Administration

by Jason Rosen

Coinsquare and the CRA

On March 19, 2021, the Honourable Justice Pamel ordered CoinSquare, a major Canadian cryptocurrency exchange to provide a list of all Customer accounts, both active and inactive, either alone or jointly held with any other person(s) or business(es).

Customers are defined as the following:

• Accounts with a value of $20,000 CAD or more from December 31, 2014 to December 31, 2020;
• Customers who have cumulative deposits of $20,000 CAD or more since the account opening; and
• The 16,500 largest Customer accounts by trading volume in CAD dollars between 2014 and 2020, and if not already included, the 16,500 largest Customer accounts by number of trades between 2014 and 2020.

Additionally, the order also required CoinSquare to disclose the following:

• A detailed listing of all cryptocurrency and fiat currency transfers identifying the source and destination of all Customer’s deposits and withdrawals.
• A detailed listing of all trading activity of its Customers, including over the counter (OTC) or off-exchange trades and information indicating over-the-counter (OTC) or off-exchange trades and information indicating the trading pair, buy/sell order, date, time, amount, price per unit, fees, transaction identifier, which can include a list of all known cryptocurrency addresses that were, or may have been, used during the Period of its Customers, either alone or jointly with any other person(s) or business(es).

 

What Does this New Order Mean & How am I Affected?

In short, this new order means that Canadian policy makers are clamping down on taxpayers who are failing to properly report their assets, capital gains or income via crypto currencies. In effect, this will impact both taxpayers who both fail to report their crypto currencies intentionally or by accident. Many crypto trading platforms actively encourage their users to monitor and report their gains from crypto currencies. The CRA has broad powers to investigate and request information from both trading platforms such as CoinSquare as well as individual taxpayers.

If a taxpayer did not disclose their assets or gains from crypto currencies properly, they may still have a chance to come clean via the Voluntary Disclosure Program (“VDP”). You can read about our earliest post on the VDP here and here. Under the Canada Revenue Agency’s Voluntary Disclosure program, taxpayers can come forward to disclose past non-compliance, whether that be non-filing, over-claimed expenses, offshore reporting, or any of an almost limitless number of errors and omissions on Canadian taxes.

 

60 Day Order

CoinSquare has 60 days from receiving the March 19, 2021 order to comply and disclose the above-mentioned information. This will surely impact many taxpayers as the order means that CoinSquare will disclose information on approximately 5% to 10% of CoinSquare’s 400,000 customers to the CRA. More importantly, this may be a sign for further things to come as the CRA and Canadian policy makers actively seek to clamp down on non-compliance.

 

If you are having trouble navigating through the complex laws surrounding crypto currencies or need advice, contact a professional at Rosen Kirshen Tax Law today! We’re here to help!

 

**Disclaimer

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

 

Additional Resources

by Jeff Kirshen

Charitable Donations, Tax Shelters and the Sham Doctrine

Taxpayers can claim tax credits or deductions for charitable donations in certain circumstances. The Income Tax Act (“ITA”) proves a regime of charitable donation deductions and credits to encourage philanthropic and public service functions which benefit the community.

Tax deductions in respect to charitable donations first appeared in 1917 for Canadians who contributed to certain patriotic and war funds. The charitable deduction was increased following the Great Depression and continued to be prioritized following World War II. From 1948, the ITA required charitable organizations to issue receipts and register in prescribed form.

 

Claiming Charitable Donations

Under the current regime, individuals may claim a tax credit against their tax payable and corporations may claim a deduction for eligible charitable donations. The former reduces the tax owed, at prescribed rates, providing a dollar-for-dollar reduction of tax payable. The latter reduces the corporate income subject to taxes for up to 75% of net income.

The charitable tax credit for individual donors is a non-refundable tax credit that can be carried forward five years or ten years for ecological gifts. Individuals can only claim the amount that is eligible.

Corporations can claim a deduction for the eligible amount of their charitable gifts for up to 75% of net income for the year. Donations that exceed the 75% net income can generally be carried forward five years.

 

Charitable Donation Requirements

There are certain requirements to be met for the charitable donation tax credit or deduction to be claimed. Donations must be made to qualifying donnees, there must be a valid gift, the value of the gift must be for an eligible amount, and the donor must comply with requirements for filing of receipts.

 

Qualified Donees

For the purposes of charitable donations, only certain organizations or entities will be eligible to issue charitable receipts. These include, but are not limited to: registered charities in Canada; registered Canadian amateur athletic associations; Canadian municipalities; United Nations agencies; and certain universities outside of Canada

 

Valid Gift

For a gift to be valid, there must be a charitable intent or absence of receiving something in return. Generally, the donor must own the gifted property, gift same voluntarily and without receiving any benefit in return. The gift must be property and not services.

 

Value of Gift

The amount eligible for the gift is the excess of the value of the gift over any advantage received. Any advantage can include broad benefits conferred to the taxpayer. For instance, in the case of dual secular and religious private schools, despite older guidelines providing otherwise, the child’s private education is considered a benefit to the donor.

 

Issuing Receipts

The qualified organizations can only issue a receipt for the amount of the contribution that exceeds any advantage received by the donor.

 

Tax Shelters and the Sham Doctrine

In certain cases, tax shelter programs may provide substantial tax benefits far above the actual contribution amount. Given the significant cost to the federal and provincial treasuries of these shelters, tax shelters involving charitable donations will be highly monitored and subject to CRA scrutiny. Programs which are found to be tax shelters will be subject to additional reporting and compliance requirements. These additional reporting requirements are also extended to individuals who participate in the program. 

In circumstances where there is evidence showing the legal effect of a transaction was to achieve a tax benefit that would otherwise be denied, the court may arrive at a finding of a sham. Essentially, the sham doctrine states that: “…acts done or documents executed by the parties to the “sham” which are intended by them to give third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create..”

In cases of an alleged sham, the court will examine the objective reality of the situation, and will determine what actually happened. In the case of many tax shelters, the Courts are only willing to provide a donation credit for the actual cash contribution. There are even times where the actual cash contribution is denied if the tax shelter was considered extremely abusive.

 

The CRA continues to conduct routine mass audits of tax shelters and charitable programs to ensure compliance. What is considered an eligible gift for the purposes of obtaining a charitable donation depends on a case-by-case basis. In findings of a sham transaction, the CRA will deny the credit or deduction with applicable interest and or penalties, even where the participant was unaware of the sham. If you are experiencing any issues regarding your charitable donations, or a tax shelter you have been involved with, speak with a qualified tax lawyer today! We can help discuss the eligibility of your charitable donation tax credit or deduction and if a charitable donation tax shelter or sham applies to you.

 

**Disclaimer

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

by Jeff Kirshen

Shareholder Loans and the CRA

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

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

 

Shareholder Loans and Benefits

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

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

 

How do I Manage Shareholder Loans?

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

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

 

Shareholder Benefits – Are there any Workarounds?

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

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

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

 

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

 

**Disclaimer

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

by Jason Rosen

T1135 Discretionary Penalties

Over the past decade, the Tax Court of Canada (TCC) has gradually carved a role for itself to decide whether to penalize Canadians who fail to file their Foreign Income Verification Statement (T1135 form) on time. A T1135 form must be filled out by any Canadian who, at any time during the year, owns foreign property valued at more than $100,000.00 CAD. Failure to file a T1135 form normally results in a strict penalty being levied against the taxpayer. A “strict” penalty is practically automatic; the circumstances that resulted in the late filing are not examined by the CRA when they’re applied.

 

T1135 Penalties and the Tax Court of Canada

The courts have gradually decided that there are circumstances where the strict T1135 penalty should not be applied. In Douglas v HMQ, 2012 TCC 73, the TCC accepted the Appellant’s argument that the penalty imposed under subsection 162(7) of the Income Tax Act should be waived for the late-filing of a T1135 form.

In that case, the Appellant knowingly filed his T1 income tax return along with his T1135 nine months late. He assumed that his failure to file on time would not attract a penalty as he did not owe any taxes for the year. However, the Minister imposed the maximum penalty of $2,500.00 for the late-filed T1135.

The TCC noted that the facts of that case justified such application to waive the T1135 penalty. The Court found that the Appellant acted reasonably in believing that there would be no penalty since no taxes were owing. Notwithstanding that subsection 162(7) imposes a strict penalty, the TCC held that it would be unfair to penalize the Appellant in these circumstances.

This decision suggests that a taxpayer may have recourse through the TCC for late-filed T1135 penalties when the taxpayer has exercised “all reasonable measures” to comply with the Income Tax Act.

In Fiset v R, 2017 TCC 63 (Informal Procedure), the Tax Court confirmed the judgement of the Court in Douglas. In that case, the Minister’s counsel (the CRA) decided to agree to cancel the penalties over the course of the proceedings. Justice Fournier stated that had the agreement not been reached, he would have done so himself. Justice Fournier explained:

“It is important to recognize that the Minister of National Revenue (or his delegate) has the discretion to waive any penalty or interest imposed under the Act (subsection 220(3.1)). This is a fairness provision. In my opinion, to insist that the appellant suffer the consequences of an honest mistake would neither benefit the public administration nor enhance confidence in the CRA.” (paragraph 10)

In other words, it is not the Act’s purpose to punish an individual who makes a reasonable mistake in good faith, nor would it generate greater confidence in the CRA. The fact that a Justice of the Tax Court of Canada is considering these appeals demonstrates that these matters are within their purview. Their impact on decisions from the Appeals Division of the CRA are less certain as Appeals Officers are not bound by Informal Procedure decisions.

 

T1135 Penalties and the Federal Court

In Biswal v Canada, 2017 FC 529, the Federal Court was not able to accept the Appellant’s use of Douglas because it found that it does not have similar jurisdiction of the Tax Court of Canada. This, in essence, confirms that matters of cancelling penalties can be within the jurisdiction of the Tax Court of Canada. The Federal Court judge even encouraged the Appellant to file an appeal to the Tax Court, to access the remedy that she sought.

 

T1135 Penalties and the Voluntary Disclosure Program

In Leclerc v R, 2010 TCC 99, the Court concluded that Canadians could not be expected to know that T1135 late filing penalties would only be waived by the CRA if they formally applied under its Voluntary Disclosure Program, since these information forms do not involve fraud or non-disclosure of income. The Court’s point in Leclerc was taken further in Moore v the Queen, 2019 TCC 141, where the Court criticized the Tax Guide available to taxpayers, and found that it is unreasonable to punish ordinary Canadians with penalties for honest mistakes.

The Court in Moore cited Leclerc, stating at paragraph 17, “Justice Favreau’s comments are also relevant to, and highlight, the fact that Mr. Moore may have voluntarily disclosed to CRA his late filing, but was unaware that would have had to be done under CRA’s formal voluntary Disclosure Program if he wanted to avoid coming to Court”. He proceeded to cancel the penalties imposed on the Appellant.

If you are considering a voluntary disclosure, please give us a call.

 

T1135 Discretionary Penalties

The evolving case law underscores the more active role that the Tax Court of Canada is taking in providing oversight for the CRA’s more severe penalties and procedures. The Court is chiefly interested in whether the taxpayer exercised due diligence in trying to meet their obligation to file a T1135.  While the Court admits that relief should be granted sparingly, it also seems quite willing to consider the remedy in a broad range of circumstances.

However, the Court’s newfound discretion has only been confirmed in judgements rendered under the Informal Procedure. It has not yet been heard in a proceeding under the General Procedure.

The distinction between these two Tax Court procedures is crucial. While officers in the CRA’s internal appeal process can consider judgements rendered through the Informal Procedure, they are only bound by ones rendered in the General Procedure. Until T1135 penalty cases are heard under the General Procedure, these new developments are less likely to have an impact on decisions made by officers in the CRA’s internal appeal process. This unfortunately means that Canadian taxpayers who are unfairly subject to T1135 penalties cannot benefit from the CRA’s internal appeal process; they will have to undergo a costly appeal to the Tax Court or pin their hopes on a taxpayer relief request.

 

If you have any questions about Form T1135, “Foreign Income Verification Statement”, or you are late filing it, or simply don’t know whether you need to file it or not, call us today! We can help!

 

**Disclaimer

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

by Jeff Kirshen

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

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

 

Current Rules for the Supply of Digital Products or Services

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

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

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

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

 

Proposed New Rules for the Supply of Digital Products or Services

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

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

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

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

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

 

Input Tax Credits

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

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

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

 

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

 

**Disclaimer

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

by Jeff Kirshen

The CRA Audit Process

Canada has a self-reporting tax regime, meaning that Canadians are responsible for accurately reporting their taxes payable to the federal government by certain prescribed filing deadlines. In order to properly police this self-reporting tax regime, Canada Revenue Agency (the CRA) requires tools at its disposal to investigate and verify the accuracy of amounts reported by taxpayers. Audits are an effective way for the CRA to assess the legitimacy of amounts claimed by taxpayers on tax filings.

In 2021, the audit process may become increasingly relevant for the average Canadian due to the possibility of COVID-19 related pandemic response audits.

 

CRA Audit Basics

Any “person” as defined by the Income Tax Act can be audited (notably, this definition includes corporations and trusts). The CRA chooses the subject of audits through risk assessments of the returns filed by taxpayers. Risk assessments look at the number of errors on the tax filings of a taxpayer and/or anything reported by the taxpayer that may indicate non-compliance or suggest a misrepresentation. Taxpayers are deemed responsible for misrepresentations advanced on their behalf by tax preparers.

Most Canadian taxpayers are familiar with what the process of an audit entails—a CRA agent (an auditor) contacting a taxpayer and asking a series of questions to determine the candidacy of the taxpayer for an audit. Establishing proof of the claims of the taxpayer requires that the auditor probe through troves of taxpayer records for lengthy periods and at great inconvenience to the taxpayer.

Most Canadian taxpayers would ideally prefer to avoid this process at all costs. While a taxpayer may believe that after receiving an income tax refund that the taxpayer is in the clear, that is not always the case. The CRA has variable discretion to reassess years after the income tax filing has been made and investigate through the taxpayer’s records from years prior to the filing.

 

How Long does the CRA have to Initiate Audit Proceedings?

If the CRA deems that a taxpayer meets the eligibility requirements of an audit, the CRA has a statutory limit of three years for reassessing tax liability. For example, if a Notice of Assessment is issued to a taxpayer on May 14^th, 2021, the CRA can adjust that tax year by issuing a notice of reassessment until May 13^th, 2024. However, if the CRA suspects that a taxpayer perpetrated a misrepresentation akin to fraud on the taxpayer’s filing, this time limit is extended.

Depending on the nature of the taxpayer’s returns (individual, corporate, etc.), this process could mean combing through a significant volume of documents. How far exactly the auditor can look back is subjective and depends on what is uncovered during the initial review of the first two to three taxation years.

If the auditor finds an error that sparks interest in a prior taxation year, the auditor then has cause to extend the period under scrutiny and open up other taxation years for review. Again, if the auditor uncovers what the auditor thinks is a misrepresentation tantamount to fraud, the auditor can look back as far as he or she wants into records from prior taxation years.

 

How Long does the CRA want me to keep my Records?

There is actually no time limit with respect to CRA requesting the production of tax records (notably in Ghermezian v. Canada, the CRA was permitted to peruse records from 21 years prior), but taxpayers are not expected to retain the records they relied on to file their returns indefinitely.

Subsections 230(4) and 230(4.1) of the Income Tax Act mandate that most tax records be kept for six taxation years following the date of filing of the taxation year. For example, if a taxpayer filed its annual income tax return on June 30th, 2020, its tax records from the 2020 taxation year should not be destroyed until June 30th, 2026 (if at all). This includes electronic records that must be kept in an “electronically readable” format of the document(s) for the same six-year period.

Where the taxpayer files its return late, the taxpayer must retain records for six years from the original date of late filing. Using the same example as above, if the taxpayer filed its 2020 income tax return on September 27, 2020, the corporation must retain its records from this reporting period until September 27, 2026.

 

The audit process can result in findings that cause life-changing adjustments to a taxpayer’s returns. Few taxpayers are aware that in lieu of having the audit conducted at their home or place of business, it is the taxpayer’s right to have the audit conducted at the office of their authorized representative. Conducting an audit at the office of a tax lawyer allows the taxpayer to protect their rights by having their lawyer present for the duration of the audit process. If you are being audited or fear you may be, having legal support can make all the difference in a successful audit defense. Contact a tax lawyer 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

Canada Recovery Benefits

On October 2, 2020, the Canadian government announced three new temporary Recovery benefits to assist Canadians unable to work, experiencing reduced income due to the COVID-19 pandemic, or recovering or tending to one sick with COVID-19. These recovery benefits are the Canada Recovery Benefit (CRB), the Canada Recovery Caregiving Benefit (CRCB), and Canada Recovery Sickness Benefit (CRSB). All three programs are administered by the Canada Revenue Agency (the “CRA”).

These new temporary benefits are replacing the Canada Emergency Response Benefit (CERB), as the economy safety restarts. Unlike CERB, the Recovery benefit periods are retroactive. Applicants can only apply within 60 days after the period for which they apply has concluded. The Recovery Benefits are available for those residing and present in Canada who meet the eligibility criteria. There is no citizenship or permanent resident status requirement.

For all Recovery benefits, the applicant must be residing and present in Canada during the period of application. Therefore, Canadians who were abroad and unable to return home due to the travel restrictions surrounding the pandemic are not eligible.  Like CERB, the Recovery benefits are taxable and must be included in total income for the taxpayer’s taxation year if received.

 

Canada Recovery Benefit

The CRB was introduced by the Canadian government to provide assistance to individuals who are not eligible to receive EI regular benefits. These include individuals who are self-employed, or those who experience at least a 50% reduced income due to COVID-19. Eligible applicants for CRB can receive a taxable $500 each week for up to 26 weeks, starting from the period of September 27, 2020 and through September 25, 2021.

While the CRB benefits extend until the fall of 2021, to be eligible, applicants must be available and looking for work. Furthermore, they cannot decline work if offered to them, if it is reasonable to accept the work. There is a claw back for the CRB where taxpayers will be required to repay $0.50 of the Benefit for every dollar in net income earned above $38,000. The threshold does not include the CRB received.

Applications for the CRB began on October 12, 2020.

 

Canada Recovery Caregiving Benefit 

 The Canada Recovery Caregiving Benefit (CRCB) provides income support to employed and self-employed individuals who are unable to work because they must care for their child under 12 years old or a family member who needs supervised care. Eligible applicants can receive $500 for each one-week period or $450 after taxes since the CRA will apply a flat 10% deduction at source. Applicants can apply for up to a total of 26 weeks between September 27, 2020 and September 25, 2021.

CRCB applies if the individual’s school, or regular facility is closed or unavailable to them due to measures surrounding COVID-19, or because of sickness, self-isolation, or risk of serious health complications due to COVID-19. However, it does not apply if an individual voluntarily chooses to stay home to care for the child or individual when the child’s school or the individual’s regular facility is open. The exception to this is if in the opinion of a medical practitioner or nurse practitioner, the child or individual would be at risk of having serious health complications if the child contracted COVID-19. The same does not apply if there is an immune-compromised family member in the same household who does not require supervised care.

An individual does not need to use up all of their vacation or other types of leave to apply for CRCB, but they cannot double-claim for the period if they are receiving either CRCB or leave for the period. Furthermore, only one individual in a household may receive the CRCB (i.e. the maximum number of weeks must be shared with the partner).

The application process for CRCB was launched on October 5, 2020.

 

Canada Recovery Sickness Benefit

The Canada Recovery Sickness Benefit (CRSB) provides income support to employed and self-employed individuals who are unable to work due to sickness, being under quarantine, must self-isolate due to COVID-19, or have an underlying health condition that puts them at greater risk of contracting COVID-19. The individual must provide evidence of the opinion of a medical practitioner, nurse practitioner, person in authority, government or public health authority in respect to COVID-19 susceptibility.

Eligible applicants for CRSB can receive $500 for a one-week period, or $450 after taxes since the CRA will apply a flat 10% deduction at source. The CRSB is available for a maximum of two weeks within the period of September 27, 2020 through September 25, 2021.

CRSB does not apply if the individual must self-isolate but they are able to work from home for more than 50% of their scheduled work per week. An individual does not have to use up any other sick leave before applying for the CRSB. They can still apply even if they have access to private insurance, the EI program or another source of paid sick leave. However, an individual cannot double-claim for CRSB when they have already claimed the sick leave for the same period.

While the CRSB is restricted to COVID-related sick leave, through the streamlined EI program, workers will only require 120 insurable hours of employment to qualify for EI sickness benefits which they can use for any sickness. The application process for CRSB was launched on October 5, 2020.

 

While the three Recovery benefits ensure Canadians will continue to have access to much needed financial support during the ongoing pandemic, Canadians should be aware of the rules surrounding these benefits. Especially considering the claw back for the CRB, the consequences can be considerable if any of the benefits are taken beyond a certain income level or without eligibility. Retroactive penalties and interest are also a reality if excess payments are accidentally received. You may be asked to supply supporting documentation at a later date.

 

If you have any questions or concerns, speak with a tax lawyer or tax specialist to discuss if these benefits apply to your particular circumstances. 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

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.

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!

 

**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

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:

1. They must be incorporated under the Ontario Business Corporations Act;
2. They must have one controlling shareholder who owns all equity and voting shares;
3. The sole shareholder must be president, sole director and sole officer of the corporation;
4. The shareholder must be a registered broker;
5. Any non-equity (non-voting) shares must be owned directly or indirectly by family;
6. No agreement restricting the authority of directors to supervise the affairs of the corporation can exist; and
7. 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!

 

**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.