Commentary

by Jason Rosen

Cryptocurrency and the OECD

The Organization for Economic Co-Operation and Development (the “OECD”) recently released its long-awaited report on global regulatory frameworks for the taxation of cryptocurrencies. In it, they outline current and emerging issues with the global taxation of virtual currencies and offer guidance on policy development for its tax treatment and associated reporting standards.

Tax policy remains a hot topic in the cryptocurrency space, especially with the approximate market capitalization of these currencies hitting an all time high at USD 390 billion as of October 2020. As such, the OECD’s report is a welcome reminder to governments of the importance of maintaining consistent, coherent, and transparent tax policies. In Canada, cryptocurrencies are treated similar to commodities for taxation purposes. This means that income from cryptocurrency transactions may be classified as business income or capital gains depending on the level of activity with the cryptocurrency.

 

Cryptocurrency Recommendations

The OECD’s new report cover three main areas:

1. Key definitions and concepts in cryptocurrency such as blockchain and crypto assets.
2. Emerging issues related to the taxation of cryptocurrencies such as the rise of stablecoins, central bank digital currencies (CBDCs), evolution of consensus mechanisms in blockchain technology, and development of decentralised finance.
3. Policy recommendations developed from a comparative review of 50 jurisdictions’ tax policies as they relate to cryptocurrencies.

One key recommendation from the report is that policy makers should consider the tax consequences of cryptocurrency across different stages of its lifecycle, from mining to disposal. Currently, countries around the world tax the various life cycles of owning cryptocurrency differently, which causes difficulty when tracking (and taxing) transfers of the currency over different jurisdictions. For example, the Internal Revenue Service in the United States of America treats the rewards developed from a mining transaction as ordinary income whereas Australia’s tax office treats this activity as a capital gain, if the mining operation is not a business. These areas of non-alignment create a tension when it comes to enforcing a jurisdiction’s regulatory framework, especially as it relates to existing tax treaties and residency requirements.

Other important recommendations from the report include encouraging policy makers to outline the rationale behind the taxation of certain events or definitions of taxable assets. These rationales can ensure consistency when interpreting the law in the fast-changing cryptocurrency space. Likewise, the OECD recommends that consideration be given to individuals who are occasional or small traders who do not pursue the activity in a business capacity. Simplified rules for these types of individuals could improve compliance and ensure clarity.

When designing all these new policies, especially as they relate to emerging technology such as CBDCs and stablecoins, the OECD emphasizes that policy makers ensure that the tax treatment of cryptocurrency be in line with the tax treatment and policy objectives of other non-virtual assets.

Countries are expected to review the OECD’s guidelines as a first step in its policy-making process. It is yet to be seen how Canada will incorporate these new guidelines into its tax policies.

 

If you have ever been involved with mining of cryptocurrencies or cryptocurrency transactions in general and are being audited by the CRA or have questions, contact our office today. Expert tax law advice can help ensure that you are meeting your reporting requirements. Additionally if you believe you have not properly disclosed this income on your tax returns in the past, the Voluntary Disclosures Program may be available to correct your past errors or omissions. Call us today, we are here to help!

 

**Disclaimer

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

by Jason Rosen

Mark Laurin and My Private Circle

Previously, we wrote about Mark Laurin, CPA, and his involvement with the Edge Software, Edge of Command, Highshare, SecureShare, Advanced Cloud Solutions Inc. (“Edge”) investment. Our earlier blog posts can be found here and here. This blog post seeks to highlight Mr. Mark Laurin’s new business venture, My Private Circle (“MPC”).

 

Edge Franchise Dispute

In summary, Edge was marketed to investors as a cloud-based software business that would be offered to small businesses domestically and abroad. Investors had the opportunity to invest in Edge thus providing themselves with franchise(s) from the business. By investing in Edge, investors expended their personal funds by paying an up-front cost and all of whom executed promissory notes for significant funds. These up-front costs and promissory note amounts varied depending on which year an individual invested, and in which form of the business they invested in for that respective year. Upon paying the up-front expenses and executing the promissory notes, the investors obtained certain rights and requirements.

Based on the above, investors claimed corresponding capital cost allowance (“CCA”) deductions on their tax returns along with other expenses including marketing expenses, publicity expenses, interest expenses, among others, depending on the investment year.

Unfortunately, based on the structure of the transactions and the tax treatment of the deductions claimed, the CRA alleged that Edge was a tax shelter, that the proper forms should have been filed, and that all of the deductions claimed by the investors associated with Edge were improper.

As a result, all of the deductions claimed by the investors on each of their tax returns were disallowed in their entirety. The CRA assessed gross negligence penalties on the amounts disallowed and opened tax years that were statute-barred due to the alleged misrepresentations.  Due to these situations, our firm has been representing 20+ Edge franchisees through the CRA Audit Division and CRA Appeals Division process, most of whom now find themselves before the Tax Court of Canada. Due to our experience that the CRA Appeals Division is not able to be impartial or independent in group audits like the CRA’s audit of the Edge investments, we have fast tracked our clients to the Tax Court of Canada to have their matters heard before an independent and impartial third-party reviewer. Unfortunately, those Edge franchisees who are not represented by us remain at the CRA Appeals Division awaiting Appeals Officers to be assigned. In our experience with these situations, it could take up to two (2) years for the same.

Our memorandum detailing the highlights of the dispute process for the Edge franchise can be found here.  

 

My Private Circle

Sometime in 2016, several Edge franchisees received a letter from the Surete du Quebec – Criminal Investigation Branch stating that an on-going fraud and police investigation has been launched in regards to the Edge of Command and Edge Highshare Franchises.

The letter further stated that since the 11^th of March 2016, bank accounts used to deposit, directly or indirectly, cheques from franchisees have been frozen by court orders. This was supposedly to protect franchisees from depositing further funds into a fraud scheme managed by Mark Laurin and associates.

Following this investigation, it has come to our attention that Mark Laurin has commenced a similar business venture under the name My Private Circle.

Among other services, MPC alleges to offer the following:

• Send & Receive Secured E-mail and SMS;
• Secure File Exchange & Encrypted Cloud Storage;
• Full Management Control;
• Secure Chat, Voice & Video Calls;
• Delivery/ Read Status & Message Destruction;
• Choice of Server location;
• Private Server Licensing;
• Real-Time Translation; and
• Account Authentication by E-mail.

If this product offering seems familiar for some readers, that is because the Edge investment also focused on offering integrated monitoring, data management and backup & recovery solutions for the small business market. Indeed, MPC’s website under the tab “All Features” states that the following:

“MPC is a Secure Global Communications Hub for business and professionals to easily and efficiently collaborate with colleagues and clients.”

Importantly, you will notice that MPC’s home webpage has their address as the following:

1060 Guelph Street,

Lower South Unit,

Kitchener ON N2B 2E3

This is the same address listed on the SecureShare homepage website. Furthermore, Mark Laurin is the director for both corporations and the MPC transmission slips note to courier all documents to Advanced Cloud Solutions Inc.

 

Similarities Found in Edge and MPC Disclosure Documents

In their disclosure documents, MPC claims that their product portfolio “seamlessly integrates” file/photo transfers, voice/video/test messaging as well as other functions revolving protection of privacy.

Furthermore, it claims that “flexibility is the key to MPC Product Portfolio in terms of product and price.” It goes on to list the different product offerings including MPC personal account, MPC – personalized (small business edition) and MPC – personalised (Enterprise Edition).

This language is strikingly similar to the statements found in the Edge Disclosure Agreement. In particular, the Edge disclosure document also states that “Edge Solutions seamlessly integrate productivity monitoring, digital backup and recovery, advanced file management functionality and other functions. It also states that “flexibility is key to the EDGE advantage in terms of product and price” and then proceeds to list the various product offerings of Edge.

In other words, the MPC disclosure statement replaced the Edge “storage” functions and offerings with the supposed MPC “security” functions and kept the other language the same.

That said, arguably the most salient similarity between the MPC and Edge disclosure statements can be found in the “Earnings and Operating Cost Projections for the Franchise”. Rather than providing any actual historical data or sales figures, both disclosure statements proceed to state the following:

One question you are probably asking yourself is, “How much money can I expect to earn as a Franchisee? There are many variables and factors that make it impossible to answer that question with any certainty.

Without making any specific projections or forward looking information, the Franchisor expects that recruiting Partners and Resellers within the Franchisor’s Territory will significantly increase potential sales. Furthermore, the Franchisor recommends the hiring of an experienced, professional manager to oversee the commercialization of the (MPC Product Portfolio or Edge Solution).

 

Potential Audit

Based on the above, and the government’s pursuits thus far, if you are a franchisee or investor of MPC, there is a high probability that your tax returns will be audited by the CRA in the future for the years in which you claimed deductions related to your investment with MPC.

Indeed, the costs relating to becoming a franchisee of the MPC business remain the same as Edge. In particular, franchisees are expected to paying for initial franchise fees, license fees and marketing costs all of which they claim can be deducted.

While we cannot say for certain, it is likely that the CRA will take issue with the deductions and will deny the same while imposing gross negligence penalties on the investors, as they did with Edge.

If you invested in MPC or Edge, or are being audited by the CRA, call us today for more information about how we can help.

 

**Disclaimer

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

by Jeff Kirshen

An Update Regarding John Scholz

Previously, we wrote about the Canada Revenue Agency (CRA) auditing certain taxpayers who were involved with John Scholz in alleged “strips” of RRSP registered plans resulting in an “advantage”. In essence, the CRA was assessing for “advantages” received from the transfer of taxpayer’s registered plans to Western Pacific Company, the subsequent purchase of Red Hill Capital Inc., and the direct repayment of the value of their registered plan from John Scholz of Northland Services Inc. following the purchase of the shares. Please review our earlier blog post on Joern (John) Scholz and the related audit for a deeper analysis of “advantages” and “Registered Plan Strips” here.

 

Conditional Prison Sentence and Fine for Tax Fraud

On September 26, 2019, the CRA announced that Joern (John) Scholz, a financial advisor based in Port Carling (and the advisor related to the registered plan strip scheme above) was found guilty of one count of fraud over $5,000 under the Criminal Code. Specifically, Mr. Scholz was convicted for the evasion of federal income tax and goods and services tax/harmonized sales (GST/HST) and subsequently sentenced to a conditional jail sentence of two years less a day.

A CRA investigation revealed that Mr. Scholz operated an investment counselling business where in which he did not report any of the commission fees received from his clients on his individual tax returns for the 2011 to 2013 taxation years.

By failing to report his commission fees, Mr. Scholz did not to report/pay the following amounts:

• Failed to report taxable income totalling $2,149,730 (2011 -2013);
• Failed to pay and evaded $605,355 in federal income (2011 – 2013);
• Failed to file GST/HST returns (2011 – 2015); and
• Failed to remit GST/HST totalling $445,789.

 

CRA Appeal of Sentence Successful

On July 13, 2021, the CRA announced that it was successful in overturning the conditional sentence imposed on John Scholz. Instead, John would be sentenced to three years imprisonment. This recent prison sentence determined at the Court of Appeal for Ontario overturns the initial conditional sentence issued on September 26, 2019. Mr. Scholz was initially sentenced to a conditional jail sentence of two years less a day, including 200 hours of community service and 12 months of house arrest. However, it was determined at the Court of Appeal that a prison sentence was warranted as Mr. Scholz’s fraud and tax evasion constituted a large-scale fraud on the taxpayers of Canada.

Additionally, Justice Ian V.B Nordheimer, the judge presiding over the appeal found that the trial judge made the following two errors when handing down the conditional sentence:

• Imposing a sentence “outside the range” for major frauds; and
• “Failed to follow the necessary and analytical proceeds and consider all of the factors required”.

 

Tax Evasion can be a Criminal Offence and Result in Heavy Fines 

Mr. Scholz prison sentence is a stark reminder that tax evasion is a criminal offence. Falsifying records and claims, willfully not reporting income, or inflating expenses can result in prosecution and jail time. Furthermore, if a taxpayer is found guilty of tax evasion, both the Income Tax Act and Excise Tax Act have court fines ranging from 50% to 200% of the taxes evaded and up to five years in prison. A conviction for tax fraud under the Criminal Code can result in up to 14 years in prison.

As such, it is critical that taxpayers understand the difference between tax avoidance and tax evasion. Generally, if the arrangement is consistent with the intent of the law, then it is tax avoidance. Alternatively, if the arrangement is inconsistent with the intent of the law, then it is tax evasion. More importantly, it is critical that taxpayers are aware that the CRA will investigate individuals for tax evasion even if they unknowingly relied on dishonest accountants or advisors.

 

The CRA states that they remain focused on maintaining the integrity of Canada’s tax system and aggressively cracking down on tax evasion and false claims. Unfortunately, this may result in innocent taxpayers who were deceived by their advisors being caught in the cross – fire. Professionals at Rosen Kirshen Tax Law have significant experience representing taxpayers in such cases in front of the CRA and the Tax Court. If you have recently dealt with John Sholz and/or concerned that you may be audited, call us today! We are here to help!

 

**Disclaimer

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

by Jeff Kirshen

The Canada Digital Services Tax

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

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

 

What is the Digital Services Tax (DST)?

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

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

 

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

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

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

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

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

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

 

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

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

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

 

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

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

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

 

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

 

**Disclaimer

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

by Jeff Kirshen

John Scholz and RRSP Advantages

Have you recently received correspondence from the CRA regarding an audit or reassessment of your income tax returns for an alleged “strip” of a registered plan (such as an RRSP, RESP, RRIF or RDSP) resulting in an “advantage”?

The CRA is auditing taxpayers for “advantages” received from the transfer of their registered plan to Western Pacific Trust Company, the subsequent purchase of shares of Red Hill Capital Inc., and the direct repayment of the value of their registered plan from John Scholz of Northland Services Inc. following the purchase of the shares.

These audits are targeting taxpayers under a specific and technical provision of the Income Tax Act (the “Act”). In this blog post, which draws from Income Tax Folio S3-F10-C3, published by the CRA, we outline the meaning of these provisions and some of the reasons for their implementation. We also highlight another recent CRA publication regarding John Scholz.

 

Advantages

An “advantage” in relation to a registered plan is defined under subsection 207.01(1) as any of the following:

1. certain benefits or debt that are conditional on the existence of the plan, subject to listed exceptions;
2. an increase in the FMV of the property held in connection with the plan which increase is reasonably attributable to certain transactions or amounts;
3. income or a capital gain that is reasonably attributable to certain property or transactions in respect of the plan; or
4. a registered plan strip in respect of the plan.

The CRA considers the above series of transactions involving John Scholz to result in an “advantage” under subsection 207.01(1) of the Act.

Under subsection 207.05(1), the Act imposes a special tax for “advantages”. The tax is equal to the amount of the advantage and is payable by the annuitant, subscriber, or holder of the plan, unless the advantage is extended by the issuer, promoter, or carrier of the plan. In the latter case, the tax is payable by the issuer, promoter or carrier.

The person responsible for paying the tax is also required to file a special tax return. The CRA has discretion to waive all or part of the tax.

 

Registered Plan Strips

The CRA defines a “registered plan strip” as the amount of a reduction in the fair market value of property of a registered plan other than a TFSA.

The reduction may be considered a “strip” if the value is reduced as part of a transaction or event (or a series of transactions or events) one of the main purposes of which is to enable the controlling individual or any person who does not deal at arm’s length with the controlling individual to obtain a benefit in respect of the property of the plan or to obtain a benefit from the reduction.

The above definition involves a few technical terms:

• “Fair market value (FMV)” is generally considered to mean the highest price expressed in terms of money that can be obtained in an open and unrestricted market between informed and prudent parties who are dealing at arm’s length and under no compulsion to buy or sell.
• “Controlling individuals” of a registered plan is defined under subsection 207.01(1) of the Act as the annuitant of an RRSP or RRIF, the subscriber of an RESP or the holder of an RDSP or TFSA.
• The rules for determining whether persons deal with each other “at arm’s length” are set out under subsection 251(1) of the Act. The CRA does not view individuals as dealing at arm’s length with any of their registered plans.

The definition of a “registered plan strip” can apply even when no amount is traceably removed from a registered plan but where the value of the plan has still been reduced. For example, this could occur by way of transactions that dilute the equity of a corporation, trust, or partnership in which the plan is invested. It could also occur where a plan has directly or indirectly invested in a debt obligation and steps are taken to ensure that the debt cannot be repaid, or where no actions are taken to enforce repayment.

 

Advantages and the Reason for the Rules

The advantage rules originally applied only to TFSAs but were extended to cover RRSPs and RRIFs from March 23, 2011 and to RESPs and RDSPs from March 23, 2017.

The advantage rules target abusive tax planning arrangements that seek to artificially shift value into or out of a registered plan while avoiding the statutory limits for contributions or withdrawals. They also apply to benefits and loans that are conditional on a registered plan.

Normal investment activities and conventional incentive programs will generally be excepted from the application of the advantage rules. Amounts excepted from the rules may include amounts included in income, amounts withdrawn under the Home Buyers’ Plan or the Lifelong Learning Plan, direct transfers of funds that are permitted to be made on a tax-deferred basis, and the non-taxable portion of payments from RESPs or RDSPs relating to a return of contributions.

For the most part, the advantage rules do not impact the average investor. However, there has been a recent uptick in CRA audit activity surrounding advantages allegedly received by taxpayers following their dealings with John Scholz.

 

John Scholz

The CRA recently investigated the investment counselling business of John Scholz. The investigation revealed that Scholz did not report any of the commission fees he received from his clients for the 2011 to 2013 taxation years.

Scholz was found to have failed to report taxable income totalling $2,149,730 for these years, and to have evaded a total of $605,355 in federal income tax. Scholz also did not file GST/HST returns for the periods ending in 2011 to 2015, and he was found to have evaded the remittance of GST/HST totalling $445,789.

On April 13, 2019, Scholz was found guilty by a jury in the Hamilton Court House of one count of fraud over $5,000 under the Criminal Code for the evasion of GST/HST remittance.

On September 26, 2019, Scholz was sentenced to a conditional jail sentence of two years less a day, including 12 months of house arrest, curfew for the remainder of the sentence, and to 200 hours of community service. He also received a fine of $445,789, representing 100% of the amount of GST/HST that he evaded.

It is important to note that Scholz was not found guilty of anything having to do with the RRSP advantage issue.

 

If you have recently dealt with John Scholz and are concerned that you may be audited, or if you have recently received a notice of reassessment for an alleged “strip” of a registered plan resulting in an “advantage”, call us today. We are here to help!

 

**Disclaimer

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

by Jeff Kirshen

What are GST/HST Carousel Schemes?

A “missing trader scheme” or “carousel scheme” is a fake supply chain created by a group of GST/HST registrants who work in collusion by repeatedly reselling goods to each other. At one point during the purchase and sale of these goods, at least one of the registrants collects GST/HST but does not remit it to the government. This registrant is the “missing trader” who gives the scheme its name. The following is a step-by-step explanation of missing trader/carousel schemes adapted from the CRA’s 2016-2017 Departmental Results Report:

1. First, a GST/HST registrant (Company X) purports to import goods, usually operating within a supply chain; no GST/HST is paid;
2. The goods do not exist, but Company X claims them to be intangible (film rights) or intangible (computer chips);
3. Company X creates fictitious invoices and bank statements to give the appearance that transactions are occurring and that it is charging GST/HST;
4. Company X disappears without remitting the GST/HST collected from the phoney transactions (the “Missing Trader”);
5. The last company in the supply chain claims to export the goods to offshore companies at 0% GST/HST;
6. Each company in the supply chain network files requests for GST/HST refunds (often for millions of dollars) for taxes “paid” to Company X; and
7. Stages (1)-(6) can repeat indefinitely.

These schemes are prevalent in Canada, and the CRA continues to improve its processes to detect and prevent GST/HST refund arrangements that bear a resemblance to them.

 

Carousel Schemes and Precious Metals

The CRA has identified the precious and scrap metals industries as a particularly high-risk target for missing trader/carousel schemes. Taxpayers involved in this industry may participate in these schemes by buying pure gold bullion from commercial suppliers (which is not subject to GST/HST) or by buying scrap metal containing gold (which is subject to GST/HST) and from which pure gold bullion can be refined.

Taxpayers who buy pure gold bullion from commercial suppliers utilize missing trader/carousel schemes by melting the bullion down and adding low levels of impurity. After impurities are added, the formerly pure gold can be sold as scrap metal. Once the scrap metal is sold, the seller will charge, but not remit, and often abscond with, GST/HST. The purchaser of the scrap metal will then claim a refund (such as Input Tax Credits) on the GST/HST paid to the seller.

The purchaser of the scrap metal will then melt the scrap metal down and refine and reshape it back into pure gold bullion. Other bullion purchasers down the supply chain will then purchase the bullion, and the cycle can continue indefinitely.

 

Carousel Schemes and CRA Issues

It is not uncommon for taxpayers involved in missing trader/carousel schemes within the precious and scrap metals industries to receive reassessments for tens of millions of dollars in unremitted GST/HST and/or disallowed Input Tax Credits. In 2011, for example, Metaux Kitco, one of Quebec’s most prominent gold-trading companies, was reassessed for $85 million in disallowed Input Tax Credits, and was alleged to be one of approximately 125 companies involved in the scheme alleged to defraud the Canadian government of approximately $350 million (see Cody Kessler, Taxpayer Non-Compliance with Input Tax Credit Rules: Data and Policy Options for Canada, Canadian Tax Journal (2020) 68:3, p 784).

Importantly, the “director’s liability” and “derivative assessment” provisions of the Excise Tax Act can place corporate tax liability on the corporate directors personally. This presents a significant risk for individuals involved in missing trader/carousel schemes.

 

If you or your business are at risk of being involved in a missing trader scheme or carousel scheme, call us today. We are here to help!

 

**Disclaimer

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

by Jeff Kirshen

Are Awards Taxable – A Tax Court of Canada Example

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

 

The Tax Court Case

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

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

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

 

The Tax Court Decision

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

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

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

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

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

 

Tax Court Comment – RKTL

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

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

 

If you are receiving an award, and want to know whether it is taxable or not, contact us today!

 

**Disclaimer

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

by Jeff Kirshen

Canada’s 2021 Budget and its Impacts on Taxpayers

On April 19^th, 2021, the Deputy Prime Minister and Minister of Finance, the Honourable Chrystia Freeland presented “Budget 2021”, the first federal budget announced by Parliament in more than two years. Subtitled “A Recovery Plan for Jobs, Growth, and Resilience”, Budget 2021 addresses many key concerns of Canadians arising from the pandemic and proposes to invest in Canadians now to incentivize future economic growth.

Budget 2021 sets out to invest in Canadians by including new initiatives like the “National Early Learning and Child Care Plan”, a national program designed to reduce the national average childcare cost by 50% by 2022 with further cost reductions in following years.

Due to the pervasive effect COVID-19 has had on the Canadian economy, it is unsurprising that Budget 2021 projects significant deficits for the foreseeable future (including a projected $354 billion dollar shortfall for this coming fiscal year-end).

In order to support these new expenditures during a period of economic uncertainty and offset these projected shortfalls, the federal government has proposed modifications to Canada’s income tax regime. Some of these implementations will have significant impacts on the Canadian consumer and individual taxpayer.

 

Canada’s 2021 Budget – Excise Tax Act (GST/HST)

Canadian consumers will now be paying a bit more their streaming services. As previously proposed by the federal government, non-resident digital vendors of online services such as Netflix and Spotify will begin to collect GST/HST on the products and services they offer to Canadians, which could see an increase in federal tax revenue in the billions over next five years.

There will also be additional excise duties levied on luxury products like private planes and yachts that exceed cost thresholds outlined by Budget 2021. These luxury taxes will be applied at a rate of the lesser of 10% of the full value of the aircraft or watercraft or 20% of the value that exceeds the federal government’s prescribed thresholds ($100,000 for aircraft and vehicles; $250,000 for watercraft) and will be in addition to the existing sales taxes and purchase prices of these products.

For example: If a consumer purchases a boat in Ontario for $160,000, the lesser of 10% of the total value ($16,000) and 20% of the value that exceeds the federal government’s prescribed threshold (20% of $60,000; $12,000) would be added to the cost of the boat. Assuming all ancillary fees were included with the boat’s purchase price, the boat would cost:

$160,000 + Ontario HST (13%; $20,800) + luxury taxes of $12,000 totalling $192,800.

 

Canada’s 2021 Budget – Filing and Reporting Taxes

A major objective of Budget 2021 surrounds the improved compliance of Canadian taxpayers with respect to filing. The federal government will be incentivizing taxpayers to file their returns electronically by lowering or eliminating return quantum thresholds of taxpayers and their tax preparers, allowing businesses to issue only electronic copies of T4As and T5s, and have eliminated the existing requirements for written signatures on prescribed forms. Some taxpayers that have registered for digital filing will also only receive some notices electronically from the CRA.

 

Canada’s 2021 Budget – Enhanced CRA Enforcement Budget

Budget 2021 will also be boosting the CRA’s existing budget for enforcement in order to capture funds that otherwise may have slipped through the CRA’s current enforcement framework. More than $500 million will be allocated to the CRA’s collections department and aggressive tax planning division and towards new programs to combat tax evasion.

While this upfront cost may seem considerable, the CRA is projected to return billions of dollars from these increased enforcement expenditures.

Budget 2021 also announced that the federal government is also planning to revisit (among others) the existing anti-avoidance rules, transfer-pricing rules and foreign affiliate dumping rules under the Income Tax Act in short order. These revisions could make aggressive tax planning increasingly risky for Canadian taxpayers; what was once strategic tax planning may soon fall under the new revisions to the Income Tax Act anti-avoidance provisions. 

 

If you are concerned about your current tax planning strategy or the impact of any of the new implementations from Budget 2021, contact a tax professional at Rosen Kirshen Tax Law today!

 

**Disclaimer

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

by Jeff Kirshen

Retail Investing and the Tax Implications in Canada

The COVID-19 pandemic has created novel economic conditions for Canadian investors. Many Canadians were laid off or let go completely from their place of employment. Stay-at-home orders have also resulted in many Canadians spending much of their winter indoors in order to comply with provincial regulations to curb the spread of the disease. The pandemic’s effect on the economy has also created an investment climate where there is tremendous potential upswing for the changing needs of our society. Stocks like Amazon, Shopify and, most notably, Tesla have seen record gains on the stock market leading to significant gains for their shareholders in turn.

These factors have led to many Canadians pursuing income-earning alternatives to try to mitigate financial damage. This has contributed to the increasing popularity of “retail investing” as a potential means of planning for one’s financial future. While retail investing may provide an opportunity for some to supplement their earnings, it is important to consider the tax implications of the addition of investment income to one’s existing income sources.

Some retail investors may believe that sheltering their securities under their Tax-Free Savings Account (TFSA) will protect their earnings from any tax liability. However, there are limitations as to what earnings are protected from inclusion in taxable income, even under a TFSA.

 

What is Retail Investing?

“Retail investing” is the term for non-professional individuals buying and selling financial instruments or securities. Retail investors open investment accounts and procure securities with or without the direct aid of a broker.

Retail investing is increasingly accessible to Canadians, with a wide range of trading accounts now offered by major Canadian financial institutions. Another arena of growth has been the development low-cost trading applications like Wealthsimple Trade and Questrade that allow for Canadians to purchase securities on the go.

 

Retail Investing and the Tax Implications

Retail investing can trigger earnings in several ways, all of which are taxable (unless eligibly positioned in a registered savings account that shelters the earnings from taxation, like an RRSP or TFSA). However, the amount of the earnings that is included in a retail investor’s taxable income depends on source of the earnings. With retail investing, earnings usually stem from one of three main sources: interest income, dividend income, or capital gains.

Interest income can be earned on investments that have a rate of return on the principal amounts invested. Typically, this is a low percentage of guaranteed earnings such as the interest return on a savings account principal, bond interest or interest earning from a Guaranteed Investment Certificate (GIC). Any interest income earned during a calendar year is to be included in full in the taxable income of the taxpayer.

Dividend income is earned when a corporation elects to pay out a portion of its profit during a specific time period to its shareholders. These earnings vary depending on the security and are to be included in full in the taxable income of the taxpayer during the taxation year in which they were accrued.

When a security appreciates in value and is sold by a taxpayer, any gains or profit earned by the taxpayer upon the sale of the security are determined to be “capital gains” (with some exceptions, e.g. where the taxpayer meets the definition of a “trader”). Half (50%) of the value of all capital gains earned by the taxpayer during a given taxation year are to be included in the taxpayer’s taxable income during a taxation year.

There is a legitimate means of avoiding taxable income inclusions with respect to earnings from these three sources for the individual: placing the financial instruments in a registered savings account such as a TFSA or RRSP (each with their own set of advantages for savings). However, this sheltering requires careful adhesion to the rules and eligibility criteria for investments to be  protected under the registered savings plan.

 

Retail Investing and the TFSA

A TFSA can be a great tool to avoid income tax inclusions on qualifying earnings of eligible securities. However, there are eligibility requirements for what sort of investment earnings garnered under a TFSA are sheltered from taxation.

A consideration to keep in mind is whether the TFSA account holder has already exceeded his or her TFSA contribution limit. The contribution limit is prescribed by the federal government and additional contribution room has been provided each year since 2009. Contributing in excess of the allowable contribution limit can result in serious penalties levied by the CRA against the taxpayer, so in almost all circumstances it would be unadvisable to exceed this limit.

Another key consideration is the nature of the security being held under the TFSA. Retail investors are able to keep mutual funds, registered stocks, bonds, ETFs and GICs among other types of investments in their TFSA. The eligible placement of these securities will protect the interest income, dividend income and capital gains earned from the securities from inclusion in the taxpayer’s taxable income for that taxation year, so long as several requirements are met.

Even still, earnings from these securities that are eligible for protection under the TFSA may be viewed by Canada Revenue Agency (the CRA) as taxable income depending on the nature of the activity undertaken by the TFSA holder. The key distinction lies with whether or not the earnings stem from “investment income” or “business income” in the eyes of the CRA, the latter of which is not protected from inclusions in taxable income.

 

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

 

**Disclaimer

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

by Jeff Kirshen

What is a Taxable Benefit – Part 2

It may come as a surprise to some Canadian taxpayers when they receive a Notice of Assessment with reported income reassessed to be significantly higher than what their reported take-home pay was. This may be because of the inclusion of a “taxable benefit” in the taxpayer’s income. The Canada Revenue Agency (CRA) is within their rights to tax purported benefits received by taxpayers from their employer by virtue of their employment. Many taxpayers are aware that work perks that provide a financial benefit to the employee are usually taxable by the CRA and do report some amount of taxable benefit on their return. For part 1 of our taxable benefit blog post where we discuss what a taxable benefit is, and what can be done if you disagree about receiving taxable benefits, please click here.

However, not all work-related benefits are taxable. So, how can you tell if a benefit you receive by virtue of your employment is taxable? The answer to this question is determined by evaluating whether the benefit falls within the scope of the meaning of “taxable benefit” under the Income Tax Act. When filing their taxes, Canadian taxpayers must examine (1) the “character” of the alleged benefit; (2) the nexus between the alleged benefit and the taxpayer’s employment; and (3) the valuation of the benefit to be included in the taxpayer’s income.

 

How do I Identify a Taxable Benefit?

Paragraph 6(1)(a) of the Income Tax Act creates a baseline from which employment benefits are determined to be taxable, taxable in part, or non-taxable. Paragraph 6(1)(a) specifically outlines benefits that may be subject to tax as:

“[T]he value of board, lodging and other benefits of any kind whatever received or enjoyed by the taxpayer, or by a person who does not deal at arm’s length with the taxpayer, in the year in respect of, in the course of, or by virtue of the taxpayer’s office of employment.”

Notably, this definition is sufficiently broad to theoretically capture any benefits earned in the course of employment. It becomes necessary to examine how this provision has been interpreted by the courts in order to properly characterize benefits received by virtue of a taxpayer’s employment as either taxable or non-taxable.

Benefits are not restricted to benefits that replace traditional remuneration for employment services. In R. v. Savage, a 1983 Supreme Court of Canada decision, the scope of taxable benefits was explained to include “material acquisition[s] which [confer] an economic benefit on the taxpayer.” Justice Dickson (as he was then) held that material facts determine whether or not the benefit conferred by virtue of employment is “taxable” or “non-taxable”.

The determinative factor is whether or not “something of value” was conveyed by the workplace to the employee. This has taken many forms in Canadian case law including life insurance benefits, health coverage, and even business trips where there is significant personal benefit (usually in the form of “enjoyment”) to the taxpayer.

 

How do I Determine if the Benefit was Sufficiently Connected to my Employment?

The words in paragraph 6(1)(a) of the Income Tax Act, “in respect of, in the course of, or by virtue of the taxpayer’s office of employment” are sufficiently broad to cover a wide range of direct and indirect benefits received from one’s workplace. In particular, the words “in respect of” have been determined by the Supreme Court of Canada in Nowegijick v The Queen, to be words of the “widest possible scope” and to “import such meanings as ‘in relation to,’ ‘with reference to’ or ‘in connection with’.”

The determinative factor is whether there was any discernable nexus between the benefit conferred to a taxpayer and the taxpayer’s working relationship with the party providing said benefit.

 

How Much of the Benefit do I Report as Part of my Taxable Income?

There may be some cases where less than the whole of the value of the taxable benefit received by the taxpayer should be included in the taxpayer’s taxable income. The Federal Court of Appeal traditionally held that the value to be included in taxable income should be limited to the cost to the employer. This method was abandoned by the Federal Court of Appeal in Spence v. Canada.

In Spence v. Canada, the court held that the fair market value of the benefit conferred to the taxpayer should be the metric to determine what percentage of the benefit should be included in the taxpayer’s income.

 

Are Any Employment Benefits Exempt from Taxation?

There are exceptions to the inclusion of employment benefits in taxable income, though they may be susceptible to assessment under other provisions of the Income Tax Act. For example, subparagraph 6(1)(a)(vi) of the Income Tax Act excludes education benefits received by those other than the taxpayer with an employment nexus to the benefit, though this amount may be included as a “scholarship” under paragraph 56(1)(n) of the Income Tax Act.

There are also some prescribed statutory exclusions to the rule in subsection 6(1) of the Income Tax Act. For example, subsection 6(6) excludes any benefits incurred that stem from a “special work site” (typically a remote location that the requires that the taxpayer leave his or her principal place of residence for 36 hours at a time).

 

If you have questions about taxable benefits, or you’ve been assessed with a benefit that you do not agree with, call us today!

 

**Disclaimer

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