Year: 2022

SHARED CUSTODY ARRANGEMENTS: Impact of School Closures

Posted on by Edixon

In an April 21, 2022, Tax Court of Canada case, the Court reviewed whether the taxpayer and her former spouse were shared-custody parents of their three children for the period from January 2019 to June 2021 for the purpose of the Canada Child Benefit (CCB). In shared-custody arrangements, each individual will get half of the payment they would have received had the child lived with them full time.

While the Minister initially fully paid the CCB to the taxpayer, the Minister later concluded that she and her former spouse were shared-custody parents and that each was entitled to half.

Parents are considered shared-custody parents if they meet three tests:

  • they must not be cohabitating spouses or common-law partners;
  • they must reside with the child either at least 40% of the time in the month or on an approximately equal basis; and
  • they must each primarily fulfil the responsibility for the care and upbringing of the child when the child resides with them.
Taxpayer wins, mostly

The Court noted that entitlement to CCB is determined on a child-by-child and then month-by-month basis.

The youngest child (V) was not old enough to attend school during the period in question, and therefore, V’s care during the day on weekdays fell entirely to the taxpayer. As such, the former spouse could not meet the 40% test for any months. The taxpayer was entitled to the full CCB in respect of V.

The two other children (N and C) were attending school and reviewed together on a month-by-month basis.

While the Court found that the taxpayer was a shared-custody parent for two time periods (September to November 2019 and January to February 2020), it found that she had full custody for the remaining
periods (with full CCB entitlement) as the former spouse did not meet the 40% criteria. The Court provided comments on several periods as follows:

  • January to June 2019 – for the three months after the separation, the former spouse had unstable housing, and it was clear he did not meet the 40% test. While there was inconsistent testimony for April to June 2019, the Court found it more likely than not that the former spouse did not meet the 40% test.
  • July to August 2019 and 2020 – N and C spent the days during the summer holidays with the taxpayer (and not at school), meaning that the former spouse did not meet the 40% test.
  • December 2019 and March 2020 – N and C would not have been at school for a considerable time during these months (Christmas and spring break) and spent this time with the taxpayer, resulting in the former spouse not meeting the 40% test.
  • April to June 2020 – the COVID-19 pandemic closed schools, forcing N and C to spend the weekdays with the taxpayer, resulting in the former spouse not meeting the 40% test.
  • September 2020 to June 2021 – the taxpayer began homeschooling N and C, resulting in the taxpayer spending all weekdays with N and C. The former spouse did not meet the 40% test.

The Court found that the former spouse met the 40% test for September to November 2019 and January to February 2020 after reviewing the schedules where N and C were at school on the weekdays. The Court also found that the former spouse was primarily responsible for the care and upbringing of N and C when they resided with him.

The Court observed that during this period, the former spouse maintained a secure environment for N and C to live with him, that he looked after their hygienic needs and that he provided guidance and companionship. While it was clear that the taxpayer fulfilled more responsibilities than the former spouse, it still found that the former spouse was primarily responsible for N and C when they were with him.

ACTION: In situations where both parents have partial custody of the children, records of the child’s activities should be kept to support the amount of time spent with each parent.

Tax considerations and planning opportunities for digital assets

Posted on by Edixon

Cryptocurrencies, non-fungible tokens (NFTs), and other digital assets have garnered significant interest and became popular investment tools for investors in all wealth brackets. Proactive planning of these investments can help taxpayers minimize their tax burden, stay ahead of evolving regulations, and pursue their personal wealth goals.

Digital assets are anything that exists only in digital form and comes with distinct usage rights. Historically, we used to associate digital assets with music on iTunes. However, with evolving technology, the biggest digital assets today are cryptocurrencies and NFTs.

Cryptocurrency is a medium of exchange that is digital, encrypted, and decentralized. Unlike traditional currencies, there is no central authority such as banks, that manages and maintains the value of the cryptocurrency. As a result, cryptocurrency mainly derives is its value from its utility such as the exchange of goods and services. NFTs are similar to cryptocurrencies as they are decentralized digital assets and mainly derive their value from their utility. Unlike fungible tokens such as cryptocurrencies, NFTs are unique and have been popularized as collectibles such as digital artwork and sports cards. They can also be used to digitally represent physical assets like real estate and artwork.

To garner attention and promote digital assets, many companies rewarded their early investors by distributing their cryptocurrency or NFTs to their investors’ wallets. These distributions are known as airdrops and can be considered similar to dividends from shares. To receive an airdrop, all you need is a valid digital wallet address (i.e. a public address from which cryptocurrency and/or NFTs can be sent and from). As sending and receiving airdrops are simple, companies, such as gaming platforms, distribute digital assets to add value to participating in an experience or activity. It is important that taxpayers regularly review their holdings and maintain proper books and records as airdrops do not require prior notification or consent from the intended recipient.

Income taxation of digital assets

In general, possessing or holding a cryptocurrency is not a taxable event. However, when you use, exchange, convert, and/or gift crypto assets1, it can have tax consequences. The Canada Revenue Agency (“CRA”) treats cryptocurrency as a commodity2 for income tax purposes. As a result, when an investor exchanges one currency such as Ethereum (ETH) for a different currency like BitCoin (BTC), it results in a taxable event. The currencies being exchanged will be deemed to have been disposed of, which may result in unintended tax liability on the disposition and, a subsequent increase in the cost basis of the new cryptocurrency received.

When cryptocurrencies are used to purchase goods and services, CRA treats them as barter transactions3and deems those transactions to have occurred at fair market value. For cryptocurrency transactions, the value of the transaction can be easily determined by the price of the cryptocurrency on a crypto brokerage platform. All barter transactions must be reported on the taxpayer’s income tax return. If the taxpayer incurred any expenses (such as travel cost, internet, trading fees, etc.) to purchase the goods or services, the expenses can be used to reduce the income.

A crypto transaction can result in two different types of income/loss: (1) business income/loss and/or (2) capital gain/loss. To determine whether the proceeds are on the account of business or capital, the CRA looks at how the taxpayer conducted the business and their intent4. Even if the taxpayer has other employment or business income, the CRA can consider the crypto transaction as an “adventure in the nature of trade5” and deem the income to be business income6. For example, if a taxpayer trades cryptocurrency on a frequent and regular basis, he can be considered to be in the business of trading crypto, hence making the income business income subject to a 100% inclusion rate for income tax purposes, as opposed to 50% when taxed as a capital gain.

It is important to note that the onus is on the taxpayer to prove that the income was characterized appropriately7. The taxpayer should consider factors such as length of the ownership and frequency of trades when determining the nature of income. If an asset was purchased as an investment as opposed to for active trade, the cryptocurrency is likely to be considered capital property. RSM advisor can assist to ensure the nature of the holding and characterization of the income are properly document to minimize tax exposure. 

With the recent economic downturn, investments in traditional and digital assets have lost value. As the CRA considered cryptocurrency to be similar to securities8, there are some restrictions on the deductibility of the capital losses incurred. Similar to securities, if a cryptocurrency is sold at a loss and reacquired within 30 days by the taxpayer or an affiliated person, it could result in a “superficial loss”9 which is not deductible for income tax purposes. Please consult RSM or your tax advisor to determine whether the “stop-loss rule” may apply and related considerations.

A common planning technique for high net-worth individuals is to consider moving their assets to a corporation in a tax-effective manner. This allows the growth in the assets and income to be taxed in the hands of the corporation, at the combined corporate tax rate of 26.5%10 (for Ontario corporations) rather than the personal tax rate of 53.53%11 at the highest personal marginal tax bracket. If the individual requires funds for personal use, the funds can be withdrawn from the corporation in various forms, each having a unique tax outcome. Please consult your RSM advisor to determine if transferring your digital assets to a corporation is best suited for your situation. A professional can help navigate various circumstances and aid in the determination of the most tax-efficient plan for you. 

Additional reporting requirements for corporations and individuals

Cryptocurrencies can be considered “specified foreign property” for the purpose of informational reporting if they are located, deposited, or held outside Canada. Form T113512 – Foreign Income Verification Statement requires all Canadian resident taxpayers to report specified foreign property if at any time during the year the cost of the property owned by them is more than $100,000 CAD.

As Form T1135 is required only on assets held outside Canada, the requirements differ depending on the type of crypto wallet. Cryptocurrency can be held in cold and/or hot wallets: a cold wallet is secure and requires physical possession of the wallet. As cold wallet is situated where it is physically present, it is relatively simple to determine its location. A hot wallet, on the other hand, is connect to the internet and can be copied to a USB drive, it can be difficult to determine the location of the cryptocurrency. As the CRA has not provided a comment on how to determine whether the digital asset is “situated, deposited or held outside Canada13 for the purposes of section 233.3 of the Income Tax Act, we recommend that you discuss your wallet type and its location with RSM to ensure that proper disclosure is made.  

In addition to entity-level reporting, to combat money laundering and terrorist financing, the Canadian government requires that accountants, financial entities, life insurance companies, brokers and agents, money services businesses, real estate companies, and securities dealers to submit a Large Virtual Currency Transaction Report (LVCTR) to the Financial Transaction and Report Analysis Centre (FINTRAC), when a taxpayer receives virtual currency of $10,000 or more. 

Estate planning with digital assets

Digital assets can present distinct estate planning complications that require a specific strategy as part of an individual’s estate plan.

When an individual passes away, there is a deemed disposition of all assets that the individual holds, and a subsequent step-up in the cost base14. The deemed disposition can have significant tax consequences with low-cost and high-value assets. It is important to weigh the benefits of isolating future appreciation from the estate versus keeping low-basis assets in the estate to receive a step-up in basis at death.

An alter-ego trust is common planning tool to isolate volatile investment from its beneficial owner. An alter ego trust is a trust under which the taxpayer is the Settlor, Trustee, and Beneficiary for as long as the taxpayer is alive. This means the taxpayer has the unrestricted benefit to the assets while alive, while being able to outline who gets the trust’s assets after death. Please consult an advisor to determine if this type of plan is suited for your situation.

Alternatively, gifting of digital assets during one’s lifetime is an option to transfer the future benefit to another taxpayer while also removing future appreciation from the estate. For Canadian tax purposes, there is no “gift tax” on a transaction noted above. As a result, the beneficiary receiving the digital assets is not required to report it and is deemed to acquire the asset at its market value15. However, the individual gifting the asset will be required to report the disposition at the market value. Please consult your RSM  advisor before entering into this type of transaction to ensure there is no unwanted attribution in the income earned from gifting the digital assets.

Maintaining proper books and records

As the crypto industry grows, there is an increased risk that CRA will begin auditing crypto transactions more frequently. As part of an initial audit request, CRA requires a taxpayer to provide a copy of the books and records showing a record of the crypto transactions that occurred during the taxation year. Many taxpayers may be inclined to send the auditors their wallet ledgers as it contains more information needed. However, the ledgers may not provide sufficient details about the transactions for a CRA to determine the nature of the transaction, whether it should be business income or capital gains,16 or the cost of assets transferred into a particular wallet. As a result, CRA could arbitrarily assess the transactions, which may result in negative tax consequences to the taxpayer.

To avoid an arbitrary assessment, it is highly recommended that taxpayers maintain adequate books and records reflecting their cryptocurrency transactions. Please see the CRA’s bulletin regarding the requirement of books and records kept. Please note that the reports prepared by various crypto transaction analysis software providers may aide in maintaining proper books and records. However, at this time, there is no guidance from CRA regarding the acceptance of software-generated reports as the only backup to crypto transactions.

Take action

Individuals and corporations who invest in cryptocurrency and other digital assets should evaluate their existing income tax planning strategies while keeping these assets in mind.

The digital assets space is constantly changing as governments look to regulate this area. RSM has a robust tax practice that serves these needs, and our team continuously and proactively reviews the landscape. Please consult your tax advisor for guidance on how to effectively plan with these types of assets.

This article was written by Clara Pham, Lingzi Layman, Chris Weinrauch, Crisbel Conradi and originally appeared on Oct 18, 2022 RSM Canada, and is available online at https://rsmcanada.com/insights/services/business-tax-insights/tax-considerations-and-planning-opportunities-for-digital-assets.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

DJB is a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how DJB can assist you, please contact us.

CPP DISABILITY BENEFIT: Following the Doctor’s Advice

Posted on by Edixon

In a June 6, 2022, Federal Court of Appeal case, the Court addressed an application for judicial review of the Social Security Tribunal’s decision to deny the taxpayer’s CPP disability benefits claim on the basis that he did not have a severe and prolonged disability. The General Division of the Social Security Tribunal stated that while the taxpayer had significant impairments (chronic back pain and osteoarthritis in both knees), he had not made reasonable efforts to follow the treatments recommended by his physicians. The taxpayer’s doctors had advised him for 12 years to lose weight and exercise, but the General Division held that he had not attempted to do so until 2020.

Taxpayer loses

The Court found that the taxpayer had a duty to mitigate the severity of his ailments by following the treatment recommendations, and the taxpayer did not provide a reasonable explanation for failing to do so. As such, it found that the General Division did not err when it found that the taxpayer did not meet the requirements for a severe and prolonged disability, making him ineligible for CPP disability benefits.

ACTION: Not following a doctor’s advice to lose weight and exercise may impact eligibility for CPP disability benefits. Heed their advice!

TFSA OVER CONTRIBUTION: Relying on Information in Your CRA Online Account

Posted on by Edixon

One challenge when relying on CRA-provided information online in respect of TFSA contribution room is that the information is not updated on a real-time basis due to the delay in receiving information from TFSA issuers. Although CRA has many disclaimers surrounding this issue, some individuals may be unaware or misinterpret their comments.

A July 14, 2022, Financial Post article (Taxpayer relying on CRA website info gets hit with a penalty for contributing too much to TFSA, Jamie Golombek) indicated that financial institutions are required to submit information on all contributions and withdrawals for each calendar year by the end of February of the following year. CRA may not process and update this information until April or later. As such, for example, the contribution room available online in January 2022, would likely only consider transactions from 2020 and earlier, with the 2021 transactions only being included later in the Spring of 2022.

In a June 15, 2022, Federal Court case, the Court addressed an application for judicial review of CRA’s decision to deny relief for taxes on excess TFSA contributions (1%/month for each month the TFSA is over-contributed) where a taxpayer misunderstood the contribution room as published online in CRA’s MyAccount. This case appears to be the one discussed in the Financial Post article above.

In 2019, the taxpayer contributed a total of $26,002, while her contribution room was only $7,849, resulting in a penalty tax of $1,784. Only $400 of interest income was earned on the over-contribution. The taxpayer made contributions in January and February 2019 based on what the taxpayer misinterpreted to be her contribution room at that particular point in time, resulting in an over-contribution. The taxpayer argued she did not intend to make an over-contribution and that the information on My Account was “very confusing” and gave rise to a reasonable error.

The taxpayer previously made excess contributions which were withdrawn after correspondence was received from CRA. It appeared that CRA assessed no excess contributions tax at that time.

Taxpayer loses

While the Court was sympathetic to the taxpayer’s position, in the self-reporting tax system in Canada, individuals are responsible for understanding their TFSA accounts, and thus the Court ruled that CRA was reasonable in denying relief to the taxpayer.

Had this been the taxpayer’s first excess contribution, the result may have been different as CRA generally offers a little more relief in such situations.

ACTION ITEM: Do not rely solely on the information presented in your online CRA account. Additional verification should be conducted to ensure that recent contributions have been incorporated into the contribution room number. If you discover you have accidentally contributed too much, the excess should be withdrawn without delay to minimize exposure to this punitive tax

Bare Trust Reporting Requirements

Posted on by Edixon
**Update – December 2022**
On November 4, 2022, the Federal government released further amendments to the draft legislation (referenced in the article below) that relates to the new reporting requirements for certain trusts (including bare trusts).
These amendments delay the effective date of the new trust reporting rules from trust years ending after December 30, 2022, to the years ending after December 30, 2023.
The 1-year extension has provided some reprieve to the administrative burden of gathering this information, however, DJB is continuing to request this information with the upcoming trust filings to avoid any difficulties once the rules come into effect the following year. 
Consideration should be given to winding up unneeded trusts prior to December 31, 2022, as they would not be subject to the proposed legislation. However, affected trusts that are wound up on January 1, 2023, or later would still be captured by the new rules and would be required to complete the new reporting requirements. Please contact your DJB advisor to discuss this further.

The Department of Finance originally announced additional reporting requirements in the 2018 Federal Budget requiring certain trusts to provide additional information on an annual basis as part of their tax filings. 

Fast forward to August 9, 2022, the Department of Finance released further draft legislation with respect to these new trust reporting rules.  Although much of what is included in the legislation was expected, there were some surprises.  One major surprise that came out of the legislation, is that these new rules will apply to bare trust arrangements. 

What is a Bare Trust?

A bare trust exists where a person, the trustee, has been given legal title to property and has no other duty to perform or responsibilities to carry out as trustee, in relation to the property given in the trust.  The sole duty of a bare trustee is to convey legal title to the trust property on demand and according to the instructions of the beneficiary as provided for within the trust document. The bare trustee does not have any independent power, discretion, or responsibility pertaining to the trust property. In such cases, the beneficial owner retains the right to control and direct the trustee in all matters relating to the trust property.

The trustee in a bare trust situation may be a nominee corporation.  It is quite common in many real estate developments for a nominee corporation to hold title to the property in a bare trust arrangement.  Both bare trust corporations and individual trustees are required to file a T3 trust return providing information as required by the legislation, where previously they had no T3 filing requirement.

What is Required Under the Legislation

Under the legislation, trusts are required to file a T3 for years ending after December 30, 2022.  Since these trusts are deemed to have a calendar year-end for T3 reporting, they will have to file a 2022 T3.  The T3 is due 90 days after the year-end or March 31, 2023.  It should be noted that in leap years the filing deadline becomes March 30.  Many bare trust corporations file a T2 corporate tax return based on an off calendar year-end.  However, their T3 filing requirement will still be based on a calendar year-end.   

The information must be reported annually on each trustee, beneficiary and settlor of the trust. The information must also be provided on each person that has the ability (through the terms of the trust) to exercise control over trustee decisions regarding the appointment of income or capital of the trust. 

Specifically, the bare trust is required to report the following information for each of these individuals:

  • Name
  • Address
  • Date of birth (if an individual, other than a trust)
  • Jurisdiction of residence
  • Taxpayer identification number

In addition, a beneficial ownership schedule needs to be completed as part of the filing.

Exceptions

There are a couple of exceptions that apply to bare trusts.  First, they will not have to file if they have been in existence for less than three months. Second, trusts that hold assets not exceeding $50,000 in total fair market value throughout the year (where the only assets are cash, certain government debt obligations, a share, debt, or right listed on a designated stock exchange, a share of a mutual fund corporation, a unit of a mutual fund trust, and an interest in a related segregated fund) will not be required to file.

Penalties

The legislation also includes penalties for late filing and failure to file.  Trusts are subject to penalties equal to $25 for each day it fails to file, with a minimum penalty of $100 and a maximum penalty of $2,500. If the failure to file the return was made knowingly or due to gross negligence, an additional penalty equal to 5% of the maximum fair market value of property held during the relevant year by the trust will apply, with a minimum penalty of $2,500.  Therefore, a trust holding property with a fair market value of $1 million could attract a penalty of $52,500.

We suggest that you start now to begin gathering your information as it may take some time in some cases.  In addition, if the trust has not filed a T3 return before, it will require obtaining a trust number from the CRA prior to filing.  If you have any questions, your DJB advisor is here to help. 

Professional Development and Continuing Education Expenses – Deductible or Not?

Posted on by Edixon

One of the key traits of a professional is a desire and need for regular professional development and continuing education.  This training can involve some travel expenses as the courses are often centralized and even occasionally located somewhere that allows the professional to enjoy a vacation in the process.  The resulting cost can be somewhat significant and while much of it may seem to relate to the training course, the full amount may not always be eligible as a tax deductible expense. 

In general, costs that are personal in nature are not deductible for tax purposes and should be tracked separately from those which relate to the professional’s actual training costs.  In addition, the Canada Revenue Agency (CRA) does not allow the deduction of expenses that are not considered reasonable.  Here are some guidelines to consider when planning to incur these expenses.

Expense vs. Capital

There are different reasons a professional might take a training course.  If a course is being taken to provide the professional with a new skill or qualification, it would be considered a capital item and is not eligible to be deducted as a current expense.  However, courses taken to maintain, update or upgrade an already existing skill or qualification may be eligible for a deduction.

Costs of Training

The CRA does allow for the deduction of more than just the specific course itself.  Accommodations, travel (including flights, taxis, etc.), and 50% of meals can also be deducted, provided they are incurred during the actual days of training or are on the days of arrival and departure.  This would also include reasonable costs incurred on the weekend that might fall in the middle of multiple weeks of training, and where it is not feasible to return home during that time.  Any costs incurred on non-training days would not be eligible for a tax deduction.

Location

Continuing education and training courses are often in locations that are also popular vacation spots.  However, costs for a course taken at a distant location or at a location outside the territorial limits of the professional organization would be considered unreasonable by the CRA if that same course was offered locally at a smaller cost.  Additionally, if the course taken in a recognized holiday area was for a short duration compared to the length of a personal holiday taken during the same trip, a portion of the costs incurred will also be considered non-deductible.

Duration

Full-time training courses generally do not exceed a period of two or three weeks.  Those that are longer may still be allowable as a deductible expense, provided the course is sponsored or accepted by the professional association to maintain the professional standards of its members.  It should be noted, however, that the total time taken in attending courses in any one year should not be so great that it affects the professional’s ability to carry on his or her business or profession for a significant part of the year.

Attendees

Only costs for the actual attendees of the training course may be deducted for tax purposes.  All expenses incurred by accompanying spouses or children would be personal and therefore not deductible.

Training vs. Convention

It should be noted that the CRA distinguishes a training course from a convention, which is described as a formal meeting of members of an organization or association for professional or business purposes.  Typically there is no formal training at a convention, although learning may occur through various interactions and seminars.  The previously mentioned deductibility guidelines are only applicable for training courses. 

Saving For Your First Home

Posted on by Edixon

Saving for a first home can be a significant challenge for many, especially when the price of the average home in Canada is nearly $630,000. The minimum down payment to qualify for a mortgage is 5% of the purchase price if the purchase price is $500,000 or less and 10% for any amount over $500,000. That means if you purchased an average home in Canada, you would need a down-payment of at least $38,000, however if you were making a down-payment of less than 20% of the purchase price, you would have to pay an insurance payment of $23,680 to the Canadian Housing & Mortgage Corporation. This insurance protects the lending institution in the event that you default on your mortgage in the future.

There are several programs outlined below which are designed to assist first-time homebuyers with saving for their new homes. In addition to the savings programs listed below, there are many tax incentives available for first-time homebuyers. These tax incentives are beyond the scope of this article and should be discussed with your trusted Accountant for more information.

RRSP First-Time Home Buyer Plan (HBP)

  • Maximum $35K tax-free withdrawal from RRSP ($70k/couple)
  • Repayment over 15 years
    1. The repayment period starts the second year after the year when you first withdrew funds from your RRSP(s) for the HBP. For example, if you withdrew funds in 2022, your first year of repayment will be 2024
    2. Each year, the Canada Revenue Agency (CRA) will send you a Home Buyers’ Plan (HBP) statement of account, with your notice of assessment or notice of reassessment
      • The statement will include:
        • The amount you have repaid so far (including any additional payments and amounts you included on your income tax and benefit return because they were not repaid)
        • Your remaining HBP balance
        • The amount you have to contribute to your RRSP(s), PRPP or SPP and designate as a repayment for the following year
        • If you repay less than the required amount owing for the year, any remaining balance owing will be added to your income and taxed as RRSP income
        • Any amounts repaid in excess of the minimum, reduce future annual minimum repayments
  • Contributions to RRSP are tax-deductible and based on your annual maximum contribution room shown on your Notice of Assessment
  • Contributions made in the 89-day period prior to the RRSP home buyers withdrawal are subject to deduction limitations
  • Cannot be used in conjunction with the First Home Savings Account (FHSA)

Tax-Free Savings Account (TFSA)

  • Started in 2009 and is available for anyone 18 or older
    • The annual TFSA contribution limits for the years:
      • 2009 to 2012 was $5,000
      • 2013 and 2014 were $5,500
      • 2015 was $10,000
      • 2016 to 2018 was $5,500
      • 2019 to 2022 is $6,000
  • The unused contribution room is carried forward and can be used in any future year
  • Contributions are not tax-deductible
  • No tax on the growth
  • Withdrawals are tax-free
  • No repayment required
  • Any amount withdrawn is added back to your contribution room in the following year

The First-Time Home Buyer Incentive

The First-Time Home Buyer Incentive is a shared-equity mortgage with the Government of Canada, which offers:

  1. 5% or 10% for a first-time buyer’s purchase of a newly constructed home
  2. 5% for a first-time buyer’s purchase of a resale (existing) home
  3. 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home
  • The shared equity component of the incentive means that the government shares in both the upside and downside of the property value, up to a maximum gain or loss equal to 8% per annum (not compounded) on the Incentive amount from the date of advance to the time of repayment
  • The homebuyer will have to repay the Incentive based on the market value of the home at the time of repayment equal to the percentage (for example, 5% or 10%) of the original home value used to determine the Incentive, up to a maximum repayment amount equal to:
    • where the home’s value has appreciated, the Incentive plus a maximum gain of 8% per annum (not compounded) on the Incentive amount from the date of advance to the time of repayment; or
    • where the home’s value has depreciated, the Incentive minus a maximum loss of 8% per annum (not compounded) on the Incentive amount from the date of advance to the time of repayment
  • The homebuyer must repay the Incentive after 25 years, or when the property is sold, whichever comes first. The homebuyer can also repay the Incentive in full any time before, without a pre-payment penalty.

Tax-Free First Home Savings Account (FHSA) – Coming in 2023

  • Maximum annual tax-deductible contributions $8K
  • Maximum lifetime contributions $40K
  • Tax-Free withdrawal for qualified first-time home buyer, which is considered to be a person who has not owned a home in which they lived during the current calendar year or the previous four calendar years; an exception to this is made for anyone making a withdrawal within 30 days of moving into their first-time home
  • Once the account is open it must be used to purchase a home within 15 years or before the end of the year that the individual turns age 71. If not used to purchase a qualifying first-time home during these periods, it can no longer be used for this purpose and must be either transferred tax-free to a Registered Retirement Savings Plan or Registered Retirement Income Fund or withdrawn and fully taxed as income
  • After an FHSA is open any unused contribution limit can be carried forward and used in any subsequent year
  • Contributions can be deducted against income in the year they are made or carried forward and deducted in any future year
  • Cannot be used in conjunction with the Home-Buyers Plan

Will you have to pay a new tax on your luxury items?

Posted on by Edixon

On Sept. 1, 2022, the Select Luxury Items Tax Act (the Luxury Tax Act), a part of Bill C-19, came into force. The Luxury Tax Act imposes a tax (the Luxury Tax) on the sale and import of certain vehicles, aircraft, and vessels (collectively referred to as subject items) exceeding a specified price threshold.

Application

The Luxury Tax applies to the supply and sale of subject items in Canada exceeding the threshold of $100,000 for vehicles and aircraft and $250,000 for vessels. However, not all vehicles, aircraft and vessels exceeding these thresholds are captured by the Luxury Tax. There is an exemption for subject aircraft and some subject vessels that are used at least 90% of the time for certain qualifying purposes, which are designed to encompass purposes other than leisure, recreation, sport or other enjoyment of the owner or their guests.  

The amount of the Luxury Tax is the lesser of (i) 10% of the total “taxable amount” of a subject item, or (ii) 20% of the amount by which the taxable amount of a subject item exceeds the Luxury Tax threshold ($100,000 or $250,000). In the case of the sale of the subject item, the taxable amount generally consists of the consideration and any amount paid for the improvements. Similarly, when imported, the taxable amount is the sum of the value of the subject item as determined under the Customs Act and the amount of any duties and taxes (other than the GST/HST) that is payable upon importation. Any modifications made to the subject items within 12 months of purchase may also be subject to self-assessment of the tax where certain conditions are met. Accessibility modifications are generally excluded. 

The Luxury Tax is generally payable by the vendor at the point of sale, except in situations where the vendor is a federal or provincial government or agency, an indigenous governing body or a diplomat, the purchaser must pay the tax. 

Registered Vendors

Under the Luxury Tax Act, ‘registered vendors’ are those that, in the course of their business activities, manufacture, wholesale, retail, or import subject items priced over the thresholds. 

Specifically, a person that is required to register as a registered vendor of a luxury item must apply with the CRA by the earlier of:

  • The day the sale is completed, where a sale first triggers the requirement to register, and
  • The day the subject item is accounted for in accordance with the Customs Act, where an importation first triggers the requirement to register.

However, a registered vendor can purchase subject item(s) from another registered vendor in regards to the same type of select good without any Luxury Tax obligation. To avail this exemption, the purchaser needs to provide an exemption certificate to the seller.

In contrast, non-registered persons, i.e., individual consumers, that acquire or import subject items for their personal use or enjoyment are also required to pay the Luxury Tax and should fulfill the reporting requirements stated below.  

Reporting requirements 

Under most circumstances, the reporting periods under the Luxury Tax are calendar quarters. Registered vendors are required to file a Luxury Tax return with the CRA for each reporting period. On the other hand, non-registered vendors are required to file the return only for the reporting period(s) where they have Luxury Tax payable. The Luxury Tax return must specify the total Luxury Tax payable for the particular reporting period. Returns are due at the end of the month following the quarterly reporting period. The first reporting period is Sept. 1, 2022, to Dec. 31, 2022, and hence, the first return is due Jan. 31, 2023.

If there is an amount of Luxury Tax owing for a particular reporting period, the taxpayer is required to pay that amount to the Receiver General on (or before) the same day that the related return is required to be filed with the CRA. The payment must be made electronically if the amount to be paid exceeds $10,000.

This article was written by Sigita Bersenas, Chetna Thapar, Clara Pham and originally appeared on 2022-09-15 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/will-you-have-to-pay-a-new-tax-on-your-luxury-items.html.

The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

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On Again Off Again – A Review of the Immediate Expensing Rules upon Coming into Force

Posted on by Edixon

On April 18th, 2021, the Minister of Finance announced measures that would allow businesses to immediately write off the full cost of capital assets purchased in a given tax year, starting with the 2021 tax year for Canadian Controlled Private Corporations (“CCPCs”). 

The rules, while announced, had not been drafted into a notice of ways and means.  The tax community anticipated that the law would be implemented as announced and tax software providers implemented the changes into their software for the 2021 tax returns.  There is a general understanding with Canada Revenue Agency (CRA) that returns can be filed on the basis of proposed legislation.  However, due to the lack of a notice of ways and means being tabled, and said legislation not being tabled in the house for a first reading, the CRA did not allow the immediate expensing to be utilized.  This prompted some backpedalling in the tax community, and returns were henceforth filed without immediate expensing, and software providers removed the ability to apply the immediate expensing rules.

This changed on April 28, 2022, when proper legislation was tabled in the House of Commons, and Bill C-19, which included the immediate expensing measures, received its first reading in the House of Commons.  Since then, taxpayers were able to file based on the tabled and proposed legislation and tax software providers have responded by adding the ability to make an immediate expensing claim on tax returns for 2021 and later years.  Bill C-19 received royal assent on June 23rd, 2022.  Now that taxpayers have the ability to use the immediate expensing rules announced back in April of 2021, it is worthwhile to revisit how they apply.

The rules provide that, for capital properties that became available for use after April 18th, 2021, for CCPCs, or for purchases of capital properties that became available for use after December 31, 2021, for individuals and partnerships, the full cost of the capital asset can be expensed if it is property of a prescribed class.  However, capital cost allowance (“CCA”) classes 1 to 6, class 14.1, class 17, class 49, and class 51 are not eligible for immediate expensing.  The class 1 exclusion is understandable as allowing buildings to be immediately expensed would add fuel to the hot real estate market, and buildings in general are long-lived assets that tend to appreciate in value.  The exception for the other classes are due to their very low CCA rate as they are also long-lived assets. 

The property must be previously unused by the eligible person, and the property must not have had CCA claimed in respect of it by any other person for a tax year prior to the year it was acquired by the eligible person (in general new property even if purchased from a related party).  Or, if the property was previously used, it cannot have been obtained on a rollover basis (section 85) and cannot have been obtained from or previously used by a non-arm’s length person.  These rules are intended to prevent abuse where existing properties are sold to members of a related group to try to get an immediate write-off, or where there is a sale and buyback from a third party to get an immediate write-off of an existing asset.  The immediate expensing option ends for assets that became available for use after December 31, 2023, for CCPCs and after December 31, 2024, for individuals and partnerships.

The amount of capital property that can be immediately expensed is limited to $1.5M for any given tax year.  A short tax year will see this limit prorated accordingly.  If the taxpayer is a person or partnership that is associated with other eligible person(s) or partnership(s), the annual limit of $1.5M must be shared and allocated amongst the associated group.  For the purposes of these rules, the concept of association is extended to include partnerships and individuals, as well as corporations.  For example, a sole proprietor with their own business would be required to share the limit with a CCPC of which they are only a 30% shareholder, where a family member such as a parent or sibling controls the corporation, even if the sole proprietor is not active in the affairs of the corporation.

The ability to immediately expense a ‘luxury’ passenger vehicle has prompted some unique rules around immediate expensing designed to deal with the way such vehicles are handled for purposes of capital cost allowance (CCA).  Passenger vehicles with a capital cost of $34,000 or higher are restricted in the amount of CCA that can be claimed and are referred to class 10.1 vehicles referring to the CCA class to which they belong.  The addition to the undepreciated capital cost pool is limited to $34,000 plus HST.  A unique aspect of the class 10.1 is that in the year of disposal, a ½ CCA claim is allowed, and any remaining undepreciated capital cost (“UCC”) is Nil and no further deduction is allowed.  Class 10.1 does not have the recapture and terminal loss rules that apply to most other CCA classes. 

Consider the Following Scenario

In year one a passenger vehicle costing $70,000 is purchased.  The taxpayer disposes of the vehicle for $34,000 in year five.  Using the special rules for class 10.1 assets, the following would result.  A total CCA of $25,574 would have been claimed.  The remaining UCC of $8,425 at the end of year five would be deemed to be nil at the end of year five.  The net deduction to the taxpayer is $25,574.    

If recapture applied to class 10.1 assets as it does to most other classes, the taxpayer would report proceeds of $34,000 (being the lesser of cost and proceeds) and the result would be full recapture in year five of $25,574, completely reversing all prior deductions for the automobile.  This would be an unfair and illogical result, so as a compromise, the legislation does not provide for terminal losses or recapture on disposals of class 10.1 vehicles, but any remaining UCC is lost.

This can cause problems with the immediate expensing rules.  Using an extreme example, assume a passenger vehicle costing $70,000 is purchased in year one but sold in year two for $50,000.  Without adjustments to the immediate expensing rules, the taxpayer will be able to claim CCA of $34,000 in year one while only selling the vehicle for $20,000 less than the original purchase price.  This result allows the taxpayer to expense $34,000 even though the actual economic cost was only $20,000.  This scenario, while once considered unlikely, is more common in the post-COVID used vehicle marketplace, where used vehicles are sometimes selling for the same price or more than new vehicles due to extreme constraints on the supply chain.

In order to address this undesirable result, the rule that restricts any resulting recapture on a class 10.1 vehicle from coming into the taxpayer’s income is deemed not to apply where the automobile was designated as immediate expensing property in the year.  Instead, the proceeds on the sale of the vehicle are deemed to be a prorated amount in the proportion that the deemed capital cost is of the purchase price adjusted for government assistance. So in our example $50,000 multiplied by $34,000 divided by $70,000.  This will yield a result of $24,286 which would be the lesser of capital cost or proceeds. The recapture would work out to be $24,286.  The result is a net CCA claim to the taxpayer of $9,714 which is a more fair and logical result.

Note that where the sale is to a related person, the proceeds are not prorated, and instead are deemed to be the actual proceeds received on the disposition.  In most cases, the lesser of capital cost and proceeds will be the deemed capital cost, and full recapture will result. However, the related party will have a class 10.1 addition at $34,000.  This result is unavoidable when selling to related persons and occurs even where the sale is conducted at fair value and using arm’s length terms.

It is important to remember, that while there has been much talk about immediate expensing in the tax community, the immediate expensing rules are not providing any actual tax savings over time.  It is merely an acceleration of deductions that would have been claimed in the following years.  Using the immediate expensing option will mean that deductions for CCA claims in the future will be reduced, resulting in more tax in the future.  The benefit is a deferral of tax.

The opportunity for true savings might exist in the following scenario.  There are new rules to adjust the upper end of the taxable capital grind to the Small Business Deduction (SBD) for CCPCs from $15 million to $50 million.  Some CCPCs whose taxable capital is hovering around $15 million to $30 million may find themselves in a position where they are not able to claim the SBD in 2022 but may be able to claim the SBD in futures years once the changes to the SBD grind are effective.  In this scenario, using the immediate expensing in 2022 will save tax at the general rate; while a reduced deduction in future years could mean higher taxable income in years where the SBD is available.

Similarly, the opportunity for a true tax cost is also possible.  Tax rates might not remain the same. The government spent a lot of money providing assistance to Canadians during the COVID-19 pandemic.  It is not hard to imagine that in an effort to balance the budget, the Minister of Finance could consider increasing corporate tax rates, which are currently at historical lows.  If corporate tax rates were to go up in future years, using the immediate expensing option in an earlier year could be to the taxpayer’s long-term detriment.

After waiting for the immediate expensing legislation in Bill C-19 to receive royal assent, it is now in force and despite a long time span from when the measures were announced, taxpayers can now use the immediate expensing option for capital properties acquired over the next couple of years. 

Should you wish to know more about the immediate expensing rules and how they may affect you or your business, please contact one of our tax professionals.

PRINCIPAL RESIDENCE EXEMPTION: Land in Excess of One-half Hectare

Posted on by Edixon

The definition of a principal residence limits the amount of land that qualifies for the principal residence exemption to half a hectare unless the taxpayer establishes that the excess land was necessary for the use and enjoyment of the housing unit as a residence.

In a January 28, 2022, Technical Interpretation, CRA reiterated that it is a question of fact as to whether the excess land is necessary to the use and enjoyment of the residence. CRA considered their position in light of the use of a rural property for a variety of recreational activities (such as skating, fishing, and horseback riding) and for farming to grow fruits and vegetables for personal enjoyment and consumption by the taxpayers’ friends and family, such that the taxpayers could “enjoy country living.”

In referencing Folio S1-F3-C2, Principal Residence, CRA stated that using excess land in connection with a particular recreation or lifestyle (such as keeping pets or country living) does not mean the land is necessary. Excess land may still be necessary where either of the following conditions are met:

  • the location of a housing unit requires such excess land to provide its occupants with access to and from public roads; or
  • where the size or character of a housing unit and its location on the lot make such excess land essential to its use and enjoyment as a residence.

In addition, if a minimum lot size or a severance or subdivision restriction existed in a given year, the excess land would normally be part of the principal residence for the year. If the restriction was released in a particular year, the excess land would generally no longer be considered necessary for that and subsequent years. In those cases, it will then be necessary to determine the portion of the capital gain on disposition that would benefit from the principal residence exemption.

Where a portion of the property is primarily used for income-producing purposes (such as farming), that portion would not be considered necessary, regardless of whether there was a minimum lot size or severance or subdivision restriction in place. While most of CRA’s comments are supported by jurisprudence, it does not appear that this particular position is.

The determination of whether the excess land is necessary should be done on an annual basis.

 

ACTION ITEM: Where a residence is on land in excess of half a hectare, maintain a record (including supporting documentation if possible) of the reasons the additional land was necessary to live on the property.