Major tax changes and improvement to services.
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.
A list of tax deductions or credits to consider in the upcoming tax season
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.
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.
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.
Even a fully exempt principal residence sale was required to be reported for 2016 and later years
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.
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:
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,
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.
A webpage, was launched to help manage one’s business during COVID-19; Canada Emergency Wage Subsidy estimator 2.0.
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.
Income from Rental of seasonal, storage of RVs taxed at over 50%. 20.67% may be refunded when dividends are paid.