Year: 2024

Executive summary

The General Anti-Avoidance Rule (GAAR) allows the Canada Revenue Agency (CRA) to assess tax where a taxpayer follows the letter of the law but not its object, spirit, and purpose causing a misuse or abuse of the Income Tax Act (Act). After years of the GAAR provisions remaining mostly unchanged, in the 2023 Budget, the federal government proposed some substantial changes in response to recent jurisprudence and the government’s concern that tax planning was increasingly circumventing the current GAAR.

The amendments, which would broaden the scope of the GAAR, are currently before the House of Commons as part of Bill C-59. Once enacted, the expanded GAAR will apply retroactively to transactions occurring on or after Jan. 1, 2024, except for the penalty which will apply to transactions occurring on or after Royal Assent.

The proposed expanded GAAR appears to reflect Canadian and global tax policy trends around addressing and preventing strategies that exploit perceived loopholes.

Summary of amendments

Preamble – The government proposes to add a preamble to guide the interpretation of the GAAR. It also seeks to clarify that the GAAR is meant to strike a reasonable balance between protecting the tax base, i.e., limiting aggressive tax planning, and taxpayers’ need for certainty in planning their affairs.

Avoidance transaction – For the GAAR to apply, there must be an avoidance transaction. As part of the amendments, the government proposes to capture additional transactions by lowering the threshold to qualify from the “primary purpose” test to “one of the main purposes” test. This lowered threshold now means that if one of the main purposes of the transaction was to obtain a tax benefit and the transaction (or series of transactions of which the transaction is part of) results directly or indirectly in a tax benefit, then it would be an avoidance transaction.

Economic substance – Under the amended rules in Bill C-59, an avoidance transaction that significantly lacks economic substance is an important consideration when determining whether there was a misuse or abuse of the Act.

The factors that may establish that a transaction lacks economic substance are:

• no substantial change in the opportunity for gain or profit and risk of loss of the taxpayer and non-arm’s length persons,
• the expected value of the tax benefit exceeds the expected value of the non-tax economic return, and
• the entire, or almost entire, purpose for undertaking or arranging the transaction or series was to obtain a tax benefit.

This list is non-exhaustive, and the government confirmed that these factors are to be read disjunctively – meaning that not all factors would need to be present to indicate a lack of economic substance. However, if the rationale underlying a provision is to encourage a particular policy, then it could result in a finding that there is no misuse or abuse in appropriate circumstances, for example, utilizing a tax-free savings account.

The economic substance requirement arguably already exists within the current GAAR case law, so it is debatable how much of an impact codifying this rule will have.

Penalty – The government opines that the current GAAR is not a sufficient deterrent to misuse or abuse of the Act as a taxpayer is simply denied the tax benefit. The amendments propose to introduce a penalty of 25% of the tax benefit obtained when the GAAR is found to apply, less any gross negligence penalties. The penalty can be avoided if the taxpayer can demonstrate that at the time the transaction was entered into, they relied on published administrative guidance or court decisions regarding an ‘identical or almost identical’ transaction such that it was reasonable to conclude the GAAR would not apply. This is called the ‘due diligence defence’ and as the CRA notes, it is a very high threshold. The penalty could also be avoided if the transaction was disclosed to the CRA under the mandatory disclosure rules (MDR) either voluntarily, or as required by legislation.

Reassessment period – The CRA normally has three or four years from the date of reassessment to reassess a taxpayer. The GAAR amendments propose a three-year extension to the normal reassessment period for GAAR assessments unless the transaction was disclosed under the MDR.

Various automobile deductions and taxable benefit rates are limited to amounts prescribed by the Department of Finance annually.

On December 18, 2023, the 2024, limits were announced as follows:

The limit on the deduction for non-taxable allowances paid by an employer to an employee using a personal vehicle for business purposes will increase in 2024 by 2 cents to 70 cents/km for the first 5,000 km driven and to 64 cents for each additional km. For Yukon, the Northwest Territories and Nunavut, the tax-exempt allowance will continue to be 4 cents/km higher, which is 74 cents for the first 5,000 km driven and 68 cents for each additional km.

The ceiling on the capital cost for CCA of most passenger vehicles will increase to $37,000 from $36,000, and the limit for zero-emission passenger vehicles will remain at $61,000.

The limit on leasing costs will increase to $1,050/month (from $950/month) for new leases entered into on or after January 1, 2024.

The maximum allowable interest will increase to $350/month (from $300/month) for new loans entered into on or after January 1, 2024.

The general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers will remain at 33 cents/km. For taxpayers employed principally in selling or leasing automobiles, the rate will remain at 30 cents/km.

ACTION: Compare automobile allowances and other payments made against the limits to determine whether expenditures that do not reduce tax are being made.

The Federal government has introduced new proposed measures to disincentivize short-term rentals that aren’t in compliance with their local jurisdiction as of January 1, 2024.  This joins other housing affordability legislation like the Underused Housing Tax Act. 

The 2023 Federal Economic Statement noted that in the cities of Toronto, Montreal, and Vancouver, there are an estimated 18,900 homes that were being used for short-term rentals (and more than half of Toronto’s short-term rentals are unregistered). 

These new measures may result in increased rental income by the taxpayer, making the short-term rental business model less appealing and viable.  Read further details in this article, written by RSM Canada.

 

Often taxpayers are audited by the Canada Revenue Agency (CRA) and end up being surprised when some or all of their expenses are disallowed.  Many times this could have been avoided with proper documentation.  In this article, we will look at some common issues the CRA has with respect to claiming of expenses and the related documentation.

In general, expenses are deductible if they are incurred for the purpose of earning income from business or property, and are reasonable in the circumstances.  Too often taxpayers attempt to deduct personal expenses from their business income.

Bank statements and credit card statements are not sufficient evidence for a CRA auditor.  You need to keep invoices that detail what was purchased.

Meals and entertainment

Receipts are the major supporting documents because they provide information such as the date/time, location, and the amount paid.  Since there can be a definite personal aspect to these expenditures, the CRA also expects an explanation on how those meals and entertainment expenses relate to your business income. Therefore, you should document the following information on each receipt:

• Who attended the event
• Their relationship to your business
• What client matter or income it relates to

If you do not have adequate supporting documents, the CRA could disallow the expense.

Automobile expenses

When you have self-employed income, the CRA allows you to take a deduction for costs associated with your vehicle.  The deduction is based on the number of kilometres you travel in your vehicle for business-related activities.

To calculate your deduction properly, you will need to keep track of your trips throughout the year, and also hang on to any receipts for vehicle-related purchases, in the event of a CRA review. To claim this deduction, the CRA requires you to keep a full logbook that journals your travel activities.  Your logbook should list the odometer reading on the first day of the tax year (or the odometer reading on the first day you decided to start using your vehicle for business), and the odometer reading for the last day of the tax year. Then for each trip, note the date, the Kilometers travelled, the address or destination of your travel and the business purpose for the trip.  From your logbook, at the end of the year, you will be able to determine the total kilometers travelled and the number of kilometers travelled for business purposes, and thus the total percentage use for business use.  To determine your tax deduction, you apply this percentage to your total vehicle costs including:

• Fuel
• License and registration fees
• Insurance
• Lease expenses (CRA maximum lease cost may apply)
• Maintenance and repairs.
• The CRA prescribed capital cost allowance (depreciation)
• Interest costs

Home office expenses

Self-employed individuals often carry out at least a portion of their business activities at home. In order to claim home office expenses, you must meet one of the following requirements:

• Your home office must be the principal place of your business
• You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients

If you are an employee, your employer must complete form T2200 indicating that you are required to use part of your home as an office to carry out your duties.

To determine how much you can deduct for your home office expenses, calculate the size of your office as a percentage of your home’s total size.

The rules for claiming home office expenses depend heavily on your type of employment:  Both self-employed individuals and eligible employees may both claim expenses for heat, electricity, water, maintenance, and rent (if applicable). Commission employees and the self-employed may also claim property taxes and insurance. Only self-employed taxpayers may claim mortgage interest as a home office expense.

If you have maintenance costs that are related exclusively to your home office, you can deduct the entire portion of those expenses.  Make sure that you keep all of your invoices to support your claim.

In some cases, you may not be able to claim the entire amount of your home office expenses in a single tax year.  Both employees and self-employed individuals cannot create a loss from claiming home office expenses. The excess expenses can be carried forward and in most cases can be applied to future years.

Oral audit evidence

If you do not have all of your documentation in place when the auditor calls, they may accept your oral testimony as support for the tax deductions that you’ve claimed.  However, in most cases you will lose at least a portion of your expense claim.  The better way and to reduce your stress, is to develop a habit of making sure that you have the right documentation in place from the start.

If you have any questions, or need assistance with claiming expenses, please contact one of our DJB tax professionals.