Tax

by Jeff Kirshen

Canada Emergency Wage Subsidy Audits

COVID-19 and the Canadian government’s response to lockdown parts of the country has naturally left many businesses struggling to operate. For some businesses, revenue have fallen so sharply that they are faced with the possibility of shutting down if they don’t receive assistance.

Canada Emergency Wage Subsidy

In response, the Government of Canada implemented a broad range of emergency benefits to help businesses through these challenging times. Most notably, the federal government enacted the Canadian Emergency Wage Subsidy (CEWS).

The CEWS operates by subsidizing up to 75% (up to a maximum of $847 per week) of the employee wages to Canadian employers who have seen a drop in their revenue due to the pandemic. In other words, the objective of the CEWS is to act as a financial crutch for businesses to re-hire workers, prevent further job losses and ease companies back into normal operations.

It follows that the CEWS program is not intended to help businesses that have not been financially affected by the pandemic.

Canada Emergency Wage Subsidy and CRA Audits

To ensure that the CEWS is achieving its objective, the Canada Revenue Agency announced that they will launch an audit pilot project to verify that CEWS applicants were in fact eligible and fraudulent transactions were not being abused.

As of August 25, 2020, it was reported that the CEWS paid out approximately $30 billion dollars to nearly 300,000 applicants.

Potential Consequences for Ineligible Applicants

If the CRA audits a Canadian employer/business and subsequently deems them ineligible, there are various potential ramifications.

First, an employer that is determined not to be eligible for the CEWS must repay all amounts paid under the wage subsidy program.

An employer will also have to return or repay all or part of the wage subsidy where:

• It made an error in the calculation of the amount claimed for a period, thereby reducing the amount originally claimed;
• It noticed that it did not qualify for the wage subsidy after submitting the application and receiving the subsidy;
• It noticed that made a data entry error (typo), thereby reducing the amount originally claimed for a period; and
• On a review of its claim by the CRA after it received the subsidy, the claim amount was either rejected or reduced by the CRA.

Furthermore, if the CRA determines that an employer knowingly, or under circumstances amounting to gross negligence, made a false statement or omission in its CEWS claim, the employer is liable to a penalty up to 50% of the difference between the amount of wage subsidy that it claimed in its application and the amount of wage subsidy to which it is actually entitled.

Lastly, if the CRA finds that a CEWS claim was made fraudulently, a criminal investigation and prosecution can be charged in addition to the civil penalties. A person convicted of a criminal offence related to a fraudulent CEWS claim faces the potential of imprisonment.

Examples of inappropriate conduct by the Canadian employer would include underreporting or even intentionally decreasing their business revenue to qualify for the CEWS. Another example would include “hiring” the services of family members and friends to receive the CEWS. As always, the finding of gross negligence and criminal prosecution would be determined on a case-by-case basis and on the specific facts.

The Onus is on the Taxpayer

It’s important to be mindful that once an audit is commenced, the onus is solely on the taxpayer (in this case Canadian employer/business) to prove they are eligible for the CEWS. This means that any further requests made by the CRA regarding records and proof of operations of the business must be adhered to in order to prove eligibility.

Considering the serious potential risks involved in the CEWS audit, it is critical that applicants understand their obligations to ensure their interests are protected. If you need assistance with the CEWS or any pending audits, professionals at Rosen Kirshen Tax Law have a proven track record fighting against claims by the CRA. Facing against the pandemic and its effects alone is a daunting task. Taxpayers should not have to also worry about the CRA making claims against them. Call us today!

**Disclaimer

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

by Jeff Kirshen

What is the Departure Tax?

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

What is the Departure Tax?

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

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

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

Who does the Departure Tax Apply to?

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

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

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

What Kind of Property does the Departure Tax Apply to?

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

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

Departure Tax – Tips and Tricks

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

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

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

The Departure Tax and Tax Planning

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

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

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

by Jeff Kirshen

The Advantages of a Holding Company

There are numerous ways in which holding corporations can be advantageous to taxpayers. As this post illustrates, holding corporations may be used to achieve objectives such as the tax-free movement of funds between related corporations, interest charge deductibility, income splitting, or estate freezing.

Holding Companies and the Movement of Funds

Suppose company X (X Co) and company Y (Y Co) are wholly owned by a person (A). Suppose also that X Co has excess funds while Y Co lacks funds. One way by which A could move funds from X Co to Y Co would be to have X Co pay dividends to A, and for A to then move these funds to Y Co. Of course, A would have to claim the dividend received as income and pay tax before moving the funds to Y Co.

In Canada, dividends may flow between corporations on a tax-free basis. If, in the above example, A were to set up a holding corporation (Holdco), A could instead have X Co pay dividends to Holdco and avoid paying tax on the movement of funds. Holdco could then move the funds to Y Co by, for example, entering into a loan agreement or share subscription with Y Co.

Holding Companies and Deducting Interest

If Holdco decides to enter into a loan agreement with Y Co that pays interest, Y Co (and its sole owner, A) should be aware of the rule restricting its ability to deduct its interest payments from its income.

Two prominent rules in the Income Tax Act affecting a corporation’s ability to deduct interest charges are found at paragraph 20(1)(c) and subsection 9(3). The former stipulates that a corporation may deduct its interest payments from its income if those payments are incurred to gain or produce business or property income. The latter stipulates that capital gains are not property income.

Suppose Y Co borrows funds to purchase an asset that is expected to generate a significant capital gain but is generating little property income. In this instance, subsection 9(3) is likely to apply to restrict the ability for Y Co to deduct its interest payments on the loan. However, if Holdco borrows these funds instead of Y Co, and if Holdco then transfers these funds to Y Co in exchange for equity, the interest payments may be deductible. The CRA has commented in Interpretation Bulletin IT-533 and in Income Tax Folio SC-F6-C1 that the expectation of a return of funds through the receipt of dividends from a subsidiary may be sufficient for a parent company to deduct the interest it pays on a loan taken out to purchase an asset such as the above.

Holding Companies – Income Splitting and Estate Freezes

Holding corporations may also be used to achieve income splitting and estate freezing objectives. For example, family members of a taxpayer may subscribe for common shares of a family-owned holding corporation that holds shares of the taxpayer’s small business corporation. It is possible that subsection 56(2) may apply to attribute back to the taxpayer any dividend payments made through the holding corporation. However, the Supreme Court of Canada in Neuman v. The Queen held that this provision could not apply unless a family member were to have a pre-existing entitlement to dividend income from its common shares. The CRA appears to endorse the Court’s decision in Interpretation Bulletin IT-335R2 at paragraph 9.

While the above strategies highlight some of the basic advantages of using a holding corporation, the sophistication of their structures and the legal complexity of their consequences vary with the circumstances and objectives of the taxpayer. If you have questions regarding the uses of a holding corporation, or if you are interested in incorporating a holding corporation, 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

Input Tax Credits – What are they, and Am I Eligible?

Through the help of e-commerce assistance platforms such as Shopify, the barriers to entering and starting a small business have dramatically decreased in recent years.  As a result, more and more Canadians are deciding to open up independent businesses. In order for a business to run its operations smoothly, business owners must ensure that they fulfil their sales tax obligations correctly to prevent intervention from the CRA. Below is a brief summary that provides some mechanics and considerations of the Canadian Sales Tax System.

Design of the GST/HST Sales Tax

The HST (for Ontario) Sales Tax is administered and legislated through the Excise Tax Act. Moreover, it is a multi-stage value added tax, imposed on a broad range of goods and services at each stage of the manufacturing and distribution process. Each recipient in the production chain recovers the HST that they paid for the expenses related to their “commercial activities” by claiming input tax credits (ITCs). This ensures that there is no double taxation and that only the final consumer holds the burden of paying the HST tax.

Typically, many businesses incur a lot of expenses related to their commercial activities. For example, a business focusing on producing and selling furniture may pay a lot of HST on the tools they bought to create that furniture. Therefore, it is important that businesses properly redeem their ITCs.

Other common purchases and expenses which may be eligible to claim ITCs include:

• Business start-up costs;
• Legal, accounting, and other professional fees;
• Maintenance and repairs; and
• Business-use-of home expenses.

Requirements / Eligibility for Input Tax Credits

First, the business/taxpayer must be a GST/HST registrant. However, for most small and medium-sized businesses in Canada, registration for GST/HST purposes is required.

Specifically, if you provide taxable supplies and not a small supplier, then you must be a GST/HST registrant. The CRA generally considers a business to no longer be a small supplier if total revenues from taxable supplies exceed over $30,000 in a single calendar quarter or over 4 consecutive calendar quarters.

Second, registrants are only allowed to claim ITCs for expenses related to “commercial activities.” The CRA states that commercial activities must be a business or adventure or concern in the nature of trade that has a reasonable expectation of profit, and is not the making of exempt supplies. Alternatively, inputs to activities that are neither part of the supply making process, not related to it, or for personal use are not eligible for ITCs.

The exception to the rule above is for the supply of real property, other than an exempt supply. In this case, any supply of real property, whether or not there is a reasonable expectation of profit is included in the definition of commercial activity. Finally, to claim an ITC, the expenses or purchases must be reasonable in quality, nature, and cost in relation to the nature of the business.

Potential Issues to Look Out For

As previously mentioned, the responsibility of charging, collecting and remitting HST falls on each business or chain of the manufacturing process. Similarly, claiming appropriate ITCs for expenses incurred by the business fall on the burden of the business. It is the responsibility of the registrant to keep records and documents to validate any claims under a CRA audit.

Issues regarding the “nature of the business” and “relation to commercial activity” have particularly been contentious and challenging for taxpayers to understand. If you need assistance in learning more about ITCs or are already in dispute with the CRA, contact us today. Professionals at Rosen Kirshen Tax Law have a proven track record of helping taxpayers successfully prove the eligibility of their ITCs.

**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 Basics of Estate Taxation in Canada

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

Is there an Estate Tax in Canada?

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

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

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

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

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

What are the Consequences for Failure to File?

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

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

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

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

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

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

When to Seek Help?

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

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

**Disclaimer 

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

by Jeff Kirshen

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

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

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

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

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

CRA Cyber Attack – What Should I do?

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

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

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

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

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

**Disclaimer 

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

by Jeff Kirshen

International 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 Kirshen

CRA Audits of COVID-19 Benefit Programs

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

CERB, CEWS, CESB, and CRA Audits

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

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

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

CRA Audits – What do I need to do?

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

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

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

Penalties and Non-Compliance

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

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

If you have questions about your eligibility for any of these programs, call us today! We’re here to help!

**Disclaimer

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

by Jeff Kirshen

Home 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:

1. Your principal place of business (you work from this space more than 50% of the calendar year); or
2. 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 Kirshen

Participating 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.