Tax Tips & Traps

GST/HST Input Tax Credits: Reasonable Expectation of Profit

A July 28, 2022 Tax Court of Canada case considered whether input tax credits (ITCs) in respect of a farming operation’s expenditures were available. The farming activity consisted of breeding and racing various horses and involved at least four full-time employees at one point. Over...

A July 28, 2022 Tax Court of Canada case considered whether input tax credits (ITCs) in respect of a farming operation’s expenditures were available. The farming activity consisted of breeding and racing various horses and involved at least four full-time employees at one point. Over a nine-year period (2007-2015), the operations never experienced positive net earnings and more than $4 million in losses were accumulated. The owner partially financed operations with earnings from his law practice.

In order for ITCs to be available, supplies must have been made in the course of a commercial activity. For a commercial activity to have occurred, there must have been a reasonable expectation of profit.

The Court considered the following criteria when determining whether the taxpayer carried on a commercial activity:

  • profit and loss experience;
  • the taxpayer’s training;
  • the taxpayer’s intended course of action; and
  • the capability to show a profit.

Taxpayer loses
While the Court noted that the taxpayer was clearly passionate and knowledgeable about horses and had invested significant funds and time, it was insufficient to demonstrate that there was a reasonable expectation of profit. Ultimately, the Court found that the taxpayer’s lack of financial organization (he did not have financial statements) and lack of financial tools left him without the ability to diagnose the causes of his farm losses. Without the ability to understand the losses, he did not have the ability to truly stem them, and therefore he did not have a reasonable expectation of profit. The ITCs were denied.

Action: Ensure to sufficiently compile financial records and information such that you can reasonably identify the profitability problems in your operation.

Director Liability: Is Asking About Source Deductions Enough?

Directors can be personally liable for payroll source deductions (CPP, EI and income tax withholdings) and GST/HST unless they exercise due diligence to prevent the corporation from failing to remit these amounts on a timely basis. An August 31, 2022 Tax Court of Canada case found...

Directors can be personally liable for payroll source deductions (CPP, EI and income tax withholdings) and GST/HST unless they exercise due diligence to prevent the corporation from failing to remit these amounts on a timely basis.

An August 31, 2022 Tax Court of Canada case found that the director was not duly diligent and therefore was personally liable for the corporation’s unremitted payroll deductions, interest and penalties of $78,121 from January 2011 to April 2012.

The taxpayer argued that he was duly diligent as he asked at the directors’ meeting each month whether the tax remittances were up-to-date and received oral confirmations that they were. The taxpayer stated that he had “checked the box” at each directors’ meeting. He also argued that his decisions were driven by materiality; he focused his efforts on the corporation’s overall well-being and safeguarding the millions of dollars of investment, rather than the payroll remittances that he considered “tiny.”

Taxpayer loses

The Court ruled that the taxpayer was not duly diligent in preventing the failure to make adequate payments. It noted that the taxpayer never contacted CRA to confirm whether payroll remittances were current, which was particularly problematic as he was unable to obtain reliable financial statements and was aware of the difficult financial situation. While it was the taxpayer’s view that this was someone else’s job, there was no evidence of the taxpayer ever asking anyone else to follow up with CRA.

Action: Prior to accepting any role as a director, ensure to fully understand your responsibilities and potential exposure to personal liability. If currently acting as a director, make sure to be dully diligent in ensuring payroll and GST/HST payments are properly made.

Executor: Whether to Accept This Role

Individuals may be asked to take on various roles in respect of loved ones, friends, clients or others. One role that is particularly riddled with challenges is that of an estate executor. While an individual may carry out their duties in an appropriate manner, it...

Individuals may be asked to take on various roles in respect of loved ones, friends, clients or others. One role that is particularly riddled with challenges is that of an estate executor. While an individual may carry out their duties in an appropriate manner, it is important to consider the risks of unhappy beneficiaries and any other undesirable outcomes, including litigation and/or strained relationships.

A March 4, 2022 Tax Court of Canada case reviewed whether the taxpayer was personally liable for the estate’s tax debts. On the death of the taxpayer’s father in 1994, the taxpayer and his brother became executors of the estate. The taxpayer argued that he renounced his role of executor two months after the death of his father and therefore should not be held liable for the estate’s tax debts.

The father left most of his estate to the taxpayer’s brother, as well as a portion to grandchildren and great-grandchildren. The taxpayer accepted this decision but wanted to ensure that his daughter received her share of the estate. To this effect, in 2010, the taxpayer and his brother took steps to distribute a balance of $240,000 payable to the taxpayer’s daughter, secured by a mortgage against one of the estate’s properties. That is, the taxpayer’s daughter was essentially provided a $240,000 receivable from the estate. No clearance certificate was obtained, and the estate was in arrears with its taxes. In 2016, the brother died.

While the taxpayer argued that he renounced his role as executor and provided an alleged handwritten note from 1994 to that effect, the Court did not accept that he formally renounced his role. While the Court acknowledged that the taxpayer may not have understood everything about being an executor or every aspect of a land transfer, the Court believed he understood that he was signing as an executor. As he was the executor when the mortgage was secured and did not obtain a clearance certificate, he was held personally liable for the estate’s tax debts.

The Court further stated that even if it did find that the taxpayer had properly renounced his role, the taxpayer acted as a “trustee de son tort” (a person who is not appointed as a trustee but whose course of conduct suggests that he be treated as one), and for income tax purposes, he would have been considered a “legal representative.”

Action: Acting as an executor comes with significant responsibilities. Failure to properly administer the estate can result in personal liability. If you choose to decline the role, you must do so properly and not as an executor.

Trusts: New and Expanded Disclosure Requirements

Legislation has been proposed for trusts (including estates) with years ending on December 31, 2022 and onwards that would significantly expand the reporting rules. More trusts would be required to file tax returns, and more information would be required to be disclosed in these returns....

Legislation has been proposed for trusts (including estates) with years ending on December 31, 2022 and onwards that would significantly expand the reporting rules. More trusts would be required to file tax returns, and more information would be required to be disclosed in these returns. In addition, sizable penalties would be introduced for non-compliance.

More trusts and estates required to file

Under the existing rules, trusts are exempt from filing a T3 tax return if they have no taxes payable and no dispositions of capital property. However, under the proposals, tax returns will be required for all Canadian resident express trusts (this generally means trusts created deliberately) that do not meet at least one of a number of exceptions. Some of the more common exceptions include the following:

  • trusts in existence for less than three months at the end of the year;
  • trusts holding only assets within a prescribed listing (including items such as cash and publicly listed shares) with a total fair market value that does not exceed $50,000 at any time in the year;
  • trusts required by law or under rules of professional conduct to hold funds related to the activity regulated thereunder, excluding any trust that is maintained as a separate trust for a particular client (this would apply to a lawyer’s general trust account, but not specific client accounts); and
  • registered charities and non-profit clubs, societies or associations.

Reporting will be required where a trust acts as an agent for its beneficiaries (referred to as bare trusts in the government’s explanatory notes). No details on the intended breadth of such trusts have been provided by the Department of Finance or CRA to date.

More disclosure of parties to trusts

Where a trust is required to file a tax return, the identity, including residency, of all of the following people must be disclosed:

  • trustees, beneficiaries and settlors; and
  • anyone that has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the income or capital of the trust.

The requirement to provide information in respect of the beneficiaries would be met if beneficiary information is provided for all whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return. Where there are beneficiaries whose identity is not known or ascertainable with reasonable effort, the person making the return would be required to provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust. For example, where the beneficiaries are both the current and future grandchildren of the settlor, details in respect of the current children must be provided in addition to details of the trust terms describing the future class of beneficiaries.

The new rules would not require the disclosure of information subject to solicitor-client privilege.

Substantial penalties

Failure to make the required filings and disclosures on time attract penalties of $25 per day, to a maximum of $2,500, as well as further penalties on any unpaid taxes. New gross negligence penalties have been proposed, applicable to filings not made on time and inaccurate filings. These penalties are proposed to be the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime, leading to the concern that multiple persons could be subject to these substantial penalties for a single trust.

Action: Make a list of all arrangements that you and your family have that may be considered a trust or bare trust. Review them with a professional to determine whether they would be subject to the rules. Obtain relevant information that will be required for the filing of the particular trust returns.

Crowdfunding: Taxable or Not?

A June 2, 2022 Technical Interpretation discussed the taxability of funds received through crowdfunding campaigns. CRA first noted that amounts received through a crowdfunding arrangement could represent loans, capital contributions, gifts, income or a combination of two or more of these. This means that the...

A June 2, 2022 Technical Interpretation discussed the taxability of funds received through crowdfunding campaigns. CRA first noted that amounts received through a crowdfunding arrangement could represent loans, capital contributions, gifts, income or a combination of two or more of these. This means that the funds received could be taxable (such as business income) or not (such as a windfall, gift or voluntary payment). As the terms and conditions for each campaign vary greatly, the determination of tax status must be conducted on a case-by-case basis.

Where an amount is not a windfall, gift or other voluntary payment, the amount may be taxable if it constitutes income from a source. To be a non-taxable gift or other voluntary payment, the following conditions must be met:

  • there is a voluntary transfer of property;
  • the donor freely disposes of their property to the donee; and
  • the donee confers no right, privilege, material benefit or advantage on the donor or on a person designated by the donor.

CRA opined that contributions would likely be considered non-taxable gifts in the case of a “Go Fund Me” campaign created by family members of an individual with cancer to assist in that individual’s treatment.

In an August 23, 2019 Technical Interpretation, CRA considered whether an employer’s contribution to their employee’s crowdfunding campaign to assist with the cost of additional therapies and support for the employee’s recently born child would be received in the recipient’s capacity as an employee (taxable) or individual (not taxable).

CRA indicated that, where the person is dealing at arm’s length with the employer and is not a person of influence (such as an executive who controls employer decisions), the benefit or amount would generally be received in the person’s capacity as an individual (non-taxable) where the amount is:

  • provided for humanitarian or philanthropic reasons;
  • provided voluntarily;
  • not based on employment factors such as performance, position or years of service; and
  • not provided in exchange for employment services.

If considered non-taxable, CRA opined that, as the contribution was not an expense incurred to gain or produce income, it would not be deductible

ACTION: Amounts raised by crowdfunding campaigns may be taxable or non-taxable, depending on the circumstances. Ensure to provide details on these activities so that the amounts are properly reported.

Buying and Selling a Home: Budget 2022 Proposals

The 2022 Federal Budget included several proposals that would significantly change the taxation environment when buying and selling a home. Broadly, the government proposed various incentives for first-time buyers and extended family units in addition to bright-line tests/restrictions for those purchasing homes for profit (e.g. home flippers). Taxpayers...

The 2022 Federal Budget included several proposals that would significantly change the taxation environment when buying and selling a home. Broadly, the government proposed various incentives for first-time buyers and extended family units in addition to bright-line tests/restrictions for those purchasing homes for profit (e.g. home flippers). Taxpayers should consider how the changes will affect their intended purchases and sales. In some cases, it may be beneficial to expedite a purchase or sale, while in others, it may be prudent to delay.

New possibilities and enhanced programs include the following:

  • Home accessibility tax credit – The annual expense limit would be doubled to $20,000 such that the maximum non-refundable tax credit would be $3,000, proposed to be effective for 2022 and subsequent taxation years. This credit applies to enduring and integral home renovations in respect of a taxpayer, or a relative who is (or will be) living with the taxpayer, that is either a senior or eligible for the disability tax credit. The renovation must enable the individual to gain access to the home, be more mobile or functional in the home, or reduce the risk of harm within, or in gaining access to, the home.
  • Home buyers’ tax credit – The amount would be doubled such that eligible first-time home buyers could access tax relief of $1,500, proposed to be effective for acquisitions of a qualifying home on or after January 1, 2022.
  • Tax-free first home savings account – A new registered account would allow for tax-deductible contributions of up to $8,000 annually and up to $40,000 in total; withdrawals from the plan (including income earned in the plan) to purchase a first home would not be taxable. This initiative is expected to become available in 2023.
  • Multigenerational home renovation tax credit – A new tax credit would provide relief on up to $50,000 of eligible expenses to construct a secondary suite for a senior or person with a disability to live with a relative. This initiative is expected to become available in 2023.

New cautions and restrictions include the following:

  • Residential property flipping rule– A new rule would be introduced to deem all gains arising from the disposition of a residential property (including rental property) that was owned for less than 12 months to be business income, other than any disposition for which an exception would apply (such as where a death or addition to the family necessitates a move). Sales on homes owned for 12 months or more would follow the traditional rules. This means that such sales could still be classified as fully taxable business income and not be eligible for the principal residence exemption. This measure would apply to residential properties sold on or after January 1, 2023.
  • Foreign buyer property banForeign commercial enterprises and people who are not Canadian citizens or permanent residents would be prohibited from acquiring non-recreational residential property in Canada for two years. This would not apply to refugees and people authorized to come to Canada while fleeing international crises, certain international students on the path to permanent residency or individuals on work permits residing in Canada.
  • GST/HST on assignment sales by individuals – All assignment sales in respect of newly constructed or substantially renovated residential housing would be taxable for GST/HST

In addition to the above tax measures, Budget 2022 proposed to develop and implement a Home Buyers’ Bill of Rights and national plan to end blind bidding. This Bill of Rights could also include items such as ensuring a legal right to a home inspection and ensuring transparency on the history of sales prices on title searches.

ACTION: Consider the expected timing of implementation for each of these measures and the impacts on purchases or sales.

Old Age Security (OAS): Clawback Planning

Individuals who normally receive OAS are occasionally surprised when some OAS is subject to a special tax (commonly referred to as a “clawback”) with their T1 tax filings due to high earnings. In particular, OAS is clawed back at a rate of 15% of adjusted...

Individuals who normally receive OAS are occasionally surprised when some OAS is subject to a special tax (commonly referred to as a “clawback”) with their T1 tax filings due to high earnings. In particular, OAS is clawed back at a rate of 15% of adjusted income (AI) received in that year over an indexed threshold amount.

The current and upcoming threshold amounts are $79,845 (2021) and $81,761 (2022). If receiving maximum OAS in 2021 (assuming no changes for items like deferred application, being over age 75, etc.), the full amount will be clawed back if 2021 AI is $129,757 or higher.

AI is net income before the deduction of any clawback with a few modifications, such as removal of Registered Disability Savings Plan (RDSP) income inclusions.

OAS payments starting in July are subject to withholdings based on AI of the prior calendar year. If it is known that AI for the current year will be less than that of the prior year, Form T1213(OAS) can be filed to request reduced withholdings.

Some planning considerations

Defer commencement of OAS receipt

Future OAS payment increases of .6% per month of delay (to a maximum of 36% for 5 years of deferral) are provided to compensate for the deferral of OAS pension payments. This flexibility may permit a person to reduce or eliminate the OAS clawback by deferring the receipt of OAS until the income of the person is below the AI clawback threshold. If OAS will be clawed back in its entirety, it costs noting to delay but provides the benefit of increased future payments. Increased OAS payments also increase the AI level at which all OAS is clawed back.

A further possibility for a high-income individual is to retroactively apply early in a year after reaching age 65 to receive up to additional 11 months of benefits in a single calendar year, hopefully retaining some benefits in that one year. For high-income seniors, application could be delayed resulting in the full 36% enhancement and 23 payments received in the year the individual reaches age 72.

Use resources that reduce AI

It is important to know how certain sources of income affect AI as any changes between the beginning clawback threshold and the amount at which OAS is completely eroded carry a 15% impact on OAS entitlement. Note that 115% of ineligible dividends and 138% of eligible dividends are included in AI. On the other hand, only 50% of capital gains are included.

Watch out for deductions

Certain deductions such as non-capital and net capital losses, the capital gains deduction, and the northern residence deduction will not reduce clawback. As such, for example, while no tax may need to be paid on the sale of qualified small business shares or qualified farm property, OAS could still be significantly impacted. On the other hand, deductions for pension splitting, which are discretionary, do reduce AI.

From an overall perspective, it may even be beneficial to shift pension income to the higher-earning spouse if it reduces clawback for the lower earner, despite the increase in marginal tax rates.

Time income inclusions

If an individual’s AI will unavoidably already fully eliminate OAS, consider whether additional amounts that have high impacts on AI could be taken into incomein the current year, with the after-tax amounts to be used to fund needs in future years. Likewise, if far below the prescribed threshold, the same may be considered as additional amounts do not erode OAS until that threshold is reached. Of course, the advantages would have to be balanced against any differences in applicable marginal tax rates and other income-tested benefits.

Individuals should also consider whether funds needed for the year could be obtained from sources that do not impact AI at all, such as capital dividends, capital withdrawals from investments, trust distributions of capital, TFSA withdrawals, repayment of shareholder loans or obtaining new loans.

ACTION: Care should be taken to minimize the current year and future year clawbacks to Old Age Security payments.

Canada Worker Lockdown Benefit (CWLB): Modified Support for Individuals

The CWLB provides a $300 per week benefit to employees and self-employed persons unable to work due to a public health restriction lasting at least seven consecutive days. It will apply only to regions designated by the federal government as eligible in the period. This...

The CWLB provides a $300 per week benefit to employees and self-employed persons unable to work due to a public health restriction lasting at least seven consecutive days. It will apply only to regions designated by the federal government as eligible in the period. This would be in regions where provincial or territorial governments have introduced capacity-limiting restrictions of 50% or more. CRA posted a webpage listing designated regions. As of January 11, 2022, Saskatchewan was the only region with no eligibility. Quebec and Northwest territories had certain regions eligible, while all the remaining provinces and territories had all regions eligible for at least some periods.

To be eligible, the applicant must also meet the following criteria:

  • SIN – have a valid social insurance number;
  • Age – be at least 15 years of age on the first day of the week;
  • Residency – be resident and present in Canada during the week;
  • Tax return filed – have filed a 2020 income tax return;
  • Prior earnings – have had, for 2020, or in the 12 months preceding the day on which they make the application, a total income of at least $5,000 from employment, self-employment, parental benefits, Canada Emergency Response Benefits (CERB), Canada Recovery Benefits (CRB) or income prescribed by legislation. For 2022 claims, the additional option of using 2021 income will be available;
  • Current benefits – no benefits are available for the same period with respect to EI, provincial parental benefits, the Canada recovery caregiving benefit or the Canada recovery sickness benefit; and
  • Loss of income – the individual must either have:
  • lost their employment during the lockdown period and been unemployed during the week;
  • been unable to perform the self-employment activities they normally performed immediately before the lockdown period; or
  • their average weekly income declined by at least 50% compared to their total average weekly employment and self-employment income for 2020 or the 12 months preceding the application (for 2022 claims, the additional option of using average weekly income for 2021 will be available).

Applicants who have voluntarily ceased to work, unless the cessation was reasonable, or failed to return to work when possible and reasonable to do so, are ineligible. Similar to the Canada Recovery Benefit, individuals will be ineligible for benefits during mandatory quarantine or self-isolation following a return from international travel. Where the inability to work results from a refusal to comply with a requirement to be vaccinated against COVID-19, the individual will be ineligible.

Where an individual received CWLB in 2021, their benefits will be reversed if they do not file their 2021 income tax return by December 31, 2022. Similarly, an individual receiving CWLB benefits in 2022 will lose entitlement if they do not file their 2021 and 2022 income tax returns by December 31, 2023.

Applications for benefits must be filed by the later of February 16, 2022, or 60 days from the end of the claim week.

ACTION: If you are eligible, ensure to make a timely claim. Also, if eligible, ensure your 2020 personal tax return was filed, and your 2021 return is filed to avoid required repayments.

Teachers and Early Childhood Educators: Expanded Access to Tax Credit

The eligible educator school supply tax credit is a refundable tax credit that allows teachers and early childhood educators to claim up to $1,000 for amounts expended (for which no allowance or reimbursement was provided) for supplies and some durable goods used to teach or...

The eligible educator school supply tax credit is a refundable tax credit that allows teachers and early childhood educators to claim up to $1,000 for amounts expended (for which no allowance or reimbursement was provided) for supplies and some durable goods used to teach or facilitate students’ learning. Individuals must have a certificate from their employer attesting to the eligibility of their expenses for the year.

Shift to online learning

In an October 19, 2021 Technical Interpretation, CRA stated that if a shift has been made to an online classroom due to COVID-19, supplies consumed could still be eligible for the educator school supply tax credit.

Enhancements to the credit

The government has proposed to enhance the eligible educator school supply tax credit to 25% of eligible supplies from the existing 15% credit and expand the list of durable goods eligible for the credit, both effective for 2021 tax years. The limit of $1,000 of eligible supplies remains unchanged.

The expanded list of durable goods includes all of the following (the first four items were previously allowed, while the other items have been added for 2021 and onwards):

  • books;
  • games and puzzles;
  • containers (such as plastic boxes or banker boxes);
  • educational support software;
  • calculators (including graphing calculators);
  • external data storage devices;
  • web cams, microphones and headphones;
  • multimedia projectors;
  • wireless pointer devices;
  • electronic educational toys;
  • digital timers;
  • speakers;
  • video streaming devices;
  • printers; and
  • laptop, desktop and tablet computers, provided that none of these items are made available to the eligible educator by their employer for use outside of the classroom.

ACTION: Ensure to provide receipts for amounts expended by teachers and early childhood educators based on the expanded list of eligible expenses for the credit.

Corporate Advertising and Promotion Expenses: CRA Increasing Reviews

Over the past few years, CRA has taken a targeted approach in reviewing amounts claimed under specific lines (based on the type of claim) of a corporate tax return. Various projects conducted included reviews of professional fees, travel expenses and the purchase of certain vehicles. CRA...

Over the past few years, CRA has taken a targeted approach in reviewing amounts claimed under specific lines (based on the type of claim) of a corporate tax return. Various projects conducted included reviews of professional fees, travel expenses and the purchase of certain vehicles.

CRA has recently focused their efforts on advertising and promotion expenses claimed by corporations. As part of this most recent project, CRA is asking for the following:

  • a detailed list of the transactions (or the general ledger entries) related to the expenses; and
  • a copy of the invoices and receipts for the ten largest transactions included in the expenses.

While there are many reasons to obtain this type of information, CRA may be analyzing whether any amounts deducted were personal, not wholly or partially deductible, or should have been capitalized. For example, provided no exceptions are available, amounts paid for food, beverages or entertainment are only 50% deductible to the corporation. Also, green fees for golf and membership fees in a golf club are not deductible regardless of whether they are incurred for business purposes.

ACTION: Be aware that additional CRA activity in these areas could result in extra time and administrative costs

 

 

Falsified Employment Records: The Penalties Can be Large

With numerous COVID-19 benefits being based on employment and remuneration levels, the federal government has likely become increasingly concerned with falsified employment records. However, this is not a new issue. In particular, the government already has experience dealing with false records used to increase access...

With numerous COVID-19 benefits being based on employment and remuneration levels, the federal government has likely become increasingly concerned with falsified employment records. However, this is not a new issue. In particular, the government already has experience dealing with false records used to increase access to employment insurance (EI) benefits.

Employers can face penalties of up to the greater of $12,000 and the total of all claimants’ penalties in relation to the offences. In addition, false claims by the applicant would result in an increased number of required hours to qualify for EI benefits in the future, with the specific number dependent on the value of the EI overpayment.

A September 14, 2021 Federal Court case addressed a $15,277 penalty that was assessed for a single employee’s records.

In respect of COVID-19 subsidies, employers may be subject to penalties including the following:

  • loss of all CEWS, CERS and CRHP benefits for the period plus a 25% penalty for manipulations of revenue;
  • loss of all CRHP benefits for the period plus a 25% penalty for manipulations of remuneration;
  • gross negligence penalties of 50% of any applicable disallowed claims;
  • third-party penalties to advisors equal to their compensation from the employer plus as much as $100,000 in situations of culpable conduct; and/or
  • in the extreme, criminal liability for false statements, attracting penalties of up to 200% of the excessive claim and potential imprisonment for upwards of five years

ACTION: Maintain supporting employment activity documentation as the government will be looking for situations in which employment records were falsified.

COVID-19 Business Supports: Targeted Measures

In the Fall of 2021, the government revised several business supports provided due to the COVID-19 pandemic. The changes include extending the Canada Recovery Hiring Program (CRHP) to May 7, 2022 and increasing the subsidy rate to 50%. The wage and rent subsidies under the previous...

In the Fall of 2021, the government revised several business supports provided due to the COVID-19 pandemic.

The changes include extending the Canada Recovery Hiring Program (CRHP) to May 7, 2022 and increasing the subsidy rate to 50%. The wage and rent subsidies under the previous Canada Emergency Wage Subsidy (CEWS) and the Canada Emergency Rent Subsidy (CERS) are also being modified to provide much more targeted support to assist the hardest-hit businesses and those in the tourism and hospitality sector and extended to May 7, 2022.

While the base rules for the wage and rent subsidies under the more targeted approach are similar to the previous CEWS and CERS rules, there are some changes.

Both the wage subsidy and the rent subsidy are available under any of the following three gateways:

  • Hardest-Hit Business Recovery Program – available to entities with a prior year revenue decline and a current period revenue decline of at least 50%;
  • Tourism and Hospitality Recovery Program – available to qualifying tourism or hospitality entities with a prior year revenue decline and a current period revenue decline of at least 40%; and
  • Local Lockdown Program – available for businesses in all sectors, subject to a qualifying public health restriction, with a current revenue decline of at least 40% (25% in some periods).

Hardest-Hit Business Recovery Program (HBRP)

Eligibility for the HBRP would require revenue declines of at least 50% for both of the following:

  1. the current month (determined under the existing CEWS and CERS rules); and
  2. the average of the first 13 CEWS periods (March 15, 2020 to March 13, 2021), referred to as the 12-month revenue decline.

The 12-month revenue decline would be calculated as the average of all revenue decline percentages from March 2020 to February 2021 (claim periods 1-13, excluding either claim period 10 or 11, which used the same comparative periods). Any periods in which an entity was not carrying on its ordinary operations for reasons other than a public health restriction (for example, because it is a seasonal business) would be excluded from this calculation.

The HBRP would be based on the qualifying remuneration (the same amounts previously eligible for CEWS) and qualifying rent expense (the same amounts previously eligible for CERS) at a rate based on the current-month revenue decline. At the minimum revenue decline of 50%, the subsidy would be 10%, rising to a maximum of 50% where the revenue decline is 75% or more. These subsidy rates would be halved for periods after March 12, 2022.

The rates are summarized in the chart below:

Hardest-Hit Business Recovery Program (HBRP) Subsidy Rates
Current-month
revenue decline
Periods 22 – 26
October 24, 2021 to March 12, 2022
Periods 27 – 28
March 13, 2022 to May 7, 2022
75% and over 50% 25%
50 – 74% 10% + (revenue decline–50%) x 1.6
(e.g., 10% + (60% revenue decline – 50%) x 1.6 = 26% subsidy rate)
5% + (revenue decline – 50%) x 0.8
(e.g., 5% + (60% revenue decline – 50%) x 0.8 = 13% subsidy rate)
0 – 49% 0% 0%

Lockdown support would also be available as under the previous CERS rules.

Tourism and Hospitality Recovery Program (THRP)

The THRP would target the tourism and hospitality sector, with examples including hotels, restaurants, bars, festivals, travel agencies, tour operators, convention centres, providers of cultural activities and convention and trade show organizers.

Eligibility for the THRP would require revenue declines of at least 40% for both of the following:

  1. the current month (determined under the existing CEWS and CERS rules); and
  2. the average of the first 13 CEWS periods (March 15, 2020 to March 13, 2021), referred to as the 12-month revenue decline (calculated in the same way as the HBRP).

At the minimum revenue decline of 40%, the subsidy would be 40%, equal to the revenue decline, rising to a maximum of 75% where the revenue decline is 75% or more. These subsidy rates would be halved for periods after March 12, 2022.

The rates are summarized in the chart below:

Tourism and Hospitality Recovery Program (THRP) Subsidy Rates
Current-month
revenue decline
Periods 22 – 26
October 24, 2021 to March 12, 2022
Periods 27 – 28
March 13, 2022 to May 7, 2022
75% and over 75% 37.5%
40 – 74% revenue decline 1/2 of revenue decline
0 – 39% 0% 0%

Lockdown support would also be available as under the previous CERS rules.

Increased cap on qualified rent expense

Under CERS, qualified rent expenses were limited to $75,000 per location and an aggregate of $300,000 for all locations within an affiliated group. The aggregate monthly cap is increased from $300,000 to $1,000,000 for rent subsidies under the new gateway.

Local Lockdown Program

Organizations that are subject to a public health restriction are proposed to be eligible for support at the same rates applicable for the THRP (see above), regardless of sector.

The base rules require having one or more locations subject to a public health restriction lasting for at least seven days in the current claim period that requires them to cease activities that accounted for at least 25% of total revenues during the prior reference period. This would not require meeting the 12-month revenue decline, only a current-month decline. It would be available to all affected organizations, regardless of sector.

Special rules were introduced to provide expanded access to this program from December 19, 2021 to February 12, 2022. The expansion allows entities to qualify if they are subject to a capacity-limiting public health restriction of 50% or more. In addition, the current-month revenue decline threshold is reduced to 25% (from 40%).

ACTION: Targeted wage and rent subsidies are still available to those particularly hard-hit entities or those in the tourism and hospitality industry. Ensure to apply if eligible.

Small Business Air Quality Improvement Tax Credit: Could Your Business Benefit?

The December 14, 2021 Economic and Fiscal Update proposed a temporary refundable small businesses air quality improvement tax credit of 25% on eligible air quality improvement expenses incurred by small businesses to make ventilation and air filtration systems safer and healthier. The credit will be available...

The December 14, 2021 Economic and Fiscal Update proposed a temporary refundable small businesses air quality improvement tax credit of 25% on eligible air quality improvement expenses incurred by small businesses to make ventilation and air filtration systems safer and healthier.

The credit will be available for qualifying expenditures between September 1, 2021 and December 31, 2022 related to the purchase or upgrade of mechanical heating, ventilation and air conditioning (HVAC) systems, and the purchase of standalone devices designed to filter air using high-efficiency particulate air (HEPA) filters, up to a maximum of $10,000 per location. There is also a $50,000 maximum claim to be shared among all affiliated entities. The $10,000 and $50,000 limits apply to expenditures over all years (since the beginning of the program) rather than to each particular taxation year.

Eligible entity

The credit is available to qualifying corporations, partnerships and individuals other than trusts. A qualifying corporation is a Canadian-controlled private corporation (CCPC) that has (in combination with associated corporations) less than $15 million in taxable capital employed in Canada.

Qualifying expenditures

To qualify, expenditures must be made for a qualifying location in Canada used by the entity in its ordinary commercial activities.

Claiming the credit

Expenses incurred September 1 – December 31, 2021 are claimed in the entity’s first tax year that ends on or after January 1, 2022, while expenses incurred January 1 – December 31, 2022 are claimed in the tax year in which the expenditure was incurred.
ACTION: Maintain and provide us with any receipts for amounts expended that may benefit from this tax credit.

The credits are taxable in the taxation year in which they are claimed.

WORKSPACE IN HOME CLAIMS: CRA Reviews

For the 2020 year, many employees were required to work from home due to the COVID-19 pandemic. Those employees generally had two deduction possibilities: using the flat method of claiming $2/day the individual worked from home, or doing a detailed calculation to claim the actual...

For the 2020 year, many employees were required to work from home due to the COVID-19 pandemic. Those employees generally had two deduction possibilities: using the flat method of claiming $2/day the individual worked from home, or doing a detailed calculation to claim the actual costs associated with working from home. While the first option was only a temporary relieving measure for the 2020 year, the Liberal election platform promised to extend access to this deduction for the 2021 and 2022 years.

In the summer of 2021, CRA started to review these claims. A tax journalist from the Financial post, was one of the individuals selected for review. He discussed his experiences in an August 5, 2021 article (What you need to know if the CRA reviews your home office expenseclaims, Jamie Golombek). The author had used the detailed method to claim actual workspace in home expenses and was asked to provide (among other items):

  • an employer-signed Form T2200 and a Form T777 setting out the claims;
  • receipts and supporting documents, noting that credit card statements, bank statements, or cheques would not be sufficient support;
  • for the workspace itself, the calculation details for the percentage claimed, including space used for employment and personal purposes and a copy of the floor plan of the residence with the home office; and
  • for cell phone expenses, CRA requested copies of the mobile contract, monthly account summaries, proof of payment, and a breakdown of the minutes and data used to earn employment income.

Similar to other deductions against income, not all claims are reviewed; nonetheless, taxpayers should be prepared to provide this level and type of detailed support.

Also, in a Technical Interpretation, CRA confirmed that the temporary flat-rate claim of $2 per day (maximum $400) can be deducted by adult children living at home provided that they contribute towards the payment of eligible home office expenses and meet the relevant eligibility criteria.

ACTION ITEM: Be prepared to provide detailed supporting documentation for workspace in home claims made under the detailed method.

WITHDRAWING FROM FAMILY RESPs: Flexible Planning Possibilities

A July 21, 2021 Money Sense article (My three kids chose different educational paths. How do I withdraw RESP funds in a way that’s fair to them and avoids unnecessary taxes?, Allan Norman) considered some possibilities and strategies to discuss when withdrawing funds from a...

A July 21, 2021 Money Sense article (My three kids chose different educational paths. How do I withdraw RESP funds in a way that’s fair to them and avoids unnecessary taxes?, Allan Norman) considered some possibilities and strategies to discuss when withdrawing funds from a single RESP when children have different financial needs for their education. Some of the key points included the following:

  • There is likely a minimum educational assistance payment (EAP) withdrawal that should be taken, even by the child that needs it least.
  • The EAP includes government grants (up to $7,200) and accumulated investment earnings on both the grants and taxpayer contributions.
  • The grants can be shared, but only up to $7,200 can be received per child, with unused amounts required to be returned to the government.
  • Only $5,000 in EAPs can be withdrawn in the first 13 weeks of consecutive enrollment.
  • The withdrawal amount is not restricted by school costs.
  • The children are taxed on EAP withdrawals.
  • It is generally best to start withdrawing the EAP amounts as early in the child’s enrollment as possible, when the child’s taxable income is lowest. If the child is expected to experience lower income in later years, there is flexibility to withdraw EAP amounts in those later years instead.
  • The level of EAP withdrawn for each child can be adjusted. As individuals are taxed on the EAP withdrawals, planning should consider the children’s other expected income (e.g. targeting less EAPs for years in which they will be working, perhaps due to co-op programs or graduation). Consider having the EAP completely withdrawn before the year of the last spring semester as the child will likely have a higher income as they start to work later in the year.
  • To the extent that investment earnings remain after all EAP withdrawals for the children are complete, the excess can be received by the subscriber. However, these amounts are not only taxable, but are subject to an additional 20% tax. Alternatively, up to $50,000 in withdrawals can also be transferred to the RESP subscriber’s RRSP (if sufficient RRSP contribution room is available), thus eliminating the additional 20% tax. An immediate decision is not necessary as the funds can be retained in the RESP until the 36th year after it was opened.

ACTION ITEM: The type, timing, and amount of RESP withdrawals can significantly impact overall levels of taxation. Where an RESP is held for multiple children, greater flexibility exists. Consult a specialist to determine what should be withdrawn, at what time, and by whom.