Administration Archives - Rosen Kirshen Tax Law

Accommodation Sharing

Recently, many Canadians have been looking to get away from the city and enjoy more spacious living due to the imposed lockdowns. As such, individuals have been turning to accommodating sharing platforms to rent out cottages or bigger homes. For a small pocket of homeowners, this has created a boost in business and an opportunity to generate extra income. Indeed, accommodation sharing has become a lucrative business since the rising popularity of AirBnB. Whether you are operating AirBnB rental units full time as a business or just part time to generate side income, there are several tax implications that homeowners should be aware of.

Rental Income v. Business Income

First, many individuals are surprised to learn that revenue earned from AirBnB and accommodation sharing is taxable. For the most part, income generated through accommodation sharing will be classified as rental income. Homeowners generating rental income will need to report and file a T776 form – Statement of Real Estate Rentals. This form provides details on the income, expenses and capital cost allowance incurred from the property.

Alternatively, in some cases the revenue earned from accommodation sharing should be reported as business income. This is often the case if the homeowner operates multiple units or provides additional services. The CRA notes that in most cases, you are earning an income from your property (rental income) if you rent space and provide basic services only. Basic services include heat, lighting, parking and laundry facilities. However, if you provide additional services to tenants, such as cleaning, security and meals, you will most likely be considered carrying on a business. The more services you provide, the greater the chance that your rental operation is a business.

It is important to remember that anyone who operates a business is required to fill out a T2125 form – Statement of Business or Professional Activities. The T2125 form is a schedule that goes along with a tax return which details the taxpayer’s income, expenses and type of business it’s operating. The following is a more detailed analysis on the T2125 form and its requirements.

GST/HST Remittances and Accommodation Sharing

Another common question many AirBnb hosts have is whether they need to collect and remit sales tax (GST/HST). The first important factor the homeowner must consider is whether they are doing short term or long term rentals. If the homeowner rents out their unit on a long-term basis (more than 30 days), the income is exempt from GST/HST. The second factor is the income threshold. For short term rentals, the homeowner must register and collect GST/HST if their revenue exceeds over $30,000 in 4 consecutive quarters (12 months).

Deductions from Income

One advantage of operating an accommodation sharing rental unit is that you can deduct certain expenses used to operate the unit. The deductibility of an expense usually depends on whether the expense was incurred for the purpose of earning or producing income.

Expenses that are commonly deducted from accommodation sharing units include but are not limited to the following:

Maintenance and repairs;
Mortgage interest;
Utilities;
Insurance;
Property taxes; and
Advertising.

Homeowners should be cognizant of the fact that personal expenses cannot be deducted. In other words, if any of the above-mentioned expenses were incurred for personal use, it cannot be deducted. Similarly, the homeowner should calculate the portion of the expense that was used for business if some of the expense was incurred personally.

Accommodation sharing is expanding and many homeowners are looking at it as a new opportunity to generate income. However, it is critical that they navigate through their tax obligations to ensure they don’t get penalties and interest if mistakes are made. If you are looking to become an accommodation host and have any questions, contact a lawyer a 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.

Administration, CRA Articles, TaxJanuary 14, 20210 comments

by Jeff Kirshen

What is FAPI?

Foreign Accrual Property Income, or FAPI, are a set of rules in the Income Tax Act (the “ITA”) that treats property income the same as if accrued domestically or abroad. Where a Canadian resident has a substantial interest or level of control in a foreign corporation, the corporation will be treated as an extension of the Canadian shareholder. The FAPI regime is intended to prevent Canadian residents from avoiding Canadian income tax on passive investment income earned through a controlled foreign affiliate located in a low tax country or tax haven. In this way, income in a controlled foreign affiliate will be taxed in the hands of the Canadian shareholder, even if the shareholder has not yet received funds. The income is taxed in Canada as if it was earned directly. This eliminates any tax deferral advantage in investing offshore.

The FAPI rules only apply to passive income held in a corporation (which is a controlled foreign affiliate) off-shore. They do not apply to active business income earned by a corporation off-shore or to a corporation that is not a controlled foreign affiliate. Passive income includes income from rents, royalties, or taxable capital gains. Active business income includes most types of businesses, such as manufacturing, or other services which require active management.

Canadian resident shareholders to which FAPI can be imputed include individuals, corporations, partnerships, and trusts.

Controlled Foreign Affiliate and FAPI

The level of control that a shareholder exercises over an off-shore corporation is determinative of whether the FAPI rules will apply. If the shareholder owns more than 50% of the shares of the offshore corporation, then the corporation will be considered a controlled foreign affiliate. However, the definition of control is broad and the rules are designed to capture instances where the shareholder continues to control the foreign corporation indirectly.

Where the corporation is a controlled foreign affiliate, the ITA taxes the Canadian shareholders directly when the controlled foreign affiliate earns passive income, eliminating any tax deferral. Where passive income is earned by the controlled foreign affiliate, it is irrelevant whether the foreign country has a tax treaty with Canada.

FAPI is not applicable where the level of control exercised by the shareholder over the off-shore corporation is under 50%, or where the off-shore corporation is otherwise not considered a controlled foreign affiliate. However, there are other tax consequences applicable once a shareholder owns 10% or more of an off-shore corporation. These tax consequences fall under a different regime.

The control rules in the ITA are complex and situation based, and it is recommended a tax lawyer is consulted.

FAPI and Equality / Neutrality

The tax system is designed to be neutral with respect to an investor’s global tax; the Canadian investor’s worldwide tax payable to Canada will be the same whether they invest at home or abroad. The principal of capital export neutrality prevents a Canadian investor from avoiding taxes by moving investments to a tax haven. Income earned abroad is taxable in the country of residence. However, to alleviate double taxation, tax relief is provided to account for foreign taxes paid abroad.

Foreign Tax Credits and FAPI

Canada provides a foreign tax credit under section 126 of the ITA to alleviate any double taxation that may arise when taxes were paid in the foreign jurisdiction on the same income taxed by Canada. For shareholders whose controlled foreign affiliate received FAPI, foreign tax credits are generally applicable where foreign taxes were also paid.

Foreign tax credits are computed by country and must be applied to foreign tax paid on non-business income before being applied to foreign tax paid on business income.

You should know it is possible that your offshore corporation pays tax, and you do not receive tax credits for the taxes paid. A lawyer should be consulted so you are not double taxed.

The CRA also requires a corporation with off-shore affiliates to comply with certain foreign reporting requirements. The FAPI rules are complex and their application will differ on a case-by-case basis. You should speak with a qualified tax lawyer to discuss how FAPI may arise in estate planning or offshore investment planning. Contact us today!

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Accounting, Administration, CRA Articles, TaxDecember 10, 20200 comments

by Jason Rosen

How Real Estate Agents can Incorporate a Company

On October 1, 2020, the Real Estate and Broker’s Act includes regulations which permit the use of Personal Real Estate Corporations (PRECs).

Based on the regulations, PRECs must have the following attributes:

They must be incorporated under the Ontario Business Corporations Act;
They must have one controlling shareholder who owns all equity and voting shares;
The sole shareholder must be president, sole director and sole officer of the corporation;
The shareholder must be a registered broker;
Any non-equity (non-voting) shares must be owned directly or indirectly by family;
No agreement restricting the authority of directors to supervise the affairs of the corporation can exist; and
There must be an agreement governing the relationship between the broker (yourself), the PREC, and the brokerage. This agreement should also include clauses that prevent the PREC from hindering the provision of services of the broker on behalf of the brokerage.

After incorporating a PREC, for it to remain valid the agent must remain an associate of the brokerage and must have all remuneration flow through the PREC. There can be no advertising done by the PREC for provision of real estate services that are not supplied by the brokerage. Lastly, the broker is responsible for evaluating the legitimacy of a PREC before making payment to it.

Ownership Requirements in a PREC

The legislation requires that all the equity shares of the corporation be legally and beneficially owned, directly or indirectly, by the controlling shareholder. It is possible for a holding corporation to own equity shares of a PREC, legal advice should be sought to confirm the best structure for you.

It also states that all the non-equity shares must be owned directly or indirectly by a family member. A family member is a spouse, child, parent, or a trust for a minor child. Whether shares will be held directly or indirectly by the controlling shareholder or a family member is a business decision to be made by the registrant setting up the PREC. Of course, legal advice should be sought to ensure compliance with the law.

Tax Benefits for Real Estate Agents who Incorporate

The passing of Trust in Real Estate Services Act carries significant tax benefits for real estate agents who decide to incorporate. As real estate agents are sole proprietors, their businesses have been subject to the same marginal tax rates as the personal incomes of Ontarians. However, as a PREC, real estate agents will be able to enjoy the much lower Ontario small business tax rate, and potentially the Canadian Controlled Private Corporations tax rate. The incorporation route promises huge tax savings for real estate agents.

Reporting Requirements for Real Estate Corporations

Of course, with incorporation comes new challenges. Requirements for filing and record keeping for corporations are far more onerous than for individuals. There are also indirect taxes like employer health tax, WSIB, taxes for payroll and GST/HST on commissions that can add expenses. In essence, while the power to incorporate would give real estate agents far more power to file their income strategically and enjoy small business tax rates, it also requires a far more complicated tax filing process with more costly obligations.

If you are a real estate agent and would like to discuss the implications of incorporating your business in the near future, contact our firm for a free consultation. We are here to help!

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Administration, CRA Articles, News, TaxNovember 9, 20200 comments

by Jeff Kirshen

The Advantages of a Holding Company

There are numerous ways in which holding corporations can be advantageous to taxpayers. As this post illustrates, holding corporations may be used to achieve objectives such as the tax-free movement of funds between related corporations, interest charge deductibility, income splitting, or estate freezing.

Holding Companies and the Movement of Funds

Suppose company X (X Co) and company Y (Y Co) are wholly owned by a person (A). Suppose also that X Co has excess funds while Y Co lacks funds. One way by which A could move funds from X Co to Y Co would be to have X Co pay dividends to A, and for A to then move these funds to Y Co. Of course, A would have to claim the dividend received as income and pay tax before moving the funds to Y Co.

In Canada, dividends may flow between corporations on a tax-free basis. If, in the above example, A were to set up a holding corporation (Holdco), A could instead have X Co pay dividends to Holdco and avoid paying tax on the movement of funds. Holdco could then move the funds to Y Co by, for example, entering into a loan agreement or share subscription with Y Co.

Holding Companies and Deducting Interest

If Holdco decides to enter into a loan agreement with Y Co that pays interest, Y Co (and its sole owner, A) should be aware of the rule restricting its ability to deduct its interest payments from its income.

Two prominent rules in the Income Tax Act affecting a corporation’s ability to deduct interest charges are found at paragraph 20(1)(c) and subsection 9(3). The former stipulates that a corporation may deduct its interest payments from its income if those payments are incurred to gain or produce business or property income. The latter stipulates that capital gains are not property income.

Suppose Y Co borrows funds to purchase an asset that is expected to generate a significant capital gain but is generating little property income. In this instance, subsection 9(3) is likely to apply to restrict the ability for Y Co to deduct its interest payments on the loan. However, if Holdco borrows these funds instead of Y Co, and if Holdco then transfers these funds to Y Co in exchange for equity, the interest payments may be deductible. The CRA has commented in Interpretation Bulletin IT-533 and in Income Tax Folio SC-F6-C1 that the expectation of a return of funds through the receipt of dividends from a subsidiary may be sufficient for a parent company to deduct the interest it pays on a loan taken out to purchase an asset such as the above.

Holding Companies – Income Splitting and Estate Freezes

Holding corporations may also be used to achieve income splitting and estate freezing objectives. For example, family members of a taxpayer may subscribe for common shares of a family-owned holding corporation that holds shares of the taxpayer’s small business corporation. It is possible that subsection 56(2) may apply to attribute back to the taxpayer any dividend payments made through the holding corporation. However, the Supreme Court of Canada in Neuman v. The Queen held that this provision could not apply unless a family member were to have a pre-existing entitlement to dividend income from its common shares. The CRA appears to endorse the Court’s decision in Interpretation Bulletin IT-335R2 at paragraph 9.

While the above strategies highlight some of the basic advantages of using a holding corporation, the sophistication of their structures and the legal complexity of their consequences vary with the circumstances and objectives of the taxpayer. If you have questions regarding the uses of a holding corporation, or if you are interested in incorporating a holding corporation, call us today!

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Administration, CRA Articles, TaxSeptember 23, 20200 comments

by Jeff Kirshen

Input Tax Credits – What are they, and Am I Eligible?

Through the help of e-commerce assistance platforms such as Shopify, the barriers to entering and starting a small business have dramatically decreased in recent years. As a result, more and more Canadians are deciding to open up independent businesses. In order for a business to run its operations smoothly, business owners must ensure that they fulfil their sales tax obligations correctly to prevent intervention from the CRA. Below is a brief summary that provides some mechanics and considerations of the Canadian Sales Tax System.

Design of the GST/HST Sales Tax

The HST (for Ontario) Sales Tax is administered and legislated through the Excise Tax Act. Moreover, it is a multi-stage value added tax, imposed on a broad range of goods and services at each stage of the manufacturing and distribution process. Each recipient in the production chain recovers the HST that they paid for the expenses related to their “commercial activities” by claiming input tax credits (ITCs). This ensures that there is no double taxation and that only the final consumer holds the burden of paying the HST tax.

Typically, many businesses incur a lot of expenses related to their commercial activities. For example, a business focusing on producing and selling furniture may pay a lot of HST on the tools they bought to create that furniture. Therefore, it is important that businesses properly redeem their ITCs.

Other common purchases and expenses which may be eligible to claim ITCs include:

Business start-up costs;
Legal, accounting, and other professional fees;
Maintenance and repairs; and
Business-use-of home expenses.

Requirements / Eligibility for Input Tax Credits

First, the business/taxpayer must be a GST/HST registrant. However, for most small and medium-sized businesses in Canada, registration for GST/HST purposes is required.

Specifically, if you provide taxable supplies and not a small supplier, then you must be a GST/HST registrant. The CRA generally considers a business to no longer be a small supplier if total revenues from taxable supplies exceed over $30,000 in a single calendar quarter or over 4 consecutive calendar quarters.

Second, registrants are only allowed to claim ITCs for expenses related to “commercial activities.” The CRA states that commercial activities must be a business or adventure or concern in the nature of trade that has a reasonable expectation of profit, and is not the making of exempt supplies. Alternatively, inputs to activities that are neither part of the supply making process, not related to it, or for personal use are not eligible for ITCs.

The exception to the rule above is for the supply of real property, other than an exempt supply. In this case, any supply of real property, whether or not there is a reasonable expectation of profit is included in the definition of commercial activity. Finally, to claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of the business.

Potential Issues to Look Out For

As previously mentioned, the responsibility of charging, collecting and remitting HST falls on each business or chain of the manufacturing process. Similarly, claiming appropriate ITCs for expenses incurred by the business fall on the burden of the business. It is the responsibility of the registrant to keep records and documents to validate any claims under a CRA audit.

Issues regarding the “nature of the business” and “relation to commercial activity” have particularly been contentious and challenging for taxpayers to understand. If you need assistance in learning more about ITCs or are already in dispute with the CRA, contact us today. Professionals at Rosen Kirshen Tax Law have a proven track record of helping taxpayers successfully prove the eligibility of their ITCs.

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Accounting, Administration, CRA Articles, GST/HST, TaxSeptember 10, 20200 comments

by Jeff Kirshen

The Basics of Estate Taxation in Canada

In addition to the emotional consequences of losing a loved one, estate administration can be a difficult undertaking, even for those familiar with the affairs of the deceased. The deceased may have passed away with a will (testate) or without a will (intestate). Either way, the personal representative of the estate has rigid obligations with respect to the tax filings of the deceased. These obligations must be discharged in order to avoid tax consequences stemming from prematurely distributing the estate, exemplifying the maxim that the only certainties in life are death and taxes.

Is there an Estate Tax in Canada?

In Canada, unlike other jurisdictions, any inheritances stemming from the estate of the deceased are not subject to estate tax. Officially, the only taxes payable by the estate of the deceased are based on the income earned by the deceased. However, it is not conclusive to say that the only taxes payable by the estate of the deceased are derived from the income of the deceased in the year prior to and the year of passing.

For example, if the testator held property in the United States at his or her time of death, the property may be subject to taxation under American estate tax. The same could be true of any other jurisdiction in which the deceased held property, as property laws vary country to country, and even province to province.

What is the Proper Filing Procedure for One’s Estate?

The personal representative of the testator must ensure that income tax returns have been properly filed for the year preceding death and that any income earned between January 1^st and the date of passing of the deceased in the same calendar year is accounted for in the last return filed on behalf of the deceased. This final return is dubbed a “terminal return” in Canadian tax law.

The day after the passing of the testator results in the creation of a “new person” in the eyes of Canada Revenue Agency: the estate. Unlike the filings of the year preceding death and the terminal return, the personal representative of the deceased would not file a T1 tax return for the filings of the estate. Instead, the estate is considered to be a trust for the purposes of taxation and consequently, the administrator of the estate must file a T3 trust return. Furthermore, income is deemed to have accrued on a daily basis for the estate, as opposed to on an annual basis for living taxpayers. This subtle variance in accrual periods has the effect of accelerating the taxation of the income of the estate.

What are the Consequences for Failure to File?

For personal representatives, planning circumspect compliance with the taxation rules surrounding the administration of estates can be an onerous task. There are various filing deadlines for the respective returns, specific documentation that must be included in the filing, and distinct accrual periods to consider. Personal representatives can also be held personally liable for failing to adequately discharge their obligations with respect to the income tax filings of the estate.

Canada Revenue Agency (CRA) is also statutorily permitted to pursue beneficiaries to recompense any amounts they assess to be owing where disbursements of the estates are deemed to have been made prior to satisfying requisite filing criteria.

How can a Personal Representative Protect Himself or Herself from Liability?

Prior to distributing any of the estate property to potential beneficiaries, it would be prudent for a personal representative to determine whether it is necessary to obtain a “clearance certificate”. If a personal representative is required to have a clearance certificate, any disbursement of an estate asset without having first obtained a clearance certificate could put the personal representative at risk of personal liability. Click here to learn more about the requirements and application of clearance certificates.

It is harder than one might think for a personal representative to ensure compliance with each of the CRA’s filing requirements. The obvious answer is to meet every filing deadline, to accurately compile all returns correctly (including any “deemed realizations” pertinent to the estate asset pool), and to retain all requisite documentation. Practically speaking, it is very difficult to ensure compliance with respect to CRA filing requirements and the personal representative and beneficiaries may collectively choose a different path.

There are alternatives available depending on the circumstances of the personal representatives and beneficiaries of the estate. For example, beneficiaries may wish to agree to indemnify the personal representative of an estate from tax liability in order to receive assets from the estate prior to the personal representative receiving a clearance certificate. Similarly, where the personal representative is the sole beneficiary of the estate, the personal representative would be liable regardless of having obtained a clearance certificate. The appropriate method of mitigating tax liability depends on the circumstances of the estate.

When to Seek Help?

Many personal representatives seek guidance with respect to estate administration to insulate themselves from personal liability, especially when they are unfamiliar with the affairs of the testator and/or the income tax rules surrounding estate administration. It is also commonplace for testators to seek tax planning advice as tax planning can be an effective means of reducing estate tax liability and passing more of what they have earned onto their loved ones. Depending on the size of the estate, proper tax planning can reduce or delay the amount of taxes payable by the beneficiaries of the estate to better provide for the loved ones of the testator in the short term and long term.

If you are considering planning out your affairs to make sure your Estate runs as smoothly as possible, contact us today!

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Administration, News, TaxSeptember 3, 20200 comments

by Jeff Kirshen

International Tax Issues Created by COVID-19

The ongoing COVID-19 pandemic has forced changes in all aspects of life. One of the main changes being the imposition of travel restrictions to and from Canada for citizens, non-residents and vacationers. The travel restrictions imposed by Canada and many other countries worldwide, has had the unforeseen consequences of forcing people to stay longer than intended in other countries, having a drastic impact on their tax consequences. This blog post is designed to help navigate these complicated Canada Revenue Agency (“CRA”) adjustments.

The rules that will be described below apply to situations that occur or have occurred between March 16, 2020 to August 31, 2020, at which point the CRA will review and determine if they need to be extended further.

Income Tax Residency and COVID-19

In general, an individual’s residency determination for Canadian tax purposes is based on a common-law factual test. The determination is made based on an individual’s residential ties to Canada (location of permanent place of residence, family members, bank accounts, etc.). In addition, an individual who sojourns (meaning physically present) in Canada for 183 consecutive days or a total of 183 days in a single tax year, will be deemed to be a resident.

Some individuals may have been forced to stay in Canada longer than originally anticipated due to travel restrictions placed by Canada or their country of residence. The CRA has stated that where the individual has remained in Canada solely because of COVID-19 related travel restrictions, the travel restricted days will not count towards the 183-day sojourn requirement. Moreover, the CRA will not take into account any of those days spent in Canada towards their common law test of residency (the common law test stems from Thomson v. Minister of National Revenue).

Under Canadian tax law, foreign corporations (corporations established under foreign law) can be considered a resident of Canada if their “central management and control” is located in Canada (stemming from the English case of De Beers Consolidated Mines v. Howe [1906] A.C. 455 (HL)). One of the main factors in determining central management and control is where the board meeting takes place. If due to COVID-19 travel restrictions, a board member is stuck in Canada, unable to leave and must attend board meetings from Canada, the CRA will take this factor into account when determining residency. The CRA will also look to applicable tax treaties where appropriate.

Carrying on Business in Canada / Permanent Establishment

Another potential issue caused by COVID-19 travel restrictions, is that generally speaking, non-residents and non-resident businesses only pay taxes on their income that stems from “carrying on business in Canada”. What will then happen to employees who regularly perform their working duties outside of Canada, but due to travel restrictions, have to perform their duties in Canada? Will they be considered to be a resident, or have a permanent establishment in Canada? The CRA has confirmed they will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees perform their duties in Canada due to travel restrictions.

Similarly, the CRA will exclude any days present in Canada due solely because of travel restrictions in their calculation of the 183-day presence test in the applicable tax treaties (such as Article V(9)(A) of the Canada-United States Income Tax Treaty).

Cross-Border Employment Income

Under the Canada-United States income tax treaty, Canada is permitted to tax an individual’s salary, wages and other similar remuneration derived by a resident of the US in respect of any employment services provided in Canada. However, some of the remuneration is not taxable in Canada if a) it does not exceed $10,000 or, b) the person is present in Canada for less than 183 days. The CRA has clarified that where such an individual is present in Canada, and exercising their employment duties in Canada, solely due to travel restrictions, those days will not count towards the 183-day total.

Sale of Canadian Property by Non-Residents of Canada

Under Canadian income tax legislation, a non-resident vendor who disposes of taxable Canadian Property must notify the CRA within 10 days after disposing of it, or at any time before officially disposing of it. Whenever the CRA receives either an amount to cover the tax on the gain from the sale of the property, or tax from a gain the vendor will realize at a later date, the agency will issue a certificate of compliance to the vendor (a section 116 certificate). Vendors needs these certificates in order to avoid penalties in the future.

Due to COVID-19, the processing of these requests was temporarily interrupted. Thankfully, the CRA has confirmed that if you are a vendor who submitted a S.116 request and the certificate has not been issued by the time the purchase happened, the purchaser or vendor can request the CRA to provide a comfort letter. This letter advises the purchaser/vendor to retain the funds they have withheld, until the CRA’s review is complete. The CRA will not assess penalties or interest on these COVID-19 related delays.

Overall, the CRA has stated that there will be hearing matters involving delays in travel due to COVID-19 travel restrictions on a case by case basis. Meaning that your specific fact scenario, might entitle you to taxation relief even if you did not meet any or all of the requirements mentioned above. On the opposing end of the spectrum, even if you fit into these rules and requirements, you may still end up owing taxes to the CRA based on their determination. If you feel that your situation requires some assistance, Rosen Kirshen Tax Law can help. If you have any questions, feel free to call us and schedule a consultation now!

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Administration, CRA Articles, Pandemic Response, TaxAugust 6, 20200 comments

by Jeff Kirshen

Home Office Expenses and COVID-19

With almost all businesses adopting a work-from-home policy during the COVID-19 pandemic, employees and independent contractors may be wondering if they can claim home office expenses for their new work environments.

If you have been working remotely, you may be able to claim some expenses related to the business use of the home.

Home Office Expenses and COVID-19 – Am I Eligible?

The COVID-19 pandemic has resulted in many unprecedented changes in our lifestyle and workspaces. The CRA is aware of these changes and recently stated that, in light of COVID-19, they will allow up to $500 in reimbursement for purchases related to setting up technology to work remotely. This means that up to $500 in personal computer equipment expenses will not be considered a taxable benefit. However, employees must have invoices for these purchases and the purchases must be made primarily for the employer’s benefit. Unfortunately, you may not be able to deduct expenses for purchases of equipment that you simply prefer to use versus those that are necessary for you to perform your job.

For an employee or an independent contractor to claim home office expenses, at least one of two requirements must be met. The workspace in your home must be either:

Your principal place of business (you work from this space more than 50% of the calendar year); or
You use the space only to earn your employment or business income on a regular and continuous basis, and for meeting customers or clients as part of your work duties

While the CRA has not announced whether they will be relaxing these requirements considering the new mandatory work-from-home arrangements put in place because of the COVID-19 lockdown, they may provide some leeway in their interpretation of the rules. This is especially true for employees who were required to work from home and adopted their home office as their principal place of business during the lockdown.

If you are an independent contractor, you must meet one of those two conditions to claim home office expenses. However, if you are working from home during the lockdown as a requirement of your contract for service and it is your principal place of business for the time period, then you may be eligible to claim home office expenses should the CRA relax the rules.

If you are an employee who is now working remotely from your home office and meet one of the two conditions required, you also need:

A formal work arrangement that outlines that you are required to work from home; and
A Form T2200 from your employer.

Home Office Expenses and COVID-19 – What is a Formal Working Arrangement?

An employee looking to deduct home office expenses must do so only if the employee is “required by the contract of employment” to incur those expenses. While it would be ideal for this requirement to be formalized in a written agreement or as part of the employment contract, it may be unrealistic given the current circumstances. Nevertheless, you may be able to rely on the fact that your work from home arrangement during the lockdown is an implied requirement of your employment. The CRA confirmed that they will accept a non-written contract where the taxpayer can establish that it was “tacitly understood” between the employer and employee that such expenses were to be made by the taxpayer and that they were necessary under the circumstances to fulfill the duties of employment.

Home Office Expenses and COVID-19 – What is Form T2200?

Please see our previous blog post found here to learn more about Form T2200.

Home Office Expenses and COVID-19 – What Expenses are Allowable?

If you meet the eligibility criteria, you may deduct the part of your costs that relate to your workspace within the home. This can include heat, home insurance, electricity, minor maintenance, and property taxes. However, you cannot claim mortgage interest expense and capital cost allowance. If your workspace within the home is part of a rented house or apartment in which you live, you can deduct the percentage of the rent and maintenance costs related to that space.

You can calculate the amount of home office expenses you can reasonably claim by dividing the total area of your home office or workspace by the total finished area of the home. The amount of maintenance costs that you can deduct in relation to your workspace likewise depends on whether the expenses you paid were used to maintain only the workspace or whether part of the material or work went towards the maintenance of other parts of the home. At all times, the expenses you claim must be reasonable and should be supported by invoices and supporting documentation. The total amount you deduct in home office expenses is also limited to your net income before your deduction. You cannot create or increase a loss from employment using home office expenses.

The CRA’s mandate and approach to taxation during the COVID-19 pandemic continues to evolve rapidly. The information provided here regarding the rules and interpretations regarding home office expenses is subject to change.

If you are filing taxes, are being audited for your home office, or you have questions about what home office expenses you are eligible to claim, give Rosen Kirshen Tax Law a call today! We can help you navigate this complicated process. We are here to help!

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Accounting, Administration, CRA Articles, Pandemic Response, TaxJuly 16, 20200 comments

by Jeff Kirshen

CRA Collections and COVID-19

Given the unprecedented financial turmoil facing Canadians as a result of the COVID-19 Pandemic, on March 20^th 2020, the government of Canada announced a suspension of collection activities and the removal of certain legal action. The following will detail how the suspension of these activities will affect taxpayers, and the proactive ways in which Canadians can benefit.

Suspension of CRA Collections Activity

The Canada Revenue Agency has suspended debt collection due to the fallout from the COVID-19 outbreak.

The CRA has stopped collection on new debts “until further notice,” and said it will allow flexible payment arrangements. As per pre-existing debt obligations, the CRA has stated that collections staff will address pre-existing situations on a case-by-case basis to prevent financial hardship. For general information on the power and limits of the CRA collections, see our blog here.

The CRA has also stated that taxpayers prevented from making payments, filing returns on time, or complying with other tax obligations due to circumstances beyond their control “can submit a request to cancel penalties and interest.” This can be done via an application for Taxpayer Relief under the IC07-1R1 Taxpayer Relief Provisions. For more information on these provisions, and the CRA’s guidelines surrounding what constitutes Taxpayer Relief, see our blog on Taxpayer Relief found here.

With regards to payment plans, the CRA has arranged for payment plans to be available on a case by case basis in relation to the inability to pay taxes, child and family benefit overpayments, Canada Student Loans, or other government program overpayments in full. The Federal Government has already pushed back the income tax filing date to June 1, and has allowed taxpayers who pay by instalments to delay their payments.

CRA Collections and COVID-19 – What Happens Next?

Canadian taxpayers have been given the unique opportunity to take proactive action and benefit from the suspension of CRA Collection’s activities. CRA Collections will be under tremendous pressure once the Pandemic has passed. There will be hundreds of thousands if not millions of Canadians who are now unable to pay their taxes. CRA Collections will have its hands full, to say the least.

That is why being proactive matters so much at this point in time. Here at Rosen Kirshen Tax Law, we are assisting our clients with working out a plan for repayment once CRA collections resumes regular operations. By having a plan of action ready, CRA collections will be much more willing to work with us and the taxpayer. The reason for this is because they will have a lot of files in their inventory, so if they can make a deal and move on, we think they will do so.

Ignoring your debt does not make it go away, even as CRA actions are suspended. In fact, it has never been more prudent to manage your affairs appropriately. It is very important that taxpayers act quickly and avoid long term financial or legal consequences which may arise when the CRA reintroduces debt collections.

Once the CRA reactivates debt collections, they will also begin charging interest compounded daily at the prescribed rate on any amount owing – until your balance is paid in full. Taking the time now to properly address your debt amount will avoid the accumulation of interest once the CRA’s pandemic protocol comes to an end. As well, properly organizing your financial affairs now, for future negotiations, will allow for a seamless process to ensure that no legal action is taken, or reinstated, once the CRA resumes their normal functions.

At Rosen Kirshen Tax Law, we have both lawyers and paralegals with years of experience negotiating directly with the CRA to resolve your tax debt and mitigate the legal consequences which may occur once CRA Collections is operating. If you have any questions about how the changes to CRA may affect you as a taxpayer, or questions about dealing with CRA Collections, please contact our firm for a free consultation.

In the meantime, we will continue to keep you informed and hope you and your families remain safe and healthy in these uncertain times.

**Disclaimer

Administration, CRA Articles, Pandemic Response, TaxMay 26, 20200 comments

by Jeff Kirshen

Navigating The Tax Court of Canada

The Tax Court of Canada is typically the third state in the dispute resolution process. First, an audit is initiated by the Canada Revenue Agency to take a look at a taxpayer’s past tax filings. Following the conclusion of the audit, taxpayer’s may file notices of objection stating they disagree with the audit results. After the notice of objection is reviewed and a new decision is made, taxpayer’s now normally file a notice of appeal in Tax Court.

However, the Tax Court of Canada may be the second stage as explained below:

Option 1: File a Notice of Appeal to the Tax Court after the CRA Appeals Division review your objection and issues a Notice of Confirmation or a Notice of Reassessment; or
Option 2: File a Notice of Appeal to the Tax Court before the CRA Appeals Division finishes reviewing your objection and before a Notice of Confirmation or a Notice of Reassessment is issued.

The Tax Court of Canada – Important Deadlines

There are deadlines that need to be met if you want to proceed with each approach described above:

In order to file a Notice of Appeal after a Notice of Confirmation or Notice of Reassessment has been issued, you need to file it within 90 days from when the Notice of Confirmation is issued. If you miss this deadline, you may still file a Notice of Appeal for another year, but an Extension Application will be needed.
In order to file a Notice of Appeal before a Notice of Confirmation has been issued, you need to wait 90 days after filing your objection before you can “bypass” the Appeals Division and file your Notice of Appeal to the Tax Court of Canada.

The Tax Court of Canada – Pros and Cons of the two Different Approaches

There are pros and cons to going through the CRA Appeals Division (Option 1) or bypassing the CRA Appeals Division (Option 2).

Option 1

Pro:
- May avoid Tax Court altogether, which will save you money since the preparation and the hearing itself can be expensive;
- May narrow the issues if agreements are made on some of the items at issue; and
- May be able to negotiate based on an agreement not to take the matter to the Tax Court of Canada.
Con:
- If the CRA denies your claim you will then still need to go to Tax Court and your dispute will therefore take longer than if you went straight to court;
- May feel like a waste of time if no changes are made from the audit position; and
- May cost additional fees if you’ve now paid for the objection stage, but still have to take the matter to the Tax Court of Canada.

Option 2

Pro:
- Get to the Tax Court of Canada faster by filing a Notice of Appeal as soon as possible;
- If the matter is complex, it will likely proceed to the Tax Court of Canada anyway;
- A quicker resolution is possible; and
- Your dispute is reviewed by lawyers and judges with decades of experience in the field, instead of CRA agents who can have as little as a few months of experience in the field
Con:
- The Tax Court of Canada can be an expensive and long endeavour; and
- By skipping the objection stage, you have given up one opportunity to fight the audit conclusions.

The Tax Court of Canada – Informal vs. General Procedure

When you file your Notice of Appeal, you can elect to proceed under the Informal Procedure instead of the General Procedure if you meet certain requirements:

The disputed amount of federal tax and penalties is not more than $25,000 per assessment (per taxation period);
The disputed loss is not more than $50,000 per determination; or
Interest on federal tax and on federal penalties is the only matter in dispute.

If you do not meet these criteria, you will have to proceed under the General Procedure.

The Informal procedure is usually quicker than the General Procedure, and the Tax Court of Canada is more flexible in their application of the rules of evidence. There are no litigation steps in an Informal procedure appeal, a notice of appeal is filed and the Department of Justice issues a Reply. The parties may then attempt settlement while waiting for a hearing date. In addition, you are not charged a filing fee for an appeal under the the Informal Procedure, but you must pay one under the General Procedure.

The Tax Court of Canada – Settlement

It is important to note that settlement discussions may occur at any point throughout these proceedings. Typically, once a Notice of Appeal and Reply are filed, we recommend that the Appellant (taxpayer) prepare a settlement offer in order to begin settlement negotiations.

Most of the time, we encourage settlement as opposed to proceeding with the hearing, because a settlement will usually end the dispute much faster and hearings are often unpredictable whereas with a settlement you know exactly the terms that you are agreeing to.

If you are considering going to the Tax Court of Canada or are currently in the middle of a dispute in the Tax Court of Canada and want assistance, call us today! We can help!

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Administration, CRA Articles, TaxApril 17, 20200 comments