by Jeff KirshenInternational Tax Issues Created by COVID-19
The ongoing COVID-19 pandemic has forced changes in all aspects of life. One of the main changes being the imposition of travel restrictions to and from Canada for citizens, non-residents and vacationers. The travel restrictions imposed by Canada and many other countries worldwide, has had the unforeseen consequences of forcing people to stay longer than intended in other countries, having a drastic impact on their tax consequences. This blog post is designed to help navigate these complicated Canada Revenue Agency (“CRA”) adjustments.
The rules that will be described below apply to situations that occur or have occurred between March 16, 2020 to August 31, 2020, at which point the CRA will review and determine if they need to be extended further.
Income Tax Residency and COVID-19
In general, an individual’s residency determination for Canadian tax purposes is based on a common-law factual test. The determination is made based on an individual’s residential ties to Canada (location of permanent place of residence, family members, bank accounts, etc.). In addition, an individual who sojourns (meaning physically present) in Canada for 183 consecutive days or a total of 183 days in a single tax year, will be deemed to be a resident.
Some individuals may have been forced to stay in Canada longer than originally anticipated due to travel restrictions placed by Canada or their country of residence. The CRA has stated that where the individual has remained in Canada solely because of COVID-19 related travel restrictions, the travel restricted days will not count towards the 183-day sojourn requirement. Moreover, the CRA will not take into account any of those days spent in Canada towards their common law test of residency (the common law test stems from Thomson v. Minister of National Revenue).
Under Canadian tax law, foreign corporations (corporations established under foreign law) can be considered a resident of Canada if their “central management and control” is located in Canada (stemming from the English case of De Beers Consolidated Mines v. Howe [1906] A.C. 455 (HL)). One of the main factors in determining central management and control is where the board meeting takes place. If due to COVID-19 travel restrictions, a board member is stuck in Canada, unable to leave and must attend board meetings from Canada, the CRA will take this factor into account when determining residency. The CRA will also look to applicable tax treaties where appropriate.
Carrying on Business in Canada / Permanent Establishment
Another potential issue caused by COVID-19 travel restrictions, is that generally speaking, non-residents and non-resident businesses only pay taxes on their income that stems from “carrying on business in Canada”. What will then happen to employees who regularly perform their working duties outside of Canada, but due to travel restrictions, have to perform their duties in Canada? Will they be considered to be a resident, or have a permanent establishment in Canada? The CRA has confirmed they will not consider a non-resident entity to have a permanent establishment in Canada solely because its employees perform their duties in Canada due to travel restrictions.
Similarly, the CRA will exclude any days present in Canada due solely because of travel restrictions in their calculation of the 183-day presence test in the applicable tax treaties (such as Article V(9)(A) of the Canada-United States Income Tax Treaty).
Cross-Border Employment Income
Under the Canada-United States income tax treaty, Canada is permitted to tax an individual’s salary, wages and other similar remuneration derived by a resident of the US in respect of any employment services provided in Canada. However, some of the remuneration is not taxable in Canada if a) it does not exceed $10,000 or, b) the person is present in Canada for less than 183 days. The CRA has clarified that where such an individual is present in Canada, and exercising their employment duties in Canada, solely due to travel restrictions, those days will not count towards the 183-day total.
Sale of Canadian Property by Non-Residents of Canada
Under Canadian income tax legislation, a non-resident vendor who disposes of taxable Canadian Property must notify the CRA within 10 days after disposing of it, or at any time before officially disposing of it. Whenever the CRA receives either an amount to cover the tax on the gain from the sale of the property, or tax from a gain the vendor will realize at a later date, the agency will issue a certificate of compliance to the vendor (a section 116 certificate). Vendors needs these certificates in order to avoid penalties in the future.
Due to COVID-19, the processing of these requests was temporarily interrupted. Thankfully, the CRA has confirmed that if you are a vendor who submitted a S.116 request and the certificate has not been issued by the time the purchase happened, the purchaser or vendor can request the CRA to provide a comfort letter. This letter advises the purchaser/vendor to retain the funds they have withheld, until the CRA’s review is complete. The CRA will not assess penalties or interest on these COVID-19 related delays.
Overall, the CRA has stated that there will be hearing matters involving delays in travel due to COVID-19 travel restrictions on a case by case basis. Meaning that your specific fact scenario, might entitle you to taxation relief even if you did not meet any or all of the requirements mentioned above. On the opposing end of the spectrum, even if you fit into these rules and requirements, you may still end up owing taxes to the CRA based on their determination. If you feel that your situation requires some assistance, Rosen Kirshen Tax Law can help. If you have any questions, feel free to call us and schedule a consultation now!
**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 KirshenCRA Audits of COVID-19 Benefit Programs
Globally, COVID-19 has been the greatest upheaval the world has seen since the second World War. Millions infected and countless effected. Government assistance programs such as the Canada Emergency Response Benefit (“CERB”), Canada Emergency Wage Subsidy (“CEWS”), and the Canada Emergency Student Benefit (“CESB”) have all been instituted in order to help the Canadian people through this challenging time. The Canada Revenue Agency has recently updated the public in regard to post-payment validation requirements for its assistance programs. Here’s what you need to know:
CERB, CEWS, CESB, and CRA Audits
Between the months of July and August, the CRA has announced that it will launch a pilot CEWS post-payment compliance project through the Trust Exam Program and Employer Compliance Audit. In order to ensure compliance, the CRA will institute a combination of automated queries within its data, follow-up calls to verify certain elements of the taxpayer’s claim (when necessary) and will also begin a more comprehensive post-payment review and audit of all claims made under the CEWS.
Beginning in September, the federal government of Canada will begin post-payment validation of the new programs introduced as a result of COVID-19. These programs include CERB, and CESB. Further, the CRA will monitor the initial intake of claims and adjust its queries as necessary. The purpose of post-payment validation for these new programs is the CRA’s attempt to maintain the integrity of the program and deter fraudulent application filings.
If the CRA concludes that a taxpayer is not eligible for the wage subsidy, the taxpayer will then be required to repay amounts paid. It is possible that penalties and interest are applied as well.
CRA Audits – What do I need to do?
The CRA expects all taxpayers to maintain adequate books and records to ensure that the claim is accurate and complete, and clearly supports the taxpayer’s eligibility for the wage subsidy for a claim period. This includes ledgers, journals, financial statements, contracts, calculations of other working papers, payroll records, etc. Creating your own “paper trail” can be tedious but is imperative in ensuring your claims are supported and can help you avoid being penalized for fraudulent claims.
For CERB, the CRA is actively monitoring the situation to ensure that compliance with the lax laws is assured. With the same goal in mind, the CRA ensures that, regardless of the assistance program you apply for, they monitor each claim and ensure that the claims are valid, and the claimant is eligible for the support program they have applied for, whether it be CERB, CEWS or CESB.
There is some good news to share. The federal government has extended the CERB payments from 16 weeks to 24 weeks as a result of the ongoing pandemic for those eligible.
Penalties and Non-Compliance
Many have wondered whether the federal government will be taking active steps in penalizing those who have applied for an assistance programs they are not qualified for. The answer to this question is, yes. Due to a specific anti-avoidance rule, an employer will not be eligible to claim the wage subsidy for a claim period if the employer participates in a plan that has one of the main purposes of effectively reducing the employer’s qualifying revenues for the current reference period, in order to qualify for the subsidy. As a result, where this anti-avoidance rule applies, the employer will be liable to a penalty equal to 25% of the amount of wage subsidy that is claimed in its application and will have to pay back any wage subsidy that it received.
In addition to this, if an employer knowingly makes a false claim amounting to gross negligence, the employer is liable to a penalty of up to 50% of the difference between the amount of the wage subsidy that it claimed in its application and the amount of wage subsidy to which it is actually entitled.
If you have questions about your eligibility for any of these programs, call us today! We’re here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenHome Office Expenses and COVID-19
With almost all businesses adopting a work-from-home policy during the COVID-19 pandemic, employees and independent contractors may be wondering if they can claim home office expenses for their new work environments.
If you have been working remotely, you may be able to claim some expenses related to the business use of the home.
Home Office Expenses and COVID-19 – Am I Eligible?
The COVID-19 pandemic has resulted in many unprecedented changes in our lifestyle and workspaces. The CRA is aware of these changes and recently stated that, in light of COVID-19, they will allow up to $500 in reimbursement for purchases related to setting up technology to work remotely. This means that up to $500 in personal computer equipment expenses will not be considered a taxable benefit. However, employees must have invoices for these purchases and the purchases must be made primarily for the employer’s benefit. Unfortunately, you may not be able to deduct expenses for purchases of equipment that you simply prefer to use versus those that are necessary for you to perform your job.
For an employee or an independent contractor to claim home office expenses, at least one of two requirements must be met. The workspace in your home must be either:
- Your principal place of business (you work from this space more than 50% of the calendar year); or
- You use the space only to earn your employment or business income on a regular and continuous basis, and for meeting customers or clients as part of your work duties
While the CRA has not announced whether they will be relaxing these requirements considering the new mandatory work-from-home arrangements put in place because of the COVID-19 lockdown, they may provide some leeway in their interpretation of the rules. This is especially true for employees who were required to work from home and adopted their home office as their principal place of business during the lockdown.
If you are an independent contractor, you must meet one of those two conditions to claim home office expenses. However, if you are working from home during the lockdown as a requirement of your contract for service and it is your principal place of business for the time period, then you may be eligible to claim home office expenses should the CRA relax the rules.
If you are an employee who is now working remotely from your home office and meet one of the two conditions required, you also need:
- A formal work arrangement that outlines that you are required to work from home; and
- A Form T2200 from your employer.
Home Office Expenses and COVID-19 – What is a Formal Working Arrangement?
An employee looking to deduct home office expenses must do so only if the employee is “required by the contract of employment” to incur those expenses. While it would be ideal for this requirement to be formalized in a written agreement or as part of the employment contract, it may be unrealistic given the current circumstances. Nevertheless, you may be able to rely on the fact that your work from home arrangement during the lockdown is an implied requirement of your employment. The CRA confirmed that they will accept a non-written contract where the taxpayer can establish that it was “tacitly understood” between the employer and employee that such expenses were to be made by the taxpayer and that they were necessary under the circumstances to fulfill the duties of employment.
Home Office Expenses and COVID-19 – What is Form T2200?
Please see our previous blog post found here to learn more about Form T2200.
Home Office Expenses and COVID-19 – What Expenses are Allowable?
If you meet the eligibility criteria, you may deduct the part of your costs that relate to your workspace within the home. This can include heat, home insurance, electricity, minor maintenance, and property taxes. However, you cannot claim mortgage interest expense and capital cost allowance. If your workspace within the home is part of a rented house or apartment in which you live, you can deduct the percentage of the rent and maintenance costs related to that space.
You can calculate the amount of home office expenses you can reasonably claim by dividing the total area of your home office or workspace by the total finished area of the home. The amount of maintenance costs that you can deduct in relation to your workspace likewise depends on whether the expenses you paid were used to maintain only the workspace or whether part of the material or work went towards the maintenance of other parts of the home. At all times, the expenses you claim must be reasonable and should be supported by invoices and supporting documentation. The total amount you deduct in home office expenses is also limited to your net income before your deduction. You cannot create or increase a loss from employment using home office expenses.
The CRA’s mandate and approach to taxation during the COVID-19 pandemic continues to evolve rapidly. The information provided here regarding the rules and interpretations regarding home office expenses is subject to change.
If you are filing taxes, are being audited for your home office, or you have questions about what home office expenses you are eligible to claim, give Rosen Kirshen Tax Law a call today! We can help you navigate this complicated process. 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 KirshenParticipating Debt Interest
Participating debt interest and regular interest are treated differently by the Income Tax Act here in Canada. Whether interest is considered to be participating or regular depends on whether certain factors are present in the the repayment of such debt. For example, if money was loaned to someone so that they could go out and buy a rental property, participating debt interest would allow the creditor to make the amount of the interest payments dependent on something, say the profit from the rental property or the cash flow moving through it. It may also be tied to revenue, prices, or a variety of other factors.
Regular interest is when there is a set amount payable to a creditor based on how much was loaned.
Participating Debt Interest and International Taxation
In today’s fast-paced and competitive market economy, many people look past the Canadian border to produce and generate personal and corporate income. This is especially true for both Canadian and U.S residents alike. However, taxpayers often question what tax implications are imposed on income generated outside of the country. For example, many Canadian residents choose to conduct and run their business in the U.S. As such, cross-border business or investment activities could potentially have both U.S and Canadian tax implications.
Normally, when interest payments are made to a resident of another Country, taxes are withheld. Each tax treaty Canada has with other countries must be examined to determine whether withholding is necessary. The type of interest being paid matters for withholding purposes as well.
Participating Debt Interest and the Income Tax Act
Section 212(3) of the Income Tax Act defines Participating Debt Interest as interest (other than certain amounts which are “fully exempt interest”) that is “paid or payable on an obligation, other than a prescribed obligation, all or any portion of which interest is contingent or dependent on the use of or production from property in Canada or is computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion or by reference to dividends paid or payable to shareholder of any class of shares of the capital stock of a corporation. Over the course of the years, the Income Tax Act has undergone many amendments and as a result, withholding from most interest payments to non-residents has been eliminated. However, it is important to note that a taxpayer may subject to withholding tax on interest payments that fall under “participating debt-interest”.
Participating Debt Interest and Withholding Taxes
As of today, if you are earning participating debt interest from another country, that other country will very likely have to withhold taxes before sending you any funds. Under the current rules in Canada, certain payments including standby and guarantee fees are treated for purposes of the Canadian non-resident withholding tax provisions as interest on the related debt that would be, or is, issued. Further, pursuant to the new rules, these payments will also be exempt from Canadian non-resident withholding tax, provided that the recipient deals at arm’s length with the borrower and, where applicable, the amounts are not participating debt interest.
If you are a Canadian tax resident, and you are earning participating debt interest or are thinking about lending funds overseas, call us today! We can assist with putting together a plan to minimize taxation and/or withholding, and we ensure that you fully understand your tax withholding obligations.
**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 KirshenNon-Residents of Canada owning Canadian Rental Property
The idea of owning property and generating a rental income is very appealing to most people. This is especially true in major cities across Canada like Toronto and Montreal, where rentals rates are high. As a result, many non-residents look at Canada as a prime place to buy property and generate rental income.
For any non-resident’s interested in taking on such an endeavour in Canada, there are a few things to keep in mind to avoid any unforeseen tax consequences. Most non-residents who own property and earn a rental income in Canada may be unaware of the Canadian non-resident withholding tax requirement and filing obligations. It is important to be aware and properly meet these requirements as there can be significant interest and/or penalties imposed by the CRA for failing to do so.
Non-Resident of Canada owning Rental Property – Reporting Requirements
There is a non-resident rental income tax reporting requirement, where the CRA imposes a 25% withholding tax rate on the gross rental revenue non-residents’ receive. The responsibility falls on the payer, such as a tenant, or a property manager to withhold the non-resident tax at the rate of 25%. The payer must remit the withholding tax to CRA on or before the 15th day of the following month the rental income applies. Failing to remit the tax will lead to penalties and interests on the non-resident tax amount.
Another thing to keep in mind is the NR4 slip which is a statement showing the amount paid to a non-resident (gross rental income). The payer needs to provide non-resident NR4 slips including the gross rental income and the tax withheld on a NR4 slip. The NR4 needs to be submitted to CRA by the payer on or before the last day of March of the following year to which the rental income applies.
Non-Resident of Canada owning Rental Property – How do I Minimize the Withholding?
There is good news though. The tax withholding amount can be reduced under certain conditions by filing an NR6 form. By doing this, the payer holds 25% on the net amount of monthly rent. Otherwise, the tax would have to be remitted at 25% of the gross rental income. Once the CRA approves the NR6 form, the payer is able to submit monthly withholding taxes on net rent income instead of the gross rental amount. Keep in mind that the NR6 form is due on or before the first day of each tax year or on the first day of rental payment.
Making use of the NR6 requires a taxpayer to elect under Section 216 of the Income Tax Act. What this means is that you need to file a specific tax return, by a specific due date.
If you weren’t aware of these deductions, and have remitted 25% withhold tax on your gross rental income, you can file a Section 216 tax return. By doing so you, you can receive a refund of the difference between the total tax payable and the non-resident rental income tax already remitted. You have until June 30th of next year to file the Canadian Income Tax Return for Electing under Section 216.
If you are a non-resident of Canada for tax purposes, and own or plan to own, a rental property in Canada, there are many requirements around non-resident rental income. At Rosen Kirshen Tax Law we have the experience and the expertise to help both non-residents and withholding agents with their tax needs and all filing requirements. Call us today to learn more!
**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 KirshenOffshore Corporations and the Voluntary Disclosures Program
With increasing globalization, it is common for many Canadian residents to be involved with business corporations and companies, both small and large, located outside Canada. If you are a Canadian taxpayer who is involved with a foreign corporation, the Canadian Income Tax Act may require you to file Form T1134 with the Canada Revenue Agency (CRA).
Given the complex reporting requirements of Form T1134, many Canadian taxpayers fail to file the form when required. This failure to meet reporting obligations under the Income Tax Act can result in significant penalties and interests for a taxpayer.
Taxpayers who are required to file a T1134 and have failed to do so, however, may be eligible for relief through the CRA Voluntary Disclosures Program. The disclosure allows taxpayers to avoid prosecution, penalties, and some interest associated with failing to meet their past reporting obligations.
Offshore Corporations and Form T1134
The Income Tax Act (s. 233.4(4)) requires resident taxpayers “of which a non-resident corporation is a foreign affiliate at any time in the year” to file a Form T1134. This means that taxpayers in Canada who are an “affiliate” to a foreign, offshore corporation at any time in the year, must file the required Form T1134 at tax year-end.
A corporation outside Canada meets the criteria of being a “foreign affiliate” of a taxpayer if:
- The taxpayer’s equity percentage in the corporation is 1% or greater; and
- The equity percentages of the taxpayer and each “person” related to the taxpayer total 10% or greater
These requirements ensure that taxpayers and related taxpayers who, together or separately, own 10% or more equity in a foreign corporation fall into the category of persons required to file a T1134.
The term “person” includes corporations, as well as individuals. The definition of “related persons” likewise includes relations with or between corporations, and individuals who control corporations. People related via marriage, blood, common-law relations, and adoption are also included in the definition.
Offshore Corporations and Form T1134 – Exceptions
Certain situations may exempt a taxpayer from filing Form T1134. Notable exemptions include:
- The first year in which a person (who is not a corporation) becomes a resident for the first time;
- Where the aggregate cost to the taxpayer, in a year, of its interest in the foreign affiliate is
- less than $100,000, and
- the corporation is “dormant” during the reporting period.
The foreign corporation must meet certain definitions to be regarded as “dormant”, such as owning assets worth less than total fair market value of $1,000,000 at all times during the year and having gross receipts of less than $25,000.
Offshore Corporations and Form T1134 – Deadline
A Form T1134 – “Information Return Relating to Controlled and Not-Controlled Foreign Affiliates” asks the taxpayer to provide information and documentation about the affiliated foreign corporation, such as the value of all shares the taxpayer owns in the company, assets held by the foreign corporation and taxes paid or payable on the net income, among other requirements.
In the past, each taxpayer had to file Form T1134 within 15 months of the end of the reporting taxpayer’s tax year or in the case of a partnership their fiscal period.
However, the CRA has changed the rules for 2020 and subsequent years. For tax years that begin in 2020, Form T1134 will have to be filed within 12 months of the end of the reporting taxpayer’s tax year or, in the case of a partnership, fiscal period.
For tax years that begin after 2020, Form T1134 will have to be filed within 10 months of the end of the reporting taxpayer’s tax year or, in the case of a partnership, fiscal period.
Note that you must include all additional information required by the Form on a separate page if there is insufficient space.
Offshore Corporations and Form T1134 – Penalties
Penalties for failure to file the required form can be severe. This includes a penalty of $2,500 for every year that a taxpayer failed to file the form, even if they did not intend to and were unaware of their obligation to do so. If a taxpayer knowingly fails to file a T1134, however, gross negligence penalties of up to $12,000 for each failure to file can also be levied after CRA conducts an audit.
Offshore Corporations and the Voluntary Disclosures Program
The Voluntary Disclosure Program can provide significant relief to taxpayers who fail to file by allowing penalties, some interest and potential prosecution to be waived upon disclosure. Persons who are associated with foreign affiliates may also need to file a T1135 if they own offshore bank accounts or have foreign income.
If you are interested in using the CRA’s Voluntary Disclosures Program to correct past errors or omissions regarding having a foreign affiliate corporation, Rosen Kirshen Tax Law can help you navigate this complex process and ensure that your privileged disclosure is dealt with correctly. We are here to help, call us for a free consultation today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenClaiming CERB but not Eligible?
The Canadian Emergency Response Benefit (CERB) has injected billions of dollars into the pockets of millions of Canadians, to help the country endure the COVID-19 pandemic. In a previous article, we discussed how to determine if you are actually eligible for CERB, and the consequences for those whom are found to be ineligible. More recently, however, news reports have surfaced regarding a proposed bill that is in its early stages in the House of Commons, that clarify how the government and the CRA could proceed following the pandemic.
Claiming CERB but not Eligible
The Canadian federal government is considering enacting a bill that would impose severe punishments, including fines and even jail time, for Canadians that have been defrauding the Canadian Emergency Response Benefit (CERB) program. The legislation is current at draft stage and is struggling to gain support from opposition parties, but is revealing of how the Canadian government would like to seek out those they deem to be undeserving of the benefit following the COVID-19 crisis.
The draft bill targets those whom:
- Made a false or misleading benefit claim
- Knowingly failed to declare income for the period which they applied for the benefit
- Received a benefit cheque they were knowingly not eligible for, and
- Aided someone in committing one of the aforementioned offences.
It appears that, much like the eligibility criteria for CERB, the fraud criteria are quite broad and are a catch-all. They almost seem like four different ways of saying the same thing: if you knew you were not eligible, but accepted CERB anyways, then you engaged in fraud. By framing each criterion in overlapping but technically distinct ways, they ensure that they are encompassing all potentially fraudulent behaviour.
It is important to emphasize that the bill is not a prescribing a punishment for those who accidentally took CERB. At its current stage, the bill seems to go after those that are maliciously accepting support from the government that they do not deserve. However, in practice the CRA will likely extend the boundaries of what would be considered fraudulent behaviour and force taxpayers to prove otherwise, just as they tend to do with gross negligence penalties.
Claiming CERB while knowing I am not Eligible
Under normal circumstances, if you are ineligible and received the CERB, the CRA will have grounds to investigate, audit, and assess you. Following an assessment the CRA will attempt to collect on the funds, plus interest and penalties. The interest and penalties accumulate quickly, and can transform into a minor debt into one that is much more substantial. The CRA could also pursue legal action in order to collect on the debt, such as garnishing wages or placing a lien on your property as security until the tax is paid.
If this bill becomes law, individuals accused of any of the above could be fined for up to $5000, plus double the amount of the benefit that was received. It also can incorporate amounts the accused would have received through CERB due to fraud. Most surprisingly, the bill also states that one could be punished with up to six months in jail for fraudulently accepting CERB.
May I Repay CERB?
Canada is allowing the repayment of CERB. More information may be found here. You may repay it if you realized you are actually ineligible, or if you’ve returned to work. CERB is taxable so unless repaid in full in 2020, you will receive a tax slip for the income that must be reported on your 2020 income tax returns. There is no indication whether repaying the CERB will stop the CRA from coming after you if you knowingly received it while ineligible, but we are hopeful that will be the case.
If you are a CERB recipient but have doubts regarding your eligibility, please feel free to contact our firm for a consultation. We have extensive experience managing CRA collections, and ensuring that no legal action takes place against you. We can assist in creating a plan of action in order to avoid the worst consequences of owing a debt to the CRA. We are here to help! In the meantime, we will continue to keep you informed and hope you and your families remain safe and healthy in these uncertain times!
*Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat if I use an RRSP as Security for a Loan?
A Registered Retirement Savings Plan is used to defer taxes on income earned to a later date. The idea behind an RRSP is that while you’re working, you are in a higher tax bracket than you will be later in life. So when you withdraw the funds down the road, it will be taxed at a lower rate. RRSPs are a very useful tax planning tool for your retirement. They are quite different from a TFSA, which is also a retirement tool. Please see here to review the differences between the two.
Withdrawal from an RRSP
Once you withdraw funds from an RRSP, the funds taken out are taxed as regular income. But, what happens if you don’t withdraw the funds, but rather pledge the account as security or collateral for a loan?
Using an RRSP as Security or Collateral for a Loan
If you want to take a loan from a bank, normally they will ask for some sort of security or collateral in case you cannot pay the loan back. The bank would then seize the security or collateral to satisfy the debt. If you pledge your RRSP as security or collateral, you may be costing yourself quite a large amount of taxes.
The reason for this is because by pledging the RRSP as security or collateral, you are unknowingly including the value of the pledged asset as income in the year of pledge.
What happens once the Loan is Repaid?
If you have included the loan amount in income, then once it has been repaid and the security is released, this amount can now be deducted from your income. This provides a good reason to pledge the RRSP as security or collateral rather than withdrawing the amounts. If you withdraw the amounts, you are unable to claim a deduction when the loan is repaid.
What happens if the Loan is not Repaid?
Typically, the bank or whoever provided the loan, will seize the pledged security or collateral to satisfy the debt. Since the income inclusion already happened, there is no second income inclusion.
If you are considering using your RRSP as security or collateral, please make sure you investigate the tax consequences before moving forward. You may, unknowingly, create a huge income tax liability that must be paid in the year this occurs. Tax planning may be very difficult for those who do not have specific expertise in the area. Should you have any questions regarding any of the above, Rosen Kirshen Tax Law has the skill and experience necessary to guide you. Be sure to contact us today to learn more!
**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 KirshenCRA Collections and COVID-19
Given the unprecedented financial turmoil facing Canadians as a result of the COVID-19 Pandemic, on March 20th 2020, the government of Canada announced a suspension of collection activities and the removal of certain legal action. The following will detail how the suspension of these activities will affect taxpayers, and the proactive ways in which Canadians can benefit.
Suspension of CRA Collections Activity
The Canada Revenue Agency has suspended debt collection due to the fallout from the COVID-19 outbreak.
The CRA has stopped collection on new debts “until further notice,” and said it will allow flexible payment arrangements. As per pre-existing debt obligations, the CRA has stated that collections staff will address pre-existing situations on a case-by-case basis to prevent financial hardship. For general information on the power and limits of the CRA collections, see our blog here.
The CRA has also stated that taxpayers prevented from making payments, filing returns on time, or complying with other tax obligations due to circumstances beyond their control “can submit a request to cancel penalties and interest.” This can be done via an application for Taxpayer Relief under the IC07-1R1 Taxpayer Relief Provisions. For more information on these provisions, and the CRA’s guidelines surrounding what constitutes Taxpayer Relief, see our blog on Taxpayer Relief found here.
With regards to payment plans, the CRA has arranged for payment plans to be available on a case by case basis in relation to the inability to pay taxes, child and family benefit overpayments, Canada Student Loans, or other government program overpayments in full. The Federal Government has already pushed back the income tax filing date to June 1, and has allowed taxpayers who pay by instalments to delay their payments.
CRA Collections and COVID-19 – What Happens Next?
Canadian taxpayers have been given the unique opportunity to take proactive action and benefit from the suspension of CRA Collection’s activities. CRA Collections will be under tremendous pressure once the Pandemic has passed. There will be hundreds of thousands if not millions of Canadians who are now unable to pay their taxes. CRA Collections will have its hands full, to say the least.
That is why being proactive matters so much at this point in time. Here at Rosen Kirshen Tax Law, we are assisting our clients with working out a plan for repayment once CRA collections resumes regular operations. By having a plan of action ready, CRA collections will be much more willing to work with us and the taxpayer. The reason for this is because they will have a lot of files in their inventory, so if they can make a deal and move on, we think they will do so.
Ignoring your debt does not make it go away, even as CRA actions are suspended. In fact, it has never been more prudent to manage your affairs appropriately. It is very important that taxpayers act quickly and avoid long term financial or legal consequences which may arise when the CRA reintroduces debt collections.
Once the CRA reactivates debt collections, they will also begin charging interest compounded daily at the prescribed rate on any amount owing – until your balance is paid in full. Taking the time now to properly address your debt amount will avoid the accumulation of interest once the CRA’s pandemic protocol comes to an end. As well, properly organizing your financial affairs now, for future negotiations, will allow for a seamless process to ensure that no legal action is taken, or reinstated, once the CRA resumes their normal functions.
At Rosen Kirshen Tax Law, we have both lawyers and paralegals with years of experience negotiating directly with the CRA to resolve your tax debt and mitigate the legal consequences which may occur once CRA Collections is operating. If you have any questions about how the changes to CRA may affect you as a taxpayer, or questions about dealing with CRA Collections, please contact our firm for a free consultation.
In the meantime, we will continue to keep you informed and hope you and your families remain safe and healthy in these uncertain times.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenThe Canada Emergency Response Benefit – What if CRA wants it back?
The Canada Emergency Response Benefit (CERB) has injected billions of dollars into the pockets of millions of Canadians, to help the country endure the COVID-19 pandemic. It is one of the most ambitious social welfare programs Canada has ever seen, and has certainly been a contributing factor in the country’s success in stopping the spread of the virus. Without the benefit, Canadians would be less likely to be able to pay their rent, stay in their homes and practice social distancing. Many would seek employment despite the virus to support their families. The CERB has provided some stability amidst great uncertainty.
Canada Emergency Response Benefit – Eligibility
It seems eligibility for the benefit has expanded every week. At first only those who lost their jobs due to COVID-19 were eligible after meeting other criteria. Then it was expanded to include those with reduced hours and pay. Students and seasonal workers struggling to find work were included after, followed by artists, farmers, and more. It is getting harder to know who is not eligible for the benefit anymore.
This is partly by design. In the current stage, the benefit’s eligibility has been set up as a catch-all system. Following the pandemic the government will take stock and determine who was not actually eligible. Therefore, determining eligibility today based on government statements and reports is difficult; they have not clarified the categories of persons who would be ineligible in recent weeks. Recently there are news reports of individuals that have been claiming the CERB when they are not eligible. While some are doing so intentionally, many are accidental, as the eligibility criteria for the CERB has become increasingly complicated over time.
We would like to help fill the gap. If you match any of the descriptions below, you are almost certainly not eligible for the CERB and may be penalized following the pandemic.
Fully Employed
If you are currently employed and are receiving the same salary as before the crisis, you are not eligible. The benefit is intended to help those that do not have a paycheque, or have seen their pay or hours sharply reduced. If you are employed and are making the same salary, then the CERB is not for you.
Voluntarily Unemployed
If you quit your job and are unemployed for reasons unrelated to COVID-19, you are not eligible for the CERB. One of the most important criteria for the CERB is that the need for assistance must be as a result of the pandemic. One cannot quit their job to take time off work, rest, take up a hobby, and then claim CERB. It is presumed that those individuals are not suffering from the lack of a paycheque because they already planned to live without earning a salary, and are therefore not in need of assistance.
Those who Receive Government Benefits and do not meet the Employment income threshold
Benefits received from the government prior to the pandemic do not count as part of your income calculation for determining if you earned enough to be eligible for the CERB ($5000 since Jan 1, 2019). The income calculation must incorporate employment or self-employment income. For example, someone living solely on disability would not be eligible, as they are already receiving support from the government. That individual’s source of income from the government has not been effected by COVID-19, so they are not eligible for CERB.
In essence, in determining your eligibility, the question that must be asked is whether your employment or income has genuinely been affected by the COVID-19 pandemic. If it has not, you are likely not eligible for the CERB.
What if I have received the Canada Emergency Response Benefit but I am not entitled to it?
If you are ineligible and received the CERB, the CRA will have grounds to investigate, audit, and assess you. Following an assessment the CRA will attempt to collect on the funds, plus interest and penalties. The interest and penalties accumulate quickly, and can transform into a minor debt into one that is much more substantial. The CRA could also pursue legal action in order to collect on the debt, such as garnishing wages or placing a lien on your property as security until the tax is paid.
If you are a CERB recipient but have doubts regarding your eligibility, please feel free to contact our firm for a free consultation. We have extensive experience managing CRA collections, and ensuring that no legal action takes place against you. We can assist in creating a plan of action in order to avoid the worst consequences of owing a debt to the CRA. We are here to help! In the meantime, we will continue to keep you informed and hope you and your families remain safe and healthy in these uncertain times!
*Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.