by Jeff KirshenInternational Tax Issues Created by COVID-19
The ongoing COVID-19 pandemic has forced changes in all aspects of life. One of the main changes being the imposition of travel restrictions to and from Canada for citizens, non-residents and vacationers. The travel restrictions imposed by Canada and many other countries worldwide, has had the unforeseen consequences of forcing people to stay longer than intended in other countries, having a drastic impact on their tax consequences. This blog post is designed to help navigate these complicated Canada Revenue Agency (“CRA”) adjustments.
The rules that will be described below apply to situations that occur or have occurred between March 16, 2020 to August 31, 2020, at which point the CRA will review and determine if they need to be extended further.
Income Tax Residency and COVID-19
In general, an individual’s residency determination for Canadian tax purposes is based on a common-law factual test. The determination is made based on an individual’s residential ties to Canada (location of permanent place of residence, family members, bank accounts, etc.). In addition, an individual who sojourns (meaning physically present) in Canada for 183 consecutive days or a total of 183 days in a single tax year, will be deemed to be a resident.
Some individuals may have been forced to stay in Canada longer than originally anticipated due to travel restrictions placed by Canada or their country of residence. The CRA has stated that where the individual has remained in Canada solely because of COVID-19 related travel restrictions, the travel restricted days will not count towards the 183-day sojourn requirement. Moreover, the CRA will not take into account any of those days spent in Canada towards their common law test of residency (the common law test stems from Thomson v. Minister of National Revenue).
Under Canadian tax law, foreign corporations (corporations established under foreign law) can be considered a resident of Canada if their “central management and control” is located in Canada (stemming from the English case of De Beers Consolidated Mines v. Howe [1906] A.C. 455 (HL)). One of the main factors in determining central management and control is where the board meeting takes place. If due to COVID-19 travel restrictions, a board member is stuck in Canada, unable to leave and must attend board meetings from Canada, the CRA will take this factor into account when determining residency. The CRA will also look to applicable tax treaties where appropriate.
Carrying on Business in Canada / Permanent Establishment
Another potential issue caused by COVID-19 travel restrictions, is that generally speaking, non-residents and non-resident businesses only pay taxes on their income that stems from “carrying on business in Canada”. What will then happen to employees who regularly perform their working duties outside of Canada, but due to travel restrictions, have to perform their duties in Canada? Will they be considered to be a resident, or have a permanent establishment in Canada? The CRA has confirmed they will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees perform their duties in Canada due to travel restrictions.
Similarly, the CRA will exclude any days present in Canada due solely because of travel restrictions in their calculation of the 183-day presence test in the applicable tax treaties (such as Article V(9)(A) of the Canada-United States Income Tax Treaty).
Cross-Border Employment Income
Under the Canada-United States income tax treaty, Canada is permitted to tax an individual’s salary, wages and other similar remuneration derived by a resident of the US in respect of any employment services provided in Canada. However, some of the remuneration is not taxable in Canada if a) it does not exceed $10,000 or, b) the person is present in Canada for less than 183 days. The CRA has clarified that where such an individual is present in Canada, and exercising their employment duties in Canada, solely due to travel restrictions, those days will not count towards the 183-day total.
Sale of Canadian Property by Non-Residents of Canada
Under Canadian income tax legislation, a non-resident vendor who disposes of taxable Canadian Property must notify the CRA within 10 days after disposing of it, or at any time before officially disposing of it. Whenever the CRA receives either an amount to cover the tax on the gain from the sale of the property, or tax from a gain the vendor will realize at a later date, the agency will issue a certificate of compliance to the vendor (a section 116 certificate). Vendors needs these certificates in order to avoid penalties in the future.
Due to COVID-19, the processing of these requests was temporarily interrupted. Thankfully, the CRA has confirmed that if you are a vendor who submitted a S.116 request and the certificate has not been issued by the time the purchase happened, the purchaser or vendor can request the CRA to provide a comfort letter. This letter advises the purchaser/vendor to retain the funds they have withheld, until the CRA’s review is complete. The CRA will not assess penalties or interest on these COVID-19 related delays.
Overall, the CRA has stated that there will be hearing matters involving delays in travel due to COVID-19 travel restrictions on a case by case basis. Meaning that your specific fact scenario, might entitle you to taxation relief even if you did not meet any or all of the requirements mentioned above. On the opposing end of the spectrum, even if you fit into these rules and requirements, you may still end up owing taxes to the CRA based on their determination. If you feel that your situation requires some assistance, Rosen Kirshen Tax Law can help. If you have any questions, feel free to call us and schedule a consultation now!
**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 and US Real Estate Transactions
On June 25, 2020, the CRA announced it will undergo an extensive review of U.S. real estate transactions over the past six years to find any tax non-compliance from Canadian taxpayers. The CRA plans to look through real estate and property data of Canadian property transactions in the States. Reassessment through this upcoming audit could mean that Canadian taxpayers are facings serious penalties and interest if found non-compliant. There is also a chance that you could be facing prosecution for tax fraud or tax evasion.
Many issues will be reviewed by the CRA during these tax audits, especially when there is undisclosed real estate property or unreported real estate transactions. As a Canadian Taxpayer who owns property in the States, you should be aware of these potential issues and how you can potentially get ahead of the taxman.
Unreported Foreign Property
One of the issues that the CRA could be looking for is whether the T1135 Foreign Income Verification Statement for a foreign property has been complied with and filed properly annually. This reporting requirement requires Canadian taxpayers who own or hold in trust a foreign property with a value of over $ 100,000 to disclose the property on their tax returns. There are some exceptions to reporting these properties but if you are earning income from the property, it generally must be reported. The definition of property is very vast. If it’s something that has value, it is probably included in the definition.
Unreported Rental Income
Canadian tax residents are generally required to declare and report their worldwide income. To avoid paying taxes on the same income in two different jurisdictions, the Income Tax Act uses the Foreign Tax Credit mechanism to avoid double taxation. For Canadian taxpayers who generate rental income from a U.S. property, he or she is required to report that income to the CRA. However, if the taxpayer fails to disclose that income to the CRA, he or she may be subject to a reassessment and will be met with heavy penalties, and interest, even if the taxpayer has already paid taxes to the U.S. government.
The reason for this is because Canadian tax rates are higher than U.S. rates. So if you’re only reporting the income to the U.S, you are paying most of the tax, but not all.
The upcoming CRA tax audits will most likely involve auditors looking for any unreported U.S. rental income from Canadian taxpayers.
Unreported Real Estate Sales
Finally, the CRA will examine U.S. real estate sales of properties owned by Canadian taxpayers. Generally, proceeds of the sale of a property are subjected to taxation as either income or capital gains by the CRA, unless the sale falls under the principal residence exemption. This means that if you sell your U.S. property, you need to report the proceeds of the sale to the CRA since the amount is likely fully taxable.
If you have not reported the sale, you are subject to audit, and the assessment of penalties and interest. It is even possible that you are charged criminally for tax evasion. This normally depends on the level of the evasion and the amount of tax you have not paid.
The most frustrating part of this audit is that the CRA will normally assess these property sales as income instead of capital gains. This doubles the amount of taxes owing in most cases. There are ways to fight this, of course, but it is a frustrating position to be in.
CRA and US Real Estate – Can I Fix Things?
The CRA offers the Voluntary Disclosure program, where Canadian taxpayers can disclose their previous errors or omissions such as; unreported income, unreported real estate sales transactions, and unreported foreign property. The benefit of the program is the potential to avoid criminal charges, penalties and you may receive a large break on the interest charged.
However, there are specific criteria that need to be met; one being that the CRA has no existing knowledge of the mistake and that you are coming forward voluntarily. A timely voluntary disclosure application could be the way to avoid not just penalties and interest, but also avoid prosecution for tax fraud or tax evasion.
If you are a Canadian taxpayer with property in the U.S and have any concerns around your U.S. real estate tax issues, now is the time to contact our experienced Tax Lawyers. At Rosen Kirshen Tax Law we have the experience and the expertise to help you with your U.S. real estate tax issues. Call us today to learn more!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenCRA Audits of COVID-19 Benefit Programs
Globally, COVID-19 has been the greatest upheaval the world has seen since the second World War. Millions infected and countless effected. Government assistance programs such as the Canada Emergency Response Benefit (“CERB”), Canada Emergency Wage Subsidy (“CEWS”), and the Canada Emergency Student Benefit (“CESB”) have all been instituted in order to help the Canadian people through this challenging time. The Canada Revenue Agency has recently updated the public in regard to post-payment validation requirements for its assistance programs. Here’s what you need to know:
CERB, CEWS, CESB, and CRA Audits
Between the months of July and August, the CRA has announced that it will launch a pilot CEWS post-payment compliance project through the Trust Exam Program and Employer Compliance Audit. In order to ensure compliance, the CRA will institute a combination of automated queries within its data, follow-up calls to verify certain elements of the taxpayer’s claim (when necessary) and will also begin a more comprehensive post-payment review and audit of all claims made under the CEWS.
Beginning in September, the federal government of Canada will begin post-payment validation of the new programs introduced as a result of COVID-19. These programs include CERB, and CESB. Further, the CRA will monitor the initial intake of claims and adjust its queries as necessary. The purpose of post-payment validation for these new programs is the CRA’s attempt to maintain the integrity of the program and deter fraudulent application filings.
If the CRA concludes that a taxpayer is not eligible for the wage subsidy, the taxpayer will then be required to repay amounts paid. It is possible that penalties and interest are applied as well.
CRA Audits – What do I need to do?
The CRA expects all taxpayers to maintain adequate books and records to ensure that the claim is accurate and complete, and clearly supports the taxpayer’s eligibility for the wage subsidy for a claim period. This includes ledgers, journals, financial statements, contracts, calculations of other working papers, payroll records, etc. Creating your own “paper trail” can be tedious but is imperative in ensuring your claims are supported and can help you avoid being penalized for fraudulent claims.
For CERB, the CRA is actively monitoring the situation to ensure that compliance with the lax laws is assured. With the same goal in mind, the CRA ensures that, regardless of the assistance program you apply for, they monitor each claim and ensure that the claims are valid, and the claimant is eligible for the support program they have applied for, whether it be CERB, CEWS or CESB.
There is some good news to share. The federal government has extended the CERB payments from 16 weeks to 24 weeks as a result of the ongoing pandemic for those eligible.
Penalties and Non-Compliance
Many have wondered whether the federal government will be taking active steps in penalizing those who have applied for an assistance programs they are not qualified for. The answer to this question is, yes. Due to a specific anti-avoidance rule, an employer will not be eligible to claim the wage subsidy for a claim period if the employer participates in a plan that has one of the main purposes of effectively reducing the employer’s qualifying revenues for the current reference period, in order to qualify for the subsidy. As a result, where this anti-avoidance rule applies, the employer will be liable to a penalty equal to 25% of the amount of wage subsidy that is claimed in its application and will have to pay back any wage subsidy that it received.
In addition to this, if an employer knowingly makes a false claim amounting to gross negligence, the employer is liable to a penalty of up to 50% of the difference between the amount of the wage subsidy that it claimed in its application and the amount of wage subsidy to which it is actually entitled.
If you have questions about your eligibility for any of these programs, call us 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 this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenHome Office Expenses and COVID-19
With almost all businesses adopting a work-from-home policy during the COVID-19 pandemic, employees and independent contractors may be wondering if they can claim home office expenses for their new work environments.
If you have been working remotely, you may be able to claim some expenses related to the business use of the home.
Home Office Expenses and COVID-19 – Am I Eligible?
The COVID-19 pandemic has resulted in many unprecedented changes in our lifestyle and workspaces. The CRA is aware of these changes and recently stated that, in light of COVID-19, they will allow up to $500 in reimbursement for purchases related to setting up technology to work remotely. This means that up to $500 in personal computer equipment expenses will not be considered a taxable benefit. However, employees must have invoices for these purchases and the purchases must be made primarily for the employer’s benefit. Unfortunately, you may not be able to deduct expenses for purchases of equipment that you simply prefer to use versus those that are necessary for you to perform your job.
For an employee or an independent contractor to claim home office expenses, at least one of two requirements must be met. The workspace in your home must be either:
- Your principal place of business (you work from this space more than 50% of the calendar year); or
- You use the space only to earn your employment or business income on a regular and continuous basis, and for meeting customers or clients as part of your work duties
While the CRA has not announced whether they will be relaxing these requirements considering the new mandatory work-from-home arrangements put in place because of the COVID-19 lockdown, they may provide some leeway in their interpretation of the rules. This is especially true for employees who were required to work from home and adopted their home office as their principal place of business during the lockdown.
If you are an independent contractor, you must meet one of those two conditions to claim home office expenses. However, if you are working from home during the lockdown as a requirement of your contract for service and it is your principal place of business for the time period, then you may be eligible to claim home office expenses should the CRA relax the rules.
If you are an employee who is now working remotely from your home office and meet one of the two conditions required, you also need:
- A formal work arrangement that outlines that you are required to work from home; and
- A Form T2200 from your employer.
Home Office Expenses and COVID-19 – What is a Formal Working Arrangement?
An employee looking to deduct home office expenses must do so only if the employee is “required by the contract of employment” to incur those expenses. While it would be ideal for this requirement to be formalized in a written agreement or as part of the employment contract, it may be unrealistic given the current circumstances. Nevertheless, you may be able to rely on the fact that your work from home arrangement during the lockdown is an implied requirement of your employment. The CRA confirmed that they will accept a non-written contract where the taxpayer can establish that it was “tacitly understood” between the employer and employee that such expenses were to be made by the taxpayer and that they were necessary under the circumstances to fulfill the duties of employment.
Home Office Expenses and COVID-19 – What is Form T2200?
Please see our previous blog post found here to learn more about Form T2200.
Home Office Expenses and COVID-19 – What Expenses are Allowable?
If you meet the eligibility criteria, you may deduct the part of your costs that relate to your workspace within the home. This can include heat, home insurance, electricity, minor maintenance, and property taxes. However, you cannot claim mortgage interest expense and capital cost allowance. If your workspace within the home is part of a rented house or apartment in which you live, you can deduct the percentage of the rent and maintenance costs related to that space.
You can calculate the amount of home office expenses you can reasonably claim by dividing the total area of your home office or workspace by the total finished area of the home. The amount of maintenance costs that you can deduct in relation to your workspace likewise depends on whether the expenses you paid were used to maintain only the workspace or whether part of the material or work went towards the maintenance of other parts of the home. At all times, the expenses you claim must be reasonable and should be supported by invoices and supporting documentation. The total amount you deduct in home office expenses is also limited to your net income before your deduction. You cannot create or increase a loss from employment using home office expenses.
The CRA’s mandate and approach to taxation during the COVID-19 pandemic continues to evolve rapidly. The information provided here regarding the rules and interpretations regarding home office expenses is subject to change.
If you are filing taxes, are being audited for your home office, or you have questions about what home office expenses you are eligible to claim, give Rosen Kirshen Tax Law a call today! We can help you navigate this complicated process. 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 KirshenUnderstanding how FINTRAC may impact your Business
The Financial Transactions and Reports Analysis Centre of Canada, otherwise known as FINTRAC, is Canada’s financial intelligence unit. Its main mandate is to detect, prevent, and deter money laundering and the financing of terrorist activities. Simply, its main goal is to prevent the funding of criminal organizations. While the acronyms associated with FINTRAC can cause some confusion, this blog post is designed to clarify how FINTRAC regulations may impact your business.
Which Businesses Must Report to FINTRAC?
The main businesses that must report their dealings with clients/customers are financial entities such as banks, life insurances companies, securities dealers, real estate brokers, casinos, and dealers in precious metals and stones. These types of business are the most likely to be used for money laundering purposes through large transactions (for a more complete list of the businesses that must report to FINTRAC click here).
For the purpose of this blog, we will be focusing on ‘dealers of precious metals and stones (DPMS). FINTRAC defines DPMS as an individual or entity that buys and/or sells precious metals, stones or jewelry in the course of its business activities.
FINTRAC requires businesses under its purview to maintain a compliance program to monitor funds from clients. Among the main requirements of the compliance program is a “risk-based approach” or (“RBA”). The RBA must be structured to help a DPMS business (or any other business subject to FINTRAC) identify the main risks associated with accepting a product or service from a potential client, and ensure timely compliance and reporting (full RBA workbook for DMPS businesses).
When do Dealers of Precious Medals and Stones Transactions Fall Under the Risk Based Approach?
- The $10,000 per 24 hours rule
Your business is subject to risk-assessment of clients if it ever engages in the purchase or sale of precious metals, stones or jewellery in an amount that is $10,000 or more in a single transaction. If such a transaction occurs, you must identify and maintain ongoing record keeping with that client.
The RBA also applies when multiple transactions are made within 24 hours of each other, with the same client, that exceed $10,000. It is important to emphasize that transactions made on a Monday and Tuesday, the first at 4:00 PM and the second at 3:00 PM, are still within 24 hours, and would trigger FINTRAC monitoring requirements.
- Reasonable Suspicion
In addition to having to obtain client information for large transactions as described above, your business must also obtain client information for any transactions deemed suspicious. If you believe a transaction/individual to be suspicious, or you believe that the person you are dealing with is buying on behalf of a third party when conducting a large scale transaction over $10,000 you should follow the procedures used for large scale transactions outlined above, and, at a minimum, ask the client to provide government issued photo identification.
You still must ensure diligence to risk assess clients you deem high risk. There are a few exceptions to this general rule: for example, you do not need to identify an individual in a large-scale transaction if the money is received from a financial entity or public body. You also do not need to identify the individual who conducts or attempts to conduct a suspicious transaction if you have already identified the individual and have no doubts as to their identification or if you believe that identifying the individual would inform them that you are submitting a suspicious transaction report.
When Must I Retain Client Information on the sale of Precious Metals, Stones or Jewelry?
For any transactions meeting these requirements you must verify the client’s identity using government issued photo identification and/or re-verify the identity to ensure it is up to date.
What Happens if I do not Comply with FINTRACT?
Non-compliance with FINTRAC can lead to serious repercussions. There are several types of penalties including but not limited to administrative, monetary and criminal penalties.
If the authorities deem you were wilfully blind or negligent in assessing suspicious transactions, you could be assessed with monetary penalties reaching $100,000. The penalties vary in terms of harm and the level of wilful blindness and/or negligence. Such punishments range from level 4 which carries a $25,000 fine to level 1, which carries a $100,000 fine. For the full breakdown of the potential penalties for non-compliance, please click here.
FINTRAC may also disclose cases of non-compliance to law enforcement when there is extensive non-compliance or little expectation of immediate or future compliance. Criminal penalties include failure to report suspicious transactions (with penalties up to $2 million and/or 5 years imprisonment) and failure to report a large cash transaction (up to $500,000 and/or 5 years imprisonment).
Overall, FINTRAC enforces highly complicated legislation, which may affect your DPMS business dealings with clients. If you are a dealer of precious metals and stones and would like to discuss these matters further, Rosen Kirshen Tax Law can help. If you have any questions, feel free to call us toll free at (844) 53-TAXES or email us at info@rktaxlaw.com.
**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 KirshenParticipating Debt Interest
Participating debt interest and regular interest are treated differently by the Income Tax Act here in Canada. Whether interest is considered to be participating or regular depends on whether certain factors are present in the the repayment of such debt. For example, if money was loaned to someone so that they could go out and buy a rental property, participating debt interest would allow the creditor to make the amount of the interest payments dependent on something, say the profit from the rental property or the cash flow moving through it. It may also be tied to revenue, prices, or a variety of other factors.
Regular interest is when there is a set amount payable to a creditor based on how much was loaned.
Participating Debt Interest and International Taxation
In today’s fast-paced and competitive market economy, many people look past the Canadian border to produce and generate personal and corporate income. This is especially true for both Canadian and U.S residents alike. However, taxpayers often question what tax implications are imposed on income generated outside of the country. For example, many Canadian residents choose to conduct and run their business in the U.S. As such, cross-border business or investment activities could potentially have both U.S and Canadian tax implications.
Normally, when interest payments are made to a resident of another Country, taxes are withheld. Each tax treaty Canada has with other countries must be examined to determine whether withholding is necessary. The type of interest being paid matters for withholding purposes as well.
Participating Debt Interest and the Income Tax Act
Section 212(3) of the Income Tax Act defines Participating Debt Interest as interest (other than certain amounts which are “fully exempt interest”) that is “paid or payable on an obligation, other than a prescribed obligation, all or any portion of which interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholder of any class of shares of the capital stock of a corporation. Over the course of the years, the Income Tax Act has undergone many amendments and as a result, withholding from most interest payments to non-residents has been eliminated. However, it is important to note that a taxpayer may subject to withholding tax on interest payments that fall under “participating debt-interest”.
Participating Debt Interest and Withholding Taxes
As of today, if you are earning participating debt interest from another country, that other country will very likely have to withhold taxes before sending you any funds. Under the current rules in Canada, certain payments including standby and guarantee fees are treated for purposes of the Canadian non-resident withholding tax provisions as interest on the related debt that would be, or is, issued. Further, pursuant to the new rules, these payments will also be exempt from Canadian non-resident withholding tax, provided that the recipient deals at arm’s length with the borrower and, where applicable, the amounts are not participating debt interest.
If you are a Canadian tax resident, and you are earning participating debt interest or are thinking about lending funds overseas, call us today! We can assist with putting together a plan to minimize taxation and/or withholding, and we ensure that you fully understand your tax withholding obligations.
**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 KirshenNon-Residents of Canada owning Canadian Rental Property
The idea of owning property and generating a rental income is very appealing to most people. This is especially true in major cities across Canada like Toronto and Montreal, where rentals rates are high. As a result, many non-residents look at Canada as a prime place to buy property and generate rental income.
For any non-resident’s interested in taking on such an endeavour in Canada, there are a few things to keep in mind to avoid any unforeseen tax consequences. Most non-residents who own property and earn a rental income in Canada may be unaware of the Canadian non-resident withholding tax requirement and filing obligations. It is important to be aware and properly meet these requirements as there can be significant interest and/or penalties imposed by the CRA for failing to do so.
Non-Resident of Canada owning Rental Property – Reporting Requirements
There is a non-resident rental income tax reporting requirement, where the CRA imposes a 25% withholding tax rate on the gross rental revenue non-residents’ receive. The responsibility falls on the payer, such as a tenant, or a property manager to withhold the non-resident tax at the rate of 25%. The payer must remit the withholding tax to CRA on or before the 15th day of the following month the rental income applies. Failing to remit the tax will lead to penalties and interests on the non-resident tax amount.
Another thing to keep in mind is the NR4 slip which is a statement showing the amount paid to a non-resident (gross rental income). The payer needs to provide non-resident NR4 slips including the gross rental income and the tax withheld on a NR4 slip. The NR4 needs to be submitted to CRA by the payer on or before the last day of March of the following year to which the rental income applies.
Non-Resident of Canada owning Rental Property – How do I Minimize the Withholding?
There is good news though. The tax withholding amount can be reduced under certain conditions by filing an NR6 form. By doing this, the payer holds 25% on the net amount of monthly rent. Otherwise, the tax would have to be remitted at 25% of the gross rental income. Once the CRA approves the NR6 form, the payer is able to submit monthly withholding taxes on net rent income instead of the gross rental amount. Keep in mind that the NR6 form is due on or before the first day of each tax year or on the first day of rental payment.
Making use of the NR6 requires a taxpayer to elect under Section 216 of the Income Tax Act. What this means is that you need to file a specific tax return, by a specific due date.
If you weren’t aware of these deductions, and have remitted 25% withhold tax on your gross rental income, you can file a Section 216 tax return. By doing so you, you can receive a refund of the difference between the total tax payable and the non-resident rental income tax already remitted. You have until June 30th of next year to file the Canadian Income Tax Return for Electing under Section 216.
If you are a non-resident of Canada for tax purposes, and own or plan to own, a rental property in Canada, there are many requirements around non-resident rental income. At Rosen Kirshen Tax Law we have the experience and the expertise to help both non-residents and withholding agents with their tax needs and all filing requirements. Call us today to learn more!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenOffshore Corporations and the Voluntary Disclosures Program
With increasing globalization, it is common for many Canadian residents to be involved with business corporations and companies, both small and large, located outside Canada. If you are a Canadian taxpayer who is involved with a foreign corporation, the Canadian Income Tax Act may require you to file Form T1134 with the Canada Revenue Agency (CRA).
Given the complex reporting requirements of Form T1134, many Canadian taxpayers fail to file the form when required. This failure to meet reporting obligations under the Income Tax Act can result in significant penalties and interests for a taxpayer.
Taxpayers who are required to file a T1134 and have failed to do so, however, may be eligible for relief through the CRA Voluntary Disclosures Program. The disclosure allows taxpayers to avoid prosecution, penalties, and some interest associated with failing to meet their past reporting obligations.
Offshore Corporations and Form T1134
The Income Tax Act (s. 233.4(4)) requires resident taxpayers “of which a non-resident corporation is a foreign affiliate at any time in the year” to file a Form T1134. This means that taxpayers in Canada who are an “affiliate” to a foreign, offshore corporation at any time in the year, must file the required Form T1134 at tax year-end.
A corporation outside Canada meets the criteria of being a “foreign affiliate” of a taxpayer if:
- The taxpayer’s equity percentage in the corporation is 1% or greater; and
- The equity percentages of the taxpayer and each “person” related to the taxpayer total 10% or greater
These requirements ensure that taxpayers and related taxpayers who, together or separately, own 10% or more equity in a foreign corporation fall into the category of persons required to file a T1134.
The term “person” includes corporations, as well as individuals. The definition of “related persons” likewise includes relations with or between corporations, and individuals who control corporations. People related via marriage, blood, common-law relations, and adoption are also included in the definition.
Offshore Corporations and Form T1134 – Exceptions
Certain situations may exempt a taxpayer from filing Form T1134. Notable exemptions include:
- The first year in which a person (who is not a corporation) becomes a resident for the first time;
- Where the aggregate cost to the taxpayer, in a year, of its interest in the foreign affiliate is
- less than $100,000, and
- the corporation is “dormant” during the reporting period.
The foreign corporation must meet certain definitions to be regarded as “dormant”, such as owning assets worth less than total fair market value of $1,000,000 at all times during the year and having gross receipts of less than $25,000.
Offshore Corporations and Form T1134 – Deadline
A Form T1134 – “Information Return Relating to Controlled and Not-Controlled Foreign Affiliates” asks the taxpayer to provide information and documentation about the affiliated foreign corporation, such as the value of all shares the taxpayer owns in the company, assets held by the foreign corporation and taxes paid or payable on the net income, among other requirements.
In the past, each taxpayer had to file Form T1134 within 15 months of the end of the reporting taxpayer’s tax year or in the case of a partnership their fiscal period.
However, the CRA has changed the rules for 2020 and subsequent years. For tax years that begin in 2020, Form T1134 will have to be filed within 12 months of the end of the reporting taxpayer’s tax year or, in the case of a partnership, fiscal period.
For tax years that begin after 2020, Form T1134 will have to be filed within 10 months of the end of the reporting taxpayer’s tax year or, in the case of a partnership, fiscal period.
Note that you must include all additional information required by the Form on a separate page if there is insufficient space.
Offshore Corporations and Form T1134 – Penalties
Penalties for failure to file the required form can be severe. This includes a penalty of $2,500 for every year that a taxpayer failed to file the form, even if they did not intend to and were unaware of their obligation to do so. If a taxpayer knowingly fails to file a T1134, however, gross negligence penalties of up to $12,000 for each failure to file can also be levied after CRA conducts an audit.
Offshore Corporations and the Voluntary Disclosures Program
The Voluntary Disclosure Program can provide significant relief to taxpayers who fail to file by allowing penalties, some interest and potential prosecution to be waived upon disclosure. Persons who are associated with foreign affiliates may also need to file a T1135 if they own offshore bank accounts or have foreign income.
If you are interested in using the CRA’s Voluntary Disclosures Program to correct past errors or omissions regarding having a foreign affiliate corporation, Rosen Kirshen Tax Law can help you navigate this complex process and ensure that your privileged disclosure is dealt with correctly. We are here to help, call us for a free consultation 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 KirshenClaiming CERB but not Eligible?
The Canadian Emergency Response Benefit (CERB) has injected billions of dollars into the pockets of millions of Canadians, to help the country endure the COVID-19 pandemic. In a previous article, we discussed how to determine if you are actually eligible for CERB, and the consequences for those whom are found to be ineligible. More recently, however, news reports have surfaced regarding a proposed bill that is in its early stages in the House of Commons, that clarify how the government and the CRA could proceed following the pandemic.
Claiming CERB but not Eligible
The Canadian federal government is considering enacting a bill that would impose severe punishments, including fines and even jail time, for Canadians that have been defrauding the Canadian Emergency Response Benefit (CERB) program. The legislation is current at draft stage and is struggling to gain support from opposition parties, but is revealing of how the Canadian government would like to seek out those they deem to be undeserving of the benefit following the COVID-19 crisis.
The draft bill targets those whom:
- Made a false or misleading benefit claim
- Knowingly failed to declare income for the period which they applied for the benefit
- Received a benefit cheque they were knowingly not eligible for, and
- Aided someone in committing one of the aforementioned offences.
It appears that, much like the eligibility criteria for CERB, the fraud criteria are quite broad and are a catch-all. They almost seem like four different ways of saying the same thing: if you knew you were not eligible, but accepted CERB anyways, then you engaged in fraud. By framing each criterion in overlapping but technically distinct ways, they ensure that they are encompassing all potentially fraudulent behaviour.
It is important to emphasize that the bill is not a prescribing a punishment for those who accidentally took CERB. At its current stage, the bill seems to go after those that are maliciously accepting support from the government that they do not deserve. However, in practice the CRA will likely extend the boundaries of what would be considered fraudulent behaviour and force taxpayers to prove otherwise, just as they tend to do with gross negligence penalties.
Claiming CERB while knowing I am not Eligible
Under normal circumstances, if you are ineligible and received the CERB, the CRA will have grounds to investigate, audit, and assess you. Following an assessment the CRA will attempt to collect on the funds, plus interest and penalties. The interest and penalties accumulate quickly, and can transform into a minor debt into one that is much more substantial. The CRA could also pursue legal action in order to collect on the debt, such as garnishing wages or placing a lien on your property as security until the tax is paid.
If this bill becomes law, individuals accused of any of the above could be fined for up to $5000, plus double the amount of the benefit that was received. It also can incorporate amounts the accused would have received through CERB due to fraud. Most surprisingly, the bill also states that one could be punished with up to six months in jail for fraudulently accepting CERB.
May I Repay CERB?
Canada is allowing the repayment of CERB. More information may be found here. You may repay it if you realized you are actually ineligible, or if you’ve returned to work. CERB is taxable so unless repaid in full in 2020, you will receive a tax slip for the income that must be reported on your 2020 income tax returns. There is no indication whether repaying the CERB will stop the CRA from coming after you if you knowingly received it while ineligible, but we are hopeful that will be the case.
If you are a CERB recipient but have doubts regarding your eligibility, please feel free to contact our firm for a consultation. We have extensive experience managing CRA collections, and ensuring that no legal action takes place against you. We can assist in creating a plan of action in order to avoid the worst consequences of owing a debt to the CRA. We are here to help! In the meantime, we will continue to keep you informed and hope you and your families remain safe and healthy in these uncertain times!
*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 KirshenWhat if I use an RRSP as Security for a Loan?
A Registered Retirement Savings Plan is used to defer taxes on income earned to a later date. The idea behind an RRSP is that while you’re working, you are in a higher tax bracket than you will be later in life. So when you withdraw the funds down the road, it will be taxed at a lower rate. RRSPs are a very useful tax planning tool for your retirement. They are quite different from a TFSA, which is also a retirement tool. Please see here to review the differences between the two.
Withdrawal from an RRSP
Once you withdraw funds from an RRSP, the funds taken out are taxed as regular income. But, what happens if you don’t withdraw the funds, but rather pledge the account as security or collateral for a loan?
Using an RRSP as Security or Collateral for a Loan
If you want to take a loan from a bank, normally they will ask for some sort of security or collateral in case you cannot pay the loan back. The bank would then seize the security or collateral to satisfy the debt. If you pledge your RRSP as security or collateral, you may be costing yourself quite a large amount of taxes.
The reason for this is because by pledging the RRSP as security or collateral, you are unknowingly including the value of the pledged asset as income in the year of pledge.
What happens once the Loan is Repaid?
If you have included the loan amount in income, then once it has been repaid and the security is released, this amount can now be deducted from your income. This provides a good reason to pledge the RRSP as security or collateral rather than withdrawing the amounts. If you withdraw the amounts, you are unable to claim a deduction when the loan is repaid.
What happens if the Loan is not Repaid?
Typically, the bank or whoever provided the loan, will seize the pledged security or collateral to satisfy the debt. Since the income inclusion already happened, there is no second income inclusion.
If you are considering using your RRSP as security or collateral, please make sure you investigate the tax consequences before moving forward. You may, unknowingly, create a huge income tax liability that must be paid in the year this occurs. Tax planning may be very difficult for those who do not have specific expertise in the area. Should you have any questions regarding any of the above, Rosen Kirshen Tax Law has the skill and experience necessary to guide you. Be sure to 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.