Annonces

Traders or dealers in securities must report to CRA the disposition of securities, such as publicly traded shares, mutual fund units, bonds and T-bills, of their clients on a T5008. A November 4, 2022 French Federal Court case summarized CRA’s administrative policy where a taxpayer has not filed a tax return, but a T5008 was issued, reporting the disposition of property that does not include the cost of the property disposed. In this case, CRA will assess the taxpayer with unreported income by estimating the capital gain to be a percentage of the total proceeds of disposition based on the stock market performance for the year in question (details on how the calculation was made were not provided in the Court case).

In 2015, CRA applied this policy and assessed the taxpayer for his 2008 year with a $967,806 capital gain (taxable capital gain of $483,903) computed as 20% of all proceeds of disposition reported on the T5008. CRA assessed the taxpayer’s income for 2009 at $141,798. The taxpayer did not object to either of these assessments.

In 2019, the taxpayer filed his 2008 and 2009 returns reporting much lower income than CRA had assessed in 2015. As the 2008 return was filed (essentially requesting adjustments to the original assessment) more than 10 calendar years after the end of the year (December 31, 2008), no adjustments could be made to this year. The taxpayer relief provisions only allow an individual to request an adjustment up to ten calendar years after the relevant year. As such, CRA confirmed their 2015 assessment.

The taxpayer then tried to argue that the excess of capital gains assessed by CRA over his actual gains for 2008 should be treated as a capital loss carried forward to offset his gains realized in 2009. CRA refused to reassess the 2009 return for this adjustment.

Taxpayer loses
The Court found that the taxpayer could not indirectly reduce the impact of the capital gain on his 2008 return by claiming a capital loss on his 2009 return.

Editors’ comment

It is typical for brokers not to include the cost base of securities disposed on the T5008 as they may not have the accurate information. Also, even if an amount is reported on a T5008, the transaction may not always result in a gain; some dispositions may be in a loss or break even position. For example, money market fund dispositions are often reported; however, there is normally no gain or loss.

ACTION: Ensure to report all gains from the disposition of securities fully; should dispositions not be reported, CRA may assess the taxpayer with unreported income much higher than the actual gain.

UHT is a 1% federal tax intended to apply to the value of vacant or underused residential real property owned by non-resident non-Canadians. However, many Canadian individuals and other entities are also required to file UHT returns and may even be liable for the tax. Numerous exemptions from the tax itself exist, but significant penalties can apply where the required return is not filed, even if no tax is payable.

UHT was first applicable to the 2022 year, with the first filing deadline being April 30, 2023. However, CRA recently announced (March 27, 2023) that penalties and interest for the 2022 calendar year will be waived for any late-filed UHT return and any late-paid UHT payable, provided the return is filed or the UHT is paid by October 31, 2023. The late filing penalties start at $5,000 for individuals and $10,000 for corporations.

In general, UHT returns must be filed by all persons (which include both individuals and corporations) that are on title of a residential property on December 31of each year, unless that person is an excluded owner. No tax is applicable if there is no filing obligation.

From an individual perspective, the only excluded owners are Canadian citizens and permanent residents. However, individuals that are on the title of a property in their capacity as a trustee of a trust, or a partner of a partnership, cannot be excluded owners, even if they are Canadian citizens or permanent residents.

From a for-profit corporate perspective, the only excluded owners are public corporations (i.e. listed on a Canadian stock exchange). That is, a private Canadian corporation is not an excluded owner.

Even if a filing obligation exists, an owner may still benefit from one of fifteen exemptions from the tax liability. The exemptions broadly fit into four categories: type of owner; availability of the property; occupant of the property; and location and use of the property. Even though the exemption eliminates the tax, the person still has a filing obligation. The exemptions are listed in Parts 4 through 6 of the UHT Return and Election Form (UHT-2900).

Some of the more common questions and concerns related to the UHT are noted below.

• Is my property a “residential property”?

In general, a “residential property” is a property that contains a building with one to three dwelling units under a single land registry title. A unit is considered a dwelling unit if it contains private kitchen facilities, a private bath and a private living area. CRA provides various examples of properties that they view as residential properties in Notice UHTN1, such as: detached houses, duplexes, laneway houses, condominium units and cabins. Apartment buildings, commercial condominiums, hotels and motor homes would not be residential properties. Properties provided through accommodation platforms are likely residential properties (see Notice UHTN15).

How would an income-earning property (such as an Airbnb property or long-term condo rental) that is held by two or more individuals, such as a married couple, be treated?

Although both individuals may be Canadian citizens or permanent residents, there is a possibility that the property is being held in their capacities as partners of a partnership. In that case, the individuals are not excluded owners. The analysis generally starts with determining whether the operating relationship for the income-earning activity constitutes a partnership, which can be complicated. In general, a partnership is a relationship between two or more people carrying on a business, with or without a written agreement, to make a profit. See Notice UHTN15 for guidance.

• A parent or child is on title of a property for probate or mortgage purposes.

Where a person is on title but is not a beneficial owner (such as where a relative is on title only for probate or mortgage purposes), they may be holding an interest in the property in their capacity as a trustee of a trust, even if no formal trust agreement is in place. As such, filing may be required even if the individual is a Canadian citizen or permanent resident.  Professional advice may be required.

• Properties sold before year-end.

UHT may apply in respect of a property sold prior to December 31 if the applicable land title registry has not been updated by the year’s end.

• Multiple returns to file.

One return must be filed for each of the properties owned by the person, potentially resulting in multiple filings by a person. Likewise, if multiple persons are on title for a single property, each has their own filing obligation.

• Private corporations that own residential property.

Most private corporations that are on title of a residential property will have filing obligations, even if they are holding the property in trust and even if they are exempt from the tax liability.

• Owner of residential property passes away.

Usually, some time is needed to transfer title of a property from a deceased person to a beneficiary or executor/trustee of an estate. In cases where an individual has died but is still on title of the property, a filing obligation may still exist. However, if the owner was an excluded owner before their death, CRA has indicated that they will continue to consider them excluded after death. Where the property title has been transferred to a personal representative of the deceased (such as an executor), a special provision applies which allows the new holder to be an excluded owner for a limited period even though they are holding the property in their capacity as a trustee.

ACTION: Consider whether you or your corporation may have UHT filing or tax obligations.

Budget 2023 (A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future) was introduced in the House of Commons on March 28, 2023. The top five changes that may impact individuals and owner-managed businesses are as follows:

• Dental plan – The Canadian Dental Care Plan would be introduced to provide coverage for all uninsured Canadians with an annual family income of less than $90,000 (the previous Canada Dental Benefit only provided benefits for children under 12) by the end of 2023. Benefits would be reduced for families with income between $70,000 and $90,000.
• Green investments – New and expanded green investment tax credits for businesses, including for clean electricity at 15%; clean hydrogen ranging from 15% to 40%; clean technology manufacturing at 30%; and expansion of the clean technology investment. Labour requirements, including wage levels and apprenticeship training opportunities, would need to be met to receive the full amount for most business credits.
• Intergenerational business transfers – In the summer of 2021, rules were introduced that allowed individuals to benefit from the sale of their corporation to a child’s corporation in the same way as a sale to a third party. Previously, such transfers to a child’s corporation would result in a capital gain being converted into a more highly taxed dividend and also prevent the usage of the capital gains exemption. Budget 2023 proposed amendments to limit the 2021 rules by adding specific eligibility requirements focused on the transfer of ownership, management and control of the business. The proposals would take effect in 2024.
• Employee ownership trusts (EOTs) – Rules were proposed to better facilitate employees buying their employer through a trust. Proposed to be effective in 2024, these rules would provide business owners with an additional exit strategy, where for example, a third-party buyer or transition to a family member is not feasible or desired.

Alternative minimum tax (AMT) – The AMT is an alternative method of calculating taxes that ensures that an individual pays a minimum amount of tax even if they would not have a tax balance under the normal system due to using one or more tax advantages. Budget 2023 proposed to modify the AMT rules to better target wealthier individuals. The standard exemption from this tax would be increased from $40,000 to approximately $173,000; however, the tax rate would be increased from 15% to 20.5%. In addition, many of the deductions and credits currently allowed to reduce AMT would be eliminated or restricted. These changes would be effective for the 2024 tax year.

ACTION: If you are significantly affected by, or could benefit from, any of these changes, reach out for more information and assistance.

A November 25, 2022 French Tax Court of Canada case considered whether a taxpayer’s poker activity constituted a source of business income and therefore the winnings were taxable, as argued by CRA. The taxpayer argued that his winnings were non-taxable as they were derived from his hobby rather than a business. The taxpayer generated poker winnings each year from 2008 to 2011, ranging from $156,855 to $573,882.

Taxpayer loses

Where an activity can be considered both a hobby and a business, the Court will examine whether it is carried on in a sufficiently commercial manner. If carried on in a sufficiently commercial manner, the activity would be from a business and therefore proceeds taxable. The Court analyzed various elements of the taxpayer’s gambling activities, noting the following.

• The taxpayer’s activities were much more than entertainment; he played for a living. It was his sole source of income and he devoted almost all of his time to it. Although the taxpayer reported to CRA that he only played 10 hours per week, CRA was able to demonstrate that he was playing over 50,000 hands per month at a rate of 765 hands per hour, averaging over 30 hours/week for at least two of the years in question.
• The taxpayer had demonstrated over the four years an ability to make profits on a consistent and regular basis even though he could not predictably control each specific game. The purchase of a residence in Quebec and a condo in Florida indicated confidence in his ability to generate income.
• Despite an unusual lifestyle (frequent parties and travelling), he behaved like a serious businessman by, for example:
  • using various strategies depending on table limits and strength of opponents;
  • playing high volumes of games at low-limit tables against weaker players;
  • using software that provided information on the tendencies of opponents;
  • tracking and analyzing his own monthly statistics;
  • buying and selling shares of player entries in large poker tournaments (such as a 5% purchase in Jonathan Duhamel’s 2010 world poker championship win); and
  • constantly reinvesting a portion of winnings into gambling.

The Court found that the taxpayer “had a subjective intention to make a profit, and that he used his expertise and ability to earn a living in poker, a game of chance where skill is a strong consideration.” Therefore, the earnings were taxable as business income. Further, the Court noted that this result was not inconsistent with another recent poker winnings case in which the much larger winnings were not considered taxable. The results in that case were different as, although the evaluation criteria were the same, the facts were different.

ACTION: Earnings from gambling and hobbies may be taxable depending on the intention and circumstances surrounding the earnings. If in doubt as to the tax status, consult a tax advisor.

A one-time tax-free payment of $500, announced in September 2022, is now available to low-income renters. The payment does not reduce other federal income-tested benefits.

Eligible individuals must:

• be 15 years of age or older on December 1, 2022;
• be resident in Canada for tax purposes in 2022;
• have filed their 2021 tax return with adjusted net income below $35,000 for families or $20,000 for individuals. If the individual has a spouse or common-law partner, they must have also filed the return. Eligible individuals that were non-residents in 2021 will need to submit a 2021 statement of income;
• have paid rent for their principal residence in calendar 2022 equal to at least 30% of the applicant’s adjusted family income.

Applicants must provide the address of the rental property, the total rent they paid in 2022, and the landlord’s contact information. Applications can be submitted until Friday, March 31, 2023 through CRA’s My Account, an online application Form, or by phone (1-800-282-8079).

ACTION: While this benefit may not be available to you personally due to income levels, it may be available to lower-income adult children or family members.

The Canada dental benefit, announced in September 2022, provides up-front tax-free payments to cover dental expenses for children under age 12 without dental coverage. The program began December 1, 2022, with expenses retroactive to October 1, 2022 being covered.

The program is available for two periods: December 1, 2022 to June 30, 2023, and July 1, 2023 to June 30, 2024. While the program expires in mid-2024, the government has stated that it is committed to fully implementing a dental program for all households with income under $90,000 by 2025.

Services that dentists, denturists or dental hygienists are lawfully able to provide, including oral surgery and diagnostic, preventative, endodontic, periodontal, prosthodontic and orthodontic services, are eligible for the benefit.

Amounts

The amount of payments that are provided annually (per period) per child under age 12 are based on adjusted family net income (AFNI) as follows:

• $650/child if AFNI is under $70,000;
• $390/child if AFNI is between $70,000 and $79,999; and
• $260/child if AFNI is between $80,000 and $89,999.

AFNI for the benefit’s purpose is the same as for the Canada child benefit, with the annual income period ending on December 31, 2021 for the first period and December 31, 2022 for the second period.

Shared-custody parents at the beginning of the relevant period are each eligible for 50% of the benefit, based on whether they incur or will incur eligible expenses in the period and their respective AFNI.

The benefit does not reduce other federal income-tested benefits (for example, the Canada workers benefit, the Canada child benefit, and the GST credit).

Eligibility

To qualify, parents need to attest that the following conditions are met:

• their child does not have access to private dental care coverage (for example, through a parent’s employer or coverage that is paid for personally); and
• the child has received, or is intended to receive, dental care services during the relevant period.

Parents also need to provide documentation to verify that out-of-pocket expenses occurred (e.g. show receipts) if required by CRA.

To qualify, the child must be under 12 on December 1, 2022 for the first period and under 12 on July 1, 2023 for the second period.

Application

The application portal for the benefit is available online through CRA’s My Account. Those unable to apply online can call 1-800-715-8836 to complete their application with an agent. In addition to an individual’s standard identifying information and the above-noted attestation, parents need to provide CRA with the name, address and telephone number of their and their spouse or common-law partner’s employer. They also need to provide information about the dental service provider from which they received or intend to receive services for their child.

ACTION: Eligible individuals must apply for this benefit on their own as accountants and representatives cannot apply on the client’s behalf.

A June 17, 2022 Ontario Superior Court of Justice case considered whether a will had been appropriately witnessed. In 2020, the owner of an insurance agency was diagnosed with terminal cancer and drafted a final will and testament. As it was the height of the COVID-19 pandemic, she chose two of her employees to meet her outside of the agency to sign the document as witnesses. She left everything to two children and nothing to the third. She died later that year.

Subsequent to her death, one of the beneficiaries wound up the agency and provided severance to the employees. One of the employee witnesses was not happy with the 14 weeks of severance pay offered and refused to affirm that she had witnessed the will signing until the dispute over her severance was completed. The Court also noted that she was quickly rehired by another insurance agent, the deceased’s child who had not received anything from the will. Later, the witness argued that she was not physically close enough to confirm that she had actually witnessed the document being signed.

The circumstances indicated that the witness was present at the signing, was close enough to see what was happening, and as a clerk in an insurance agency, would not have originally signed the will inappropriately. The Court found that the witness was lying about not having witnessed the signing with the likely motivation of increasing her severance.

While the will was eventually determined to be valid, this case reiterates the importance of carefully selecting individuals to witness signing important documents, such as a will.

ACTION: When selecting an individual to witness the signing of a legal document, consider whether they would be available and willing to properly verify their signature in the future, if required.

CRA updated several administrative policies in respect of employment benefits, effective January 1, 2022. Two of the key changes relate to employee gifts and parking. These updates were released in late 2022.

Gifts, awards and long-service awards

Under CRA’s existing gifts and awards administrative policy, the first $500 of annual gifts and awards provided to arm’s length employees is non-taxable. This policy does not apply to cash or near-cash gifts. Historically, CRA had considered all gift cards to be cash or near-cash gifts and, therefore, a taxable benefit.

However, CRA will now accept certain gift cards to be non-cash and eligible to be a non-taxable benefit provided all of the following requirements are met:

• the gift card comes with money already on it which the terms clearly state cannot be converted to cash;
• the use of the gift card is limited to purchases from a single retailer or a group of retailers identified on the card;
• the employer maintains a log to record all of the following details:
  • name of the employee;
  • date the gift card was provided;
  • reason for providing the gift card to the employee (e.g. gift, award, social event);
  • type and amount of gift card; and
  • name of retailer(s) at which the gift card can be used.

Parking

Generally, employer provided parking is a taxable benefit to employees unless a particular exception applies, such as where there is scramble parking. As a COVID-19 relieving measure, CRA stated that where there was a closure of the place of employment (including situations where employees were given the option to work from home full-time) due to COVID-19 between March 15, 2020 and December 31, 2022, no taxable benefit arose in respect of employer-provided parking in this period. When the employee returns to their regular place of employment to perform their duties, including returning on a part-time basis, the policy no longer applies, meaning that the parking benefit becomes taxable (unless another exception applies).

CRA also discussed many other policies related to parking benefits, such as the exception for scramble parking such that no taxable benefit arises. This policy requires that parking spaces are not assigned and are available to all employees who want to park. Not more than two parking spaces can be available for every three employees who want to park. CRA indicated that this ratio would be based on the average number of parking spaces and employees, calculated at least annually, with a recalculation if there is a significant change.

ACTION: Consider whether these updates will affect the taxability of current benefits offered.

A September 12, 2022 Tax Court of Canada case reviewed the gain on a residential property purchased in 2007 and disposed of in 2011. The property was substantially rebuilt during the ownership period. The proceeds, cost and gain were all determined by CRA as the sale was unreported. These amounts were largely unchallenged by the taxpayer and accepted by the Court. The Court noted that the taxpayer’s tumultuous relations with her ex-husband, whom she divorced in 2014, resulted in “an off-again/on-again cohabitation” during much of the relevant period.

Although the taxpayer argued that the property was her principal residence, CRA denied it, assessing the gain as an adventure in the nature of trade and, therefore, fully taxable. CRA also assessed outside the normal reassessment period of three years and applied gross negligence penalties.

Capital property or adventure in the nature of trade?

The Court accepted that the taxpayer lived at this property from time to time during the ownership period, a personal use inconsistent with a business venture of acquiring, improving and selling the property for a profit. In addition, the taxpayer was a teacher not connected to the real estate sector. Her marital difficulties demonstrated a plausible reason for acquiring this larger residence for personal use as a residence in which to start a family. There was no suggestion that the reconstruction was undertaken for purposes other than for personal use. The nature of the property, length of ownership, lack of prior or subsequent activity in real estate and her personal circumstances all led to the conclusion that the property was acquired for personal use and not resale, so it was a capital property.

Principal residence?

The property was used as an intermittent refuge and was never occupied with regularity. In the absence of evidence such as a change of address, domestic expenses beyond mandatory utilities or other permanent hallmarks, the Court could not conclude that the property was ordinarily inhabited, preventing it from being the taxpayer’s principal residence. As such, the taxpayer could not claim the principal residence exemption on the disposition.

Statute-barred?

The Court acknowledged that a fully exempt principal residence sale was not required to be disclosed in the taxpayer’s 2011 personal tax return. However, the taxpayer provided no details to show a reasonable basis for believing the gains were fully exempt. Without such evidence, she could not support her defense that the failure to report the gain was based on a reasoned and thoughtful assessment of her filing position rather than a result of carelessness or neglect, as CRA asserted. As she could not disprove CRA’s assertions, the return could be assessed outside the normal reassessment period.

Note that all principal residence sales were required to be disclosed in an individual’s tax return starting in 2016. If not reported, the individual could not claim the principal residence exemption on the disposition of the property and would be liable for the tax on the gain on disposition. As the taxpayer’s disposition was in 2011, this issue was not addressed in the Court case.

Gross negligence?

The Court noted that CRA’s gross negligence penalty assessment (50% of the understated tax) was linked to three factors: the conclusion that the property was held in the course of an adventure in the nature of trade; the assertion that the taxpayer never lived in the property; and the magnitude of unreported income. All three of these assertions were incorrect. The taxpayer’s belief that she could navigate the tax laws related to personally held real property was incorrect; however, it was not tantamount to a deliberate act demonstrating indifference to compliance with the law. The gross negligence penalties were therefore reversed.

ACTION: Ensure to report all dispositions of real property, whether it is eligible for the principal residence exemption or not, on your personal tax return.

On December 6, 2022, the Auditor General of Canada released its report on COVID benefit compliance enforcement. The report reviewed a total of $210.7 billion in payments with the following breakdown among programs.

• Canada Worker Lockdown Benefit(CWLB) – $0.9 billion
• Canada Emergency Wage Subsidy(CEWS) – $100.7 billion
• Canada Recovery Sickness Benefit(CRSB) – $1.5 billion
• Canada Recovery Childcare Benefit(CRCB) – $4.4 billion
• Canada Recovery Benefit(CRB) – $28.4 billion
• Canada Emergency Response Benefit(CERB) and related EI program – $74.8 billion

The report indicated that $4.6 billion in overpayments were made to ineligible individuals, and an additional $27.4 billion of payments to individuals and businesses should be investigated further. This included an estimated $15.5 billion in CEWS received by employers that did not suffer a significant drop in revenue, extrapolated from a review of monthly GST/HST filers’ reported revenues. The report noted that GST/HST filings were far from a perfect measure but were still useful for risk assessment.

CRA has indicated that they have completed audits of $2.8 billion in CEWS claims (1,739 applications), but this only led to $200 million being redetermined post-payment. $11.6 million in penalties had been issued as of October 28, 2022.

The report also indicated the following in respect of CERB paid to recipients likely ineligible:

• $1.6 billion was provided to 190,254 individuals who had quit their jobs;
• $6.1 million was provided to 1,522 people who were in prison and $1.2 million to 391 dead people; and
• $2.2 million was provided to 434 children under 15 years old at the time of application.

Just before the release of the report, a November 30, 2022 National Post article (CRA clawing back $3.2 billion from suspect COVID-19 aid payments, but that’s just the start, Christopher Nardi) noted the following, based on comments from two top CRA officials:

• CRA has issued notices of redetermination disallowing $3.2 billion in COVID-19 benefit overpayments;
• CRA sent out 825,000 notices of redetermination to individuals it suspected of receiving ineligible or excess payments from several COVID-19 benefit programs as of November 18, 2022;
• post-payment reviews are set to continue until at least 2025; and
• 25,000 cases of fraudulent payments were tied to identity theft.

Many of the overpayments stemmed from confusion and challenges associated with the attestation-based programs.

One of the CRA representatives also noted that “we want to recover money, but we don’t want to create financial hardship” and “it’s going to be based on the capacity of each and every individual to repay.”

ACTION: Review and audit activity in respect of COVID benefits is likely to increase. Ensure to have all supporting documentation ready for claims made.

Download your 2022 Personal Income Tax Return Checklist here!

December 31, 2022 is fast approaching… click here to download a list of tax planning considerations. Please contact us for further details or to discuss whether these may apply to your tax situation.