Category: Domestic Tax

A June 18, 2024, Technical Interpretation discussed the tax treatment of losses resulting from a personal scam, as opposed to an investment scam. Two examples of personal scams were provided, as follows:

• a grandparent scam that generally involves the fraudster impersonating a grandchild, claiming that they are in trouble and require financial assistance (e.g. they have been in an accident, have been kidnapped, or are stranded abroad); and
• a phishing scam where the fraudster impersonates an entity (e.g. a financial institution, a utility company, or CRA) and attempts to pressure their victim into providing personal or financial information or assets.

CRA noted that there is no tax relief specific to fraud. In some instances, a capital loss or even a business loss may result from investment scams. However, a loss incurred by a victim of a personal scam would generally not result in a loss from employment, business, property, or a business investment loss as there is no income-earning activity related to the loss.

The property that is lost is generally personal funds that would likely be considered to be capital property. The lost cash would normally be personal use property, such that any losses would be deemed to be nil.

Be mindful of falling victim to fraudulent scams. There is no tax relief with respect to losses resulting from personal scams.

A December 20, 2024, Tax Court of Canada case reviewed the denial of losses from two activities, a dog breeding business and the short-term rental of properties in the Okanagan region of BC. The operation had been carried on by a married couple in the taxation years 2004 to 2010.

Dog activities

The Court undertook an extensive analysis of the taxpayers’ activities breeding champion dogs to establish a reputation for their kennel and generate revenues from stud fees and sales of puppies and semen, resulting in significant losses from 1999 to 2018. The Court first discussed whether the venture had elements of a hobby or other personal pursuit, concluding that the taxpayers’ lifelong connection to dogs suggested such elements.

Although the evidence demonstrated that the taxpayers intended to earn income, their dog-breeding activities were not a source of income as they were not conducted in a commercially reasonable manner. The Court cited the following factors as particularly relevant:

• recurring large losses over many years, with almost $1 million of losses over the 20-year period, with less than $50,000 in total revenues;
• use of credit card financing rather than securing less expensive commercial loans or lines of credit;
• rudimentary budgeting processes, lacking any plan to limit costs from various dog shows or on an overall basis;
• loose management of expenses, which were generally only summarized after the end of the year for income tax filings;
• unsophisticated books and records mingled with their law practices and rental operations;
• restrictive marketing that limited sales, which was not comparable to other commercial breeders; and
• the opinion of their own expert witness that activities generating such losses over a fifteen-year period cannot be a business.

The Court ruled that these losses were properly disallowed.

Rental activities

In 2001, the taxpayers purchased a house in a recreational area that they rented on a short-term basis. In 2005, they acquired the adjacent house to expand their rental business. The Court concluded that the taxpayers intended to earn income from the properties. In reviewing the commerciality of the activity, the Court noted the following factors:

• prior to purchasing the properties, they had undertaken research that indicated that short-term rental would be more profitable than long-term rental and obtained appraisals of market rents;
• limited rentals from 2006 to 2010 were attributable to unexpected factors including a decline in the US dollar and wildfires in several of those years that reduced demand for short-term rentals;
• they discovered that significant repairs were required to the second property, and a shortage of tradespeople delayed the repairs, resulting in that property being unavailable for extended periods;
• one of the taxpayers had prior experience with rental properties;
• the taxpayers obtained short-term rental insurance, obtained assistance for property cleaning and on-site management of renter issues and maintained a guest book to obtain feedback and solicit repeat business;
• mortgage financing and the financing of the repair costs reflected businesslike operations;
• they carefully budgeted furnishing and decorating the properties, with an eye to quality and risk mitigation with extended warranties and the scotch guarding of upholstery, practices different from those applied to their personal appliances and furniture;
• they advertised the properties and monitored the practices of neighbouring rental properties;
• they revised their strategies over time, including implementing guest book suggestions, expanding advertising to online platforms (e.g. Airbnb and VRBO) and taking advantage of long-term rental opportunities; and
• subsequent years’ results showed significant profits.

As the factors reflected sufficient commerciality, the rental losses were allowed.

Statute-barred returns?

CRA had reassessed several years after the ordinary reassessment period of three years from initial assessment. The Court noted that this was permitted only if the taxpayers had made a misrepresentation attributable to carelessness, neglect, willful default, or fraud. The Court noted that this is determined on an issue-by-issue basis and not on a year-by-year basis. Any reassessment can relate only to the misrepresentation(s) in question.

The Court concluded that the taxpayers had a bona fide belief that both the dog and rental activities were sources of income, a conclusion reached with the assistance of professional tax preparers. Their difference of opinion with CRA was either not a misrepresentation or was not attributable to carelessness or neglect. Where deductibility was a question of judgement, whether in determining whether a source of income existed or whether a specific expense was properly deductible, the returns could not be reassessed. As a result, several years were largely statute-barred.

However, some expenses were clearly not related to the income earning activities. The taxpayers’ practice of accounting for expenses only after the end of the year, rather than as they were incurred, resulted in an increased risk of error. To the extent that clearly personal expenses had been claimed, this resulted from carelessness or neglect, and these expenses could therefore be disallowed after the ordinary reassessment period.

The Court identified several expenses that could therefore be disallowed in years that were otherwise statute-barred.

Ensure your business or rental activities are conducted in a commercially reasonable and well documented manner to support loss claims and avoid disallowed deductions.

Have you received a call claiming to be from CRA but are unsure if it is legitimate?

CRA has launched a webpage to assist taxpayers in determining whether the call is actually from CRA. Taxpayers can go to the webpage and enter the 10-digit number that they were given to call back. The website will automatically confirm the validity of the phone number. CRA also reminded taxpayers not to rely on the number displayed on their caller ID.

Only phone numbers listed on the CRA website can be found using this tool. It does not include individual CRA employees’ direct work numbers.

Use CRA’s verification tool to confirm the legitimacy of calls before responding.

The Canada disability benefit is a new monthly payment for working-age persons with disabilities who have low income. The first payments will be made in July 2025.

To be eligible for this benefit, individuals must meet the following criteria:

• be a resident of Canada (for tax purposes);
• have a valid disability tax credit certificate;
• be between the ages of 18 and 64;
• have filed an income tax return for the previous tax year; and
• be either a Canadian citizen, permanent resident, protected person, a temporary resident (that lived in Canada for the past 18 months), or registered (or entitled to be registered) under the Indian Act.

The maximum benefit for the July 2025 to June 2026 period is $2,400 ($200 per month), but is reduced by the following:

• 20% of income above $23,000 if the beneficiary is single;
• 20% of income above $32,500 if the beneficiary is married or has a common-law partner; and
• 10% of income above $32,500 if the beneficiary is married or has a common-law partner and both are eligible.

The first $10,000 of working income ($14,000 for a couple) is exempt from this calculation. Income is based on the most recent taxation year that ended before the payment period begins.

If the individual is married or in a common-law relationship, their partner must also file a tax return for the previous tax year. In limited cases, the person applying for the benefit can ask to remove the requirement that their spouse or common-law partner file an income tax return. This includes situations where the partner is not resident in Canada, the partner does not live with their partner for reasons that they cannot control (e.g. one partner lives in a long-term care home), or it is unsafe for the person to ask their spouse to file a tax return.

While the application process has not yet opened, individuals should ensure the following is completed in preparation:

• apply for the disability tax credit;
• ensure that their (and their spouse’s) 2024 personal tax returns are filed; and
• obtain a social insurance number.

Details on the application process will be posted on this webpage.

If you or a family member are eligible for this new benefit, ensure you prepare for a timely application.

A director of a corporation, non-profit organization, or other entity can be personally liable for payroll source deductions and GST/HST that the entity fails to remit to CRA, unless the director exercised due diligence to prevent failure to remit these amounts on a timely basis. An individual can be held personally liable for up to two years after they resign as a director.

A November 29, 2024, French Quebec Court of Appeal case considered whether the taxpayer was a de facto director of a corporation and therefore liable for unremitted QST and source deductions for 2012 and 2013.

Taxpayer loses

Although the taxpayer had formally resigned as a director in 2010, the taxpayer continued to act as a director. Therefore, the Court ruled he was a de facto director and liable for the corporation’s debts. This determination was based on the fact that the taxpayer remained involved in banking, contract negotiations, discussions with Revenu Québec, and other corporate decisions after he resigned.

If you resign as a director, ensure to cease acting as a director.

Executive summary

Switching to and from Airbnb or another form of short-term rentals can result in a GST/HST bill when the condo is sold or there is a change in use, the Federal Court of Appeal affirms.

Disincentivizing short-term rentals has been the policy goal of an increasing number of tax and non-tax measures. In recent years, governments at all levels have introduced stricter regulations to address housing shortages. Federally, new measures have been implemented denying short-term rental operators’ expense deductions for tax purposes in jurisdictions where such rentals are not legally permitted.

At the same time, courts have reinforced that short-term rental activity can trigger unexpected goods and services tax (GST)/harmonized sales tax (HST) obligations when the property is sold or there is a change in use, with significant financial implications for property owners.

GST/HST and short-term rentals: The legal framework

Under the Excise Tax Act, the sale of a used “residential complex” is generally exempt from GST/HST. However, a key exception applies:

If the property

a. is part of a building, that is a hotel, motel, an inn, a boarding house, a lodging house, or other similar premises; and

b. at least 10% or more of the leases or similar arrangements of the units are for periods of continuous possession or use of less than sixty days,

it may be classified as a taxable supply upon sale and not a residential complex. This means that property owners may be required to collect and remit GST/HST, potentially reducing the net proceeds from the sale or collect GST/HST from the buyer, making it less commercially appealing due to associated tax costs.

A sale for these purposes can be either a change of legal ownership, or a deemed sale when the property changes in use (e.g. from commercial to personal), albeit the legal ownership remains the same.

GST/HST collectible: 1351231 Ontario Inc. v. Canada

The Federal Court of Appeal recently affirmed the decision by the Tax Court of Canada (TCC) that GST/HST could be collected on the sale of a condo unit originally used for long-term rentals, which was later used for Airbnb.

Between February 2008 and February 2017, 1351231 Ontario Inc. owned a condominium unit which was leased on a long-term basis (i.e. the lease intervals were for 60 days or more) to third parties. The property was then listed on the Airbnb platform and rented out through a series of short-term leases until April 2018, when it was sold to a third party.

Subsequently, 1351231 Ontario Inc. was assessed for the GST/HST payable on the sale of a condominium unit citing unavailability of GST/HST exemption available on the sale of a used residential complex.

The TCC had upheld the CRA assessment determining that the property did not qualify as an exempt “residential complex” under section 2 of the Part I to Schedule V of the Excise Tax Act. At the time the condo unit was sold, it was considered to be a real property that is similar to a hotel, motel, or other similar premises, meeting the first criteria set out in the exception above.

For the second criteria, 1351231 Ontario Inc. attempted to argue the TCC had to consider the entire period of ownership, and that more than 90% of the overall rentals in that period were long-term rentals. TCC rejected this argument. It found the relevant time period to consider was at the time that the condo unit was sold. By that time, the condominium was only being leased for taxable short-term leases of less than 60 days and most being only for a few days.

On appeal, the Federal Court of Appeal affirmed the TCC’s decision.

In this case, 1351231 Ontario Inc., was registered for GST/HST. However, it is important to note that GST/HST is applicable on a taxable supply of real property, irrespective of whether the supplier is a registrant or not, for GST/HST purposes. Accordingly, the above case poses a challenge for non-registrant property owners also selling properties used for short-term rentals.

Key takeaways and challenges for property owners

This decision, alongside broader tax policy changes, has significant implications for property owners engaged in short-term rental activities, summarized below:

• Property owners selling units with substantial short-term rental history may face unexpected GST/HST liabilities, affecting their net proceeds.
• Operators in areas where short-term rentals are restricted may be unable to deduct related expenses for income tax purposes.
• The CRA is actively enforcing GST/HST rules for mixed-use properties, highlighting the need for accurate record-keeping and professional tax planning.
• There a complicated set of change-in-use rules which may trigger GST/HST liability even in cases where the property’s use has changed from taxable to exempt, albeit the legal ownership remains the same.

As governments continue to tighten regulations on short-term rentals and real estate continues to be a popular area for CRA audits, property owners must be proactive in assessing their tax obligations.

The Canadian Income Tax law states that taxpayers are deemed to dispose of all of their property at fair market value immediately prior to death.   This can result a significant income tax liability in the year of death.  If the estate includes shares of a small business, the lack of funds to pay this liability may make it difficult to continue the business and keep it in the family.  This deemed disposition can be deferred when assets are left to a spouse or a spousal trust, but this is only a temporary solution to the problem and does not solve the problem when the shares are transferred to the children.

The purpose of an estate freeze is to transfer the future increase in the value of assets to other individuals.  In most cases, this would be other family members but could also include a key employee of the family business.  The transferor retains the current value of his/her shares and defers the income taxes on the capital gain to the time of their actual or deemed disposition.

By entering into a freeze transaction, the transferor can determine the taxes that will be due on his/her death.  Knowing what the future liability will be makes it easier to plan.  For example, a life insurance policy may be considered as an option to fund the liability.

To accomplish the estate freeze an owner of a small business corporation exchanges his/her common shares for fixed value preference shares with dividend rights.  New common shares are then issued to the new shareholders.  They will enjoy the benefits of the future growth of the business. This will result in a lower capital gain on the deemed disposition when the transferor dies. One of the reasons for a freeze is to transfer the business to the next generation.  However, consideration must be given to the share structure to allow the transferor to retain control of the business and, if he/she wants, provide a source of income by paying dividends on his/her freeze shares.

Careful consideration must be given to the value of the shares of the corporation that is being frozen.  In many cases, it is recommended that a Chartered Business Valuator be engaged to determine the value of the shares.  Unwanted tax consequences could result if the Canada Revenue Agency successfully challenges that the value of the fixed value preference shares does not line up with the value of the corporation at the time of the freeze.

What should be done if you as the business owner want to enter into an estate freeze but you are not sure whom you want the future growth to go to or your children are too young to have share ownership?  In this situation, it would be a great idea to create a family trust to hold the new common shares.  A family trust allows you to put off this decision for up to twenty-one years.  Beneficiaries of the trust normally include all family members.  At some date in the future, the trustees of the trust give the shares to the chosen beneficiaries.  This is a non-taxable event.  To provide for maximum flexibility, the business owner would also be a beneficiary of the trust in the event he/she decides not to transfer future growth and effectively decides to cancel the freeze. In certain circumstances income splitting can be achieved by paying dividends to the trust and then allocating the funds to beneficiaries. It is recommended that you seek professional advice before undertaking such tax planning and to help with the creation of a family trust.

Often the freeze shares that the transferor receives are redeemed over a number of years as part of their retirement income.  This spreads out the tax liability and reduces the liability to their estate.

Individuals who have a significant portfolio of investments may want to consider implementing an estate freeze.  To do so they would incorporate a holding company in which to transfer the portfolio.  At the end of the transactions, the individual will own fixed value preference shares of the holding company and possibly a note receivable from the holding company with a combined value equal to the value of the stock portfolio.  Other family members or a family trust will hold the common shares.  Careful planning is required, including proper tax filings in order to transfer the portfolio to the holding company on a tax-deferred basis.  In addition, the transferor needs to be aware of and to plan around the corporate attribution rules of the Income Tax Act, which could have a negative effect on the planning for years into the future.

In summary, an estate freeze can be a very good tax-planning tool but there are a number of items that must be addressed and considered before undertaking such a plan.  A bad plan could result in an unwanted tax bill.   The plan should be tailored to fit your needs.