Category: Construction & Real Estate

A June 21, 2022, Tax Court of Canada case considered whether motor vehicle costs of $1,642 associated with a construction foreman’s travel between home and various job sites were deductible against employment income. The taxpayer worked on many of his employer’s 50 projects, located at numerous construction sites. The taxpayer was responsible for ensuring that the workers were in place each morning and were ready to work with properly functioning tools, materials, and equipment. This meant that the taxpayer was required to take the tools, materials, and equipment home each night for inspection and repair, and then bring them back in the morning. The taxpayer also testified that this process was necessary to protect the assets from job site theft at night. Storage and repair took place in a designated spot in his garage.

To be eligible for a deduction, the taxpayer must be:

• ordinarily required to carry on the employment duties away from the employer’s place of business or in different places; and
• required by employment contract to pay motor vehicle travel expenses in the performance of employment duties.

Generally, travel from one’s home to one’s place of work is personal; therefore, motor vehicle expenses would not be deductible. However, a few exceptions to this position have been determined by the courts, such as where the taxpayer’s home was found to be an essential place of business as mandated by the employer.

Taxpayer wins

First, the Court found that the taxpayer was ordinarily required to carry on employment duties in “different places,” being his garage and the various worksites. While CRA argued that the taxpayer must have carried on the majority of employment duties at home for it to constitute a place of work, the Court disagreed, finding that he only had to be required to “ordinarily” carry on duties at home. This meant that he had to perform employment duties at home in the ordinary or usual course of events or state of things. Although the taxpayer spent most of his work day at construction sites, he was still required to fix and store business assets at home on an ordinary basis, and therefore this condition was met.

Second, the Court found that the travel between these different places was conducted in the course of the taxpayer’s employment. The Court specifically noted that his day did not end when he left the construction site. Rather, it ended after he had completed the storage and repair duties at home. Likewise, his day started at home when he loaded the tools, materials, and equipment, and not just when he arrived at the job site. As the travel occurred after his employment duties had commenced and before they ended, the Court determined that the travel was conducted in the course of employment.

The taxpayer was allowed to fully deduct the expenses associated with travelling between his home workspace and the construction sites.

ACTION: This case is a noteworthy exception from the general rule that travel between home and the workplace is normally personal, and non-deductible. As the circumstances allowing the deduction were fairly specific, CRA will likely generally continue to assess most travel between home and the workplace as personal.

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.

One of Canada Revenue Agency’s (CRA) strategies to combat the ever-growing underground economy is to require construction businesses to file an annual T5018 return. A T5018 Statement of Contract Payments Information Return, and slips, are required to be filed by any individual, trust or corporation with construction as their primary business activity (>50% of income earning activities are derived from construction) and have made payments to (or received credits from) subcontractors for construction services in excess of $500 in the year. CRA uses this information to identify subcontractors that do not file returns, report their full income, or are not properly registered for GST/HST.

Filing requirements
If you file more than 50 information slips, you have to file them over the Internet (www.cra.gc.ca/iref). If you file fewer than 50 information slips, you may submit your information return electronically, or in paper format at the address provided on the back of the summary.

Failure to file and penalties
You can choose to do these slips either at your fiscal year-end, or at December 31st each year. Regardless of which reporting period you decide, you have 6 months from that date to file the slips. In order to change the reporting period you have selected, you will need approval from the CRA. If your business stops operating, you must file the information return within 30 days of the day your business ends.

If you fail to file an information return by the due date, a late-filing penalty may be assessed. Each slip is an information return and the penalty is based on the number of slips filed late. The penalty is the greater of $100 or a penalty determined as follows:

Voluntary Disclosure Program
If you have not filed T5018’s in the past but were required to, CRA offers a voluntary disclosure program (VDP) to bring these filings up to date. Under this program, CRA will usually waive any late-filing penalties that would result from filing the returns past their due date. To be eligible for the VDP you must take action before CRA issues a demand to file the overdue return, the information return must be at least one year overdue, and the information being submitted must be complete. It is important to note that you are expected to bring your T5018 filings up to date for all insufficient tax years under a single voluntary disclosure.

For further information, or assistance with filing a T5018 Statement of Contract Payments Information Return, please contact your nearest DJB office.

For a number of years the government has given taxpayers the ability to split certain pension income with their spouse when filing their tax returns.  Taxpayers can also contact Service Canada and ask them to split their monthly Canada Pension Plan payments.  As a result, many people wonder if there are still advantages of contributing to a spousal Registered Retirement Savings Plan (RRSP).  Let us look at some reasons why spousal RRSPs still do make sense.

To refresh your memory, spousal RRSPs were originally designed to allow the high-earning individuals to contribute to their spouse’s RRSP but claim the deduction themselves. When it comes time to withdraw the funds from the RRSP, the money will be taxed in the hands of the spouse.  However, there is one key item of note.  The last contribution must remain in the plan for at least two calendar years after the year in which it was deposited.

Here are some reasons a spousal RRSP may make sense for you:

• Greater immediate tax savings. Let us assume that the higher earning spouse is in the 50% tax bracket and the lower earning spouse is in the 30% bracket.  If the lower earning spouse contributed $1,000 to their own RRSP, they would only realize tax savings of $300.  Conversely, a spousal RRSP contribution by the higher earning spouse of $1,000 would save $500 in taxes, an increase of $200.

• Your goal is to retire before the age of 65. The pensions splitting rules do not allow you to split RRSP income before the age of 65.  Therefore, if you take money out of your RRSP before the age of 65 you cannot move half of it to your spouse’s tax return.  Taking money out of a spousal RRSP ensures the income is taxed 100% in the hands of your spouse.  The same principle applies if you expect that one spouse will have significantly more income from non-pension sources during retirement.  (Remember the waiting period rule above.)

• One spouse is older than 71. The year after you turn 71, you can no longer contribute to your RRSP.  However if you have a younger spouse, you can contribute to their RRSP as long as you have the contribution room.  This could produce significant tax savings, and depending on your situation, the avoidance of having to pay back your Old Age Security.

• You are saving to purchase your first home. Under the Home Buyer’s plan, a first-time buyer can withdraw up to $25,000 from their RRSP to aid in the purchase.  A spousal RRSP can allow access to a second $25,000.  This is the case even if one spouse does not work outside the home.

• You know the lower earning spouse’s income will decrease. Perhaps there is the consideration of having a family, or returning to school, or starting a business that will not be profitable in the early years.  Perhaps one spouse is planning to retire earlier than the other does.  These are all good reasons for the higher earning spouse to contribute to a spousal RRSP that can then be withdrawn and taxed at a lower rate when the time comes.  (Again, remember the waiting period rule above.)

• Contributions after Death. No contributions can be made to a deceased individual’s RRSP after the date of death. However, the deceased individual’s legal representative can contribute to a spousal RRSP in the year of death or during the first 60 days after the end of that year.

For more information on using a spousal RRSP, contact a DJB Tax Professional.