Category: Domestic Tax

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.

In a more globalized world, and especially after the COVID-19 pandemic brought about a seismic shift in our workplaces and the adoption of remote work, emigration has become a more popular option for many taxpayers in the past few years. Emigration also represents the “final departure from Canada” of a taxpayer, and potentially the final opportunity for the Canada Revenue Agency (CRA) to tax a taxpayer, which can therefore mean large tax liabilities. The purpose of this article is to explore some of the more common consequences of emigration of a Canadian taxpayer.

Determination of Residency

Any discussion of emigration pivots around the concept of residency in Canada. In Canada, the Income Tax Act (ITA) taxes Canadian residents on their worldwide income, and non-residents on their Canadian-sourced income.

Per CRA policies and technical bulletins, the most important determinants of residency are significant residential ties, or what are colloquially referred to as the “house and spouse” ties. These ties include whether you keep a dwelling place in Canada available for occupation by you, and whether your spouse or common-law partner, or other dependents, continue to be in Canada (or in a separate country).

After the significant residential ties are assessed, secondary residential ties are then assessed – these include personal property such as cars, furniture, and clothing, any economic ties (like a job or investment accounts), or insurance coverage in Canada.

It should be noted from the above that citizenship does not equal residency – a taxpayer can be a citizen of Canada but not a resident of Canada for tax purposes.

If a taxpayer leaves Canada, and they are determined to have “severed ties” with Canada, they are determined to have ceased residency on that date, i.e. emigrated from Canada.

Consequences of Ceasing Residency

If a taxpayer ceases residency in the year, they will be deemed to have disposed of certain types of capital property, the gain on which will trigger “departure tax”. Under the ITA, any securities, cryptocurrencies, or other investments held will be deemed to be disposed of at their fair market value, , potentially creating a large tax liability.. Notably, Canadian real estate is excluded from this rule.

If the taxpayer holds an RRSP, TFSA, or RRIF, these accounts will be excluded from the deemed disposition. Any withdrawals are likely to be taxed as passive income and subject to the withholding tax requirements discussed below. However, it is important to note that the other country in which the taxpayer is now resident may not recognize the RRSP or TFSA as a tax deferring vehicle, and thus tax any income earned in the plan.

Non-residents earning income in Canada

Employment or self-employment income earned in Canada as a non-resident will be subject to Part 1 tax in Canada, and a regular T1 income tax return is required to be filed.

If passive income, such as dividends, interest, or royalties, is received by a non-resident, such income will be subject to a 25% withholding tax that will be withheld and remitted to the CRA at source.  The withholding rate could be lower than 25% for residents from certain countries having tax treaties with Canada.

RRSP, RRIF, OAS, and other pension payments are also subject to a 25% withholding tax. However, an election is available to a non-resident to file a tax return with the CRA and report the income as if they were a Canadian resident, claiming certain tax credits, and enjoying lower tax brackets.

Income from a rental property is usually subject to the 25% withholding tax as well. However, an election is available for a non-resident to file a tax return with the CRA and report the income as if they were a Canadian resident, claiming rental expenses and certain tax credits, and enjoying lower tax brackets.

Note that the election to file a return does not eliminate the requirement of withholding tax at source.

If a non-resident owns a piece of Canadian real estate, or other “taxable Canadian property”, prior to or upon disposition, 25% of the net gain must be remitted to the government and a Request for a Clearance Certificate, T2062, must be filed with the CRA. Tax returns are available to be filed to receive a partial refund of this.  Of note, the government has introduced legislation to increase this withholding tax to 35% effective January 1, 2025.

Other tax considerations

There are certain provisions of the ITA that only apply to Canadian residents.  Three notable instances of this are:

1. Capital Gains Exemption with regards to a share sale, which requires that the shares in question be held by a Canadian resident throughout the year.
2. The definition of a Canadian-Controlled Private Corporation states that a corporation must not be controlled by a non-resident.
3. The emigration of a trustee/beneficiary and their subsequent non-resident status has an impact on the taxation of a Trust.

Absent proper planning, running afoul of these rules can yield a significant unplanned tax liability.

Finally, as a non-resident, a taxpayer may still have social, employment, or tourism-related desires to return to Canada. Under the ITA, a non-resident who is temporarily staying (“sojourning”) in Canada for 183 days or more in a calendar year will be considered a deemed resident of Canada for the entire year. As discussed above, a resident of Canada will be taxed on their worldwide income, which can yield a significant tax liability.

Conclusion

Determining residency can be a complex endeavour, and dealing with the consequences of a change in residency can be overwhelming. Our experienced advisors at DJB are well versed in international and domestic tax and can gladly assist you with the development of an exit plan, advise on the consequences of moving, or can help advise you on any other issues that can arise with regards to emigration.

Reasonable motor vehicle allowances received by employees in the course of employment duties are non-taxable. An allowance is not reasonable (and therefore taxable) if any of the following are met:

• the allowance is not based solely on the number of kilometres driven for employment purposes;
• the employee is reimbursed in whole or part for expenses in respect of that use; or
• the per-km amount is not reasonable.

A November 23, 2023, French Technical Interpretation considered the tax implications of an employer increasing the motor vehicle allowance paid to its employees by an additional per kilometre amount for each person accompanying the driver. CRA opined that the two parts of the allowance (base and additional amount per passenger) constituted a single allowance since both were intended for the same use of the vehicle. They then opined that as the allowance provided was not solely based on the number of kilometres travelled to perform the duties of employment, the entire allowance was taxable.

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

In late 2023, the Federal government announced its intention to deny income tax deductions for expenses by non-compliant operators of short-term rental properties (such as Airbnb or VRBO properties rented for periods of less than 90 days). These rules would apply to individuals, corporations, and trusts with non-compliant short-term rentals. These rules are proposed to come into effect on January 1, 2024.

A short-term rental would be noncompliant if, at any time, either:

• the province or municipality does not permit the short-term rental operation at the location of the residential property; or
• the short-term rental operation is not compliant with all applicable registration, licensing, and permit requirements.

Many municipalities require a business license or permit for short-term rental operations. Where short-term rental activities are carried on without such a permit, the operator would be subject to these proposals and taxable on gross rental revenues with no deductions in 2024 and later years.

Residential property would include a house, apartment, condominium unit, cottage, mobile home, trailer, houseboat, and any other property legally permitted to be used for residential purposes.

No expenses incurred with respect to the non-compliant short-term rental would be deductible. For example, consider a short-term rental that incurred $100,000 in expenses to generate $20,000 in profit. If non-compliant, all expenses would be denied, resulting in a profit for tax purposes of $120,000. Assuming the individual owner was in the top tax bracket (53.53% in Ontario), they would pay tax of $64,236. As the actual profit was only $20,000, the effective tax rate would be 321% ($64,236/$20,000). In absolute dollars, the individual would have to pay $53,530 in additional taxes due to the denied expenses.

Where the short-term rental was non-compliant for part of the year and compliant for another part of the year, the total expenses incurred for all short-term rental activity would be pro-rated over the period of that activity to determine the nondeductible portion.
For example, assume that a property was used for long-term rental from January 1 to June 30, then converted to short-term rental on July 1. However, the owner did not obtain a business permit as required until September 1 (62 days non-compliant). Expenses for July 1 to December 31 (the short-term rental period, 184 days) would be 62/184 non-deductible. Expenses related to the long-term rental period would not be part of the calculation of non-deductible expenses.

Transitional rule

For the 2024 taxation year, if the taxpayer is compliant with all applicable registration, licensing, and permit requirements on December 31, 2024, they would be deemed compliant for the entire 2024 year and, as such, would be able to deduct all relevant expenses for 2024.

Ensure you comply with all municipal and provincial rules by December 31, 2024, to retain all deductions applicable to your short-term rental for the year.

For reporting periods that begin in 2024 and onwards, GST/HST registrants (except charities and selected financial institutions) must file all GST/HST returns with CRA electronically. Registrants who file their GST/HST returns on paper are subject to a penalty of $100 for the first offense and $250 for each subsequent return not filed electronically. While CRA waived these penalties for monthly and quarterly filers who failed to file returns electronically for periods beginning before March 31, 2024, the relief will end shortly.

Ensure that GST/HST returns are properly filed electronically to avoid these penalties.