Accounting

by Jason Rosen

What is a CRA Net Worth Audit?

Has your CRA auditor informed you that your audit will be a Net Worth Audit? Are you wondering what that means? We previously wrote about Net Worth Audits and Assessments which you can find here. This blog provides more information about net worth audits, what they are, why they occur, and what can be done to fight them.

 

Net Worth Audit

Generally, a standard audit consists of reviewing a taxpayer’s accounting records (i.e., bank statements) as well as other related records. However, in cases where the CRA finds the taxpayer’s records insufficient, the CRA may initiate a Net Worth Audit. Once initiated, the CRA will consider a multitude of factors to arrive at a taxpayer’s taxable income. This can include a review of bank records, assets, and liabilities, along with accounting records. In a way, the CRA is assuming the taxpayer’s unreported income when utilizing a Net Worth Audit. The CRA justifies this type of audit when they claim there is any indication of irregularity or insufficiency in the financial affairs and records of the taxpayer.

The auditor may even increase taxable income if they feel that a taxpayer’s respective tax returns do not support his or her lifestyle (also referred to as a CRA lifestyle audit). This can result in a financial gift from a parent turning into taxable income, or even unidentified bank deposits being termed income. The overall goal of a CRA Net Worth Audit is to increase a taxpayer’s taxable income. If the taxpayer’s books and records are in poor shape, it will be much easier for them to do so.

 

When will CRA use the Net Worth Audit Method?

The CRA refers to a Net Worth Audit as an indirect verification of income. The CRA may rely on the Net Worth Method, if:

• Your books and records are inadequate and indicate potential errors;
• You mix personal and business income into one bank account. For instance, one account may be used for both personal and business transactions;
• The income you reported does not support your lifestyle;
• If the business you are in is in an industry where tax evasion is common; and/or
• If comparable businesses report higher income then your business.

These are all factors that the CRA may rely on to initiate a Net Worth Audit.

 

How do you challenge a Net Worth Audit Tax Assessment?

CRA auditors have immense discretion. Additionally, there is a reverse onus in tax law, meaning that it is on the taxpayer to prove his or her income (as the Canadian tax systems is a self-reporting system). In practice, auditors are allowed to assume facts that a taxpayer must then rebut.

A taxpayer can successfully challenge a net worth assessment by preparing detailed responses and explanations to each assumption of the auditor. The taxpayer’s goal is to demolish the auditor’s assumptions. This is normally done with explanations and documentation rebutting each assumption.

If your audit has been concluded, you may continue to fight the assessment by filing a Notice of Objection and/or appealing to the Tax Court of Canada. The best method to dispute the Net Worth Audit is have your books and records reconstructed to show the difference between the CRA auditor’s accounting and factual assumptions. Providing detailed and accurate records of your finances is key.

 

At Rosen Kirshen Tax Law, we have represented several clients during and after a Net Worth Audit. If a taxpayer wants to appeal a Net Worth Audit tax assessment, we can file a Notice of Objection, challenging the assessment before a CRA Appeals Officer. If you are going through a CRA Net Worth Audit, or have had one completed that you disagre with, and you need assistance, contact us today! We are here to help!

 

**Disclaimer

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

by Jeff Kirshen

Why you Should Keep your Receipts

Keeping your receipts, regardless of the field it pertains to, is a prudent and highly advisable practice. In the area of tax, this practice becomes even more important. In the event you should be audited, reassessed, or be the subject of a processing review, the Canada Revenue Agency (“CRA”) will request (and frankly demand) that the appropriate receipts be provided to verify the information you filed on your tax return is accurate. Keeping your record books accurate will help to ensure the process is as painless as possible.

 

Where do I Keep my Records?

The CRA has stated that you must keep your records at either your place of business (for any business records) or at your residence, unless the CRA has given you express permission to keep them elsewhere. If you would like to obtain the CRA’s permission to keep your records elsewhere, you will need to write to your local tax services office.

 

How long do I have to keep records for?

The record keeping requirement stems from paragraph 230(4)(b) of the Income Tax Act. This section states that every person carrying on business and/or every person who is required to pay taxes shall keep all records and books that are necessary to verify the information until the expiration of six years from the end of the last taxation year. In theory, if you are filing your 2020 return, you should keep the documents until 2026. However, this rule does have some caveats. The six-year requirement for keeping documents relates not only to the original tax year in which you file, but also relates to the tax year in which you are claiming a certain expense/deduction, etc.

Looking at our previous example, when filing your 2020 tax return, the minimum requirement for keeping the relevant documents is 2026. However, if you plan on carrying a business loss forward to use in a future year (say 2030), then the relevant documents to prove the business loss must be kept until 2036. The six-year requirement not only relates to the original year the return was filed, but more importantly, it relates to the year in which the taxpayer plans to use that document.

 

Can I Destroy the Records before the Six-year period Expires?

If you want to destroy the records prior to the retention period expiring, you must request permission from the CRA to do so. In order to obtain this written permission, either yourself or your authorized representative must do one of two things:

• Complete the Form T137 (Request for Destruction of Records); or
• Apply in writing to your local Tax Services Office.

 

In what Situations does the Six-year limitation Period not Apply?

The six-year limitation period does not apply to all possible situations. Some situations in which a different limitation period applies includes:

• When your records and supporting documents concern long-term acquisitions and disposal of property, the share registry, or other historical information that would have an effect on the sale, liquidation or wind‑up of the business, you have to keep them indefinitely.
• If the CRA wants you to keep records for a period longer than six years, a CRA official will let you know how long to keep them either in person or by registered mail.
• If you file an income tax return late, you must keep your records for six years from the date you file that return.
• If you filed an objection or an appeal, you must keep all necessary records until the latest of the following dates:
  • the date the objection or appeal is resolved;
  • the date for filing any further appeal has passed; or
  • the six-year record keeping period has passed.

 

What if I don’t have my Receipts?

All is not lost if you did not keep all of your receipts. That being said, it does make proving your expenses much more challenging. You may attempt to use other methods of proving the expenses, such as bank and credit card statements. The CRA, however, will likely have a hard time accepting your expenses claims. In these types of situations, you should seek the assistance of a professional.

 

Overall, the CRA requirements for record keeping seem simple, but are quite complex. Failure to retain your records for the appropriate period can have a detrimental impact on the successful defence of any audit, processing review, etc. If you are going through a CRA review, and you need assistance with proving your receipts and expenses, contact us today!

 

**Disclaimer

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

by Jeff Kirshen

Bill C-208 – New Rules for Intergenerational Wealth Transfers

On June 29, 2021, Bill C-208 received Royal Assent. It represents a significant change to the Income Tax Act (“ITA”) for intergenerational wealth transfers. The private member’s bill amended sections 84.1 and 55 of the ITA, providing more flexibility to intergenerational transfers of small businesses, family farms or fishing corporations. For business owners, Bill C-208 may allow access to new tax-efficient strategies when the time comes to pass down the torch to the next generation.

 

Basics of Wealth Transfer

There are two main ways for business owners to pay themselves out: by selling equity (capital gains) or issuing dividends. In Canada, taxpayers may obtain more favourable tax treatment on capital gains than on dividends. They may also be eligible to claim the lifetime capital gains exemption to reduce some or all the tax payable on the sale of qualified businesses.

 

Section 84.1

Section 84.1 of the ITA is a specific anti-avoidance rule intended to prevent surplus stripping, a tax strategy where business owners pull out their earnings as capital gains rather than dividends. The law deems certain transactions involving related parties (a non-arm’s length transaction) as a dividend instead of a capital gain.

One popular method of passing on a business is through the use of a holding corporation. For example, parents sell their shares of a qualified small business corporation to a holding corporation owned by a child or a grandchild. Under the old rules, the transaction would be classified as a non-arm’s length transaction and would be captured by the s.84.1 anti-avoidance provision. The parents would have to pay dividends tax and lose the advantages associated with capital gains. In contrast, had the parents sold to a holding company owned by third parties, the sale would’ve been classified as an arm’s length (unrelated) transaction and deemed a capital gain.

The amendments in Bill C-208 intended to address the application of s. 84.1 on transactions between parents and their children or grandchildren. It effectively provides an exemption to section 84.1 of the ITA where three criteria are met:

1. The business is a qualified small business corporation or a family farm or fishing corporation within the meaning of s. 110.6(1) of the ITA;
2. The purchaser corporation is controlled by one or more children or grandchildren of the taxpayer who are 19 years of age or older; and
3. The purchaser corporation does not dispose of the subject shares within 60 months of the transaction (other than for reasons due to death).

If the transaction meets the three criteria, the transaction would be assessed as a capital gain rather than a dividend and allow the parents to tap into significant tax savings.

Bill C-208 also include additional rules such as limiting a business owner’s access to the lifetime capital gains deductions for corporations with taxable capital employed in Canada over $10 million. Furthermore, the rules also require the business owner to obtain an independent assessment of the business’s fair market value. In the end, there remain many uncertainties in the wording of the new bill, and taxpayers should be vigilant when planning the sale of their family business.

 

Section 55

Subsection 55(2) of the ITA is a specific anti-avoidance rule that would apply to certain transactions involving the transfer of a corporation’s cash or property. Before the amendment, the rule converts tax-free inter-corporate dividends into a capital gain in some circumstances. There were exceptions to this rule for related persons, but it did not apply to siblings. However, Bill C-208 effectively expanded the related person exception to provide additional tax savings to transactions involving siblings.

 

Summary

Bill C-208 introduced new amendments to the ITA to provide small business owners with new tax-efficient strategies for passing on their business to the next generation. Under the new rules, parents may be eligible to report the transaction as a capital gain, as opposed to the transaction being deemed a dividend under the old rules. Furthermore, the amendments relaxed transactions between siblings, adding greater flexibility for transactions within the family.

However, on July 29, 2021, the Department of Finance also indicated its intentions to release further legislative amendments that “honour the spirit of Bill C-208 while safeguarding against any unintended tax avoidance loopholes”. Taxpayers should be wary as these new amendments may change the applicability of Bill C-208.

 

Are you seeking to transfer your small business to your children? Contact us today to schedule an appointment with our team of experts! Rosen Kirshen Tax Law will provide you with the expert advice you need to minimize your tax exposure!

 

**Disclaimer

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

by Jeff Kirshen

RRSPs Explained

The Registered Retirement Saving’s Plan, also known as an RRSP, is a retirement account that was introduced by the Government of Canada in 1957. The primary purpose of the RRSP is to promote and incentive taxpayers to save for retirement by providing specific tax benefits to those who contribute to their account. Indeed, having many Canadians reach old age with no savings, no ability to work and relying on government assistance to make ends meet would be a national concern. As such, the RRSP was designed to prevent the same by promoting a lifestyle that financially rewards saving during a taxpayer’s working years.

This blog post will briefly examine the various advantages and functions of the Registered Retirement Saving’s Plan.

 

How Does it Work?

As mentioned earlier, the RRSP is a retirement savings account where taxpayers can contribute funds into and hold various investments including cash, GIC’s, stocks (equities), bonds, ETF’s and others. The primary tax advantage of the RRSP is that any contributions are made pre-tax and are allowed to grow tax free until withdrawal. In other words, any money you contribute to the RRSP will be deducted from your taxable income for that year, and will only be taxed in whichever later year the funds are ultimately withdrawn.

 

RRSP Tax Advantages

RRSPs present a tremendous opportunity for savings via tax-deferral. For one, we know that the Canadian tax system operates under progressive rates meaning that higher earned income pays a higher tax (for every dollar earned in that bracket) than the lower-earned income. The idea of the RRSP is to deduct as much taxable income as possible during your working years, presumably when you would be earning in the highest tax bracket, and subsequently pay the deferred tax during your retirement years when you would likely be in the lowest tax bracket.

For example, if Taxpayer A earns $100,000 but contributes $18,000 to their RRSP, his/her taxable income would effectively be $82,000 for that year. If the Taxpayer subsequently withdraws the same amount years later after they retired (assuming $0 income), they would be paying 15% on that amount as opposed to the higher 20.5% and 29% tax brackets.

More importantly, the taxpayer gets to immediately recognize the tax advantage of decreasing their tax burden at present and deferring payment until years later. This is arguably the key differentiating factor between RRSP’s and the Tax-Free Savings Account (“TFSA”), another savings account promoted by the Government of Canada.  Despite TFSA withdrawals being ultimately tax free, any contributions made to the TFSA do not reduce the taxpayer’s income by the same amount. Alternatively, RRSP’s withdrawals are considered taxable income, but contributions are considered a tax deduction and effectively will lower the taxpayer’s income.

The other main tax advantage of the RRSP is that investments can grow tax-free until withdrawal. Using the example above, if the taxpayer purchases $18,000 worth of equites which issue quarterly dividends, both the capital gain and dividend income will not be taxed until the withdrawal date.  This means that the taxpayer can capture the whole dividend income and use it to purchase more equities or other growth-type investments rather than pay a portion to the CRA. Indeed, by allowing the gains to be tax-deferred, this allows investments inside the RRSP to compound and grow at a much faster compared to just investing in a normal brokerage account.

 

RRSP Contribution and Deduction Limits

Naturally, there is a limit to how much a taxpayer can contribute to the RRSP annually. The Canada Revenue Agency (“CRA”) typically calculates a taxpayer’s RRSP deduction limit as the following:

• The Lesser of
  • 18% of your earned income in the previous year; or
  • RRSP limit ($27,830 as of 2020).

Importantly, any unused contribution amounts from preceding years carry forward to the contribution limit. That said, unused amounts do not carry over for deduction limits and the maximum amount is capped at 18% of your income or the RRSP limit. Taxpayers must be careful not to overcontribute as there is tax penalty of 1% per month on contributions that exceed their RRSP deduction limit by more than $2,000.

 

Additional Factors Regarding Contributions and Withdrawals

The RRSP contribution age limit is 71. After that, the RRSP will either convert to a Registered Retirement Income Fund (“RRIF”) or the full amount must be withdrawn and taxed that year. Taxpayer’s can also withdraw from their RRSP anytime before 71, but the withdrawals will be considered taxable income for that year.

One exception to the above rule is the Home Buyer’s Plan (“HBP”). This program allows eligible taxpayers to withdraw up to $35,000 tax-free from their RRSP to help purchase their first home ($25,000 limit for withdraws before March 2019). This incentive aligns with another one of Canada’s policy objectives of promoting home buying for taxpayers. Nevertheless, any amounts taken out from the RRSP via the HBP must be eventually paid back. In effect, taxpayers looking to purchase a new home can view the $35,000 amount in their RRSP as an interest free loan.

 

Conclusion

The RRSP is truly one of the few great tax saving accounts the Government of Canada promotes and provides to taxpayers. However, there are complex rules surrounding the application of the RRSP and taxpayers must ensure they do not fall into any pitfalls causing unnecessary financial damage to their accounts. If done correctly, taxpayers will benefit greatly from contributing to the RRSP and even get ahead in purchasing their first new home.

 

If you need assistance with structuring your RRSP or have any general inquiries, contact us today. Professionals at Rosen Kirshen Tax Law have years of experience developing effective tax planning structures specifically tailored to each individual taxpayer. We’re here to help!

 

**Disclaimer

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

by Jeff Kirshen

Employee Stock Options

Employee stock options give employees the right to purchase a specified number of shares of a company at a specified price. Employees can derive financial and tax benefits from these stock options if they exercise their options when the market purchase price of the stock is greater than the purchase price specified by the option. They can then sell the stocks they own. However, there are important tax rules that must be understood when an employee exercises their options, and also when those stocks are sold.

 

Employee Stock Option – Public Companies and Tax Benefits

The following analysis is for stock options granted by public companies.

Under paragraph 7(1)(a) of the Income Tax Act, employees are taxed on the difference between the amount they pay to purchase their option and the fair market value of the stock at the time they exercise the option. The way in which employees are taxed on employee stock options is similar to the way in which they would be taxed on a bonus.

For example, if an employee is given an option to purchase stock for $1,000 and, at the time the employee exercises the option, the fair market value of the stock is $2,000, then the employee will be taxed on the $1,000 difference between the exercise price and the fair market value. This will be counted as employment income in the year the option is exercised.

The way in which employees are taxed on the exercise of their stock options creates the possibility for double taxation. Usually, when an employee sells stock purchased with an employee stock option, the gain incurred from the sale is taxed as a capital gain. In this case, and using the above example, the $1,000 option purchase price would be the cost base for the stock, while the $2,000 fair market value of the stock would be the price of disposition (assuming that the stock is sold for fair market value). The $1,000 difference would be the taxable capital gain. Double taxation can arise here because the employee could be taxed twice: once when the employee exercises the option, and again when the employee sells the stock.

Fortunately, paragraph 53(1)(j) of the Act provides that the difference between the exercise price and the fair market value is to be added to the cost base for the stock. This means that, for the above example, the $1,000 difference between the employee’s exercise price and the stock’s fair market value would be added to the $1,000 cost base on the sale of the stock. Now, with a $2,000 cost base, there would be a $0 difference between the cost base and the price of disposition. The employee’s taxable capital gain would be cancelled out.

 

Employee Stock Option – Canadian Controlled Private Corporations

If options are provided by a Canadian-controlled private corporation (“CCPC”), and those options are exercised, the taxable benefit mentioned above will only be added to the employee’s income when the stock is actually sold. This is the benefit of exercising options that were granted by a CCPC, you don’t pay any of the taxes until you actually sell.

These shares may also be eligible for the lifetime capital gains exemption. There are specific rules and conditions that must be met before being eligible for this exemption so please consult a tax lawyer.

 

Employee Stock Options – Tax Deferral

The Income Tax Act provides other mechanisms for the preferential treatment of employee stock options. Under paragraphs 110(1)(d) and (d.1), only half of the difference between the exercise price and the fair market value is taxable. This preferential treatment is, however, limited to certain circumstances: employees must deal at arm’s length with their employer, must generally receive prescribed stock on the exercise of options (rather than generally receiving cash), and, on the date the option is granted, the purchase price specified by the option must be greater than or equal to the fair market value of the stock. Also, if the employer granting the option is a CCPC, the employee must hold the stock for at least two years.

 

Employee stock options are useful for attracting and retaining employees. For CCPCs especially, employee stock options can act as tax subsidies because they can offer potential employees tax-deferred compensation in exchange for cash investment in the stock of the corporation. If a CCPC is strapped for cash, and if markets are rising, employee stock options can be an ideal means of taking advantage of such circumstances. If you have questions regarding employee stock options, or if you are interested in learning how to use them to your advantage, call us today!

 

**Disclaimer

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

by Jeff Kirshen

Shareholder Loans and the CRA

Many independent business owners dedicate a significant part of their time and effort into managing the operations of their business. Naturally, it is difficult for business owners to separate their personal life and the time spent managing their business. A common consequence from these set of circumstances is that owners start using their corporate account or credit cards to fund personal purchases and vice versa. This may be better known as “shareholder loans” and “shareholder benefits”.

The Government of Canada recognizes that this is relatively a common phenomenon and has provisions in the Income Tax Act to ensure that they are dealt with effectively and fairly. This post will briefly highlight the main tax consequences of shareholder benefits/loans and what business owners should be aware of. For a previous blog post overview of shareholder loans in general, please see here.

 

Shareholder Loans and Benefits

A shareholder benefit is money given by a corporation to one of its shareholder, or to a person or partnership who does not deal at arm’s length with the shareholder. It is intended to capture economic advantages a shareholder may receive which are derived from the corporation. More specifically, s.15(1) of the Income Tax Act ensures that the value of any such “benefits” conferred on a shareholder of a corporation are included in income of the shareholder, and taxed.

The term “benefit” however is not explicitly defined in the Income Tax Act and can compass several meanings. As a result, some benefits are easier to recognize than others. For example, a business owner withdrawing cash from their corporate account would be considered a benefit conferred. A more subtle yet just as equally a benefit conferred would be purchasing an item for personal use such as a MacBook with corporate funds. In this case, the value of the MacBook would be attributed as income to the shareholder.

 

How do I Manage Shareholder Loans?

Typically, the balance sheets of corporate accounts have an account called “shareholder loans” to oversee what is owed and paid to the business. For example, if the shareholder deposited excess personal funds to the business, the shareholder loan account would be in the liability section as the business owes the shareholder.

Alternatively, if the shareholder withdrew excess funds from the business, the shareholder loan account would appear on the asset section as the shareholder owes the business money.

 

Shareholder Benefits – Are there any Workarounds?

It is important to note that dividends or capital distributions are not included as shareholder benefits. This is because when income is extracted from the corporation in the form of a taxable dividend, the amount of the taxable dividend is already fully included in the income of a taxpayer.

Furthermore, s.15(2) of the Income Tax Act allows loans paid to the shareholder not to be deemed a benefit conferred as long as the loan amount is repaid within one taxation year after the end of the taxation year in which the loan was given. The purpose of this rule is to prevent business owners from unfairly providing themselves or other shareholders long term loans that effectively allow them to use corporate funds for personal purchases while deferring their tax obligations.

The Courts have also grappled with the issue of whether or not a benefit is actually conferred when there is an accounting oversight. For example, what happens when an accountant erroneously posts a personal home purchase as a corporate expense rather than debiting the shareholder loan account. In this situation, the Courts determined that an erroneous failure to adjust a loan account does not create tax liability.

 

If used properly, shareholder loans can be an extremely powerful tool for business owners to leverage their corporate accounts. However, improper use of shareholder loans can result in double taxation and audits from the CRA. If your business is being audit or have further questions regarding shareholder loans and benefits, contact a professional at RKTL today! We’re here to help!

 

**Disclaimer

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

by Jeff Kirshen

GST/HST Rules for the Supply of Digital Products or Services

The Government of Canada has proposed new measures surrounding the registration and collection and remittance of the goods and services tax / harmonized sales tax (“GST/HST”) for cross-border digital products and services. This comes at a time of accelerated digital shopping and growth in e-commerce as public health measures surrounding COVID-19 remain in place.

 

Current Rules for the Supply of Digital Products or Services

Under the current rules in Canada, any business or company is required to register, collect, and remit the GST/HST on their sales when they exceed $30,000.00 over a 12-month period, are selling taxable supplies, and are carrying on a business in Canada.

Currently, non-resident vendors who are not considered to be “carrying on business” in Canada but are supplying digital products or services to consumers in Canada, are not required to register for the GST/HST and collect and remit GST/HST.

Whether a taxpayer is “carrying on business” in Canada is a factual test. Factors include whether the company is located in Canada, whether the activity is continuous, whether the company has some physical presence, or uses Canadian warehouses or other infrastructure to hold its assets.  Currently, a non-resident online marketplace with only a place of contract, solicitation and payment would not be considered to be carrying on business in Canada despite exceeding the sales threshold.

The current rules place Canadian vendors at a disadvantage since large scale non-resident vendors do not have to charge the GST/HST if they do not carry on business in Canada.  This allows non-resident vendors to provide competitive pricings since the inclusion of tax does not pass to the consumer.

 

Proposed New Rules for the Supply of Digital Products or Services

On November 30, 2020, Minister of Finance, Chrystia Freeland, tabled the Fall Economic Statement 2020, with proposed amendments and draft legislation for new GST/HST registration requirements for non-residents of Canada who do not carry-on commercial activities in Canada. The proposals are effective July 1, 2021. The government consultation period ended February 1, 2021.

Under the proposed legislation, non-resident vendors that supply digital products or services to consumers in Canada would be required to register for the GST/HST and be responsible for collecting and remitting same.

The proposed legislation applies regardless if the non-resident vendor carries on business in Canada or has a permanent establishment in Canada.

Furthermore, digital distribution platform operators, such as the online marketplace which facilitate the sales of the non-resident vendors, would also be required to register for and collect and remit the GST/HST on the sales of goods located in Canadian fulfilment warehouses if the sales to Canadians exceed a certain threshold.

These non-resident vendors and distribution platform operators can register under a new simplified registration system. However, the option to register for the normal GST/HST system remains open.

 

Input Tax Credits

Input tax credits (“ITCs”) allow GST/HST registrations to recover the GST/HST paid on business expenses. However, ITCs can only be claimed under the normal GST/HST system and not the simplified GST/HST system.

The simplified GST/HST system provided in the proposals do not allow for registrants to claim ITCs.

Whether a non-resident vendor should register under the normal or simplified system depends on a variety of factors. A qualified tax lawyer or professional should be consulted prior to the July 1, 2021 effective date to determine a compliance plan accordingly.

 

The new rules surrounding the supply of digital products or services are among some of the new amendments proposed by the Government of Canada in late 2020. Given the complexity of the GST/HST rules and amendments in light of a changing economic landscape, speaking with a qualified tax lawyer or tax professional can assist in ensuring compliance with new or continuing business operations in Canada. Contact us today to learn more!

 

**Disclaimer

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

by Jeff Kirshen

The Taxation of Electric Vehicles

In recent years, Canada has experienced a significant increase in the adoption rate of ZEV (zero emission vehicle). According to Statistics Canada, electric and plug-in hybrid sales grew from two percent in 2018, to 2.7 percent in 2019, and 3.3 percent in 2020.  While a large reason for the increase in ZEV adoption can be credited to the improvements of battery technology and subsequently a better selection of electric vehicles, the Government of Canada has also implemented many incentives to help lower the costs of ZEVs for Canadian consumers. This post will briefly highlight the main potential ZEV tax incentives Canadians should be aware of.

 

What is a Zero Emission Vehicle?

Before diving into the various types and forms of incentives, taxpayers must first ensure that the vehicle they are looking to purchase qualifies as a ZEV. Transport Canada defines zero emission vehicles (ZEV) as vehicles that has the potential to produce zero tailpipe emissions. They can still have a conventional internal combustion engine but must also be able to operate without using it.

Examples of ZEV’s include the following:

• Battery-electric;
• Plug-in hybrid electric; and
• Hydrogen fuel-cells.

Among others, popular vehicles that qualifies as a ZEV include Tesla Model 3, Audi A3 e-Tron and Chevrolet Volt.

 

Purchase and Lease Incentives

The first incentive offered by the Government of Canada for consumers looking to buy or lease a ZEV is the point of sale incentive. Essentially, the Government of Canada will pay for $5,000 of the final price of an eligible battery-electric, hydrogen fuel cell and longer-range plug-in hybrid vehicles. Alternatively, shorter range plug-in hybrid electronic vehicles are eligible for $2,500. The purchase incentive will be applied at point-of-sale directly on the sale or lease agreement. As a result, the dealership will be responsible for completing the documentation required to receive the incentive.

It is important to note that in order to be eligible for the ZEV program, the vehicle must have either:

• Manufacturer’s Suggested Retail Price (MSRP) of less than $45,000 if vehicle has six seats or lower; or
• Manufacturer’s Suggested Retail Price (MSRP) of less than $55,000 if vehicle has seven seats or greater.

The reasoning for the cap in MSRP is so that the incentive helps overall ZEV adoption rather than just subsidize the purchase price for luxury vehicles.

 

Capital Cost Allowance and Zero Emission Vehicles

In addition to the point of sale incentive, the Government of Canada also introduced two new Capital Cost Allowance (CCA) classes specifically for businesses looking to adopt ZEVs. As mentioned earlier in the previous blog post about CCAs, capital expenditures are distinct from current expenses in that while both may be incurred for the purposes of earning income, only the latter is immediately deductible under the Income Tax Act.

Class 54 now captures ZEV excluding taxicabs and automobiles used for lease and rent. The CCA rate for this class is 30%. Meanwhile, class 55 captures ZEV for leasing/renting taxicabs and the CCA rate for this class is 40%.

Importantly, businesses can now write off 100% of the purchase price of eligible class 54 and class 55 vehicles, up to $55,000, in the year the car becomes available for use. However, the Government of Canada has also implemented the following phase out period:

• 100% after March 18, 2019 and before 2024;
• 75% after 2023 and before 2026;
• 55% after 2025 and before 2028; and
• 0% after 2028.

 

As the world strives for a greener future, electronic vehicles will become increasingly more common place. If your business is looking to purchase ZEV’s and capitalize on the current tax incentives, or you have general questions regarding the deductibility of business expenses, contact a professional at RKTL today!

 

**Disclaimer

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

by Jeff Kirshen

CRA 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 30^th, 2018 and was reassessed on June 1^st, 2020, compounding interest will be charges from the initial filing date (April 30^th, 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 Kirshen

Deducting 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.