Category: Domestic Tax

PAYING RENT TO NON-RESIDENTS: Withholdings
Required

Posted on by Edixon

In a March 30, 2023, Tax Court of Canada case, the taxpayer was assessed for failing to withhold taxes on rent paid on Canadian real estate to a non-resident. Penalties and interest were also assessed.

The information known to the taxpayer was limited to an Italian telephone number on the lease document (with a Canadian number), the landlord’s email address ending with “.it” rather than “.ca” or “.com” and some Italian writing at the bottom of an email. The taxpayer argued that he did not know that the landlord was a non-resident, and that a due diligence defence should apply.

Taxpayer loses

The Court first noted that a non-resident is subject to a 25% flat tax on gross rent received on Canadian property. The Canadian resident paying the rent is required to withhold and remit this tax and is liable for it if this is not done. Penalties and interest on this amount also apply.

The Court then noted that the withholding requirement exists regardless of whether or not the taxpayer knows that the landlord is non-resident. Further, there is no due diligence defence in respect of the tax withholding. As such, the taxpayer was liable for the tax not withheld.

The Court stated that a due diligence defence could apply to penalties and interest. However, the taxpayer provided no evidence of any efforts to confirm the landlord’s residency. The absence of any reason to question the landlord’s residency was insufficient – due diligence requires taking positive steps to ensure compliance.

ACTION: Ensure to take proactive steps to understand a landlord’s residency status. Renters can be liable for unremitted withholdings even if they do not know the landlord’s residency status.

GIFTS DIRECTED TO OTHER DONEES: Loss of
Charitable Status

Posted on by Edixon

In some situations, a registered charity may be asked to receive donations on behalf of another organization or cause. While this may seem like a good way to generate funds and reward donors with charitable contribution receipts, it can have serious implications for the charity.

A February 1, 2023, Technical Interpretation considered a charity that would collect funds, issue receipts, and then disburse the funds to a qualified donee (a municipality). The municipality would then direct the funds to a non-qualified donee. The charity’s intention was to assist a non-qualified donee (in this case, a non-profit organization) in a fundraising campaign by collecting funds and issuing receipts.

A charity may have its status revoked if the charity:

  • carries on a business that is not a related business of that charity;
  • fails to expend amounts in any taxation year on charitable activities carried on by the charity and by way of qualifying disbursements, the total of which is at least equal to the charity’s disbursement quota for that year; or
  • makes a disbursement, other than
    • one made in the course of charitable activities carried on by it, or
    • a qualifying disbursement.

If the charity’s disbursement to the municipality was not a qualifying disbursement, the charity could have its status revoked.

A qualifying disbursement includes a gift to a qualified donee. A qualified donee includes a municipality in Canada that is registered by the Minister.

It is a question of fact as to whether the transfer to the qualified donee constituted a gift received, and therefore a qualifying disbursement. CRA’s general view is that donations can be received and receipted by a qualified donee (such as the municipality), provided that the qualified donee retains discretion regarding how the donated funds will be spent. If a qualified donee is merely acting as a conduit by collecting funds from donors, including a charity, on behalf of an organization that is legally or otherwise entitled to the funds so donated, the qualified donee is not in receipt of a gift. In this case, the gift from the charity would not be a qualifying disbursement.

A charity may also have its status revoked if it accepts a gift, the granting of which was conditional on the charity making a gift to another person, club, society, association, or organization other than a qualified donee.

ACTION: Caution and professional guidance should be sought should a charity consider accepting donations on behalf of another organization.

Tax Planning: 2023 Year-end Considerations for Businesses and Individuals

Posted on by Edixon

RSM Canada’s 2023 year-end tax guide summarizes the key federal, provincial, and territorial tax updates that may create risk or opportunity for middle-market taxpayers in 2024 and beyond.

Tax trends and topics discussed as the Canadian economy moves into 2024 include:

  • Revisions to the general anti-avoidance rule
  • Mandatory disclosure rules
  • Financial institutions dividend
  • Tax on repurchase of equity

As year-end approaches, companies and individuals alike must carefully consider tax-planning opportunities in light of economic uncertainty and evolving tax legislation and regulations. Learn more in our year-end planner.

 

Download the Guide

 

Canadian tax integration on private company Income

Tax integration is achieved when a particular stream of income is subject to the same or similar total tax rate once it reaches the individual taxpayer level. These tables provide an illustration of how the Canadian income tax integration system works.

 
Learn More

CRYPTOCURRENCY EXCHANGE CESSATION: Recordkeeping

Posted on by Edixon

A June 7, 2023, CryptoTaxLawyer.com article (Binance Bids Canada Bye-Bye! Canadian Tax Implications for Cryptocurrency Investors and Traders) reminded Canadians about the importance of maintaining an offline record of transactions as exchanges, such as Binance, shut down in Canada. On May 12, 2023, Binance announced that Canadian users will be required to close any open positions by September 30, 2023.

Once the exchange is closed to Canadians, there is the possibility that access to records will disappear. Such records are necessary to support tax positions and filings. The article also noted that records may need to be maintained well beyond six years, as they can support the determination of tax that may occur much farther into the future. For example, if a cryptocurrency was purchased in 2015, but is sold in 2025, records must be maintained to support the cost of the cryptocurrency sold for reporting purposes in 2025.

ACTION ITEM: Ensure records of transactions are retained offline in the event that they are no longer available online in the future.

DISABILITY TAX CREDIT (DTC): Electronic
Applications

Posted on by Edixon

The DTC is a non-refundable tax credit that provides tax relief for individuals (or those that support those individuals) who have a severe and prolonged impairment in physical or mental functions. To access the DTC, eligible individuals must apply for it by completing Form T2201, Disability Tax Certificate. Recently, CRA updated their services so that this application can be completed and submitted entirely electronically.

The patient can complete the non-medical portion (Part A) of Form T2201 online in CRA’s My Account with data prepopulated from CRA’s files. Doing so will generate a reference number that can be provided to the medical practitioner for entry when they complete the medical certification (Part B) within the existing digital application. The information is automatically submitted to CRA on completion of the medical certification (Part B), provided the medical practitioner has entered the reference number.

The reference number will remain on My Account until the medical certification (Part B) is completed. Representatives cannot currently complete the non-medical portion (Part A) through their Represent a Client account.

To use this new option, the patient (person applying for the DTC) must register for CRA’s My Account.

Alternatively, the non-medical portion (Part A) can be completed over the phone, either by calling the personal tax general enquiries line (1.800.959.8281) or through a new automated voice system (1.800.463.4421). The automated voice system indicates that it is intended to be used only by the disabled individual.

ACTION ITEM: To speed up and simplify the process for applying for the disability tax credit, consider using the electronic method.

WITHDRAWING FROM FAMILY RESPs: Flexible Planning Possibilities

Posted on by Edixon

A July 21, 2021, Money Sense article (My three kids chose different educational paths. How do I withdraw RESP funds in a way that’s fair to them and avoids unnecessary taxes?, Allan Norman) considered some possibilities and strategies to discuss when withdrawing funds from a single RESP when children have different financial needs for their education.

Some of the key points included the following:

  • There is likely a minimum educational assistance payment (EAP) withdrawal that should be taken, even by the child that needs it least.
  • The EAP includes government grants (up to $7,200) and accumulated investment earnings on both the grants and taxpayer contributions.
  • The grants can be shared, but only up to $7,200 can be received per child, with unused amounts required to be returned to the government.
  • Only $8,000 ($5,000 in previous years) in EAPs can be withdrawn in the first 13 weeks of consecutive enrollment.
  • The withdrawal amount is not restricted by school costs. • The children are taxed on EAP withdrawals.
  • It is generally best to start withdrawing the EAP amounts as early in the child’s enrollment as possible, when the child’s taxable income is lowest. If the child is expected to experience lower income in later years, there is flexibility to withdraw EAP amounts in those later years instead.
  • The level of EAP withdrawn for each child can be adjusted. As individuals are taxed on the EAP withdrawals, planning should consider the children’s other expected income (e.g. targeting less EAPs for years in which they will be working, perhaps due to co-op programs or graduation). Consider having the EAP completely withdrawn before the year of the last spring semester as the child will likely have a higher income as they start to work later in the year.
  • To the extent that investment earnings remain after all EAP withdrawals for the children are complete, the excess can be received by the subscriber. However, these amounts are not only taxable, but are subject to an additional 20% tax. Alternatively, up to $50,000 in withdrawals can also be transferred to the RESP subscriber’s RRSP (if sufficient RRSP contribution room is available), thus eliminating the additional 20% tax. An immediate decision is not necessary as the funds can be retained in the RESP until the 36th year after it was opened.

ACTION ITEM: The type, timing, and amount of RESP withdrawals can significantly impact overall levels of taxation. Where an RESP is held for multiple children, greater flexibility exists. Consult a specialist to determine what should be withdrawn, at what time, and by whom.

CEBA Loan Repayments and Debt Forgiveness

Posted on by Edixon

****EXTENDED DEADLINES****

CEBA loans must be repaid by JANUARY 18, 2024 to be eligible for partial loan forgiveness.

For eligible CEBA borrowers in good standing, repaying the balance of the loan on or before January 18, 2024, will result in loan forgiveness of up to $20,000.

More specifically, where the outstanding principal other than the amount of potential loan forgiveness is repaid by January 18, 2024, the outstanding principal amount will be forgiven, provided no default under the loan has occurred.   

For example, if you borrowed $40,000 or less, repaying the outstanding balance of the loan (other than the amount available to be forgiven) on or before January 18, 2024, will result in loan forgiveness of 25% (up to a max of $10,000).

If you received a $40,000 loan and subsequently received the $20,000 expansion, repaying the outstanding balance of the loan (other than the amount available to be forgiven) on or before January 18, 2024, will result in loan forgiveness up to $20,000 based on a blended rate:

  • 25% on the first $40,000; plus
  • 50% on amounts above $40,000 and up to $60,000.

For loans outstanding on January 19, 2024, during the period of January 19, 2024 to December 31, 2026, you will be required to pay interest on your CEBA loan and be subject to the following repayment terms:

  • 0% per annum interest until January 18, 2024.
  • No principal repayment required before January 18, 2024.
  • Automatic conversion to a three-year term loan beginning January 19, 2024.
  • 5% per annum interest starting on January 19, 2024; interest payment frequency to be determined by your financial institution.
  • Only interest payments are required to be paid on the term loan beginning January 19, 2024, however, the full principal is due on December 31, 2026.

CEBA loan holders who submit a refinancing application with their financial institution by January 18, 2024, may qualify for an extension of the partial loan forgiveness repayment deadline to March 28, 2024.

We suggest that you contact your financial institution to assist you with making a payment towards your CEBA loan or to submit a refinance application well in advance of the January 18, 2024, deadline.

Replacement Property Rules Pertaining to Real Estate and Business Properties

Posted on by Edixon

When a taxpayer (including a corporation) disposes of real estate for more than its cost, the capital gain must be reported on the taxpayer’s income tax return.  If the taxpayer previously claimed capital cost allowance (CCA) on the building, then that CCA will be recaptured and included in income as well.  However, the Income Tax Act permits a taxpayer, in certain conditions, to elect to defer the recognition of recapture of CCA or capital gains where a property was involuntarily disposed of, or a former business property was voluntarily disposed of, and a replacement property is acquired.  

Requirements for the replacement property rules to apply

There are a number of requirements in order to take advantage of the replacement property rules.  They are as follows:

  • A replacement property can be acquired before or after the former property, as long as it meets the other conditions.
  • For involuntary dispositions such as an expropriation, the replacement property must be acquired before the later of:
    • the end of the second tax year following the year proceeds become receivable for the former property; and
    • 24 months after the end of the year those proceeds become receivable.
  • For voluntary dispositions of a former business property, the replacement property must be acquired before the later of:
    • the end of the first tax year following the year proceeds become receivable for the former property; and
    • 12 months after the end of the year those proceeds become receivable.
  • To qualify as a former business property, the property must be used by the taxpayer or a person related to the taxpayer primarily for the purpose of gaining or producing income from a business. A rental property does not qualify as a former business property unless it was rented in the year of disposition to a related person who used the property principally for gaining or producing business income.
  • The replacement property must be acquired to replace the former property, have the same or similar use as the former property and, if the former property was used for the purpose of gaining or producing income from a business, the replacement property must be acquired for the purpose of producing income from the same or a similar business.
  • A taxpayer must make a valid election to use the replacement property rules.
Reporting requirements

A taxpayer is required to report any recaptured CCA or taxable capital gain arising from the disposition of a former property in the year of disposition. However, where a replacement property is acquired in a subsequent tax year and within specified time limits, the taxpayer may request a reassessment of the income tax return for the year of disposition of the former property. This will generate a refund in respect of the income tax paid on income arising on the disposition.

Election to use the replacement property rules

A taxpayer must elect to have the replacement property rules apply. The election should be made as follows:

  • If the disposition and replacement take place in the same year, the taxpayer’s calculation (in the income tax return for that year) of the recaptured CCA or the capital gain by virtue of subsection 44(1) will be considered to constitute an election.
  • If the property is not replaced until a subsequent year, the election should take the form of a letter attached to the income tax return for the year the replacement property is acquired. The letter should include a description of the replacement property and the former property, a request for an adjustment to the recapture of capital cost or the taxable capital gain reported, and a calculation of the revised recapture or taxable capital gain.
  • If the replacement property is acquired prior to the year of disposition of the property, the election should take the form of a letter attached to the income tax return for the year in which the replacement property is acquired. The letter should include descriptions of the replacement property and the property that is to be replaced. If the taxpayer late-files such an election, it will be accepted if it is filed in the income tax return for the year in which the former property is disposed of, provided it is evident that the new property qualifies as a replacement property.

The calculation of the tax deferral can be complicated.  The new capital cost of the replacement property is reduced by the capital gain of the former property that was deferred. As a result, when the replacement property is eventually sold in the future, the now lower capital cost is used in determining the capital gain to be realized.  The amount eligible for capital cost allowance purposes will also be reduced, as it is affected by both the deferred capital gain and the deferred recapture.  We at DJB are here to help you work through this complicated tax filing to give you the best tax filing position.

CPP ENHANCEMENTS: Higher Contributions and Higher Benefits

Posted on by Edixon

In 2019, the government commenced a two-part enhancement to the Canada Pension Plan (CPP), with full implementation to be completed in 2025. Phase 1 occurred from 2019-2023; phase 2 will occur from 2024-2025. Overall, the changes will require larger contributions but also will provide larger benefits.

Pre-CPP enhancement

CPP contributions for employees and employers under the pre-enhancement CPP model (referred to as base contributions) were calculated as 4.95% of the employee’s pensionable earnings to a maximum of the year’s maximum pensionable earnings (YMPE; for 2023, $66,600), less the $3,500 basic exemption.

Phase 1

Referred to as the first enhanced CPP contributions, these are calculated as a percentage of the YMPE, less the $3,500 basic exemption, with the contribution rate for employees and employers gradually increasing from 4.95% in 2019 until it reached 5.95% in 2023.

Phase 2

Referred to as second enhanced CPP contributions, the contribution rate for employees and employers will be 4% but will only be applied to earnings above YMPE up to the yearly additional maximum pensionable earnings (YAMPE) ceiling. For 2024, YAMPE will be set at a number 7% higher than YMPE, estimated at $72,400. For subsequent years, YAMPE will be 14% higher, estimated at $79,400 for 2025.

The rates discussed above apply separately to both the employer and employee. Where the individual is self-employed, they are responsible for both the employer and employee contributions.

The payout

The enhanced portion of CPP payouts will only be available to those who contributed since the enhancements were introduced in 2019. Employees that have fully participated under the enhanced contribution regime for sufficient years will receive maximum retirement benefits set at 33% of pensionable earnings, whereas benefits under the pre-enhancement regime would be 25%.

ACTION ITEM: Employers, employees, and self-employed individuals should all be aware that the costs of the CPP will continue to increase as the changes are fully phased in. Individuals should be aware that their take-home pay may be reduced, and employers should budget for these higher costs.

Reimbursements and Allowances for Remote Workers’ Travel Expenses

Posted on by Edixon

Canada Revenue Agency (CRA) considers travel between an employee’s residence and a regular place of employment (RPE) to be personal travel and not part of the employee’s office or employment duties; therefore, any reimbursement or allowance relating to this travel is a taxable benefit

In this article, authored by RSM Canada, they explore in the era of remote work, what is considered to be a RPE.

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