Significant changes due to the COVID-19 pandemic, and numerous tax issues to be aware of this year
Different ways to legally smooth income over a number of years… Maximizing access to the lowest marginal tax rates.
IRS announced a new process to facilitate eligible individuals in becoming compliant with their U.S. tax obligations, in conjunction with renouncing their U.S. citizenship
On September 6, 2019, the IRS announced Relief Procedures for Certain Former Citizens, a new process to facilitate eligible individuals in becoming compliant with their U.S. tax obligations, in conjunction with renouncing their U.S. citizenship (IR-2019-151). There was no announced specified termination date; however, a closing date will be announced in the future.
Eligible individuals will be required to file U.S. tax returns, including all relevant disclosure filings, including financial account disclosures, for the year they renounce their citizenship and the five preceding years. Eligibility criteria include the following:
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Only individuals (not corporations, trusts, partnerships, estates or other entities) are eligible.
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Past non-compliance must be non-willful.
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The individual must never have filed as a U.S. citizen or resident (an FAQ question indicated that prior filing of a 1040NR return, in the belief the individual was neither a resident nor a citizen will not disqualify them).
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The individual’s net assets cannot exceed $2 million U.S. at either the date of relinquishing citizenship or the date of the submission under these procedures, and their average net income tax for the five years preceding loss of citizenship cannot exceed an inflation-adjusted amount ($168,000 U.S. for 2019).
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Taxes payable for the six years required to be filed cannot exceed $25,000 in aggregate after foreign tax credits and before penalties or interest are calculated. This does not include the “exit tax” which might apply outside the procedure, but is also not reduced for any U.S. withholdings.
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The individual must have relinquished U.S. citizenship after March 18, 2010.
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The individual must obtain a Social Security Number, if they do not already have one.
Assuming these criteria are met, no penalties or interest will apply, and any taxes payable for the six years, up to the $25,000 maximum, will be waived entirely. The individual will also be exempt from the “covered expatriate” rules, which could otherwise impose additional tax and filing requirements. However, the IRS will process submissions by non-eligible individuals under the ordinary rules, potentially attracting significant interest and/or penalty charges.
ACTION ITEM: Often, children of U.S. parents are surprised to learn that they too are considered U.S. persons and subject to U.S. taxation. This program may assist them in correcting their affairs and obligations.
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.
Gathering information about taxpayers using third parties. CRA must first obtain the authorization of a judge.
CRA uses third parties to get information about other taxpayers to ensure they are complying with their tax responsibilities. This could include obtaining information from a business about its employees, customers or suppliers, without needing to list their specific names. CRA has recently announced that they intend to continue and increase the use of these information gathering methods. In order to obtain such information without providing specific names, CRA must first obtain the authorization of a judge.
In an April 24, 2019 Federal Court case, CRA applied for judicial authorization to require the taxpayer, a roofing material supplier, to provide information about residential and commercial construction contractors who had an account with them. Specifically, CRA requested:
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the customers’ legal name, business or operating name, contact person, business address, postal code, and all telephone numbers on file;
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the customers’ business numbers, if known;
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the customers’ itemized transaction details including invoice date, invoice number, total sales amount, method of payment, and address of delivery; and
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all bank account information for the customer from credit applications and/or otherwise maintained by the taxpayer.
The information was sought for customers whose total annual purchase and/or billed amount was $20,000 or greater for the period January 1, 2015 to June 30, 2018. For January 1, 2018 to June 30, 2018, information on customers whose total annual purchase and/or billed amount was $10,000 or greater was to be provided.
The Court authorized the CRA to impose the information request on the taxpayer.
ACTION ITEM: CRA has indicated that they will make increased use of this ability to obtain information from one taxpayer about their customers. Consultation should be sought immediately if such a request is received.