News

by Jeff Kirshen

The CRA’s New Audit Powers

In the new Budget 2021, there are changes to Canada’s taxation regime regarding the expansion of the authority of Canada Revenue Agency (CRA) auditors during the audit process. In theory, increasing the scope and degree of the powers of auditors will enhance the capabilities of auditors to collect the information they require to make fully thought out decisions. However, in practice, these new additions to the auditor’s arsenal may create unintended consequences for taxpayers who do not understand the gravity of hastily answering seemingly innocuous questions.

Following our previous blog entry that covered “Budget 2021” in broad strokes, this article will examine in greater detail the implications of the new CRA audit powers and what it could mean for the Canadian taxpayer.

 

What are the Existing Powers of CRA Auditors

Participating in the CRA audit process can be a significant inconvenience to a Canadian taxpayer. An audit is essentially the process by which a CRA agent reviews the records of a taxpayer for a specified period and asks clarifying questions to the taxpayers to determine the legitimacy of said taxpayer’s CRA filings.

The audit process can take years to complete, and auditors have many tools to review and evaluate the reported filings of taxpayers. Typically, auditors will send “queries” or questionnaires that request answers to pointed questions regarding certain aspects of returns for which the CRA requires further clarification. A taxpayer’s answers to those questions can bear significant weight on the scope and outcome of the audit. For example, the answers to audit queries will often open the door for the auditor to request documentation related to the taxpayer’s answers. The answers and documentation provided by taxpayers during the course of an audit could result in significant changes to the amount of taxes payable by the taxpayer for the period covered by the audit.

The audit query process forms the basis of the auditor’s decision-making process. Presently, auditors only have the authority to request certain responses from taxpayers. However, the proposed changes to auditor powers under Budget 2021 could expand this authority to require certain responses from taxpayers instead.

 

What New Powers would Auditors have under Budget 2021?

As alluded to above, the newly proclaimed rules under Budget 2021 would allow for auditors to have greater authority with respect to the types of answers they receive from taxpayers and from whom they may require answers.

As of now, taxpayers are not bound to answer audit queries under a specific method or form, but this may be changing very soon. The new powers vested in auditors would allow for auditors to require taxpayers to answer CRA queries and to govern the form of the answer (for example, mandating that the taxpayer respond orally or in writing).

The consequence of these additional powers would be the potential for auditors to request for oral or written answers from specific agents of a taxpayer. In the corporate context, for example, an auditor may request oral answers from not only from the directing minds of the corporation, but also from employees.

Additionally, it is likely that the audit division will be receiving an increase to their bottom line, which could increase the number of audits conducted and/or impact the types of taxpayers subject to audit.

 

What are the Implications of these New Audit Powers?

The implications for Canadian taxpayers stemming from the new powers proposed by Budget 2021 will primarily affect the correspondence between auditors and taxpayers at critical stages of the audit process. This will profoundly change the level of preparedness necessary for taxpayers who are under audit, as any answer that has the potential to mischaracterize or elicit a misapprehension of nefarious conduct on the part of the taxpayer could result in a significant change to the taxpayer’s taxes payable for the audit period.

Additionally, forcing taxpayers to answer questions orally will create stress and a high level of frustration for taxpayers. Many people do not know the answers to these questions offhand, and normally respond in writing because it gives them time to gather their thoughts and provide a detailed response. CRA auditors will compel taxpayers to respond to their questions orally, and by doing so, they will try to get taxpayers to say or admit things that they may not understand which will have an extremely negative effect on their audit. The CRA will hold what was said against the taxpayer through the audit stage, the objection stage, and all the way through Tax Court. A few wrong words might mean the difference between settling an audit with no issues, and having to fight for years.

Many tax professionals are now recommending that if a taxpayer has the means to involve a third party tax professional (such as a tax lawyer or accountant) during the audit stage of the CRA appeals process to do so. Providing unreviewed answers to the CRA that fail to properly represent the taxpayer’s rights and interests could turn an unpleasant experience into a fiscal nightmare. For the most part, the potential danger of an audit to a taxpayer’s bottom line can be mitigated (if not remedied entirely) by the interposition of a tax professional.

 

If you would like to know more about how a lawyer can assist you through the audit process 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 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 Jason Rosen

Coinsquare and the CRA

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

Customers are defined as the following:

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

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

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

 

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

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

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

 

60 Day Order

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

 

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

 

**Disclaimer

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

 

Additional Resources

by Jeff Kirshen

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

The Taxation of Electric Vehicles

In recent years, Canada has experienced a significant increase in the adoption rate of ZEV (zero emission vehicle). According to Statistics Canada, electric and plug-in hybrid sales grew from two percent in 2018, to 2.7 percent in 2019, and 3.3 percent in 2020.  While a large reason for the increase in ZEV adoption can be credited to the improvements of battery technology and subsequently a better selection of electric vehicles, the Government of Canada has also implemented many incentives to help lower the costs of ZEVs for Canadian consumers. This post will briefly highlight the main potential ZEV tax incentives Canadians should be aware of.

 

What is a Zero Emission Vehicle?

Before diving into the various types and forms of incentives, taxpayers must first ensure that the vehicle they are looking to purchase qualifies as a ZEV. Transport Canada defines zero emission vehicles (ZEV) as vehicles that has the potential to produce zero tailpipe emissions. They can still have a conventional internal combustion engine but must also be able to operate without using it.

Examples of ZEV’s include the following:

• Battery-electric;
• Plug-in hybrid electric; and
• Hydrogen fuel-cells.

Among others, popular vehicles that qualifies as a ZEV include Tesla Model 3, Audi A3 e-Tron and Chevrolet Volt.

 

Purchase and Lease Incentives

The first incentive offered by the Government of Canada for consumers looking to buy or lease a ZEV is the point of sale incentive. Essentially, the Government of Canada will pay for $5,000 of the final price of an eligible battery-electric, hydrogen fuel cell and longer-range plug-in hybrid vehicles. Alternatively, shorter range plug-in hybrid electronic vehicles are eligible for $2,500. The purchase incentive will be applied at point-of-sale directly on the sale or lease agreement. As a result, the dealership will be responsible for completing the documentation required to receive the incentive.

It is important to note that in order to be eligible for the ZEV program, the vehicle must have either:

• Manufacturer’s Suggested Retail Price (MSRP) of less than $45,000 if vehicle has six seats or lower; or
• Manufacturer’s Suggested Retail Price (MSRP) of less than $55,000 if vehicle has seven seats or greater.

The reasoning for the cap in MSRP is so that the incentive helps overall ZEV adoption rather than just subsidize the purchase price for luxury vehicles.

 

Capital Cost Allowance and Zero Emission Vehicles

In addition to the point of sale incentive, the Government of Canada also introduced two new Capital Cost Allowance (CCA) classes specifically for businesses looking to adopt ZEVs. As mentioned earlier in the previous blog post about CCAs, capital expenditures are distinct from current expenses in that while both may be incurred for the purposes of earning income, only the latter is immediately deductible under the Income Tax Act.

Class 54 now captures ZEV excluding taxicabs and automobiles used for lease and rent. The CCA rate for this class is 30%. Meanwhile, class 55 captures ZEV for leasing/renting taxicabs and the CCA rate for this class is 40%.

Importantly, businesses can now write off 100% of the purchase price of eligible class 54 and class 55 vehicles, up to $55,000, in the year the car becomes available for use. However, the Government of Canada has also implemented the following phase out period:

• 100% after March 18, 2019 and before 2024;
• 75% after 2023 and before 2026;
• 55% after 2025 and before 2028; and
• 0% after 2028.

 

As the world strives for a greener future, electronic vehicles will become increasingly more common place. If your business is looking to purchase ZEV’s and capitalize on the current tax incentives, or you have general questions regarding the deductibility of business expenses, contact a professional at RKTL 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 Kirshen

The CRA Audit Process

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

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

 

CRA Audit Basics

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

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

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

 

How Long does the CRA have to Initiate Audit Proceedings?

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

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

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

 

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

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

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

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

 

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

 

**Disclaimer

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

by Jeff Kirshen

Canada Recovery Benefits

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

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

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

 

Canada Recovery Benefit

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

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

Applications for the CRB began on October 12, 2020.

 

Canada Recovery Caregiving Benefit 

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

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

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

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

 

Canada Recovery Sickness Benefit

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

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

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

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

 

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

 

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

 

**Disclaimer

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

by Jeff Kirshen

The Canada Emergency Wage Subsidy

Previously, we wrote about the initial emergency relief Canada Emergency Wage Subsidy (CEWS) implemented by the Government of Canada. As the changes implemented on November 19^th build on the already existing CEWS, it is important to have a good understanding of the initial program. Our earlier blog posts on the COVID-19 Benefit Programs and CEWS and can be found here and here.

Essentially, the CEWS operates by subsidizing a percentage of the employee wages to Canadian employers who have seen a drop in their revenue due to the pandemic. The primary goal of the CEWS is to act as a financial crutch for businesses to re-hire workers, prevent further job losses and ease companies back into normal operations. This fundamental characteristic has not changed, and it continues to be the purpose which drives the CEWS.

 

Changes to the Canada Emergency Wage Subsidy

The following are some notable changes to the CEWS as of November 19, 2020.

1. The CEWS has now been extended to June 30, 2021. Moreover, the deadline to apply for the CEWS has been extended to the later of:

• January 31, 2021; or
• 180 days after the end of the claim period.

2. The maximum subsidy rates for periods 8 to 10 will remain at 65% (40% base rate + 25% top – up rate) up to the maximum weekly benefit of $734. To be eligible for the maximum 65% subsidy rate, there must be a revenue drop of 70% or more. The following is the dates for the eligible periods:

• Period 8 – September 27, 2020 to October 24, 2020;
• Period 9 – October 25, 2020 to November 21, 2020; and
• Period 10 – November 22 to December 19, 2020.

3. Beginning in period 8, the calculation for the top-up rate is based on the higher revenue drop between the following:

• One – month revenue drop for the claim period month used to calculate the base rate; and
• The average revenue drop of the three months prior to claim period month.

Any employer who experiences a revenue drop less than 50% is not eligible for the addition of the top – up rate. Therefore, this change would only apply for employers who have experienced a revenue drop of more than 50%. Click here for the breakdown and calculation of the subsidy amount. The calculator has been updated to include the changes implemented on November 19^th, 2020.

4. The term “eligible employee” has now been narrowed down to include only those individuals who have been employed in Canada primarily throughout the relevant qualifying period. In other words, wages paid to employees that are not employed in Canada are no longer eligible to be subsidized.

 

The Canada Emergency Wage Subsidy – What to Watch For?

The changes to the CEWS should be welcomed by Canadian employers as they are ultimately made for their benefit. However, the added changes to the program also mean more calculations and moving parts to consider.

It is critical to remember that the CRA can and will audit taxpayers they suspect are not eligible for the CEWS. The CRA will likely start the audit process by issuing a questionnaire. These questionnaires would be sent to the taxpayer who applied for relief via one of these programs and notify them that the CRA is looking for further clarification with respect to their claim.

For the CEWS, the questionnaire would be concerned with how the employer calculated their payroll for the period for which the employer applied for relief and whether or not the employer had a valid business number and payroll account with the CRA.

Most importantly, the questionnaire would be concerned with how and on what basis the employer calculated their revenue declines. As shown above, the subsidy amount base rate and top up rate depends on the amount of revenue decline experienced by the employer. Therefore, it is imperative that the calculations are done properly.

 

What initially may seem like a lifeboat can turn out to be a financial and emotional setback if the CRA comes knocking. If you have questions about CEWS or your business is being audited, 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 Jason Rosen

How Real Estate Agents can Incorporate a Company

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

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

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

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

 

Ownership Requirements in a PREC

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

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

 

Tax Benefits for Real Estate Agents who Incorporate

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

 

Reporting Requirements for Real Estate Corporations

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

 

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

 

**Disclaimer

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