News

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.

by Jeff Kirshen

The CRA and Automatic Tax Filings

In her 2020 Speech from the Throne, Right Honourable Julie Payette, Governor General of Canada, addressed many potential changes that may be adopted by the Canadian government to address the revenue shortfalls precipitated by the COVID-19 pandemic. One potential new program mentioned by the Governor General would be a new tax filing system whereby individuals will have their income tax returns automatically filed on their behalf with the Canada Revenue Agency each year.

While at first glance this may seem like a long-overdue addition to our self-filing income tax system, the interposition of “automatic” returns could see benefits for some and have unforeseen consequences for others.

 

The CRA and Automatic Tax Filings

The addition of “automatic” returns to the income tax filing framework of the Canada Revenue Agency (CRA) would allow for the filing of millions of individual tax returns each year that otherwise go unrecorded. The CRA already has access to most of the requisite taxpayer information and receives much of what would be required to file simple returns from employers and institutions. While the idea of an “automatic” filing program may seem radical to some, if Canada were to allow for “automatic” returns today, we would be the 37^th nation to do so.

Right now, the CRA offers “File My Return” services, whereby low-income taxpayers can receive income tax refunds and benefits simply by sharing personal information. Taxpayers do not have to complete any calculations or fill out any paper forms. However, as of now not every taxpayer is permitted to file using this service.

Those who are eligible receive confirmation via mail of their eligibility for the File My Return services. Taxpayers must complete this process via telephone after receiving their eligibility letter in the mail. “Automatic” returns would be different from this process as, presumably, no action would have to be taken on the part of the taxpayer in terms of filing. For example, in the UK, taxpayers who meet all of their income tax remittance requirements at the source (usually having their taxes deducted directly from income earned) and are not required to make any self-assessment for any other reason, still qualify for benefits and refunds despite never having personally filed a return on their own behalf or having shared additional information with the UK tax collection service.

 

Automatic Tax Filings – Who Benefits?

Many Canadians do not file their tax returns each year. For example, in Ontario approximately 16% of adults do not file an annual tax return. This could be for a host of reasons, one of the main reasons being that in situations where taxpayers do not believe that they owe anything to the government, they do not file a return. The program could abridge this gap and provide for millions of additional returns each year.

Ultimately, it will be the federal government who decides what the eligibility thresholds for the “automatic” return program would be. These standards would determine to whom the program would apply.

The “automatic” returns are reportedly slated to be free for all citizens. Citizens who previously did not have access to certain benefits because due to non-filing would have the potential to have their filings up-to-date and consequently become eligible for federal tax benefits, such as the Disability Tax Credit or the Canada Child Benefit. Thus, “automatic” returns have the potential to improve access to federal programs among marginalized members of the citizenry, whether their lack of access to proper filing is the result of financial bars or a low degree of financial sophistication.

Additionally, low-income Canadians with simple income tax returns may be able to avoid filing costs altogether, as in lieu of paying a tax professional to file their returns, the CRA would be completing their returns free of charge.

 

Automatic Tax Filings – Who Loses?

If a taxpayer’s returns do not fall into the “simple” category, the taxpayer may be under a mistaken belief that the automatic filing system would cover the taxpayer’s filing requirements. This may be the case where a taxpayer qualifies in one taxation year, but the filing circumstances of the taxpayer change in a subsequent year such that the taxpayer no longer meets the program’s eligibility requirements. There can be stark penalties and interest applied to Canadian taxpayers who fail to meet their income tax filing requirements. This could create a potential risk to taxpayers under the mistaken belief that their returns have been adequately filed through the “automatic” return program.

 

All of this information is also speculative, as no details of the “automatic” return program were announced during 2020’s Speech to the Throne. Careful planning and administration of the program would be central to its success. While an “automatic” return program could pose potential risks to Canadian taxpayers, to many Canadians it could finally provide much needed access to tax refunds and federal programs and services. If you need help with filing your taxes, call us today!

 

**Disclaimer 

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

by Jeff Kirshen

What is the Departure Tax?

COVID-19 has grounded many Canadians from international travel and has created unforeseen tax issues related to residency. As winter approaches, many will find themselves dreaming of relocating to a sunnier destination with fewer confirmed cases. What you should know is that up-and-moving out of the country may have significant tax consequences, one of which is the little-known “departure tax”.

 

What is the Departure Tax?

The departure tax”is a tax levied on the assets of emigrants ceasing to be Canadian residents. For the purposes of section 219.1 of the Income Tax Act, the departure tax can also apply to corporations leaving Canada, usually enlisted to levy a 25% tax on funds that could have been distributed as dividends during the year the corporation ceased to be resident in Canada.

For the individual taxpayer, departure taxes capture gains on the emigrants’ taxable Canadian property that may or may not have been sold prior to emigration. Paragraph 128.1(1)(b) of the Income Tax Act notes the requisite criteria for the application of the departure tax with respect to individuals.

The application of the tax involves the deemed disposition of the assets at their fair market value (FMV). The asset is then deemed by Canada Revenue Agency (CRA) to have been reacquired by the taxpayer at FMV. The result of these artificial transactions is to trigger capital gains payment on the part of the taxpayer, theoretically to protect the Canadian tax base from erosion.

 

Who does the Departure Tax Apply to?

The Departure Tax applies to individuals who CRA deems to be emigrants. To be considered an emigrant for taxation purposes, a taxpayer must meet both of the following criteria:

1. The taxpayer leaves Canada to live in another country; and
2. The taxpayer has severed “residential ties” with Canada, which include
   • a principal residence in Canada;
   • a spouse or common-law partner in Canada;
   • dependants in Canada;
   • membership in social organizations;
   • personal property such as bank accounts, a car or furniture; and
   • documents of Canadian citizenship (driver’s license, passport, health cards, etc.).

If a non-resident Canadian keeps some residential ties to Canada, the non-resident may still be considered an emigrant pursuant to the tax treaty of the non-resident’s new jurisdiction with Canada.

What Kind of Property does the Departure Tax Apply to?

Departure Taxes can capture a wide variety of personal property, such as shares in a corporation, jewellery, artwork and many others. Personal property is a broad category that encompasses many kinds of “personal-use property” as defined by section 54 of the Income Tax Act.

In short, if you are emigrating out of the country, it would be prudent to consider broadly all items of significant value as personal-use property and then identify which of these assets may be captured by the departure tax.

 

Departure Tax – Tips and Tricks

Emigrants with property that had an FMV greater than $25,000 on the date the taxpayer ceased to be a resident of Canada must file a T1161. This form outlines several exclusions to this $25,000 amount, including cash, registered saving plans, certain personal property, and certain real property.

Pursuant to subsections 220(4.5) to 220(4.54) of the Income Tax Act, taxpayers may be eligible to defer payment of departure tax, so long as “adequate security” is provided by using a Form T1244. The Income Tax Act does not define “adequate security” but does provide a formula for calculating the requisite value a security must hold before being considered “adequate”. Deferral may be the best option for taxpayers who do not wish to emigrate from Canada permanently, as when subsection 220(4.5) is used in conjunction with subsection 128.1(6), a taxpayer can retrieve the security intact upon the emigrant’s return to Canada.

Subsection 128.1(6) of the Income Tax Act may also allow emigrated taxpayers who return to Canada to be treated as never having accrued gains, so long as they meet all eligibility requirements of the provision.

 

The Departure Tax and Tax Planning

Taxpayers with significant assets that could be subject to departure tax should ensure compliance with all reporting requirements during the year in which they cease to be Canadian residents. If this cannot be confidently or competently done without assistance, it may be prudent to seek tax planning advice from a legal professional. Subsection 128.1(6) does not insulate a taxpayer from penalties and interest stemming from non-compliance with the departure tax. Since interest is calculated at the compound rate of 5% per annum, this could result in serious debt obligations to CRA upon returning to Canada.

 

If you need assistance with non-resident tax planning, or you’re in doubt about whether your departure tax filing meets CRA’s reporting requirements or if you want to be sure your deferral security is in fact “adequate security”, it may be safer to seek guidance from a legally trained tax professional. Call us today!

 

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 Basics of Estate Taxation in Canada

In addition to the emotional consequences of losing a loved one, estate administration can be a difficult undertaking, even for those familiar with the affairs of the deceased. The deceased may have passed away with a will (testate) or without a will (intestate). Either way, the personal representative of the estate has rigid obligations with respect to the tax filings of the deceased. These obligations must be discharged in order to avoid tax consequences stemming from prematurely distributing the estate, exemplifying the maxim that the only certainties in life are death and taxes.

 

Is there an Estate Tax in Canada?

In Canada, unlike other jurisdictions, any inheritances stemming from the estate of the deceased are not subject to estate tax. Officially, the only taxes payable by the estate of the deceased are based on the income earned by the deceased. However, it is not conclusive to say that the only taxes payable by the estate of the deceased are derived from the income of the deceased in the year prior to and the year of passing.

For example, if the testator held property in the United States at his or her time of death, the property may be subject to taxation under American estate tax. The same could be true of any other jurisdiction in which the deceased held property, as property laws vary country to country, and even province to province.

 

What is the Proper Filing Procedure for One’s Estate?

The personal representative of the testator must ensure that income tax returns have been properly filed for the year preceding death and that any income earned between January 1^st and the date of passing of the deceased in the same calendar year is accounted for in the last return filed on behalf of the deceased. This final return is dubbed a “terminal return” in Canadian tax law.

The day after the passing of the testator results in the creation of a “new person” in the eyes of Canada Revenue Agency: the estate. Unlike the filings of the year preceding death and the terminal return, the personal representative of the deceased would not file a T1 tax return for the filings of the estate. Instead, the estate is considered to be a trust for the purposes of taxation and consequently, the administrator of the estate must file a T3 trust return. Furthermore, income is deemed to have accrued on a daily basis for the estate, as opposed to on an annual basis for living taxpayers. This subtle variance in accrual periods has the effect of accelerating the taxation of the income of the estate.

 

What are the Consequences for Failure to File?

For personal representatives, planning circumspect compliance with the taxation rules surrounding the administration of estates can be an onerous task. There are various filing deadlines for the respective returns, specific documentation that must be included in the filing, and distinct accrual periods to consider. Personal representatives can also be held personally liable for failing to adequately discharge their obligations with respect to the income tax filings of the estate.

Canada Revenue Agency (CRA) is also statutorily permitted to pursue beneficiaries to recompense any amounts they assess to be owing where disbursements of the estates are deemed to have been made prior to satisfying requisite filing criteria.

 

How can a Personal Representative Protect Himself or Herself from Liability?

Prior to distributing any of the estate property to potential beneficiaries, it would be prudent for a personal representative to determine whether it is necessary to obtain a “clearance certificate”. If a personal representative is required to have a clearance certificate, any disbursement of an estate asset without having first obtained a clearance certificate could put the personal representative at risk of personal liability. Click here to learn more about the requirements and application of clearance certificates.

It is harder than one might think for a personal representative to ensure compliance with each of the CRA’s filing requirements. The obvious answer is to meet every filing deadline, to accurately compile all returns correctly (including any “deemed realizations” pertinent to the estate asset pool), and to retain all requisite documentation. Practically speaking, it is very difficult to ensure compliance with respect to CRA filing requirements and the personal representative and beneficiaries may collectively choose a different path.

There are alternatives available depending on the circumstances of the personal representatives and beneficiaries of the estate. For example, beneficiaries may wish to agree to indemnify the personal representative of an estate from tax liability in order to receive assets from the estate prior to the personal representative receiving a clearance certificate. Similarly, where the personal representative is the sole beneficiary of the estate, the personal representative would be liable regardless of having obtained a clearance certificate. The appropriate method of mitigating tax liability depends on the circumstances of the estate.

 

When to Seek Help?

Many personal representatives seek guidance with respect to estate administration to insulate themselves from personal liability, especially when they are unfamiliar with the affairs of the testator and/or the income tax rules surrounding estate administration. It is also commonplace for testators to seek tax planning advice as tax planning can be an effective means of reducing estate tax liability and passing more of what they have earned onto their loved ones. Depending on the size of the estate, proper tax planning can reduce or delay the amount of taxes payable by the beneficiaries of the estate to better provide for the loved ones of the testator in the short term and long term.

 

If you are considering planning out your affairs to make sure your Estate runs as smoothly as possible, 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

CRA Cyber Attack – Here’s What You Need to Know

On August 14, 2020, the Canada Revenue Agency (“CRA”) website was temporarily shut down following being hit by three cyber-attacks, potentially compromising the personal information and security of all taxpayers with an account in the country.

The first and largest attack compromised thousands of GCKey accounts, which is responsible for providing Canadians with access to services like Employment Insurance (EI), Immigration and Refugee citizenship accounts and veterans programs. It is noted that this attack may have allowed hackers access to over 5,600 CRA My Accounts.

The second attack took place shortly after the first, which allowed hackers to by-pass all security questions and gain access to thousands more My Accounts. Finally, a third attack occurred over the weekend of August 15-16, which finally prompted the CRA to suspend all online activities in order to address these significant security breaches.

While the CRA Portal has now resumed online services as of August 20, many Canadians may be wondering if their account has been hacked, and what to do in order to ensure the security of their personal tax information

 

CRA Cyber Attack – What Should I do?

The government of Canada has updated the public, stating that those who were impacted by these beaches will be notified by the CRA that their account was breached, and what to do to rectify the situation.

While waiting to hear from the CRA, there are measures you can take independently in order to ensure the privacy and security of your account. First, it is important that you change your password, as the current one being used might be recorded by others who are not authorized to access your “My Account”. As always, passwords which include numbers, and capital letters will help secure your account as the password will be harder to guess. It is recommended that you do not use a similar password from other online accounts with your CRA My Account.

In addition to recreating your password, the CRA also recommends people to add email notifications as an added security measure. Through these notifications, you will be informed if someone has accessed your account, which will help confirm whether you or an unknown party may have accessed it. If you suspect there may be suspicious activity going on with your account, you should notify the CRA immediately in order for them to address the situation promptly, which can prevent the potential for any breaches to your account.

Though not required, some people may also choose to get SIN protection where companies monitor your SIN for any attempts to open lines of credit, bank accounts, etc.

 

If you have any questions or want assistance regarding any of your dealings with the CRA, call us today! We can help!

 

**Disclaimer 

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

by Jeff Kirshen

CRA Audits of COVID-19 Benefit Programs

Globally, COVID-19 has been the greatest upheaval the world has seen since the second World War. Millions infected and countless effected. Government assistance programs such as the Canada Emergency Response Benefit (“CERB”), Canada Emergency Wage Subsidy (“CEWS”), and the Canada Emergency Student Benefit (“CESB”) have all been instituted in order to help the Canadian people through this challenging time. The Canada Revenue Agency has recently updated the public in regard to post-payment validation requirements for its assistance programs. Here’s what you need to know:

 

CERB, CEWS, CESB, and CRA Audits

Between the months of July and August, the CRA has announced that it will launch a pilot CEWS post-payment compliance project through the Trust Exam Program and Employer Compliance Audit. In order to ensure compliance, the CRA will institute a combination of automated queries within its data, follow-up calls to verify certain elements of the taxpayer’s claim (when necessary) and will also begin a more comprehensive post-payment review and audit of all claims made under the CEWS.

Beginning in September, the federal government of Canada will begin post-payment validation of the new programs introduced as a result of COVID-19. These programs include CERB, and CESB.  Further, the CRA will monitor the initial intake of claims and adjust its queries as necessary. The purpose of post-payment validation for these new programs is the CRA’s attempt to maintain the integrity of the program and deter fraudulent application filings.

If the CRA concludes that a taxpayer is not eligible for the wage subsidy, the taxpayer will then be required to repay amounts paid. It is possible that penalties and interest are applied as well.

 

CRA Audits – What do I need to do?

The CRA expects all taxpayers to maintain adequate books and records to ensure that the claim is accurate and complete, and clearly supports the taxpayer’s eligibility for the wage subsidy for a claim period. This includes ledgers, journals, financial statements, contracts, calculations of other working papers, payroll records, etc. Creating your own “paper trail” can be tedious but is imperative in ensuring your claims are supported and can help you avoid being penalized for fraudulent claims.

For CERB, the CRA is actively monitoring the situation to ensure that compliance with the lax laws is assured. With the same goal in mind, the CRA ensures that, regardless of the assistance program you apply for, they monitor each claim and ensure that the claims are valid, and the claimant is eligible for the support program they have applied for, whether it be CERB, CEWS or CESB.

There is some good news to share. The federal government has extended the CERB payments from 16 weeks to 24 weeks as a result of the ongoing pandemic for those eligible.

 

Penalties and Non-Compliance

Many have wondered whether the federal government will be taking active steps in penalizing those who have applied for an assistance programs they are not qualified for. The answer to this question is, yes. Due to a specific anti-avoidance rule, an employer will not be eligible to claim the wage subsidy for a claim period if the employer participates in a plan that has one of the main purposes of effectively reducing the employer’s qualifying revenues for the current reference period, in order to qualify for the subsidy. As a result, where this anti-avoidance rule applies, the employer will be liable to a penalty equal to 25% of the amount of wage subsidy that is claimed in its application and will have to pay back any wage subsidy that it received.

In addition to this, if an employer knowingly makes a false claim amounting to gross negligence, the employer is liable to a penalty of up to 50% of the difference between the amount of the wage subsidy that it claimed in its application and the amount of wage subsidy to which it is actually entitled.

 

If you have questions about your eligibility for any of these programs, call us 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.

by Jeff Kirshen

Offshore Corporations and the Voluntary Disclosures Program

With increasing globalization, it is common for many Canadian residents to be involved with business corporations and companies, both small and large, located outside Canada. If you are a Canadian taxpayer who is involved with a foreign corporation, the Canadian Income Tax Act may require you to file Form T1134 with the Canada Revenue Agency (CRA).

Given the complex reporting requirements of Form T1134, many Canadian taxpayers fail to file the form when required. This failure to meet reporting obligations under the Income Tax Act can result in significant penalties and interests for a taxpayer.

Taxpayers who are required to file a T1134 and have failed to do so, however, may be eligible for relief through the CRA Voluntary Disclosures Program. The disclosure allows taxpayers to avoid prosecution, penalties, and some interest associated with failing to meet their past reporting obligations.

 

Offshore Corporations and Form T1134

The Income Tax Act (s. 233.4(4)) requires resident taxpayers “of which a non-resident corporation is a foreign affiliate at any time in the year” to file a Form T1134. This means that taxpayers in Canada who are an “affiliate” to a foreign, offshore corporation at any time in the year, must file the required Form T1134 at tax year-end.

A corporation outside Canada meets the criteria of being a “foreign affiliate” of a taxpayer if:

1. The taxpayer’s equity percentage in the corporation is 1% or greater; and
2. The equity percentages of the taxpayer and each “person” related to the taxpayer total 10% or greater

These requirements ensure that taxpayers and related taxpayers who, together or separately, own 10% or more equity in a foreign corporation fall into the category of persons required to file a T1134.

The term “person” includes corporations, as well as individuals.  The definition of “related persons” likewise includes relations with or between corporations, and individuals who control corporations. People related via marriage, blood, common-law relations, and adoption are also included in the definition.

 

Offshore Corporations and Form T1134 – Exceptions

Certain situations may exempt a taxpayer from filing Form T1134. Notable exemptions include:

• The first year in which a person (who is not a corporation) becomes a resident for the first time;
• Where the aggregate cost to the taxpayer, in a year, of its interest in the foreign affiliate is
  • less than $100,000, and
  • the corporation is “dormant” during the reporting period.

The foreign corporation must meet certain definitions to be regarded as “dormant”, such as owning assets worth less than total fair market value of $1,000,000 at all times during the year and having gross receipts of less than $25,000.

 

Offshore Corporations and Form T1134 – Deadline

A Form T1134 – “Information Return Relating to Controlled and Not-Controlled Foreign Affiliates” asks the taxpayer to provide information and documentation about the affiliated foreign corporation, such as the value of all shares the taxpayer owns in the company, assets held by the foreign corporation and taxes paid or payable on the net income, among other requirements.

In the past, each taxpayer had to file Form T1134 within 15 months of the end of the reporting taxpayer’s tax year or in the case of a partnership their fiscal period.

However, the CRA has changed the rules for 2020 and subsequent years. For tax years that begin in 2020, Form T1134 will have to be filed within 12 months of the end of the reporting taxpayer’s tax year or, in the case of a partnership, fiscal period. 

For tax years that begin after 2020, Form T1134 will have to be filed within 10 months of the end of the reporting taxpayer’s tax year or, in the case of a partnership, fiscal period.

Note that you must include all additional information required by the Form on a separate page if there is insufficient space.

 

Offshore Corporations and Form T1134 – Penalties

Penalties for failure to file the required form can be severe. This includes a penalty of $2,500 for every year that a taxpayer failed to file the form, even if they did not intend to and were unaware of their obligation to do so. If a taxpayer knowingly fails to file a T1134, however, gross negligence penalties of up to $12,000 for each failure to file can also be levied after CRA conducts an audit.

 

Offshore Corporations and the Voluntary Disclosures Program

The Voluntary Disclosure Program can provide significant relief to taxpayers who fail to file by allowing penalties, some interest and potential prosecution to be waived upon disclosure. Persons who are associated with foreign affiliates may also need to file a T1135 if they own offshore bank accounts or have foreign income.

 

If you are interested in using the CRA’s Voluntary Disclosures Program to correct past errors or omissions regarding having a foreign affiliate corporation, Rosen Kirshen Tax Law can help you navigate this complex process and ensure that your privileged disclosure is dealt with correctly. We are here to help, call us for a free consultation today!

 

**Disclaimer

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

by Jeff Kirshen

Claiming CERB but not Eligible?

The Canadian Emergency Response Benefit (CERB) has injected billions of dollars into the pockets of millions of Canadians, to help the country endure the COVID-19 pandemic. In a previous article, we discussed how to determine if you are actually eligible for CERB, and the consequences for those whom are found to be ineligible. More recently, however, news reports have surfaced regarding a proposed bill that is in its early stages in the House of Commons, that clarify how the government and the CRA could proceed following the pandemic.

 

Claiming CERB but not Eligible

The Canadian federal government is considering enacting a bill that would impose severe punishments, including fines and even jail time, for Canadians that have been defrauding the Canadian Emergency Response Benefit (CERB) program. The legislation is current at draft stage and is struggling to gain support from opposition parties, but is revealing of how the Canadian government would like to seek out those they deem to be undeserving of the benefit following the COVID-19 crisis.

The draft bill targets those whom:

1. Made a false or misleading benefit claim
2. Knowingly failed to declare income for the period which they applied for the benefit
3. Received a benefit cheque they were knowingly not eligible for, and
4. Aided someone in committing one of the aforementioned offences.

It appears that, much like the eligibility criteria for CERB, the fraud criteria are quite broad and are a catch-all. They almost seem like four different ways of saying the same thing: if you knew you were not eligible, but accepted CERB anyways, then you engaged in fraud. By framing each criterion in overlapping but technically distinct ways, they ensure that they are encompassing all potentially fraudulent behaviour.

It is important to emphasize that the bill is not a prescribing a punishment for those who accidentally took CERB. At its current stage, the bill seems to go after those that are maliciously accepting support from the government that they do not deserve. However, in practice the CRA will likely extend the boundaries of what would be considered fraudulent behaviour and force taxpayers to prove otherwise, just as they tend to do with gross negligence penalties.

 

Claiming CERB while knowing I am not Eligible

Under normal circumstances, if you are ineligible and received the CERB, the CRA will have grounds to investigate, audit, and assess you. Following an assessment the CRA will attempt to collect on the funds, plus interest and penalties. The interest and penalties accumulate quickly, and can transform into a minor debt into one that is much more substantial. The CRA could also pursue legal action in order to collect on the debt, such as garnishing wages or placing a lien on your property as security until the tax is paid.

If this bill becomes law, individuals accused of any of the above could be fined for up to $5000, plus double the amount of the benefit that was received. It also can incorporate amounts the accused would have received through CERB due to fraud. Most surprisingly, the bill also states that one could be punished with up to six months in jail for fraudulently accepting CERB.

 

May I Repay CERB?

Canada is allowing the repayment of CERB. More information may be found here.  You may repay it if you realized you are actually ineligible, or if you’ve returned to work. CERB is taxable so unless repaid in full in 2020, you will receive a tax slip for the income that must be reported on your 2020 income tax returns. There is no indication whether repaying the CERB will stop the CRA from coming after you if you knowingly received it while ineligible, but we are hopeful that will be the case.

 

If you are a CERB recipient but have doubts regarding your eligibility, please feel free to contact our firm for a consultation. We have extensive experience managing CRA collections, and ensuring that no legal action takes place against you. We can assist in creating a plan of action in order to avoid the worst consequences of owing a debt to the CRA. We are here to help! In the meantime, we will continue to keep you informed and hope you and your families remain safe and healthy in these uncertain times!

 

*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 Response Benefit – What if CRA wants it back?

The Canada Emergency Response Benefit (CERB) has injected billions of dollars into the pockets of millions of Canadians, to help the country endure the COVID-19 pandemic. It is one of the most ambitious social welfare programs Canada has ever seen, and has certainly been a contributing factor in the country’s success in stopping the spread of the virus. Without the benefit, Canadians would be less likely to be able to pay their rent, stay in their homes and practice social distancing. Many would seek employment despite the virus to support their families. The CERB has provided some stability amidst great uncertainty.

 

Canada Emergency Response Benefit – Eligibility

It seems eligibility for the benefit has expanded every week. At first only those who lost their jobs due to COVID-19 were eligible after meeting other criteria. Then it was expanded to include those with reduced hours and pay. Students and seasonal workers struggling to find work were included after, followed by artists, farmers, and more. It is getting harder to know who is not eligible for the benefit anymore.

This is partly by design. In the current stage, the benefit’s eligibility has been set up as a catch-all system. Following the pandemic the government will take stock and determine who was not actually eligible. Therefore, determining eligibility today based on government statements and reports is difficult; they have not clarified the categories of persons who would be ineligible in recent weeks. Recently there are news reports of individuals that have been claiming the CERB when they are not eligible. While some are doing so intentionally, many are accidental, as the eligibility criteria for the CERB has become increasingly complicated over time.

We would like to help fill the gap. If you match any of the descriptions below, you are almost certainly not eligible for the CERB and may be penalized following the pandemic.

 

Fully Employed

If you are currently employed and are receiving the same salary as before the crisis, you are not eligible. The benefit is intended to help those that do not have a paycheque, or have seen their pay or hours sharply reduced. If you are employed and are making the same salary, then the CERB is not for you.

 

Voluntarily Unemployed

If you quit your job and are unemployed for reasons unrelated to COVID-19, you are not eligible for the CERB. One of the most important criteria for the CERB is that the need for assistance must be as a result of the pandemic. One cannot quit their job to take time off work, rest, take up a hobby, and then claim CERB. It is presumed that those individuals are not suffering from the lack of a paycheque because they already planned to live without earning a salary, and are therefore not in need of assistance.

 

Those who Receive Government Benefits and do not meet the Employment income threshold

Benefits received from the government prior to the pandemic do not count as part of your income calculation for determining if you earned enough to be eligible for the CERB ($5000 since Jan 1, 2019). The income calculation must incorporate employment or self-employment income. For example, someone living solely on disability would not be eligible, as they are already receiving support from the government. That individual’s source of income from the government has not been effected by COVID-19, so they are not eligible for CERB.

 

In essence, in determining your eligibility, the question that must be asked is whether your employment or income has genuinely been affected by the COVID-19 pandemic. If it has not, you are likely not eligible for the CERB.

 

What if I have received the Canada Emergency Response Benefit but I am not entitled to it?

If you are ineligible and received the CERB, the CRA will have grounds to investigate, audit, and assess you. Following an assessment the CRA will attempt to collect on the funds, plus interest and penalties. The interest and penalties accumulate quickly, and can transform into a minor debt into one that is much more substantial. The CRA could also pursue legal action in order to collect on the debt, such as garnishing wages or placing a lien on your property as security until the tax is paid.

 

If you are a CERB recipient but have doubts regarding your eligibility, please feel free to contact our firm for a free consultation. We have extensive experience managing CRA collections, and ensuring that no legal action takes place against you. We can assist in creating a plan of action in order to avoid the worst consequences of owing a debt to the CRA. We are here to help! In the meantime, we will continue to keep you informed and hope you and your families remain safe and healthy in these uncertain times!

 

*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.