Category: Domestic Tax

Taxpayers who contribute excess amounts to their TFSA are subject to a penalty tax of 1%/month that the excess contribution remains in the TFSA. If subject to the tax, an individual may apply to have the tax waived. If the individual is unsuccessful after the CRA’s first and second review of the application, the individual may apply for a judicial review of the denial in the Federal Court.

Moving Funds between TFSA Accounts

In an April 9, 2024, French Federal Court case, the taxpayer withdrew $40,000 from a TFSA at one financial institution and deposited it into another TFSA at a different financial institution at a time when he only had a TFSA contribution room of $6,270, leading to an overcontribution. Withdrawals from a TFSA are only added to an individual’s contribution room at the start of the following year. Had the taxpayer directly transferred $40,000 between the two TFSAs, there would have been no overcontribution. CRA held that the overcontributions were not the result of a reasonable error, so they could not waive the penalty tax.

The Court noted past cases that supported CRA’s interpretation that neither ignorance of the tax law nor bad advice constitutes a reasonable error. The taxpayer’s failure to transfer funds by direct transfer between the two TFSA issuers resulted in the penalty tax being properly applied CRA’s decision to deny relief was reasonable, and the application for judicial review was dismissed.

Relying On CRA Portals

In a March 27, 2024, Federal Court case, the taxpayer made TFSA contributions in line with the available TFSA room listed on CRA’s My Account; however, the balances online did not reflect some contributions, resulting in the taxpayer making excess contributions. CRA alerted the individual after the excess contributions were made. As the individual continued to contribute based on the values posted on My Account, the Court found CRA’s decision to deny relief on the penalty tax reasonable.

Do not overcontribute to your TFSA, as the penalty tax can become costly and difficult to pay. Balances posted in My Account may not be timely nor accurate.

Individuals can start collecting Canada Pension Plan (CPP) retirement benefits as early as age 60. However, benefits are decreased by 0.6%/ month (7.2% per year) prior to age 65 for a maximum reduction of 36%. They are increased by 0.7%/month (8.4% per year) that CPP is delayed past age 65 to a maximum increase of 42% if collection is deferred to age 70. In other words, monthly retirement benefits are more than 2.2 times as large for someone who waits until age 70 rather than collecting at age 60.

A recent National Institute on Aging report indicated that an individual with median CPP benefits and an average life expectancy loses over $100,000 of CPP benefits, in current dollars, by starting CPP at age 60 instead of 70. The report noted that 9 out of 10 individuals opt to start CPP by age 65 or earlier.

The report also noted that collecting earlier may be a rational decision for individuals with financial hardship or poor health, resulting in reduced life expectancy. However, it suggested that most individuals would be better off drawing on other savings (such as RRSPs) to bridge the gap until reaching age 70. The report indicated that 4 in 5 individuals with RRSPs or RRIFs would receive higher lifetime income using this approach.

Consider the lifetime benefits and costs when deciding at what age to commence CPP payments.

Under the Competition Act, employees posting reviews online about their employer or the competition must disclose their connection to the business, even if the individual provides their honest opinion. This requirement applies to all types of reviews, including testimonials. A January 18, 2024, Competition Bureau Canada News Release (Online reviews posted by employees: businesses could be liable) recommended that businesses establish policies and provide employee training to reduce the risk of liability. The release also recommended that if an employee cannot make the connection clearly visible in a review, they should avoid posting it. This may occur when an employee intends to provide a star rating for a product or service but cannot disclose their connection with the provider.

Ensure employees are aware of this requirement under the Competition Act and properly disclose relevant connections when posting online reviews.

In 2023, CRA issued Shopify an unnamed persons requirement (UPR) that required Shopify to provide information on more than 121,000 Canadian vendors for the past six years. CRA uses this information to verify whether the unnamed persons for whom it received information have fulfilled their income tax and GST/HST obligations.

CRA has recently been using UPRs to detect non-compliance in several other industries, such as construction, crypto-assets, and real estate. They can request various types of information in a UPR, including client information (e.g. names, addresses, phone numbers, date of birth) and books and records (e.g. sales and purchase records and legal and public records). CRA reiterated that a UPR differs from an audit as information requested from a business in an audit generally only pertains to the specific entity. However, for a UPR, the requested information typically pertains to an identified group of the business’ clients.

Taxpayers who have not complied with their tax obligations may qualify for penalty relief through the voluntary disclosure program. However, the program does not apply if CRA has commenced an enforcement action, such as a UPR, or received information about potential tax non-compliance.

Ensure you properly report all of your income. Once CRA commences an enforcement action, including receiving information about noncompliance, the voluntary disclosure program is no longer an option.

Directors can be personally liable for payroll source deductions (CPP, EI, and income tax withholdings) and GST/HST unless they are duly diligent in preventing the corporation from failing to remit these amounts on a timely basis. Individuals can be personally liable as directors for up to two years after their resignation.

A July 19, 2023, French Court of Quebec case reviewed whether the taxpayer had resigned as a director of a corporation, thereby protecting the individual from personal liability of the corporation’s failure to remit $22,418 in QST and $38,479 of source deductions. The taxpayer argued that she resigned in writing on the day the corporation declared bankruptcy. Revenu Québec (RQ) argued that even if the taxpayer had resigned, she continued acting as a dire

Taxpayer loses

The Court found that even after the taxpayer allegedly resigned, she continued to carry on the duties of a director. For example, she signed an income tax return for the corporation, authorized the corporation’s accountant to discuss matters with RQ, had conversations with RQ regarding collection activities but did not disclose that she was allegedly no longer a director, and sent two $500 cheques to RQ in an attempt to settle the corporation’s tax debts.

The Court also reiterated previous jurisprudence that found that a director who has resigned must inform the Minister of their resignation during exchanges of correspondence relating to the company’s tax debt and those relating to the liability of directors. While the Court’s comment was specific to the Quebec Companies Act, the Court stated that it did not believe the rules were different for corporations under other provinces or the federal act.

The Court also stated that just because a corporation is bankrupt, the director does not lose their status as a director.

Ensure that allowances paid to employees meet the strict conditions for being tax-free to avoid a surprise tax bill for the recipient.

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.