Tax

by Jason Rosen

The Taxation of Cryptocurrency

For the past decade, the rise of Bitcoin and other cryptocurrencies has taken Canadians by storm. However, through the lens of legal policy making, cryptocurrencies are still considered a relatively new phenomenon. That said, Canadian policy makers have recently taken a stronger stance in the regulation and monitoring of crypto purchases. This blog post seeks to summarize the general rules surrounding crypto currencies as well as the main changes Canadians should be aware of.

 

What are Crypto Currencies?

Generally, the Canada Revenue Agency (“CRA”) considers crypto currencies to be a taxable form of commodity equivalent to stocks and investments. It follows that any gains or losses arising from a taxpayer’s purchase and subsequent disposition of Crypto will be subject to tax.

Irrespective of whether the disposition is from crypto to fiat or coin to coin, the disposition constitutes a taxable event.

 

Capital Gains vs. Business Income?

Typically, the sale of cryptocurrencies would be categorized as a capital gain and result in only 50% of the gross capital gain being taxable. On the same “token”, this means that only 50% of any losses derived from the sale of crypto currencies would be considered a taxable capital loss. Furthermore, capital losses are “quarantined”, in that it can only be applied to offset capital gains and not other sources of income (such as from business nor employment).

However, in some circumstances, the CRA may determine that this trading activity constitutes income on account of business. When this happens, the proceeds of disposition arising from the transaction is captured in full (100%) and taxed accordingly. This usually occurs when the CRA determines that the taxpayer is actively trading crypto currencies or is in the business of speculating price changes of crypto currencies.

Other factors the CRA considers when determining if the taxpayer’s profit in selling crypto is capital or business income includes but not limited to:

• The intention of the Taxpayer;
• The length of time the crypto currency is held;
• The frequency in which the taxpayer buys/sells crypto currencies; and
• The taxpayer’s knowledge and expertise .

It is important to note that each case is very fact-dependent on the taxpayer, their trading activity and other material circumstances.

 

How do I Calculate my Gains and Losses?

Taxpayers must also be very attentive of the constantly changing adjusting cost base (“ACB”) of their crypto currencies. In short, ACB is the measure of what the taxpayer paid to receive the coins. Naturally, the ACB is subject to change then if the taxpayer purchases and sells their coins throughout the year at different prices.

The following example clarifies this concept. Suppose the following transactions occurred:

• Taxpayer purchased 1 coin of X for $100 on January 1^st;
• Taxpayer purchased an additional 1 coin of X for $200 on May 1^st;
• Taxpayer sold 1.5 coins of X for $300 on June 1^st; and
• Taxpayer purchased an additional 1 coin of X for $400 on August 1^st.

In this example, the Taxpayer’s ACB after transaction 1 would be $100. However, after transaction 2, the taxpayer’s ACB for coin X would increase to $150. As a result, the taxpayer’s proceeds from the disposition in transaction 3 would be $150 ($300 – $150). After transaction 4, the taxpayer’s ACB of coin X would rise to $275. This example assumes there are not transaction fees for each purchase and sale.

Taxpayer’s should also be aware that the ACB of each type of coin should be calculated and monitored. For instance, the cost basis of Bitcoin, Ethereum, Litecoin and others must be calculated separately and adjusted after each corresponding transaction. Intuitively, this is akin to calculating the ACB for different stocks. The ACB of a taxpayer’s Apple shares should not be affected by a subsequent purchase or sale of RBC shares or any other stock except Apple.

 

If you have questions about the taxation of crypto currencies, call us today! We are here to help!

 

**Disclaimer

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

by Jason Rosen

Coinsquare and the CRA

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

Customers are defined as the following:

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

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

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

 

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

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

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

 

60 Day Order

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

 

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

 

**Disclaimer

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

 

Additional Resources

by Jeff Kirshen

Employee Stock Options

Employee stock options give employees the right to purchase a specified number of shares of a company at a specified price. Employees can derive financial and tax benefits from these stock options if they exercise their options when the market purchase price of the stock is greater than the purchase price specified by the option. They can then sell the stocks they own. However, there are important tax rules that must be understood when an employee exercises their options, and also when those stocks are sold.

 

Employee Stock Option – Public Companies and Tax Benefits

The following analysis is for stock options granted by public companies.

Under paragraph 7(1)(a) of the Income Tax Act, employees are taxed on the difference between the amount they pay to purchase their option and the fair market value of the stock at the time they exercise the option. The way in which employees are taxed on employee stock options is similar to the way in which they would be taxed on a bonus.

For example, if an employee is given an option to purchase stock for $1,000 and, at the time the employee exercises the option, the fair market value of the stock is $2,000, then the employee will be taxed on the $1,000 difference between the exercise price and the fair market value. This will be counted as employment income in the year the option is exercised.

The way in which employees are taxed on the exercise of their stock options creates the possibility for double taxation. Usually, when an employee sells stock purchased with an employee stock option, the gain incurred from the sale is taxed as a capital gain. In this case, and using the above example, the $1,000 option purchase price would be the cost base for the stock, while the $2,000 fair market value of the stock would be the price of disposition (assuming that the stock is sold for fair market value). The $1,000 difference would be the taxable capital gain. Double taxation can arise here because the employee could be taxed twice: once when the employee exercises the option, and again when the employee sells the stock.

Fortunately, paragraph 53(1)(j) of the Act provides that the difference between the exercise price and the fair market value is to be added to the cost base for the stock. This means that, for the above example, the $1,000 difference between the employee’s exercise price and the stock’s fair market value would be added to the $1,000 cost base on the sale of the stock. Now, with a $2,000 cost base, there would be a $0 difference between the cost base and the price of disposition. The employee’s taxable capital gain would be cancelled out.

 

Employee Stock Option – Canadian Controlled Private Corporations

If options are provided by a Canadian-controlled private corporation (“CCPC”), and those options are exercised, the taxable benefit mentioned above will only be added to the employee’s income when the stock is actually sold. This is the benefit of exercising options that were granted by a CCPC, you don’t pay any of the taxes until you actually sell.

These shares may also be eligible for the lifetime capital gains exemption. There are specific rules and conditions that must be met before being eligible for this exemption so please consult a tax lawyer.

 

Employee Stock Options – Tax Deferral

The Income Tax Act provides other mechanisms for the preferential treatment of employee stock options. Under paragraphs 110(1)(d) and (d.1), only half of the difference between the exercise price and the fair market value is taxable. This preferential treatment is, however, limited to certain circumstances: employees must deal at arm’s length with their employer, must generally receive prescribed stock on the exercise of options (rather than generally receiving cash), and, on the date the option is granted, the purchase price specified by the option must be greater than or equal to the fair market value of the stock. Also, if the employer granting the option is a CCPC, the employee must hold the stock for at least two years.

 

Employee stock options are useful for attracting and retaining employees. For CCPCs especially, employee stock options can act as tax subsidies because they can offer potential employees tax-deferred compensation in exchange for cash investment in the stock of the corporation. If a CCPC is strapped for cash, and if markets are rising, employee stock options can be an ideal means of taking advantage of such circumstances. If you have questions regarding employee stock options, or if you are interested in learning how to use them to your advantage, 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

Charitable Donations, Tax Shelters and the Sham Doctrine

Taxpayers can claim tax credits or deductions for charitable donations in certain circumstances. The Income Tax Act (“ITA”) proves a regime of charitable donation deductions and credits to encourage philanthropic and public service functions which benefit the community.

Tax deductions in respect to charitable donations first appeared in 1917 for Canadians who contributed to certain patriotic and war funds. The charitable deduction was increased following the Great Depression and continued to be prioritized following World War II. From 1948, the ITA required charitable organizations to issue receipts and register in prescribed form.

 

Claiming Charitable Donations

Under the current regime, individuals may claim a tax credit against their tax payable and corporations may claim a deduction for eligible charitable donations. The former reduces the tax owed, at prescribed rates, providing a dollar-for-dollar reduction of tax payable. The latter reduces the corporate income subject to taxes for up to 75% of net income.

The charitable tax credit for individual donors is a non-refundable tax credit that can be carried forward five years or ten years for ecological gifts. Individuals can only claim the amount that is eligible.

Corporations can claim a deduction for the eligible amount of their charitable gifts for up to 75% of net income for the year. Donations that exceed the 75% net income can generally be carried forward five years.

 

Charitable Donation Requirements

There are certain requirements to be met for the charitable donation tax credit or deduction to be claimed. Donations must be made to qualifying donnees, there must be a valid gift, the value of the gift must be for an eligible amount, and the donor must comply with requirements for filing of receipts.

 

Qualified Donees

For the purposes of charitable donations, only certain organizations or entities will be eligible to issue charitable receipts. These include, but are not limited to: registered charities in Canada; registered Canadian amateur athletic associations; Canadian municipalities; United Nations agencies; and certain universities outside of Canada

 

Valid Gift

For a gift to be valid, there must be a charitable intent or absence of receiving something in return. Generally, the donor must own the gifted property, gift same voluntarily and without receiving any benefit in return. The gift must be property and not services.

 

Value of Gift

The amount eligible for the gift is the excess of the value of the gift over any advantage received. Any advantage can include broad benefits conferred to the taxpayer. For instance, in the case of dual secular and religious private schools, despite older guidelines providing otherwise, the child’s private education is considered a benefit to the donor.

 

Issuing Receipts

The qualified organizations can only issue a receipt for the amount of the contribution that exceeds any advantage received by the donor.

 

Tax Shelters and the Sham Doctrine

In certain cases, tax shelter programs may provide substantial tax benefits far above the actual contribution amount. Given the significant cost to the federal and provincial treasuries of these shelters, tax shelters involving charitable donations will be highly monitored and subject to CRA scrutiny. Programs which are found to be tax shelters will be subject to additional reporting and compliance requirements. These additional reporting requirements are also extended to individuals who participate in the program. 

In circumstances where there is evidence showing the legal effect of a transaction was to achieve a tax benefit that would otherwise be denied, the court may arrive at a finding of a sham. Essentially, the sham doctrine states that: “…acts done or documents executed by the parties to the “sham” which are intended by them to give third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create..”

In cases of an alleged sham, the court will examine the objective reality of the situation, and will determine what actually happened. In the case of many tax shelters, the Courts are only willing to provide a donation credit for the actual cash contribution. There are even times where the actual cash contribution is denied if the tax shelter was considered extremely abusive.

 

The CRA continues to conduct routine mass audits of tax shelters and charitable programs to ensure compliance. What is considered an eligible gift for the purposes of obtaining a charitable donation depends on a case-by-case basis. In findings of a sham transaction, the CRA will deny the credit or deduction with applicable interest and or penalties, even where the participant was unaware of the sham. If you are experiencing any issues regarding your charitable donations, or a tax shelter you have been involved with, speak with a qualified tax lawyer today! We can help discuss the eligibility of your charitable donation tax credit or deduction and if a charitable donation tax shelter or sham applies to you.

 

**Disclaimer

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

by Jeff Kirshen

Shareholder Loans and the CRA

Many independent business owners dedicate a significant part of their time and effort into managing the operations of their business. Naturally, it is difficult for business owners to separate their personal life and the time spent managing their business. A common consequence from these set of circumstances is that owners start using their corporate account or credit cards to fund personal purchases and vice versa. This may be better known as “shareholder loans” and “shareholder benefits”.

The Government of Canada recognizes that this is relatively a common phenomenon and has provisions in the Income Tax Act to ensure that they are dealt with effectively and fairly. This post will briefly highlight the main tax consequences of shareholder benefits/loans and what business owners should be aware of. For a previous blog post overview of shareholder loans in general, please see here.

 

Shareholder Loans and Benefits

A shareholder benefit is money given by a corporation to one of its shareholder, or to a person or partnership who does not deal at arm’s length with the shareholder. It is intended to capture economic advantages a shareholder may receive which are derived from the corporation. More specifically, s.15(1) of the Income Tax Act ensures that the value of any such “benefits” conferred on a shareholder of a corporation are included in income of the shareholder, and taxed.

The term “benefit” however is not explicitly defined in the Income Tax Act and can compass several meanings. As a result, some benefits are easier to recognize than others. For example, a business owner withdrawing cash from their corporate account would be considered a benefit conferred. A more subtle yet just as equally a benefit conferred would be purchasing an item for personal use such as a MacBook with corporate funds. In this case, the value of the MacBook would be attributed as income to the shareholder.

 

How do I Manage Shareholder Loans?

Typically, the balance sheets of corporate accounts have an account called “shareholder loans” to oversee what is owed and paid to the business. For example, if the shareholder deposited excess personal funds to the business, the shareholder loan account would be in the liability section as the business owes the shareholder.

Alternatively, if the shareholder withdrew excess funds from the business, the shareholder loan account would appear on the asset section as the shareholder owes the business money.

 

Shareholder Benefits – Are there any Workarounds?

It is important to note that dividends or capital distributions are not included as shareholder benefits. This is because when income is extracted from the corporation in the form of a taxable dividend, the amount of the taxable dividend is already fully included in the income of a taxpayer.

Furthermore, s.15(2) of the Income Tax Act allows loans paid to the shareholder not to be deemed a benefit conferred as long as the loan amount is repaid within one taxation year after the end of the taxation year in which the loan was given. The purpose of this rule is to prevent business owners from unfairly providing themselves or other shareholders long term loans that effectively allow them to use corporate funds for personal purchases while deferring their tax obligations.

The Courts have also grappled with the issue of whether or not a benefit is actually conferred when there is an accounting oversight. For example, what happens when an accountant erroneously posts a personal home purchase as a corporate expense rather than debiting the shareholder loan account. In this situation, the Courts determined that an erroneous failure to adjust a loan account does not create tax liability.

 

If used properly, shareholder loans can be an extremely powerful tool for business owners to leverage their corporate accounts. However, improper use of shareholder loans can result in double taxation and audits from the CRA. If your business is being audit or have further questions regarding shareholder loans and benefits, contact a professional at RKTL 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 the articles. If you have specific legal questions you should consult a lawyer.

by Jeff Kirshen

Retail Investing and the Tax Implications in Canada

The COVID-19 pandemic has created novel economic conditions for Canadian investors. Many Canadians were laid off or let go completely from their place of employment. Stay-at-home orders have also resulted in many Canadians spending much of their winter indoors in order to comply with provincial regulations to curb the spread of the disease. The pandemic’s effect on the economy has also created an investment climate where there is tremendous potential upswing for the changing needs of our society. Stocks like Amazon, Shopify and, most notably, Tesla have seen record gains on the stock market leading to significant gains for their shareholders in turn.

These factors have led to many Canadians pursuing income-earning alternatives to try to mitigate financial damage. This has contributed to the increasing popularity of “retail investing” as a potential means of planning for one’s financial future. While retail investing may provide an opportunity for some to supplement their earnings, it is important to consider the tax implications of the addition of investment income to one’s existing income sources.

Some retail investors may believe that sheltering their securities under their Tax-Free Savings Account (TFSA) will protect their earnings from any tax liability. However, there are limitations as to what earnings are protected from inclusion in taxable income, even under a TFSA.

 

What is Retail Investing?

“Retail investing” is the term for non-professional individuals buying and selling financial instruments or securities. Retail investors open investment accounts and procure securities with or without the direct aid of a broker.

Retail investing is increasingly accessible to Canadians, with a wide range of trading accounts now offered by major Canadian financial institutions. Another arena of growth has been the development low-cost trading applications like Wealthsimple Trade and Questrade that allow for Canadians to purchase securities on the go.

 

Retail Investing and the Tax Implications

Retail investing can trigger earnings in several ways, all of which are taxable (unless eligibly positioned in a registered savings account that shelters the earnings from taxation, like an RRSP or TFSA). However, the amount of the earnings that is included in a retail investor’s taxable income depends on source of the earnings. With retail investing, earnings usually stem from one of three main sources: interest income, dividend income, or capital gains.

Interest income can be earned on investments that have a rate of return on the principal amounts invested. Typically, this is a low percentage of guaranteed earnings such as the interest return on a savings account principal, bond interest or interest earning from a Guaranteed Investment Certificate (GIC). Any interest income earned during a calendar year is to be included in full in the taxable income of the taxpayer.

Dividend income is earned when a corporation elects to pay out a portion of its profit during a specific time period to its shareholders. These earnings vary depending on the security and are to be included in full in the taxable income of the taxpayer during the taxation year in which they were accrued.

When a security appreciates in value and is sold by a taxpayer, any gains or profit earned by the taxpayer upon the sale of the security are determined to be “capital gains” (with some exceptions, e.g. where the taxpayer meets the definition of a “trader”). Half (50%) of the value of all capital gains earned by the taxpayer during a given taxation year are to be included in the taxpayer’s taxable income during a taxation year.

There is a legitimate means of avoiding taxable income inclusions with respect to earnings from these three sources for the individual: placing the financial instruments in a registered savings account such as a TFSA or RRSP (each with their own set of advantages for savings). However, this sheltering requires careful adhesion to the rules and eligibility criteria for investments to be  protected under the registered savings plan.

 

Retail Investing and the TFSA

A TFSA can be a great tool to avoid income tax inclusions on qualifying earnings of eligible securities. However, there are eligibility requirements for what sort of investment earnings garnered under a TFSA are sheltered from taxation.

A consideration to keep in mind is whether the TFSA account holder has already exceeded his or her TFSA contribution limit. The contribution limit is prescribed by the federal government and additional contribution room has been provided each year since 2009. Contributing in excess of the allowable contribution limit can result in serious penalties levied by the CRA against the taxpayer, so in almost all circumstances it would be unadvisable to exceed this limit.

Another key consideration is the nature of the security being held under the TFSA. Retail investors are able to keep mutual funds, registered stocks, bonds, ETFs and GICs among other types of investments in their TFSA. The eligible placement of these securities will protect the interest income, dividend income and capital gains earned from the securities from inclusion in the taxpayer’s taxable income for that taxation year, so long as several requirements are met.

Even still, earnings from these securities that are eligible for protection under the TFSA may be viewed by Canada Revenue Agency (the CRA) as taxable income depending on the nature of the activity undertaken by the TFSA holder. The key distinction lies with whether or not the earnings stem from “investment income” or “business income” in the eyes of the CRA, the latter of which is not protected from inclusions in taxable income.

 

If you are concerned about unreported taxable income from your retail investing or wish to carefully plan your investment portfolio to ensure compliance with registered savings plan rules and eligibility requirements, contact a tax professional at Rosen Kirshen Tax Law today!

 

**Disclaimer

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

by Jason Rosen

T1135 Discretionary Penalties

Over the past decade, the Tax Court of Canada (TCC) has gradually carved a role for itself to decide whether to penalize Canadians who fail to file their Foreign Income Verification Statement (T1135 form) on time. A T1135 form must be filled out by any Canadian who, at any time during the year, owns foreign property valued at more than $100,000.00 CAD. Failure to file a T1135 form normally results in a strict penalty being levied against the taxpayer. A “strict” penalty is practically automatic; the circumstances that resulted in the late filing are not examined by the CRA when they’re applied.

 

T1135 Penalties and the Tax Court of Canada

The courts have gradually decided that there are circumstances where the strict T1135 penalty should not be applied. In Douglas v HMQ, 2012 TCC 73, the TCC accepted the Appellant’s argument that the penalty imposed under subsection 162(7) of the Income Tax Act should be waived for the late-filing of a T1135 form.

In that case, the Appellant knowingly filed his T1 income tax return along with his T1135 nine months late. He assumed that his failure to file on time would not attract a penalty as he did not owe any taxes for the year. However, the Minister imposed the maximum penalty of $2,500.00 for the late-filed T1135.

The TCC noted that the facts of that case justified such application to waive the T1135 penalty. The Court found that the Appellant acted reasonably in believing that there would be no penalty since no taxes were owing. Notwithstanding that subsection 162(7) imposes a strict penalty, the TCC held that it would be unfair to penalize the Appellant in these circumstances.

This decision suggests that a taxpayer may have recourse through the TCC for late-filed T1135 penalties when the taxpayer has exercised “all reasonable measures” to comply with the Income Tax Act.

In Fiset v R, 2017 TCC 63 (Informal Procedure), the Tax Court confirmed the judgement of the Court in Douglas. In that case, the Minister’s counsel (the CRA) decided to agree to cancel the penalties over the course of the proceedings. Justice Fournier stated that had the agreement not been reached, he would have done so himself. Justice Fournier explained:

“It is important to recognize that the Minister of National Revenue (or his delegate) has the discretion to waive any penalty or interest imposed under the Act (subsection 220(3.1)). This is a fairness provision. In my opinion, to insist that the appellant suffer the consequences of an honest mistake would neither benefit the public administration nor enhance confidence in the CRA.” (paragraph 10)

In other words, it is not the Act’s purpose to punish an individual who makes a reasonable mistake in good faith, nor would it generate greater confidence in the CRA. The fact that a Justice of the Tax Court of Canada is considering these appeals demonstrates that these matters are within their purview. Their impact on decisions from the Appeals Division of the CRA are less certain as Appeals Officers are not bound by Informal Procedure decisions.

 

T1135 Penalties and the Federal Court

In Biswal v Canada, 2017 FC 529, the Federal Court was not able to accept the Appellant’s use of Douglas because it found that it does not have similar jurisdiction of the Tax Court of Canada. This, in essence, confirms that matters of cancelling penalties can be within the jurisdiction of the Tax Court of Canada. The Federal Court judge even encouraged the Appellant to file an appeal to the Tax Court, to access the remedy that she sought.

 

T1135 Penalties and the Voluntary Disclosure Program

In Leclerc v R, 2010 TCC 99, the Court concluded that Canadians could not be expected to know that T1135 late filing penalties would only be waived by the CRA if they formally applied under its Voluntary Disclosure Program, since these information forms do not involve fraud or non-disclosure of income. The Court’s point in Leclerc was taken further in Moore v the Queen, 2019 TCC 141, where the Court criticized the Tax Guide available to taxpayers, and found that it is unreasonable to punish ordinary Canadians with penalties for honest mistakes.

The Court in Moore cited Leclerc, stating at paragraph 17, “Justice Favreau’s comments are also relevant to, and highlight, the fact that Mr. Moore may have voluntarily disclosed to CRA his late filing, but was unaware that would have had to be done under CRA’s formal voluntary Disclosure Program if he wanted to avoid coming to Court”. He proceeded to cancel the penalties imposed on the Appellant.

If you are considering a voluntary disclosure, please give us a call.

 

T1135 Discretionary Penalties

The evolving case law underscores the more active role that the Tax Court of Canada is taking in providing oversight for the CRA’s more severe penalties and procedures. The Court is chiefly interested in whether the taxpayer exercised due diligence in trying to meet their obligation to file a T1135.  While the Court admits that relief should be granted sparingly, it also seems quite willing to consider the remedy in a broad range of circumstances.

However, the Court’s newfound discretion has only been confirmed in judgements rendered under the Informal Procedure. It has not yet been heard in a proceeding under the General Procedure.

The distinction between these two Tax Court procedures is crucial. While officers in the CRA’s internal appeal process can consider judgements rendered through the Informal Procedure, they are only bound by ones rendered in the General Procedure. Until T1135 penalty cases are heard under the General Procedure, these new developments are less likely to have an impact on decisions made by officers in the CRA’s internal appeal process. This unfortunately means that Canadian taxpayers who are unfairly subject to T1135 penalties cannot benefit from the CRA’s internal appeal process; they will have to undergo a costly appeal to the Tax Court or pin their hopes on a taxpayer relief request.

 

If you have any questions about Form T1135, “Foreign Income Verification Statement”, or you are late filing it, or simply don’t know whether you need to file it or not, 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

The Taxation of Electric Vehicles

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

 

What is a Zero Emission Vehicle?

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

Examples of ZEV’s include the following:

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

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

 

Purchase and Lease Incentives

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

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

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

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

 

Capital Cost Allowance and Zero Emission Vehicles

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

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

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

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

 

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

 

**Disclaimer

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

by Jeff Kirshen

The CRA Audit Process

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

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

 

CRA Audit Basics

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

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

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

 

How Long does the CRA have to Initiate Audit Proceedings?

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

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

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

 

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

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

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

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

 

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

 

**Disclaimer

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

by Jeff Kirshen

Accommodation Sharing

Recently, many Canadians have been looking to get away from the city and enjoy more spacious living due to the imposed lockdowns. As such, individuals have been turning to accommodating sharing platforms to rent out cottages or bigger homes. For a small pocket of homeowners, this has created a boost in business and an opportunity to generate extra income.  Indeed, accommodation sharing has become a lucrative business since the rising popularity of AirBnB. Whether you are operating AirBnB rental units full time as a business or just part time to generate side income, there are several tax implications that homeowners should be aware of.

 

Rental Income v. Business Income

First, many individuals are surprised to learn that revenue earned from AirBnB and accommodation sharing is taxable. For the most part, income generated through accommodation sharing will be classified as rental income. Homeowners generating rental income will need to report and file a T776 form – Statement of Real Estate Rentals. This form provides details on the income, expenses and capital cost allowance incurred from the property.

Alternatively, in some cases the revenue earned from accommodation sharing should be reported as business income. This is often the case if the homeowner operates multiple units or provides additional services. The CRA notes that in most cases, you are earning an income from your property (rental income) if you rent space and provide basic services only. Basic services include heat, lighting, parking and laundry facilities. However, if you provide additional services to tenants, such as cleaning, security and meals, you will most likely be considered carrying on a business. The more services you provide, the greater the chance that your rental operation is a business.

It is important to remember that anyone who operates a business is required to fill out a T2125 form – Statement of Business or Professional Activities. The T2125 form is a schedule that goes along with a tax return which details the taxpayer’s income, expenses and type of business it’s operating. The following is a more detailed analysis on the T2125 form and its requirements.

 

GST/HST Remittances and Accommodation Sharing

Another common question many AirBnb hosts have is whether they need to collect and remit sales tax (GST/HST). The first important factor the homeowner must consider is whether they are doing short term or long term rentals. If the homeowner rents out their unit on a long-term basis (more than 30 days), the income is exempt from GST/HST. The second factor is the income threshold. For short term rentals, the homeowner must register and collect GST/HST if their revenue exceeds over $30,000 in 4 consecutive quarters (12 months).

 

Deductions from Income

One advantage of operating an accommodation sharing rental unit is that you can deduct certain expenses used to operate the unit. The deductibility of an expense usually depends on whether the expense was incurred for the purpose of earning or producing income.

Expenses that are commonly deducted from accommodation sharing units include but are not limited to the following:

• Maintenance and repairs;
• Mortgage interest;
• Utilities;
• Insurance;
• Property taxes; and
• Advertising.

Homeowners should be cognizant of the fact that personal expenses cannot be deducted. In other words, if any of the above-mentioned expenses were incurred for personal use, it cannot be deducted. Similarly, the homeowner should calculate the portion of the expense that was used for business if some of the expense was incurred personally.

 

Accommodation sharing is expanding and many homeowners are looking at it as a new opportunity to generate income. However, it is critical that they navigate through their tax obligations to ensure they don’t get penalties and interest if mistakes are made. If you are looking to become an accommodation host and have any questions, contact a lawyer a 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.