Announcements

When filing an objection to a CRA reassessment, one of the most frequently-posed questions is “How long will it take?”. The answer, according to the Auditor General, is “too long”.

On November 29, 2016, the Auditor General released a report to Parliament focusing on the effectiveness and timeliness of the objection process.

Length of Process

For the five-year period ending March 31, 2016, CRA took the following numbers of days, on average, to resolve objections from the time they were filed by the taxpayers:

• 143 days for low-complexity objections (about 61% of total objections for the period);
• 431 days for medium-complexity objections (about 37% of total objections for the period); and
• 896 days for high-complexity objections (about 2% of total objections for the period).

On average, CRA did not assign an objection to an appeals officer until 150 days after the taxpayer had mailed the notice of objection.

CRA’s performance was also compared to six other administrations using 2009 data. Canada took 276 days compared to an average of 70 days for the other six countries.

It was also noted that the tracking system for timing the process was not sufficiently accurate or complete.

Objection Decision Results

Of the objections accepted and processed by CRA, 65% were decided in favour (in whole or part) of the taxpayer. 0.6% of objections resulted in an increase in income tax owed.

Next Steps

In the Fall of 2016, CRA commenced a review of its objections process. As an immediate response, CRA indicated that it will implement the standard to respond to taxpayers on low-complexity objections within 180 days, 80% of the time. Also, beginning in the 2017-2018 year, as part of the initial step when objections are received and screened, taxpayers will be contacted (if necessary) to provide missing information to ensure the file is complete when assigned for resolution.

Action Item: As it will likely take a long time to complete an objection, a significant amount of interest on the tax liability may accumulate. Consider making an earlier payment to reduce the interest cost in the event that the objection is not successful. If it is successful, the CRA will pay interest to the taxpayer, albeit at a lower rate.

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 an April 26, 2016 Technical Interpretation, CRA opined that where an employer provides a payroll advance to an employee, the amount is not generally considered to be a loan. A salary advance is a payment for salary, wages or commissions that an employee is expected to earn in the performance of future services. These amounts are generally included in the employee’s income in the year the advance is received.

If a repayment by the employee is required, a deduction is available in the tax year in which the repayment was made. The deduction cannot exceed the advance that was previously included in the employee’s income from employment.

Action Item: When providing an advance to an employee, ensure that the employee clearly understands the tax implications.

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 June 10, 2016 French Technical Interpretation, CRA commented on whether an employer had conferred a benefit to an employee where the employee was reimbursed for their meal expenses.

Generally, an employee must include the value of any benefits received or enjoyed in their taxable income. CRA normally considers a taxable benefit to be conferred when:

• the benefit provides an economic advantageto the employee;
• the benefit is measurable and quantifiable; and
• it mainly benefits the employee(or a non-arms’ length person) and not the employer.

If the meal is reimbursed while the employee is travelling within the municipality or metropolitan area of the establishment of the employer, the employee is generally considered the primary beneficiary. However, in certain cases, the reimbursement can be excluded from the employee’s income. For example, if the main purpose of the reimbursement is to ensure that the employee’s functions are carried out more effectively as part of a shift, then the employer could be the one who mainly benefits.

Meal reimbursements when the employee travels outside the municipality of the employer in the performance of their duties is generally considered to primarily benefit the employer.

The fact that the employer charges the client for the reimbursement is not a factor in this determination.

Action Item: Consider the tax ramifications when developing and implementing a meal reimbursement 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.

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.