Tax Break Bulletins

Earnings in a TFSA are typically not taxable. However, earnings in a TFSA become taxable when they are earned from carrying on a securities trading business.

In a February 6, 2023 Tax Court of Canada case, CRA had assessed the TFSA on the basis that it was carrying on a business and was therefore taxable on its income for the 2009 through 2012 taxation years. The TFSA holder was a professional investment advisor who had engaged in aggressive trading in non-dividend-paying speculative penny stocks, all of which were qualified investments. The total income assessed was $569,481, earned from annual contributions of $5,000 in each of 2009, 2010 and 2011.

The taxpayer argued that the TFSA should be treated in the same manner as an RRSP and not taxed on income from a business of trading in qualified investments. The taxpayer further argued that the traditional tests used to determine whether a business of trading in securities was being carried on were inappropriate for application to TFSAs. The taxpayer referred to an earlier Court case that had suggested registered accounts trading in qualified investments are not carrying on a business.

Taxpayer loses
The Court noted that TFSAs are one of several statutory schemes, each with its own detailed provisions. Their components are not interchangeable. In comparing TFSAs to RRSPs specifically, the Court cited ten significant differences between the two schemes other than the treatment of business income.

The Court further noted that the judicial test for carrying on a business of securities trading was well established when TFSAs were introduced in 2008 and would have been known to Parliament when they legislated taxation of income from carrying on a business in a TFSA. This indicated that the existing test was considered appropriate for this purpose.

Parliament provided that income earned from carrying on a business within a TFSA would be taxable to the TFSA. If Parliament intended to exclude a business of trading qualified investments, it would have included the same exception provided for RRSPs.

The TFSA, directed by its holder, traded frequently, had an extensive history of buying and selling shares that were speculative in nature and held the shares for short periods. The holder was a knowledgeable and experienced investment professional and spent considerable time researching securities markets. There was no doubt that the TFSA carried on a business of trading qualified investments throughout the period at issue.

ACTION: Carrying on a business of trading securities in a TFSA leads to full taxable income inclusion rather than tax-free amounts. Caution should be afforded when considering such activities.

In a January 14, 2021 Federal Court case, the taxpayer sought a judicial review of CRA’s denial to provide interest and penalty relief on a tax debt of nearly $400,000. The taxpayer argued that relief should be granted due to financial hardship and inability to pay. While the taxpayer provided information demonstrating that monthly expenses and income resulted in a deficit, the taxpayer’s own statements referring to his assets suggested that there was more to his financial situation.

 Taxpayer loses

The Court supported CRA’s view that assets and liabilities, not just income and expenses, were relevant to the question of financial hardship, and information requested on his assets had not been provided.

The Court ruled that, as it appeared that the taxpayer could pay the debt arrears by selling assets, it was not unreasonable for CRA to deny relief. The Court also stated that financial hardship is “the prolonged inability to afford basic necessities such as food, clothing, and shelter and reasonable non-essentials” reiterating the high bar to demonstrate financial hardship.

ACTION ITEM: Be aware that interest relief requested on the basis of financial hardship is very difficult to obtain.

The eligibility periods for several personal income replacement COVID-19 benefits have been extended:

• the previous limit of 26 weeks for the Canada Recovery Benefit (CRB) and Canada Recovery Caregiver Benefit (CRCB) will be extended by 12 weeks to 38 weeks;
• the previous limit of two weeks for the Canada Recovery Sickness Benefit (CRSB) will be extended to four weeks; and
• the normal limit of 26 weeks for Employment Insurance (EI) benefits will be extended by 24 weeks to 50 weeks.

In the absence of these extensions, individuals who transitioned to CRB or EI on September 27, 2020 could have reached the maximum claim period as early as March 27, 2021.

In addition, self-employed workers who have opted in to the EI program to access special benefits will be able to use a 2020 earnings threshold of $5,000 compared to the previous threshold of $7,555. This change will be retroactive to claims as of January 3, 2021 and will apply until September 25, 2021.

ACTION ITEM: More weeks of COVID-19 income support are now available. Make sure to file your 2020 personal tax returns to reduce the chance of interruptions in benefit receipt.

In a February 11, 2021 Tax Court of Canada case, the deductibility of rental expenses for a condo unit that underwent major repairs was considered.

In 2010, major structural repairs (the exterior repairs) commenced on an entire condo complex. As a result, the

taxpayer lost the tenants for his particular unit, and was unable to replace them. As the property was empty, the taxpayer decided to carry out repairs within the condo itself (the interior repairs) costing approximately $24,000. The repairs consisted of fixing or replacing items such as fixtures, appliances, walls, and counters.

Taxpayer wins – source of income

CRA argued that since the property was not being rented out, there was not a source of income and the expenses could not be deducted. However, the Court found there was a source of income since there was a continuing intent to earn a profit, demonstrated by several attempts to rent the property during the external structural repair phase. The property was also rented out after the repairs were completed, and the Court observed that the taxpayer operated in a business-like manner.

Taxpayer wins – current vs. capital

The Court then considered whether all of the repairs could be deducted immediately as “current expenses”, or must be depreciated over time as “capital expenses”. In ruling that the interior repairs were a current expense, the Court noted the following:

• Betterment and enduring benefit – Although any repairs improve a property, the question is whether the improvement was significant enough to bring into existence a different capital asset than what was there before. No building permits were required; no redesign or change to size, layout, or function occurred; and materials used were “like for like” (no upgrades). No new asset resulted; rather, the property was just kept in rentable condition. The Court also noted that being a “once in a lifetime” expenditure does not mean it is not a repair.
• Typical repairs – If repairs are out of the ordinary, the expenditures are more likely on account of capital. However, these repairs, even though they occurred infrequently, were typical.
• Timing of the repairs – CRA argued that since the repairs were all done at once, they resulted in a new asset. However, the Court noted that the test is only whether the cumulative effect of the repairs was to improve the property past its original condition. The Court found that the timing of the repairs was not a significant factor.
• Cost of repairs compared to value of the property – The cost of the repairs was only 5% of the total fair market value of the property, suggesting that the expenses were current rather than capital.
• Increase in rent – The rent increased from $1,500 to $2,200 after the repairs were complete. The Court opined that the increase in rent was just as likely attributable to exterior repairs as to the interior repairs and that the increase in rent was not a significant factor. It was not surprising that property in good state commands higher rent than one needing repairs. 

ACTION ITEM: If considering a major renovation to a rental property, consider whether the repairs require delayed deduction, or can be immediately deducted.

On September 3, 2020, CRA announced that, effective January 1, 2020, the rates allowable under the simplified method related to travel for medical expenses, moving expenses, and the northern residents deduction, as well as meal claims for transport employees, increased to $23 from $17 per meal, for a total of $69/day. This is also the amount that CRA has stated is reasonable for a meal and therefore the non-taxable portion of an overtime meal or allowance, or certain other travel allowances provided to employees.

CRA has previously noted that reasonable allowances paid by employers for meal costs incurred while travelling is a question of fact. Reasonable allowances are generally not taxable. Although they would generally accept $23 per meal (including taxes), higher amountscould be reasonable, provided they are supported by relevant facts, including:

• cost of ordinary meals in the travel area;
• availability of meals in proximity to the location of work or lodgings while away;
• whether some meals will likely be provided to the employee at no cost; and
• exchange rates where travel is outside of Canada.

CRA has also indicated previously that they consider the meal allowances based on the National Joint Council rates (which well exceed $69/day but are currently less than $23 for breakfast or lunch) to be reasonable for the meal portion of these travel allowances. However, these Council rates are not accepted for the other purposes mentioned above.

ACTION ITEM: Keep a list of all medical and moving travel.  Retain associated receipts so that the actual costs can be compared against claims available under the simplified method rates.

Please find below an important update and requirement for reporting T4 this year.

For the 2020 tax year, the Canada Revenue Agency (CRA) will be introducing additional reporting for the T4 slip, Statement of Remuneration Paid.

Additional reporting requirements will apply to all employers and will help the CRA validate payments under the Canada Emergency Wage Subsidy (CEWS), the Canada Emergency Response Benefit (CERB) and the Canada Emergency Student Benefit (CESB).

How to report employment income during COVID-19 pay periods

For the 2020 tax year, in addition to reporting employment income in Box 14, other  new information codes must be completed when reporting employment income and retroactive payments in the following periods:

• Code 57: Employment Income – March 15 to May 9
• Code 58: Employment Income – May 10 to July 4
• Code 59: Employment Income  –  July 5 to August 29
• Code 60: Employment Income – August 30 to September 26

Eligibility criteria for the CERB, CEWS, and CESB is based on employment income for a defined period. The new requirement means employers should report income and any retroactive payments during these periods.

To find out more information about this new requirement please visit: https://www.canada.ca/en/revenue-agency/campaigns/covid-19-update/support-employers-cra-covid-19.html#howto

In a September 17, 2019 Tax Court of Canada case, at issue was the deductibility of vehicle expenses, and in particular, the portion of total vehicle use that was for employment purposes. While initially challenged by CRA, the Court eventually accepted the credit card statements as support for the amounts expended. The taxpayer held and produced a T2200 which indicated that motor vehicle expenditures were requirements of employment. 

Taxpayer loses – vehicle expenses

The taxpayer had initially claimed 90% employment usage but later asserted that only 1,015 of her total 1,353 kilometres travelled (75%) were for employment purposes. This percentage is used to determine the portion of total vehicle expenses that can be deducted. The Court then noted that the total kilometres driven for the year were more likely approximately 10,000 based on the odometer readings listed on the third-party garage repair invoices provided throughout the year. As the reported employment kilometres (which were supported by a vehicle log) were about 10% of the total reported on the invoices, only 10% of expenses were allowed.

ACTION ITEM: In addition to employment/business travel logs, CRA may ask for support of total travel. Retain records that support total kilometres traveled such as repair receipts.

This is a friendly reminder that the deadline to file your 2019 personal income tax return is  – Monday, June 1st 2020. If you haven’t already done so please bring in your tax related information and documents.  We will be accepting payment by phone, e-transfer to payments@andrews.ca or through our website at Andrews.ca. Thank you!

The T4/T5 filing deadline is fast approaching!

A friendly reminder that the T4 (RL1), T4A (RL2), T5 (RL3) filing deadline is one week away (February 28^th, 2020). Be sure to provide your accountant with all relevant documents to make sure that your T4s, T5s and all other slips are filed on time to avoid penalties.

• The amount of income an individual can earn without paying tax (basic personal amount) will begin increasing in 2020. In the first year, it will rise to $13,229 (from $12,069 in 2019), and will reach $15,000 in 2023. The benefit will begin to be phased out when an individual has earnings of approximately $150,000.
• The purchase of a zero-emission vehicle, if associated with an income earning purpose (e.g. used in a business), may be eligible for a 100% immediate write-off as long as the federal government purchase incentive was not obtained.
• TFSAs – As of 2017, the average number of contributions per individual was 49, the average fair market value of each account was $19,633, and the average unused space was $30,947.
• There are 21 million corporations in Canada (according to 2016 statistics that were recently released). Total tax payable for 2016 was $72.21 Billion.

Starting January 1, 2019, the CPP will be enhanced. This means that both employees and employers will be required to contribute more, but, retirement, survivor, and disability pensions will also increase. The changes will be gradually phased in over 7 years: Phase 1 will take place from 2019 to 2023; and Phase 2 will take place in 2024 and 2025.

Phase 1 – The prior 4.95% base employer/employee contribution rate will increase annually to 2023, as follows, 5.10%, 5.25%, 5.45%, 5.70%, 5.95%.

Phase 2 – In 2024, an additional 4% contribution will be required on earnings in excess of the Year’s Maximum Pensionable Earnings (YMPE), up to 107% of the YMPE. For example, if the YMPE is $70,100, the additional limit will be approximately $75,000 ($70,100 x 107%). The 4% rate will be applied to the difference between the two numbers: $4,900 ($75,000 – $70,100). For 2025 and later, the 107% multiplier will be increased to 114%.

Eligibility for CPP benefits will not be affected, however, some benefits will increase. In 2019, the CPP retirement benefits will begin to grow, eventually covering 1/3 of average earnings up to the maximum amount (which will also be increasing by 14%). One’s benefits will depend on how much and how long they contributed to the enhanced CPP. Post-retirement benefits will also be increased. Disability benefits will be increased depending on one’s contributions, and the survivor’s benefit will also be increased based on the deceased spouse or common-law partner’s contribution.

ACTION ITEM: Employers should budget for higher CPP costs on continual increases over the coming seven years.

On October 23, 2018, draft amendments to the Federal Fuel Charge Regulations and the Greenhouse Gas Pricing Act were released. As of April 1, 2019, a federal carbon tax is scheduled to be imposed in respect of Ontario, New Brunswick, Manitoba, and Saskatchewan. The federal backstop legislation will be partially used in Prince Edward Island, Yukon, and Nunavut. The other provinces and territory are not subject to this regime as they have, or are, instituting their own custom carbon pricing structures.

In the first year, the federal tax will, for example, subject gasoline purchases to a 4.42 cents/L tax while 3.91 cents/cubic meter will be assessed on marketable natural gas. The rates will be increased annually until 2024.

According to a Government Backgrounder entitled “Ensuring Transparency” the direct proceeds from the federal carbon tax will be returned to the territory or province of origin. For the provinces subject to the federal carbon tax, approximately 90% of funds will be returned directly to individuals and families through a Climate Action Incentive (CAI) payment. The remainder will be returned through electricity generation support in remote communities; support for small and medium enterprises; and support for municipalities, universities, schools, colleges, hospitals, non-profit-organizations, and indigenous communities.

The following are sample published payout amounts and estimated costs for 2019.

Also note that a 10% top-up will apply for those residing in rural areas.

The legislation does not set out the amounts of the payments. Rather, it provides that the amounts for each year may be specified by the Minister of Finance. Absent amounts specified for any specific province, the amounts are nil. It is not clear whether the amounts included in the above release are estimates, or are the amounts specified in accordance with this provision. Payments are expected to increase annually to reflect increases in the federal carbon tax, until at least 2022.

The Government of Canada website (https://www.canada.ca/en/

environment-climate-change/services/climate-change/pricing-

pollution-how-it-will-work.html) provides additional information specific to each jurisdiction.

The other provinces which are not subject to the federal program generally have similar systems in place which include the collection of levies, and a partial refund to individuals, with the remainder being used to fund the programs or other credits and direct expenditures. For example, in Alberta, the carbon levy is applied at a rate of $30/ton in 2019 to diesel, gasoline, natural gas and propane at the gas station and on heating bills. It does not apply to electricity. A carbon rebate valued at $300 for the first taxpayer, $150 for the spouse, and $45 for each child will be available with the payments beginning to be phased out at an income of $47,500 for individuals ($95,000 for families).

ACTION ITEM: Review the above website to review exposure and potential rebates in your particular jurisdiction. Businesses may want to budget for increased costs to operate.

In response to U.S. tax changes and cuts, the Federal Government released its Fall Economic Update on November 21, 2018 which primarily focused on changes to the first year of depreciation on most capital assets. The changes include immediate full depreciation in respect of manufacturing & processing assets, along with clean energy generation and storage assets. Also, an enhanced first year depreciation claim is now available for most other depreciable assets.

Manufacturing and Processing Machinery and Equipment

Machinery and equipment used in manufacturing and processing acquired and made available for use from November 21, 2018 to December 31, 2023 will be eligible for a full capital cost allowance (CCA) deduction in the year of acquisition (the full deduction will then be phased out incrementally). Specifically, the asset must be used directly or indirectly by the taxpayer in Canada primarily for the manufacturing or processing of goods for sale or lease, or leased by certain corporations to a lessee who can reasonably be expected to use the property in this manner.

In broad terms, the manufacture of goods normally involves the creation of something (e.g. making or assembling machines, clothing or soup) or the shaping, stamping or forming of an object of something (e.g. making steel rails, wire nails, rubber balls, or wood moulding).

Processing of goods usually refers to a uniform process, system, technique, or method of preparation, handling or other activity designed to effect a physical or chemical change in an article or substance (e.g. galvanizing iron, creosoting fence posts, dyeing cloth, dehydrating foods, or homogenizing and pasteurizing dairy products), other than natural growth. Jurisprudence has determined that a taxpayer would be engaged in processing if the following two tests are met: there is a change in the form, appearance, or other characteristics of the goods subject to the operation; and the product becomes more marketable.

Property “used directly or indirectly” in eligible activities may qualify for this enhanced deduction.

Some assets commonly used in smaller operations, such as restaurants, bars or bakeries, may qualify. For example, an oven which converts ingredients into a meal for sale may be considered used in manufacturing or processing.

Clean Energy Assets

Clean energy assets (Classes 43.1 and 43.2) will qualify for the same first year depreciation claims as manufacturing and processing equipment (100% up to December 31, 2023, declining thereafter). Eligible assets for these classes include certain types of energy and heat production and storage equipment related to hydro, wind, solar, bio fuel, eligible waste fuels, hydrogen fuel cells, kinetic wave/tidal, ground source heat pump systems and heat recovery equipment.

Most Other Capital Assets – Accelerated Investment Incentive

CCA also will be enhanced for acquisitions of depreciable assets in most other classes from November 21, 2018 to December 31, 2027.

Prior to the rule change, the half-year rule essentially only allowed half a year of depreciation in the year of acquisition (applicable to most CCA classes), regardless of how early or late in the fiscal year the asset was acquired. Now, for most assets, the usual half year of CCA available in the year of acquisition will be tripled for acquisitions to December 31, 2023 (the enhancement will decline thereafter, returning to the typical half-year rule in 2028).

For example, a Class 10 vehicle which is normally subject to a 15% depreciation claim in the first year would now be allowed a 45% claim.

Planning and Purchases

Claiming depreciation is optional. In essence, one has the option of claiming depreciation up to the maximum level available in respect of its class for any given year (other less common limits may also apply). The accelerated depreciation rules operate as the name implies: they accelerate when a tax deduction for depreciation can be claimed, but they do not increase the overall lifetime amounts that can be claimed. In other words, more can be claimed up front, but less will be available in the future. Note that an accelerated CCA claim in the year of acquisition is only available in that year – one must “use it or lose it”. Reducing the claim in the year of acquisition does not allow an accelerated deduction in a future year.

When determining whether, and to what extent a claim should be made, considerations vary depending on factors such as:

• whether the asset is owned personally or in a corporation;
• the current income levels, and the expected income in the future;
• future corporate tax rates (for example, whether the corporation may be subject to small business deduction restrictions as too much passive income is being earned); and
• whether the asset is generating passive or active income.

Accelerated depreciation is available even if purchased just before year’s end, as long as it is also made available for use by that point as well.

ACTION ITEM: Review whether capital purchases should be accelerated, and whether the accelerated deduction should be claimed given your particular situation.

Travel from home to a regular place of employment is usually a personal expenditure, the costs of which cannot be claimed as an employment expense. However, if the taxpayer is required to travel away from the employer’s place of business, amounts may be deductible by the employee.

A June 29, 2018 Tax Court of Canada case examined this issue. The taxpayer travelled from home to three different construction sites to carry on employment duties. Specifically, the taxpayer’s work for a Toronto construction corporation required frequent travel to sites requiring round trips of 167 km (Hamilton) and 92 km (Aurora), and infrequently to a site requiring a 94 km round trip (Whitby).

CRA argued that each was a regular place of employment, such that no deduction was available. The Court, however, concluded that this was travel “away from the employer’s place of business or in different places”, as required by the Income Tax Act. As such, the costs of this travel could qualify as deductible employment expenses.

While the taxpayer was not ultimately successful in his claim due to his receipt of an allowance from his employer, the case may provide a basis for business travel from home to a construction site.

As implied above, there are other conditions that must be met in order to deduct amounts against employment income. For example, the employee must not receive a non-taxable allowance in respect of the travel, and an appropriately completed T2200 from their employer must have been issued.

CAUTION ITEM: Although it may be possible deduct travel amounts against employment income, such amounts are often challenged by CRA.