Tax Tips & Traps

GUARANTEED INCOME SUPPLEMENT: More People Are Now Eligible

As many individuals had lower income in the 2020 year, some may be surprised that they are eligible to receive the Guaranteed Income Supplement (GIS). In addition, changes in July 2020 allow individuals to earn more without eroding benefits. For those who have been eligible...

As many individuals had lower income in the 2020 year, some may be surprised that they are eligible to receive the Guaranteed Income Supplement (GIS). In addition, changes in July 2020 allow individuals to earn more without eroding benefits. For those who have been eligible for some time, GIS (and OAS) can be applied for retroactively (up to eleven months back).

Individuals over the age of 65, living in Canada, receiving OAS and having income not exceeding certain thresholds, will qualify for GIS. A single, widowed or divorced individual must have income below $18,648. The combined income of a married or common-law couple cannot exceed the following:

  • $24,624 if the spouse/common-law partner receives the full OAS pension;
  • $44,688 if the spouse/common-law partner does not receive an OAS pension; and
  • $44,688 if the spouse/common-law partner receives the Allowance. 

Income for this purpose is generally net income on the personal tax return (line 23600) with the most notable difference being the exclusion of OAS, GIS and related payments. CPP and EI premiums can also be deducted against income. In addition, effective July 2020, up to $5,000 of employment and self-employment income annually is exempted. For those earning between $5,000 and $15,000, 50% of income earned in this bracket is also exempted.

Payments from July to June are based on the previous year’s income. So, the 2020 personal tax return will impact benefits from July 2021 to June 2022.

Also, note that individuals outside Canada for more than six months cannot collect GIS. Service Canada and the Canada Border Services share information.

ACTION ITEM: Review whether you or a relative may be eligible for GIS as soon as possible. Retroactive applications can only be made for the previous 11 months.

BENEFICIAL OWNERSHIP OF CORPORATIONS: More Information to Be Disclosed

There is a global trend emerging focused on requiring corporations to disclose the identity of their beneficial owners. Beneficial owners are generally individuals that either directly or indirectly exercise ultimate ownership or control over a corporation. The 2021 Federal Budget in Canada provided $2.1 million to...

There is a global trend emerging focused on requiring corporations to disclose the identity of their beneficial owners. Beneficial owners are generally individuals that either directly or indirectly exercise ultimate ownership or control over a corporation.

The 2021 Federal Budget in Canada provided $2.1 million to support the implementation of a publicly accessible corporate beneficial ownership registry by 2025. Some provinces have also commenced work on such disclosures.

As an example of what may come, consider the developments in the U.S. and U.K.

United States

On January 1, 2021, the National Defense Authorization Act for Fiscal 2021 was enacted. This Bill contained the Corporate Transparency Act, which introduced significant disclosure of beneficial ownership requirements. The legislation will apply to private corporations and limited liability companies (LLCs) registered to do business in the U.S. (including both domestic and foreign corporations) but will exclude a few types of entities, such as publicly listed corporations. Identifying information of beneficial owners that have substantial control will be required to be disclosed for new entities and those entities that have changes. Information collected will be available to law enforcement agencies, but not to the general public.

United Kingdom

In 2016, the U.K. launched a publicly accessible register of beneficial owners of companies (the register of Persons with Significant Control). The information displayed can basically be used by organizations and individuals without restriction. The minimum share percentageownership at which disclosure is required is 25%.

ACTION ITEM: Identifying information of beneficial owners of corporations may be required to be disclosed in the near future.

EXTENDED WAGE AND RENT SUBSIDIES: Details Released

On March 3, 2021, the Department of Finance announced details on the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) for the March 14 - June 5 periods. Later, the Federal Budget (April 19, 2021) announced an extension of these programs to...

On March 3, 2021, the Department of Finance announced details on the Canada Emergency Wage Subsidy (CEWS) and Canada Emergency Rent Subsidy (CERS) for the March 14 – June 5 periods. Later, the Federal Budget (April 19, 2021) announced an extension of these programs to September 25, 2021.

Revenue comparison reference periods
The reference periods will continue to use either of the two months ended prior to the end of the relevant period (so February or March, 2021 for CEWS period 14/CERS period 7). However, the prior reference month to be used when comparing average monthly revenues from March onwards would be changed. Rather than comparing to the same month in 2020, the same month from 2019 would be used. For example, March 2021 revenues would be compared to March 2019 revenues rather than March 2020 revenues.

Rates
For the periods between March 14 and July 3, 2021, the maximum CEWS subsidy rate is 75%, while the maximum CERS rate is 65%. Subsequently, the maximum rates for both CEWS and CERS will be the same, and decline gradually: 60% (July 4 – July 31), 40% (August 1 – August 28), and 20% (August 29 – September 25). The additional lockdown support to CERS will remain at 25% for the entire period (March 14 – September 25).  

Deadlines
Both CERS and CEWS applications are due 180 days after the end of the qualifying period.

The chart below summarizes the upcoming deadlines for the various periods currently announced.

CEWS/CERS Period Period date Deadline for application
9/2 Oct. 25 to Nov. 21, 2020 May 20, 2021
10/3 Nov. 22 to Dec. 19, 2020 Jun. 17, 2021
11/4 Dec. 20, 2020 to Jan. 16, 2021 Jul. 15, 2021
12/5 Jan. 17 to Feb. 13, 2021 Aug. 12, 2021
13/6 Feb. 14 to Mar. 13, 2021 Sep. 9, 2021
14/7 Mar. 14, 2021 to Apr. 10, 2021 Oct. 7, 2021
15/8 Apr. 11, 2021 to May 8, 2021 Nov. 4, 2021
16/9 May 9, 2021 to Jun. 5, 2021 Dec. 2, 2021
17/10 Jun. 6, 2021 to Jul. 3, 2021 Dec. 30, 2021
18/11 Jul. 4, 2021 to Jul. 31, 2021 Jan. 27, 2022
19/12 Aug. 1, 2021 to Aug. 28, 2021 Feb. 24, 2022
20/13 Aug. 29, 2021 to Sep. 25, 2021 Mar. 24, 2022 

ACTION ITEM: Ensure to consider whether a claim should be made well before the deadline for application.

CANADA RECOVERY HIRING PROGRAM (CRHP): New Hiring Subsidy

The 2021 Federal Budget introduced the new CRHP which would provide eligible employers with a subsidy of up to 50% of the incremental remuneration paid to eligible employees in respect of June 6, 2021 to November 20, 2021. The higher of the Canada Emergency Wage...

The 2021 Federal Budget introduced the new CRHP which would provide eligible employers with a subsidy of up to 50% of the incremental remuneration paid to eligible employees in respect of June 6, 2021 to November 20, 2021. The higher of the Canada Emergency Wage Subsidy (CEWS) or CRHP may be claimed for a particular qualifying period, but not both.

Eligible employers

Employers eligible for CEWS would generally be eligible for CRHP. However, a for-profit corporation would be eligible only if it is a Canadian-controlled private corporation (subject to a few minor exceptions). Eligible employers (or their payroll service provider) must have had a CRA payroll account open March 15, 2020.

Eligible employees

The same employees eligible for CEWS are proposed to be eligible for CRHP, except that CRHP will not be available for furloughed employees.

Incremental remuneration for a qualifying period means the difference between:

  • an employer’s total eligible remuneration paid to eligible employees for the qualifying period, and
  • its total eligible remuneration paid to eligible employees for the base period (March 14 to April 10, 2021).

The same types of remuneration eligible for CEWS would also be eligible for CRHP (e.g., salary, wages, and other remuneration for which employers are required to withhold or deduct amounts). The amount of remuneration for employees would be based solely on remuneration paid in respect of the qualifying period.

Eligible remuneration for each eligible employee would be subject to a maximum of $1,129 per week, for both the qualifying period and the base period.

Similar to CEWS, the eligible remuneration for a non-arm’s length employee for a week will also be limited based on their “baseline remuneration” (that is, their pre-COVID remuneration levels).

Required revenue decline

To qualify, the eligible employer would have to have experienced a decline in revenues. For the qualifying period between June 6, 2021 and July 3, 2021, the decline would have to be greater than 0%. For later periods, the decline must be greater than 10%.

Application deadline

Similar to CEWS and CERS, an application for a qualifying period would be required to be made no later than 180 days after the end of the qualifying period.

ACTION ITEM: As only CEWS or CRHP can be claimed for a particular period, and each program has different parameters and benefits, consideration should be given to determine the best option.

IMMEDIATE CAPITAL ASSET WRITE-OFF: Budget 2021

The 2021 Federal Budget proposed to allow immediate expensing of certain property acquired by a Canadian-controlled private corporation (CCPC) on or after April 19, 2021 (Budget Day) and before 2024. Up to $1.5 million per taxation year is available (shared among associated CCPCs, and prorated...

The 2021 Federal Budget proposed to allow immediate expensing of certain property acquired by a Canadian-controlled private corporation (CCPC) on or after April 19, 2021 (Budget Day) and before 2024. Up to $1.5 million per taxation year is available (shared among associated CCPCs, and prorated for short taxation years), with no carry-forward of excess capacity.

Property eligible for this immediate write-off is quite broad. It includes all depreciable capital property, other than certain assets with particularly long lives, such as buildings, physical infrastructure, pipelines and goodwill. As such, property acquired in the course of business, such as computers, vehicles, tools and machinery and equipment, would be eligible.

As this immediate write-off is discretionary, planning should be afforded to consider current and future profits.

Where capital costs of eligible property exceed $1.5 million in a year, the taxpayer would be allowed to decide which assets would be deducted in full, with the remainder subject to the normal CCA rules. Other enhanced deductions already available, such as the full expensing for manufacturing and processing machinery or zero-emission vehicles, would not reduce the maximum amount available.

Generally, property acquired from a non-arm’s length person, or which was transferred to the taxpayer on a tax-deferred “rollover” basis, would not be eligible. Also, while the taxpayer can always claim less than the maximum, claims in future years would be limited to the usual CCA rates.

ACTION ITEM: An immediate full write-off of many capital assets may provide an incentive to acquire capital assets.

RRIF/RRSP On Death: Rollover to a Child or Grandchild’s RDSP

Normally we think about rolling RRIFs and RRSPs to the surviving spouse upon death, however, there are other options.  One such option is to roll it on a tax-deferred basis to a child or grandchild’s Registered Disability Savings Plan (RDSP). A June 26, 2020 Technical Interpretation...

Normally we think about rolling RRIFs and RRSPs to the surviving spouse upon death, however, there are other options.  One such option is to roll it on a tax-deferred basis to a child or grandchild’s Registered Disability Savings Plan (RDSP).

A June 26, 2020 Technical Interpretation discussed the ability to roll funds from a deceased taxpayer’s RRIF to an RDSP for a financially dependent child or grandchild eligible for the disability tax credit. This results in the RRIF funds not being taxable to the deceased and only being taxable to the beneficiary when funds are withdrawn from the RDSP.

CRA noted that there is a rebuttable presumption that the child is not financially dependent if their income for the year prior to the parent’s death exceeds the basic personal amount plus the disability amount.  For 2020, the basic personal amount ranges from $12,298 to $13,229, while the disability amount is $8,576.  Where the child’s income exceeds the threshold and/or the child did not reside with the deceased, they may still qualify, depending on all of the facts and circumstances.

Based on the facts of the specific case CRA reviewed, they indicated that it was reasonable to consider this child to be financially dependenton the taxpayer, such that the rollover would be available.  The facts included:

  • the child suffered from a mental impairment which made him unable to work;
  • the child previously resided with the parents but now resided in a group home, as the parents’ advancing age made it difficult for them to provide necessary care;
  • the child resided with the taxpayer on weekends and holidays;
  • the child’s sole income, from provincial disability support, did not exceed the basic personal amount plus the disability amount (that is, the income test was met);
  • the child’s income covered only basic room and board, with all other financial needs provided by the taxpayer;
  • the financial support provided by the taxpayer was provided on a regular and consistent basis and consisted of more than merely enhancing or supplementing an adequate lifestyle for the child; and
  • the child received no other financial support.

CRA noted that, in addition to funds from a RRIF, an RRSP or a pooled registered pension plan (PRPP), and some registered pension plan(RPP) receipts, can be similarly transferred to an RDSP for a financially dependent child on the death of the taxpayer.

ACTION ITEM: If you have a child or grandchild that is financially dependent on you and eligible for the disability tax credit, consider leaving your RRIF/RRSP to them in their RDSP.

Unremitted GST/HST Or Source Deductions: Directors can be Personally Liable

Directors can be personally liable for employee source deductions (both the employer and employee’s portion of CPP and EI, and income tax withheld) and GST/HST unless they exercise due diligence to prevent failure of the corporation to remit these amounts on a timely basis.  As...

Directors can be personally liable for employee source deductions (both the employer and employee’s portion of CPP and EI, and income tax withheld) and GST/HST unless they exercise due diligence to prevent failure of the corporation to remit these amounts on a timely basis.  As many businesses are struggling with cashflow, it may be attractive to direct these amounts held in trust for the government to satisfy other creditors, such as suppliers.  However, in doing so, directors may unknowingly expose themselves to personal liability if the entity is not able to remit the required source deductions and GST/HST.

Director liability can extend beyond directors of a corporation to other directors, such as those of a non-profit organization.

The following recent court cases highlight some of the issues related to this liability exposure:

  • In a July 20, 2020 Tax Court of Canada case, the use of trust funds (employee withholdings and GST/HST collected on revenues) to pay other creditors resulted in the directors being personally liable for the unremitted amounts. Their significant contributions of personal assets to pay other creditors and efforts to remedy the failure after it has occurred could not offset the lack of steps taken to prevent the failure to remit.
  • However, in another July 20, 2020 Tax Court of Canada case, the director was not personally liable as due diligence to prevent failure to remit was demonstrated. In this case, there was no evidence GST/HST funds had been diverted to other expenses, and significant efforts to make remittances was conducted, including prioritizing remittances over opportunities to benefit the business. Racial discrimination and sexual harassment by its customers impeded the business’s efforts to collect revenues including GST/HST.

Care should also be provided to properly resign as a director to limit future exposure.  CRA must issue the assessment against the directors within two years from the time they last ceased to be directors.

In another July 23, 2020 Tax Court of Canada case, failure to comply with all resignation requirements under the relevant provincial corporate law meant that the director’s resignation was not legally effective, even though he had submitted a signed letter of resignation to the corporation. As he was still a director, he was still personally liable for unremitted GST/HST and source deductions.

ACTION ITEM: Ensure all source deductions are made in a timely manner.  Failing to make source deductions may expose directors personally to the liability.

Unreported Income: Statute-Barred Periods

In a June 10, 2020 French Court of Quebec case, the taxpayer had been assessed with unreported income of $68,162, $66,192 and $31,540 for 2004, 2005 and 2006, respectively, all beyond the normal reassessment period (generally 3 years). The amounts were computed using the cash...

In a June 10, 2020 French Court of Quebec case, the taxpayer had been assessed with unreported income of $68,162, $66,192 and $31,540 for 2004, 2005 and 2006, respectively, all beyond the normal reassessment period (generally 3 years). The amounts were computed using the cash flow analysis method, meaning that cash received was considered taxable income unless it could be shown that it  was from a non-taxable source, such as a gift or a loan.

Originally, the taxpayer’s son was under audit.  After it was noted that several transactions had occurred between the taxpayer and his son, the taxpayer came under audit.

The taxpayer argued that several items were not taxable. They included:

  • tax refunds gifted from the son to the taxpayer;
  • insurance and car payments by the son;
  • repayment of a loan following a condo purchase that did not go through; and
  • various cash deposits.

The taxpayer argued that he had safety deposit boxes with large sums of money which was deposited over time to prevent his first wife, who had struggled with mental health issues and addictions, from stealing the money and supporting her drug habit. He also noted that he continued to collect money in the boxes following the divorce of the first wife and on into the relationship with his second wife. It was implied that the cash deposits above came from these safety deposit boxes.

In order to assess outside of the normal reassessment period for Quebec purposes, similar to federal law, the taxpayer must have misrepresented the facts through carelessness or wilful omission, or have committed fraud in filing the statement or in providing information.

Taxpayer wins

The Court noted the following which indicated that the criteria for reassessment outside of the normal reassessment period were not met:

  • the taxpayer’s file was not identified as being a risk file, and was only a secondary file to that of his son;
  • the taxpayer provided good cooperation and provided the documents requested of him (over 700 pages were provided); and
  • the taxpayer’s testimony, along with those of his sons, were credible and never seriously shaken.

As Revenu Québec did not demonstrate that the requisite level of misrepresentation was present, their reassessments were overturned. Further, the Court noted that, even if the test had been met, using the cash flow method in such a case, where many of the receipts were reasonably explained, would not have been justified.

ACTION ITEM: An audit of one person can trigger audits of others around them.  Ensure to maintain proper documentation and comply with auditor requests as best as possible (with professional assistance) to conclude and contain the audit efficiently.

Commingling of personal expenses in the business: The Cost Could Be Very High

In a July 23, 2020 Tax Court of Canada case, at issue were a number of expenses claimed by the taxpayers (a corporationand its sole individual shareholder) in respect of the business of selling financial products and providing financial planning advice. CRA denied various expenses...

In a July 23, 2020 Tax Court of Canada case, at issue were a number of expenses claimed by the taxpayers (a corporationand its sole individual shareholder) in respect of the business of selling financial products and providing financial planning advice. CRA denied various expenses spanning 2007 and 2008 and assessed many of them as shareholder benefits.  That is, the amounts were taxable to the individual shareholder and not deductible to the corporation.

CRA also assessed beyond the normal reassessment period on the basis that the taxpayers made a misrepresentation attributable to neglect, carelessness, wilful default or fraud.  They also assessed gross negligence penalties which is computed as the greater of 50% of the understated tax or overstated credits related to the false statement or omission, and $100.

The following expenses were reviewed:

  • bonuses paid to family members who were not employees of the taxpayer;
  • payments to family members under an Employee Profit Sharing Plan (EPSP) where there was no evidence that the payments referred to profits;
  • salaries paid to family members (including the shareholder’s daughter who received a salary of $5,000 in 2007 and $400 in 2008);
  • salaries paid to the taxpayer’s children’s care providers;
  • salaries to the taxpayer’s former spouse, which the taxpayer argued was the same as personally paying spousal support;
  • travel costs for the taxpayer and his family to go on a cruise on which the taxpayer made business-related presentations (CRA conceded the taxpayer’s travel costs);
  • significant interest expense with very little support; and
  • many other costs such as clothing, toys, jewelry, personal items, lawncare, maid service, and pet care for the shareholder and family members.

CPP: When to Apply?

While the normal age to begin receiving regular CPP is 65, individuals can apply to start receiving earlier at a cost, or later for a greater benefit: If the individual starts before age 65, payments will decrease by 0.6% each month (or by 7.2% per...

While the normal age to begin receiving regular CPP is 65, individuals can apply to start receiving earlier at a cost, or later for a greater benefit:

  • If the individual starts before age 65, payments will decrease by 0.6% each month (or by 7.2% per year), up to a maximum reduction of 36% if started at age 60.
  • If the individual starts after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if started at age 70.

The decision as to when to commence CPP payments can be very complex, with extensive variables to consider, primarily related to personal factors and economic scenarios.  While 95% of Canadians have consistently taken CPP payments at normal retirement age (age 65) or earlier since the CPP introduced flexible retirement in the 1980s, a July 27, 2020 report (The CPP Take-Up Decision) by the Canadian Institute of Actuaries and the Society of Actuaries examined whether that is always the best option.

The report compared receiving CPP commencing at age 65 against pulling funds from RRSP/RRIF savings to replace the CPP payments and then commencing CPP at age 70. The two primary factors which influence the decision are life expectancy and rate of return. In particular, the report noted the following:

  • A major advantage of increasing CPP payments via postponement is that the increased CPP provides additional secure lifetime income that increases each year alongside the price of consumer goods, thus protecting against inflation, financial market risk, and the risk of outliving retirement savings.
  • Given today’s low-interest-rate environment and general population longevity expectations, the report noted that delaying CPP paymentsis often a financially advantageous
    • In the risk-free investment comparison, 75-80% of Canadians within this framework receive more income by delaying their CPP payments.
    • Even in an extreme case that favours not deferring CPP payments (low longevity expectations and very high expected investment returns), a person faces a 50% probability of receiving more income by delaying CPP payments, along with the risk-reduction benefits of a delay mentioned above.
  • Higher-income Canadians have longer life expectancies than lower-income Canadians, and females generally live longer than males; therefore, it would more often be in their best interest to delay CPP payments.

ACTION ITEM:  Consider whether starting CPP before, after, or at age 65, would be the most advantageous.