Year: 2022

Canadian Residents Earning Income through Non-resident US LLCs

Posted on by Edixon

There are ample commentaries on the negative tax consequences faced by non-resident investors using a fiscally transparent US entity to carry on a business or to earn investment income in Canada, but what about Canadian-resident investors earning Canadian-sourced income through such entities? This structure is uncommon but occasionally useful for commercial reasons, and it results in negative Canadian withholding tax consequences. However, the Canadian withholding tax analysis is more favourable where the fiscally transparent entity is a partnership. US tax consequences are outside the scope of this article.

Consider a limited liability company (LLC) with US and Canadian shareholders that is not a corporation resident in Canada. Dividend income is received from a Canadian-resident corporation.

The CRA’s longstanding position is that an LLC is a corporation for Canadian tax purposes (even though it can be treated as a fiscally transparent entity for US tax purposes). The definition of “person” in subsection 248(1) includes a corporation, so the LLC is a person. The LLC is also a non-resident; therefore, the dividend payment by the Canadian-resident corporation triggers a 25 percent withholding tax under subsection 212(2). The issue is whether treaty relief is available for this tax in the scenario described above, specifically if amounts are allocated to Canadian shareholders.

Under article IV(1) of the Canada-US tax treaty, the LLC does not qualify as a US resident because, as a fiscally transparent entity for US purposes, it is not liable for US tax. According to this rule, the LLC itself would therefore not be eligible for treaty benefits.

The next step in the analysis is to consider article IV(6) of the treaty, which specifically addresses fiscally transparent entities. A US resident can meet all the conditions of this provision; therefore, if all other conditions are satisfied (for example, the limitation-on-benefits clause in article XXIX A), the withholding tax rate may go down to either 5 percent or 15 percent (pursuant to article X(2)). On the other hand, a Canadian resident could not meet the test in article IV(6) because, among other reasons, paragraph (b) of the provision requires that the entity be treated as fiscally transparent in Canada, which is not the case (see the CRA opinion noted above). As a result, the applicable withholding tax rate is not reduced below 25 percent in our example.

In summary, it appears that where the Canadian-source income is derived through a US-resident LLC, this look-through provision applies to its US-resident shareholders only and does not apply to grant benefits to non-US-resident shareholders. As a result, the dividend income in the example would be subject to 25 percent withholding tax, without treaty relief.

Where the fiscally transparent entity is a partnership, the situation generates different results. Paragraph 212(13.1)(b) of the ITA provides that where a Canadian-resident person pays an amount to a partnership other than a Canadian partnership, the partnership will be deemed to be a non-resident person for the purposes of part XIII; as a result, withholding tax will apply to all dividend recipients, whether they are Canadian residents or non-residents. A similar position is stated in paragraph 7 of Interpretation Bulletin IT-81R. However, the commentary in form NR 302 is generally more favourable: where a partnership has Canadian-resident and non-resident partners, withholding tax may not apply to the portion of the dividend allocated to the Canadian-resident partners, subject to certain qualifying conditions. Relying on the latter CRA position, no negative consequences for the Canadian residents should occur in the example where the fiscally transparent US entity is a partnership rather than an LLC.

This content originally published in the Canadian Tax Foundations newsletter: Canadian Tax Focus. Republished with permission.

This article was written by Nakul Kohli, Clara Pham and originally appeared on 2022-08-19 RSM Canada.

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.

Crisis Proofing Your Business

Posted on by Edixon

The events over the past two and a half years have taught us many lessons in life and business. Whether preparing to expect the unexpected, adapting to rapidly changing laws and regulations, or feeling a direct impact on sales and profitability, these events caught many by surprise.

While no one could have fully prepared for the pandemic’s extent and impact, those who had planned for some form of disruption undoubtedly fared better than those without such planning. Every business, including yours, is unique and should have a plan in the event of a disaster or other business interruptions. This plan should include things like information technology requirements, human resources issues, client relationships, cash flow management, business continuity/ succession planning, contingency planning, and more.

Developing a plan to mitigate these potential risks in the event of unforeseen circumstances should be considered by all business owners specific to the needs of their business. Still, there are a few common risks that all company owners face. For example, even successful business owners don’t always have fail-safes in place to protect their business if a key stakeholder dies, becomes disabled, or retires. Without adequate planning, many businesses do not survive these events.

Let’s look at two businesses to see how their situation impacted them.

Business 1 – SARA’S VETERINARY CLINIC

Sara is a veterinary school graduate and has worked at a veterinary clinic for the past few years. The owner, who was retiring, offered Sara the opportunity to purchase the practice. Sara took the plunge, and the dream of owning her practice was now a reality.

Sara was excited but also worried since she had never been in this much debt. After all, she still owed her parents for student debt and was now responsible for a substantial business loan. With new responsibilities as a business owner, she didn’t have much time to think about the financial burden.

Soon after, Sara began having health issues and was eventually diagnosed with Multiple Sclerosis. She was devastated by the news but determined to work through it. Over time, Sara’s health suffered, as did her practice. Key employees quit due to uncertainty, some clients left, and as a result, revenues fell. Unfortunately, by the time Sara realized the stress of running her business was too much, the damage had already been done. With no contingency plan in place and only limited income available through her association plan, Sara had to sell her practice for less than she paid. As a result, she had to deal with a serious illness, significant debt to the bank and her parents, and little means to pay it off. These events shattered her dreams.

How her story could have been different

Suppose Sara had a contingency plan to replace her income and cover her business expenses; she could have taken time off work to deal with her illness and looked for a purchaser while her business was still healthy, stable, and profitable.

Things Sara should have thought about
  • What happens if I, or a key employee become disabled or seriously injured and can no longer work?
  • What happens if a key employee or I pass away?
Key takeaways from this story

Consult with your dedicated professionals about implementing a disability and life insurance strategy (buy-sell agreements, key employees).

Business owners have several insurance strategies to help financially protect the business should a key employee, or themselves, suffer a severe injury, illness, or pass away.

Business 2 – Daniel’s Family Construction Business

Daniel joined the successful family construction business with his dad and uncle John. Daniel worked hard, anticipating that one day he would take over his dad’s share of the business when he was ready to retire.

Suddenly, John died from a heart attack. With no shareholder agreement in place and no buy/sell agreement, his uncle’s share of the business passed to Daniel’s aunt, with whom Daniel had a great relationship. Although a kind and generous woman, Daniel’s aunt had little business experience but wanted to honour her husband’s legacy and give her teenage children the opportunity to take over their dad’s share of the business when they got older.

While Daniel and his father had focused on the construction side of the business, his uncle had been responsible for sales, which began dwindling immediately after his passing. They tried to hire salespeople but couldn’t find someone with the same experience, knowledge, and commitment. Sales continued to lag while the business declined until the doors were closed a few years later. The family was splintered, each blaming the other for the failure.

How their story could have been different

Alternatively, if Daniel’s father and uncle had a funded shareholders’ agreement or a funded buy/sell agreement, Daniel’s aunt would have been compelled to sell her husband’s share of the business to Daniel’s father, who would have had to purchase the shares for the agreed value. As a result, with a succession plan, the construction business and the two families would have had the opportunity to survive and thrive after this devasting event.

Things Daniel’s father and Uncle should have thought about
  • Who will be responsible for taking over if one of us suddenly becomes ill or dies?
  • What happens to the shares of the business?
Key takeaways from this story

Consult with your dedicated professionals about estate planning for business continuity, including Shareholders’ (buy-sell) Agreements, Wills, and Powers of Attorney.

Help maintain family harmony and increase the chances of a successful succession to the next generation by guiding ownership, decision-making, conflict resolution, and, importantly, the distribution of money within the family.

So what’s the lesson here?

Don’t leave the survival of your business to chance. Working with a team of dedicated professionals, such as your Accountant, Lawyer, and Certified Financial Planner, you can be sure that you’ll have the fail-safes in place to protect your financial future and the ongoing success of your business, should disaster strike.

Choosing the Right Software

Posted on by Edixon

One of the most important things in any business is making sure you have enough money to pay your bills; this is why it is imperative to choose the correct software for your bookkeeping.  Take your time choosing the right software because it can be costly having to repeat this process.  You need a system that will track all your day-to-day transactions, such as invoicing, recording payments, tracking expenses, HST, payroll, and reconciling transactions.  The more accurate the information is, the better the reports will be and the more insight you will have into your business performance.

Choosing the best accounting software for your individual business is challenging. Each program includes a different set of features. Depending on those features and the number of users, will determine the price point.  Some of the questions you have to ask is:

  • Would you like your program to be cloud based so you can access it from anywhere on multiple devices?
  • What kind of features are you looking for?
  • What kind of reporting are you looking for?
  • Do you need to track inventory, payroll, HST?
  • Do you invoice and pay bills out of the system?
  • How many users will be using the system?
  • What is the price point you would like to stay within? 

Creating a list of needs and wants will help you determine which software is best for you.  Reach out to other business owners and ask them what they use and what they like and dislike about the system.  Check to see if the system has a free version; see if it can do all the things you want it to do.  Talk to your accountant or bookkeeper, they will have suggestions as well.  Don’t be afraid to ask the questions.

Once you have made the decision on the software, make sure that the setup is correct.  An incorrectly set-up system can be just as costly as choosing the incorrect system.

 

ESTIMATED SALES BY CRA: Audit File Selection and Assessment

Posted on by Edixon

In an attempt to identify unreported revenue, CRA and Revenu Québec may compare a business’ reported revenue to what would be expected given the business’ level of purchases. The analysis is based on industry-specific profit and revenue ratios.

In a January 31, 2022, French Court of Quebec case, Revenu Québec had assessed QST on additional income for a pizzeria by applying industry revenue ratios to purchases made by the restaurant between 2013 and 2017.

The restaurant argued that it purchased supplies not only for itself but also as an agent for other restaurants so that better deals could be maintained. Further, it argued that it did not have the capacity to generate the level of gross revenue that Revenu Québec assessed based on its available resources.

Taxpayer loses

While the taxpayer argued that it did not have sufficient staffing capacity to generate the assessed level of revenues, evidence was presented that indicated that not all staffing hours were recorded and reported. Further, one of the parties for whom the taxpayer allegedly purchased supplies contradicted the taxpayer’s position.

As such, the Court found Revenu Québec’s estimated assessment of gross revenues correct.

Another case

In another case, Revenu Québec noted that the sales records for a used car dealership indicated prices as low as $25. Therefore, the auditors took a sample of 15 sales and followed up with calls to the customers, finding that several had paid prices that were significantly higher than those reported on the sales records. The values of all vehicles sold were then redetermined primarily by using the values included in a regionally recognized auto price/valuation publication (Hebdo Mag guide). The Court upheld Revenu Québec’s assessment.

ACTION ITEM: CRA and Revenu Québec often use these and similar techniques to estimate underreported sales. Consider establishing similar tests and metrics to ensure that your revenue is accurately recorded.

SCC: Rescission Not Available to Avoid Unforeseen Tax Consequences

Posted on by Edixon

In Canada (Attorney General) v. Collins Family Trust (2022 SCC 26), the Supreme Court of Canada (SCC) effectively closed the door on the equitable remedy of rescission where the result would amount to retroactive tax planning.

The taxpayer relied on a widely accepted – and CRA endorsed – interpretation of a certain provision the Income Tax Act (ITA) when structuring its affairs. Subsequently, an unrelated court decision identified that the relevant provision had been misinterpreted and established the proper interpretation. Applying the proper interpretation to the taxpayer’s transaction resulted in unintended tax consequences. The taxpayer sought to rescind the transaction on the basis that it would not have completed the transaction but for the widely accepted, but incorrect, interpretation.

The SCC held that the remedy of rescission was not available to the taxpayer. Rescission is an equitable remedy that undoes a transaction with the aim of putting the impacted parties in the same position they would be had the transaction not occurred. The SCC held that equitable remedies, such as rescission, are appropriate “where it would be unconscionable or unfair to allow the common law to operate in favour of the party seeking enforcement of the transaction.” (paragraph 11) However, there is nothing unfair about parties being taxed based on transactions they completed. Taxpayers must recognize that there is always a risk of a change in the interpretation or application of the law that may result in adverse tax consequences, even for years that have passed.

Background of the case 

Rite-Ways Metals Ltd. implemented a structure involving the Collins Family Trust (the Trust) with the aim of protecting its assets from creditors without incurring tax liability. When the structure was set up in 2008, it was believed to allow for tax-free amounts to be paid to the Trust due to the widely-accepted interpretation of the trust attribution rule in subsection 75(2) of the ITA. However, in 2011, a court decision corrected the interpretation of the trust attribution rule. Under the new interpretation, the trust attribution rule did not apply to the Trust, meaning the amounts the Trust received were taxable dividends. 

The Trust applied for rescission to undo the structure. Both lower courts granted the rescission remedy. The government appealed these decisions to the SCC. 

Supreme Court of Canada’s findings 

The SCC declined to grant the remedy of rescission. The SCC reiterated some basic concepts of the Canadian tax system:

  • The CRA is bound to apply tax legislation as it is drafted by parliament and interpreted by the courts. 
  • Taxes result directly from the legal relationships or transactions established by the taxpayer.

The SCC held that the courts cannot modify a legal agreement, instrument or legal relationship between taxpayers just because a party discovered that there was an adverse or unplanned tax liability. Either the parties failed to conduct the appropriate due diligence to avoid such tax liability, or they are – like the Trust – negatively impacted by the ordinary operation of the Canadian legal system. Regardless, modifying the agreement would result in the courts participating in retroactive tax planning, which the SCC sought to prevent: “It follows that the prohibition against retroactive tax planning […] should be understood broadly [to preclude] any equitable remedy by which it might be achieved, including rescission.” (paragraph 7)

Does the SCC’s decision affect rectification?

Aside from rescission, another equitable remedy taxpayers often attempt to use to avoid unintended tax consequences is rectification. Where rescission seeks to undo a transaction, rectification seeks to alter an instrument recording a legal agreement where the instrument does not correctly reflect the intent of the parties to that agreement. The SCC referred to its prior decisions on rectification where it held that granting rectification was not possible if the result is retroactive tax planning. Rectification is still available provided that the purpose of the rectification is to cure the instrument of its failure to reflect the intent of the parties and not to engage in retroactive tax planning. Granting rectification to fix the instrument for non-tax reasons could equally result in a benefit to the CRA.

When are equitable remedies available?

Collins Family Trust likely closes the door on rescission and on using equitable remedies to avoid unforeseen or unintended tax consequences. Instead, equitable remedies should only be available where the legal agreements do not reflect the parties’ agreement and the tax impact is purely incidental. To allow otherwise would lead to retroactive tax planning.

This article was written by Cassandra Knapman, Yoni Moussadji and originally appeared on 2022-08-09 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/scc-rescission-not-available-to-avoid-unforseen-tax-consequences.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.

5 signs your Not for Profit needs to update its business processes

Posted on by Edixon
How do you know if your Not for Profit organization needs to modernize?

Being stuck in the past is not a good place to be. However, many nonprofit organizations continue to operate the same way—year after year or even decade after decade—when more effective and inexpensive options can be implemented. The mission may not have changed, but the optimal way of conducting business certainly has. Modernizing has never been more crucial for mission-driven organizations. Inefficient procedures can bust budgets, create internal turmoil and limit the ability to achieve mission objectives. In contrast, improving your nonprofit’s operational efficiency can greatly increase your organization’s impact. So how do you know if it’s time to update your processes? Here are some signs that your Not for Profit organization needs to modernize:

1. Paper everywhere

The most glaring issue is when a nonprofit has skipped technology altogether. Hard copies have their uses, but there is likely not a single situation or process in which paper is a better solution than digital. Nonprofits that rely on paperwork rather than technology are not just losing the race. They aren’t even at the starting line.

2. Email overload

You’ve received five emails from four different people, with three different versions of the same document. You need to download the attachment, reformat it and email it out again. But then someone is accidentally left out of the email chain, and another person has the message trapped in her spam folder, and … well, it just gets worse from there. It’s far more efficient to automate decisions, track changes, and establish approval flows outside of emails. Online dashboards—such as those within enterprise resource planning enterprise resource planning (ERP), content management (CMS) or customer relationship management customer relationship management (CRM) systems—allow you to set up processes so you don’t need to email every request. People can access the dashboard and work within the system. Everything is tracked, no one is left out and communication is vastly improved.

3. Spreadsheet dependency

Microsoft Excel is a great tool for static data storage and presentation, but it is usually not optimal for dynamic data that is constantly changing. For many nonprofits, Excel or other spreadsheet programs have become the default application for too many functions, even if there are better tools that are specifically designed for certain activities. For example, grant financial reports and trackers can be built and updated directly within an ERP, and member data can exclusively reside within an association management system (AMS). Doing the same task in Excel might get a similar result, but only after a great deal more effort and with a higher error rate. The more you use Excel for everything, the more likely it is that your technology is not being optimized.

4. Manual data entry

One of the most powerful aspects of technology is its ability to automate processes. However, many Not for Profit organizations still rely on planting a staff member in front of a computer to manually input mounds of data. But whether it’s membership management, event organization, or some other essential function, there is likely a way to automate the entire process. Wasting staff members’ time by having them type in names or numbers is not just inefficient. It is also prone to errors and can lead to job dissatisfaction. If names or numbers exist somewhere, like on a statement or a third-party report, chances are that it can be uploaded or automatically brought into your core systems of record. Automating your processes can make manual entry seem like a relic from another era—which is exactly what it is.

5. Same data, different systems

The Not for Profit world, unfortunately, seems more prone than other industries to put information into silos and maintain data in separate systems. Often, an organization’s development team maintains the donor records in their database, but the finance team tracks invoices in the accounting system, and the marketing team tracks the fundraising campaign and so on. Furthermore, these different systems usually do not communicate with one another, so when there are discrepancies (if those are even looked for), who is right? Keeping the same information in different places means staff members have to double their effort, or even triple it if they reconcile the competing systems. The solution is to link data in a centralized system, like a data warehouse, that eliminates duplicate information and redundant tasks, while maintaining master data records to be used across the technology ecosystem. Data gets entered once and is immediately reconciled for different uses. Again, technology can automate this process and keep the organization’s data up-to-date and accessible.

Conclusion

Most Not for Profit professionals have seen and felt the aftermath of botched technology implementations. But upgrading your nonprofit’s technology does not have to be a scary or intimidating process. On the contrary, it can be exciting to unleash your organization’s full potential, freeing it from the constraints of antiquated systems. Of course, it is imperative to work with technology experts when implementing new approaches. Therefore, partnering with a technology provider that has a proven track record—and understands your industry as well as the latest software and its applicability to your practices—is key for a successful implementation. Together, you can make your nonprofit more strategic, more efficient and more successful.

This article was written by Matt Haggerty and originally appeared on Aug 16, 2022 RSM Canada, and is available online at https://rsmcanada.com/insights/industries/nonprofit/5-signs-your-nonprofit-needs-to-update-its-business-processes.html.

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.

RESP Withdrawal Options

Posted on by Edixon

So, you’ve saved for your child’s education within a Registered Education Savings Plan (RESP), hoping that they will pursue post-secondary education one day.

Congratulations! They are enrolled!

For all these years, your contributions, grants, and growth have been tax-sheltered. So now you’re wondering how best to get the money out of the plan and how it works. Within the RESP plan, there are the subscriber’s contributions, grants, and possibly bonds received, and earnings on the investments.

Withdrawals of the original contributions are referred to as Post-Secondary Education (PSE) withdrawals and are not taxable.

The Canada Education Savings Grant and Canada Learning Bond (CESG, CLB), if applicable, and earnings on the investments are taxable to the student, referred to as Educational Assistance Payments (EAP). You want to withdraw all EAP dollars while your child is in school so that those funds are taxed in their hands, not yours. Before making any withdrawals, it is important to find out the available EAP amounts for tax planning from your RESP provider.

For the 1st 13 weeks of a program, there is a maximum EAP withdrawal of $5,000 for full-time and $2,500 for part-time programs.

After the initial 13 weeks, there is no limit. Even if the funds are not needed upon your child beginning their program you may consider withdrawing some to take advantage of the basic exemption amount of $14,398 for tax year 2022. That means the student can withdraw those funds tax-free up to that amount if they have no other income. If they are working part-time, make sure to factor that in. EAP amounts can be taken for up to six months after the program ends.

The name of the game is to ensure the plan is completely drawn down by the time your child finishes school.

If money is left in the plan after they finish their studies, or if they didn’t pursue post-secondary education, you can collapse the RESP and withdraw your original contributions without any tax. If there is still grant or bond money left, it’s headed back to the government. All earnings in the plan are taxable to you, the subscriber, plus a 20% penalty tax. If you have not reached your RRSP contribution limit, you can transfer up to $50,000 of the growth to your RRSP and avoid the penalty tax. The RESP must be in existence for 10+ years, with all beneficiaries being at least 21 years old and not enrolled in a postsecondary education program. CESG and CLB are still repaid to the government.

You may be able to transfer the funds to a sibling under 21, or in the case of a family plan, have another beneficiary use the proceeds. CESG exceeding $7,200 per beneficiary must be repaid. 

An RESP can remain in place for up to 36 years from when the plan was opened. If your child’s circumstances change in a few years, they may still be able to use those funds as intended and taxed to them. It can also give you time to accumulate RRSP contribution room if it appears you might need to wind up the plan.

There are many ways to structure the withdrawals and different aspects to each, so please get in touch with one of our CERTIFIED FINANCIAL PLANNER™ professionals, so that we can help you plan the appropriate withdrawal strategy.

 

Handy Resource: Canada Revenue Agency – Registered Education Savings Plans (RESP) Guide

Residential Property Flipping – Important Taxation Considerations

Posted on by Edixon

Canadian residents who dispose of their family home and realize a gain may be eligible to claim an exemption, known as the Principal Residence Exemption (PRE) when computing the tax on that gain.  The exemption can eliminate all or part of the taxable capital gain, depending on the circumstances.  The PRE has been a part of the Canadian tax system for many years.  To qualify for the PRE, an individual must own the property and that individual or their spouse or child must “ordinarily inhabit” it in each year for which the exemption is claimed.  This does not require spending all of your time at the residence.  Seasonal cottages, for example, can qualify for the PRE.

A married or common-law couple are only allowed to designate each year one property as a PRE.  Therefore, if they own a family home and a cottage, one of those properties will be subject to tax when disposed.  Fortunately, due to the capital gains rules, only 50% of the gain realized on a sale is subject to tax.  The same rule applies to other properties, such as a rental property.

Over the past number of years, more and more individuals have purchased real estate with the intention of reselling the property in a short period of time to realize a profit.  Profits from flipping properties are fully taxable as business income, meaning they are not eligible for the 50% capital gains inclusion rate or the PRE.

To avoid paying tax on the entire profit, taxpayers have been reporting their profit as a capital gain.  In some cases they have moved into the house even while it is being renovated, claiming the PRE, thus avoiding taxes altogether.  Now, it has always been a question of fact as to how the profit on the sale of a house should be taxed.  Question of fact is often based on intent.  Unfortunately, in many cases, it is difficult for the Canada Revenue Agency to determine intent.  Was the intent at the time of purchase to flip the property or was the intent to hold the property for a number of years but circumstances changed, requiring a sale sooner than expected?

To make it more difficult for individual taxpayers to avoid paying taxes on their profits from property flipping, the government proposed in the latest budget the “Residential Property Flipping Rule”.  This new rule will apply to property sales on or after January 1, 2023. If the sale falls under these rules, then the full profit will be subject to income tax.  The intent of the taxpayer will no longer be considered.   Specifically, profits arising from dispositions of residential property (including a rental property) that was owned for less than 12 months will be deemed to be business income. The new rule will not apply if the sale took place due to certain life events as follows:

  • A disposition due to, or in anticipation of, the death of the taxpayer or a related person.
  • A household addition such as the birth of a child or care of an elderly parent.
  • A disposition due to the breakdown of a marriage or common-law partnership, where the taxpayer has been living separate and apart from their spouse or common-law partner because of a breakdown in the relationship for a period of at least 90 days.
  • A disposition due to a threat to the personal safety of the taxpayer or a related person, such as the threat of domestic violence.
  • A disposition due to a taxpayer or a related person suffering from a serious disability or illness.
  • A disposition for the taxpayer or their spouse or common-law partner to work at a new location or due to an involuntary termination of employment. In the case of work at a new location, the taxpayer’s new home must be at least 40 kilometres closer to the new work location.
  • A disposition due to insolvency or to avoid insolvency (i.e., due to an accumulation of debts).
  • A disposition against someone’s will, for example, due to, expropriation or the destruction or condemnation of the taxpayer’s residence due to a natural or man-made disaster.

Profits realized on the sale of properties held for more than 12 months will continue to be taxed based on the facts of each situation.  It is also important to point out that these proposals have not yet been enacted into law.

Home Office and Permanent Establishment for Non-resident Corporations

Posted on by Edixon
Executive summary 

Home office(s) in Canada may constitute a permanent establishment of the non-resident corporation in Canada if the employer requires the employees to work from home.

Non-resident corporations may be subject to tax in Canada if they carry on business in Canada. Most of Canada’s tax treaties with its major trading partners require the higher-threshold presence of a permanent establishment in Canada to be satisfied before a non-resident is subject to Canadian tax. 

A permanent establishment is generally a fixed place of business through which the business of an enterprise is wholly or partly carried on. In general, a permanent establishment requires the existence of three conditions:

1. A place of business, whether owned or rented, so long as the enterprise has the legal right to use the place of business,

2. The place of business must have a degree of permanence and,

3. The business must be carried on wholly or partly through the fixed place of business.

The Organization for Economic Co-operation and Development (OECD) Model Tax Convention defines a permanent establishment as “a fixed place of business in which a business is wholly or partly carried on, including a place of management, a branch, or an office, a factory, a workshop, a mine and etc.” Further, a person acting in Canada on behalf of a non-resident, other than an agent of an independent status, can be deemed to have a permanent establishment in Canada if such person has, and habitually exercises in Canada, an authority to conclude contracts in the name of the non-resident. Permanent establishment could also arise if the employee or agent has a stock of merchandise owned by the corporation from which they regularly fill orders received. 

Change in hiring policies during the COVID-19 period

During the COVID-19 pandemic, some foreign corporations may have hired senior management employees in Canada who decided to work from their home offices in Canada. Assuming these employees do not habitually exercise the authority to conclude contracts in the name of the non-resident, would their home offices constitute a fixed place of business in Canada, and therefore, a permanent establishment in Canada? 

Whether a home office constitutes a permanent establishment?

Whether a home office constitutes a permanent establishment of a non-resident corporation is largely dependent on whether the home office should be considered a place of business at the disposal of the non-resident corporation. In general, the ‘right of disposal’ means that the non-resident must have a right to use the space as the non-resident’s place of business and the mere presence of space is insufficient to conclude the determination of a permanent establishment.

Generally, the home offices of the Canadian-resident employees are likely not considered permanent establishments if they are not referred to as the non-resident corporation’s Canadian address on their website, business cards, or any advertisement. Further, to the extent the non-resident corporation does not bear home office expenses, does not stipulate what the home offices may contain, and Canadian employees do not have access to each other’s homes to perform their official functions, the home offices may not be considered the permanent establishment of the non-resident corporation.

Despite these conditions, the OECD provides that a home office may still constitute a permanent establishment if used on a continuous basis for carrying on business activities for a company and it is clear from the facts and circumstances that the company has required the individual to use that location to carry on the company’s business (e.g., by not providing an office to an employee in circumstances where the nature of the employment clearly requires an office). Alternatively, if the carrying of business activities at the home of an individual (under most circumstances, employee) is intermittent or incidental with interruptions, the home office is not likely to be considered to be a location at the disposal of the enterprise.

The OECD has also provided a few examples to illustrate situations where a home office is considered to be a permanent establishment of an enterprise. For example, if a non-resident consultant uses a home office in another country, in which she carries on most of her business activities from an office set up in her home, the home office could be considered a location at the disposal of the employer. On the other hand, a cross-frontier worker who completes most of her work at home in one country rather than in the office made available to her in another country would likely not be considered a permanent establishment, because the employer did not require that the home be used for its business activities. 

That is, if a non-resident corporation hires employees in Canada and requires them to work from their home office(s) in Canada, the home offices may constitute a permanent establishment of the non-resident corporation in Canada, resulting in tax obligations in Canada.

Some practical examples 

Non-resident corporations may not be considered to have a permanent establishment in Canada in the following situations:

1. Non-resident corporations do not bear any costs relating to the Canadian employees’ home offices in Canada;

2. Non-resident corporations do not use the Canadian employees’ home offices for any advertisement, business address, or on their website and,  

3. Non-resident corporations provide an office space or hoteling work arrangements in the non-resident corporation’s principal jurisdiction (e.g., the US) to conduct their official duties. The employees may choose to work from their home offices in Canada.

Corporations to review their employee’s locations and employment contracts to avoid creating conflicting taxable positions

The CRA in 2020 announced certain relief from pandemic-induced permanent establishments at the national level. However, there has been no further similar administrative relief related to the pandemic and instead, significant financial investment and measures have been introduced to bolster the CRA’s audit and enforcement powers. Non-resident corporations should review any permanent establishment exposures in light of lifting travel restrictions and increasingly mobile workforces.

 

This article was written by Nakul Kohli and originally appeared on 2022-08-01 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/home-office-and-permanent-establishment-for-non-resident-corporations.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.

Post pandemic new hybrid-work era and related tax considerations

Posted on by Edixon
Executive summary

The COVID-19 pandemic has led to a significant increase in remote work. This article discusses the key tax considerations and pitfalls of implementing a hybrid-work model in order to adapt to an evolving global workforce.

The COVID-19 pandemic has led to a significant increase in remote work. According to StatsCan research, 90% of workers who began telecommuting due to the pandemic reported being at least as productive as they were in office , while gaining flexibility and better work-life balance.  As we enter the post-pandemic work era, it is unsurprising that employers are experiencing pushback when trying to bring workers back to the office, and many are choosing to embrace the post-pandemic new hybrid-work model by setting organizational remote work policies.

The possibility of working for an employer abroad, or in another province or territory has never been as available as now, and employers are able to access a much larger, more diverse talent pool. StatsCan estimates that between 2016 and 2022, the number of Canadian employees working at home from another province or territory has increased more than fivefold.  Of all industries, information and cultural industries, administrative services, and professional services have seen the highest increase in workers working from home from another province or territory, with finance & insurance and wholesale trade following closely behind.

Discussed below are the potential corporate and individual income tax considerations employers should be mindful of when considering the adoption of an organizational remote work policy.

Home office and provincial permanent establishment (PE)

The concept of provincial permanent establishment (PE) is relevant for Canadian income purposes of allocating taxable income between provinces. Remote work has significantly increased the level of complexity in determining whether a PE has been created as a result of having an employee working in a different province or country.

Under Reg. section 400(2) of the ITA, a PE is:

1. A place of business, whether owned or rented, so long as the enterprise has the legal right to use the place of business;

2. The place of business must have a degree of permanence and

3. The business must be carried on wholly or partly through the fixed place of business.

Whether a corporation has created a PE in a particular province is ultimately a question of fact. In CRA Views Interpretation 2010-0378421I7, the CRA examined whether an employee’s home office can give rise to a PE, and how the consideration differs where an employer rents office space from which the employee works. A home office will generally not result in a PE. However, where an employer rents an office space from which an employee works, a PE will likely result if the day-to-day business activities of the corporation are carried on there.

Where a PE exists in another jurisdiction, the corporation must determine the income tax liabilities with respect to that jurisdiction. This may cause added administrative burden as corporations must track and allocate profits and wages amongst jurisdictions.

Canadian Payroll Considerations

Under Reg 102, an employer is required to deduct withholdings when it pays employment income, based on “where he reports for work at an establishment of the employer in a province, in Canada…”. However, employees pay individual income tax based on their province of residence at the end of the taxation year. If the employee reports to the employer’s establishment in person, the employee’s province or territory of employment for the purpose of payroll withholding is where the employer’s establishment is located.   If the employee does not have to report to an employer’s establishment in person (for example, the employment contract states the employee works from a home exclusively), the employee’s province or territory of employment for the purpose of payroll withholding is where the employee’s salary and wages are paid. This will normally be the location of the employer’s payroll department or payroll records.

Some Canadian provinces have Employer Health Tax (EHT) such as Ontario, BC and Manitoba, whereas Alberta and Saskatchewan do not. Consideration should be given to the definition of PE under each of the relevant provincial governing legislations, as they can differ from Federal regulations and from province to province, thus possibly subjecting an employer to provincial EHT beyond the scope of Reg 400 of the ITA.

Salaries and wages can also be eligible for tax credits under federal and provincial research and development (R&D) incentive programs. Canadian provincial R&D programs that supplement the federal scientific research & experimental development (SR&ED) incentives have rates ranging from 3.5% in Ontario to 10% in B.C. and 30% in Quebec. Many provinces offer refundable credits where the qualifying corporation is a  Canadian-controlled private corporation (CCPC). The provinces generally require that the claimant is carrying on eligible work in the province and that they have a PE in the province. If a company maintains a remote workforce outside the province in which they have a PE and where the R&D credit is being claimed, the R&D work performed outside that province may become ineligible for purposes of the provincial credit.

Inbound taxation: Foreign employers hiring Canadian resident employees

The concept of PE is also relevant to non-resident employers operating in Canada. However, the concept of PE in the international tax context is not only governed by Canadian domestic tax law, but also by relevant tax treaties.   While non-resident corporations may be subject to tax in Canada if they carry on business in Canada, most of Canada’s tax treaties require the higher-threshold presence of a PE in Canada to be satisfied before a non-resident is subject to Canadian tax. For non-resident corporations hiring Canadian resident employees, a recent RSM Tax Alert discusses the key tax considerations in depth. It is important to note if an employee is a Canadian resident, Canadian payroll obligations and Canadian personal tax liabilities will apply, regardless of whether treaty relief is available to the employer, or PE implications to the employer.

Outbound taxation: Canadian company hiring employees in a foreign country

Canadian employers should assess the foreign country’s tax rules for hiring remote workers in that foreign country, and any potential non-tax concerns, such as immigration, business/commercial laws and regulations, and local employment laws. Foreign countries may not have the same tax requirements on corporate profits as in Canada, and the concept of having a PE in a foreign country may be viewed differently than in Canada. In some cases, there may not be a tax treaty in effect and corporate income tax may apply based on meeting the foreign country’s domestic “carrying on business” tax rules.

For Canadian tax purposes, no amount shall be deducted or withheld from a payment to an employee who was neither employed nor resident in Canada at the time of the payment except in respect of a remuneration reasonably attributable to the duties of any office or employment performed or to be performed in Canada by the non-resident person. On that basis, if a Canadian resident employer hires a US-resident employee who works exclusively from their home in the US, Canadian income tax withholdings should not apply. The Canadian employer will still be required to issue a T4 slip and the wages paid may potentially be subject to US payroll withholding obligations.

Non-resident employees providing employment services in Canada are subject to the same withholding, remitting and reporting obligations as Canadian resident employees. Employers must withhold CPP and EI premiums on a non-resident employee’s remuneration in a similar fashion as they would for a resident employee. An exemption of CPP may be available based on a reciprocal social security agreement between Canada and the employee’s home country. These agreements make sure only one plan covers an employee—the Canada Pension Plan or a foreign social security plan. An exemption for EI may also be available if the unemployment insurance laws of the employee’s home country require premiums to be paid on the same employment income.

Adapting to evolving work models

The pandemic has changed our lives in many aspects, and the reality of the new hybrid work model is here to stay. From a tax perspective, the new reality of shifting to remote business has many aspects that need to be considered. As the workforce evolves, policy changes and legislative updates are to be expected. We encourage practitioners and business owners to be proactive in their research and assess the potential impact of any business decisions before their implementation.

This article was written by Lingzi Layman and originally appeared on Aug 01, 2022 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/post-pandemic-new-hybrid-work-era-and-related-tax-considerations.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.