Announcements

The Canadian Retirement Income Calculator (https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement-income-calculator.html) provided by the Government of Canada estimates retirement income generated through a number of programs such as the Canada Pension Plan, Old Age Security pension, an individual’s employer’s pension plan, RRSPs, and other sources based on past and intended contributions.

When using this tool, individuals should have their CPP Statement of Contributions, financial information about their employer’s pension, most recent RRSP statement, and any other information related to savings that will provide for ongoing monthly retirement income.

Action Item: Use this tool to help assess your financial readiness for retirement.

A death benefit is a payment received subsequent to the death of an employee, in recognition of the deceased employee’s services. Up to $10,000 can be received by the Estate or beneficiaries of the deceased as a death benefit on a tax-free basis. As an employment-related cost, this would generally be deductible to the payer.

A March 14, 2017 Technical Interpretation, addressed several questions related to these payments following the death of an owner-manager.

CRA noted that the determination of whether an individual is an employee is a question of fact. The fact that an owner-manager received salaries for several years but was only paid dividends in the two years prior to death would not automatically mean that no death benefit could be received. It would be more difficult to support an employment relationship where the individual never received employment income from the corporation.

The existence of a formal commitment, such as a contract or a Directors’ Resolution, prior to the date of death is not a requirement for an amount to be a death benefit. Finally, a death benefit could be paid out over time, but the $10,000 exclusion applies only once, not once for each year.

Action Item: Consider this tax-free employment benefit.

Historically, CRA has stated that an employee enjoying a discount on the purchase of merchandise from their employer is only taxable if a limited number of specified situations exist, such as where the employer makes a special arrangement with the employee or group of employees to buy the merchandise at a discount; the employee buys the merchandise for less than the employer’s cost; or the employer makes a reciprocal arrangement with another employer so that the employees of one employer can buy merchandise from the other at a discount.

While the above guidance is still published in certain CRA documents, CRA has recently released updated guidance which appears to limit this administrative position. In CRA Folio S2-F3-C2, CRA noted that where an employee receives a discount on merchandise because of their employment, the value of the discount is generally a taxable benefit. This would apply regardless of whether the discount was provided by the employer or a third-party.

This updated guidance appears to be consistent with a number of Court decisions.

Action Item: Consider your business policy in respect of discounts on merchandise for employees in light of this updated administrative position.

On July 18, 2017, Minister of Finance, Bill Morneau announced the release of a Consultation Paper which focused on three tax practices that the Government considers to provide an unfair tax advantage to private corporations and their owners. These include:

• Income Sprinkling – The Government is concerned that business owners can direct income to lower income family members who are not involved in the business, gaining a tax advantage unavailable to other Canadians. A common example is dividend sprinkling, where lower income family members own a share of the business and therefore can receive dividends, subject to their lower marginal rate. The Paper suggests taxing the unreasonable portion of dividends received by a family member of the principal of the business at the top marginal tax rate. Reasonability will be based on factors such as labour and capital contributions, and risk assumed. While this reasonableness test will apply on all dividends to family members of the principal, a more stringent criteria will apply for individuals between age 18 and 24.

Similarly, the Paper proposed limits on access to the capital gains exemption (CGE) based on age and reasonableness, with minors not entitled to the CGE at all. The proposals also deny the CGE for most gains accumulated while shares are held by a trust.

The Paper noted that the Government is committed to addressing this issue in some fashion, and that the changes will be effective in 2018.

• Passive Investment Income – The Government is concerned that it is unfair to most Canadians to permit the accumulation of passive investments with capital shielded from the higher personal tax rates. No specific proposals were made, but a number of possible approaches were set out which will essentially eliminate the advantage provided by the deferral on funds retained for investment in private corporations.

The new rules will be designed in the coming months. The timing of any changes was not specified.

• Capital Gains – The Government is concerned with plans to withdraw corporate funds as capital gains rather than dividends. The overall tax liability on capital gains is generally much lower than that of dividends, in particular for individuals subject to tax at the top marginal tax rate. The Government has proposed some more complicated technical measures which would limit this type of planning.

These changes will apply to amounts received, or becoming receivable, on or after July 18, 2017 (i.e. the date the Paper was released).

Action Item: If you or your corporation utilizes one of the above tax planning strategies, be cognizant of any legislated changes, their impact, and the effective date of the change.

A number of issues may arise if a shareholder uses a corporate asset personally without providing the corporation with fair market value (FMV) consideration. Barring a special relieving provision of the Act, the shareholder may be subject to a shareholder benefit, essentially resulting in double tax. Another issue that may arise relates to GST/HST. This was considered in the below Court case.

In a September 23, 2016 Tax Court of Canada case, at issue was whether the input tax credits (ITCs) for the corporate purchase of a $310,000 recreational vehicle (RV), which was allegedly used for both corporate and personal purposes, would be permitted. For the periods that the taxpayer conceded that the vehicle was used personally, the shareholder paid $2,000 plus GST/HST per week. The Minister provided evidence from a 3rd party that the average rate for such a vehicle would be between $4,500 and $5,000 per week.

Taxpayer loses

The Court determined that the vehicle was acquired exclusively, or at least primarily, for the shareholder’s personal use. To be eligible for an ITC, an asset must be acquired “for use primarily in commercial activities of the registrant”. As such, the GST/HST paid would not be recoverable as an ITC.

Action Item: Assets acquired for personal use by shareholders should not generally be acquired by the corporation. Significant income tax and GST/HST issues may arise if such assets are held corporately.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

On March 17, 2017, CRA released a Tax Tip reminding those involved in the sharing economy to ensure that they comply with relevant income tax and GST/HST obligations. All income earned through sharing economy activities should be reported.

CRA identified five key sectors, being accommodation sharing, ride sharing, music and video streaming, online staffing, and peer/crowdfunding.

CRA also noted that it is co-operating with industries, the provinces, and the territories to identify and address areas where the tax system and compliance might be affected.

Action Item: If you are involved in the sharing economy, ensure you are compliant with your tax obligations.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

A deferred salary leave plan (DSLP) permits an employee to fund, through salary deferrals, a leave of absence from their employment. Generally, salary deferrals are included in income when the amounts are earned. However, if certain conditions are met under a DSLP, the employment income is taxed when the amounts are received.

In a December 19, 2016 French Technical Interpretation, CRA opined that the requirements of a DSLP must be met when the plan is entered into and throughout the duration of the plan. One requirement is that the employee return to their employment after the leave of absence for a period that is not less than the leave period.

If, when entering into the agreement, the parties expect the employee to cease employment during the plan, it would not qualify as a DSLP. In this case, the deferred amounts would be included in the employee’s income when earned.

On the other hand, if, at the time the agreement is made, it is clear that the employee will meet all the requirements, being temporarily out of work during the period should not, in and of itself, prohibit an employee from participating in a DSLP.

Action Item: Consider a deferred salary leave plan as an option for key employees wishing to take a leave of absence.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

Most businesses must register for a GST/HST account (and therefore collect and remit GST/HST as appropriate) if they earn revenues from worldwide taxable supplies greater than $30,000 within the previous four consecutive quarters, or exceed the $30,000 threshold in a single calendar quarter. However, a special rule applies to self-employed “taxi businesses” which requires them to register regardless of the quantum of revenues.

There has been some uncertainty as to whether drivers of ride-sharing services, such as Uber, are considered “taxi businesses”.

The 2017 Federal Budget ended this uncertainty. It proposed that, effective July 1, 2017, ride-sharing services will be defined as a “taxi business” for GST/HST purposes and therefore will be required to charge and remit GST/HST. More specifically, a “taxi business” will now include all persons engaged in a business of transporting passengers for fares by motor vehicle within a municipality and its environs where the transportation is arranged for or coordinated through an electronic platform or system, such as a mobile application or website.

Action Item: Drivers of ride-sharing services should consider registering for GST/HST.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

In a November 29, 2016 Technical Interpretation, CRA opined that where investment management fees incurred by an RRSP, RRIF or TFSA are paid from outside of the plan (such as by the annuitant or holder) the plan’s controlling individual would likely be subject to a tax equal to 100% of the fees paid.

CRA opined that investment management fees represent a liability of the registered plan trust and should, therefore, be paid using funds from the plan. If paid from outside of the plan, the resulting indirect increase in value of the plan assets would likely constitute an advantage. That is, more assets would be retained in the tax-sheltered vehicle.

CRA further noted that it is not commercially reasonable for an arm’s length party to gratuitously pay the expenses of another party. As such, there is a strong inference that a motivating factor of the above is to maximize the savings in the plan so as to benefit from the tax exemption afforded to the plan.

Recognizing that it is common practice for the holder of these accounts to pay the management fees, CRA indicated they will defer the application of this position until January 1, 2018.

Action Item: Be aware of changes in how investment management fees are charged in the near future to avoid this tax.

This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.