Different ways to legally smooth income over a number of years… Maximizing access to the lowest marginal tax rates.
Consider setting up SUPPLEMENTAL UNEMPLOYMENT BENEFIT (SUB) plans as individuals transition to traditional EI
The purpose of a SUB plan is to allow an employer to make supplemental payments to Employment Insurance (EI) benefits, without eroding those EI benefits. As payments under a registered SUB plan are not insurable earnings, EI premiums are not deducted.
In order to be eligible, SUB plans must be registered with Service Canada before their effective date. Plans must:
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identify the group of employees covered and the duration of the plan;
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cover a period of unemployment caused by one or a combination of the following:
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temporary stoppage of work,
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training,
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illness, injury or quarantine;
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require employees to apply for and be in receipt of EI benefits in order to receive payments under the plan;
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require that the combined weekly payments from the plan and the portion of the EI weekly benefit rate does not exceed 95% of the employee’s normal weekly earnings;
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require it be entirely financed by the employer;
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require that on termination all remaining assets of the plan will revert to the employer or be used for payments under the plan or for its administrative costs;
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require that written notice of any change to the plan be given to Service Canada within 30 days after the effective date of the change;
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provide that the employees have no vested right to payments under the plan except during a period of unemployment specified in the plan; and
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provide that payments in respect of guaranteed annual remuneration, deferred remuneration, or severance pay will not be reduced or increased by payments received under the plan.
A plan registered with Service Canada is not required to be a trust. It could be funded from general revenues.
Income tax treatment
For income tax purposes, a SUB plan is defined more restrictively, as it is required to be a trust to which the employer makes payments. Such plans can be registered with CRA, in which case any income earned within the SUB trust is non-taxable. Whether or not registered, receipts are taxable to the employee. Payments to a registered SUB plan are deductible to the employer if made no later than 30 days after year-end. Payments to SUB plans are not otherwise deductible, so a plan structured as a trust must be registered for employer contributions to be deductible.
A SUB plan which is not a trust would not be subject to the above rules. Deductibility of payments would follow the general rules for all expenses for income tax purposes.
Interaction with the Canada Emergency Response Benefit (CERB)
The provisions that exist under the EI system for employers to make additional payments to workers through SUB plans do not apply to employees who are receiving the CERB.
Amounts received by individuals from any employer in excess of the $1,000 threshold would create an obligation for the individuals to repay CERB they received for the same benefit period.
Employers that wish to do so may continue to submit a SUB plan to Service Canada. By registering a plan, employers can make payments to employees who are currently receiving EI regular or sickness benefits and will also be prepared should employees need EI benefits at a future time.
ACTION ITEM: As CERB is scheduled to end September 26, 2020, many individuals will now begin to rely on the EI system. The time may be right to consider setting up SUB plans as individuals transition to traditional EI.
The Court upheld the previous Tax Court decision which classified an employer-provided parking pass as a taxable benefit to an employee of an airline
In a June 10, 2019 Federal Court of Appeal case, the Court upheld the previous Tax Court decision which classified an employer-provided parking pass as a taxable benefit to an employee of an airline. However, in doing so, the Court provided differing reasons which may affect employees in all sectors.
Taxpayer loses
In the previous Tax Court case, the argument focused on whether the primary beneficiary of the pass was the employer or the employee. However, in this decision, the Federal Court of Appeal stated that the ultimate goal should be determining whether the employer conferred something of economic value on the employee. The determination of whether the employee was the primary beneficiary is useful in determining whether an economic benefit was conferred but is not the ultimate test in and of itself. Instead, the factors weighed in the primary beneficiary test may help determine that there was only incidental or no personal economic benefit, in which case it would not be a taxable benefit.
The Court also noted that the fact that the good or service provided is necessary for the discharge of employment-related activities is relevant in drawing an inference about whether it is also providing a personal benefit to employees. Basically, if the benefit provided is necessary for the employee to do their job, it is less likely personal.
Since having the employee’s car at work was not necessary to, or required by, the employer, the Court determined that the cost of parking was a personal expense and, therefore, a personal benefit.
ACTION ITEM: This case may result in a change in CRA assessing policy. Benefits not previously taxed may need to be reviewed in the upcoming year to determine if they are now taxable.
Criterion for identifying individuals who have significant control over a corporation
Over the past few years there has been much discussion at both the federal and provincial levels in respect of increased disclosure and tracking requirements of beneficial owners (those who may be considered owners even if not on title) of various types of property.
Recent changes to the Canada Business Corporations Act , which came into force on June 13, 2019, incorporated these discussions. The legislation sets out a criterion for identifying individuals who have significant control over a corporation and also requires certain corporations to keep a register of these individuals.
For these purposes an individual may have significant control over a corporation if the individual has any of the following interests or rights, or any combination of them, in respect of a significant number of shares (more than 25% of voting rights or value) of the corporation:
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the individual is the registered holder;
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the individual is the beneficial owner; or
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the individual has direct or indirect control or direction over.
A group of two or more individuals whose joint holdings meet these criteria are considered to be an individual with significant control.
Also, an individual who has any direct or indirect influence that, if exercised, would result in control in fact of the corporation, would be considered to have significant control. The legislation also provides that other prescribed situations may result in an individual having significant control.
Directors, shareholders and creditors of the corporation may, on application, be able to access the register.
Failure to comply with the requirements to maintain a registry may be subject to a $5,000 penalty. A director or corporation who “knowingly authorizes, permits or acquiesces” in not fulfilling this requirement or who provides false or misleading information in the registry may be subject to a fine of up to $200,000 and/or imprisonment of up to six months.
Similar requirements are currently being considered or enacted in respect of corporations governed by various provincial corporations acts.
ACTION ITEM: Consider whether your corporation is subject to this new requirement. If so, ensure that a proper register is being maintained.
If receiving full salary even after being injured, consider whether some of it could be classified as Worker Compensation and therefore tax-free
In a March 29, 2019 Tax Court of Canada case, the taxpayer had been injured on the job and was held eligible for workers’ compensation (WC) payments by the relevant provincial authority. However, in accordance with the collective agreement setting out his terms of employment, he was paid 100% of his salary by his employer and, therefore, did not receive payments from the provincial WC authority. He argued that the maximum provincial WC should be included in income as WC and not as employment income. The distinction is important because an offsetting deduction is available for WC such that no tax must be paid.
Taxpayer wins
The taxpayer’s eligibility for the employer-paid compensation was determined under provincial law. As such, the Court found that the maximum WC benefits, 85% of his salary, were properly considered WC and, therefore, deductible from taxable income.
ACTION ITEM: If receiving full salary even after being injured, consider whether some of it could be classified as WC and therefore tax-free, even if not received directly from the provincial WC authority.