Fall 2020 - Tax Tips & Traps Newsletter

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Posted by on September 16, 2020

SHARON’S CORNER

September is here and for me, that has always felt like the beginning of my “New Year”. My business cycle runs the same as our schools, September to June, with summer off to relax and recover from tax season, so albeit our summer was slightly different this year with far more work than usual resulting from the frequent government announcements, updates and changes for all individuals, families and small businesses, we are back at it and ready to go.

Just like many of you, we have spent the last few months getting our personal protection equipment (PPE) in order as well as new technology and systems to ensure we can move forward efficiently and effectively in this new world of ours. Happy to say our office has finally re-opened, however we are still being extra cautious where paperless delivery of documents or zoom are not options for some clients. Please check out our safety plan for more details.

With many more changes likely to come (financial statement standards too), know that we are posting regularly to our social media channels and blogging, in cases where more than 140 characters are needed. Our checklists have recently been re-vamped, refreshed and a few new ones added too.

Have a question? Email or call us. And remember to check out our blogs, checklists and social media pages for more information on all things small business, tax, accounting and the Tri-Cities community.

NORAH’S QUESTION

“What is the difference between the wage subsidies, CEWS and TWS?”

TWS is a 10% Temporary Wage Subsidy which applies to wages paid for eligible employees between March 18 to June 19, 2020. You must have a payroll (RP) account as of March 18, 2020 and be an individual, sole proprietor, non-profit, registered charity or Canadian-controlled private corporation (CCPC). When TWS was originally announced, employers were allowed to reduce their payroll remittance by 10% of eligible gross wages, up to a maximum of $1,375 per employee and a maximum of $25,000 per company. At the time, there was no extra documentation needed. However, you are now required to file Form PD27 and provide all payroll details for each period (i.e. number of employees, gross wages, CPP, EI, Income Tax, etc.). This is MANDATORY whether you claimed it or not and have applied for the CEWS. It has also been suggested that the TWS will be reported on each employee's T4 so keeping records is extremely important.

CEWS is the Canada Emergency Wage Subsidy which has evolved over time, since originally announced on March 27, 2020. There are currently 9 eligible 4-week periods which began March 15, 2020. Eligibility varies between periods (P) and is based on revenue decline; i.e. P 1 requires a minimum 15% decline, P 2-4 requires a minimum 30% decline and P 5-9 require anything over 0% decline. As of P 5, the 75% wage subsidy (originally to a max of $847/week per employee) has also increased, upwards of 85%, under certain revenue declines. These calculations are complicated. The revenue decline percentages vary with periods. The various elections (i.e. cash vs. accrual) also change between some of the periods.

Both wage subsidy programs are different and as an employer, you may be eligible for one and/or both. If you are filing any of these yourself, make sure you are keeping really good documentation as we know CRA is auditing even more with these. If you need our help, please reach out, before 2021 when tax slips are due.

WORKING FROM HOME: Reimbursing Employees For Technology Costs

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.

REAL ESTATE PROJECTS: Watch Out!

General CRA Activity

fall-2020-02.jpgOver 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.

LOANS FOR VALUE: Income Splitting Tool

fall-2020-04.jpgSpecial 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.

OAS DEFERRAL: Undoing An Application

fall-2020-03.jpgAs 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.fall-2020-05.jpg

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.

CHANGES TO PAYROLL: Correcting Errors

What if I make a clerical, administrative, or system error resulting in a salary overpayment? On April 6, 2020, CRA released the updated guide RC4120 Employers’ Guide – Filing the T4 slip and Summary providing detailed instructions on these such issues.

The employer may elect to have the employee repay the net amount (gross amount less CPP, EI and income tax withheld) overpaid due to the error, provided they meet the following criteria:

  • no later than three years after the end of the year in which the salary was overpaid
    • the employer made the election in the prescribed manner (see below),
    • the employee repaid or arranged to repay the net amount of the overpayment;
  • the employer did not issue a T4 slip with the employee’s correct earnings (that is, with the salary overpayment removed); and
  • the employer’s business is actively operating.

This election would reduce the cashflow burden the employee would otherwise bear.

fall-2020-08.jpgThe Election

The election is made by either excluding the salary overpayment from an original T4 slip or amending a T4 slip to remove the overpayment and reducing the corresponding income tax deducted, along with CPP and EI withheld and remitted.

Repayment After The T4 Is Issued

If the employee repays or arranges to repay after the original T4 is issued, the employer must amend the T4 slip appropriately, including any relevant CPP and EI adjustments.

After CRA receives and processes the amended T4, it will credit the income tax, CPP and EI remitted on the salary overpayment made in error (including the employer’s share of CPP contributions and EI premiums) to the employer’s payroll program account. The employer can then reduce the next payroll remittance by the credited amount.

Finally, CRA also provided guidance and examples for situations in which the employer does not elect to have the net amount repaid, and the gross amount is repaid instead.

UNREASONABLE ALLOWANCES: Fully Or Partially 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

fall-2020-07.jpg 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.

TEMPORARY LAY-OFFS: Supplemental Unemployment Benefit (SUB) Plans

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:

  • identify the group of employees covered and the duration of the plan;
  • cover a period of unemployment caused by one or a combination of the following: temporary stoppage of work, training, illness, injury or quarantine;
  • require employees to apply for and be in receipt of EI benefits in order to receive payments under the plan;
  • 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;
  • require it be entirely financed by the employer;
  • 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;
  • 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;
  • provide that the employees have no vested right to payments under the plan except during a period of unemployment specified in the plan; and
  • 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.

TAX TICKLERS

  • To estimate your CEWS entitlement, consider using the CEWS 2.0 Estimator or CRA’s more complete calculator.
  • The Government has launched a webpage 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.

***This publication is a high-level summary of the most recent tax developments applicable to business owners, investors, and high net worth individuals. This information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional. No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents. For any questions…give us a call.