Deducting personal expenses in a corporation can lead to a very costly bill, as in Tax Court of Canada case, July 23, 2020
Claim amount increased to $23 from $17 per meal, for a total of $69/day
Taxability of unreported income all beyond the normal reassessment period- French Court of Quebec case, June 10, 2020.
U.S. Economic Impact payments and Canada Emergency Wage Subsidy program extension announcements
Consider whether starting CPP before, after, or at age 65, would be the most advantageous
Voluntary departure for CERB purposes has the same meaning as for EI
In a June 5, 2020 Federal Court of Appeal case, the Court reviewed Service Canada’s decision to deny EI benefits on the basis that the individual left his employment voluntarily. The individual argued that although it was his decision to leave, he had just cause (which would allow him to receive EI). To have just cause, the individual would be required to establish that he had no reasonable alternative but to leave his job.
Taxpayer loses
The Court found no reviewable error in earlier decisions, noting that the individual could have:
-
discussed his concerns more thoroughly with his employer to explore possible accommodations (rather than asking on arrival at the worksite not to work the night shift);
-
requested medical leave, consulted with a doctor, or obtained a doctor’s note; or
-
continued to work until he found other employment.
The Court also noted the individual’s own statement that he could have continued working if his employer had not refused to pay him an additional $3/hour.
The Canada Emergency Response Benefit (CERB) angle
Voluntary departure from a position (quitting) also prevents participation in the CERB. Although there is uncertainty as to whether a “voluntary departure” for CERB purposes has the same meaning as for EI, they will likely be fairly similar.
ACTION ITEM: Eligibility for CERB is dependent upon whether it is the employer or employee’s decision to leave, and why that decision was made. Prior to changing employment status of workers, consult with a human resources specialist or lawyer to understand the implications for both the business and the employees.
Ensure that allowances paid are reasonable. If they are determined unreasonable, the full allowance could be taxable
In a May 15, 2020 Federal Court of Appeal case, the Court reviewed whether various allowances paid to employees of the taxpayer were subject to CPP and EI. This required determining whether the allowances were taxable. The Tax Court of Canada had previously ruled that some of the allowances were partially taxable, while others were either fully taxable or fully non-taxable. At issue in this case was whether an allowance could be partially taxable or whether being in excess of a “reasonable amount” resulted in the allowance being entirely taxable.
Taxpayer loses
After reviewing the exclusion of reasonable travel allowances from income rules, the Court concluded that the entire allowance is excluded from income if it is reasonable, or fully included in income if it is unreasonable. It cannot be partially taxable. As the allowances in question exceeded a reasonable amount, they were entirely taxable.
ACTION ITEM: It is extremely important to ensure that allowances paid are reasonable. If they are determined to be unreasonable, even if by the thinnest of margins, the full allowance could go from non-taxable to taxable. Consult with a specialist to ensure that they are comfortably reasonable.
Before applying for OAS, make sure if your income (& expected income) will erode the benefits. If so, consider deferring application.
As of July 1, 2013, where receipt of Old Age Security (OAS) is delayed, the monthly pension is increased by a factor of 0.6% for each month deferred, to a maximum increase of 36% (60 months, commencing receipt at age 70).
In a March 25, 2020 Federal Court case, the Court reviewed Service Canada’s decision to deny relief to an individual who applied to cancel his OAS pension slightly more than one year after it had commenced. The taxpayer wanted to benefit from recent changes which allowed deferral of receipt in exchange for higher future payments. His entire OAS pension for the previous year was lost due to high earnings.
Normally an individual has the ability to cancel a pension only within six months of the first payment. However, the Court looked to a special provision which allows the government to take remedial action for denied benefits resulting from erroneous advice or administrative error in the administration of the OAS Act.
Taxpayer wins
The Court found that the government was not required to demonstrate that communications advising the taxpayer of changes to the rules had been appropriately delivered. However, they were required to demonstrate that these communications had been sent, and the evidence they provided did not demonstrate their mailings went to the specific taxpayer. Therefore, the decision to deny relief was not reasonable. Further, although the taxpayer did not lose immediate benefits as a result of the early application, there were future benefits lost due to the denied deferral.
ACTION ITEM: Before applying for OAS, make sure to determine whether your income (and expected income) will erode the benefits. If so, consider deferring application to benefit from increased future OAS payments.
Consider if there is significant investment capital available, and a family member at a lower marginal tax rate
Special attribution rules prevent the shifting of income between certain related people (including a spouse, parent, grandparent, sibling, uncle or aunt). Consider the situation where high-earning Spouse A gives investments to low-earning Spouse B so that investment income can be taxed at Spouse B’s lower tax rate. The attribution rules prevent this by requiring the earnings to be taxed in the hands of the transferor, Spouse A. However, these rules do not apply where the low-income person pays fair market value for the capital received. One way to pay for such investment capital is with properly structured loans, commonly referred to as “loans for value”.
The loan must satisfy several conditions to facilitate income splitting:
-
the loan must bear interest;
-
the interest must be at a rate no lower than the CRA prescribed rate at the date the loan is advanced; and
-
the interest for every year must be paid no later than January 30 of the following year.
Missing a single interest payment invalidates the loan for the year in respect of which the interest accrued and all subsequent years. For example, interest for 2019 was required to be paid by January 30, 2020. If the interest was not paid, attribution would apply for 2019 and all subsequent years.
The borrower (commonly a trust for minor children or grandchildren) can then invest the borrowed funds and earn income. Because the borrowed funds are used to earn income, the borrower is entitled to deduct the interest incurred as a carrying charge. To the extent the return on their investments exceeds the interest, the difference will be taxable to the lower-income borrower.
This planning tool is of particular interest now as CRA’s prescribed interest rate declined to 1% (from 2%), as of July 1, 2020.
CRA has confirmed that the interest rate can be fixed at the time the loan is advanced, without further adjustment when the prescribed rate changes. However, where a pre-existing loan requires higher interest (such as the 2% rate in effect to June 30, 2020), the rate cannot be adjusted downwards as it is also locked in at initial advance. Where there is an existing loan at 2% (or higher), refinancing at the lower 1% rate would require that the borrower repay the original loan. A new loan could then be advanced at 1% interest. Where appreciated assets must be transferred or sold to repay the loan, accrued gains would need to be reported.
ACTION ITEM: Consider setting up a loan for value if there is significant investment capital available, and a family member at a lower marginal tax rate.