by Jeff KirshenEmployee Stock Options
Employee stock options give employees the right to purchase a specified number of shares of a company at a specified price. Employees can derive financial and tax benefits from these stock options if they exercise their options when the market purchase price of the stock is greater than the purchase price specified by the option. They can then sell the stocks they own. However, there are important tax rules that must be understood when an employee exercises their options, and also when those stocks are sold.
Employee Stock Option – Public Companies and Tax Benefits
The following analysis is for stock options granted by public companies.
Under paragraph 7(1)(a) of the Income Tax Act, employees are taxed on the difference between the amount they pay to purchase their option and the fair market value of the stock at the time they exercise the option. The way in which employees are taxed on employee stock options is similar to the way in which they would be taxed on a bonus.
For example, if an employee is given an option to purchase stock for $1,000 and, at the time the employee exercises the option, the fair market value of the stock is $2,000, then the employee will be taxed on the $1,000 difference between the exercise price and the fair market value. This will be counted as employment income in the year the option is exercised.
The way in which employees are taxed on the exercise of their stock options creates the possibility for double taxation. Usually, when an employee sells stock purchased with an employee stock option, the gain incurred from the sale is taxed as a capital gain. In this case, and using the above example, the $1,000 option purchase price would be the cost base for the stock, while the $2,000 fair market value of the stock would be the price of disposition (assuming that the stock is sold for fair market value). The $1,000 difference would be the taxable capital gain. Double taxation can arise here because the employee could be taxed twice: once when the employee exercises the option, and again when the employee sells the stock.
Fortunately, paragraph 53(1)(j) of the Act provides that the difference between the exercise price and the fair market value is to be added to the cost base for the stock. This means that, for the above example, the $1,000 difference between the employee’s exercise price and the stock’s fair market value would be added to the $1,000 cost base on the sale of the stock. Now, with a $2,000 cost base, there would be a $0 difference between the cost base and the price of disposition. The employee’s taxable capital gain would be cancelled out.
Employee Stock Option – Canadian Controlled Private Corporations
If options are provided by a Canadian-controlled private corporation (“CCPC”), and those options are exercised, the taxable benefit mentioned above will only be added to the employee’s income when the stock is actually sold. This is the benefit of exercising options that were granted by a CCPC, you don’t pay any of the taxes until you actually sell.
These shares may also be eligible for the lifetime capital gains exemption. There are specific rules and conditions that must be met before being eligible for this exemption so please consult a tax lawyer.
Employee Stock Options – Tax Deferral
The Income Tax Act provides other mechanisms for the preferential treatment of employee stock options. Under paragraphs 110(1)(d) and (d.1), only half of the difference between the exercise price and the fair market value is taxable. This preferential treatment is, however, limited to certain circumstances: employees must deal at arm’s length with their employer, must generally receive prescribed stock on the exercise of options (rather than generally receiving cash), and, on the date the option is granted, the purchase price specified by the option must be greater than or equal to the fair market value of the stock. Also, if the employer granting the option is a CCPC, the employee must hold the stock for at least two years.
Employee stock options are useful for attracting and retaining employees. For CCPCs especially, employee stock options can act as tax subsidies because they can offer potential employees tax-deferred compensation in exchange for cash investment in the stock of the corporation. If a CCPC is strapped for cash, and if markets are rising, employee stock options can be an ideal means of taking advantage of such circumstances. If you have questions regarding employee stock options, or if you are interested in learning how to use them to your advantage, 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 KirshenCharitable Donations, Tax Shelters and the Sham Doctrine
Taxpayers can claim tax credits or deductions for charitable donations in certain circumstances. The Income Tax Act (“ITA”) proves a regime of charitable donation deductions and credits to encourage philanthropic and public service functions which benefit the community.
Tax deductions in respect to charitable donations first appeared in 1917 for Canadians who contributed to certain patriotic and war funds. The charitable deduction was increased following the Great Depression and continued to be prioritized following World War II. From 1948, the ITA required charitable organizations to issue receipts and register in prescribed form.
Claiming Charitable Donations
Under the current regime, individuals may claim a tax credit against their tax payable and corporations may claim a deduction for eligible charitable donations. The former reduces the tax owed, at prescribed rates, providing a dollar-for-dollar reduction of tax payable. The latter reduces the corporate income subject to taxes for up to 75% of net income.
The charitable tax credit for individual donors is a non-refundable tax credit that can be carried forward five years or ten years for ecological gifts. Individuals can only claim the amount that is eligible.
Corporations can claim a deduction for the eligible amount of their charitable gifts for up to 75% of net income for the year. Donations that exceed the 75% net income can generally be carried forward five years.
Charitable Donation Requirements
There are certain requirements to be met for the charitable donation tax credit or deduction to be claimed. Donations must be made to qualifying donnees, there must be a valid gift, the value of the gift must be for an eligible amount, and the donor must comply with requirements for filing of receipts.
Qualified Donees
For the purposes of charitable donations, only certain organizations or entities will be eligible to issue charitable receipts. These include, but are not limited to: registered charities in Canada; registered Canadian amateur athletic associations; Canadian municipalities; United Nations agencies; and certain universities outside of Canada
Valid Gift
For a gift to be valid, there must be a charitable intent or absence of receiving something in return. Generally, the donor must own the gifted property, gift same voluntarily and without receiving any benefit in return. The gift must be property and not services.
Value of Gift
The amount eligible for the gift is the excess of the value of the gift over any advantage received. Any advantage can include broad benefits conferred to the taxpayer. For instance, in the case of dual secular and religious private schools, despite older guidelines providing otherwise, the child’s private education is considered a benefit to the donor.
Issuing Receipts
The qualified organizations can only issue a receipt for the amount of the contribution that exceeds any advantage received by the donor.
Tax Shelters and the Sham Doctrine
In certain cases, tax shelter programs may provide substantial tax benefits far above the actual contribution amount. Given the significant cost to the federal and provincial treasuries of these shelters, tax shelters involving charitable donations will be highly monitored and subject to CRA scrutiny. Programs which are found to be tax shelters will be subject to additional reporting and compliance requirements. These additional reporting requirements are also extended to individuals who participate in the program.
In circumstances where there is evidence showing the legal effect of a transaction was to achieve a tax benefit that would otherwise be denied, the court may arrive at a finding of a sham. Essentially, the sham doctrine states that: “…acts done or documents executed by the parties to the “sham” which are intended by them to give third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create..”
In cases of an alleged sham, the court will examine the objective reality of the situation, and will determine what actually happened. In the case of many tax shelters, the Courts are only willing to provide a donation credit for the actual cash contribution. There are even times where the actual cash contribution is denied if the tax shelter was considered extremely abusive.
The CRA continues to conduct routine mass audits of tax shelters and charitable programs to ensure compliance. What is considered an eligible gift for the purposes of obtaining a charitable donation depends on a case-by-case basis. In findings of a sham transaction, the CRA will deny the credit or deduction with applicable interest and or penalties, even where the participant was unaware of the sham. If you are experiencing any issues regarding your charitable donations, or a tax shelter you have been involved with, speak with a qualified tax lawyer today! We can help discuss the eligibility of your charitable donation tax credit or deduction and if a charitable donation tax shelter or sham applies to you.
**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 KirshenShareholder Loans and the CRA
Many independent business owners dedicate a significant part of their time and effort into managing the operations of their business. Naturally, it is difficult for business owners to separate their personal life and the time spent managing their business. A common consequence from these set of circumstances is that owners start using their corporate account or credit cards to fund personal purchases and vice versa. This may be better known as “shareholder loans” and “shareholder benefits”.
The Government of Canada recognizes that this is relatively a common phenomenon and has provisions in the Income Tax Act to ensure that they are dealt with effectively and fairly. This post will briefly highlight the main tax consequences of shareholder benefits/loans and what business owners should be aware of. For a previous blog post overview of shareholder loans in general, please see here.
Shareholder Loans and Benefits
A shareholder benefit is money given by a corporation to one of its shareholder, or to a person or partnership who does not deal at arm’s length with the shareholder. It is intended to capture economic advantages a shareholder may receive which are derived from the corporation. More specifically, s.15(1) of the Income Tax Act ensures that the value of any such “benefits” conferred on a shareholder of a corporation are included in income of the shareholder, and taxed.
The term “benefit” however is not explicitly defined in the Income Tax Act and can compass several meanings. As a result, some benefits are easier to recognize than others. For example, a business owner withdrawing cash from their corporate account would be considered a benefit conferred. A more subtle yet just as equally a benefit conferred would be purchasing an item for personal use such as a MacBook with corporate funds. In this case, the value of the MacBook would be attributed as income to the shareholder.
How do I Manage Shareholder Loans?
Typically, the balance sheets of corporate accounts have an account called “shareholder loans” to oversee what is owed and paid to the business. For example, if the shareholder deposited excess personal funds to the business, the shareholder loan account would be in the liability section as the business owes the shareholder.
Alternatively, if the shareholder withdrew excess funds from the business, the shareholder loan account would appear on the asset section as the shareholder owes the business money.
Shareholder Benefits – Are there any Workarounds?
It is important to note that dividends or capital distributions are not included as shareholder benefits. This is because when income is extracted from the corporation in the form of a taxable dividend, the amount of the taxable dividend is already fully included in the income of a taxpayer.
Furthermore, s.15(2) of the Income Tax Act allows loans paid to the shareholder not to be deemed a benefit conferred as long as the loan amount is repaid within one taxation year after the end of the taxation year in which the loan was given. The purpose of this rule is to prevent business owners from unfairly providing themselves or other shareholders long term loans that effectively allow them to use corporate funds for personal purchases while deferring their tax obligations.
The Courts have also grappled with the issue of whether or not a benefit is actually conferred when there is an accounting oversight. For example, what happens when an accountant erroneously posts a personal home purchase as a corporate expense rather than debiting the shareholder loan account. In this situation, the Courts determined that an erroneous failure to adjust a loan account does not create tax liability.
If used properly, shareholder loans can be an extremely powerful tool for business owners to leverage their corporate accounts. However, improper use of shareholder loans can result in double taxation and audits from the CRA. If your business is being audit or have further questions regarding shareholder loans and benefits, contact a professional at RKTL today! 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 the articles. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenRetail Investing and the Tax Implications in Canada
The COVID-19 pandemic has created novel economic conditions for Canadian investors. Many Canadians were laid off or let go completely from their place of employment. Stay-at-home orders have also resulted in many Canadians spending much of their winter indoors in order to comply with provincial regulations to curb the spread of the disease. The pandemic’s effect on the economy has also created an investment climate where there is tremendous potential upswing for the changing needs of our society. Stocks like Amazon, Shopify and, most notably, Tesla have seen record gains on the stock market leading to significant gains for their shareholders in turn.
These factors have led to many Canadians pursuing income-earning alternatives to try to mitigate financial damage. This has contributed to the increasing popularity of “retail investing” as a potential means of planning for one’s financial future. While retail investing may provide an opportunity for some to supplement their earnings, it is important to consider the tax implications of the addition of investment income to one’s existing income sources.
Some retail investors may believe that sheltering their securities under their Tax-Free Savings Account (TFSA) will protect their earnings from any tax liability. However, there are limitations as to what earnings are protected from inclusion in taxable income, even under a TFSA.
What is Retail Investing?
“Retail investing” is the term for non-professional individuals buying and selling financial instruments or securities. Retail investors open investment accounts and procure securities with or without the direct aid of a broker.
Retail investing is increasingly accessible to Canadians, with a wide range of trading accounts now offered by major Canadian financial institutions. Another arena of growth has been the development low-cost trading applications like Wealthsimple Trade and Questrade that allow for Canadians to purchase securities on the go.
Retail Investing and the Tax Implications
Retail investing can trigger earnings in several ways, all of which are taxable (unless eligibly positioned in a registered savings account that shelters the earnings from taxation, like an RRSP or TFSA). However, the amount of the earnings that is included in a retail investor’s taxable income depends on source of the earnings. With retail investing, earnings usually stem from one of three main sources: interest income, dividend income, or capital gains.
Interest income can be earned on investments that have a rate of return on the principal amounts invested. Typically, this is a low percentage of guaranteed earnings such as the interest return on a savings account principal, bond interest or interest earning from a Guaranteed Investment Certificate (GIC). Any interest income earned during a calendar year is to be included in full in the taxable income of the taxpayer.
Dividend income is earned when a corporation elects to pay out a portion of its profit during a specific time period to its shareholders. These earnings vary depending on the security and are to be included in full in the taxable income of the taxpayer during the taxation year in which they were accrued.
When a security appreciates in value and is sold by a taxpayer, any gains or profit earned by the taxpayer upon the sale of the security are determined to be “capital gains” (with some exceptions, e.g. where the taxpayer meets the definition of a “trader”). Half (50%) of the value of all capital gains earned by the taxpayer during a given taxation year are to be included in the taxpayer’s taxable income during a taxation year.
There is a legitimate means of avoiding taxable income inclusions with respect to earnings from these three sources for the individual: placing the financial instruments in a registered savings account such as a TFSA or RRSP (each with their own set of advantages for savings). However, this sheltering requires careful adhesion to the rules and eligibility criteria for investments to be protected under the registered savings plan.
Retail Investing and the TFSA
A TFSA can be a great tool to avoid income tax inclusions on qualifying earnings of eligible securities. However, there are eligibility requirements for what sort of investment earnings garnered under a TFSA are sheltered from taxation.
A consideration to keep in mind is whether the TFSA account holder has already exceeded his or her TFSA contribution limit. The contribution limit is prescribed by the federal government and additional contribution room has been provided each year since 2009. Contributing in excess of the allowable contribution limit can result in serious penalties levied by the CRA against the taxpayer, so in almost all circumstances it would be unadvisable to exceed this limit.
Another key consideration is the nature of the security being held under the TFSA. Retail investors are able to keep mutual funds, registered stocks, bonds, ETFs and GICs among other types of investments in their TFSA. The eligible placement of these securities will protect the interest income, dividend income and capital gains earned from the securities from inclusion in the taxpayer’s taxable income for that taxation year, so long as several requirements are met.
Even still, earnings from these securities that are eligible for protection under the TFSA may be viewed by Canada Revenue Agency (the CRA) as taxable income depending on the nature of the activity undertaken by the TFSA holder. The key distinction lies with whether or not the earnings stem from “investment income” or “business income” in the eyes of the CRA, the latter of which is not protected from inclusions in taxable income.
If you are concerned about unreported taxable income from your retail investing or wish to carefully plan your investment portfolio to ensure compliance with registered savings plan rules and eligibility requirements, 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 KirshenGST/HST Rules for the Supply of Digital Products or Services
The Government of Canada has proposed new measures surrounding the registration and collection and remittance of the goods and services tax / harmonized sales tax (“GST/HST”) for cross-border digital products and services. This comes at a time of accelerated digital shopping and growth in e-commerce as public health measures surrounding COVID-19 remain in place.
Current Rules for the Supply of Digital Products or Services
Under the current rules in Canada, any business or company is required to register, collect, and remit the GST/HST on their sales when they exceed $30,000.00 over a 12-month period, are selling taxable supplies, and are carrying on a business in Canada.
Currently, non-resident vendors who are not considered to be “carrying on business” in Canada but are supplying digital products or services to consumers in Canada, are not required to register for the GST/HST and collect and remit GST/HST.
Whether a taxpayer is “carrying on business” in Canada is a factual test. Factors include whether the company is located in Canada, whether the activity is continuous, whether the company has some physical presence, or uses Canadian warehouses or other infrastructure to hold its assets. Currently, a non-resident online marketplace with only a place of contract, solicitation and payment would not be considered to be carrying on business in Canada despite exceeding the sales threshold.
The current rules place Canadian vendors at a disadvantage since large scale non-resident vendors do not have to charge the GST/HST if they do not carry on business in Canada. This allows non-resident vendors to provide competitive pricings since the inclusion of tax does not pass to the consumer.
Proposed New Rules for the Supply of Digital Products or Services
On November 30, 2020, Minister of Finance, Chrystia Freeland, tabled the Fall Economic Statement 2020, with proposed amendments and draft legislation for new GST/HST registration requirements for non-residents of Canada who do not carry-on commercial activities in Canada. The proposals are effective July 1, 2021. The government consultation period ended February 1, 2021.
Under the proposed legislation, non-resident vendors that supply digital products or services to consumers in Canada would be required to register for the GST/HST and be responsible for collecting and remitting same.
The proposed legislation applies regardless if the non-resident vendor carries on business in Canada or has a permanent establishment in Canada.
Furthermore, digital distribution platform operators, such as the online marketplace which facilitate the sales of the non-resident vendors, would also be required to register for and collect and remit the GST/HST on the sales of goods located in Canadian fulfilment warehouses if the sales to Canadians exceed a certain threshold.
These non-resident vendors and distribution platform operators can register under a new simplified registration system. However, the option to register for the normal GST/HST system remains open.
Input Tax Credits
Input tax credits (“ITCs”) allow GST/HST registrations to recover the GST/HST paid on business expenses. However, ITCs can only be claimed under the normal GST/HST system and not the simplified GST/HST system.
The simplified GST/HST system provided in the proposals do not allow for registrants to claim ITCs.
Whether a non-resident vendor should register under the normal or simplified system depends on a variety of factors. A qualified tax lawyer or professional should be consulted prior to the July 1, 2021 effective date to determine a compliance plan accordingly.
The new rules surrounding the supply of digital products or services are among some of the new amendments proposed by the Government of Canada in late 2020. Given the complexity of the GST/HST rules and amendments in light of a changing economic landscape, speaking with a qualified tax lawyer or tax professional can assist in ensuring compliance with new or continuing business operations in Canada. Contact 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 KirshenThe Taxation of Electric Vehicles
In recent years, Canada has experienced a significant increase in the adoption rate of ZEV (zero emission vehicle). According to Statistics Canada, electric and plug-in hybrid sales grew from two percent in 2018, to 2.7 percent in 2019, and 3.3 percent in 2020. While a large reason for the increase in ZEV adoption can be credited to the improvements of battery technology and subsequently a better selection of electric vehicles, the Government of Canada has also implemented many incentives to help lower the costs of ZEVs for Canadian consumers. This post will briefly highlight the main potential ZEV tax incentives Canadians should be aware of.
What is a Zero Emission Vehicle?
Before diving into the various types and forms of incentives, taxpayers must first ensure that the vehicle they are looking to purchase qualifies as a ZEV. Transport Canada defines zero emission vehicles (ZEV) as vehicles that has the potential to produce zero tailpipe emissions. They can still have a conventional internal combustion engine but must also be able to operate without using it.
Examples of ZEV’s include the following:
- Battery-electric;
- Plug-in hybrid electric; and
- Hydrogen fuel-cells.
Among others, popular vehicles that qualifies as a ZEV include Tesla Model 3, Audi A3 e-Tron and Chevrolet Volt.
Purchase and Lease Incentives
The first incentive offered by the Government of Canada for consumers looking to buy or lease a ZEV is the point of sale incentive. Essentially, the Government of Canada will pay for $5,000 of the final price of an eligible battery-electric, hydrogen fuel cell and longer-range plug-in hybrid vehicles. Alternatively, shorter range plug-in hybrid electronic vehicles are eligible for $2,500. The purchase incentive will be applied at point-of-sale directly on the sale or lease agreement. As a result, the dealership will be responsible for completing the documentation required to receive the incentive.
It is important to note that in order to be eligible for the ZEV program, the vehicle must have either:
- Manufacturer’s Suggested Retail Price (MSRP) of less than $45,000 if vehicle has six seats or lower; or
- Manufacturer’s Suggested Retail Price (MSRP) of less than $55,000 if vehicle has seven seats or greater.
The reasoning for the cap in MSRP is so that the incentive helps overall ZEV adoption rather than just subsidize the purchase price for luxury vehicles.
Capital Cost Allowance and Zero Emission Vehicles
In addition to the point of sale incentive, the Government of Canada also introduced two new Capital Cost Allowance (CCA) classes specifically for businesses looking to adopt ZEVs. As mentioned earlier in the previous blog post about CCAs, capital expenditures are distinct from current expenses in that while both may be incurred for the purposes of earning income, only the latter is immediately deductible under the Income Tax Act.
Class 54 now captures ZEV excluding taxicabs and automobiles used for lease and rent. The CCA rate for this class is 30%. Meanwhile, class 55 captures ZEV for leasing/renting taxicabs and the CCA rate for this class is 40%.
Importantly, businesses can now write off 100% of the purchase price of eligible class 54 and class 55 vehicles, up to $55,000, in the year the car becomes available for use. However, the Government of Canada has also implemented the following phase out period:
- 100% after March 18, 2019 and before 2024;
- 75% after 2023 and before 2026;
- 55% after 2025 and before 2028; and
- 0% after 2028.
As the world strives for a greener future, electronic vehicles will become increasingly more common place. If your business is looking to purchase ZEV’s and capitalize on the current tax incentives, or you have general questions regarding the deductibility of business expenses, contact a professional at RKTL 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.
by Jeff KirshenThe CRA Audit Process
Canada has a self-reporting tax regime, meaning that Canadians are responsible for accurately reporting their taxes payable to the federal government by certain prescribed filing deadlines. In order to properly police this self-reporting tax regime, Canada Revenue Agency (the CRA) requires tools at its disposal to investigate and verify the accuracy of amounts reported by taxpayers. Audits are an effective way for the CRA to assess the legitimacy of amounts claimed by taxpayers on tax filings.
In 2021, the audit process may become increasingly relevant for the average Canadian due to the possibility of COVID-19 related pandemic response audits.
CRA Audit Basics
Any “person” as defined by the Income Tax Act can be audited (notably, this definition includes corporations and trusts). The CRA chooses the subject of audits through risk assessments of the returns filed by taxpayers. Risk assessments look at the number of errors on the tax filings of a taxpayer and/or anything reported by the taxpayer that may indicate non-compliance or suggest a misrepresentation. Taxpayers are deemed responsible for misrepresentations advanced on their behalf by tax preparers.
Most Canadian taxpayers are familiar with what the process of an audit entails—a CRA agent (an auditor) contacting a taxpayer and asking a series of questions to determine the candidacy of the taxpayer for an audit. Establishing proof of the claims of the taxpayer requires that the auditor probe through troves of taxpayer records for lengthy periods and at great inconvenience to the taxpayer.
Most Canadian taxpayers would ideally prefer to avoid this process at all costs. While a taxpayer may believe that after receiving an income tax refund that the taxpayer is in the clear, that is not always the case. The CRA has variable discretion to reassess years after the income tax filing has been made and investigate through the taxpayer’s records from years prior to the filing.
How Long does the CRA have to Initiate Audit Proceedings?
If the CRA deems that a taxpayer meets the eligibility requirements of an audit, the CRA has a statutory limit of three years for reassessing tax liability. For example, if a Notice of Assessment is issued to a taxpayer on May 14th, 2021, the CRA can adjust that tax year by issuing a notice of reassessment until May 13th, 2024. However, if the CRA suspects that a taxpayer perpetrated a misrepresentation akin to fraud on the taxpayer’s filing, this time limit is extended.
Depending on the nature of the taxpayer’s returns (individual, corporate, etc.), this process could mean combing through a significant volume of documents. How far exactly the auditor can look back is subjective and depends on what is uncovered during the initial review of the first two to three taxation years.
If the auditor finds an error that sparks interest in a prior taxation year, the auditor then has cause to extend the period under scrutiny and open up other taxation years for review. Again, if the auditor uncovers what the auditor thinks is a misrepresentation tantamount to fraud, the auditor can look back as far as he or she wants into records from prior taxation years.
How Long does the CRA want me to keep my Records?
There is actually no time limit with respect to CRA requesting the production of tax records (notably in Ghermezian v. Canada, the CRA was permitted to peruse records from 21 years prior), but taxpayers are not expected to retain the records they relied on to file their returns indefinitely.
Subsections 230(4) and 230(4.1) of the Income Tax Act mandate that most tax records be kept for six taxation years following the date of filing of the taxation year. For example, if a taxpayer filed its annual income tax return on June 30th, 2020, its tax records from the 2020 taxation year should not be destroyed until June 30th, 2026 (if at all). This includes electronic records that must be kept in an “electronically readable” format of the document(s) for the same six-year period.
Where the taxpayer files its return late, the taxpayer must retain records for six years from the original date of late filing. Using the same example as above, if the taxpayer filed its 2020 income tax return on September 27, 2020, the corporation must retain its records from this reporting period until September 27, 2026.
The audit process can result in findings that cause life-changing adjustments to a taxpayer’s returns. Few taxpayers are aware that in lieu of having the audit conducted at their home or place of business, it is the taxpayer’s right to have the audit conducted at the office of their authorized representative. Conducting an audit at the office of a tax lawyer allows the taxpayer to protect their rights by having their lawyer present for the duration of the audit process. If you are being audited or fear you may be, having legal support can make all the difference in a successful audit defense. Contact a tax lawyer 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 Corporate Association Rules
If a Canadian-controlled private corporation (“CCPC”) is associated with one or more CCPCs, subsection 125(3) of the Income Tax Act (the “Act”) provides that all the CCPCs must file with their tax returns an agreement under which the Small Business Deduction limit of $500,000 is allocated amongst them. For this reason, subsection 125(3) can pose a tax disadvantage to small business owners seeking to associate their business with others.
What does Associated Mean?
“Association” is a technical term under the Act, and the essential rules regarding whether two corporations are “associated” are found under subsection 256(1).
Under subsection 256(1)(a), two corporations are associated if, at any time during the year, one corporation controls the other. “Control” is another technical term under the Act. For the purposes of this blog post, “control” refers to indirect or direct control. Under paragraph 256(1)(a), control of one corporation by another could arise, for example, if one corporation owns more than 50% of the voting shares of another corporation.
Under subsection 256(1)(b), two corporations are associated if, at any time during the year, both corporations are controlled by the same person or group of persons. This means that two corporations could be associated even if a business owner has a 100% share over one corporation and only a 51% share over another.
Under subsection 256(1)(c), two corporations are associated if, at any time during the year, one of two related persons, who together control both corporations, has at least a 25% share of one of the corporations. This means that two corporations could be associated even if a business owner has a 100% share in one corporation and only a 25% share of his spouse’s corporation. Similarly, paragraph 256(1)(c) would apply to a business owner who has a 100% share in a corporation that has a 25% share of the corporation controlled by that business owner’s spouse.
Under subsection 256(1)(d), two corporations are associated if, at any time of the year, a person who controls one of the corporations, and who is related to each member of a group of persons who together control the other corporation, has at least a 25% share of that group’s corporation. This means that even if, for example, the ownership of one corporation were to be evenly divided amongst a business owner’s spouse and children, the corporation over which that business owner has control would be associated with the corporation over which the business owner’s spouse and children have control so long as that business owner has at least a 25% share.
Similarly, under subsection 256(1)(e), two corporations are associated if, at any time of the year, at least one of the persons of a group of persons, who are all related to each other and who together control one of the corporations, has at least a 25% share of a corporation controlled by another group of persons each member of which is related to each other and to every member of the first group.
Association – Example
Suppose, for example, a spousal couple together controlled a corporation and their three children each held a 25% share of another corporation. The two corporations would be associated under paragraph 256(1)(e) if a spouse held the remaining 25% share of the children’s corporation. However, if the couple had four children who each held a 20% share of a corporation, this corporation would not be associated if a spouse only held the remaining 20% share of the children’s corporation. This is because paragraph 256(1)(e) applies only if a person holds at least a 25% share of a corporation controlled by a related group of persons.
“Association” and “control” are technical terms under the Act, but small business owners can use these technicalities to their advantage. They have important consequences for the legal use of the Small Business Deduction. Any small business owners seeking to associate their business with another should consider the above provisions and subsection 125(3) of the Act. If you are a small business owner seeking to review the rules of association, or if you are simply interested in learning more about using the Small Business Deduction to your advantage, contact a lawyer 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 KirshenCanada Recovery Benefits
On October 2, 2020, the Canadian government announced three new temporary Recovery benefits to assist Canadians unable to work, experiencing reduced income due to the COVID-19 pandemic, or recovering or tending to one sick with COVID-19. These recovery benefits are the Canada Recovery Benefit (CRB), the Canada Recovery Caregiving Benefit (CRCB), and Canada Recovery Sickness Benefit (CRSB). All three programs are administered by the Canada Revenue Agency (the “CRA”).
These new temporary benefits are replacing the Canada Emergency Response Benefit (CERB), as the economy safety restarts. Unlike CERB, the Recovery benefit periods are retroactive. Applicants can only apply within 60 days after the period for which they apply has concluded. The Recovery Benefits are available for those residing and present in Canada who meet the eligibility criteria. There is no citizenship or permanent resident status requirement.
For all Recovery benefits, the applicant must be residing and present in Canada during the period of application. Therefore, Canadians who were abroad and unable to return home due to the travel restrictions surrounding the pandemic are not eligible. Like CERB, the Recovery benefits are taxable and must be included in total income for the taxpayer’s taxation year if received.
Canada Recovery Benefit
The CRB was introduced by the Canadian government to provide assistance to individuals who are not eligible to receive EI regular benefits. These include individuals who are self-employed, or those who experience at least a 50% reduced income due to COVID-19. Eligible applicants for CRB can receive a taxable $500 each week for up to 26 weeks, starting from the period of September 27, 2020 and through September 25, 2021.
While the CRB benefits extend until the fall of 2021, to be eligible, applicants must be available and looking for work. Furthermore, they cannot decline work if offered to them, if it is reasonable to accept the work. There is a claw back for the CRB where taxpayers will be required to repay $0.50 of the Benefit for every dollar in net income earned above $38,000. The threshold does not include the CRB received.
Applications for the CRB began on October 12, 2020.
Canada Recovery Caregiving Benefit
The Canada Recovery Caregiving Benefit (CRCB) provides income support to employed and self-employed individuals who are unable to work because they must care for their child under 12 years old or a family member who needs supervised care. Eligible applicants can receive $500 for each one-week period or $450 after taxes since the CRA will apply a flat 10% deduction at source. Applicants can apply for up to a total of 26 weeks between September 27, 2020 and September 25, 2021.
CRCB applies if the individual’s school, or regular facility is closed or unavailable to them due to measures surrounding COVID-19, or because of sickness, self-isolation, or risk of serious health complications due to COVID-19. However, it does not apply if an individual voluntarily chooses to stay home to care for the child or individual when the child’s school or the individual’s regular facility is open. The exception to this is if in the opinion of a medical practitioner or nurse practitioner, the child or individual would be at risk of having serious health complications if the child contracted COVID-19. The same does not apply if there is an immune-compromised family member in the same household who does not require supervised care.
An individual does not need to use up all of their vacation or other types of leave to apply for CRCB, but they cannot double-claim for the period if they are receiving either CRCB or leave for the period. Furthermore, only one individual in a household may receive the CRCB (i.e. the maximum number of weeks must be shared with the partner).
The application process for CRCB was launched on October 5, 2020.
Canada Recovery Sickness Benefit
The Canada Recovery Sickness Benefit (CRSB) provides income support to employed and self-employed individuals who are unable to work due to sickness, being under quarantine, must self-isolate due to COVID-19, or have an underlying health condition that puts them at greater risk of contracting COVID-19. The individual must provide evidence of the opinion of a medical practitioner, nurse practitioner, person in authority, government or public health authority in respect to COVID-19 susceptibility.
Eligible applicants for CRSB can receive $500 for a one-week period, or $450 after taxes since the CRA will apply a flat 10% deduction at source. The CRSB is available for a maximum of two weeks within the period of September 27, 2020 through September 25, 2021.
CRSB does not apply if the individual must self-isolate but they are able to work from home for more than 50% of their scheduled work per week. An individual does not have to use up any other sick leave before applying for the CRSB. They can still apply even if they have access to private insurance, the EI program or another source of paid sick leave. However, an individual cannot double-claim for CRSB when they have already claimed the sick leave for the same period.
While the CRSB is restricted to COVID-related sick leave, through the streamlined EI program, workers will only require 120 insurable hours of employment to qualify for EI sickness benefits which they can use for any sickness. The application process for CRSB was launched on October 5, 2020.
While the three Recovery benefits ensure Canadians will continue to have access to much needed financial support during the ongoing pandemic, Canadians should be aware of the rules surrounding these benefits. Especially considering the claw back for the CRB, the consequences can be considerable if any of the benefits are taken beyond a certain income level or without eligibility. Retroactive penalties and interest are also a reality if excess payments are accidentally received. You may be asked to supply supporting documentation at a later date.
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 this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenAccommodation Sharing
Recently, many Canadians have been looking to get away from the city and enjoy more spacious living due to the imposed lockdowns. As such, individuals have been turning to accommodating sharing platforms to rent out cottages or bigger homes. For a small pocket of homeowners, this has created a boost in business and an opportunity to generate extra income. Indeed, accommodation sharing has become a lucrative business since the rising popularity of AirBnB. Whether you are operating AirBnB rental units full time as a business or just part time to generate side income, there are several tax implications that homeowners should be aware of.
Rental Income v. Business Income
First, many individuals are surprised to learn that revenue earned from AirBnB and accommodation sharing is taxable. For the most part, income generated through accommodation sharing will be classified as rental income. Homeowners generating rental income will need to report and file a T776 form – Statement of Real Estate Rentals. This form provides details on the income, expenses and capital cost allowance incurred from the property.
Alternatively, in some cases the revenue earned from accommodation sharing should be reported as business income. This is often the case if the homeowner operates multiple units or provides additional services. The CRA notes that in most cases, you are earning an income from your property (rental income) if you rent space and provide basic services only. Basic services include heat, lighting, parking and laundry facilities. However, if you provide additional services to tenants, such as cleaning, security and meals, you will most likely be considered carrying on a business. The more services you provide, the greater the chance that your rental operation is a business.
It is important to remember that anyone who operates a business is required to fill out a T2125 form – Statement of Business or Professional Activities. The T2125 form is a schedule that goes along with a tax return which details the taxpayer’s income, expenses and type of business it’s operating. The following is a more detailed analysis on the T2125 form and its requirements.
GST/HST Remittances and Accommodation Sharing
Another common question many AirBnb hosts have is whether they need to collect and remit sales tax (GST/HST). The first important factor the homeowner must consider is whether they are doing short term or long term rentals. If the homeowner rents out their unit on a long-term basis (more than 30 days), the income is exempt from GST/HST. The second factor is the income threshold. For short term rentals, the homeowner must register and collect GST/HST if their revenue exceeds over $30,000 in 4 consecutive quarters (12 months).
Deductions from Income
One advantage of operating an accommodation sharing rental unit is that you can deduct certain expenses used to operate the unit. The deductibility of an expense usually depends on whether the expense was incurred for the purpose of earning or producing income.
Expenses that are commonly deducted from accommodation sharing units include but are not limited to the following:
- Maintenance and repairs;
- Mortgage interest;
- Utilities;
- Insurance;
- Property taxes; and
- Advertising.
Homeowners should be cognizant of the fact that personal expenses cannot be deducted. In other words, if any of the above-mentioned expenses were incurred for personal use, it cannot be deducted. Similarly, the homeowner should calculate the portion of the expense that was used for business if some of the expense was incurred personally.
Accommodation sharing is expanding and many homeowners are looking at it as a new opportunity to generate income. However, it is critical that they navigate through their tax obligations to ensure they don’t get penalties and interest if mistakes are made. If you are looking to become an accommodation host and have any questions, contact a lawyer a 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.