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EMPLOYMENT INSURANCE (EI): Voluntary Departure

September 29, 2020 0 By Xienan Shaw

Voluntary departure for CERB purposes has the same meaning as for EI

EMPLOYMENT INSURANCE (EI): Voluntary Departure

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.

UNREASONABLE ALLOWANCES: Taxable fully or Partially?

September 22, 2020 0 By Xienan Shaw

Ensure that allowances paid are reasonable. If they are determined unreasonable, the full allowance could be taxable

UNREASONABLE ALLOWANCESb Taxable fully or Partially?

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.

OAS DEFERRAL: Undoing an Application

September 15, 2020 0 By Xienan Shaw

Before applying for OAS, make sure if your income (& expected income) will erode the benefits. If so, consider deferring application.

OAS DEFERRAL: Undoing an 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.

LOANS FOR VALUE: Income Splitting Tool

September 8, 2020 0 By Xienan Shaw

Consider if there is significant investment capital available, and a family member at a lower marginal tax rate

LOANS FOR VALUE: Income Splitting Tool

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.

Watch Out! Real estate sector focused by CRA

September 1, 2020 0 By Xienan Shaw

Even a fully exempt principal residence sale was required to be reported for 2016 and later years

Watch Out! Real estate sector focused by CRA

General CRA activity

Over the last few years, CRA has focused on purchases and sales within the real estate sector. They are reviewing transactions for several items, such as:

property flips on account of income;
ineligible principal residence claims;
commissions on sales;
pre-sale condo assignments; and
eligibility for the GST/HST new housing and rental rebates.

One method for reviewing such transactions is by requiring taxpayers to respond to a detailed questionnaire. The questionnaire covers items such as:

date and details of purchase and sale in sale agreements, statements of adjustments, and mortgage/financial documentation;
details of any major renovations, building permits, construction contracts, and municipal approvals;
estimates of fair market values at different key points (such as after the completion of a renovation);
real estate listing agreements; and
invoices, receipts, bank statements, driver’s licence, and other items which indicates the address of the property.

The purchaser’s intention for the use of the property is key in determining the appropriate tax treatment upon sale.

U.S. real estate

On June 25, 2020, CRA issued a solicitation for engaging one or more third-party suppliers to provide “U.S. real estate and real property data where a Canadian resident is the owner or party to the purchase, sale or transfer” back to, at a minimum, January 1, 2014 with ongoing provision of new data on a monthly basis.

CRA may consider reviewing several issues in this context, including:

missed disclosure of real estate not exclusively held for personal use;
unreported rental income, whether not reported at all or not reported accurately;
unreported real estate sales; and
inappropriate claims for the principal residence exemption on such dispositions.

ACTION ITEM: Even a fully exempt principal residence sale was required to be reported for 2016 and later years. Where disposals of real estate in 2016 or subsequent years are not reported, CRA can reassess for an unlimited period. Ensure all disposals, in Canada and abroad, are reported on the tax return.

Reimbursing Employees for Technology Costs: Working from home

August 23, 2020 0 By Xienan Shaw

Up to $500 reimbursement to employees for the personal purchase of equipment for working remotely

Reimbursing Employees for Technology Costs: Working from home

In an April 14, 2020 French Technical Interpretation, CRA was asked whether amounts paid to an employee for costs of equipment for working remotely would be a taxable benefit.

Generally, a reimbursement for a personal purchase of equipment used for working remotely would be a taxable benefit. However, CRA noted that in the context of the COVID-19 pandemic, which has required many employees to work remotely, acquisition of computer equipment may be primarily for the employer’s benefit. In that context, CRA indicated that no taxable benefit would arise for a reimbursement, supported by actual invoices or receipts, of no more than $500 towards such equipment.

CRA also stated that a non-accountable allowance would always be taxable, as no provision would provide for an exclusion of such amounts.

CRA did not comment on the consequences if the equipment were used exclusively for employment and was owned by the employer, not the employee. CRA has indicated in the past that, where equipment is property of the employer, and any personal use is incidental, there would be no taxable benefit to the employee.

ACTION ITEM: Consider providing a reimbursement to employees for the personal purchase of equipment for working remotely of up to $500.

TAX TICKLERS August 2020

August 20, 2020 0 By Xienan Shaw

A webpage, was launched to help manage one’s business during COVID-19; Canada Emergency Wage Subsidy estimator 2.0.

Tax ticlers August 2020

As of August 9, 2020, the Government has approved 813,570 Canada Emergency Wage Subsidies (CEWS), with a total value exceeding $26 billion.

To estimate your CEWS entitlement, consider using the CEWS 2.0 Estimator at WageSubsidyCalculator.ca, or CRA’s more complete calculator at https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-wage-subsidy.html.

The Government has launched a webpage, https://www.canada.ca/en/services/business/maintaining-your-business.html, to help manage one’s business during COVID-19. It provides links to government financial supports and loans, reopening guidance and rules, employee issues, industry-specific assistance, tax issues, and a support phone line.

MOBILE HOMES, RV PARKS, CAMPGROUNDS Loss of the Small Business Deduction?

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