpayer’s RRSP deduction limit as the following:
- The Lesser of
- 18% of your earned income in the previous year; or
- RRSP limit ($27,830 as of 2020).
Importantly, any unused contribution amounts from preceding years carry forward to the contribution limit. That said, unused amounts do not carry over for deduction limits and the maximum amount is capped at 18% of your income or the RRSP limit. Taxpayers must be careful not to overcontribute as there is tax penalty of 1% per month on contributions that exceed their RRSP deduction limit by more than $2,000.
Additional Factors Regarding Contributions and Withdrawals
The RRSP contribution age limit is 71. After that, the RRSP will either convert to a Registered Retirement Income Fund (“RRIF”) or the full amount must be withdrawn and taxed that year. Taxpayer’s can also withdraw from their RRSP anytime before 71, but the withdrawals will be considered taxable income for that year.
One exception to the above rule is the Home Buyer’s Plan (“HBP”). This program allows eligible taxpayers to withdraw up to $35,000 tax-free from their RRSP to help purchase their first home ($25,000 limit for withdraws before March 2019). This incentive aligns with another one of Canada’s policy objectives of promoting home buying for taxpayers. Nevertheless, any amounts taken out from the RRSP via the HBP must be eventually paid back. In effect, taxpayers looking to purchase a new home can view the $35,000 amount in their RRSP as an interest free loan.
Conclusion
The RRSP is truly one of the few great tax saving accounts the Government of Canada promotes and provides to taxpayers. However, there are complex rules surrounding the application of the RRSP and taxpayers must ensure they do not fall into any pitfalls causing unnecessary financial damage to their accounts. If done correctly, taxpayers will benefit greatly from contributing to the RRSP and even get ahead in purchasing their first new home.
If you need assistance with structuring your RRSP or have any general inquiries, contact us today. Professionals at Rosen Kirshen Tax Law have years of experience developing effective tax planning structures specifically tailored to each individual taxpayer. We’re 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.