by Jeff KirshenThe Canada Child Benefit and Shared Custody Arrangements
The Canada Child Benefit (or CCB) is a tax-free monthly benefit payment provided to qualifying Canadian families to help with the cost of raising their dependent children.
The CCB is provided to the person who is primarily responsible for raising and caring for the child. Where two individuals who are spouses or common-law partners reside together, it is usually the female parent who is presumed by the CRA to be the person responsible for raising the child and so should be the one applying for CCB. However, in cases where the other partner may be the primary caregiver of the children in the home, they can claim the CCB if they provide a letter from the female parent attesting to the situation.
For same-sex parents, the CRA outlines that only one parent should apply for all the children in the home.
Where the parents of the children are separated, the CRA will consider the custody sharing arrangement to determine which parent is entitled to the CCB.
Primary Custody Arrangement
If a child resides with one parent majority of the time, that is more than 60% of the time, and that parent is responsible for caring for and raising the child, then he or she will be entitled to the full amount of the CCB based on their household income.
Shared Custody Arrangements
Section 122.6 of the Income Tax Act outlines that shared custody applies to scenarios where the child resides with both parents on a more or less equal basis. A shared custody parent must meet the following requirements:
- The individual must be one of the two parents of the qualified dependant;
- The two parents must not be cohabiting spouses or common law partners;
- The individual and the other parents must reside with the qualified dependent on an equal or near equal basis; and
- The individual and the other parent must primarily fulfil the responsibility for the care and upbringing of the qualified dependant when residing with them.
If all the above criteria are met, the CRA will provide each parent with 50% of what they would have received if they had full custody of the child, based on respective adjusted family net incomes.
Caselaw
However, it is not always clear what the term “equal or near equal basis” means. The Federal Court of Appeal (FCA) has recently provided guidance on the term and delineated what constitutes an equal or near equal basis.
In Lavrineko v. Canada, the FCA determined that the equal or near equal refers to time in a quantitative sense only, and not to any qualitative factors, as opposed to those listed in Income Tax Regulation 6302. The court held that the words “near equal” do not change the overall meaning of the word “equal”, and that it only serves to relieve parents from having to keep very detailed records of every hour that the parent resides with the child. Nonetheless, the time spent with the child, based on a percentage of time spent, should be able to be rounded to 50% and that any percentage that cannot, does not qualify as near equal. Specifically, any percentage between 45% and 49% should be rounded upwards to 50%, while any percentage between 41% and 44% should be rounded downwards to 40%.
The Court in Morrissey v. Canada confirmed the Judge’s analysis in Lavrineko and held that based on the tax court’s initial finding of fact that the parents resided with their child somewhere between a 57.14%/42.86% and 59.38%/40.62% of time, that the percentages could be properly rounded down to 40% of the time. This resulted in a determination that the parents were not in fact “shared custody” parents as defined by section 122.6 of the Income Tax Act.
Contrastingly, in Jersak v. The Queen, the court held that a custody percentage ratio that ranged from 53-47% to 54-46% in the specified years was determined to be a ratio that met the definition of shared custody parents under the Income Tax Act. Both parents were entitled to 50% of the CCB, adjusted based on their respective household incomes.
If you are having trouble with determining whether you are considered a shared custody parent under the Income Tax Act or undergoing other difficulties with claiming CCB – Contact us to schedule an appointment with our team of experts. We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions, you should consult a lawyer.
by Jeff KirshenBusiness Emergency Subsidies (CEWS, CERS, and CHRP)
The Federal Government announced changes to the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”) programs and established the new Canada Recovery Hiring Program (“CRHP”).
Canada Emergency Wage Subsidy (“CEWS”)
The Covid-19 pandemic took the world by storm and placed many businesses, especially small ones, in a precarious position of both losing revenue and potential long-term closures. To alleviate some of the pressure on businesses, the government introduced the CEWS to help businesses by covering part of their employee’s wages due to drops in business revenue. The subsidy was designed to help employers re-hire workers, prevent further job loss, and ease their business back into normal operations.
As of July 2021, changes have been introduced to the CEWS. These changes include:
- Extending the eligibility period for the Canada Emergency Wage Subsidy until October 23, 2021, and increasing the rate of support employers and organizations can receive during the period between August 29 and September 25, 2021.
- The rate of CEWS will now remain the same for claim period 20 as for period 19, declining in period 21.
- Eligible employers that were not operating on March 1, 2019, may now choose to use the alternative approach to calculate their revenue drop for claim periods 14 to 17.
The next deadline to apply for CEWS is October 7, 2021.
Canada Emergency Rent Subsidy (“CERS”)
CERS provides support directly to qualifying commercial Tenants and Property owners who are adversely impacted by the Covid-19 pandemic. The subsidy will cover part of qualifying entity’s commercial rent or property expenses, starting on September 27, 2020, until October 23, 2021.
The amount you can claim of your expenses (your rent subsidy rate) is based on the revenue drop you experienced between the claim period you are applying for and a prior reference period. You have options for choosing which prior reference period you will use.
The rate of the subsidy will be calculated as set out in the table below.
| Calculate your rent subsidy rate for periods 1 to 10 | |
| Revenue Decline (%) | Base Subsidy rate |
| 70% or more | 65% subsidy rate |
| 50 to 69.99% | (Your revenue drop – 50%) x 1.25 + 40% |
| Less than 50% | 0.8 x your revenue drop |
Eligible expenses to be subsidized under the program include:
- Gross rent;
- Percentage rent;
- Minimum rent and other amounts required to be paid under a new lease to the Landlord or a third party such as operating expenses; and
- Property taxes.
Eligible entities include individuals, taxable corporations, trusts, non-profit organizations, registered charities, and partnerships that are up to 50% owed by non-eligible members.
Eligible entitles must have a payroll account as of March 15, 2020, or have a CRA business number as of September 27, 2020, and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim. The deadline to apply is October 7, 2021.
Similarly, the government is extending the eligibility period for the CERS until October 23, 2021, and increasing the rate of support employers and organizations can receive during the period between August 29 and September 25, 2021.
Canada Recovery Hiring Program (“CRHP”)
This new program is designed to help businesses grow and recover through the hiring of more employees by providing a subsidy. The subsidy will help offset a portion of reopening costs for businesses caused by increased employee wages and hours.
To qualify for the CRHP, there needs to be a revenue decline of more than 0 percent in period 17 and more than 10 percent between periods 18 to 22. Most of the eligibility criteria for the CRHP and CEWS are similar. The maximum eligible remuneration per employee that qualifies for the CRHP is $1,129 per week. The next deadline to apply for CRHP is December 30, 2021.
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 the articles. If you have specific legal questions you should consult a lawyer.
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by Jeff KirshenBill C-208 – New Rules for Intergenerational Wealth Transfers
On June 29, 2021, Bill C-208 received Royal Assent. It represents a significant change to the Income Tax Act (“ITA”) for intergenerational wealth transfers. The private member’s bill amended sections 84.1 and 55 of the ITA, providing more flexibility to intergenerational transfers of small businesses, family farms or fishing corporations. For business owners, Bill C-208 may allow access to new tax-efficient strategies when the time comes to pass down the torch to the next generation.
Basics of Wealth Transfer
There are two main ways for business owners to pay themselves out: by selling equity (capital gains) or issuing dividends. In Canada, taxpayers may obtain more favourable tax treatment on capital gains than on dividends. They may also be eligible to claim the lifetime capital gains exemption to reduce some or all the tax payable on the sale of qualified businesses.
Section 84.1
Section 84.1 of the ITA is a specific anti-avoidance rule intended to prevent surplus stripping, a tax strategy where business owners pull out their earnings as capital gains rather than dividends. The law deems certain transactions involving related parties (a non-arm’s length transaction) as a dividend instead of a capital gain.
One popular method of passing on a business is through the use of a holding corporation. For example, parents sell their shares of a qualified small business corporation to a holding corporation owned by a child or a grandchild. Under the old rules, the transaction would be classified as a non-arm’s length transaction and would be captured by the s.84.1 anti-avoidance provision. The parents would have to pay dividends tax and lose the advantages associated with capital gains. In contrast, had the parents sold to a holding company owned by third parties, the sale would’ve been classified as an arm’s length (unrelated) transaction and deemed a capital gain.
The amendments in Bill C-208 intended to address the application of s. 84.1 on transactions between parents and their children or grandchildren. It effectively provides an exemption to section 84.1 of the ITA where three criteria are met:
- The business is a qualified small business corporation or a family farm or fishing corporation within the meaning of s. 110.6(1) of the ITA;
- The purchaser corporation is controlled by one or more children or grandchildren of the taxpayer who are 19 years of age or older; and
- The purchaser corporation does not dispose of the subject shares within 60 months of the transaction (other than for reasons due to death).
If the transaction meets the three criteria, the transaction would be assessed as a capital gain rather than a dividend and allow the parents to tap into significant tax savings.
Bill C-208 also include additional rules such as limiting a business owner’s access to the lifetime capital gains deductions for corporations with taxable capital employed in Canada over $10 million. Furthermore, the rules also require the business owner to obtain an independent assessment of the business’s fair market value. In the end, there remain many uncertainties in the wording of the new bill, and taxpayers should be vigilant when planning the sale of their family business.
Section 55
Subsection 55(2) of the ITA is a specific anti-avoidance rule that would apply to certain transactions involving the transfer of a corporation’s cash or property. Before the amendment, the rule converts tax-free inter-corporate dividends into a capital gain in some circumstances. There were exceptions to this rule for related persons, but it did not apply to siblings. However, Bill C-208 effectively expanded the related person exception to provide additional tax savings to transactions involving siblings.
Summary
Bill C-208 introduced new amendments to the ITA to provide small business owners with new tax-efficient strategies for passing on their business to the next generation. Under the new rules, parents may be eligible to report the transaction as a capital gain, as opposed to the transaction being deemed a dividend under the old rules. Furthermore, the amendments relaxed transactions between siblings, adding greater flexibility for transactions within the family.
However, on July 29, 2021, the Department of Finance also indicated its intentions to release further legislative amendments that “honour the spirit of Bill C-208 while safeguarding against any unintended tax avoidance loopholes”. Taxpayers should be wary as these new amendments may change the applicability of Bill C-208.
Are you seeking to transfer your small business to your children? Contact us today to schedule an appointment with our team of experts! Rosen Kirshen Tax Law will provide you with the expert advice you need to minimize your tax exposure!
**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 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 KirshenThe Canada Digital Services Tax
On April 19th, 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 19th to June 18th, 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 1st, 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 KirshenJohn 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:
- certain benefits or debt that are conditional on the existence of the plan, subject to listed exceptions;
- an increase in the FMV of the property held in connection with the plan which increase is reasonably attributable to certain transactions or amounts;
- income or a capital gain that is reasonably attributable to certain property or transactions in respect of the plan; or
- 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 RosenCoinsquare 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 KirshenRetail 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 KirshenThe 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 KirshenThe 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 14th, 2021, the CRA can adjust that tax year by issuing a notice of reassessment until May 13th, 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.