by Jeff KirshenBusiness Emergency Subsidies (CEWS, CERS, and CHRP)
The Federal Government announced changes to the Canada Emergency Wage Subsidy (“CEWS”) and Canada Emergency Rent Subsidy (“CERS”) programs and established the new Canada Recovery Hiring Program (“CRHP”).
Canada Emergency Wage Subsidy (“CEWS”)
The Covid-19 pandemic took the world by storm and placed many businesses, especially small ones, in a precarious position of both losing revenue and potential long-term closures. To alleviate some of the pressure on businesses, the government introduced the CEWS to help businesses by covering part of their employee’s wages due to drops in business revenue. The subsidy was designed to help employers re-hire workers, prevent further job loss, and ease their business back into normal operations.
As of July 2021, changes have been introduced to the CEWS. These changes include:
- Extending the eligibility period for the Canada Emergency Wage Subsidy until October 23, 2021, and increasing the rate of support employers and organizations can receive during the period between August 29 and September 25, 2021.
- The rate of CEWS will now remain the same for claim period 20 as for period 19, declining in period 21.
- Eligible employers that were not operating on March 1, 2019, may now choose to use the alternative approach to calculate their revenue drop for claim periods 14 to 17.
The next deadline to apply for CEWS is October 7, 2021.
Canada Emergency Rent Subsidy (“CERS”)
CERS provides support directly to qualifying commercial Tenants and Property owners who are adversely impacted by the Covid-19 pandemic. The subsidy will cover part of qualifying entity’s commercial rent or property expenses, starting on September 27, 2020, until October 23, 2021.
The amount you can claim of your expenses (your rent subsidy rate) is based on the revenue drop you experienced between the claim period you are applying for and a prior reference period. You have options for choosing which prior reference period you will use.
The rate of the subsidy will be calculated as set out in the table below.
| Calculate your rent subsidy rate for periods 1 to 10 | |
| Revenue Decline (%) | Base Subsidy rate |
| 70% or more | 65% subsidy rate |
| 50 to 69.99% | (Your revenue drop – 50%) x 1.25 + 40% |
| Less than 50% | 0.8 x your revenue drop |
Eligible expenses to be subsidized under the program include:
- Gross rent;
- Percentage rent;
- Minimum rent and other amounts required to be paid under a new lease to the Landlord or a third party such as operating expenses; and
- Property taxes.
Eligible entities include individuals, taxable corporations, trusts, non-profit organizations, registered charities, and partnerships that are up to 50% owed by non-eligible members.
Eligible entitles must have a payroll account as of March 15, 2020, or have a CRA business number as of September 27, 2020, and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim. The deadline to apply is October 7, 2021.
Similarly, the government is extending the eligibility period for the CERS until October 23, 2021, and increasing the rate of support employers and organizations can receive during the period between August 29 and September 25, 2021.
Canada Recovery Hiring Program (“CRHP”)
This new program is designed to help businesses grow and recover through the hiring of more employees by providing a subsidy. The subsidy will help offset a portion of reopening costs for businesses caused by increased employee wages and hours.
To qualify for the CRHP, there needs to be a revenue decline of more than 0 percent in period 17 and more than 10 percent between periods 18 to 22. Most of the eligibility criteria for the CRHP and CEWS are similar. The maximum eligible remuneration per employee that qualifies for the CRHP is $1,129 per week. The next deadline to apply for CRHP is December 30, 2021.
If you have any questions or concerns, speak with a tax lawyer or tax specialist to discuss if these benefits apply to your particular circumstances. Contact us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer.
Related Posts:
by Jeff KirshenThe Toronto Vacancy Tax
On December 16, 2020, the City of Toronto approved the implementation of the new tax on vacant Toronto homes. The new tax is expected to generate at least $55 million to $66 million in tax revenue per year. The vacant home tax will be effective in 2022.
While further details of the tax development process will be provided in 2021, it is expected Toronto’s vacant home tax will be styled after Vancouver’s vacancy tax. The latter was introduced in 2016 by the British Columbia provincial government and became effective in 2017.
British Columbia Vacancy Tax
Under British Columbia’s Vacancy Tax Bylaw No. 11674, certain vacant properties in the city of Vancouver are subject to a 1%-1.25% tax of the assessed value of the property. A 5% penalty applies for unpaid amounts related to the vacancy tax.
Vancouver’s vacancy tax applies to all taxable property as defined in the provincial bylaw. Taxable property is residential property that is vacant property that is not exempt from taxation and not exempt from the vacancy tax. Residential property is defined as class 1 property such as single-family residences, duplexes, multi-family residences, apartments and condominiums. Vacant property is further defined as residential property that has been unoccupied for more than 180 days from January 1 to December 31 of the year (“Period”) or otherwise deemed by the rules. A property that is the principal residence of the occupier or is being rented out for at least 30 consecutive days will not be considered unoccupied.
Uninhabitable properties that do not meet the enumerated exemptions are generally taxable.
Since the vacancy tax became effective on January 1, 2017, all homeowners in Vancouver are required to submit a property tax declaration each year. If the homeowner fails to make a declaration, or makes a false declaration, then the property will be deemed vacant under the rules and possibly subject to the vacancy tax if the other criteria apply.
Vacancy Tax Exemptions
Exemptions from the vacancy tax are available. Homeowners who are away from the property for more than 180 days due to death, property renovations, hospitalization or court order will not be required to pay the vacancy tax under the Vancouver bylaw. Further exemptions apply for certain strata units and land that is limited in its lawful use. Homeowners are further exempt from the vacancy tax if title was transferred during the Period. Furthermore, even if the property is not the homeowner’s principal residence, the vacancy tax will not apply if the homeowner occupies the home for a minimum of 180 days during the Period.
Vacancy Tax Audits
During the pandemic, audits continued to be conducted in respect to the vacancy tax. An estimated 4% of Vancouver homes were audited. With the introduction of the vacancy tax on Toronto properties to be implemented in 2022, it is expected similar audits will be conducted. Taxpayers who own commercial properties, vacant land, property of which a portion is uninhabitable, or property which will undergoing lengthy renovations should consider the application of the vacancy tax in their planning. Evidentiary issues relating to the use of different mailing addresses or lack of tenancy documentation should also be considered.
The vacant home tax is expected to generate significant tax revenues and increase the Toronto housing supply. However, the tax changes will impact taxpayers in Toronto should the new rules apply to them. If you have questions, or want to look into a tax plan to ensure you don’t run afoul of the vacancy tax, speak with a qualified tax lawyer today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenGST/HST and Crypto Currency Rules
If you use cryptocurrencies to pay for goods and services, then that is considered a barter transaction. What that means, is that the value received for a sale of goods or services in exchange for crypto assets should be the fair market value of that crypto asset.
Therefore for GST/HST purposes, if a taxable product or service is sold for cryptocurrency as payments, the value of the cryptocurrency on which the GST/HST is to be assessed is the fair market value of the cryptocurrency at the time of transaction.
GST/HST Rules – Crypto Currency
Generally, GST/HST is levied such that, while the recipient of a taxable supply is liable to pay the tax, the party that makes a taxable supply must collect the tax and remit it to the CRA. While its administrative policy is to pursue the supplier, the CRA has the right to assess the recipient directly.
Presently, and until further clarification of the law, the CRA’s general position regarding the GST/HST treatment of the use of cyptoassets/currency as payment is that vendors accepting crypto for payment are at minimal risk, but that purchasers paying with crypto are at risk of incurring potential GST/HST liability (CRA documents no. 2013-0514707I7, December 23, 2013).
Crypto Currency and Financial Instruments
So, if a taxpayer “supplies” crypto by using it as a method of payment, it is still uncertain as to whether that taxpayer be required to collect and remit GST/HST. The best argument for the position that the supplying taxpayer will be not be required to collect and remit is that crypto is “money” for the purposes of the Excise Tax Act (“ETA”). This means that, if supplies of crypto are considered supplies of money, they are therefore supplies of financial services, which are exempt from GST/HST. Furthermore, the ETA definition of “money” is broad and not limited to financial instruments issued by governments, which offers even greater potential for the definition of crypto for GST/HST purposes to fall within this scope.
A secondary argument for the position that the supplying taxpayer will be not be required to collect and remit is that crypto is that crypto suppliers are usually small suppliers (i.e., less than $30,000 of supplies to both crypto and normal goods and services). Crypto suppliers who are considered small suppliers would therefore not be engaged in a commercial activity.
Lastly, if the recipient of the crypto is a non-resident, then, generally, GST/HST would not be required to be collected and remitted.
Crypto Currency, GST/HST and Canadian Tax Policy
In essence, Canada is taking a reactionary approach as they are seeing individuals and particularly institutions opening up more to the idea of transacting with cryptocurrencies. Naturally, the increase in flow of money (through crypto) creates a tremendous amount of opportunities for tax avoidance and evasion.
The CRA issued a statement in June 2019 which solidifies their stance on crypto regulation. The government formally expressed its commitment to ensuring cryptocurrency is taxed in accordance with the law.
“Canadians should know that the Canada Revenue Agency is very active in pursuing cases of non-compliance, in order to make sure that the tax system is fair for everyone.”
If you have questions about the whether GST/HST applies to your crypto currency transactions, call us today! We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenThe Corporate Association Rules
If a Canadian-controlled private corporation (“CCPC”) is associated with one or more CCPCs, subsection 125(3) of the Income Tax Act (the “Act”) provides that all the CCPCs must file with their tax returns an agreement under which the Small Business Deduction limit of $500,000 is allocated amongst them. For this reason, subsection 125(3) can pose a tax disadvantage to small business owners seeking to associate their business with others.
What does Associated Mean?
“Association” is a technical term under the Act, and the essential rules regarding whether two corporations are “associated” are found under subsection 256(1).
Under subsection 256(1)(a), two corporations are associated if, at any time during the year, one corporation controls the other. “Control” is another technical term under the Act. For the purposes of this blog post, “control” refers to indirect or direct control. Under paragraph 256(1)(a), control of one corporation by another could arise, for example, if one corporation owns more than 50% of the voting shares of another corporation.
Under subsection 256(1)(b), two corporations are associated if, at any time during the year, both corporations are controlled by the same person or group of persons. This means that two corporations could be associated even if a business owner has a 100% share over one corporation and only a 51% share over another.
Under subsection 256(1)(c), two corporations are associated if, at any time during the year, one of two related persons, who together control both corporations, has at least a 25% share of one of the corporations. This means that two corporations could be associated even if a business owner has a 100% share in one corporation and only a 25% share of his spouse’s corporation. Similarly, paragraph 256(1)(c) would apply to a business owner who has a 100% share in a corporation that has a 25% share of the corporation controlled by that business owner’s spouse.
Under subsection 256(1)(d), two corporations are associated if, at any time of the year, a person who controls one of the corporations, and who is related to each member of a group of persons who together control the other corporation, has at least a 25% share of that group’s corporation. This means that even if, for example, the ownership of one corporation were to be evenly divided amongst a business owner’s spouse and children, the corporation over which that business owner has control would be associated with the corporation over which the business owner’s spouse and children have control so long as that business owner has at least a 25% share.
Similarly, under subsection 256(1)(e), two corporations are associated if, at any time of the year, at least one of the persons of a group of persons, who are all related to each other and who together control one of the corporations, has at least a 25% share of a corporation controlled by another group of persons each member of which is related to each other and to every member of the first group.
Association – Example
Suppose, for example, a spousal couple together controlled a corporation and their three children each held a 25% share of another corporation. The two corporations would be associated under paragraph 256(1)(e) if a spouse held the remaining 25% share of the children’s corporation. However, if the couple had four children who each held a 20% share of a corporation, this corporation would not be associated if a spouse only held the remaining 20% share of the children’s corporation. This is because paragraph 256(1)(e) applies only if a person holds at least a 25% share of a corporation controlled by a related group of persons.
“Association” and “control” are technical terms under the Act, but small business owners can use these technicalities to their advantage. They have important consequences for the legal use of the Small Business Deduction. Any small business owners seeking to associate their business with another should consider the above provisions and subsection 125(3) of the Act. If you are a small business owner seeking to review the rules of association, or if you are simply interested in learning more about using the Small Business Deduction to your advantage, contact a lawyer at Rosen Kirshen Tax Law today! We are here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenTax Residency and Avoiding Double Taxation
Canadian residents are responsible for taxes on their worldwide income. Please see our other article for more information about residency status. A non-resident of Canada for tax purposes will only be responsible for taxes on income received from sources in Canada. However, due to Canada’s source-based taxation rules, Canadian residents who pay non-residents money or transfer property to non-residents may be subject to withholding tax, to be reduced by an application tax treaty. Persons who immigrate or emigrate in the year are taxed when they are considered a resident of Canada for that part of the year. Residency for tax purposes differs from residency in the immigration sense. Tax residency is a question of fact and depends on the specific facts of each case. Knowing what country you are a tax resident of is extremely important so that you are not subject to double taxation.
Tax Treaties and Avoiding Double Taxation
Tax treaties are conventions, agreements, and arrangements Canada negotiates with other countries for the purpose of avoiding double taxation for taxpayers who would otherwise be subject to taxation in both Canada and the foreign country. Another purpose of tax treaties is to prevent tax evasion.
While some countries may tax persons similar to Canada, that is, on their worldwide income based on residency, other countries may levy taxes based on citizenship (United States), or on a territorial basis for income from a source (such as France and Hong Kong).
As a result, a tax treaty is necessary to resolve situations where a single citizen is liable to tax in two or three different countries (if they are resident of one country, a citizen of another, and/or have income generated from another country). An analysis must be completed to determine where a taxpayer is actually resident so that he or she knows what country they are liable to pay tax in.
Tax Residency and Tax Treaties
Tax treaties contain a number of tests that are used to determine what country a person is a tax resident of.
The tie-breaker rules are found in paragraph 2 of the Resident Articles of most of Canada’s income tax treaties. They provide several tests for determining which country can levy its taxes in cases where the person may be liable to tax in two or three different countries. Subsection 250(5) of Canada’s Income Tax Act provides that if a person is considered a Canadian resident, then that person will be deemed to be a non-resident if a tie-breaker rule in the applicable tax treaty treats them as being a resident of the other country.
For breaking the “tie” between residencies, the tie-breaker rules generally provide a permanent home test. Where a permanent home (a permanent dwelling place the individual retains either owned or rented) is available to the individual in one country but not the other, the individual will be considered a resident where that permanent home is available. Therefore, if a dual resident only has a permanent home in one country, the individual will be deemed a resident of that country with the permanent home for the purposes of the tax treaty. The other tie-breaker rules will not have to be considered. If an individual has two permanent homes, one in Canada and abroad, then the next-tie breaker rule will need to be considered.
The Centre of Vital Interests test requires examining the individual’s personal and economic ties with each country to determine which is closest. They are similar to the common law test in determining Canadian residency for tax purposes. Significant primary ties include property ownership, where the common-law partner or spouse resides, and where dependants reside. Significant secondary residential ties include but are not limited to which country the individual’s bank accounts, social clubs, gym memberships, personal property are located. Other considerations are whether the individual has permanently severed ties with Canada (such as by cancelling provincial health coverage by advising of change of address) and the regularity and length of visits to Canada.
Tax Credits for Avoiding Double Taxation
In cases where double taxation may result from having the same income taxed at both the source and the country of residence, Canadian residents can receive a tax credit or exemption depending on the circumstances.
The tax situations involving dual residency can be complex and a taxpayer may need to speak with a tax specialist or lawyer to confirm their residency status. If you have questions about tax residency, double taxation, or tax treaties, contact us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenThe Fine Line between a CRA Tax Audit and a Criminal Tax Investigation
The Canadian income tax system operates through self-reporting, which means that each individual taxpayer is required to file his or her own Canadian tax returns. The CRA is responsible for ensuring that taxpayers are not abusing the self-reporting system and are accurately reporting their income as well associated tax payable.
The Income Tax Act confers a lot of power to the CRA to investigate tax non-compliance, ensuring that taxpayers are filing their taxes correctly and on time. The CRA is able to conduct tax audits, which gives them the far reaching power to examine and inspect the books, records, documents, and even physical locations of businesses and homes. In cases where the CRA auditor finds issues with a taxpayer’s returns, the CRA has the power to proceed with a tax investigation, reassess returns, issue fines, penalties, interest, and even criminally prosecute taxpayers. A taxpayer who is suspected of tax evasion or fraud could be facing up to five years in prison, so criminal tax investigations should be taken seriously.
The main difference between a tax audit and a criminal tax investigation is that a tax audit focuses on determining the accuracy of a taxpayer’s income tax returns, while criminal tax investigations focus on the finding of significant tax fraud and tax evasion. So, when does a tax audit turn into a criminal tax investigation?
Tax Audits
The CRA’s power to conduct tax audits is derived from subsection 231.1(1) of the Income Tax Act. During a tax audit, the CRA is able to inspect and examine any records, accounts, and documents, both personal and business records, of the taxpayer. The CRA has wide discretion over how to conduct the audit, meaning that they can even reach out to family members or neighbours to retrieve documents.
The tax audit may even involve a CRA tax auditor visiting the taxpayer’s place of business to examine the property, review inventory, or any other documents and items that they believe will assist them in determining the accuracy of the taxpayer’s returns or records.
Essentially, the CRA is able to require a person to provide any information or document they need if it is used or required for the purpose of relating to the administration or enforcement of the Income Tax Act. This power does not only apply to residents of Canada, but also non-resident taxpayers who are carrying on business in Canada. However, there are some limits to the CRA’s power. For example, a tax auditor cannot examine a taxpayer’s home without the taxpayer’s consent or the authorization from the Courts.
In a way, there is a statutory requirement for Canadian taxpayers to cooperate with tax auditors, with no guaranteed extra constitution or charter protections. In summary, CRA tax auditors have wide discretion and power over how to conduct and proceed with a tax audit, and taxpayers are required to cooperate with the investigation, despite the financial and emotional strains it may pose.
Criminal Tax Investigations
In contrast, there are more restrictions on the CRA’s power when it comes to criminal tax investigations. The CRA tax investigator does not have the same level of discretion and freedom over how to conduct the investigation as they do over an audit. If you are the target of a criminal tax investigation, the consequence of being convicted could mean not only fines but also imprisonment under s. 239 of the Income Tax Act and under s.327 of the Excise Tax Act.
The Canadian Charter of Rights and Freedoms guarantees a number of criminal procedural rights for the criminally accused. Given the potential for imprisonment and the loss of liberty involved in a criminal tax investigation, the Charter guarantees certain protections for the taxpayer. Opposed to a tax audit, when the CRA conducts a criminal tax investigation, it is constitutionally required to respect the taxpayer’s criminal procedural rights.
For instance, the CRA can require individuals to release certain documents and records during a non-criminal tax audit. During a criminal tax investigation, however, the taxpayer has the constitutionally protected right to not self-incriminate. As such, the CRA is not able to freely access the taxpayer’s information, but requires a warrant to have the taxpayer to release information.
Given the sensitivity of a criminal tax investigation, the CRA has a specific department dedicated to handling these types of investigation called the Criminal Investigations Program.
When does a Tax Audit become a Tax Investigation?
The tax Criminal Investigations Program usually gets involved when there is something in the investigation that indicates that there is a criminal element involved. As such, many tax evasion investigations begin first as a tax audit, and then develop into a criminal tax evasion investigation.
However, there is a concern that the CRA might not always tell the taxpayer when the tax audit has changed into a criminal tax investigation. So the CRA can use their significant powers of examination and requirement to further build their criminal tax investigation without the taxpayer even knowing that they may be prosecuted.
The information the CRA obtains from the taxpayer during the tax audit can be used by tax investigators, but they are not allowed to use information which was obtained after the tax investigation begins. In reality, there might not always be a clear line of when the tax audit ends and the tax investigation begins.
As such, it is important to determine when a tax investigation begins. The Supreme Court of Canada in the case of R. v Jarvis, [2002] 3 SCR 757 listed 6 factors to help draw the line:
- Did the authorities have reasonable ground to lay charges?
- Was the general conduct of the authorities such that it was consistent with the pursuit of an investigation?
- Had the tax auditor transferred his file and materials to the tax investigators?
- Was the conduct of the tax auditor such that he was effectively acting as an agent in the collection of evidence?
- Is the evidence sought relevant to the taxpayer’s tax liability generally? Or was the evidence as to the taxpayer’s mens rea which is only relevant for penal liability
- Are there any other circumstances or factors that can lead the judge to the conclusions that the compliance tax audit had in reality become a tax investigation?
Although these factors do offer some clarity, it may still be difficult to tell which side of the line you stand on. No matter whether it is a tax audit or investigation, the consequences can be severe. Our top Canadian Tax Lawyers at Rosen Kirshen Tax Law are here to help. 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 KirshenCan I Really Get an Apology from the CRA?
The Office of the Taxpayers’ Ombudsman recently claimed in its Annual Report for 2019-2020, Transformation through Disruption, that it recommends the CRA develop a formal guideline for apologizing to Taxpayers.
In the report, the Taxpayer’s Ombudsman highlighted that the absence of a consistent, uniform policy for administering “letters of apology” to Taxpayers has resulted in differential treatment of Taxpayers while dealing with various CRA departments. Currently, the CRA issues letters of apology to Taxpayers who have not received the level of service to which they are entitled on a case-by-case basis.
The report outlines that this recommendation would further protect Taxpayers’ rights under the Taxpayer Bill of Rights, by “improving accountability and treating everyone fairly”.
What are your Rights as a Taxpayer under the Taxpayer Bill of Rights?
The Taxpayer Bill of Rights outlines 16 rights to which Taxpayers are entitled when dealing with the CRA.
Notable rights include:
- Article 4 – The right to a formal review and subsequent appeal
See more here: Can I File An Income Tax Objection? ; Rosen Kirshen Tax Law Services –
Objections; Considering a Judicial Review?
- Article 6 – The Right to be Treated Professionally, Courteously, and Fairly
- Article 7 – The right, unless otherwise provided by law, not to pay income tax amounts in dispute before you have had an impartial review
See more here: Revenue Canada Disputes
- Article 9 – The Right to Lodge a Service Complaint and to be Provided with an Explanation [of the CRA’s] findings
- Article 11 – The right to expect [the CRA] to be accountable
How do I Complaint about a Violation of my Rights?
Taxpayers who are dissatisfied with the service received from the CRA can submit a service complaint. You can submit a service complaint about:
- Mistakes;
- Undue delays, outside of normal processing times;
- Incorrect or misleading information; and
- Employee behaviour and other service-related issues.
After submitting your complaint, a service feedback officer may contact you during the review process. The CRA aims to have complaints resolved within 30 business days.
Apart from filing a service complaint to the CRA, you can also submit a complaint to the Office of the Taxpayers’ Ombudsman.
Can I Sue the CRA?
The Crown Liability Act allows individuals to sue the federal government for negligence and damages. As such, Taxpayers have a right to sue the CRA for actions caused by its employees. However, Taxpayers must establish the following to be successful:
- The CRA officer owed a duty of care to the taxpayer;
- They breached that duty of care; and
- Damages and losses resulted from that breach.
Further, in Ontario, the Proceedings Against the Crown Act and its relevant provisions apply when suing the CRA.
What if I have a Non-Service Related Complaint?
If you believe that the CRA is wrong about your audit or other important tax dispute, you can file an objection. Rosen Kirshen Tax Law and its experienced team of tax lawyers can help you navigate this complex process. 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 KirshenThe CRA and US Real Estate Transactions
On June 25, 2020, the CRA announced it will undergo an extensive review of U.S. real estate transactions over the past six years to find any tax non-compliance from Canadian taxpayers. The CRA plans to look through real estate and property data of Canadian property transactions in the States. Reassessment through this upcoming audit could mean that Canadian taxpayers are facings serious penalties and interest if found non-compliant. There is also a chance that you could be facing prosecution for tax fraud or tax evasion.
Many issues will be reviewed by the CRA during these tax audits, especially when there is undisclosed real estate property or unreported real estate transactions. As a Canadian Taxpayer who owns property in the States, you should be aware of these potential issues and how you can potentially get ahead of the taxman.
Unreported Foreign Property
One of the issues that the CRA could be looking for is whether the T1135 Foreign Income Verification Statement for a foreign property has been complied with and filed properly annually. This reporting requirement requires Canadian taxpayers who own or hold in trust a foreign property with a value of over $ 100,000 to disclose the property on their tax returns. There are some exceptions to reporting these properties but if you are earning income from the property, it generally must be reported. The definition of property is very vast. If it’s something that has value, it is probably included in the definition.
Unreported Rental Income
Canadian tax residents are generally required to declare and report their worldwide income. To avoid paying taxes on the same income in two different jurisdictions, the Income Tax Act uses the Foreign Tax Credit mechanism to avoid double taxation. For Canadian taxpayers who generate rental income from a U.S. property, he or she is required to report that income to the CRA. However, if the taxpayer fails to disclose that income to the CRA, he or she may be subject to a reassessment and will be met with heavy penalties, and interest, even if the taxpayer has already paid taxes to the U.S. government.
The reason for this is because Canadian tax rates are higher than U.S. rates. So if you’re only reporting the income to the U.S, you are paying most of the tax, but not all.
The upcoming CRA tax audits will most likely involve auditors looking for any unreported U.S. rental income from Canadian taxpayers.
Unreported Real Estate Sales
Finally, the CRA will examine U.S. real estate sales of properties owned by Canadian taxpayers. Generally, proceeds of the sale of a property are subjected to taxation as either income or capital gains by the CRA, unless the sale falls under the principal residence exemption. This means that if you sell your U.S. property, you need to report the proceeds of the sale to the CRA since the amount is likely fully taxable.
If you have not reported the sale, you are subject to audit, and the assessment of penalties and interest. It is even possible that you are charged criminally for tax evasion. This normally depends on the level of the evasion and the amount of tax you have not paid.
The most frustrating part of this audit is that the CRA will normally assess these property sales as income instead of capital gains. This doubles the amount of taxes owing in most cases. There are ways to fight this, of course, but it is a frustrating position to be in.
CRA and US Real Estate – Can I Fix Things?
The CRA offers the Voluntary Disclosure program, where Canadian taxpayers can disclose their previous errors or omissions such as; unreported income, unreported real estate sales transactions, and unreported foreign property. The benefit of the program is the potential to avoid criminal charges, penalties and you may receive a large break on the interest charged.
However, there are specific criteria that need to be met; one being that the CRA has no existing knowledge of the mistake and that you are coming forward voluntarily. A timely voluntary disclosure application could be the way to avoid not just penalties and interest, but also avoid prosecution for tax fraud or tax evasion.
If you are a Canadian taxpayer with property in the U.S and have any concerns around your U.S. real estate tax issues, now is the time to contact our experienced Tax Lawyers. At Rosen Kirshen Tax Law we have the experience and the expertise to help you with your U.S. real estate tax issues. 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 KirshenUnderstanding how FINTRAC may impact your Business
The Financial Transactions and Reports Analysis Centre of Canada, otherwise known as FINTRAC, is Canada’s financial intelligence unit. Its main mandate is to detect, prevent, and deter money laundering and the financing of terrorist activities. Simply, its main goal is to prevent the funding of criminal organizations. While the acronyms associated with FINTRAC can cause some confusion, this blog post is designed to clarify how FINTRAC regulations may impact your business.
Which Businesses Must Report to FINTRAC?
The main businesses that must report their dealings with clients/customers are financial entities such as banks, life insurances companies, securities dealers, real estate brokers, casinos, and dealers in precious metals and stones. These types of business are the most likely to be used for money laundering purposes through large transactions (for a more complete list of the businesses that must report to FINTRAC click here).
For the purpose of this blog, we will be focusing on ‘dealers of precious metals and stones (DPMS). FINTRAC defines DPMS as an individual or entity that buys and/or sells precious metals, stones or jewelry in the course of its business activities.
FINTRAC requires businesses under its purview to maintain a compliance program to monitor funds from clients. Among the main requirements of the compliance program is a “risk-based approach” or (“RBA”). The RBA must be structured to help a DPMS business (or any other business subject to FINTRAC) identify the main risks associated with accepting a product or service from a potential client, and ensure timely compliance and reporting (full RBA workbook for DMPS businesses).
When do Dealers of Precious Medals and Stones Transactions Fall Under the Risk Based Approach?
- The $10,000 per 24 hours rule
Your business is subject to risk-assessment of clients if it ever engages in the purchase or sale of precious metals, stones or jewellery in an amount that is $10,000 or more in a single transaction. If such a transaction occurs, you must identify and maintain ongoing record keeping with that client.
The RBA also applies when multiple transactions are made within 24 hours of each other, with the same client, that exceed $10,000. It is important to emphasize that transactions made on a Monday and Tuesday, the first at 4:00 PM and the second at 3:00 PM, are still within 24 hours, and would trigger FINTRAC monitoring requirements.
- Reasonable Suspicion
In addition to having to obtain client information for large transactions as described above, your business must also obtain client information for any transactions deemed suspicious. If you believe a transaction/individual to be suspicious, or you believe that the person you are dealing with is buying on behalf of a third party when conducting a large scale transaction over $10,000 you should follow the procedures used for large scale transactions outlined above, and, at a minimum, ask the client to provide government issued photo identification.
You still must ensure diligence to risk assess clients you deem high risk. There are a few exceptions to this general rule: for example, you do not need to identify an individual in a large-scale transaction if the money is received from a financial entity or public body. You also do not need to identify the individual who conducts or attempts to conduct a suspicious transaction if you have already identified the individual and have no doubts as to their identification or if you believe that identifying the individual would inform them that you are submitting a suspicious transaction report.
When Must I Retain Client Information on the sale of Precious Metals, Stones or Jewelry?
For any transactions meeting these requirements you must verify the client’s identity using government issued photo identification and/or re-verify the identity to ensure it is up to date.
What Happens if I do not Comply with FINTRACT?
Non-compliance with FINTRAC can lead to serious repercussions. There are several types of penalties including but not limited to administrative, monetary and criminal penalties.
If the authorities deem you were wilfully blind or negligent in assessing suspicious transactions, you could be assessed with monetary penalties reaching $100,000. The penalties vary in terms of harm and the level of wilful blindness and/or negligence. Such punishments range from level 4 which carries a $25,000 fine to level 1, which carries a $100,000 fine. For the full breakdown of the potential penalties for non-compliance, please click here.
FINTRAC may also disclose cases of non-compliance to law enforcement when there is extensive non-compliance or little expectation of immediate or future compliance. Criminal penalties include failure to report suspicious transactions (with penalties up to $2 million and/or 5 years imprisonment) and failure to report a large cash transaction (up to $500,000 and/or 5 years imprisonment).
Overall, FINTRAC enforces highly complicated legislation, which may affect your DPMS business dealings with clients. If you are a dealer of precious metals and stones and would like to discuss these matters further, Rosen Kirshen Tax Law can help. If you have any questions, feel free to call us toll free at (844) 53-TAXES or email us at info@rktaxlaw.com.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenWhat is a T1135 Tax Form: Foreign Income Verification
A T1135 Tax Form: Foreign Income Verification Statement reports all required foreign property owned by a Canadian resident taxpayer. If a taxpayer in Canada owns specified foreign property with a total cost of more than $100,000, they must fill out Form T1135, the Foreign Income Verification Statement in addition to their annual income tax return.
Presently, the T1135 Form has been redesigned to have the following two-tier information reporting structure for specific foreign property:
- Part A – Simplified Reporting method
- Part B – Detailed Reporting method
T1135: Do I Fill Out the Simplified or Detailed Reporting Method?
Taxpayers can fill out the Simplified Reporting method if they own specified foreign property which collectively costs $100,000, but less than $250,000 at any time of the year. Alternatively, if the foreign specified property is valued at more than $250,000, then the taxpayer must fill out the Detailed Reporting Method.
The distinguishing factor between the two forms is that the Simplified Reporting method allows the taxpayer to report the gross income from all specified foreign property they held during the year. For the Detailed Reporting Method, the taxpayer must provide the gross income from each type of foreign property. In other words, as the name says, the Detailed Reporting Method requires the taxpayer to give a more detailed response regarding the quantum and type of specified foreign property held. Categories in the Detailed Reporting method include:
- Funds held outside of Canada;
- Shares of non-resident corporations;
- Indebtedness owed by non-resident;
- Interests in non-resident trusts;
- Real property outside Canada;
- Other property outside Canada; and
- Property held in an account with a Canadian registered securities dealer or a Canadian trust company.
T1135: What is Specified Foreign Property?
When the term “foreign property” is used, rental property owned outside of Canada immediately comes to mind. However, the categories in the Foreign Reporting Method show that specified foreign property encapsulates a much broader term. For instance, a common mistake made by taxpayers is failing to realize that foreign stocks held in Canadian registered securities dealers must be reported. As such, if you invest in classic blue-chip stocks such as Apple, Disney, Microsoft or any other companies based in American stock exchanges, they must be reported (Over $100,000).
Regarding “specified foreign property” the term also includes but are not limited to the following:
- Foreign bank account balances;
- Shares of Canadian corporations on deposit with a foreign broker;
- Shares of foreign corporations;
- Foreign land and buildings;
- Interests in foreign mutual funds;
- Debts owed by non-residents and
- Interests or rights in specified foreign property.
T1135 Penalties
Failure to file T1135 forms can result in harsh penalties for the taxpayer. Specifically, taxpayers are charged a penalty of $25 per day for up to 100 days for failing to file the T1135 Form. The minimum penalty for failure to file is $100 and the maximum is capped at $2,500 per year. So if you have missed multiple years the penalty and interest amounts can be steep!
What if I have not Filed my T1135 Form?
Taxpayers who have not filed the T1135 form or otherwise have provided inadequate information can file a Voluntary Disclosure. The CRA encourages taxpayers who have provided incomplete information, omitted information, or who have not filled Form T1135 to come forward and correct their tax affairs through the program.
It is important to note that the period within which the CRA can reassess a taxpayer’s tax return is extended by three years if both of the following conditions have been satisfied:
- The taxpayer has failed to report income form a specified foreign property on their income tax return; and
- Form T1135 was not filed, was not filed on time, or was filed inaccurately.
Taxes involving foreign property always involve an added layer of complexity. If you have any questions about how to file a T1135 form or apply for a voluntary disclosure, 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.