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.
by Jeff KirshenCanada Recovery Benefits
On October 2, 2020, the Canadian government announced three new temporary Recovery benefits to assist Canadians unable to work, experiencing reduced income due to the COVID-19 pandemic, or recovering or tending to one sick with COVID-19. These recovery benefits are the Canada Recovery Benefit (CRB), the Canada Recovery Caregiving Benefit (CRCB), and Canada Recovery Sickness Benefit (CRSB). All three programs are administered by the Canada Revenue Agency (the “CRA”).
These new temporary benefits are replacing the Canada Emergency Response Benefit (CERB), as the economy safety restarts. Unlike CERB, the Recovery benefit periods are retroactive. Applicants can only apply within 60 days after the period for which they apply has concluded. The Recovery Benefits are available for those residing and present in Canada who meet the eligibility criteria. There is no citizenship or permanent resident status requirement.
For all Recovery benefits, the applicant must be residing and present in Canada during the period of application. Therefore, Canadians who were abroad and unable to return home due to the travel restrictions surrounding the pandemic are not eligible. Like CERB, the Recovery benefits are taxable and must be included in total income for the taxpayer’s taxation year if received.
Canada Recovery Benefit
The CRB was introduced by the Canadian government to provide assistance to individuals who are not eligible to receive EI regular benefits. These include individuals who are self-employed, or those who experience at least a 50% reduced income due to COVID-19. Eligible applicants for CRB can receive a taxable $500 each week for up to 26 weeks, starting from the period of September 27, 2020 and through September 25, 2021.
While the CRB benefits extend until the fall of 2021, to be eligible, applicants must be available and looking for work. Furthermore, they cannot decline work if offered to them, if it is reasonable to accept the work. There is a claw back for the CRB where taxpayers will be required to repay $0.50 of the Benefit for every dollar in net income earned above $38,000. The threshold does not include the CRB received.
Applications for the CRB began on October 12, 2020.
Canada Recovery Caregiving Benefit
The Canada Recovery Caregiving Benefit (CRCB) provides income support to employed and self-employed individuals who are unable to work because they must care for their child under 12 years old or a family member who needs supervised care. Eligible applicants can receive $500 for each one-week period or $450 after taxes since the CRA will apply a flat 10% deduction at source. Applicants can apply for up to a total of 26 weeks between September 27, 2020 and September 25, 2021.
CRCB applies if the individual’s school, or regular facility is closed or unavailable to them due to measures surrounding COVID-19, or because of sickness, self-isolation, or risk of serious health complications due to COVID-19. However, it does not apply if an individual voluntarily chooses to stay home to care for the child or individual when the child’s school or the individual’s regular facility is open. The exception to this is if in the opinion of a medical practitioner or nurse practitioner, the child or individual would be at risk of having serious health complications if the child contracted COVID-19. The same does not apply if there is an immune-compromised family member in the same household who does not require supervised care.
An individual does not need to use up all of their vacation or other types of leave to apply for CRCB, but they cannot double-claim for the period if they are receiving either CRCB or leave for the period. Furthermore, only one individual in a household may receive the CRCB (i.e. the maximum number of weeks must be shared with the partner).
The application process for CRCB was launched on October 5, 2020.
Canada Recovery Sickness Benefit
The Canada Recovery Sickness Benefit (CRSB) provides income support to employed and self-employed individuals who are unable to work due to sickness, being under quarantine, must self-isolate due to COVID-19, or have an underlying health condition that puts them at greater risk of contracting COVID-19. The individual must provide evidence of the opinion of a medical practitioner, nurse practitioner, person in authority, government or public health authority in respect to COVID-19 susceptibility.
Eligible applicants for CRSB can receive $500 for a one-week period, or $450 after taxes since the CRA will apply a flat 10% deduction at source. The CRSB is available for a maximum of two weeks within the period of September 27, 2020 through September 25, 2021.
CRSB does not apply if the individual must self-isolate but they are able to work from home for more than 50% of their scheduled work per week. An individual does not have to use up any other sick leave before applying for the CRSB. They can still apply even if they have access to private insurance, the EI program or another source of paid sick leave. However, an individual cannot double-claim for CRSB when they have already claimed the sick leave for the same period.
While the CRSB is restricted to COVID-related sick leave, through the streamlined EI program, workers will only require 120 insurable hours of employment to qualify for EI sickness benefits which they can use for any sickness. The application process for CRSB was launched on October 5, 2020.
While the three Recovery benefits ensure Canadians will continue to have access to much needed financial support during the ongoing pandemic, Canadians should be aware of the rules surrounding these benefits. Especially considering the claw back for the CRB, the consequences can be considerable if any of the benefits are taken beyond a certain income level or without eligibility. Retroactive penalties and interest are also a reality if excess payments are accidentally received. You may be asked to supply supporting documentation at a later date.
If you have any questions or concerns, speak with a tax lawyer or tax specialist to discuss if these benefits apply to your particular circumstances. Contact us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenThe 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 19th 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.
- 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.
- 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.
- 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 19th, 2020.
- 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 RosenHow 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:
- They must be incorporated under the Ontario Business Corporations Act;
- They must have one controlling shareholder who owns all equity and voting shares;
- The sole shareholder must be president, sole director and sole officer of the corporation;
- The shareholder must be a registered broker;
- Any non-equity (non-voting) shares must be owned directly or indirectly by family;
- No agreement restricting the authority of directors to supervise the affairs of the corporation can exist; and
- 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 KirshenThe 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 37th 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 KirshenWhat 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:
- The taxpayer leaves Canada to live in another country; and
- 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 KirshenThe 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 1st 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.