Year: 2023

COVID BENEFITS: Review/Audit Activity

Posted on by Edixon

On December 6, 2022, the Auditor General of Canada released its report on COVID benefit compliance enforcement. The report reviewed a total of $210.7 billion in payments with the following breakdown among programs.

  • Canada Worker Lockdown Benefit (CWLB) – $0.9 billion
  • Canada Emergency Wage Subsidy (CEWS) – $100.7 billion
  • Canada Recovery Sickness Benefit (CRSB) – $1.5 billion
  • Canada Recovery Childcare Benefit (CRCB) – $4.4 billion
  • Canada Recovery Benefit (CRB) – $28.4 billion
  • Canada Emergency Response Benefit (CERB) and related EI program – $74.8 billion

The report indicated that $4.6 billion in overpayments were made to ineligible individuals, and an additional $27.4 billion of payments to individuals and businesses should be investigated further. This included an estimated $15.5 billion in CEWS received by employers that did not suffer a significant drop in revenue, extrapolated from a review of monthly GST/HST filers’ reported revenues. The report noted that GST/HST filings were far from a perfect measure but were still useful for risk assessment.

CRA has indicated that they have completed audits of $2.8 billion in CEWS claims (1,739 applications), but this only led to $200 million being redetermined post-payment. $11.6 million in penalties had been issued as of October 28, 2022.

The report also indicated the following in respect of CERB paid to recipients likely ineligible:

  • $1.6 billion was provided to 190,254 individuals who had quit their jobs;
  • $6.1 million was provided to 1,522 people who were in prison and $1.2 million to 391 dead people; and
  • $2.2 million was provided to 434 children under 15 years old at the time of application.

Just before the release of the report, a November 30, 2022, National Post article (CRA clawing back $3.2 billion from suspect COVID-19 aid payments, but that’s just the start, Christopher Nardi) noted the following, based on comments from two top CRA officials:

  • CRA has issued notices of redetermination disallowing $3.2 billion in COVID-19 benefit overpayments;
  • CRA sent out 825,000 notices of redetermination to individuals it suspected of receiving ineligible or excess payments from several COVID-19 benefit programs as of November 18, 2022;
  • post-payment reviews are set to continue until at least 2025; and
  • 25,000 cases of fraudulent payments were tied to identity theft.

Many of the overpayments stemmed from confusion and challenges associated with the attestation-based programs.

One of the CRA representatives also noted that “we want to recover money, but we don’t want to create financial hardship” and “it’s going to be based on the capacity of each and every individual to repay.”

ACTION ITEM: Review and audit activity in respect of COVID benefits is likely to increase. Ensure to have all supporting documentation ready for claims made.

U.S. Tax Compliance for Canadians Who Own U.S. Real Property

Posted on by Edixon
U.S. Rental income

If a Canadian resident receives rental income from real property located in the U.S., they are subject to a non-resident withholding tax of 30% of the gross rental income, which is required to be remitted to the Internal Revenue Service (IRS) by the tenant. The 30% withholding tax cannot be reduced by way of the Canada – United States income tax convention.

Non-residents of the U.S. can also make an election to be taxed as if their rental income was effectively connected with the conduct of a trade or business in the U.S. Furthermore, the taxpayer can deduct expenses engaged to earn rental income and then be taxed on the net income at graduated rates, rather than a 30% flat rate on the gross rent. To make this election and avoid the 30% withholding, a taxpayer must complete form W-8ECI and provide the form to the person who is paying the rent.

To deduct expenses in order to be taxed on your net income, a taxpayer must file a U.S. tax return as a non-resident (form 1040NR). The amount of the tax withheld will be reported on the 1040NR and will get refunded if there is excess tax withheld over the final income tax liability. The tax return must include a statement confirming that an election has been made. The election must include the address of the property, your percentage of ownership, description of improvements made, etc.

A taxpayer only has to make the election once and the election has to be made on each new property. The election will be valid for as long as a taxpayer owns a property and if their 1040NR is filed on time. To file a 1040NR, a taxpayer will need to obtain a U.S. Individual Taxpayer Identification Number (ITIN) by completing a form W-7.

A taxpayer also has to report rental income in the state where the property is located.

Selling U.S. Real Property

If a Canadian resident sells real estate located in the United States, they are subject to a 10% or 15% withholding tax of the gross selling price under FIRPTA (Foreign Investment in Real Property Tax Act). If the property is sold for an amount greater than $300,000 but less than $1,000,000 and the property is being purchased with the intention of being used as the purchaser’s residence, then the sale will only be subject to a 10% withholding as opposed to the 15% rate. The tax withheld will be offset against the U.S. tax liability on any gain realized on the sale and will be refunded if it exceeds the tax liability.

There are two exceptions to the withholding requirement which can reduce or eliminate the requirement.

  • The first exception applies if the property is sold for less than $300,000 USD to a buyer who intends to occupy it as their principal residence. The gain on the sale is still taxable in the U.S. and a tax return (1040NR) must be filed.
  • The second exception is if a Canadian resident gets a withholding certificate from the IRS on the basis that the expected U.S. tax liability will be less than 10% or 15% of the selling price. The certificate will indicate the amount of tax that should be withheld by the purchaser rather than the full 10% or 15%. Ideally, the withholding certificate should be obtained from the IRS before the sale closes. To apply for a withholding certificate a Form 8288-B must be completed and sent to the IRS. A U.S. ITIN must be included on the Form 8288-B or can be applied for by way of a Form W-7 with the Form 8288-B. The IRS will generally issue a withholding certificate within 90 days of submission.

The gain or loss on the sale of a U.S. real property by a non-resident is required to be reported on a U.S. Non-Resident Income Tax Return (1040NR). As a Canadian tax resident the disposition of a U.S. property is required to be reported in Canada. If there is a gain on the sale, the U.S. has the right to tax the gain first and the U.S. tax liability can be claimed as a foreign tax credit against any Canadian and provincial tax on the sale.

Similarly, state income tax may apply on the sale depending on where the property is located.

Please contact your DJB accountant should you wish to discuss this further.

New Regulations Prohibit Builders/Developers with Whole or Partial Foreign Ownership from Purchasing Canadian Residential Property

Posted on by Edixon

On December 21, 2022, the federal government released the Prohibition On The Purchase Of Residential Property By Non-Canadians Act.  This new regulation came into force immediately on January 1, 2023, for a period of two years.

Although the Act when initially announced was intended to prevent the purchase of housing units by non-Canadians (and curtail the rising housing costs), the publication of the Regulations states that it also applies to Canadian companies with more than 3% foreign ownership. 

The act will prohibit affected entities with partial foreign ownership from buying vacant land for residential development, or purchasing properties with less than four units on them (hence inhibiting assembling parcels of land for multiple-unit construction). This also precludes buying farmland to develop communities. 

In reviewing the publication of the Regulation, it has been noted that there is an unintended consequence in its wording that also directly affects the development industry, specifically builders/developers with partial foreign ownership, preventing them from buying or assembling land for the development. This Regulation will not affect companies that are 100% Canadian-owned. 

There are significant penalties for non-Canadians in violation of the Act, and for Canadians that knowingly assist a non-Canadian in violating the Act. The penalties include both a fine of up to $10,000.00 and a court-ordered sale of contravening property.

The federal government’s ban on residential property purchases by non-Canadians is part of a broader effort to address rising housing costs that includes federal tax changes for residential property flipping (also in effect as of January 1, 2023) and underused housing (in effect as of January 1, 2022), and provincial and/or municipal taxes on vacant homes or land speculation.

If you are a builder/developer with whole or partial foreign ownership and have questions on how this new regulation may affect you, please contact one of our Construction Industry Professionals.

Role of an Expert

Posted on by Edixon

When a dispute or litigation arises the people involved will often need to seek the advice of several professionals. While their lawyers will often act as their advocates, other professionals are frequently retained as independent experts. Depending on the nature of the dispute, this type of expert may include psychologists or social workers, medical doctors, real estate appraisers, actuaries, Chartered Business Valuators (CBVs), forensic accountants and economic loss experts.

These experts are expected to assume an objective, neutral and independent role. In matters that proceed to court, the experts will be expected to serve as a neutral expert in order to assist the court. It is important for experts to maintain their independence not only in fact but also in appearance. If a judge believes that an expert has failed to maintain their independence and has assumed the role of an advocate on behalf of the party who hired them, they may either refuse to accept their report and testimony or, if accepted, give it less weight in their decision.

Several years ago, the courts expressed concern about the role of experts and what they felt was an increasing trend for some experts to assume the role of an advocate. This concern led to a requirement for any expert appearing in an Ontario court to sign a form in which they acknowledge that, regardless of which party hired them, they have duty to the court to provide an opinion that is fair, objective, non-partisan and related only to matters that are within their area of expertise. The expert also acknowledges they are required to assist the court and that these duties prevail over any duties or obligations to the party that hired them.

The issue regarding independence was highlighted in a recent court case (Plese v. Herjavec, 2018 ONSC 7749). This case was a matrimonial dispute in which CBVs were retained as independent experts. The judge was critical of the CBV’s retained by each party to value Mr. Herjavec’s business, stating:

“Both valuators signed the requisite acknowledgement of their duties as experts, namely to provide opinion evidence that is fair, objective and non-partisan. As was the case with the real estate appraisers, their opinions squarely align with the interests of the party who retained them. Again, I am astonished that there should be this kind of disparity between them. I wonder if their results would have been the same had they been retained by the other party. This case highlights in very stark fashion the continued problems with expert evidence. Notwithstanding the experts’ clear duties, they nevertheless end up supporting the position of the party who hired them. The changes to the expert rules, and the requirement for experts to acknowledge their duties of independence and impartiality were supposed to solve the problem of experts simply being ‘hired guns’. Sadly, the problem remains. I must therefore approach each expert’s opinion with a certain degree of caution and skepticism.”

When retaining an expert to assist you, it is important for the expert to maintain their independence and to provide a balanced, objective opinion. While it is natural for the party retaining the expert to want that expert to act as their advocate, doing so may ultimately be of limited use as that opinion may be rejected.

An alternative to the ‘traditional’ model of each party hiring their own experts, involves both parties jointly retaining a single expert. Where an expert is jointly retained, both parties are involved throughout the process, both provide their input and raise any questions they have with the jointly retained expert. In our experience, this approach often leads to a better exchange of information and is less costly than each party retaining separate experts. This approach is used extensively in matrimonial disputes for which the parties agree to and follow a collaborative model. Under the collaborative model, the parties agree to work with their lawyers outside of the court system and to jointly retain any experts that are required to assist them in the collaborative process.

DJB is frequently retained to act as independent experts both by an individual party and on a joint retainer basis. Please contact us if you wish to discuss our role and how we may be able to assist.

 

The Virtues of Family Employment Policies

Posted on by Edixon

There comes a time in every company — a tipping point — when growth prompts the need for more formal policies and procedures. One of the areas where this need quickly becomes most obvious is in the human resources arena. As the number of family members increases from generation to generation, the complexity of hiring, training, and managing relatives can quickly overwhelm the original founders.

Part of the problem is that sometimes, typically after the second generation of family members is hired, there’s an expectation that all of the third generation of children and cousins will find life-long careers in the family business. While this works beautifully for a few family companies, it’s untenable for most.

Some relatives are more talented, knowledgeable, or harder working than others. Some have unique skills or training that make them particularly valuable to the company. Others are less motivated or less responsible, or just aren’t interested in pursuing a career there.

Be Intentional

The best way to manage these expectations — and the ensuing family drama — is to create thoughtful written family employment policies. Having these policies in place lets all of the relatives know exactly how the company handles the employment of family members. The topics to be addressed by the policies should include:

Education and training: Do you expect family members to attain certain degrees, licenses, or certifications before they join the company? If so, this should be spelled out in the employment policies, along with a timeframe required for completing the education or training. Also, clarify the company’s policy on paying for additional education or training programs.

Experience: Some family businesses require relatives to have a certain number of years of outside experience before joining the company. Exposing young adults to the rigors of the “real world” often gives them an appreciation for the dedication it takes to make a company thrive. They can also learn from others outside the business and bring those lessons back to the family, which adds a fresh perspective and new ideas.

Career track: Where will family members start their careers and how will they move up the corporate ladder? Some companies have formal training programs that rotate relatives through the various departments of the business so they get the big picture and discover their passions. Others start relatives at the lowest position and have them work their way up just as non-family employees do. Whatever path you choose is fine, but get it in writing so relatives know what to expect.

Compensation: How and how much will family members be paid? It’s not unusual for family businesses to overpay or underpay relatives. Best practices dictate that salaries be market-driven. That way, the family employees know the true value of their services relative to other employees and the marketplace.

You must also determine how to compensate relatives who actually work in the business (versus those who don’t), who will participate in ownership, and how ownership shares will be dispersed.

Communicate Regularly

To be effective, these policies must be enforced, communicated, and updated. An annual family meeting — separate from a business meeting — is the perfect forum for discussion of these and other family issues. While introducing these policies may be met with some resistance, moving forward with them in place takes a huge burden off the executive team and ultimately preserves family relationships.

If you’re making major changes to the way family employment has been traditionally handled, these discussions might be a bit emotionally charged. But getting everything out on the table is often a relief, and having everyone informed and on the same page sets the stage for a successful future.