Announcements

In a May 26, 2016 Technical Interpretation, CRA summarized the conditions that must be met in order for an individual that earns employment income to deduct employment expenses. Deductible expenses are limited to only a select group described in the Income Tax Act.

Generally, an employee may deduct costs of employment related expenses if:

• under the contract of employment, the employee had to provide and pay for the expenses;
• the employee does not receive a non-taxable allowance for the expenses;
• the employer does not, or will not, repay the employee for the expenses; and
• the employee keeps with his/her records a completed and signed copy of the appropriate form(s) (i.e.Form T2200, Declaration of Conditions of Employment, or Form TL2, Claim for Meals and Lodging Expenses).

Additional conditions must be met to deduct certain types of expenses (such as, for example, travel).

For more information on employment related expenses, see www.cra.gc.ca/employmentexpenses, Chapters 3 and 4 of Guide T4044, Employment Expenses 2015.

Action Item: Employers – ensure that Form T2200 is properly completed and distributed or employees may be denied employment expense claims. Employees – obtain Form T2200 from your employer as early as possible.

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.

The Eligible Educator School Supply Tax Credit, worth 15% on up to $1,000 of eligible supply expenses, has now become law. To mark the occasion, CRA has published a Question and Answer providing commentary on this new refundable tax credit available in 2016 and subsequent years. The credit is also referred to as the Teacher and Early Childhood Educator School Supply Tax Credit.

Who Qualifies?

The new tax credit can only be claimed by an eligible teacher or early childhood educator employed at an elementary or secondary school or a regulated child care facility. The employee must either:

• hold a teacher’s certificate that is valid in the province or territory in which they are employed (eligible teacher); or
• hold a certificate or diploma in early childhood education that is recognized in the province or territory in which the individual is employed (eligible early childhood educator).

What Expenditures Qualify?

An eligible supply expense is an amount paid in the year for supplies used or consumed in the school or regulated child care facility in the performance of the taxpayer’s employment. Supplies include:

• consumable goods such as construction paper, flashcards, items for science experiments, art supplies, and stationary items; and
• durable goods limited to games, puzzles, books, containers and educational support software. Computers, tablets and rugs (for kids to sit on) are provided as examples of expenses which are not eligible.

The expense must not be reimbursable, nor subject to an allowance or other form of assistance. As well, the credit cannot be claimed for an expense which is deducted by any person for the year. The credit is available for the year in which it was purchased rather than when it was used.

Documentation Requirements

CRA may ask taxpayers to provide certification from their employer attesting to the eligible supplies expense. The certification should be a statement signed by the individual’s employer that attests that the supplies were used for the purpose of teaching or facilitating students’ learning, directly consumed in an appropriate facility in the performance of the individual’s employment duties, and amounts paid were not reimbursable or otherwise deducted in income calculation. Employers providing this certification should not also provide a T2200, Declaration of Conditions of Employment, in relation to those supplies.

Taxpayers should request the certification from their employer in a timely manner and keep it in their files, along with their receipts for the supplies.

Action Item: Eligible Teachers and Educators – Keep receipts from the purchase of eligible supplies in the year.

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 May 5, 2016 Tax Court of Canada case, at issue was whether the taxpayer (a director and 50% shareholder of the Corporation) was liable for the Corporation’s unremitted payroll deductions and tax. A director would not be held liable if he/she had exercised the degree of care, diligence and skill of a reasonably prudent person in comparable circumstances in order to prevent the corporation’s failure to remit.

In this case, the taxpayer was informed by the other 50% shareholder, who was involved in the day-to-day operations, that the business was doing well. In reality, the Corporation was in financial difficulty and remittances were not being made.

On receiving correspondence from CRA regarding arrears with its GST and payroll deduction remittances, the taxpayer turned his attention to the corporation’s failures. He spoke to the other 50% shareholder about the need to be diligent, as well as stopping by the business every two or three weeks to check on matters. However, he continued to rely on assurances provided by the other 50% shareholder, even after receiving additional correspondence regarding outstanding source deductions.

Director loses – personally liable for corporate remittances
The Court found that reliance on the other shareholder’s word was not acting diligently given the taxpayer’s knowledge of the Corporation’s financial state. The Court suggested a reasonable person would independently verify that remittance payments were being made, whether by direct contact with CRA, review of the Corporation’s bank account, or other approaches. As a result, the Director was personally liable for the unremitted corporate GST/HST and source deductions.

Action Item: Especially in times of corporate financial difficulty, review source documents to ensure that payments to CRA are being made appropriately

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.

CRA holds the authority to suspend receipting privileges and refuse or revoke the registration of a registered charitable organization when an “ineligible individual is a board member or controls or manages the organization”.

On March 17, 2016 CRA Guide CG-024, Ineligible Individuals, was updated. It provides 29 pages of description and implications of having ineligible individuals on boards and in management positions.

Generally, an individual is ineligible if he/she:

• has been convictedof an offence:
• related to financial dishonesty; or
• relevant to the operation of the organization; or
• was connectedto an organization whose registration was revoked for a serious breach of the requirements for registration. Relevant connections could include:
  • a director, trustee, officer, or like official;
  • an individual in a position of management or control; or
  • a promoter of a tax shelter, and participating in that tax shelter caused the revocation of an organization’s registration.

Individuals who manage a registered organization, directly or indirectly, include anyone who does one or more of the following:

• performs managerial (rather than only operational) duties;
• hires, disciplines and dismisses employees;
• prepares budgets within the organization; or
• varies staff assignments.

Individuals who have influence or the power to do one or more of the following would be considered to have control:

• change the board of directors or reverse its decisions;
• make alternative decisions concerning the actions of the organization;
• directly or indirectly end the organization; or
• appropriate the organization’s assets.

Action Item: Review your charity’s current leadership for possible ineligible individuals. Also consider adjusting recruitment and engagement processes to detect such individuals.

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.

The CRA is aware that owner-managers have an incentive to receive benefits deductible by their corporation which are non-taxable to the owner. In essence, this can be perceived as a method to extract profits out of a corporation without paying tax on it. As such, CRA is particularly vigilant to ensure that these benefits comply with the Income Tax Act and do not confer unfair advantages on owners.

To start off, it must be established whether the benefits or allowances have been conferred on the individual in their capacity as an employee or in their capacity as a shareholder. Unless the particular facts establish otherwise, CRA presumes that an employee-shareholder receives a benefit or an allowance in their capacity as a shareholder (assuming the individual can significantly influence business policy). This presumption may not apply if:

• the benefit or allowance is available to all employees of the corporation; or
• all of the employees are shareholders or individuals related to a shareholder, and the benefit or allowance is comparable (in nature and amount) to benefits and allowances generally offered to non-shareholder employees of similar-sized businesses, who perform similar services and have similar responsibilities.

If the benefit or allowance is received in their capacity as an employee, the federal income tax treatment is the same as for an unrelated employee. This means that the benefit is generally deductible to the corporation and, under certain special circumstances, not taxable to the employee.

Where an employee-shareholder receives a benefit or an allowance in their capacity as a shareholder, the value of the benefit or allowance is included in the shareholder’s income and may not be deductible to the company.

Action Item: When commencing the provision of non- taxable benefits, consider whether they will also be offered to non-shareholder employees. If not, they may be taxable to the shareholder employee.

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.

Prior to the summer of 2015, CRA often accepted copies of the U.S. tax returns, as support to claim a U.S. Foreign Tax Credit (FTC). The “Federal Account Transcript” was selected as alternative evidence the return provided to CRA was filed and assessed as filed.

Some practitioners report that obtaining “transcripts” from the Federal Government, and State Governments in particular, can be onerous, often requiring a request from the client rather than a representative.

Form T2209 Federal Foreign Tax Credits sets out the documents required to support foreign tax credit claims, including federal, state and municipal tax returns with all associated schedules and forms, a copy of the federal account transcript and an account statement or similar document from state and/or municipal tax authorities.

CRA recently changed its requirements, to accept proof of payments made or refunds received in lieu of a notice of assessment, transcript, statement or other document from the applicable foreign tax authority (FTA), provided all of the following information is clearly indicated:

• that the paymentwas made to or received from the FTA;
• the amountof the payment or refund;
• the tax yearto which the payment or refund relates; and
• the date of paymentof receipt.

Action Item: Request these documents before a CRA pre- or post-assessing review letter is received to expedite the FTC Claim.

To get a Federal transcript from the IRS, go to: www.irs.gov/individuals/get-transcript

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.

When transferring the legal title of a property to a family member, a disposition for tax purposes may not necessarily occur. The taxable event would occur when a “beneficial ownership” change happens. Usually, a beneficial change and legal change are one in the same, but not always.

In a June 14, 2016 Technical Interpretation, CRA examined the situation where a married couple transferred the title to a property and mortgage into a parent’s name because they no longer qualified to refinance the original mortgage. Once their financial position improved, they transferred the title back. The original taxpayers continued to make all mortgage payments and other house costs. They also continued to live in the dwelling throughout the legal transitions.

The CRA opined that despite the legal ownership changes, no beneficial ownership change occurred. Therefore, there was no taxable disposition.

Action Item: Since the taxability of such a transaction is a matter of interpretation, caution should be taken when relying on such a position. Discuss your fact pattern with a professional and be sure to document appropriate support.

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.

Mutual fund corporations have often been structured to permit changing funds within the group on a tax-free basis. These are commonly referred to as “switch funds” or “corporate-class funds”, and have become popular due to the ability to defer accumulated capital gains. Essentially, investors can switch funds without realizing dispositions and the related taxable capital gains.

However, new legislation has been proposed to end these deferrals commencing with exchanges on or after January 1, 2017.

Some exceptions exist, including switching between different series in the same class of shares representing the same underlying fund (for example, due to different commission or fee terms) and transactions where the underlying investment is unchanged, but shares are reorganized for other bona fide reasons (for example, changing voting rights or amalgamating funds).

Action Item: Consider rebalancing switch fund portfolios by December 31, 2016.

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.

Amounts paid out of an RESP may be taxable, non-taxable, or may trigger a repayment of Government support. The taxation status of a receipt depends on whether it is considered an Educational Assistance Payment, a Refund of Contributions, or an Accumulated Income Payment.

Educational Assistance Payment (EAP) – An EAP is a taxable amount paid to a beneficiary (a student) from an RESP to help finance the cost of post-secondary education. An EAP consists of the Canada Education Savings Grant, the Canada Learning Bond, amounts paid under a provincial education savings program, and the earnings on the money saved in the RESP. The student includes the EAPs as income on their income tax return for the year the student receives them.

Refund of Contributions – The promoter can return contributions tax-free to the subscriber or beneficiary when the contract ends, or, at any time before. These payments are not considered income to the recipient. That said, a refund of contributions may, in some cases, trigger a repayment of Government support.

Accumulated Income Payments (AIP) – An AIP is an amount paid to the subscriber that relates to the income earned in an RESP. An AIP does not generally include: EAPs; payments to a designated educational institution in Canada; the refund of contributions to the subscriber or to the beneficiary; transfers to another RESP; or repayments under the Canada Education Savings Act or under a designated provincial program. An AIP is included in the income of the subscriber and is generally subject to an additional 20% tax rate, except where the amount is eligible for a rollover to another registered plan.

Action Item: Consider the financial consequences, tax or otherwise, on withdrawing funds from an RESP.

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.

The Government of Canada provides analysis and detailed information on economic indicators using the most recent data from Statistics Canada on the website, www.ic.gc.ca/eic/site/cis-sic.nsf/eng/home. 

This website can help small to medium sized businesses understand the dynamics of their industries. Users can focus on a single industry over time or compare one industry against another.

Data is segregated based on the North American Industry Classification System (NAICS) code. Within each specific NAICS code is detailed financial performance data. Such data includes, for example, average gross margins, detailed breakdowns of expenses (e.g. repairs and maintenance, labour, professional and business fees) as a percentage of revenues, and certain financial ratios (e.g. current ratio, return on total assets).

Action Item: Consider using this site to compare your costs as a percentage of revenues to other Canadian companies in your industry.

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.

The 2014 Federal Budget introduced major life insurance taxation changes that received Royal Assent (Bill C-43) on December 16, 2014. These changes take effect in 2017 however, there is still time to take advantage of the old rules if action is taken quickly.

The Exempt Test

Some insurance policies may offer the ability to generate investment earnings exempt from accrual taxation. This is particularly beneficial for policies owned by corporations, as investments outside the policy would be subject to non-active business tax rates (generally above 50%). There are, however, “exempt test” rules to ensure that this favourable tax treatment is not available to policies that are mainly investment vehicles with only an ancillary insurance element. This test will be modernized to reflect more recent mortality experiences, to provide standardization across insurance companies and products, and to take into account the new products that have emerged in the marketplace over the last 30 years, such as universal life.

Changes to the “exempt test” will reduce many of the tax advantages available. Policies issued prior to 2017 will be grandfathered, and retain a larger window for cash accumulation and tax sheltering than will be available on policies issued after 2016.

Changes to the Adjusted Cost Basis (ACB)

A second major factor for policies issued post-2016 will be the impact on the capital dividend account (CDA) of corporately owned policies. The investment fund portion of a life insurance policy forms part of the death benefit payout, which may become an addition to the CDA. Dividends paid out of CDA to the shareholders are tax-free.

It is often assumed that the addition to the CDA will equal the full balance received on the death of the insured shareholder. However, the addition to the CDA is actually the death benefit (proceeds), less the ACB of the policy. The ACB is generally the total premiums paid less the net cost of pure insurance (NCPI).

The NCPI is a complex calculation; one that must usually be done by the insurance provider.

The change is related to the way that the NCPI is calculated. Effectively, it will take significantly longer for the ACB to decline to zero. This change will result in a much lower CDA addition for many years after issuance of the policy. As such, a smaller portion of the death benefit will be added to the CDA for tax-free payout to the shareholder.

Grandfathering 
As indicated above, policies in place before January 1, 2017 will generally be grandfathered. However, alterations to such policies may result in loss of grandfathering. For example, increases in the amount of insurance where medical evidence is required or Term insurance conversions after 2016 may not qualify as pre-2017 grandfathered policies.

 Action Item: Consider reviewing your existing coverage soon – don’t wait to the end of 2016 as considerable time may be required to implement a new policy.

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.

Many individuals received unusually high incomes in 2015 as a result of triggering capital gains or taking extra dividends and/or salary from their corporation to avoid being subject to the higher tax rates taking effect in 2016.

When tax returns for 2015 were filed, many of these individuals would have been required to make a substantial tax payment in April of 2016 since their 2015 withholdings and instalment payments were not sufficient to cover the additional income. In general, if that April payment upon filing was greater than $3,000, CRA will request those individuals to make instalment payments during the 2016 year.

Instalment reminders are sent out by CRA (usually in August) and may ask for large amounts to be paid in September and December of 2016. Those amounts are based on the income from the 2015 year. The first few instalment requests in 2017 may also be based on 2015 income levels. If the taxpayer’s income in 2016 is, or will be lower than 2015, the instalments per the notices may significantly exceed the taxpayer’s expected 2016 liability. It is important to note that there are alternatives to paying the recommended instalment amount included on the notice.

One such possibility is to pay instalments based on the expected tax liability for the 2016 year. If there has been a significant decrease in income, this method may free up large amounts of cash that may otherwise have been tied up in instalment payments and only returned upon CRA processing of the 2016 personal tax return.

Where CRA’s requested instalments are remitted, no instalment interest will be charged. Instalments based on 2016 taxes must be made equally by March 15, June 15, September 15 and December 15 to avoid instalment interest. If no payments were made for March and June, remitting payments for September and December can offset the late payment of the earlier amounts. Paying early, and/or paying more than the expected 2016 taxes, will reduce the potential of interest for late payments, and provide a cushion in case actual 2016 taxes exceed the estimated amount.

Action Item: Review your 2015 and expected 2016 tax situation to determine appropriate instalment payments.

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.

Similar to limitations on accessing the SBD on payments amongst certain corporations, the 2016 Federal Budget also proposed changes when payments are made from a partnership. The measures will apply to taxation years that begin on or after March 22, 2016.

Currently, a corporation which is a member of a partnership may claim the SBD on active business income it receives from the partnership up to its pro-rata share of a notional $500,000 business limit determined at the partnership level (its specified partnership income limit, or “SPI”).  For example, if $500,000 or more of ABI is earned by a partnership with 10 equal partners, the SPI of each partner would be $50,000.

A corporation’s SPI is added to its active business income from other sources, if any, and the corporation can claim the SBD on the total (subject to its annual business limit).

Some business structures circumvent the application of the SPI rules. In one structure, a shareholder of a corporation is a partner and the partnership pays the corporation as an independent contractor under a contract for services separate from the Partnership Agreement. As a result, the corporation claims a full SBD in respect of its active business income earned in respect of the partnership because the corporation itself is not a partner. A number of professional services firms, such as those of lawyers and medical professionals, use a structure like this.

To address this, and other similar strategies, the 2016 Federal Budget proposed to extend the SPI rules. Basically, the amount paid to a corporation available for the SBD will be restricted if the corporation has a shareholder who is a partner, or, if it does not deal at arm’s length with a partner.

Action Item: Consider whether your current partnership structure achieves your goals. Be prepared to pay a higher corporate tax rate if affected by these changes.

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.