by Jeff KirshenExporting Vehicles and the Agency-Principal Relationship
The cost to purchase vehicles (especially luxury vehicles) is frequently much cheaper for Canadian consumers than consumers in other countries. Sometimes vehicles in Canada retail for between just 25%-50% of what the exact same make and model would cost in another jurisdiction. While there are various reasons that contribute to this price discrepancy (known in market terms as a “grey market”), this variance creates an opportunity for Canadian businesses to export these vehicles at a profit.
However, recently an increasing number of Canadian vehicle exporters have been subjected to audits by the Canada Revenue Agency (CRA) for one specific reason: the CRA has alleged the Canadian vehicle exporter to be an “agent” for a foreign “principal”. Where the CRA is successful in establishing agent/principal relationship between the vehicle exporter and its foreign buyers, the vehicle exporter can lose entitlement to Input Tax Credits (ITCs) claimed on the purchase of the exporter’s inventory.
The difference in a business’ characterization as a legitimate business or an agent/principal relationship is a legal distinction that depends on a factual analysis of key components of the relationship between a vehicle exporter and its buyers. Though nuanced, for a Canadian vehicle exporter this distinction can be the difference between operating a lucrative, profitable business and the loss of all (or substantially all) profits earned.
This blog entry will discuss how the CRA conducts factual analyses of a principal/agent relationships and what is necessary for Canadian vehicle exporters to establish to avoid this designation.
What is an Agent/Principal Relationship?
If the CRA alleges that your business amounts to an agent/principal relationship, they are essentially saying that your business (the “agent”) exists only to serve the interests of an off-shore party (the “principal”) and does not offer legitimate services of its own.
The effect of this designation is to disallow the exporter’s claims to ITCs, or credits issued by the Canadian government to offset the incurrence of HST on the vehicles purchased in Canada for international export. In many cases, this would greatly reduce (or negate) the profits earned by the exporter.
Hallmarks of an Agent/Principal Relationship
In order to evaluate whether an exporter is a legitimate business or merely an agent to a foreign principal, the CRA must conduct an analysis into the nature of the relationship between the exporter and its buyer(s). The analysis considers two main sets of criteria in evaluating the relationship:
- the “essential qualities” of a principal/agent relationship; and
- other “indicators” of a principal/agent relationship.
“Essential qualities” of a principal/agent relationship are: (i) whether the parties have consented to having the agent act on behalf of the principal; (ii) whether the agent has the authority to act on behalf of the principal in a legally binding manner; and (iii) whether the principal exerts some degree of control over the actions of the agent.
If these qualities are determined to be present in the relationship between an exporter and a foreign buyer, it is likely that the CRA would determine that a principal/agent relationship exists. This would have the effect of barring any claim to ITCs on the part of the exporter.
Other “indicators” of a principal/agent relationship include:
- if there is limited assumption of business risk on the part of the exporter;
- whether the accounting practices of the exporter suggest a principal/agent relationship;
- the payment history between the parties;
- if the exporter makes any alterations to the vehicles;
- whether the exporter uses the vehicles prior to export;
- the substance of the contractual payment relationship between the exporter and buyer; and
- the nature of the vehicles’ ownership.
The CRA uses these two sets of criteria conjunctively to issue a factual determination as to whether an exporter is in substance just the agent of a foreign principal.
What do I do if my Business gets Audited?
As outlined above, if your vehicle exporting business is selected for audit, the CRA will be conducting an in-depth factual analysis into all aspects of your business to issue its determination. As the CRA’s audit powers are only increasing, it is imperative that if your business is audited, you prepare a complete and circumspect defense and/or rebuttal to the CRA’s position.
Any single misstatement or missed deadline could be the difference between an entirely successful defence and the loss of all profits during the audit period. As principal/agent relationships are factual determinations based on nuanced legal arguments, it is often a prudent decision to retain a tax lawyer to defend yourself during the audit process or to carefully plan your business affairs prior to being audited to mitigate the risk of the CRA determining that your business is nothing more than a principal/agent relationship.
If you would like to know more about how a lawyer can assist you through the audit process or with planning your business in general, contact a tax professional at Rosen Kirshen Tax Law today! We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat 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:
- First, a GST/HST registrant (Company X) purports to import goods, usually operating within a supply chain; no GST/HST is paid;
- The goods do not exist, but Company X claims them to be intangible (film rights) or intangible (computer chips);
- Company X creates fictitious invoices and bank statements to give the appearance that transactions are occurring and that it is charging GST/HST;
- Company X disappears without remitting the GST/HST collected from the phoney transactions (the “Missing Trader”);
- The last company in the supply chain claims to export the goods to offshore companies at 0% GST/HST;
- 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
- 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 KirshenThe GST/HST Self-Assessment Rules
To self-assess for GST/HST means calculating how much GST/HST should be paid on a good or service where no actual sale has been completed, and to charge yourself that GST/HST. The GST/HST self assessment rules are extremely complex and can lead to a good amount of trouble with the CRA.
The GST/HST Self-Assessment Rules
Generally, the self-assessment rules apply to consumers and persons engaged in non-commercial activities who have not been billed for GST/HST by the supplier. Where a person is not a GST/HST registrant, self-assessment for GST/HST will apply in certain circumstances. Goods purchased in a non-HST province or territory and brought into an HST province will require the person to self-assess at the applicable rate for the provincial component of the HST.
Self-assessment is also required for non-registrants where goods are purchased in a province with a lower HST rate and then brought into a province with a higher HST rate. Commercial goods imported into an HST participating province will also require the non-registrant to self-assess. Where a non-resident that is also a non-registrant delivers goods to a person who is also a non-registrant in a participating HST province, the person receiving the goods will also be required to self-assess for HST.
The non-registrant of an HST province is also required to self-assess for HST where the non-registrant uses or consumes or is supplied by significantly (more than 10$%), services and intangible personal property (IPP) (i.e. intellectual property) from a non-HST province or an HST province with a lower HST rate than that person’s province. Although special HST rules apply for imported motor vehicles, generally persons importing motor vehicles from outside Canada are also required to self-assess for HST when those vehicles are brought into an HST province and provincial laws do not require the registration of the vehicle. Non-registrants who are required to self-assess on the provincial part of the HST on goods, services and IPP must declare by filing a Return for Self-assessment of the Provincial Part of the HST.
For HST registrants, self-assessment is required where the provincial component of the HST has not been billed by the supplier for property or services that are not for consumption or use or supply exclusively in the course of their commercial activities. The threshold for a supply to be considered exclusively used in the course of commercial activity is 90% or more. Registrants who self-assess should account for the tax on their GST return for the reporting period in which the tax was payable. Registrants using certain accounting methods are also required to self-assess.
The GST/HST Self-Assessment Rules and Real Estate
In the real estate context, a builder where the self-supply rules apply (who is deemed to have sold and repurchased the property), is required to calculate the GST/HST collected on the fair market value of the property. In the case of a multiple unit residential complex (MURC), the builder must account for tax on the fair market value of the entire building and not the individual unit that was deemed to be sold and repurchased.
Certain supplies do not require self-assessment. These include zero-rated goods, services or IPP. No GST or HST applies for zero-rated supplies. No HST is assessable if the supply is exempt from HST. Furthermore, self-assessment is not required when HST has already been paid at the same or higher rate in the province of acquisition. Prizes won abroad, personal and household effects of a deceased, transportation or telecommunication services, and property donated to a charity or a public institution are other circumstances where no self-assessment is required for non-registrants.
The GST/HST Self-Assessment Rules – Calculating the GST/HST
In declaring and paying the required HST, the registrant or non-registrant must determine the type of supply and place of supply of the goods or service. Once the type of supply and place of supply are determined, HST can be calculated. The CRA has provided an GST/HST calculator for determining the amount of tax applicable to sales in Canada.
The GST/HST Self-Assessment Rules – Type of Supply
As a value-added sales tax, HST applies to a supply of nearly all goods and services consumed in Canada. For provinces and territories that participate, HST is imposed on a taxable supply of goods and services. A supply is taxable if it is made in the course of commercial activity. However, a supply that is zero-rated (i.e. groceries) will not have HST. A supply of goods or services that are exempt will also not have HST. One difference between zero-rated and exempt supplies is that Input Tax Credits (ITCs) can be claimed for the former but not the later.
The GST/HST Self-Assessment Rules – Place of Supply
The HST rates depend on the place of supply. HST applies at the rate of 13% in Ontario, New Brunswick, and Newfoundland and Labrador, 15% in Nova Scotia, and 12% in British Columbia.
The GST/HST consequences surrounding any transaction depend on the unique circumstances of each case. It is recommended to speak with a qualified tax lawyer given the complexity of the HST rules and how they can affect a person’s income tax position. If you have questions regarding the Self-Assessment rules, 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 KirshenInput Tax Credits – What are they, and Am I Eligible?
Through the help of e-commerce assistance platforms such as Shopify, the barriers to entering and starting a small business have dramatically decreased in recent years. As a result, more and more Canadians are deciding to open up independent businesses. In order for a business to run its operations smoothly, business owners must ensure that they fulfil their sales tax obligations correctly to prevent intervention from the CRA. Below is a brief summary that provides some mechanics and considerations of the Canadian Sales Tax System.
Design of the GST/HST Sales Tax
The HST (for Ontario) Sales Tax is administered and legislated through the Excise Tax Act. Moreover, it is a multi-stage value added tax, imposed on a broad range of goods and services at each stage of the manufacturing and distribution process. Each recipient in the production chain recovers the HST that they paid for the expenses related to their “commercial activities” by claiming input tax credits (ITCs). This ensures that there is no double taxation and that only the final consumer holds the burden of paying the HST tax.
Typically, many businesses incur a lot of expenses related to their commercial activities. For example, a business focusing on producing and selling furniture may pay a lot of HST on the tools they bought to create that furniture. Therefore, it is important that businesses properly redeem their ITCs.
Other common purchases and expenses which may be eligible to claim ITCs include:
- Business start-up costs;
- Legal, accounting, and other professional fees;
- Maintenance and repairs; and
- Business-use-of home expenses.
Requirements / Eligibility for Input Tax Credits
First, the business/taxpayer must be a GST/HST registrant. However, for most small and medium-sized businesses in Canada, registration for GST/HST purposes is required.
Specifically, if you provide taxable supplies and not a small supplier, then you must be a GST/HST registrant. The CRA generally considers a business to no longer be a small supplier if total revenues from taxable supplies exceed over $30,000 in a single calendar quarter or over 4 consecutive calendar quarters.
Second, registrants are only allowed to claim ITCs for expenses related to “commercial activities.” The CRA states that commercial activities must be a business or adventure or concern in the nature of trade that has a reasonable expectation of profit, and is not the making of exempt supplies. Alternatively, inputs to activities that are neither part of the supply making process, not related to it, or for personal use are not eligible for ITCs.
The exception to the rule above is for the supply of real property, other than an exempt supply. In this case, any supply of real property, whether or not there is a reasonable expectation of profit is included in the definition of commercial activity. Finally, to claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of the business.
Potential Issues to Look Out For
As previously mentioned, the responsibility of charging, collecting and remitting HST falls on each business or chain of the manufacturing process. Similarly, claiming appropriate ITCs for expenses incurred by the business fall on the burden of the business. It is the responsibility of the registrant to keep records and documents to validate any claims under a CRA audit.
Issues regarding the “nature of the business” and “relation to commercial activity” have particularly been contentious and challenging for taxpayers to understand. If you need assistance in learning more about ITCs or are already in dispute with the CRA, contact us today. Professionals at Rosen Kirshen Tax Law have a proven track record of helping taxpayers successfully prove the eligibility of their ITCs.
**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 KirshenGST/HST Rebates when Buying Canadian Property
Houses are expensive, so it is important to take advantage of any program that allows you to recover some of your costs. The New Residential Rental Property Rebate (“NRRP”) and the New Housing Rebate (“NHR”) allow you to do this. However, the criteria can be confusing, and people often apply for the wrong one, or their circumstances change and the application that they originally applied for is no longer appropriate. That is why it is important to know the differences.
The New Residential Rental Property Rebate
The NRRP allows you to recover some of your costs when you purchase real estate that will be used as residential rental property.
The New Home Housing Rebate
The NHR allows you to recover some of your costs when you construct or substantially renovate a home.
What are the Criteria for Applying?
The criteria for an NHR are:
- The home must be used as a principal residence; and
- The construction must be for a newly built home or for substantial renovations or major additions
- Substantial renovation must include gutting the entire home with at least 90% of the dry wall removed; and
- A major addition must at least double the size of the home.
The criteria for an NRRP are:
- First occupants of the new residential rental property must be the tenants;
- First occupants cannot include the landlord; and
- The fair market value of the qualifying residential unit at the time the tax was payable must be less than $450,000.
- If you are a resident of Ontario and the fair market value exceeds $450,000 you may be eligible to claim the provincial NRRP.
If you receive the NRRP and then sell the residence within 1 year, you may have to repay the entire rebate unless you sell it to a person who occupies it as their principal residence.
How to Apply?
You can apply for an NHR by:
- Within 2 years are the property closes, complete either Form GST191 for owner-built houses or Form GST190 for houses purchased from a builder; and
- Provide the appropriate supporting documentation.
You can apply for an NRRP by:
- Within 2 years after the property closes or sells, complete Form GST524; and
- Provide the appropriate supporting documentation.
Change in Circumstances
If you purchase your home with the intention of making it your primary residence, often the builder will apply for the NHR on your behalf, thus lowering your purchase price. However, if your circumstances change, and once the home is built you are no longer the first occupant, you no longer meet the criteria of the NHR. However, if you rent out your new home, you could very likely qualify for the NRRP instead.
When this occurs, it is very possible the CRA audits you to determine if you qualify for the rebate. We see quite a lot of this and can assist with your audit!
Other Issues to Note
The principle residence exemption can also result in tax implications upon the purchase or sale of property.
Property assignment can result in GST/HST as well as income tax implications. Assignment is when you purchase a pre-construction home or property, and sell the property before it is built and before you gain title to it. In other words, you are assigning your purchased rights to a home to another person.
If you have any questions about the tax consequences that relate to purchasing or selling property, contact our firm for a free consultation. We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a Defacto Director’s Liability Assessment?
A Defacto Director is someone who acts as a director, but is not a director on paper.
Directors of a corporation can be found jointly and severally liable for certain tax debts of a corporation under section 227.1 of the Income Tax Act and 323 of the Excise Tax Act. Directors’ liability arises in one of two ways, either in fact or in law. For more background material on this distinction, and on director’s liability, feel free to consult our blog post that discusses the topic at greater length.
It is possible to become a de facto director by accident, without knowing or recognizing this designation at the time of dealing with the corporation. Officers, employees, and those whom are not legally appointed or elected but who perform the functions that directors would perform, may be liable. It is imperative that individuals are vigilant and careful in their dealings with struggling corporations, as well as, those that are known to be failing to remit GST/HST or their payroll source deductions.
Defending Against a CRA Director’s Liability Assessment
All directors whether deemed such or those validly elected to the position can use procedural defences to protect against the assessment of liability. Furthermore, de facto directors can use the due diligence defence to prove that they acted responsibly and with due diligence, allowing the director to avoid liability. As well, there is a statutory limitation under section 227.1(3) of the Income Tax Act. This limitation on assessment protects any individual from being assessed on the basis of directors’ liability if they ceased to be a “de facto director” more than two years prior to assessment. The only other way to avoid being deeming such is to prove via the common law that one’s actions should not deem them a director.
Defacto Director Tax Court Cases
There is a test established by jurisprudence to determine whether one’s actions arise to the level of de facto director. As well, the Tax Court of Canada found for a Taxpayer not being de facto director on the grounds of documentary evidence alone.
In Mosier v. The Queen, 2002 GTC 28, a case where the taxpayer was deemed not to be a de facto director, the Tax Court of Canada Court heavily weighed documentary evidence. Specifically, the court relied on evidence which indicated that the powers and duties of the taxpayer were very extensive. The Court ultimately held that the taxpayer was not a de facto director as only the power and responsibility of running the day-to-day operation of the corporation were conferred to the taxpayer, but the power to participate in pure directorial acts was not.
As well, there is not a single factor which determines whether someone is a de facto director. Instead, the courts consider, as in Soper v. The Queen, a number of different non-exhaustive indicators to determine whether an individual is a de facto director:
- Whether the individual has been signing documents as a director;
- Whether the individual has been signing tax returns;
- Whether the individual has been attending director’s meetings;
- Whether the individual introduces themselves to third parties as a director;
- Whether the individual signs directors’ resolutions; and
- Whether the individual plays a significant role in supervising the management of the company or otherwise controlling the company.
If you have received a pre assessment letter threatening de facto director’s liability, or an assessment for Director’s Liability, we strongly recommend giving us a call. If found to be a director, you may be held liable for enormous amounts of money due to unpaid GST/HST or source deductions even when it was not your fault. The process can be quite complicated, with many moving parts that are time sensitive, so it is best to have legal counsel helping you navigate through it. Don’t delay, contact us for a free consultation 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 the articles. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenPossible Taxes on the Sale of a Principal Residence
When you sell your home, you may realize a capital gain. A capital gain is a profit earned on the sale of property. However, there is an exception to this rule if your home is a principal residence which would allow you to pay no taxes on the sale.
What is the Principal Residence Exemption
The principal residence exemption allows homeowners to avoid paying taxes on the capital gains realized from the sale of their primary residence. If a property qualifies as a taxpayer’s principal residence, he or she can use the principal residence exemption to reduce or eliminate any capital gain otherwise occurring, for income tax purposes, on the disposition (or deemed disposition) of the property.
The Principal Residence Exemption and the 2016 Changes
Prior to 2016, for every year you have owned your property, it was your sole residence, you did not have to report any income tax on the profits from the sale of your home, or to report the sale of a principal residence at all. However, in an effort to ensure only eligible homeowners benefit from the exemption, the federal government now requires that taxpayers report information such as the proceeds of sale, and details of the transaction to claim the principal residence exemption. See our other article regarding designating your property here: How do I designate a Property as my Principal Residence – T2091 Form
For 2016 and onwards, this information is provided by the taxpayer on Schedule 3 of their income tax return, and by filing Form T2091, Designation of a Property as a Principal Residence by an Individual, for the year the property is sold. It is important to note that only one home is eligible for a principal tax exemption for any given tax year.
If you have sold your home and not reported it in your income tax return, it may be appropriate to submit an application through the Voluntary Disclosures Program to avoid significant penalties.
The Principal Residence Exemption and Possible Taxes
If you sell your principal residence, normally the profits are tax free. However, the Canada Revenue Agency (CRA) may claim that you are in the business of buying and selling homes. If this is the case, then your profit could actually be termed business income. You would have to include 100% of the profit as income, and you don’t even get to claim it as a capital gain which would have cut the taxes in half.
Additionally, if you are found to be in the business of buying and selling homes, the CRA may come in and say you should have charged GST/HST on the sale of the property. If this occurs, all of a sudden 13% (in Ontario) of the total purchase price actually counts as GST/HST. Which means you might owe hundreds of thousands of dollars in GST/HST which may remove your entire profit margin.
If either of the above happen to you, it is likely that the CRA will charge you their worst possible penalty known as gross negligence. This adds 50% of the amount owing as a penalty. So if you now owe $100,000, you will actually owe $150,000 before they even start calculating any interest charges.
If you have recently sold your principal residence, and you are worried about the above, call us today! Or if you are being audited for the sale of your principal residence and you need professional assistance, we are here to help! 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 KirshenAssigning Property and the GST/HST Implications
Assigning a property is selling the property before you even own it. So you are just selling the contract which contains the right to close on the property. You purchased a property pre-construction condominium with a builder, signed the contract, gave your deposit cheques, and then sold the property before gaining title. For the assignor (the person selling the property), there can be serious tax implications.
Assigning a Property and the CRA
Upon detecting an assignment, the Canada Revenue Agency (CRA) will decide whether or not you should be considered a “builder” of the property. The test the CRA uses is subjective: they try to determine what your intention were when you purchased the property and why you’re selling. They ask questions like:
- Did the seller ever intend to live there; and
- Was this transaction intended to generate profit?
More often than not, in our experience the CRA considers assignors builders if they never took occupancy of the property. And if you are found to be a builder by the CRA, they hold you liable for HST on the sale.
Assigning a Property and the GST/HST Implications
If the CRA considers you to be a builder, they expect you to charge and remit sales tax (GST/HST) on the full sales price. The problem becomes almost no one does this on the original sale. Only once CRA has come and audited do they determine you to be a builder, and rule that GST/HST should have been charged.
Because this normally happens after the fact, most “builders” are unable to collect the GST/HST from the purchaser, and are now liable for the amount owing plus penalties and interest. This is typically where most people will file notices of objection, arguing that they are not “builders” and should not be responsible for GST/HST.
Additionally, once the CRA comes and audits you for one sale, they will review your entire history of buying and selling properties to see if they can determine that you are selling property as a business, and are therefore running a property selling business. They would further audit you to see if any use of the principal residence exemption was correct, if you are entitled to capital gains, or if you should have been claiming business income. Again, the issue with CRA determining that you should be claiming business income is that there are GST/HST implications as above.
If you have recently assigned a property, or have been assessed for the assignment or sale of a home/property in the course of a business, call us today! We can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenTax Requirements for the Gig Economy in Canada
The Canada Revenue Agency (the “CRA”) requires all taxpayers to file income tax returns every year. Since Uber, and other similar companies, have arrived on the scene there have been questions about the tax implications of working for a company in the gig economy like Uber.
Status of Uber Drivers
The CRA considers Uber drivers to be self-employed, or independent contractors. As far as the ride-sharing companies are concerned, you are the owner of a separate business that it uses to provide driving services.
So, drivers follow similar rules to all other self-employed individuals. Importantly, this means that Uber drivers do not receive T4 slips from Uber. Rather, Uber drivers are responsible for paying their income tax by the regular tax filing deadline. This is the case because Uber does not deduct taxes from the income made by Uber drivers throughout the taxation year.
Tax Structure of Working in the Gig Economy
Beginning July 1, 2017, for Uber drivers, federal and/or provincial taxes are added to fares when clients book a ride. Thus, drivers must register for a GST/HST account within 30 days of their first trip. For drivers in Quebec, you must also have a GST number before you can begin providing services to clients.
The “Small Supplier” exception was forced to change upon the creation of Uber jobs. Before July 1, 2017, only drivers who made $30,000 per year or more had to charge and remit GST/HST. That said, because of Uber, Lyft, and other similar companies, the CRA implemented new rules. The CRA was forced to amend/change the GST/HST definition of “taxi business” in the Excise Tax Act.
So, Uber drivers must register for a GST/HST account, regardless of income. Uber drivers must also charge and collect GST/HST for all fares, report these amounts on their income tax return, and remit the GST/HST charged to the CRA.
In Quebec, Uber collects and remits QST and GST for drivers. In the rest of Canada, Uber collects GST/HST automatically from clients and transfers it to the drivers weekly. Thus, drivers must remit these amounts to the CRA on their own. Uber provides its drivers with their tax information in their “Uber profile”. Tax summaries are available in the app’s profile which provides information on total earnings and other tax information.
Deducting Business Expenses in the Gig Economy
Since drivers are independent business owners, most, if not all, money spent on deriving income from the ride-sharing services can be considered tax deductible expenses. The significant expense for drivers is the actual use of the vehicle. Uber drivers can deduct the actual expenses of operating a vehicle for business including gas, oil, insurance, maintenance, repairs, depreciation of the car or lease payments.
If your vehicle is used for ride-sharing purposes and personal transportation, then you should be careful only deduct the portion of your expenses that apply to business use. More importantly, whatever deduction you claim, it is imperative that you keep thorough records to support your claims. The CRA is always liable to scrutinize taxpayer return filings, so you should keep receipts, mileage logbooks, or any other documentation that support the expenses you are claiming as deductions.
If you have any questions about tax requirements for Uber drivers or the gig economy in Canada or any of its Provinces, please give us a call or set up a consultation online!
**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 KirshenWhat is HST in Canada?
The harmonized sales tax (“HST”) is a consumption tax in Canada and it combines the goods and services tax (“GST”) and provincial sales tax (“PST”) . It is most often used in provinces where both the federal goods and services tax and the regional provincial sales tax have been combined into a single value added sales tax. HST resulted from attempts by the federal government to pressure provinces to abandon their individual provincial sales tax systems in favour of a blended tax that they argued would improve the competitiveness of Canadian businesses across the country.
Due to opposition from some provinces, the HST has not been universally implemented, and some provinces still charge and administer their own provincial taxes in addition to GST.
Where does HST apply in Canada?
The HST is in effect in five of the 10 Canadian provinces. These include New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island. HST is collected by the Canada Revenue Agency (“CRA”). Once collected, the CRA remits the appropriate amounts to the participating provinces.
HST may differ across the five provinces mentioned above, as each province establishes its own PST rates within the HST calculation. If the province does not enact HST collection, the CRA will only collect 5% GST.
Businesses and the HST
Businesses that operate in any of the provinces that charge HST have the responsibility to charge, collect and remit HST as required by the tax provisions. Similar to exceptions for GST, there is a “Small Supplier” exception for businesses that charge HST in the appropriate provinces. If a small business makes less than $30,000.00 annually, they are not required to register for GST/HST. That said, businesses should consider registering for GST/HST regardless because it allows them to claim Input Tax Credits on the goods and services they consume during the course of conducting their business. Small business owners that are eligible for exception should weight the pros and cons of registering for GST/HST before deciding not to.
If businesses are selling goods and services out-of-province or out-of-country, they need to ensure they are charging the appropriate tax. Due to the different tax regimes amongst the provinces, this can prove to be somewhat complicated at times. The main rule is that businesses must charge either HST or GST/PST according to the destinations provincial or territorial taxation rates. For example, if the business resides in Nova Scotia, but they are shipping the goods to Ontario, they would charge an HST rate of 13% instead of 15%. If the business resides in Saskatchewan, but they are shipping goods to Alberta, then they would charge 5% GST and no PST.
Important to note, HST/GST/PST does not apply to sales of goods and services to jurisdictions outside of Canada. Interestingly, this rule applies to Canadian businesses that have their destination address outside of Canada.
Canada HST Rates
For a full breakdown of GST/HST rates in Canada and its provinces, please click here.
Finally, as a side note, the federal, and some provincial, governments issued a GST/HST credit to help compensate low-income individuals who are negatively affected by the GST/HST. Eligibility for the GST/HST credit is determined from the previous year’s tax return. If a taxpayer is eligible, they receive a tax-free quarterly payment intended to offset all or part of the GST/HST paid in the previous taxation year.
If you have any questions about HST in Canada or any of its Provinces, or if you have questions regarding setting up your business’ GST/HST remittance structure, please give us a call or set up a consultation online!
**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.