Commentary

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.

by Jeff Kirshen

COVID-19 and Taxpayer Relief

In certain circumstances, the Minister of National Revenue may grant relief to a taxpayer where they cannot meet their tax obligations. Relief is discretionary. The Minister has broad discretion to provide relief. For instance, The Minister can provide for the waiver or cancellation of all or part of the penalties and interest payable by the taxpayer. The Minister can also allow an extension of the filing-due date for making certain elections or to amend or grant permission to amend or revoke certain elections. Furthermore, the Minister can authorize a reassessment resulting in a refund of tax or a refund of tax alone to an individual (not applicable for trusts) or certain estates even if an income tax return is filed beyond three years.

A taxpayer must apply for relief under the provisions of the Income Tax Act (the “ITA”) or the Excise Tax Act ( the “ETA”). Relief will be determined by a delegated Canada Revenue Agency (“CRA”) official on a case-by-case basis and depends on the relevant facts and circumstances of the taxpayer’s situation.

 

CRA Penalties and Interest

The COVID-19 administrative changes extended the filing of returns, forms, elections, and designations to June 1, 2020. No interest or penalties were applied during the extension period. However, interests and penalties were charged if the new deadlines were not met. Taxpayers who filed past the extended deadline would need to apply to the Minister for a waiver of interest and or penalties.

Subsection 220(3.1) of the ITA and section 281.1 of the ETA allow the Minister, through the discretion of the CRA, to cancel or waive all or a portion of the penalties and interest payable by a taxpayer.

 

CRA Taxpayer Relief – Individuals and Corporations

The ITA and ETA recognize several grounds for relief for individuals. These circumstances include extraordinary factors outside the taxpayer’s control, financial hardship, or actions of the CRA. Applicable extraordinary factors include natural or man-made disasters, disturbances or disruptions in service, serious illness or accident, and or serious mental distress.

Penalties or interest in respect to a failure to file a corporate tax return or to make payment may be waived if the reason was beyond the corporations’ control. These circumstances outside the taxpayer’s control include, floods or fires, civil disturbances, postal strikes, serious illness or accident, the corporation received the incorrect information from the CRA, and natural or human-made disasters. The CRA will also consider relief when a business is experiencing extreme financial difficultly. Where enforcement of penalties would imperil the continuity of operations, result in job loss for employees and significantly impact the community as a whole, the CRA may waive or cancel penalties and or interest even without extraordinary circumstances.

 

CRA Penalties and Interest

Any penalty calculated on an annual rate is compounded daily. For instance, a nominal annual rate of 3% would be an effective annual rate of 3.045326%. Penalties paid under both the GST/HST legislation and the ITA are non-deductible. The Minister can waive any penalty incurred under the ITA, with the exception of penalties that are enacted as taxes such as Part III tax on excessive capital dividends.

The CRA charges compound daily interest on any late payments. The total owing increases each day and the interest rate applies to the increased balance. The rate changes quarterly as prescribed by the Interest Rates Regulations in both the ITA and ETA.

Due to delays surrounding the measures relating to COVID-19, it is expected that processing times for taxpayer relief requests will be extended. In usual times, it takes approximately 6 to 8 months for a reviewing agent to be assigned to the file and to contact the taxpayer for further details in respect of their application. Once an officer is assigned for review, it takes an approximate 1-3 months for a decision to be rendered.

Even when a taxpayer makes a request for relief, the CRA will continue to charge compound daily interest. Given the current circumstances, processing requests may take over a year. Should relief be granted and the penalties and interests cancelled, the CRA will refund the interest on the penalty and interest amounts.

 

CRA Taxpayer Relief – 10 Year Limitation Period

The taxpayer has 10 years from the end of a calendar year in which the tax year ended to request relief from penalties. The 10-year limitation also applies for requests to the Minister to accept a late, amended or revoked income tax election, or to request that the Minister issue a refund or make an adjustment beyond the normal three-year assessment period.

For a request to waive or cancel interest under subsection 220(3.1) of the ITA,  the Minister may grant relief from accrued interest for the 10 years before the year the request is made for any tax year in which the tax liability arose. This legislative amendment, applicable for requests made on or after June 2, 2011, followed the Federal Court of Appeal decision in Bozzer v Cananda, 2011 FCA 186.

Taxpayer relief requests are processed on a priority basis. Processing delays exacerbated by the measures surrounding COVID-19 may mean greater interest and penalties on any unpaid balances that continue to be compounded daily. However, if relief is granted, a refund of the interest will be issued to the taxpayer.

 

If you are feeling overwhelmed by the amount of interest and penalties charged to you by the Canada Revenue Agency, we can help! Call us today to learn how we can get them removed!

 

**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

Participating Debt Interest

Participating debt interest and regular interest are treated differently by the Income Tax Act here in Canada. Whether interest is considered to be participating or regular depends on whether certain factors are present in the the repayment of such debt. For example, if money was loaned to someone so that they could go out and buy a rental property, participating debt interest would allow the creditor to make the amount of the interest payments dependent on something, say the profit from the rental property or the cash flow moving through it. It may also be tied to revenue, prices, or a variety of other factors.

Regular interest is when there is a set amount payable to a creditor based on how much was loaned.

 

Participating Debt Interest and International Taxation

In today’s fast-paced and competitive market economy, many people look past the Canadian border to produce and generate personal and corporate income. This is especially true for both Canadian and U.S residents alike. However, taxpayers often question what tax implications are imposed on income generated outside of the country. For example, many Canadian residents choose to conduct and run their business in the U.S. As such, cross-border business or investment activities could potentially have both U.S and Canadian tax implications.

Normally, when interest payments are made to a resident of another Country, taxes are withheld. Each tax treaty Canada has with other countries must be examined to determine whether withholding is necessary. The type of interest being paid matters for withholding purposes as well.

 

Participating Debt Interest and the Income Tax Act

Section 212(3) of the Income Tax Act defines Participating Debt Interest as interest (other than certain amounts which are “fully exempt interest”) that is “paid or payable on an obligation, other than a prescribed obligation, all or any portion of which interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholder of any class of shares of the capital stock of a corporation. Over the course of the years, the Income Tax Act has undergone many amendments and as a result, withholding from most interest payments to non-residents has been eliminated. However, it is important to note that a taxpayer may subject to withholding tax on interest payments that fall under “participating debt-interest”.

 

Participating Debt Interest and Withholding Taxes

As of today, if you are earning participating debt interest from another country, that other country will very likely have to withhold taxes before sending you any funds. Under the current rules in Canada, certain payments including standby and guarantee fees are treated for purposes of the Canadian non-resident withholding tax provisions as interest on the related debt that would be, or is, issued. Further, pursuant to the new rules, these payments will also be exempt from Canadian non-resident withholding tax, provided that the recipient deals at arm’s length with the borrower and, where applicable, the amounts are not participating debt interest.

 

If you are a Canadian tax resident, and you are earning participating debt interest or are thinking about lending funds overseas, call us today! We can assist with putting together a plan to minimize taxation and/or withholding, and we ensure that you fully understand your tax withholding obligations.

 

**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.