by Jeff KirshenCRA Penalties and Interest: An Update
Many taxpayers are surprised to learn that the Canada Revenue Agency (“CRA”) can and does charge interest and penalties on the outstanding tax liabilities of Canadian taxpayers. Penalties and interest are often applied in concert and can quickly escalate what was originally a minor tax debt into a serious problem for the taxpayer. This post updates our first blog post about CRA penalties and interest. For that post please click here.
Interest Charges
If you owe funds to the CRA, your interest will start on the date that your tax filing was due. This results in taxpayers often receiving assessments or reassessments months or even years after the initial filing date with interest applied from the day that the taxpayer originally filed. For example, if a taxpayer filed a tax return on April 30th, 2018 and was reassessed on June 1st, 2020, compounding interest will be charges from the initial filing date (April 30th, 2018).
CRA compounds interest daily. The rate is available online here with it changing every three months. The current rate is 5%.If all of this interest wasn’t bad enough, the CRA even charges interest on any and all penalties that are assessed to a taxpayer.
Late Filing Penalties
Late filing penalties are charged by the CRA exactly when you expect they would be, when a taxpayer files a tax return past the prescribed filing deadline. If a taxpayer files a late return, CRA will charge an additional 5% on top of the balance owing. Additionally, they will charge 1% of the balance owing for each month late but only to a maximum of twelve months.
For this reason, even if a taxpayer cannot pay the anticipated taxes payable, it is still wise to file one’s return on time to avoid this penalty and subsequently pursue alternative measures of repayment for the outstanding tax liability.
If you know you have missed your filing deadline, you may be eligible for the CRA’s Voluntary Disclosure Program. Click Here for more information about RKTL’s Voluntary Disclosure Program Service.
Repeat Penalties
If you repeatedly make mistakes or file your tax returns late, the CRA can and will assess you for repeated penalties.
If you repeatedly file your tax returns late, the penalty mentioned above will increase up to 10% of the balance owing. Additionally, for each month you are late filing your taxes, the CRA will assess another 2% of the balance owing to a maximum of 20 months.
A “Failure to Report Income” penalty occurs where a taxpayer fails to declare income on a tax return, and also failed to report income in any of the previous three years’ returns. If a taxpayer did not report an amount of income of $500 or more for a taxation year, it will be considered by the CRA to be a failure to report income.
The federal and provincial or territorial penalties are each equal to the lesser of:
- 10% of the amount you failed to report on your return for 2019; or
- 50% of the difference between the understated tax (and/or overstated credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report.
A “Failure to Deduct” penalty relates to Canada Pension Plan, Employment Insurance or income tax remittances. Those who are required to remit these amounts to the CRA, but fail to, will be liable for a 10% penalty on the amount that you did not deduct. The repeated failure to deduct penalty increases this amount to 20%. This occurs where the penalty is charged to someone twice in the same year, or if gross negligence was involved.
Gross Negligence Penalties
The Income Tax Act allows the CRA to charge a penalty of 50% on tax amounts owing, where they believe the taxpayer committed gross negligence. The definition of gross negligence varies but basically, it is where a taxpayer purposefully hides income or over-inflates expenses to pay less taxes.
Trust Fund Penalties
The failure to properly remit penalty occurs where taxpayers do not remit the funds required or make remittance payments on time from the GST/HST and Payroll accounts of incorporated entities (corporations). The CRA views these funds as being held in trust for the CRA. Consequently, failure to remit the funds on time can create serious issues for the taxpayer. Penalties begin to accumulate after a period of just three days past the prescribed remittance date.
This is particularly complicated with respect to GST/HST accounts, due to the complexities of the GST/HST Self-Assessment Rules.
How to Tackle Penalties and Interest
In a perfect world all taxpayers would file their taxes correctly and on time and the CRA would never impose a penalty. However, the complexity of the Canadian taxation regime and the realities of modern life means that this ideal standard that is frequently breached.
The CRA has no remorse for taxpayers who did not receive their correspondences due to a change in address or phone number as the CRA views these changes as essential to report to their offices. Taxpayers can rack up significant debts, be completely unaware of any problem and be ineligible for any relief from the interest and penalties they have accrued. However, there are instances where taxpayers are granted relief from the penalties and interest accumulated by their outstanding tax liability.
One method of seeking relief from existing penalties and interest is to file a Taxpayer Relief Application with the CRA. While every taxpayer has the right to request taxpayer relief, the CRA’s decision to grant the relief is discretionary. Therefore, it is crucial to submit a strong argument that clearly states the reasons why one should be granted relief from the penalties and interest accumulated by one’s alleged failure to meet the CRA’s reporting requirements. For more information on the CRA’s Taxpayer Relief program, check out our blog post.
If you are drowning in debt with CRA, contact a tax lawyer at Rosen Kirshen Tax Law today! We can help deal with any of the above penalties and interest and 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 KirshenDeducting Expenses from your Taxes
Income tax is nothing more than a tax on income. Income, on the other hand, is, for tax purposes, a complex concept that forms the basis of many tax disputes. Additionally, understanding what expenses are deductible and what are not deductible may be a difficult exercise come tax time.
The general rationale for the deductibility rules is that only expenses incurred for the purposes of earning or producing income should be deductible from a taxpayer’s income because only these expenses increase a taxpayer’s ability to pay. Expenses incurred for personal enjoyment, living, or savings, on the other hand, do not increase a taxpayer’s ability to pay and should therefore not be deductible.
Tax disputes often arise over where to draw the line between expenses incurred for the purposes of earning income and expenses incurred for the purposes of personal enjoyment, living, or savings. There are often two important factors to consider in resolving tax disputes of this kind. The first is whether the expense is deductible according to the deductibility rules. The second is whether the amount deducted was deducted at the appropriate time.
The Deductibility of Expenses
As mentioned above, the deductibility of an expense usually depends on whether the expense was incurred for the purpose of earning or producing income. The income for which the expense was incurred must be generated from a business or a property.
Expenses incurred in earning or producing income from a business or property might include, for example, employee wages, interest on money borrowed to finance operations, inventory or supplies costs, or rent and utilities costs for a business premises or rental property. Expenses incurred for personal enjoyment might include, for example, those incurred for the purchase of food, shelter, clothing, or personal entertainment.
Determining the purpose of an expense is fundamental for determining its deductibility. Determining the result of an expense, on the other hand, is irrelevant to determining its deductibility. Although the distinction between “purpose” and “result” may seem vague, it has at least one important consequence: expenses incurred for the purpose of earning or producing income from a business or property are deductible even if the result of incurring those expenses turns out to be a loss. This means, for example, that the expenses incurred in a given tax year for the purpose of starting a business may be deductible even if the business does not earn or produce income in that tax year.
The Timing of the Deduction
Expenses are generally categorized as current expenses or capital expenses (i.e., “capital expenditures”). Current expenses are fully deductible in the year in which they are incurred. Capital expenditures are deductible over a period of time during which the expense provides value to the business (click here for more information on the deduction of capital expenditures).
The general timing rule is that a taxpayer may deduct expenses in the year they are incurred (i.e., current expenses) only if the value of the expense is totally consumed in the year for the purpose of earning or producing income. The reason for this general rule is that, if the value of an expense is totally consumed in earning or producing income, then it cannot have been consumed for personal enjoyment, living, or savings.
On the other hand, if the value of a capital expenditure (e.g., the cost of purchasing a table saw used in a business) is not totally consumed in the year for the purpose of earning or producing income, the portion of the capital expenditure that is not yet consumed still has value. The remaining value is like the value of cash sitting in a bank account and waiting to be used for the purpose of earning or producing income. Just like cash sitting in a bank account, the remaining value of a capital expenditure could still be used for personal enjoyment, living, or savings rather than for the purpose of earning or producing income. This means that the “purpose” of the expenditure is still unknown, and so the portion of the value of the capital expenditure not yet consumed should not be deducted in the year.
It can be difficult to know where and when to draw the line between expenses incurred for the purposes of earning income and expenses incurred for the purposes of personal enjoyment, living, or savings. If you have questions regarding the deductibility of your expenses or when to deduct your expenses, 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 KirshenWhat is FAPI?
Foreign Accrual Property Income, or FAPI, are a set of rules in the Income Tax Act (the “ITA”) that treats property income the same as if accrued domestically or abroad. Where a Canadian resident has a substantial interest or level of control in a foreign corporation, the corporation will be treated as an extension of the Canadian shareholder. The FAPI regime is intended to prevent Canadian residents from avoiding Canadian income tax on passive investment income earned through a controlled foreign affiliate located in a low tax country or tax haven. In this way, income in a controlled foreign affiliate will be taxed in the hands of the Canadian shareholder, even if the shareholder has not yet received funds. The income is taxed in Canada as if it was earned directly. This eliminates any tax deferral advantage in investing offshore.
The FAPI rules only apply to passive income held in a corporation (which is a controlled foreign affiliate) off-shore. They do not apply to active business income earned by a corporation off-shore or to a corporation that is not a controlled foreign affiliate. Passive income includes income from rents, royalties, or taxable capital gains. Active business income includes most types of businesses, such as manufacturing, or other services which require active management.
Canadian resident shareholders to which FAPI can be imputed include individuals, corporations, partnerships, and trusts.
Controlled Foreign Affiliate and FAPI
The level of control that a shareholder exercises over an off-shore corporation is determinative of whether the FAPI rules will apply. If the shareholder owns more than 50% of the shares of the offshore corporation, then the corporation will be considered a controlled foreign affiliate. However, the definition of control is broad and the rules are designed to capture instances where the shareholder continues to control the foreign corporation indirectly.
Where the corporation is a controlled foreign affiliate, the ITA taxes the Canadian shareholders directly when the controlled foreign affiliate earns passive income, eliminating any tax deferral. Where passive income is earned by the controlled foreign affiliate, it is irrelevant whether the foreign country has a tax treaty with Canada.
FAPI is not applicable where the level of control exercised by the shareholder over the off-shore corporation is under 50%, or where the off-shore corporation is otherwise not considered a controlled foreign affiliate. However, there are other tax consequences applicable once a shareholder owns 10% or more of an off-shore corporation. These tax consequences fall under a different regime.
The control rules in the ITA are complex and situation based, and it is recommended a tax lawyer is consulted.
FAPI and Equality / Neutrality
The tax system is designed to be neutral with respect to an investor’s global tax; the Canadian investor’s worldwide tax payable to Canada will be the same whether they invest at home or abroad. The principal of capital export neutrality prevents a Canadian investor from avoiding taxes by moving investments to a tax haven. Income earned abroad is taxable in the country of residence. However, to alleviate double taxation, tax relief is provided to account for foreign taxes paid abroad.
Foreign Tax Credits and FAPI
Canada provides a foreign tax credit under section 126 of the ITA to alleviate any double taxation that may arise when taxes were paid in the foreign jurisdiction on the same income taxed by Canada. For shareholders whose controlled foreign affiliate received FAPI, foreign tax credits are generally applicable where foreign taxes were also paid.
Foreign tax credits are computed by country and must be applied to foreign tax paid on non-business income before being applied to foreign tax paid on business income.
You should know it is possible that your offshore corporation pays tax, and you do not receive tax credits for the taxes paid. A lawyer should be consulted so you are not double taxed.
The CRA also requires a corporation with off-shore affiliates to comply with certain foreign reporting requirements. The FAPI rules are complex and their application will differ on a case-by-case basis. You should speak with a qualified tax lawyer to discuss how FAPI may arise in estate planning or offshore investment planning. 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 KirshenWhat is a Taxable Benefit – Part 2
It may come as a surprise to some Canadian taxpayers when they receive a Notice of Assessment with reported income reassessed to be significantly higher than what their reported take-home pay was. This may be because of the inclusion of a “taxable benefit” in the taxpayer’s income. The Canada Revenue Agency (CRA) is within their rights to tax purported benefits received by taxpayers from their employer by virtue of their employment. Many taxpayers are aware that work perks that provide a financial benefit to the employee are usually taxable by the CRA and do report some amount of taxable benefit on their return. For part 1 of our taxable benefit blog post where we discuss what a taxable benefit is, and what can be done if you disagree about receiving taxable benefits, please click here.
However, not all work-related benefits are taxable. So, how can you tell if a benefit you receive by virtue of your employment is taxable? The answer to this question is determined by evaluating whether the benefit falls within the scope of the meaning of “taxable benefit” under the Income Tax Act. When filing their taxes, Canadian taxpayers must examine (1) the “character” of the alleged benefit; (2) the nexus between the alleged benefit and the taxpayer’s employment; and (3) the valuation of the benefit to be included in the taxpayer’s income.
How do I Identify a Taxable Benefit?
Paragraph 6(1)(a) of the Income Tax Act creates a baseline from which employment benefits are determined to be taxable, taxable in part, or non-taxable. Paragraph 6(1)(a) specifically outlines benefits that may be subject to tax as:
“[T]he value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office of employment.”
Notably, this definition is sufficiently broad to theoretically capture any benefits earned in the course of employment. It becomes necessary to examine how this provision has been interpreted by the courts in order to properly characterize benefits received by virtue of a taxpayer’s employment as either taxable or non-taxable.
Benefits are not restricted to benefits that replace traditional remuneration for employment services. In R. v. Savage, a 1983 Supreme Court of Canada decision, the scope of taxable benefits was explained to include “material acquisition[s] which [confer] an economic benefit on the taxpayer.” Justice Dickson (as he was then) held that material facts determine whether or not the benefit conferred by virtue of employment is “taxable” or “non-taxable”.
The determinative factor is whether or not “something of value” was conveyed by the workplace to the employee. This has taken many forms in Canadian case law including life insurance benefits, health coverage, and even business trips where there is significant personal benefit (usually in the form of “enjoyment”) to the taxpayer.
How do I Determine if the Benefit was Sufficiently Connected to my Employment?
The words in paragraph 6(1)(a) of the Income Tax Act, “in respect of, in the course of, or by virtue of the taxpayer’s office of employment” are sufficiently broad to cover a wide range of direct and indirect benefits received from one’s workplace. In particular, the words “in respect of” have been determined by the Supreme Court of Canada in Nowegijick v The Queen, to be words of the “widest possible scope” and to “import such meanings as ‘in relation to,’ ‘with reference to’ or ‘in connection with’.”
The determinative factor is whether there was any discernable nexus between the benefit conferred to a taxpayer and the taxpayer’s working relationship with the party providing said benefit.
How Much of the Benefit do I Report as Part of my Taxable Income?
There may be some cases where less than the whole of the value of the taxable benefit received by the taxpayer should be included in the taxpayer’s taxable income. The Federal Court of Appeal traditionally held that the value to be included in taxable income should be limited to the cost to the employer. This method was abandoned by the Federal Court of Appeal in Spence v. Canada.
In Spence v. Canada, the court held that the fair market value of the benefit conferred to the taxpayer should be the metric to determine what percentage of the benefit should be included in the taxpayer’s income.
Are Any Employment Benefits Exempt from Taxation?
There are exceptions to the inclusion of employment benefits in taxable income, though they may be susceptible to assessment under other provisions of the Income Tax Act. For example, subparagraph 6(1)(a)(vi) of the Income Tax Act excludes education benefits received by those other than the taxpayer with an employment nexus to the benefit, though this amount may be included as a “scholarship” under paragraph 56(1)(n) of the Income Tax Act.
There are also some prescribed statutory exclusions to the rule in subsection 6(1) of the Income Tax Act. For example, subsection 6(6) excludes any benefits incurred that stem from a “special work site” (typically a remote location that the requires that the taxpayer leave his or her principal place of residence for 36 hours at a time).
If you have questions about taxable benefits, or you’ve been assessed with a benefit that you do not agree with, 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 KirshenIs Interest Paid on my Investments Deductible?
There is a proverbial expression that goes, “It takes money to make money”. When taken literally, this expression could be interpreted as the act of borrowing and using leverage to help increase income. Of course, this would also mean that a business or individual is increasing their risk in the pursuit of higher returns.
However, what is often overlooked in this endeavour is the room for effective tax planning and restructuring. Mainly, s.20(1)(c)(i) the Canadian Income Tax Act states that in computing a taxpayer’s income for the year, interest paid on borrowed money which is used for the purpose of earning income from a business or property can be deductible. This deductibility allows the individual or business to greatly increase their after-tax rate of return on their investment.
There are several criteria that must be met in order for interest expense to be deductible.
The Conditions of Interest Deductibility
First, it must be established that the money borrowed is used for the purpose of earning business or property income. Examples of property income include rent, dividends and royalties. Share appreciation through capital gains is not considered income. Therefore, if an individual or business purchased shares of a business, they must demonstrate that they expect to receive dividends.
Second, the interest on the borrowed money must be paid in the year or be payable during the year you are claiming the deduction. Lastly, you must be under a legal obligation to pay the interest and the interest expense amount must be reasonable.
It is also important to note that the Income Tax Act explicitly states that the interest expense deductibility is not intended for life insurance policies.
Interest Deductibility – An Example
One application of the interest expense deductibility for taxpayers is to deduct the mortgage on their house. More specifically, one can take out a home equity line of credit on their home and use those funds to invest in dividend yielding stocks or other investments. The interest rate on the home equity line of credit, which is often prime rate or a few points above, would be deductible when computing income.
Similarly, a taxpayer could restructure their borrowings in order to be eligible to deduct their interest expense. Consider the scenario where a taxpayer already owns 1000 shares of a corporation and a personal use condominium that was purchased through borrowed money. At this point, the mortgage paid on the condominium cannot be deducted as it was not borrowed for the purpose of earning income.
However, the taxpayer’s borrowing could be restructured and interest expense deductible if he/she does the following:
- Taxpayer decides to sell the 1000 shares of the Corporation and use that money to pay off the mortgage on the condominium; and
- Taxpayer now takes out a home equity line of credit or borrow money to re-purchase the 1000 shares of the Corporation.
By doing this, the taxpayer has now demonstrated that the new borrowed money was specifically for the purpose of earning income through purchasing shares of the corporation. As previously mentioned, the shares of the corporation must yield a return on capital and cannot be just capital gains. Examples of return on capital include but are not limited to dividend yielding stocks, mutual funds and Real Estate Investment Trusts.
Interest Deductibility – Tax Planning
If carefully planned and managed, individuals and businesses can use the interest expense deductibility provision of the Income Tax Act to greatly increase their after-tax returns on investment. With that in mind, the deductibility of interest continues to very contentious in tax courts and the meanings of “use”, “purpose of earning income” have been highly litigated.
If you need assistance with tax restructuring or have any inquiries regarding interest expenses, contact us today. Professionals at Rosen Kirshen Tax Law have years of experience developing effective tax strategies for both businesses and individuals.
**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 Automatic Tax Filings
In her 2020 Speech from the Throne, Right Honourable Julie Payette, Governor General of Canada, addressed many potential changes that may be adopted by the Canadian government to address the revenue shortfalls precipitated by the COVID-19 pandemic. One potential new program mentioned by the Governor General would be a new tax filing system whereby individuals will have their income tax returns automatically filed on their behalf with the Canada Revenue Agency each year.
While at first glance this may seem like a long-overdue addition to our self-filing income tax system, the interposition of “automatic” returns could see benefits for some and have unforeseen consequences for others.
The CRA and Automatic Tax Filings
The addition of “automatic” returns to the income tax filing framework of the Canada Revenue Agency (CRA) would allow for the filing of millions of individual tax returns each year that otherwise go unrecorded. The CRA already has access to most of the requisite taxpayer information and receives much of what would be required to file simple returns from employers and institutions. While the idea of an “automatic” filing program may seem radical to some, if Canada were to allow for “automatic” returns today, we would be the 37th nation to do so.
Right now, the CRA offers “File My Return” services, whereby low-income taxpayers can receive income tax refunds and benefits simply by sharing personal information. Taxpayers do not have to complete any calculations or fill out any paper forms. However, as of now not every taxpayer is permitted to file using this service.
Those who are eligible receive confirmation via mail of their eligibility for the File My Return services. Taxpayers must complete this process via telephone after receiving their eligibility letter in the mail. “Automatic” returns would be different from this process as, presumably, no action would have to be taken on the part of the taxpayer in terms of filing. For example, in the UK, taxpayers who meet all of their income tax remittance requirements at the source (usually having their taxes deducted directly from income earned) and are not required to make any self-assessment for any other reason, still qualify for benefits and refunds despite never having personally filed a return on their own behalf or having shared additional information with the UK tax collection service.
Automatic Tax Filings – Who Benefits?
Many Canadians do not file their tax returns each year. For example, in Ontario approximately 16% of adults do not file an annual tax return. This could be for a host of reasons, one of the main reasons being that in situations where taxpayers do not believe that they owe anything to the government, they do not file a return. The program could abridge this gap and provide for millions of additional returns each year.
Ultimately, it will be the federal government who decides what the eligibility thresholds for the “automatic” return program would be. These standards would determine to whom the program would apply.
The “automatic” returns are reportedly slated to be free for all citizens. Citizens who previously did not have access to certain benefits because due to non-filing would have the potential to have their filings up-to-date and consequently become eligible for federal tax benefits, such as the Disability Tax Credit or the Canada Child Benefit. Thus, “automatic” returns have the potential to improve access to federal programs among marginalized members of the citizenry, whether their lack of access to proper filing is the result of financial bars or a low degree of financial sophistication.
Additionally, low-income Canadians with simple income tax returns may be able to avoid filing costs altogether, as in lieu of paying a tax professional to file their returns, the CRA would be completing their returns free of charge.
Automatic Tax Filings – Who Loses?
If a taxpayer’s returns do not fall into the “simple” category, the taxpayer may be under a mistaken belief that the automatic filing system would cover the taxpayer’s filing requirements. This may be the case where a taxpayer qualifies in one taxation year, but the filing circumstances of the taxpayer change in a subsequent year such that the taxpayer no longer meets the program’s eligibility requirements. There can be stark penalties and interest applied to Canadian taxpayers who fail to meet their income tax filing requirements. This could create a potential risk to taxpayers under the mistaken belief that their returns have been adequately filed through the “automatic” return program.
All of this information is also speculative, as no details of the “automatic” return program were announced during 2020’s Speech to the Throne. Careful planning and administration of the program would be central to its success. While an “automatic” return program could pose potential risks to Canadian taxpayers, to many Canadians it could finally provide much needed access to tax refunds and federal programs and services. If you need help with filing your taxes, 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 KirshenWhat is Capital Cost Allowance?
Capital expenditures are distinct from current expenses. While both may be incurred for the purpose of earning income, only the latter is immediately deductible under the Income Tax Act. The former is only deductible pursuant to an exception under paragraph 20(1)(a), which allows for regulations to determine the amount of a capital expenditure that is deductible in a given tax year. This amount is called the “capital cost allowance” (CCA).
What is Depreciable Property?
The property for which capital cost allowance may be claimed is called “depreciable property”. The idea behind this is that the property may be used year after year, while slightly declining in value.
There are prescribed classes of depreciable property listed in Schedule II to the Income Tax Act, the most common of which are listed here. Examples include motor vehicles, tools, or goodwill.
What is Undepreciated Capital Cost?
Regulation 1100(1) sets out the percentage amount of CCA that applies to the “undepreciated capital cost” (UCC) of a class of depreciable property. UCC can be thought of as the cost that a taxpayer estimates to incur in acquiring and keeping depreciable property, which includes not only the purchase price, but also maintenance, legal, accounting, and/or other similar fees. The legal definition of UCC is found under subsection 13(21).
The CCA system allows for taxpayers to recover UCC by deducting it from their income. For example, a professional carpenter who purchases a new power saw for his business can expect for the saw to have the highest possible UCC at the moment of purchase, but he can expect for its UCC to be increasingly used up as it approaches the end of its life. This is because he has been using the depreciation yearly, which continues to lower the UCC of the saw eventually getting down to zero.
Capital Cost Allowance Calculation
The CCA that may be deducted for a class of depreciable property is calculated as follows under Regulation 1100(1):
CCA = CCA % amount x UCC at the end of the tax year
Capital Cost Allowance – Limitations
CCA deductibility may be limited. For instance, since Regulation 1100(1) mandates a determination of the UCC of a class of property at the end of the tax year, no CCA amount, subject to certain exceptions, may be deducted in a tax year if the class of depreciable property has no UCC left over at the end of that tax year and even if UCC was outstanding prior to the end of that tax year. Similarly, for depreciable property acquired during a tax year, only half of the CCA amount is deductible. This is known as the “half year rule”.
The Sale of Capital Assets
If a depreciable property is sold for more than its UCC, the value of the property according to the price for which it is sold will be greater than the value of the property according to its UCC. Under these circumstances, subsection 13(1) provides for a “recapture” by adding the difference in value to the seller’s income. This means that the provision effectively looks back to prior tax years in which too great a CCA amount was deducted, and then reduces the deduction. This ensures that the seller does not deduct from income any CCA that exceeds the actual decline in value of the property.
If a depreciable property is sold for less than its UCC, the value of the property according to the price for which it is sold will be less than the value of the property according to its UCC. Under these circumstances, subsection 20(16) provides for a “terminal loss” by allowing the seller to deduct from income the difference in value.
The possibility of claiming a “terminal loss” does not mean that taxpayers are free to create losses that shelter income but that do not reflect the economic reality of their circumstances. Rental property investments, for example, may present an attractive means of using the CCA system to shelter income, but the Act’s “stop-loss rules” restrict such use. For our blog post further discussing the relationship between rental properties and the CCA system, click here.
If you have questions regarding the capital cost allowance system, or if you are interested in learning how to use it 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 KirshenThe GST/HST Self-Assessment Rules
To self-assess for GST/HST means calculating how much GST/HST should be paid on a good or service where no actual sale has been completed, and to charge yourself that GST/HST. The GST/HST self assessment rules are extremely complex and can lead to a good amount of trouble with the CRA.
The GST/HST Self-Assessment Rules
Generally, the self-assessment rules apply to consumers and persons engaged in non-commercial activities who have not been billed for GST/HST by the supplier. Where a person is not a GST/HST registrant, self-assessment for GST/HST will apply in certain circumstances. Goods purchased in a non-HST province or territory and brought into an HST province will require the person to self-assess at the applicable rate for the provincial component of the HST.
Self-assessment is also required for non-registrants where goods are purchased in a province with a lower HST rate and then brought into a province with a higher HST rate. Commercial goods imported into an HST participating province will also require the non-registrant to self-assess. Where a non-resident that is also a non-registrant delivers goods to a person who is also a non-registrant in a participating HST province, the person receiving the goods will also be required to self-assess for HST.
The non-registrant of an HST province is also required to self-assess for HST where the non-registrant uses or consumes or is supplied by significantly (more than 10$%), services and intangible personal property (IPP) (i.e. intellectual property) from a non-HST province or an HST province with a lower HST rate than that person’s province. Although special HST rules apply for imported motor vehicles, generally persons importing motor vehicles from outside Canada are also required to self-assess for HST when those vehicles are brought into an HST province and provincial laws do not require the registration of the vehicle. Non-registrants who are required to self-assess on the provincial part of the HST on goods, services and IPP must declare by filing a Return for Self-assessment of the Provincial Part of the HST.
For HST registrants, self-assessment is required where the provincial component of the HST has not been billed by the supplier for property or services that are not for consumption or use or supply exclusively in the course of their commercial activities. The threshold for a supply to be considered exclusively used in the course of commercial activity is 90% or more. Registrants who self-assess should account for the tax on their GST return for the reporting period in which the tax was payable. Registrants using certain accounting methods are also required to self-assess.
The GST/HST Self-Assessment Rules and Real Estate
In the real estate context, a builder where the self-supply rules apply (who is deemed to have sold and repurchased the property), is required to calculate the GST/HST collected on the fair market value of the property. In the case of a multiple unit residential complex (MURC), the builder must account for tax on the fair market value of the entire building and not the individual unit that was deemed to be sold and repurchased.
Certain supplies do not require self-assessment. These include zero-rated goods, services or IPP. No GST or HST applies for zero-rated supplies. No HST is assessable if the supply is exempt from HST. Furthermore, self-assessment is not required when HST has already been paid at the same or higher rate in the province of acquisition. Prizes won abroad, personal and household effects of a deceased, transportation or telecommunication services, and property donated to a charity or a public institution are other circumstances where no self-assessment is required for non-registrants.
The GST/HST Self-Assessment Rules – Calculating the GST/HST
In declaring and paying the required HST, the registrant or non-registrant must determine the type of supply and place of supply of the goods or service. Once the type of supply and place of supply are determined, HST can be calculated. The CRA has provided an GST/HST calculator for determining the amount of tax applicable to sales in Canada.
The GST/HST Self-Assessment Rules – Type of Supply
As a value-added sales tax, HST applies to a supply of nearly all goods and services consumed in Canada. For provinces and territories that participate, HST is imposed on a taxable supply of goods and services. A supply is taxable if it is made in the course of commercial activity. However, a supply that is zero-rated (i.e. groceries) will not have HST. A supply of goods or services that are exempt will also not have HST. One difference between zero-rated and exempt supplies is that Input Tax Credits (ITCs) can be claimed for the former but not the later.
The GST/HST Self-Assessment Rules – Place of Supply
The HST rates depend on the place of supply. HST applies at the rate of 13% in Ontario, New Brunswick, and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia.
The GST/HST consequences surrounding any transaction depend on the unique circumstances of each case. It is recommended to speak with a qualified tax lawyer given the complexity of the HST rules and how they can affect a person’s income tax position. If you have questions regarding the Self-Assessment rules, call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenInput Tax Credits – What are they, and Am I Eligible?
Through the help of e-commerce assistance platforms such as Shopify, the barriers to entering and starting a small business have dramatically decreased in recent years. As a result, more and more Canadians are deciding to open up independent businesses. In order for a business to run its operations smoothly, business owners must ensure that they fulfil their sales tax obligations correctly to prevent intervention from the CRA. Below is a brief summary that provides some mechanics and considerations of the Canadian Sales Tax System.
Design of the GST/HST Sales Tax
The HST (for Ontario) Sales Tax is administered and legislated through the Excise Tax Act. Moreover, it is a multi-stage value added tax, imposed on a broad range of goods and services at each stage of the manufacturing and distribution process. Each recipient in the production chain recovers the HST that they paid for the expenses related to their “commercial activities” by claiming input tax credits (ITCs). This ensures that there is no double taxation and that only the final consumer holds the burden of paying the HST tax.
Typically, many businesses incur a lot of expenses related to their commercial activities. For example, a business focusing on producing and selling furniture may pay a lot of HST on the tools they bought to create that furniture. Therefore, it is important that businesses properly redeem their ITCs.
Other common purchases and expenses which may be eligible to claim ITCs include:
- Business start-up costs;
- Legal, accounting, and other professional fees;
- Maintenance and repairs; and
- Business-use-of home expenses.
Requirements / Eligibility for Input Tax Credits
First, the business/taxpayer must be a GST/HST registrant. However, for most small and medium-sized businesses in Canada, registration for GST/HST purposes is required.
Specifically, if you provide taxable supplies and not a small supplier, then you must be a GST/HST registrant. The CRA generally considers a business to no longer be a small supplier if total revenues from taxable supplies exceed over $30,000 in a single calendar quarter or over 4 consecutive calendar quarters.
Second, registrants are only allowed to claim ITCs for expenses related to “commercial activities.” The CRA states that commercial activities must be a business or adventure or concern in the nature of trade that has a reasonable expectation of profit, and is not the making of exempt supplies. Alternatively, inputs to activities that are neither part of the supply making process, not related to it, or for personal use are not eligible for ITCs.
The exception to the rule above is for the supply of real property, other than an exempt supply. In this case, any supply of real property, whether or not there is a reasonable expectation of profit is included in the definition of commercial activity. Finally, to claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of the business.
Potential Issues to Look Out For
As previously mentioned, the responsibility of charging, collecting and remitting HST falls on each business or chain of the manufacturing process. Similarly, claiming appropriate ITCs for expenses incurred by the business fall on the burden of the business. It is the responsibility of the registrant to keep records and documents to validate any claims under a CRA audit.
Issues regarding the “nature of the business” and “relation to commercial activity” have particularly been contentious and challenging for taxpayers to understand. If you need assistance in learning more about ITCs or are already in dispute with the CRA, contact us today. Professionals at Rosen Kirshen Tax Law have a proven track record of helping taxpayers successfully prove the eligibility of their ITCs.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff 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.