Tax Tips & Traps

Self-employed individuals whose net self-employment income was less than $5,000 will not be required to repay CERB, as long as their gross self-employment income was at least $5,000 (in 2019 or the previous 12 months preceding the application) and they met all other eligibility criteria.

On May 12, 2021, a remission order that would allow this relief was released. For the debt to be remitted, individuals will need to file their 2019 and 2020 tax returns before December 31, 2022. The explanatory notes also indicated that CRA estimates approximately 30,000 individuals will benefit from this remission order.

Individuals who have already repaid CERB due to their net income being less than $5,000 (but meeting all other eligibility criteria) will need to apply by completing Form T180 to get reimbursed for their repayment. Eligible applicants can expect reimbursements within about 90 days of submitting their applications. It is estimated that approximately 6,500 individuals could receive this type of reimbursement. CRA has also noted that, if a taxpayer is reimbursed for their CERB payment repaid in 2020, CRA may reassess their 2020 tax return.

ACTION ITEM: If you repaid CERB for the above reasons, make sure to apply to have the amount reimbursed.

Individuals who contribute excess amounts into their TFSA are subject to a penalty tax of 1%/month on the excess amount for each month that the TFSA is overcontributed. However, CRA has the discretion to waive this penalty tax if the excess amount resulted from reasonable error and the excess contribution, plus any income or capital gains reasonably attributable to them, is withdrawn without delay.

CRA recently considered whether relief on this penalty tax could be provided where the value of the TFSA had reduced to nil. They opined that, as the excess contribution could not be withdrawn without delay, they would not have the discretion to waive the penalty tax. As such, the penalty tax would continue to apply until the individual accumulated enough additional TFSA room to cover the excess contribution.

ACTION ITEM: Under the facts above, CRA does not believe they have the discretion to waive the penalty tax on an excess TFSA contribution. Even where they have that discretion, they often refuse to waive the tax. Care should be afforded to ensure not to make excess TFSA contributions, and if an error is made, it should be corrected as soon as possible.

RRSP designations

A May 10, 2021 CBC article demonstrated the importance of reviewing RRSP beneficiary designations. The article discussed the unfortunate cascade of events where, in 2018, a 50-year-old individual went to the hospital for stomach pain and was diagnosed with cancer. He passed away three weeks later, leaving a spouse and a child. It appeared as if the deceased had not reviewed the designated beneficiary on his $685,000 RRSP, which remained his mother from the time when he had originally set it up while single. Not only did this mean that the surviving spouse and child would not receive these savings, but also that they were effectively liable for the tax on the RRSP funds. Although the will included a clause making the spouse the 100% beneficiary of the estate, this did not override the RRSP beneficiary designation.

While the spouse and mother were able to settle and cover the tax bill with the proceeds of a life insurance policy, the case serves as a good reminder to review whether insurance and registered account beneficiary designations match the current intent of the parties. 

Wills
In a March 16, 2021 Ontario Court of Appeal case, a dispute arose over the interpretation of a will regarding how proceeds from the sale of a cottage were to be distributed. As the deceased’s daughters held a life interest in the cottage, the cottage was not sold until more than 40 years after the original owner’s death. The proceeds from the sale of the cottage were to go to the grandchildren. However, within the 40-year period, one of the grandchildren passed away. At issue was whether the proceeds should be split among the four surviving grandchildren, or in five parts, with the deceased grandchild’s estate and beneficiaries receiving a fifth.

The court used the “armchair rule,” which seeks to interpret the will using the same knowledge that the testator had when making the will, and determined that it should be divided into four.

ACTION ITEM: Ensure to review wills and beneficiary designations when major life events or changes in the family occur. Death or critical illness/injury can arrive unexpectedly, limiting the possibility of estate planning updates that can compound the emotional strife of loved ones after an individual’s passing.

Most, if not all of us, have received a call from someone claiming to be from CRA. They may threaten arrest or other such actions if a tax bill is not immediately paid via iTunes or Bitcoin, for example. While some of these calls have become easier to identify as fraudulent, scamming techniques and systems constantly evolve.

On May 26, 2021, CRA released a Tax Tip which discussed why a taxpayer might be contacted by CRA, when to be suspicious, and how to report potential scams.

Some signs indicating that the caller may be a scammer include:

• they do not provide proof of CRA employment (such as a name and an office location);
• they pressure you to act immediately;
• they ask you to pay with gift cards, cryptocurrency or some other unusual manner;
• they ask for information not normally included on your tax return or not related to amounts owed CRA, such as a credit card number; and
• they recommend you apply for benefits and ask for related information.

To verify a caller is a CRA employee, CRA recommends that an individual:

• tell the caller that they first want to verify their identity;
• ask for, and note the caller’s name, phone number, and office location;
• call the CRA phone number from the official CRA website to confirm that the call was legitimate; and
• call the CRA employee back.

To report a scam, go to antifraudcentre.ca or call 1-888-495-8501.

ACTION ITEM: Follow these instructions if you suspect a call is from a fraudster or scammer. Give us a call if you are uncertain how to respond to a call from CRA, whether or not it sounds legitimate. 

Medical expenses eligible for a personal tax credit are limited to those specifically provided for by the Income Tax Act. While an expense may clearly relate to an individual’s health, it may still not be an eligible medical expense. CRA recently provided comments on a number of medical expenses related to COVID-19.

Face masks

In a February 25, 2021 Technical Interpretation, CRA opined that the costs of a non-medical mask, that is mostly used to protect others from the wearer, would not likely qualify as a medical expense. However, in the specific situation where a medical practitioner prescribes a medical face mask or respirator for a patient to cope with or overcome a severe chronic respiratory or immune condition, the mask or respirator would likely be an eligible medical expense.

COVID-19 vaccines and tests

In an April 22, 2021 Technical Interpretation, CRA opined that a COVID-19 vaccination received outside of Canada and a COVID-19 test (for example, those required for travel) must be prescribed by a medical practitioner to potentially be eligible as a medical expense. CRA also reiterated that they do not have the discretion to waive the prescription requirement.

Leasing costs of temporary accommodations

In a January 19, 2021 Technical Interpretation, CRA stated that the leasing cost of a second condominium to protect a family member’s health during the COVID-19 pandemic does not qualify as an eligible medical expense.

ACTION ITEM: Although expenses may relate to an individual’s health, they should still be reviewed to determine eligibility for the medical expense tax credit. Collect medical-related expenditures throughout the year such that at personal tax time, we can review whether an expense is eligible or not.

As some businesses struggle with cash flow, they may be motivated to prioritize suppliers and other creditors ahead of CRA. A recent court case demonstrates CRA’s power to collect tax arrears and the impact of CRA exercising this power on a business.

In a June 11, 2021 Court of Queen’s Bench of Alberta case, the taxpayer had fallen into arrears in respect of both GST/HST and payroll remittances. Payment arrangements were entered into with CRA to assist in meeting the obligations. However, after failing to meet the agreed-upon terms, requirements to pay (RTPs) were issued to several of the taxpayer’s clients.

RTPs are legal documents that require recipients (the taxpayer’s clients in this case) to submit payment to CRA rather than the taxpayer. The RTP gives priority to CRA over most other creditors.

After the taxpayer had renegotiated a new payment plan, all RTPs were cancelled except for the one to its largest client. After struggling to meet the new payment plan and facing a new withholding liability, CRA once again issued RTPs. Shortly after, the taxpayer lost its largest client (the one that the sole RTP had been issued to previously).

The taxpayer advised CRA that it was considering receivership, which led to the seizure of assets and issuance of more RTPs. One client sent a letter to the taxpayer that noted that CRA had visited them personally to serve the RTP and implied that the taxpayer could be out of business or shut down. Further, the client noted that they were asked by CRA whether they could get their parts from alternate suppliers, and the client indicated that they were now considering doing so.

Taxpayer loses

The court found that CRA and its agents did not owe a duty of care to the taxpayer, that there was no negligence, and that the government’s actions did not unlawfully interfere with the economic relations of the taxpayer.

ACTION ITEM: CRA can collect your tax liability by requiring your clients to pay them rather than you. To limit the business and operational issues arising from an RTP, steps should be taken proactively to communicate with CRA collections. 

CERS provides support to businesses by covering a portion of rent and property ownership costs of qualifying property. The government has recently extended access to this program until October 23, 2021.

The CERS program has the following two components:

• the base CERS which subsidizes eligible expenses based on the applicant’s revenue decline compared to pre-pandemic earnings; and,
• the lockdown support component, which provides an additional subsidy for eligible applicants subject to a lockdown under a public health order (due to COVID-19) that must shut their doors or significantly restrict their activities (25% of the revenue derived from the property from the prior period must have been earned from “restricted activities”).

CRA has recently provided several comments on these subsidies.

Eligible property

Property with a personal living space

A self-contained domestic establishment (“SCDE,” typically a living unit with restricted access that contains a kitchen, bathroom and sleeping facilities) used by the applicant (or by a person not dealing at arm’s length with the applicant) is not a qualifying property and therefore not eligiblefor CERS.

However, in a May 17, 2021 Technical Interpretation, CRA opined that property could still be eligible for CERS even if a portion of it were an SCDE. CRA provided the example where an individual owned a single-story building, with a store in the front of the building and a separated apartment in the back. The separated apartment had its own entrance, bathroom, kitchen, bedroom, and living room. The portion of the building used for the store could be a qualifying property, and therefore eligible for CERS.

Hotel, motel, or bed and breakfast

Property primarily used to earn rental income from arm’s length persons is not eligible for CERS.

In a July 16, 2021 Technical Interpretation, CRA considered whether a hotel, motel, or bed and breakfast was earning rental income for this purpose. While it is a question of fact, CRA opined that a hotel, motel, or bed and breakfast that provides significant additional services that are integral to the success of its ordinary activities, in addition to basic services that are customarily supplied with real estate rentals, would be considered to be earning income from those services, and not earning rental income. Therefore, these venues may be eligible for CERS.

CRA applied the same test they historically use to assess whether such businesses generate active business income eligible for the small business deduction.

Lockdown support – changes to a business model

In two June 7, 2021 Technical Interpretations, CRA provided clarification on what constituted restricted activities, allowing, in some cases, more entities to access the additional lockdown support component of CERS. CRA provided examples of specific businesses, with an overall theme that, even if a business could continue, changes in how the business is conducted could allow access to lockdown support. These comments focus on instances where in-person visits are replaced with remote or other types of less traditional visits.

Travel agencies

CRA opined that, where in-person visits were previously used to book travel arrangements and a public health order prevented the in-person visits, these activities would be considered restricted. Working from home and making bookings over the phone may be considered a different activitythan the restricted in-person visits. Where all activities were performed in person at the travel agency previously, CRA opined that the 25% test to access the additional lockdown support may be met.

Stores in a mall

Some stores located in malls were required to close for in-person shopping but could deliver goods via curbside pick-up or delivery to a designated area of the mall.

CRA noted that the activity of in-person shopping would have been restricted in respect of the stores. As such, even though the goods could be collected outside the store, in-person shopping could still be considered a restricted activity.

Food court restaurants

Where sit-down dining was no longer available because a food court was closed due to a public health order, CRA opined that the activity could also be considered a restricted activity. Providing take-out food would not preclude the restaurant from having a restricted activity.

ACTION ITEM: Business traditionally conducted in person may have required changes (e.g. services provided virtually; curbside pick-up; delivery) during a lockdown.  These changes may permit access to the lockdown subsidy, even though business continued in some form.

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.

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.

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.

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

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.

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.

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.

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.

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.