Year: 2023

Why is Operational Resiliency Important?

Posted on by Edixon

During a crisis, companies need to be able to continue to deliver core products and services. Companies that fail to prepare for unexpected challenges can suffer a host of negative consequences that include reputational damage and financial loss.

Creating a business model that anticipates and has a plan to rebound from disaster will ultimately achieve a high degree of operational resiliency.

This article drills down on the importance of operational resiliency in today’s business atmosphere and breaks down the steps that companies can take now to plan, prepare, respond, and recover from a crisis.

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Employment Insurance: Misconduct

Posted on by Edixon

An August 24, 2023, Federal Court of Canada case reviewed whether the taxpayer’s employment had ceased due to misconduct, which would render the taxpayer ineligible for employment insurance. The taxpayer worked at a community health care centre that required all employees to provide proof of full vaccination against COVID-19 unless they provided evidence of a valid medical reason or they had a valid human rights reason (including religion) in accordance with the Ontario Human Rights Code for not being vaccinated. The Social Security Tribunal found that the taxpayer lost his employment due to his own misconduct because he was aware of his employer’s vaccination policy and the consequences of not complying. The Court found that this decision was not unreasonable.

ACTION ITEM: An employee’s cessation of employment due to their failure to comply with the employer’s vaccination policy may result in that individual being ineligible for employment insurance.

CBVs and Legal Matters

Posted on by Edixon

In this article, we discuss some of the ways a Chartered Business Valuator (CBV) is often asked to assist in various legal matters.

CBVs and Litigation

In litigation, CBVs are often involved as either independent “expert witnesses” or non-independent litigation consultants.

Expert Witnesses
  • An expert witness is an opinion witness of the court. An opinion witness does not have direct involvement in the matter that is before the proceeding until after the incident occurred, and is relied on to provide an opinion on the matter based on their specific expertise. This is different from a fact witness, which is a person who has direct involvement in the matter.
  • An expert is a person with specialized skills, knowledge, experience, or training in a specific subject matter area that is pertinent to the legal proceeding. To be an expert witness, the expert must be clear of any conflicts.
  • Prior to becoming an expert witness, the expert prepares an expert report to be used as evidence in litigation. Experts must be accepted by the court and qualified as an expert witness at the time of trial to testify in a proceeding related to matters of their specific expertise.
  • An expert witness must be independent and objective, and it is their duty to assist the court impartially on matters relevant to their area of expertise.
CBVs as Expert Witnesses

CBVs are regularly relied on in legal proceedings to assist in the following areas:

  • Disputes where a business valuation is required;
  • Dispute-related matters such as shareholder, intellectual property, contract, and matrimonial disputes;
  • Quantification of economic/ financial losses; or
  • Other conclusions of a financial nature.

A CBV may be asked to prepare an independent written report, which will be entered as an exhibit in litigation. This report is known as an “expert report”, which is a written communication containing a conclusion as to the quantum of financial loss, or any conclusion of a financial nature in the context of litigation or a dispute, prepared by an expert acting independently. In situations where the fair market value of a business or asset/liability is required, an expert report may contain a valuation conclusion.

A CBV may also prepare a limited critique report, which has the purpose of commenting on another expert’s report but does not include a separate financial conclusion. In a limited critique report, comments are provided with respect to the approach and techniques used and calculations in the original report, subjective matters such as the selection of discount rates, and whether the original report is suitable for the purpose at hand.

CBVs as Litigation Consultants

A CBV can also assist clients in litigation matters as a litigation consultant. In this case, the CBV will act as an advisor to legal counsel to promote the interests of their client. In this situation, a CBV is not considered independent, and would not be able to act as an independent expert witness during the trial or in other future litigation on this matter. In this role, a CBV generally acts as an advisor to legal counsel, will provide advice, support their client in various processes, and may advocate on their client’s behalf. Because certain valuation principles and topics are often subject to interpretation and professional judgment, the consultant is often relied on to assist the client to advance their own position in the litigation process. The litigation consultant can assist with such issues as strategy and cross-examination. A CBV acting as a litigation consultant is not independent and will not be required to testify. In some situations where a CBV is engaged as a litigation consultant, the CBV may be covered by litigation privilege.

CBVs and Family Law

CBVs are regularly involved in family law matters. CBVs are most often involved in assisting in valuation determinations related to the division of property on marriage breakdown and the determination of income for spousal or child support purposes.

If you have any questions regarding how a CBV can assist you in legal matters, please contact a member of our Financial Services Advisory Team (FSAT) team.

NOTE: This article is not intended to be legal advice. Please contact a lawyer to discuss the legal implications discussed in this article further.

REVIVAL OF A CORPORATION: Tax Collection

Posted on by Edixon

A June 12, 2023, Court of King’s Bench of Alberta case reviewed CRA’s application to revive a corporation dissolved in 2020. The former sole shareholder opposed the application. The corporation’s capital losses (as quantified during an audit of the 2013 and 2014 years) were used in 2017 and 2018. CRA sought to revive the corporation and issue notices of assessment for 2017 and 2018.

Revival granted

Under the Alberta Business Corporations Act, a creditor has standing to ask that a dissolved corporation be revived. While taxpayers remain liable for tax when income is earned, the liability does not become a debt until taxes are assessed. As no notice of assessment had been issued, CRA had no standing as a creditor. They would only become a creditor if they issued a notice of assessment. This created a circularity issue as an assessment could not be issued to a dissolved corporation. However, the Court has the power to designate someone as an “interested person,” allowing the designated person to revive a dissolved corporation. The Court found that CRA had a valid interest in the revival and sought this remedy to further its interest; that is, to issue a notice of assessment to convert the taxpayer’s liability for taxes into a debt. While the revived corporation would have no assets, no property, no directors, and no shareholders, a dissolved corporation that has been revived is deemed to always have existed. CRA argued that they could pursue the former shareholders on the basis that assets were transferred on dissolution to non-arm’s length parties for less than fair market value consideration. Similar rules are applicable in other provinces.

ACTION ITEM: Dissolving a corporation may not protect former shareholders from CRA taking measures to collect a tax debt.

SURCHARGE TO ACCEPT PAYMENT VIA CREDIT CARD: GST/HST?

Posted on by Edixon

As of October 2022, merchants could charge an additional fee for accepting payment via credit card. In a March 28, 2023, Technical Interpretation, CRA opined that the additional fee would be a separate exempt supply of a financial service and, therefore, not subject to GST/HST if all of the following conditions are met:

  • the fee is charged to the cardholder solely for the acceptance of the use of the credit card as a payment method and is not charged if another payment method is used;
  • the fee is imposed by (and is thus the revenue of) the merchant who provides to the cardholder the property or service that is purchased with the use of the credit card and not by a person who acts as a billing agent or payment service provider in facilitating the payment;
  • the fee is subject to the relevant credit card network rules relating to surcharging, including rules regarding the calculation and level of the surcharge; and • the fee is shown and charged separately to the cardholder.

ACTION ITEM: If charging an additional fee to accept credit cards, ensure you satisfy the above conditions to ensure the fee is not subject to GST/HST.

ENHANCED GST RESIDENTIAL RENTAL REBATE: Increased Incentives

Posted on by Edixon

On September 14, 2023, the Department of Finance provided details on a proposal to enhance the existing GST rental rebate. In general, the existing rebate provides a 36% rebate of the GST component of the price paid by landlords to construct, or purchase newly constructed, rental property. The existing rebate begins to be phased out for properties valued at over $350,000 and is eliminated at $450,000.

The proposal would increase the rebate from 36% to 100% and remove the phase-out thresholds for properties with a value over $350,000. The proposal would apply to certain rental housing projects that begin construction between September 14, 2023, and December 31, 2030, inclusive, and complete construction by December 31, 2035.

To qualify for the enhanced rebate, new residential units would need to meet the requirements for the existing rental rebate and be in buildings meeting the following criteria:

  • the property must contain at least four private apartment units (units must have a private kitchen, bathroom, and living area) or at least 10 private rooms or suites (examples of residences for students, seniors, and people with disabilities were provided); and
  • at least 90% of the residential units in the building must be designated for long-term rental.

Projects that convert existing non-residential real estate, such as an office building, into a residential complex would also be eligible if all other conditions are met. Public service bodies would also be eligible to access the enhanced rebate.

The enhanced rebate will not apply to other properties, such as individuallyownedcondominiumunits, single-unithousing, duplexes, triplexes, or housing co-ops; however, the existing rebate would still be available. Substantial renovations of existing residential complexes would not be eligible.

On September 21, 2023, the Bill to enact these measures was introduced in the House of Commons. This Bill did not include all the criteria for eligible projects but provided that the remaining specifics would be set by regulation in the future.

ACTION: If involved in developing multi-unit residential rental property, consider whether you are eligible for this enhanced GST rental rebate.

Managed services can deliver results for businesses

Posted on by Edixon

Effectively utilizing managed services is becoming a critical success factor for companies of all sizes and in all industries. Often times, a board might recommend maintaining an in-house model to manage risks, but that may not be completely realistic anymore.

With risks coming quicker and from many more directions, adopting a managed services strategy may be the best option.

In this article from RSM Canada, they explore how organizations can use managed services to assist with supporting smaller back-office functions or to fill an executive role, or staff an entire department such as human resources or finance.

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Minority Shareholdings – Does a
Minority Discount Apply?

Posted on by Edixon
Who are minority shareholders?

A minority shareholder is any shareholder who does not own a controlling interest in a public or privately-held company.

What is a minority discount?

In a notional valuation context, a minority discount is when the pro rata value of a particular minority shareholding is reduced to reflect the disadvantages of owning a minority interest of an asset or security
as a whole. Typically, a minority shareholding realizes a discount for:

  • The inherent lack of marketability or illiquidity, which refers to assets or securities that cannot be sold and converted to cash without a loss in value. Minority shareholdings are generally viewed as less marketable or liquid than a controlling interest, therefore attracting fewer potential buyers resulting in a discount. Sometimes referred to as Discount for Lack of Marketability or DLOM; and
  • The lack of control over the company’s operations and the ability to influence the future direction of the company and the distribution of profits/dividends. Sometimes referred to as Discount for Lack of Control or DLOC.

The level of minority discount can range significantly depending on the facts of the particular situation and ownership interest held.

Minority shareholders in a publicly traded company vs. a privately-held company

Minority shares in a publicly traded

company, where shares are widely held and large volumes of share are frequently traded, usually has a minimal illiquidity discount. While minority shareholders have no control over the direction of the public company, they can choose whether to sell or hold the company’s shares. As a result, there is often no significant discount for illiquidity or lack of control.

In contrast, a privately-held company’s en bloc value may already reflect a general illiquidity discount as there is no ready market available to buy or sell shares in a privately-held company. A further discount for

illiquidity may apply specifically to a minority shareholder, compared to a controlling shareholder of the same privately-held company.

Factors influencing discount

While the specific methods and possible empirical evidence are outside of the scope of this article, the quantum of the discount for lack of control and lack of marketability, which are sometimes combined into one discount, is dependent on several factors, including the following factors:

  • Shareholder’s level of involvement in the business.
  • A shareholder who is on the board of directors or involved in the daily operations of the business would generally have a lower quantum of discount than a shareholder who has no involvement in the business operations or governance.
  • Relationship and size of the shareholding relative to the other shareholdings.
  • In scenarios where there are no controlling shareholder, the relationship and combination of the size of the subject shareholding with other minority shareholders must be considered to determine if the subject shareholder can influence decisions.
  • Additionally, the applicable minority discount may be less or a potential premium may be available, if the other minority shareholders want to purchase the subject’s shares in order to become a majority shareholder.

Shareholders’ agreements

  • Clauses that influence liquidity or control will have influence on the quantum of a discount, such as restrictions on share transfer, rights of first refusal, or tag-along/drag-along provisions.

Nuisance value

  • Shareholders who hold just enough shareholdings to prevent or delay the plans of a controlling shareholder are considered to have “nuisance value” and may have a lower quantum of discount.
  • It is difficult to determine the discount for nuisance value in a notional valuation.

Family or group control

  • Shareholders who act in concert and in aggregate owns over 50% of the shares, may not have an applicable minority discount. However, a third party who enters into a shareholder agreement may have a significant minority discount applied to the value of their shares.

Dividends

  • A history of dividend distribution is an indication of return on investment and may indicate less of a minority discount.

Prior sales of minority shareholdings

  • Prior transactions provide insight regarding the quantum of any minority discount.
To apply a minority discount or not?

To determine whether a minority discount applies, consider the following two factors: the purpose of the valuation and the valuator’s professional judgment. If the valuation were to determine the value of the minority’s interest for the purpose of a sale to a non-related party, a minority discount would apply. The quantum of the discount that applies to the sale requires a valuator’s professional judgment and analysis.

In shareholder disputes involving oppression, one of the remedies is to have the corporation purchase the oppressed minority shareholder’s interest at fair value. In this case, a minority discount would not apply.If you have any questions or require assistance with determining if a minority discount is applicable and the quantum of the discount, please contact a member of our Financial Services Advisory Team (FSAT) team.

New Financial Statement Disclosure Requirements for the Construction Industry and Enhanced Guidance Issued for the Percentage of Completion Method under ASPE

Posted on by Edixon

The Accounting Standards Board has issued significant application guidance for entities utilizing the percentage of completion method (POC) for revenue recognition under Canadian Accounting Standards for Private Enterprises (ASPE). This will specifically affect the construction industry since the POC is utilized in accounting for revenue on long term contracts. Also, there are new disclosure requirements outlined in the ASPE revenue recognition standard which mandate specific details that companies operating in the construction sector must now include in their financial statements.

Next steps:

With the enhanced guidance issued, entities should review their existing methods to ensure they are following the new requirements. Entities will want to evaluate their methods to ensure they have selected  the appropriate basis for progress measurement, the type of costs for inclusion in the POC calculation (such as whether it is appropriate to include uninstalled materials or equipment when an input method is used) and the method of calculating amounts of revenue and costs recorded in the reporting period. Identifying contract costs and reviewing your process to allocate general costs to a specific contract will be an important consideration under the new amendments. Lastly, entities should review their processes to compare total contract costs to expected contract revenue and recognize an expected loss when total contract costs exceed contract revenue.

New disclosures:

The additional guidance added specific disclosure requirements to Section 3400 of the ASPE Accounting Handbook for any contracts accounted for using the percentage of completion method. These new disclosures provide users of the financial statements with information regarding the significant estimates and assumptions involved in calculating revenue using this method. An enterprise is required to disclose each of the following for contracts in progress at the end of the reporting period accounted for using the percentage of completion method: (a) The method or methods of measuring the degree of completion; (b) The aggregate amount of costs incurred and recognized profits (less recognized losses) to date; (c) The aggregate amount of advances received; (d) The aggregate amount of holdbacks withheld; and (e) Uncertainties affecting the measurement of the degree of completion.  These disclosures are required for entities with fiscal year ends beginning on or after January 1, 2022. These new disclosures make take time and effort to accumulate this information.

If you need assistance with implementing these amendments and new disclosure requirements, please reach out to your trusted advisor at DJB.

Included is an article authored by RSM Canada, some helpful insights on the percentage of completion method.

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Tax Considerations for Canadian Snowbirds

Posted on by Edixon
Canada is known for its long and frigid winters. Many Canadians, often referred to as snowbirds travel south to the USA to escape the freezing Canadian temperatures, taking extended vacations to enjoy the year-round warmth that parts of the United States have to offer. These so-called snowbirds should carefully plan their stays in the USA, however, since a stay exceeding a specific number of days might have unintended Canadian and US income tax consequences.
 
Canadian income tax consequences for snowbirds

Snowbirds should continue to file their Canadian tax return, as usual, reporting any worldwide income earned in the year on their T1 income tax and benefit return, whether received from inside or outside of Canada. Similarly, they should claim all the applicable deductions and credits and pay the federal and provincial or territorial taxes based on their residential ties. This generally means that any income earned by the snowbirds from the USA should be reported in their T1 return. However, to avoid double taxation, they will be able to claim a credit for the amount of any US tax paid by them, thereby reducing their Canadian tax liabilities.

US income tax consequences for snowbirds

On spending a significant amount of time in the USA, snowbirds might not realize that they may be subject to US income tax obligations by becoming, in effect, US residents as per the US tax residency rules. For US tax purposes, the residential status of a snowbird is determined under either of the US domestic tax rules for residency below. If they meet either of these tests, they will be considered a US resident and will need to comply with US income tax laws.

  1. Physically present in the USA in the current calendar year for more than 183 days
  2. Substantial presence test (SPT)

Snowbirds who are in the USA for less than 183 days in the current year can still be treated as US residents for tax purposes if they meet the SPT.

The SPT would be met if they are physically present in the USA for at least:

  • 31 days during the current year; and
  • A total of 183 days during the three-year period that includes the current and the immediately preceding two years, counting:
    • All the days they were present in the USA in the current year, and
    • One-third of the days they were present in the USA in the first year before the current year, and
    • One-sixth of the days they were present in the USA in the second year before the current year.

It is worth noting that for the SPT, a day generally includes any part of the day spent in the USA unless the individual is in transit through the USA. Furthermore, the purpose of the stay in the USA does not affect the SPT.

There are certain exceptions from the tests above that exempt snowbirds from being treated as US residents for tax purposes. These are discussed below.

1.    Canada–US income tax treaty “tie-breaker” provision – greater than 183 days

The tie-breaker rule in the income tax treaty between Canada and the USA  allows a taxpayer treated as a tax resident of both the USA and Canada under their domestic tax rules to only be treated as a resident of the country to which they have stronger ties to. Essentially, this rule will allow the taxpayer to remain a resident of one country as opposed to two. 

To be exempt under the treaty, snowbirds must demonstrate that they have stronger ties with Canada than the USA, including a permanent home, social/economic ties, habitual abode, and citizenship. In addition, they must file Form 1040NR along with a fully completed Form 8833 (treaty-based return position disclosure) explaining why they should be considered a resident of Canada and not a resident of the USA. The filing due date of both the forms—Form 1040NR and Form 8833—is June 15 of each year.

2.    Closer connection exception—SPT

Even after meeting the requirements of the SPT in a given year, snowbirds may still be able to avoid being considered US residents using the closer connection exception. Under this exception, snowbirds need to demonstrate:

  • A “closer connection” to Canada, and 
  • That they were in the USA for less than 183 days in the year.

To claim this exception, snowbirds must first establish that they maintained more significant residential ties with Canada than with the USA. A closer connection generally exists if their social and economic ties (such as the location of a permanent home; family connections; personal belongings; business and banking ties; and social, political, cultural, or religious affiliations, etc.) remain closer to Canada. Secondly, they have to stay in the USA for less than 183 days during the year for which the exception is claimed. On satisfying both these conditions, snowbirds can fall under the closer connection exception.

In addition, they must file a US Form 8840 (closer connection exception statement for aliens) for each year for which the SPT is met, and the closer connection exception is claimed. Similar to Forms 1040NR and 8833, the filing deadline for Form 8840 is June 15 of the year following the end of the relevant tax year unless the filing date falls on a weekend or a holiday. Filing the form will allow them to maintain their tax status as a non-resident of the USA under US tax law.

Snowbirds owning US real property

Snowbirds owning US real estate property might be liable for US income tax regardless of whether they are treated as a US resident for tax purposes. While owning and using US real estate property only for personal purposes might require them to report the property on their T1 return, they do not have any US annual filing obligations with regard to that property. However, renting the US property for more than 15 days during the year or the eventual sale of the property may trigger US tax and filing obligations. 

Snowbirds renting out their homes in the USA for more than 15 days during the year and earning rental income from investment properties are usually subject to a 30%  US non-resident withholding rate which satisfies their US tax requirements. However, snowbirds can make an election to be taxed on net rental income (after taking into consideration certain expenses related to the rental income) at graduated tax rates applicable to the individual which can be more beneficial and reduce the tax liability. However, to elect to file on a net rental basis, the taxpayer will need to complete Form W-8ECI to avoid the 30% withholding tax. The form applies to a foreign national who is the beneficial owner of the US source income that is (or is deemed to be) effectively connected with the conduct of a trade or business within the USA.

If the election is filed, the snowbird will be required to file a US tax return (Form 1040NR) to report the net rental income.

The taxpayer will require a US tax identification number to make this election and to file the US return.

Similarly, the sale of a US property would be subject to a 15% US non-resident withholding rate on the gross sale price at the closing date. However, the snowbird can file a waiver to have this withholding based on the net capital gain (if any) and/or claim a possible exemption. The snowbird would then report the net capital gain realized from the sale on a US tax return and claim any withholding as an instalment toward their final liability.

Since US net rental income or US net capital gain would also have to be reported on their Canadian tax return, the snowbird can claim any US tax paid on their US return as a credit on their Canadian return to reduce their Canadian tax and avoid double taxation.

Key takeaways

While an extended vacation to warmer locales may be an excellent way to beat the Canadian winter blues, travellers must keep abreast of any US tax reporting obligations they may be subject to. Keeping track of the number of days spent in the USA is an important first step for all snowbirds. Staying under the 183-day threshold may help snowbirds avoid any unintended tax consequences.



This article was written by Frank Casciaro, Chetna Thapar, Danielle Wallace and originally appeared on 2022-07-28 RSM Canada, and is available online at https://rsmcanada.com/insights/services/business-tax-insights/tax-considerations-for-canadian-snowbirds.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.

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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.

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