Administration

by Jeff Kirshen

How to Apply for the Disability Tax Credit Certificate

We previously explained what the Disability Tax Credit was in our blog post found here. This blog post will explore how to apply for the credit.

How to Apply for the Disability Tax Credit Certificate

When applying, you must fill out and submit form T2201 (Disability tax credit certificate) to the CRA. The individual applying would fill in Part A, and Part B must be filled out by your medical practitioner. Medical practitioners for the purpose of this application include:

• Audiologists;
• Medical doctors;
• Nurse practitioners;
• Occupational therapists;
• Optometrists;
• Physiotherapists;
• Psychologists; and
• Speech-language pathologists.

What are the Eligibility Requirements for the Disability Tax Credit Certificate?

The eligible impairments for the DTC include areas such as:

• Vision;
• Speaking;
• Hearing;
• Walking;
• Eliminating (bowel and bladder functions);
• Feeding;
• Dressing; and
• Mental functions necessary for everyday life.

As mentioned, the disability must be severe and prolonged, and must result in a marked restriction. The CRA defines a marked restriction as one that, “even with appropriate therapy, devices, and medication, the individual is unable or takes an inordinate amount of time to perform activities or functions in one of the listed categories, and this is the case all or substantially all of the time”. The above-mentioned criteria does not apply to vision or life-sustaining therapy as they have their own conditions which are outlined by the CRA.

The CRA also defines prolonged to mean either the disability has lasted for 12 months continuously, or it is expected to last 12 months or more continuously.

What Happens Once the Form is Submitted?

The CRA will review all applications thoroughly before denying or accepting the claim. Their decision will be based on the information given by the medical practitioner. If your application is accepted, you will receive a notice of determination which will show which years you are eligible for the DTC. If you are denied, you will still receive a notice of determination and it will explain why the application was denied. If you disagree with the decision to deny your request, you can submit an objection to your local tax center.

Overall, knowing how to navigate the CRA application process will make submitting your claim much easier, and will increase the likelihood of its success. If you have any questions or need any assistance regarding disability tax credits, or any tax matter, please feel free to 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 Jason Rosen

Implied Undertakings in the Tax Court of Canada

An undertaking is a legally binding promise to do or provide something, or to refrain from doing something or providing something. Undertakings can exist in different forms depending on the context. For example, the seller in a real estate transaction may agree to an undertaking to produce certain documents related to the property. Alternatively, in criminal cases, bail is a form of undertaking where the accused is released under the promise to appear in court when required. For this article, we will be discussing undertakings in the context of Tax Court proceedings and appeals.

Examination for Discovery

Examination for Discovery is an official court proceeding where each party may examine the opposing side under oath. The process can take the form of Oral Discovery, where parties are examined in person; or it can take the form of Written Discovery, where parties are examined through written requests. Discovery facilitates the exchange of information before trial, thus ensuring the litigation process remains fair and efficient.

What is the Implied Undertaking Rule?

The Implied Undertaking Rule limits each party’s right to use the information obtained through the Examination for Discovery process, with some exceptions. The rule prohibits each party from using information obtained through discovery for any other purpose or in any other context other than the specific proceeding. The rule is critical to ensure fairness in the litigation process by protecting the privacy interests of the litigants, and in turn, encourage a complete and truthful Discovery process.

The Implied Undertaking Rule is set out in Juman v. Doucette (2008 SCC 8). The rule has a broad scope: it applies to all documentary and oral information obtained during discovery. Parties are not allowed to use the information except for that litigation, with certain exceptions.

However, according to Juman, a court may exercise its discretion to relieve a party from an undertaking under certain conditions. The Court decide whether, on a balance of probabilities, the public interest in permitting the disclosure outweighs the privacy interests of the party and the goal of promoting efficiency in the court system.

In the context of Tax proceedings, one important factor to consider when balancing public and private interests is whether the parties and issues are similar to another action. In Juman, the Supreme Court of Canada found that there is virtually no prejudice to the discovered party, and leave will generally be granted where the discovery material in one action is sought to be used in another action with similar parties and similar issues.

What are the Consequences of Breaching the Implied Undertaking Rule?

The consequences of breaching an implied undertaking can vary depending on the context. These consequences can range from a stay of proceedings, substantial costs awards, or contempt proceedings. However, in other cases, it may not result in a remedy at all.

Fio Corporation v. The Queen (2014 TCC 58) is an example of a particular costly consequence of breaching the Implied Undertaking Rule. In this case, the Taxpayer brought a motion to direct the Minister of National Revenue (the “MNR”) and the Attorney General of Canada (the “AGC”) to pay $100,000 as “punishment for her/their contempt of [the Tax Court of Canada]” and costs on a full indemnity basis for breach of the Implied Undertaking Rule.

In Fio, the Taxpayer filed a Notice of Appeal to the Tax Court of Canada in response to a reassessment by the MNR and provided the MNR with the Notice of Appeal along with several supporting documents. The Taxpayer made it clear in a letter to the MNR that the supporting documents were provided to minimize time and costs and to reach a settlement. However, the MNR reassessed the Taxpayer using the supporting documents for tax years beyond the scope of the original appeal.

The Tax Court of Canada held that an implied undertaking exists the moment a taxpayer provides discovery documents to the MNR and AGC. This implied undertaking prohibits the MNR and AGC from using the documents for purposes outside of the appeal. Furthermore, the court found the use of the material without leave constitutes an abuse of process, which was also deliberate.

In the end, the Court awarded substantial costs of $25,000 to the appellant against the MNR for breach of the implied undertaking rule. Furthermore, the Court ordered the documents not to be used by the MNR for additional reassessments.

Due to the nature and scope of the implied undertaking rule and the potential remedies available for a breach, litigants should be mindful of how they handle discovery documents and the potential implications from the implied undertaking rule.

If you are having trouble with an appeal to the Tax Court of Canada, contact us today to schedule an appointment with our team of experts at Rosen Kirshen Tax Law.

**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 Jason Rosen

Tax Court of Canada – The Book of Documents

What is a List of Documents?

Before we can dive into the book of documents, we must briefly discuss the list of documents (“LOD”), which is a mandatory litigation step pursuant to the Tax Court of Canada Rules (General Procedure) – specially rule 81. The LOD is a list of all documents that a party has in their power, possession or control that they plan on relying on at the inevitable hearing.

This list is generally organized chronological order starting with the earliest dated documents and ending with the documents most closely dated to the day the list of documents is made. The Parties must provide this list to the other side well in advance of trial so that the opposition can have adequate time to inspect the documents and prepare their examination questions on discovery.

The Parties submit a joint request for a litigation timetable which would include the date that the LOD must be exchanged by and filed with the Court.

What is a Book of Documents?

The book of documents (“BOD”) as it is known, relates to the discovery stage of a Tax Court matter (or any court matter for that reason). While this is not a formal step in the dispute resolution process, it is common practice to exchange the BOD at least thirty (30) days prior to the examinations for discovery (whether in writing or orally). The BOD contains all the relevant documentation that a side will be using to help prove their case or will be using to help demolish arguments made by the other party. Any documents that are going to be referred to at the hearing must be included in the previously mentioned LOD, produced in the BOD or by way of undertaking following the examinations for discovery.

Each party must prepare four copies of the BOD ahead of trial. One copy for yourself to keep, one copy for the judge, one copy for the opposing counsel, and the last copy will stay in the witness box to assist them in answering the questions asked by counsel.

What is a Joint Book of Documents?

A joint book of documents (“JBOD”) is highly advisable for parties who have the ability to be civil with one another, as a JBOD can help save your client or yourself (if self-represented) a sizeable amount of money. A JBOD involves both parties to a dispute agreeing on which documents should be produced within the book, and which documents are unnecessary and therefore do not need to be included. The parties submit one joint book, rather than each party submitting their own book of documents. All the previously mentioned rules for the LOD and BOD still apply when the book is made jointly. Overall, this is a fantastic method to save money when practically possible by the cooperation of both parties and is greatly appreciated by the Court (and the environment).

Overall, the requirements relating to the list of documents and book of documents may seem simple but are quite complex. Failure to properly file and serve the list of documents and/or produce the book of documents can have a detrimental impact on the potential success of your Tax Court of Canada case (or any level court case for that matter). If you have any questions or need any assistance, please feel free to call us toll free at 877-921-8423 or email us at info@rktaxlaw.com.

**Disclaimer

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

Related Articles:

• Tax Court of Canada – Settlement Conference
• Navigating the Tax Court of Canada
• How to Object to a Notice of Assessment or Reassessment

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

Exporting Vehicles and the Agency-Principal Relationship

The cost to purchase vehicles (especially luxury vehicles) is frequently much cheaper for Canadian consumers than consumers in other countries. Sometimes vehicles in Canada retail for between just 25%-50% of what the exact same make and model would cost in another jurisdiction. While there are various reasons that contribute to this price discrepancy (known in market terms as a “grey market”), this variance creates an opportunity for Canadian businesses to export these vehicles at a profit.

However, recently an increasing number of Canadian vehicle exporters have been subjected to audits by the Canada Revenue Agency (CRA) for one specific reason: the CRA has alleged the Canadian vehicle exporter to be an “agent” for a foreign “principal”. Where the CRA is successful in establishing agent/principal relationship between the vehicle exporter and its foreign buyers, the vehicle exporter can lose entitlement to Input Tax Credits (ITCs) claimed on the purchase of the exporter’s inventory.

The difference in a business’ characterization as a legitimate business or an agent/principal relationship is a legal distinction that depends on a factual analysis of key components of the relationship between a vehicle exporter and its buyers. Though nuanced, for a Canadian vehicle exporter this distinction can be the difference between operating a lucrative, profitable business and the loss of all (or substantially all) profits earned.

This blog entry will discuss how the CRA conducts factual analyses of a principal/agent relationships and what is necessary for Canadian vehicle exporters to establish to avoid this designation.

What is an Agent/Principal Relationship?

If the CRA alleges that your business amounts to an agent/principal relationship, they are essentially saying that your business (the “agent”) exists only to serve the interests of an off-shore party (the “principal”) and does not offer legitimate services of its own.

The effect of this designation is to disallow the exporter’s claims to ITCs, or credits issued by the Canadian government to offset the incurrence of HST on the vehicles purchased in Canada for international export. In many cases, this would greatly reduce (or negate) the profits earned by the exporter.

Hallmarks of an Agent/Principal Relationship

In order to evaluate whether an exporter is a legitimate business or merely an agent to a foreign principal, the CRA must conduct an analysis into the nature of the relationship between the exporter and its buyer(s). The analysis considers two main sets of criteria in evaluating the relationship:

• the “essential qualities” of a principal/agent relationship; and
• other “indicators” of a principal/agent relationship.

“Essential qualities” of a principal/agent relationship are: (i) whether the parties have consented to having the agent act on behalf of the principal; (ii) whether the agent has the authority to act on behalf of the principal in a legally binding manner; and (iii) whether the principal exerts some degree of control over the actions of the agent.

If these qualities are determined to be present in the relationship between an exporter and a foreign buyer, it is likely that the CRA would determine that a principal/agent relationship exists. This would have the effect of barring any claim to ITCs on the part of the exporter.

Other “indicators” of a principal/agent relationship include:

• if there is limited assumption of business risk on the part of the exporter;
• whether the accounting practices of the exporter suggest a principal/agent relationship;
• the payment history between the parties;
• if the exporter makes any alterations to the vehicles;
• whether the exporter uses the vehicles prior to export;
• the substance of the contractual payment relationship between the exporter and buyer; and
• the nature of the vehicles’ ownership.

The CRA uses these two sets of criteria conjunctively to issue a factual determination as to whether an exporter is in substance just the agent of a foreign principal.

What do I do if my Business gets Audited?

As outlined above, if your vehicle exporting business is selected for audit, the CRA will be conducting an in-depth factual analysis into all aspects of your business to issue its determination. As the CRA’s audit powers are only increasing, it is imperative that if your business is audited, you prepare a complete and circumspect defense and/or rebuttal to the CRA’s position.

Any single misstatement or missed deadline could be the difference between an entirely successful defence and the loss of all profits during the audit period. As principal/agent relationships are factual determinations based on nuanced legal arguments, it is often a prudent decision to retain a tax lawyer to defend yourself during the audit process or to carefully plan your business affairs prior to being audited to mitigate the risk of the CRA determining that your business is nothing more than a principal/agent relationship.

If you would like to know more about how a lawyer can assist you through the audit process or with planning your business in general, contact a tax professional at Rosen Kirshen Tax Law today! We are here to help!

**Disclaimer

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

by Jeff Kirshen

The Canada Revenue Agency Post-Pandemic

With Canada’s vaccination rates on the rise, many taxpayers are wondering when the Canada Revenue Agency (“CRA”) will get back to its regular business. Currently, almost all audits were halted before they even started though high risk audits were allowed to continue. CRA collections released all legal action against taxpayers and has not yet restarted going full force in its collections activities. The Tax Court of Canada just reopened its doors and has started setting down hearings beginning in September.

So the question becomes, when will CRA restart their audit program in full, and when will they start collecting the billions in taxes they are owed that remains unpaid?

The Canada Revenue Agency Post-Pandemic

Though there has been no official guidance, it is likely that the CRA beings to resume its normal operations in September. Barring another deadly wave in the pandemic of course. What this will mean is that all audits that were previously scheduled or cancelled will resume. Hundreds of thousands of taxpayers will be subject to new audits, and CRA auditors will be under pressure to achieve results. These upcoming audits will likely be more difficult to deal with since the auditors will have a set result in mind because the CRA sorely lacks funds.

CRA collections will also likely reopen their offices and will begin contacting taxpayers to arrange for payment of their tax debts. They will also start to take legal action to collect the debts. They will seize bank accounts, garnish wages, issue requirements to pay, and potentially lien property or other assets of value. It is imperative to be in contact with CRA collections to ensure that you can get yourself on a payment plan so that your business is not interrupted by their legal action.

The CRA appeals section will also likely reopen in full force. They have been operating at an extremely reduced capacity, but that should change come September. They will also be under pressure to resolve their files quickly knowing that the audit section will be making tough decisions that taxpayers will likely not agree with. So there will be a large amount of objections coming following the resumption of CRA audit activities.

The Tax Court of Canada Post-Pandemic

The Tax Court of Canada has announced that they are scheduling in person hearings in September of 2021. So absent another deadly wave of the pandemic, the Tax Court of Canada should be back to normal operations soon. If you have an ongoing Tax Court of Canada appeal, and were waiting for the resumption to seek assistance, now is the time.

The Voluntary Disclosure Program Post-Pandemic

The Voluntary Disclosure Program has been experiencing delays even before the pandemic started. Their normal processing times have slowed from one year to more than two years. We are hopeful that they will return to their normal operations and will review and make decisions quicker than the current two year timeline. However, it will likely take additional CRA resources in order to achieve something like this.

The positive of the lengthy delay is that taxpayers have more time to pay their estimated amounts owing. The negative is that the taxpayer is essentially in limbo for years. Their financial lives are on the line, and they have no idea what the result will be.

COVID-19 Benefits Post-Pandemic

A major area that the CRA will focus on post-pandemic is auditing COVID-19 benefit programs. The CRA has created groups and task forces specifically to review the pandemic benefits claimed by individuals and corporations, and verify whether they were entitled to those benefits. We can already see this happening with CERB and CRB.

If your audit was put on hold, or you have CRA issues that need assistance once they get back to business, call us today! Rosen Kirshen Tax Law is here to assist everyone who has a CRA problem.

**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 CRA’s New Audit Powers

In the new Budget 2021, there are changes to Canada’s taxation regime regarding the expansion of the authority of Canada Revenue Agency (CRA) auditors during the audit process. In theory, increasing the scope and degree of the powers of auditors will enhance the capabilities of auditors to collect the information they require to make fully thought out decisions. However, in practice, these new additions to the auditor’s arsenal may create unintended consequences for taxpayers who do not understand the gravity of hastily answering seemingly innocuous questions.

Following our previous blog entry that covered “Budget 2021” in broad strokes, this article will examine in greater detail the implications of the new CRA audit powers and what it could mean for the Canadian taxpayer.

What are the Existing Powers of CRA Auditors

Participating in the CRA audit process can be a significant inconvenience to a Canadian taxpayer. An audit is essentially the process by which a CRA agent reviews the records of a taxpayer for a specified period and asks clarifying questions to the taxpayers to determine the legitimacy of said taxpayer’s CRA filings.

The audit process can take years to complete, and auditors have many tools to review and evaluate the reported filings of taxpayers. Typically, auditors will send “queries” or questionnaires that request answers to pointed questions regarding certain aspects of returns for which the CRA requires further clarification. A taxpayer’s answers to those questions can bear significant weight on the scope and outcome of the audit. For example, the answers to audit queries will often open the door for the auditor to request documentation related to the taxpayer’s answers. The answers and documentation provided by taxpayers during the course of an audit could result in significant changes to the amount of taxes payable by the taxpayer for the period covered by the audit.

The audit query process forms the basis of the auditor’s decision-making process. Presently, auditors only have the authority to request certain responses from taxpayers. However, the proposed changes to auditor powers under Budget 2021 could expand this authority to require certain responses from taxpayers instead.

What New Powers would Auditors have under Budget 2021?

As alluded to above, the newly proclaimed rules under Budget 2021 would allow for auditors to have greater authority with respect to the types of answers they receive from taxpayers and from whom they may require answers.

As of now, taxpayers are not bound to answer audit queries under a specific method or form, but this may be changing very soon. The new powers vested in auditors would allow for auditors to require taxpayers to answer CRA queries and to govern the form of the answer (for example, mandating that the taxpayer respond orally or in writing).

The consequence of these additional powers would be the potential for auditors to request for oral or written answers from specific agents of a taxpayer. In the corporate context, for example, an auditor may request oral answers from not only from the directing minds of the corporation, but also from employees.

Additionally, it is likely that the audit division will be receiving an increase to their bottom line, which could increase the number of audits conducted and/or impact the types of taxpayers subject to audit.

What are the Implications of these New Audit Powers?

The implications for Canadian taxpayers stemming from the new powers proposed by Budget 2021 will primarily affect the correspondence between auditors and taxpayers at critical stages of the audit process. This will profoundly change the level of preparedness necessary for taxpayers who are under audit, as any answer that has the potential to mischaracterize or elicit a misapprehension of nefarious conduct on the part of the taxpayer could result in a significant change to the taxpayer’s taxes payable for the audit period.

Additionally, forcing taxpayers to answer questions orally will create stress and a high level of frustration for taxpayers. Many people do not know the answers to these questions offhand, and normally respond in writing because it gives them time to gather their thoughts and provide a detailed response. CRA auditors will compel taxpayers to respond to their questions orally, and by doing so, they will try to get taxpayers to say or admit things that they may not understand which will have an extremely negative effect on their audit. The CRA will hold what was said against the taxpayer through the audit stage, the objection stage, and all the way through Tax Court. A few wrong words might mean the difference between settling an audit with no issues, and having to fight for years.

Many tax professionals are now recommending that if a taxpayer has the means to involve a third party tax professional (such as a tax lawyer or accountant) during the audit stage of the CRA appeals process to do so. Providing unreviewed answers to the CRA that fail to properly represent the taxpayer’s rights and interests could turn an unpleasant experience into a fiscal nightmare. For the most part, the potential danger of an audit to a taxpayer’s bottom line can be mitigated (if not remedied entirely) by the interposition of a tax professional.

If you would like to know more about how a lawyer can assist you through the audit process in general, contact a tax professional at Rosen Kirshen Tax Law today! We are here to help!

**Disclaimer

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

by Jeff Kirshen

The Canada Digital Services Tax

On April 19^th, 2021, the Deputy Prime Minister and Minister of Finance, the Honourable Chrystia Freeland presented “Budget 2021”, the first budget seen from Parliament in nearly two years. One of the standout new additions to the Canadian income tax regime is the Digital Services Tax (DST). The DST will be an entirely new tax implemented to garner previously uncaptured tax revenue from major tech players with a Canadian consumer base.

Following our previous blog entry that covered “Budget 2021” in broad strokes, this article will examine in greater detail the implications of the DST for consumers, corporations and stakeholders alike.

What is the Digital Services Tax (DST)?

The DST is a new tax implemented in response to the exponential growth of tech industries in Canada. The tax will target the revenue of large corporations who offer digital services currently offered and offered in the future within Canada’s borders. This will allow the federal government to capitalize on the revenue earned by major tech companies from the consumption of digital products and services where previously no taxes were levied. The DST will be levied at a flat rate of 3% on all revenue that exceeds Parliament’s prescribed revenue benchmarks.

The federal government’s consultations with stakeholders ran from April 19^th to June 18^th, 2021 and provided an opportunity for stakeholders to submit their written observations and insights regarding the new DST. Consultations have now ended, and the DST is scheduled to take effect as of January 1^st, 2022. The DST is part of a broader initiative from the international community to collect taxes on major players in the digital services sector.

Who Will be Charged the Digital Services Tax (DST)?

Companies that will be charged DST beginning in 2021 are from a wide range of larger digital service providers who have both domestic and international reach. Only companies that have:

• More than approximately $1.125 billion (CAD) in global revenue; or
• More than $20 million (CAD) in domestic revenue (from Canadian users)

will be subject to the DST on their revenue from products and services to sold to Canadian consumers.

In order to be subject to the DST, tech companies will also have to fall into one of Parliament’s prescribed tech business models to fall under the purview of the DST. These business models will include social media corporations, online marketplaces and advertisers and companies that compile the data of users of major digital platforms.

Consumers may be affected by the implementation of this tax, as it is likely that companies such as Uber and Amazon will be subject to paying substantial Digital Services Taxes on their revenues. Corporations may wish to offset these revenue losses by increasing the costs to consumers.

Why Implement the Digital Services Tax (DST) at All?

With consumption of digital services on a steady incline and with no signs of stopping, the DST is projected to net the federal government billions in tax revenues in the coming years ($2.72 billion – $3.4 billion CAD is the current projection for 2022-2027).

Additionally, the DST is in line with the ambitions of the Organization for Economic Cooperation and Development (OECD) to better capture taxes that have traditionally been hard to garner due to the international reach of major tech conglomerates. The DST will allow for revenue to be collected prior to the enactment of cooperative international agreements between member nations of the OECD.

What Challenges will be Faced by the Digital Services Tax (DST)?

Whenever there are novel implementation of new taxes or modifications to existing elements of a taxation regime, tax planning is typically one avenue of frustrating the intentions of Parliament to collect revenues. It is possible that companies near the threshold could organize their affairs in such a way to limit the impact of the DST on their revenue streams. However, with the tax levied being just 3% and only on earnings exceeding high values, the effectiveness of corporate tax planning around the DST will be circumstantial.

Any time international organizations attempt to implement cooperative legislative measures, the context of international politics and the complexities surrounding enforcement of said legislation come into play. As of now, the DST is domestic legislation, but when agreements are signed between OECD member nations, new challenges pertaining to the enforcement of the DST could become apparent.

If you would like to know more about the DST or corporate tax planning in general, contact a tax professional at Rosen Kirshen Tax Law today!

**Disclaimer

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

by Jeff Kirshen

Am I Earning Business Income or Investment Income?

The COVID-19 pandemic has created novel socioeconomic conditions where many Canadians are in a state of professional flux. The prospect of earning supplementary income is tantalizing, and retail investing has never been more accessible to the taxpayer.

The advent of smartphone trading apps and low- or no-fee trading has provided many Canadians with the opportunity to purchase and sell securities without the interposition and cost of an investment broker. However, there may be tax implications and/or reporting requirements depending on the type of earnings garnered though retail investing.

While many investors believe that sheltering their investments under a tax-free savings account (TFSA) is the solution to the inclusion dividends or capital gains earned from the purchasing and/or selling of securities in their taxable income for a given taxation year, TFSAs do not offer categorical protection from paying taxes on investment earnings.

It is critical to discern whether the earnings garnered from a retail investor’s securities are “business income” or “investment income” under the Income Tax Act. If the Canada Revenue Agency (CRA) determines that the investment earnings are “business income”, the taxpayer must include those earnings in the taxpayer’s taxable income for that taxation year (regardless of the account in which the investment is being held).

So how does one determine whether investment earnings are “investment income” or “business income” under the Income Tax Act?

Investment Income vs. Business Income 

The distinction between “investment income” and “business income” stems from the motive of the taxpayer for purchasing the security. TFSAs are designed to protect “investment income” from taxation, so if a taxpayer is determined to be purchasing a financial instrument with the view of “investing” (as opposed to quickly profiting), this would be material in the CRA’s determination process to characterize the earnings as “investment income” versus “business income”. It is difficult to establish one’s motive for purchasing a security, so assessing this motive typically falls on viewing the activity of the taxpayer with respect to the security and the trading account in general.

The earnings garnered by retail investors could be characterized as business income where the trading undertaken resembles that of a “trader”. Essentially, where the level of trading activity engaged in by the retail investor during the course of the taxation year is analogous to what a trader would undertake, any earnings may be assessed by the CRA as “business income” and included in full in the taxpayer’s income, despite taking up valuable contribution room in the taxpayer’s TFSA.

What sort of activity would re-characterize what would otherwise be “investment income” as “business income”? If a retail investor is trading too frequently to the point where their activity could be labeled “day trading”, the CRA may assess earnings under the TFSA as business income. The exact number of transactions that would constitute “day trading” is not defined and is not the sole factor in determining whether earnings under a TFSA are “business income”. But frequent transactions that would lead a CRA agent to believe that the financial instruments were not purchased with a view to “invest” may be determinative in the CRA’s decision-making process.

The profession of the TFSA-holder would also be considered by the CRA. The CRA may assess what would otherwise be “investment income” as “business income” where the TFSA holder works in the financial sector or deals with securities regularly. This is because the motive of the retail investor may be coloured by his or her profession.

There is no definite method to protect oneself from having earnings under a TFSA (or other registered account) reassessed as “business income”. It is imperative to understand the eligibility requirements of financial instruments held under the TFSA and to be cautious with the type and number of transactions entered into as a TFSA-holder, as the assessment of earnings as business income could have significant tax consequences for the retail investor.

If you are concerned about unreported taxable income from your retail investing or wish to carefully plan your investment portfolio to ensure compliance with registered savings plan rules and eligibility requirements, contact a tax professional at Rosen Kirshen Tax Law today!

**Disclaimer

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

by Jeff Kirshen

Are Awards Taxable – A Tax Court of Canada Example

In 2020, the Tax Court of Canada published its decision for Saunders v The Queen (2020 TCC 114). The issue in this case is whether monetary awards received by employees following a successful grievance against their employer is taxable as employment income. The following provides a summary and brief comment.

The Tax Court Case

The Appellants, who were, at the time, experienced team leaders in the Revenue Collections Division of the CRA, made successful grievances to the Public Service Labour Relations and Employment Board. The grievances addressed an arbitrary overtime policy implemented by Terry Harder, the incoming assistant director of the Calgary Tax Services Office. Under this policy, overtime hours were no longer available to all Collections team leaders, and they were instead only available to team leaders already stationed at a particular section of Collections.

Before the Board, the Appellants successfully argued that the policy breached a clause of their collective agreement with their employer, which stated that the employer was to make every reasonable effort to offer overtime work on an equitable basis. Despite numerous inquiries about the policy change, and despite repeated expressions of interest in working overtime, Mr. Harder denied the appellants access to overtime work. They also described his behaviour toward them as bullying, aggressive, and harassing.

The Board left the parties to negotiate the appropriate amount of monetary compensation for the Appellants’ losses. Mr. Harder, with typical hostility, then sought to negotiate the compensation award himself despite the Appellants’ request for him to delegate the task. He intended to ensure that the compensation would be taxable as income. The parties settled despite the Appellants’ wish to word the settlement agreement to receive the compensation as non-taxable damages for personal injury rather than as taxable income.

The Tax Court Decision

The Honourable Justice Susan Wong of the Tax Court of Canada decided that the compensation did not meet the exception under paragraph 81(1)(g.1) of the Income Tax Act, which provides that “income for the year from any property acquired by or on behalf of a person as an award of, or pursuant to an action for, damages in respect of physical or mental injury to that person” is not taxable. The compensation was therefore employment income and not damages for personal injury.

Wong J relied on the two questions posed by the Supreme Court of Canada in Tsiaprailis v Canada (2005 SCC 8):

• (1) What was the payment intended to replace?
• (2) Would the replaced amount have been taxable in the recipient’s hands?

The compensation replaced the remuneration the Appellants would have received had they been offered, and accepted, overtime work. While Wong J acknowledged the Appellants’ distinguishing missed overtime, the remuneration for which ought to be taxable, from missed offers of overtime, which ought to be compensated with damages, she did not agree that it was appropriate in the circumstances. The compensation, which was calculated according to the approximate number of overtime hours that the appellants would have worked, replaced remuneration despite breach of the collective employment agreement.

Wong J distinguished the facts in this case from Schwartz v Canada ([1996] SCR 254), which decided on the question whether compensation paid for losses arising from the retraction of an employment offer could be characterized as a retiring allowance and therefore taxable. The employment relationship, the breach of the collective employment agreement, and the lack of any issue concerning retiring allowances, were facts sufficient to depart from Schwartz.

Tax Court Comment – RKTL

With respect, it is questionable whether these facts are sufficient to distinguish Schwartz. In that case, the compensation was not characterized as a retiring allowance since the taxpayer was never “in the service” of the offeror and could not therefore be considered an employee under subsection 248(1) of the Act. While, in this case, the compensation may have replaced remuneration otherwise unearned in the service of the employer, this construal overlooks the context in which such remuneration went unearned.

In reaching a settlement, the Appellants referred to the approximate amount of otherwise unearned overtime hours to quantify the awardable compensation, but they would never have been compelled to do so without first suffering Mr. Harder’s un-admirable qualities and the subsequent breach of their collective employment agreement. This leaves open the possibility that the compensation was not paid as foregone earnings “in the service” of their employer but awarded as damages for earnings foregone because of the breach of their employment agreement.

If you are receiving an award, and want to know whether it is taxable or not, 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.