Accounting

by Jeff Kirshen

Non-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 Kirshen

What 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.

by Jeff Kirshen

Canada Emergency Response Benefit Updates

On Wednesday, April 15, 2020, the Government of Canada announced that a greater number of Canadians will be eligible for the Canadian Emergency Response Benefit (CERB). The CERB provides $500 per week to Canadians for 16 weeks. In most cases, individuals can only apply for the benefit 14 days after their last paycheque. Applicants must re-apply every four weeks.

The government is actively seeking to fill the gaps created by the original eligibility criteria. The original requirements for qualifying for the CERB were the following:

• The applicant must be at least 15 years old;
• The applicant must have stopped working for reasons due to COVID-19;
• The applicant must have earned employment or self-employment income of at least $5,000 in 2019, or in the 12 months prior to the date of their application; and
• The applicant must not have quit their job voluntarily.

The most important expansion of CERB eligibility criteria is to permit those who make under $1000 per month to apply. This is to help those that are still working and making a paycheque, but at reduced hours. This adds some flexibility to the rule that applicants must wait 14 days since their last paycheque to apply. Now, even though an individual is still earning a salary, if it is under $1000 they can be eligible.

The criteria have also been expanded to include Employment Insurance (EI) exhaustees. If you have completed a claim of EI since January 1st, 2020, you will qualify for CERB. This is intended to help individuals who have not necessarily stopped working because of COVID-19, but are now finishing their EI and are unable to find employment because of COVID-19.

The expansion also benefits seasonal workers, who might use their EI in the off-season, and work in the warmer months. Now, as we approach summer, seasonal workers who cannot find employment due to COVID-19 are also eligible for the CERB.

Additionally, essential workers who are working full time but earn less than the CERB provides are going to get a wage boost. The federal and provincial governments are working together across the country to provide a top-up or wage boost for essential workers that are paid less than $500 per week. The details on this are not finalized yet, but it appears that the government is going to reconsider who are truly “essential workers”, and give them a wage supplement as compensation for working during this pandemic. We will provide further details on this as they become available.

The government has stated that if you select to receive the benefit as direct deposit, you should receive it within one business day. If you choose to receive the benefit by cheque, it can take up to five business days.

If a recipient receives a double-payment, there is no reason to worry. The government has stated they are tracking those cases and those individuals will just have to ration the larger benefit amount over a larger period of time. The government will not retrieve the additional funds. They will just stop providing additional payments once that recipient reaches the maximum benefit amount of $8000.

 

If you have any questions about how the taxable benefit above may affect you as a taxpayer, or questions about applying, contact our firm for a free consultation. 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 Kirshen

The Canada Revenue Agency Response to COVID-19

In order to alleviate the burden of the ongoing COVID-19 crisis on Canadians, the Federal Government of Canada has introduced changes to the Canada Revenue Agency (CRA) processes and extended the tax calendar for this upcoming tax season. The changes affect all taxpayers, and hopefully will have the effect of relieving some of the stress of the current circumstances.

 

CRA and COVID-19 Personal Tax Changes

The following changes are relevant for individual taxpayers:

1. The filing due date for 2019 tax returns of individuals have been deferred until June 1^st, 2020. However, the CRA encourages individuals who receive benefits under the GSTC or the Canada Child Benefit not to delay the filing of their return if possible. This is to ensure that their entitlements for the 2020-2021 benefit year are properly calculated.
2. The filing date for Trusts with a taxation year ending of December 31 2019 will be postponed until May 1, 2020.
3. Taxpayers are allowed to defer the payment of any income tax amounts that become payable between March 18 and September 2020 until after August 31, 2020. This applies to all balances due, including any instalments. No interest and penalties will apply.
4. The CRA will recognize electronic signatures as having met the signature requirements of the Income Tax Act, effective immediately. Usually, taxpayers are required to sign their tax returns by hand. In an effort to reduce the amount of person-to-person contact between taxpayers and their tax-preparers or accountants, they are now allowing electronic signatures instead.

 

CRA and COVID-19 Corporate Tax Changes

The following changes are relevant for businesses:

5. Similar to individuals, the CRA is allowing businesses to defer the payment of any income amounts that become payable between March 18 and September 2020 until after August 31, 2020. This applies to all balances due, including any instalments. No interest or penalties will accumulate on these amounts owing during this period.
6. The CRA will not contact any small or medium business to initiate any income tax or GST/HST audit for the next four weeks, starting March 18, 2020. Additionally, for the vast majority of businesses, the CRA will suspend audit interaction between CRA agents and taxpayers.

 

CRA and COVID-19 – Collections

Rosen Kirshen Tax Law has successfully negotiated the removal of the vast majority of the legal action taken against our clients. CRA understands that now is not the time to garnish wages, freeze bank accounts or take additional action against taxpayers. If CRA has taken legal action against you, call us to see if we can help get it removed ASAP.

 

CRA and COVID-19 – Situation Moving Forward

If the situation continues to worsen, we expect the CRA to continue loosening its rules and regulations. More importantly, the CRA will likely begin offering credits and benefits that were not necessarily available before the crisis in order to alleviate the financial burden of the COVID-19 pandemic. We will be sure to keep you updated on any changes that could ultimately lower your amount owing.

If you have any questions about how the changes above may affect you as a taxpayer or small-to-medium size business owner, contact our firm for a free consultation. We are here to help! In the meantime, we want to wish everyone a safe and healthy quarantine / self-isolation period. We are truly fortunate to be in Canada during this crisis, where from our government, to our neighbours, we all take it upon ourselves to ensure the well-being of those around us. Let’s get through this together.

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

What are the CRA Requirements for Record Keeping?

The Canada Revenue Agency (CRA) requires individual and corporate taxpayers to keep their records in case they are audited, or if the CRA wants a taxpayer to justify their income and / or expenses in another way.

 

CRA Requirements for Record Keeping – Where do I keep my Records?

Unless you have permission from the CRA, you must keep your records at your place of business or your residence in Canada.

Records that are kept outside of Canada and accessed electronically from inside Canada are not considered to be records kept in Canada.

In order to get permission to keep your records elsewhere, you must write to your  tax services office. If you are granted permission, you must make your records available upon request for review by the CRA in Canada.

The CRA will not give permission to keep records outside of Canada to the following:

• Registered charities;
• Registered Canadian amateur athletic associations;
• Canadian municipalities;
• Public bodies performing a function of government; and
• Housing corporations resident of Canada and exempt from tax under Part 1 of the Income Tax Act.

The CRA could give you permission to store your electronic records outside of Canada. If so, the CRA may accept copies if:

• The CRA is satisfied that the copies of the records are true copies;
• They are made available to CRA officials in Canada in an electronic format readable by CRA software; and
• They show enough details to support the returns filed with the CRA.

 

CRA Requirements for Record Keeping – How Long Do I need to Keep my Records?

In general, you must keep all records and supporting documentation for a period of 6 years from the end of the last tax year they relate to. The tax year will be the fiscal period for corporations and the calendar year for individuals.

The 6 year rule applies to the following legislations:

• The Income Tax Act;
• The Excise Tax Act (includes the GST/HST);
• The Employment Insurance Act;
• The Canada Pension Plan;
• The Excise Act, 2001; and
• The Air Travellers Security Charge Act.

However, there are times when you must keep your record for longer. Some of these include:

• If you file an income tax return late, you must keep your records for 6 years from the date you file that return;
• If you have not filed a GST/HST return for a reporting period that ended more than 6 years ago, you are still required to file the return and retain the records to support the amounts reported on the return;
• If you filed an objection or an appeal, you must keep all necessary records until the latest of the following dates:
  • The date the objection or appeal is resolved;
  • The date for filing any further appeal has passed;
  • The six-year record keeping period has passed;
• When a corporation is dissolved, it must keep the following records for 2 years after the date of its dissolution:
  • All records and supporting documents to verify its tax obligations and entitlements;
  • All other records that corporations have to keep;
• When you are the legal representative of a deceased taxpayer or trust, you can destroy the records after receiving a clearance certificate(s) to distribute property under your control.

 

CRA Requirements for Record Keeping – Am I allowed to Destroy my Records?

In order to destroy your records prior to the expiration of the mandatory period, you must get written permission from the CRA.

To obtain this permission, you or your authorized representative can:

• Complete Form T137, Request for Destruction of Records and;
• Apply in writing to your  tax services office.

It is important to note that the CRA is not authorized to approve the destruction of records that you must keep under other federal, provincial, territories, or municipal laws.

If your records were destroyed due to a disaster, you need to contact the CRA to advise them of this.

 

If you are unsure about how long you are required to keep your records, or if the CRA is reviewing or auditing you or your business call us today! We can help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

GST/HST Rebates when Buying Canadian Property

Houses are expensive, so it is important to take advantage of any program that allows you to recover some of your costs. The New Residential Rental Property Rebate (“NRRP”) and the New Housing Rebate (“NHR”) allow you to do this. However, the criteria can be confusing, and people often apply for the wrong one, or their circumstances change and the application that they originally applied for is no longer appropriate. That is why it is important to know the differences.

 

The New Residential Rental Property Rebate

The NRRP allows you to recover some of your costs when you purchase real estate that will be used as residential rental property.

 

The New Home Housing Rebate

The NHR allows you to recover some of your costs when you construct or substantially renovate a home.

 

What are the Criteria for Applying?

The criteria for an NHR are:

1. The home must be used as a principal residence; and
2. The construction must be for a newly built home or for substantial renovations or major additions
   1. Substantial renovation must include gutting the entire home with at least 90% of the dry wall removed; and
   2. A major addition must at least double the size of the home.

The criteria for an NRRP are:

1. First occupants of the new residential rental property must be the tenants;
2. First occupants cannot include the landlord; and
3. The fair market value of the qualifying residential unit at the time the tax was payable must be less than $450,000.
   1. If you are a resident of Ontario and the fair market value exceeds $450,000 you may be eligible to claim the provincial NRRP.

If you receive the NRRP and then sell the residence within 1 year, you may have to repay the entire rebate unless you sell it to a person who occupies it as their principal residence.

 

How to Apply?

You can apply for an NHR by:

1. Within 2 years are the property closes, complete either Form GST191 for owner-built houses or Form GST190 for houses purchased from a builder; and
2. Provide the appropriate supporting documentation.

You can apply for an NRRP by:

1. Within 2 years after the property closes or sells, complete Form GST524; and
2. Provide the appropriate supporting documentation.

 

Change in Circumstances

If you purchase your home with the intention of making it your primary residence, often the builder will apply for the NHR on your behalf, thus lowering your purchase price. However, if your circumstances change, and once the home is built you are no longer the first occupant, you no longer meet the criteria of the NHR. However, if you rent out your new home, you could very likely qualify for the NRRP instead.

When this occurs, it is very possible the CRA audits you to determine if you qualify for the rebate. We see quite a lot of this and can assist with your audit!

 

Other Issues to Note

The principle residence exemption can also result in tax implications upon the purchase or sale of property.

Property assignment can result in GST/HST as well as income tax implications. Assignment is when you purchase a pre-construction home or property, and sell the property before it is built and before you gain title to it. In other words, you are assigning your purchased rights to a home to another person.

 

If you have any questions about the tax consequences that relate to purchasing or selling property, contact our firm for a free consultation. 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 Kirshen

Assigning Property and the Income Tax Implications

Assignment is when you purchase a pre-construction home or property, and sell the property before it is built and before you gain title to it. In other words, you are assigning your purchased rights to a home to another person.

 

Property Assignment and the Income Tax Implications

When you assign a property, you typically earn a profit from the difference in the amount that you originally purchased the property for and the amount that you sold your rights to the property for. This profit needs to be reported to the Canada Revenue Agency (CRA). This is done by including the profit as income for the year in which the assignment occurred.

 

Property Assignment – Income or Capital Gains?

Most people assume that the income earned from property assignment should be reported as capital gains and therefore only 50% of the profit is taxable. However, there are circumstances under which the CRA considers the profits as business income and therefore 100% of the profit is taxable.

It is the intent of the buyer, and not the nature of the property the determines whether the property was capital or inventory. If the CRA concludes that the property is capital, then its assignment (or disposition) would result in a capital gain. If the CRA concludes that the property is inventory, then the disposition of that inventory would result in business income.

The intent of the buyer is the key factor because if the CRA determines that the intention of the taxpayer at the time of purchase was to resell the property for a profit (or “flip it”), then they will classify the transaction as a business transaction and the profit as business income.

 

Property Assignment – What Factors does the CRA Consider?

There is no specific provision in the Income Tax Act that outlines the circumstances under which the proceeds from a sale of property must be reported as either business income or capital gain.

However, a review of court decisions shows that the courts have historically focused on several key factors in determining how to classify sales of property.

These are some of the factors that the courts have looked at:

1. Individuals’ stated or deduced intention with respect to the property at the time of purchase and the feasibility of those intentions;
2. Extent to which this intention was actively carried out by the seller;
3. Geographical location and zoning restrictions of the property;
4. Nature of the business/profession that the seller is involved in;
5. The extent to which borrowed money was used to finance the real estate acquisition, including the terms of the financing;
6. The length of time the property was held by the seller;
7. Whether or not there were other individuals who shared an interest in the property;
8. The factors involved in the sale of the property; and
9. Evidence that the individual and/or their associates have previously dealt with real estate.

Taken together, these factors are used by the courts to determine whether the intention at the time of purchase was to resell the property for a profit.

 

Property Assignment and Other Tax Implications

Property assignment can also result in GST/HST implications. For more information on those implications, please review this article.

The principle residence exemption can also result in tax implications upon the purchase or sale of property.

The CRA has been actively pursuing and investigating real estate transactions due to the fact that this is a significant area of non-compliance.

 

If you have recently assigned a property, or have been assessed for the assignment or sale of a home/property in the course of a business, contact our firm for a free consultation. 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 Jason Rosen

What is an Allowable Business Investment Loss?

When a capital loss satisfies certain criteria, it can be reported to the CRA as an Allowable Business Investment Loss (“ABIL”), which is subject to preferential tax treatment.

For a loss to be an “allowable business investment loss”, it first must be a “business investment loss”. An ABIL is simply the portion of a business investment loss that is deductible (thus the word “allowable” in ABIL). Of your total business investment losses of tax year, 50% qualify as ABILs and are therefore deductible. However, unlike other sources of income like capital gains which can only be applied to reduce capital losses, the Canadian tax authorities have decided to give taxpayers greater privileges when applying ABILs.

 For instance, taxpayers can apply ABILs to any source of income, to reduce their overall taxable income. If your ABIL is higher than your income, you could effectively reduce your income to zero and pay no income tax for that year. Additionally, if you have ABILs that you do not wish to apply to your income earned this year, it can optionally be carried back three years or forward ten years to offset any amount of income from any source in those years.

 

What are the Requirements to claim an ABIL?

There are four questions taxpayers must ask themselves before determining whether their capital loss qualifies as an ABIL:

1. Did the Taxpayer invest in shares or debt of a Corporation?

 The taxpayer would have had to purchase shares or have made a loan to a corporation.

 

2. Has the debt been established to be a bad debt?

 A “bad debt” is an expense owed to a creditor that is unlikely to be paid. For a debt to be claimable as an ABIL, it must be a bad debt; uncollectible.

 

3. Was the property issued by a “Small Business Corporation”?

An ABIL can only be claimed on a loss from a stock in a small business corporation (“SBC”) or a debt owing to the taxpayer by an SBC. Meeting the definition of an SBC in Section 248 of the ITA is an important element of an ABIL claim:

• It must be a Canadian-controlled private corporation (“CCPC”)
• All or substantially all of the fair market value of the assets is carried on primarily in Canada

 

4. Was the property acquired for the purpose of earning income?

The investment must have been made to an active business. Taxpayers are sometimes faced with the argument that the business was not being carried on because it never commenced or because it had already ceased. The question comes down to whether the taxpayer can prove they were investing in a business that was active; that it had indicia of an active business. Indicia can include an organizational structure, employees, market research, cost benefit analysis, etc.

 

Are there any Limitations to Claiming an ABIL?

The amount of ABIL you can claim is reduced by the amount you have previously claimed under the lifetime capital gains deduction. The capital gains exemption has a top limit, exempting you from paying tax on the first $424,126.00 (as of 2018) of taxable capital gains (half of $848,252.00 in capital gains) in your lifetime. If your capital gains exempt income from the past in addition to your ABIL reach that threshold, then the remainder can only be used to reduce capital gains.

 

If you have questions about the above, have attempted to claim a business investment loss, or an allowable business investment loss and the Canada Revenue Agency is auditing your loss claim, give us a call today to see how we can help!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Possible Taxes on the Sale of a Principal Residence

When you sell your home, you may realize a capital gain. A capital gain is a profit earned on the sale of property. However, there is an exception to this rule if your home is a principal residence which would allow you to pay no taxes on the sale.

 

What is the Principal Residence Exemption

The principal residence exemption allows homeowners to avoid paying taxes on the capital gains realized from the sale of their primary residence. If a property qualifies as a taxpayer’s principal residence, he or she can use the principal residence exemption to reduce or eliminate any capital gain otherwise occurring, for income tax purposes, on the disposition (or deemed disposition) of the property.

 

The Principal Residence Exemption and the 2016 Changes

Prior to 2016, for every year you have owned your property, it was your sole residence, you did not have to report any income tax on the profits from the sale of your home, or to report the sale of a principal residence at all. However, in an effort to ensure only eligible homeowners benefit from the exemption, the federal government now requires that taxpayers report information such as the proceeds of sale, and details of the transaction to claim the principal residence exemption. See our other article regarding designating your property here: How do I designate a Property as my Principal Residence – T2091 Form

For 2016 and onwards, this information is provided by the taxpayer on Schedule 3 of their income tax return, and by filing Form T2091, Designation of a Property as a Principal Residence by an Individual, for the year the property is sold. It is important to note that only one home is eligible for a principal tax exemption for any given tax year.

If you have sold your home and not reported it in your income tax return, it may be appropriate to submit an application through the Voluntary Disclosures Program to avoid significant penalties.

 

The Principal Residence Exemption and Possible Taxes

If you sell your principal residence, normally the profits are tax free. However, the Canada Revenue Agency (CRA) may claim that you are in the business of buying and selling homes. If this is the case, then your profit could actually be termed business income. You would have to include 100% of the profit as income, and you don’t even get to claim it as a capital gain which would have cut the taxes in half.

Additionally, if you are found to be in the business of buying and selling homes, the CRA may come in and say you should have charged GST/HST on the sale of the property. If this occurs, all of a sudden 13% (in Ontario) of the total purchase price actually counts as GST/HST. Which means you might owe hundreds of thousands of dollars in GST/HST which may remove your entire profit margin.

If either of the above happen to you, it is likely that the CRA will charge you their worst possible penalty known as gross negligence. This adds 50% of the amount owing as a penalty. So if you now owe $100,000, you will actually owe $150,000 before they even start calculating any interest charges.

 

If you have recently sold your principal residence, and you are worried about the above, call us today! Or if you are being audited for the sale of your principal residence and you need professional assistance, we are here to help! Contact us today!

 

**Disclaimer

This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Business Use of the Home

Every year, more and more Canadians are opting to work from home. It saves the cost of renting/buying an additional space in an increasingly inaccessible property market, as well as travel costs. Technology has also made it possible to use a workspace at home on a regular basis with access to the same resources as would be provided in an exclusive office space.

The Canada Revenue Agency (CRA) enables Canadians who make business use of a work space in their homes to deduct expenses that flow from that use. However, the CRA often scrutinizes taxpayers for how they may draw the line between business and home expenses. It is important to understand the rules and conditions they set to avoid unnecessary audits and reassessments.

 

What is Required to Deduct Business Use of the Home Expenses

The CRA says that you can deduct expenses for the business use of a work space in the home, as long as you meet one of the following conditions:

• It is your principal place of business; or
• You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers or patients.

In essence, your home office must be your main office. It must be your home base. Individuals who, say, work from home for a couple days each week, but their work still centres around a workspace outside the home would not be eligible. This is an important distinction because individuals are increasingly working from home, but that does not mean that their home office would be their principal place of business.

Or, you use the space in your home exclusively to produce business income. This is very relevant when it comes to deducting expenses incurred for upkeep and maintaining the work space. For instance, one could not claim their kitchen as their home office, and deduct expenses for buying a new kitchen table they work on. It must be a space used exclusively for deriving business income.

 

How do I Deduct Home Office Expenses?

If you satisfy one of the conditions mentioned above, you can deduct part of your home costs such as heat, home insurance, and electricity. You can even deduct part of your property taxes, mortgage interest, and CCA. However, you can only deduct the work space’s proportion of the total expenses. This attracts much scrutiny by the CRA: what proportion of the home’s expenses are incurred due to the home office?

The CRA advises that if you use part of your home for both business and personal living, you should calculate how many hours a day you use the rooms for business, and then divide that amount by 24 hours, and then multiply that by your total home expenses.

The amount of expenses you deduct cannot be more than your net income from the business before you deduct these expenses. Basically, the CRA does not allow you to use expenses to increase a business loss.

 

If you are being audited for your home office, or you have questions about what expenses are eligible, give us a call 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.