CONTRACTOR VS. EMPLOYEE: Agreement on Contractor Status Is Not Enough

In a May 8, 2018 Tax Court of Canada case, the Court reviewed whether the taxpayer was earning insurable and pensionable amounts related to her work at a healthcare clinic for 2015 and part of 2016 up to her termination. Classification as an employee would subject the business to various CPP, EI, and other withholdings for past and future years. Such classification could also subject the payer to other significant non-withholding liabilities such as employment benefits, wrongful dismissal, vacation pay, and sick pay.

kelowna accounting firm contractor tax

The taxpayer’s work commenced at the clinic in 2008, at which point both the taxpayer and the clinic agreed that the taxpayer was an independent contractor. She originally provided clerical services and over time took on additional duties which included acting as a chiropractic and physiotherapist assistant and a Pilates instructor. In 2016 the taxpayer realized she should have been collecting and remitting GST/HST on services performed for the clinic. The taxpayer filed a voluntary disclosure related to this GST/HST matter. At this point the taxpayer and clinic decided that the taxpayer and similar workers should become employees.

 

Taxpayer determined to be an employee

The Court stated that while it appeared that the taxpayer believed she was an independent contractor (evidenced, as an example, by her efforts regarding GST/HST collection), the objective reality must be examined. The Court looked to the following factors to find that the individual was an employee:

 

  • Control – With the exception of the Pilates sessions, the services were supervised either directly by the payer or by a referring health professional, as required by the legislation governing the services she provided. The taxpayer had no discretion as to how those services were to be offered and followed the exercise routine established by the health professional. The taxpayer was in a subordinate position. While the taxpayer had some autonomy (she was not required to be at the clinic if no appointment was booked), there were other restrictions on her. She was required to operate under the clinic brand and was not allowed to operate out of her home studio when seeing clinic patients. While there was a relaxed work culture at the clinic, the ultimate authority rested with the owner of the clinic. This indicated an employment relationship.

 

  • Ownership of Tools – The clinic owned the equipment used by the worker in addition to bearing the costs associated with the equipment, consistent with employment status.

 

  • Chance of Profit and Risk of Loss – The worker was paid an hourly rate for clerical work and a percentage of client billings for work as an assistant and Pilates instructor. Apart from the hourly rate, the Court found that the earnings were primarily a result of the success of the clinic, the flow of patients, and referrals received. Likewise, the risks borne by the taxpayer were no different than an ordinary employee whose future is tied to the success or failure of the business. While the taxpayer did pay for additional training, it was not necessarily indicative of a contractor relationship as ambitious employees may take similar steps to advance their career. The clinic was responsible for mishaps or liability issues – the taxpayer was not required to maintain any type of insurance coverage. Finally, the taxpayer was not expected to actively seek out clients as they were provided in a regular and predictable fashion through referrals by the clinic. The fact that the taxpayer could seek out clients to see at her home studio was not highly relevant. This weighed in favour of employment.

 

  • Integration of Work into Payer’s Business – While the taxpayer had a wide latitude with respect to her Pilates sessions, the Court found that this was ancillary to the health services provided by the clinic, which was fully integrated with the clinic. The Court stated that she could not have gone out and “hung out her own shingle.” The owner of the clinic conceded that to the outside world the taxpayer would have been perceived to be an employee as, for example, the taxpayer was referred to as “staff” and attended office functions and parties. This indicated employment status.

 

It appeared that the taxpayer was led to believe that she could be an independent contractor if she agreed and chose to do so. However, the Court found that the express intention of the parties as to the nature of their relationship was fundamentally flawed from the beginning and should be disregarded.

 

The Court determined that the taxpayer was an employee, earning insurable and pensionable amounts for the years in question.

 

ACTION ITEM: Even though there is a clear understanding between the worker and the payor/business that services will be performed as an independent contractor, the reality and conditions of the working relationship must be examined to determine if it truly is an independent contractor relationship. Consider reviewing terms of worker engagement with a professional.

ACTIVE BUSINESS VS. PROPERTY INCOME: Music Royalties

A private corporation’s income from a specified investment business (SIB) is not eligible for the active business tax rates (varying from 10% to 31%, depending on a number of factors, including the total earnings from operations and the province or territory in which it is located). Rather, a corporate investment tax rate of around 50% is levied (again, it varies by jurisdiction). In a July 10, 2018 Tax Court of Canada case, at issue was whether royalties received by a taxpayer for use of its musical works (used in television shows such as “Curious George”, and CBC’s “The National”) was income from an SIB. The royalties were paid from the Society of Composers, Authors and Music Publishers of Canada (SOCAN), an organization composed of approximately 150,000 members that licenses musical works for use in public performances and public telecommunications (e.g. broadcast television, radio, internet, etc.) across Canada and globally. Fees are collected and then distributed by formula to SOCAN’s members.

kelowna accounting musicians

An SIB exists where the principal purpose of the business is to derive income (including interest, dividends, rents and royalties) from the property. CRA has previously indicated that royalty income which is related to an active business carried on by the corporation in the year, or which is received by a corporation which is in the business of originating property from which royalties are received, would be considered active income and not income from an SIB. It is unclear why their position, in this case, was different.

 

Taxpayer wins

The Court determined that the principal purpose of the taxpayer’s business was to engage in the writing and recording of music for television shows. The sole shareholder, who was also the sole employee, worked an average of 30 hours per week pitching work, attending viewing sessions with producers, and writing/recording music. During the years in dispute, roughly 6,000 music tracks were composed.

 

The Court stated that income received in the form of royalties is not automatically income from an SIB. The principal purpose of the corporation’s music composing business was to derive income from the provision of services, not from property such as music copyrights. The royalties were, therefore, part of the taxpayer’s active business income, and not income from an SIB.

 

Finally, the Court addressed whether residual royalties (primarily generated from re-runs) would also be active business income. The Court opined that this income was “incident to and pertained to” the taxpayer’s active business and, therefore, was also considered active business income eligible for the active business rates.

 

ACTION ITEM: CRA frequently reviews the business purpose and activities of corporations to determine whether the small business tax rate is available. In most cases, corporate earnings from royalties, rents, interest or dividends, will not be eligible for the small business deduction, however, some opportunities may be available where the activity level is sufficiently substantial.

TAX ON SPLIT INCOME (TOSI): Can I Take a Salary Instead of a Dividend?

Dividends received by individuals from private corporations as of January 1, 2018 may be subject to taxation at top marginal tax rates (due to the new TOSI rules) if, in general, they are determined to be unreasonable. Salaries, however, are not specifically subject to these rules. As such, some may consider replacing potentially unreasonable dividends with large salaries or bonuses. This article considers some implications and risks when deciding to pay a salary instead of a dividend (or vice versa), in context of the new TOSI rules.

Kelowna accounting firm dividends salary

First, to be deductible against corporate income, salaries or bonuses must be reasonable. In the past, CRA has considered most salaries paid to heavily involved key owner-managers of active businesses reasonable regardless of size. However, it is uncertain whether CRA would continue to provide such tolerance, and what level of ownership or involvement in the business would be required. While unreasonable salaries may result in loss of deductibility, it is also possible (although not common) that CRA may take the position that they are shareholder benefits. Such reclassification could once again make the receipts subject to TOSI in the same way that dividends are. This result would generally put the shareholder in a worse position than if they had simply received dividends subject to TOSI.

As such, it is key to determine whether the dividend or salary is reasonable. Generally, if one’s labour contributions are sufficient to indicate that the salary is reasonable, it would also mean that a dividend paid instead would be reasonable (since labour is one of the factors to consider when determining dividend reasonability). However, reasonability in respect of a salary only considers labour in the period for which the salary is paid. For dividends, reasonability is considered in context of the recipient’s entire historical involvement. For example, consider a shareholder that contributes $50,000 in effort each year and receives $50,000 salary, however, last year he received a $200,000 dividend as well. A $50,000 salary in the current year would be reasonable, however, a $50,000 dividend may not be since the individual had already received total compensation far in excess of contributions. Individuals that have received large amounts in previous years may be more inclined to receive salaries.

In addition, one may also prefer to receive salaries in order to avoid the uncertainties and complication related to larger and more complex dividend reasonability calculations. On the other hand, credit for risk borne, capital provided and other contributions can increase the quantum that may be paid as a reasonable dividend, but would not increase the amount that would be a reasonable salary.

 

Beyond TOSI, there are a number of other considerations to weigh. Some of them include:

  • Salaries require T4 filings and payroll remittances such as CPP.
  • Salaries generate RRSP contribution room.
  • Salaries could trigger a health payroll tax for the employer (Manitoba, Newfoundland and Labrador, Ontario, Quebec, and starting in 2019, British Columbia) or employee (Northwest Territories and Nunavut).
  • When evaluating how much credit will be offered to an individual, financial institutions may give greater weight to salaries.
  • Payment of a dividend may expose the individual recipient to corporate tax liabilities.
  • The overall tax burden differs slightly between salaries and dividends. This difference changes annually. It is primarily a function of provincial jurisdiction, changes to tax rates and credits, and variances in income level.

 

In summary, various factors should be balanced when determining whether a dividend, salary, or combination of the two should be paid. Also note that dividends may receive special protection from the TOSI rules depending on a number of factors such as age, levels/types of corporate contributions, whether shares were inherited, and the type of relationship that one has with key participants in the corporation.

 

ACTION ITEM: The facts of each situation must be considered to determine whether an exception from TOSI is available, and whether remuneration in the form of dividend, salary or both is most appropriate. Consider reviewing remuneration structures with your professional advisors.

INTEREST DEDUCTIBILITY: Returns of Capital

In an April 20, 2018, Tax Court of Canada case, at issue was whether the taxpayer could deduct interest incurred in 2013, 2014 and 2015 related to $300,000 borrowed in 2007 to purchase mutual funds. From 2007-2015, the taxpayer received a return of capital from the funds, totalling $196,850 over the period. A return of capital is essentially a return of the taxpayer’s original investment. The taxpayer used some proceeds to reduce the loan principal, but the majority was used for personal purposes.

Taxpayer loses

The Court examined whether there was a sufficiently direct link between the borrowed money and its current use in respect of gaining or producing income from the investments.

As much of the returned capital was used for personal purposes, there was no longer a direct link to the income earning purpose. The Court upheld CRA’s denial of interest expense.

 

Action Item: Where funds are borrowed to invest, one may need to track any return of capital which is not reinvested to determine interest deductibility.

 

The preceding 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…contact us HERE.

DONATION RECEIPTS: How Complete Is Complete?

Charities should ensure that any donation receipts issued are fully compliant with the tax rules. Failure to do so may result in the donor being denied a charitable donation if reviewed by CRA. This could cause operational and goodwill problems for the charity.

Kelowna Charity Tax

Receipts for cash gifts must have the following:

  • a statement that it is an official receipt for income tax purposes;
  • the name and address of the charity as on file with CRA;
  • a unique serial number;
  • the registration number issued by CRA;
  • the location (city, town, municipality) where the receipt was issued;
  • the date or year the gift was received and the date the receipt was issued;
  • the full name, including middle initial, and address of the donor;
  • the amount of the gift;
  • the amount and description of any advantage received by the donor;
  • the eligible amount of the gift;
  • the signature of an individual authorized by the charity to acknowledge gifts; and
  • the name and website address of CRA.

 

Receipts for non-cash gifts must also include:

  • the date the gift was received (if not already included);
  • a brief description of the gift received by the charity; and
  • the name and address of the appraiser (if the gift was appraised).

 

The amount of a non-cash gift must be the fair market value of the gift at the time the gift was made.

 

Effective March 31, 2019, charities and qualified donees must include the new website address of CRA, www.canada.ca/charities-giving on all donation receipts. This follows the move of various old Federal Government websites to the new official www.canada.ca website.

 

Action Item: If you are involved with a charity, ensure properly completed donation receipts are being distributed.

 

The preceding 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…contact us HERE.

DIRECTORS: Can They Be Liable for Corporate Income Taxes?

A December 11, 2017, Tax Court of Canada case examined whether a taxpayer was liable for unpaid income taxes of the corporation of which he was a director. CRA’s assessment was based on the assertion that the taxpayer was a legal representative of the corporation and had distributed assets of the corporation without having first obtained a clearance certificate from CRA.

kelowna tax tips

A clearance certificate essentially confirms that the corporation has paid all amounts of tax, interest and penalties it owed to CRA at the time the certificate was issued. Legal representatives that fail to get a clearance certificate before distributing property may be liable for any unpaid amounts, up to the value of the property distributed.

Taxpayer wins

The Court examined whether the taxpayer was a legal representative and personally liable for the corporation’s unpaid taxes. The definition of a legal representative does not specifically include directors, despite naming many other persons (e.g. a receiver, a liquidator, a trustee, and an executor). While a director could become a receiver or liquidator for a corporation, carrying out the usual activities of a director, such as declaring dividends, would not result in the director being a “legal representative”.

A director could become a legal representative where:

  1. additional powers beyond directorship have been legally granted or, if not legally granted, were available and assumed;
  2. these additional powers allowed the legal representative to legally and factually dissolve (wind-up) and liquidate the corporation; and
  3. by virtue of these powers, the director liquidated the assets of the corporation.

In this case, no such legal powers had been conferred or exercised. The taxpayer was not considered to be the corporation’s legal representative. Also, the corporation had not been dissolved. As such, the taxpayer was not personally liable for unpaid corporate income taxes.

Action Item: If you are a director and legal representative of a corporation, ensure that you are properly protected if distributing assets.

 

The preceding 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…contact us HERE.

PERSONAL USE OF BUSINESS AIRCRAFT: How Big of a Taxable Benefit Is It?

A CRA communication dated March 7, 2018 provided updated commentary on taxable benefits arising from the personal use of a business aircraft.

CRA categorized the types of flights into three groups, as follows:

  • Mixed-use flights – If a shareholder or employee takes a flight which has a clear business purpose, they would not generally be subject to a taxable benefit. An individual’s purpose is a question of fact. If others take the same flight (such as a non-employee spouse or child) for purely personal purposes, the taxable benefit would be equal to the highest priced ticket available for an equivalent commercial flight available in the open market for the accompanying individual(s).
  • Full personal use flights – Where there is no business purpose to the flight, the shareholders or employees will be considered to have received a taxable benefit equal to the price of a charter on an equivalent aircraft for an equivalent flight in the open market (split amongst relevant individuals on the flight). Limited exceptions may apply where an open market charter is not a viable option.
  • Full personal use by non-arm’s length persons – For shareholders or employees who do not act at arm’s length with the business (such as an owner who controls the business), where the aircraft is used primarily for personal purposes relative to the aircraft’s total use, the taxable benefit will equal their portion of the aircraft’s operating costs plus an available-for-use amount. The available-for-use amount is computed as the original cost multiplied by the prescribed interest rate for the percentage of personal usage. The available-for-use amount on leased aircraft is based on the monthly leasing costs of the actual usage multiplied by the proportion of personal usage.

 

The preceding 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…contact us HERE.

 

2018 Tax Tips and Traps

What does 2018 have in store for us in the tax world?  As your Kelowna Chartered Accountants, we’ll explain with the following high-level summary of the most recent tax developments applicable to business owners, investors, and high net worth individuals.

TAX TICKLERS

Some quick points to consider:

  • CRA has required PayPal to disclose sales and other transaction records for Business Account Holders from January 1, 2014, to November 10, 2017.  It is expected CRA will review records for unreported sales. 
  • Employers can now provide a tax-free party or social event to employees where the cost per person is $150 or less (the limit was previously $100).
  • Although such cases are rarely successful, two taxpayers were awarded nearly $1.7 million in relation to CRA’s malicious prosecution.  

 

DIGITAL CURRENCY: Basics And Tax Implications

What is Digital Currency (DC)?

DC is essentially electronic money. It’s not available as bills or coins. Cryptocurrency is a type of DC created using computer algorithms with the most popular being bitcoin.

No single organization, such as a central bank, creates DC. DC is based on a decentralized, peer-to-peer network. The “peers” in this network are the people that take part in DC transactions, and their computers make up the network.

DC can be used to buy goods and services, whether in store or online. DC may also be bought and sold on open exchanges (similar to a stock market).

DC is often created through a complex process known as “mining” and then monitored by a global network of computers. About 3,600 new bitcoins are created each day, with about 16.5 million now in circulation.  Like all currencies, its value is determined by how much people are willing to buy and sell it for.

Kelowna accountant bitcoin

 

Tax – Buying and Selling Digital Currency

Gains or losses from selling or buying DCs must be reported on one’s tax return. These may be on account of capital (taxed at half rates) or ordinary income (full rate) depending on the context. It is not clear whether purchases and sales of bitcoins and other DC are subject to GST/HST.

There are no special tax rules directed specifically towards DC.  Like any property, where DC is acquired with the primary intention of selling it for a profit, any gains would be on an account of income, rather than capital.  Where property is acquired for some other purpose, such as generating ongoing income (like a rental property), the gain or loss on disposition is likely on account of capital.  

When evaluating a taxpayer’s intention, CRA will generally consider factors such as: frequency of transactions; period of ownership; knowledge of industry; time spent on the activities; financing; and the nature and quantity of the property held.

It is also important to note that some DC do not produce income (generating neither dividends like a share, nor interest like a loan).  With no plausible purpose other than resale, it becomes easier for CRA to take the position that the DC must have been purchased with the intention of selling it at a profit and therefore any gain or loss on disposition is on account of income.  This may override the other factors noted above.

That said, CRA has administratively allowed gains on certain commodity investments to be on account of capital, even though they typically appear to be on account of income based on the factors above. One condition of this policy is that all such transactions are treated the same.  In other words, one could not simply classify it to be on account of capital in “gain” years, and then income in “loss” years. It is uncertain whether CRA would adopt the same policy for sales of DC.

 

Tax – Buying and Selling Goods Using Digital Currency

Similar to sales using traditional currency, DC received in exchange for goods or services must be included in the seller’s income for tax purposes. GST/HST would also apply on the fair market value (FMV) of goods or services bought or sold for DC (subject to the same rules as traditional currency). It is not clear whether the DC itself would be subject to GST/HST, meaning that the person using DC to pay for the goods or services would be required to collect GST/HST on the value of the DC.

CRA considers DC to be a commodity rather than a currency and, therefore, transactions involving DC are considered barter transactions. This means that the sale price to be recorded in income would be determined as the FMV of the goods or services provided. If that FMV is less readily available than the FMV of the DC, the value of the DC would be used to determine the sale price.

Also, being a commodity means that these assets are not eligible to be directly held in tax preferred registered accounts (e.g. RRSPs, TFSAs, RRIFs, etc.).

 

Government Access to Records

The IRS has been successful in issuing an Order compelling one of the world’s largest bitcoin virtual currency exchanges, Coinbase, to disclose certain transaction and user information for the 2013-2015 period.  It is very possible that the CRA may obtain such types of information as well.

Action Item: Consider the tax implications (income tax and GST/HST) when investing or conducting business using digital currency.

 

FAMILY MEMBERS: Can I Pay Them a Salary?

For a small business, whether operated as a corporation, proprietorship or partnership, it is quite possible that relatives of the owners or partners may be engaged as employees. Due to the closer familial relationship between employer and employee, CRA pays particular attention to ensure that the salary is truly an eligible deduction to the business.

According to CRA, salaries to children and spouses are deductible as long as all of these conditions are met:

  • the salary is actually paid;
  • the work the family member does is necessary for earning business or professional income; and
  • the salary is reasonable when considering the family member’s age and the amount one would pay someone else.

CRA also states that T4s are required for all employees, including family members, and subject to payroll deductions, as appropriate. Payment in the form of room and board is not accepted by CRA.

CRA suggests that the average salary for an arm’s length person providing similar services under similar conditions would provide guidance as to reasonableness.

Action Item: Consider whether family members can perform services for one’s business, and what level of income is reasonable.

CORPORATE PASSIVE INVESTMENT INCOME: Proposed Changes

A new passive investment tax regime for Canadian Controlled Private Corporations (CCPCs) is proposed to apply to taxation years commencing after 2018.  Passive income may include interest, rental, royalties, dividends from portfolio investments and taxable capital gains.

Two significant changes are proposed. First, a limit to the small business deduction for CCPCs generating significant income from passive assets, and second, a new regime to stream the recovery of refundable tax to the payment of specific types of dividends (eligible versus non-eligible).

 

Access to the Small Business Deduction (SBD)

The first prong of the proposals will reduce access to the SBD for CCPCs having more than $50,000 of passive income. CCPCs with passive income in excess of the threshold will incrementally lose access to their SBD, until $150,000 of passive income is reached, at which point the entire SBD will be lost.  The prior year’s passive income will determine the current year’s SBD limit.

For purposes of these new rules, capital gains on certain types of property will be excluded from being considered passive income. These are as follows:

  • Capital gains realized on the disposition of property used principally in an active business carried on in Canada. The active business could be carried on by the owner of the asset, or by a related party. Examples include gains on the sale of the goodwill of an active business, and gains on the real estate from which the active business operates.
  • Capital gains realized on shares of another CCPC all or substantially all of whose assets are used in an active business carried on in Canada, provided the seller has a significant interest (generally over 10%) in that corporation.
  • Similarly, capital gains realized on an interest in a partnership all or substantially all of whose assets are used in an active business carried on in Canada will generally be excluded where the seller has a significant interest (generally over 10%) in the partnership.

 

Capital losses realized in a different taxation year that are applied to offset capital gains realized in the current year will not reduce passive income for these new rules.

Consistent with the existing SBD rules, the sum of passive income of all associated corporations will determine the reduced business limit available to the associated group.

The total advantage or disadvantage of earning passive investment income in a corporation, after considering personal and corporate tax costs, will depend on a number of factors such as the individual’s marginal tax rate, rate of return on the investment and the province or territory of residence.

 

Recovering Refundable Taxes

Passive income is subject to a high corporate tax rate. However, a portion of these taxes are refunded when the CCPC pays taxable dividends.

The second prong of the passive income proposals will add a new restriction. Recovering refundable taxes will generally require the CCPC to pay out non-eligible dividends. These carry a higher personal tax cost than eligible dividends.  The exception will be where refundable taxes arise from the CCPC’s receipt of eligible dividends. Dividends received from most Canadian public corporations are eligible. This portion of the refundable tax can then be recovered when the CCPC pays out eligible dividends.

Action Item: If your corporation has passive earnings in excess of $50,000 and is also earning active business income, prepare for a potentially higher corporate tax bill in the coming years.

 

REASONABLE AUTOMOBILE ALLOWANCES: GST/HST Claim

A travel allowance paid to an employee for the use of their personal vehicle for business purposes will be non-taxable if it is reasonable.  

Where such reasonable allowances are paid, an input tax credit (ITC) may be claimed by the employer.  The ITC is computed as the imputed GST/HST in the allowance, without adjustment for the fact that some costs likely did not attract GST/HST. In non-harmonized provinces/territories (such as Alberta and B.C.), the ITC would be 5/105 of the allowance.  The ITC in a harmonized province is different. For example, in Ontario, with 13% HST, the ITC would be 13/113 of the allowance. Other HST provinces would apply this formula to their respective rate.

In a November 10, 2017 Tax Court of Canada case, CRA denied ITCs of $4,935 related to motor vehicle allowances paid to employees that were also shareholders. CRA argued that the allowances were not reasonable.

 

Taxpayer wins

The allowances were based on the maximum per kilometer rates that the employer could deduct. The accounting for the allowances was complicated by the use of fuel cards provided and paid by the customer of the taxpayer. However, a detailed review of the accounting records demonstrated that:

  • detailed logbooks of business and personal driving had been maintained;
  • allowances were paid for business kilometers only, with careful tracking of personal use;
  • fuel paid by the corporate customer had been charged back to the taxpayer; and
  • the allowances paid to the shareholder-employee were effectively reduced by the customer’s fuel payments.

 

Although the accounting for the allowances was quite complicated, the Court concluded that it complied with the law and ensured the employees received reasonable allowances limited to business driving. The ITCs were, therefore, properly claimed.

Action Item: If paying reasonable allowances to employees, consider claiming an input tax credit in respect of the payment.

 

CONSTRUCTION ACTIVITIES: Reporting Obligations for Subcontractors

 

A July 17, 2017 Technical Interpretation examined the conditions which would require the filing of a T5018, Statement of Contract Payments.

Where a person or partnership primarily derives their business income from construction activities for a reporting period, a T5018 should be filed for any subcontractor payment or credit made relating to goods or services received in the course of construction activities. The reporting period may be a calendar or fiscal year but cannot be changed once selected (unless authorized by CRA).

The term “construction activities” is broadly defined. It includes, for example, the erection, excavation, installation, alteration, modification, repair, improvement, demolition, destruction, dismantling or removal of all or any part of a building, structure, surface or sub-surface construction, or any similar property. Such activities are considered to be those normally associated with the on-site fabrication and erection of buildings, roads, bridges, parking lots, driveways, etc. which are intended to be permanently affixed to the land on which they are built.

It is a question of fact as to whether a particular activity is a construction activity, and whether the business income for the reporting period is derived primarily from such activity. If a T5018 is not required, consideration should be given to the requirement of a T4A, Statement of Pension, Retirement, Annuity, and Other Income.

CRA has also noted that there are businesses that have a significant amount of construction done for them or by them, but the activity is not their principal business. For example, a natural gas company may do a large amount of construction to install pipelines, however, its principal business is gas transmission, not constructing pipelines. It would not be required to file T5018s.

Penalties are levied on the payer when T5018s are not timely filed.  Penalties range from $100 to $7,500, depending on the number of T5018s and the number of days they are late.

Action Item: If you are in the construction industry, ensure you are filing T5018s appropriately.  

 

U.S. CITIZENS: Risks of Tax Non-Compliance

Commencing January 1, 2016, the U.S. State Department was able to deny or revoke passports to U.S. citizens having a “seriously delinquent tax debt” or no Social Security Number associated with their passport. A “seriously delinquent tax debt” is one where the taxpayer owed more than $51,000, after January 1, 2018 (indexed going forward), in tax, interest and penalties.

An Alert on the IRS website recently noted that commencing January 2018 the IRS will begin certifying tax debts to the State Department. After receiving certification from the IRS, the State Department will not generally issue a passport.

In addition to passport denial and revocation, several states impose non-monetary non-criminal sanctions for certain taxpayers who are sufficiently delinquent on their taxes.  For example, New York, California, Louisiana and Massachusetts may revoke driving privileges.

Action Item: If you have an outstanding U.S. tax liability, or are concerned you may not be compliant with your U.S. tax obligations, contact us to discuss options.

CRA MOBILE PHONE APPS: Tools for Individuals and Businesses

CRA provides a number of mobile phone apps that taxpayers (individuals, corporations, etc.) can use to assist with their tax obligations.

CRA BizApp – An app for small businesses owners to view and pay outstanding balances, view account transactions, view expected GST/HST returns, and view the status of filed GST/HST and corporate income tax returns.

CRA Business Tax Reminders – An app for businesses which sends pop-up notifications and/or calendar reminders for individual and business due dates for installments (individual, corporate and GST/HST), returns, and remittances (payroll and GST/HST).

MyBenefits CRA – An app for individuals which provides a quick view of an individual’s benefit and credit payment details and eligibility information.

MyCRA – An app for individuals which provides access to key tax information such as notice of assessments, tax return status, benefits and credits, and RRSP and TFSA contribution room. It also allows individuals to request a proof of income, manage online mail, update contact information, and update direct deposit information.

Action Item: Consider using one of these apps to assist with your tax filing obligations.

 

Is it time to review your tax planning? Contact us today so we can discuss what affects you, your business and family regarding the above information.

 

The legal stuff: The preceding information is for educational purposes only as it is impossible to include all situations, circumstances and exceptions in one article. A further review of your personal circumstances should be done by Kerr & Company’s qualified Kelowna chartered accountants. No individual or organization involved in either preparation or distribution of this article accepts any contractual, tortious, or any other form of liability of its contents.

 

Tips on Making the Best Choice Between RRSPs and TFSAs

For decades, the go-to tax-sheltered savings and investment vehicle has been the registered retirement savings plan. Most Canadians are aware of the importance of making regular contributions to their RRSP.

In 2009, however, a new option was introduced called the Tax-Free Savings Accounts (TFSAs). Since then, we’ve had a choice to better meet short-term and long-term financial objectives.  And it’s right about now, close to tax season when Canadians are making the choice between RRSPs and TFSAs.

Are you taking advantage of the maximum allowable contribution to both your TFSA and RRSP every year?

Doing both may not be feasible for many incomes.  There simply isn’t enough income to go around. There are also various circumstances that make contributions to one over the other clearly the better choice.

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For Canadians over the age of 71, there is no choice. All individual Canadians must collapse their RRSPs by the end of the year in which they turn 71, and no RRSP contributions can be made after that time.

However, taxpayers over the age of 71 can contribute to a TFSA.

Many of those taxpayers, however, have transferred their RRSP savings to a registered retirement income fund (RRIF) and are required to withdraw a specified percentage of funds from that RRIF each year.

If you’re in the fortunate position of having such income in excess of current cash flow needs, that excess can be contributed to a TFSA.

The RRIF withdrawals must still be included in income and taxed in the year of withdrawal but transferring the funds to a TFSA will allow them to continue compounding free of tax and no additional tax will be payable when and if the funds are withdrawn.  Additionally, withdrawals in the future from a TFSA will not affect your eligibility for Old Age Security benefits or for the federal age credit.

For those of you who are members of registered pension plans (RPPs) may also find the savings through a TFSA are better or perhaps the only option.

The maximum amount which can be contributed to an RRSP in a given year is generally 18% of the previous year’s income. However, any allowable contribution is reduced, for members of RPPs, by the amount of benefits accrued during the year under their pension plan. If the RPP is a generous one, RRSP contribution room may be minimal, or even non-existent, and a TFSA contribution is the only logical alternative.

Younger Canadians whose savings goals are more short-term typically benefit more from contributing to a TFSA.

Where savings are being accumulated for an expenditure which is likely to occur within the next five years the TFSA is clearly the better choice.

If you’ve been in that situation, you’ve likely thought about making an RRSP contribution instead to get a tax refund, and then to withdraw the funds when the planned expenditure is to be made. However, while choosing that option will provide a deduction on this year’s return, a tax refund will still have to be paid when the funds are withdrawn from the RRSP a year or two later. From a long-term point of view, using an RRSP in this way will eventually erode one’s ability to save for retirement, as RRSP contributions which are withdrawn from the plan cannot be replaced. This can really make a difference when compounding the loss over 25, 30, or more years.

The greatest tax benefit of contributing to an RRSP is when both income and tax payable is high and the intention is to withdraw those funds when both income and the rate of tax payable on that income is lower. If that’s not the case in your situation, saving through a TFSA can make more sense.

If you’re expecting your income to rise significantly within a few years, you can save some tax by contributing to a TFSA while income is still low.  This allows the funds to compound on a tax-free basis and then withdrawing the funds tax-free once the income is higher and your tax rate will have increased. At that time, the withdrawn funds can be used to make an RRSP contribution, which will be deducted against income which would be taxed at the much higher rate, generating a tax savings. And, if a need for funds should arise in the meantime, a tax-free TFSA withdrawal can always be made.

In the case of lower incomes, where there isn’t likely to be a great difference between pre- and post-retirement income, you’re better off saving through a TFSA. That’s especially the case if you’re eligible in retirement for means-tested government benefits like the Guaranteed Income Supplement or tax credits like the GST credit or age credit.

Withdrawals made from an RRSP during retirement will be included in income for purposes of determining eligibility for such benefits or credits, and lower-income taxpayers could find that an RRSP withdrawal has pushed their income to a level which reduces or eliminates their eligibility.

Withdrawals from a TFSA are not included in income for the purpose of determining eligibility for any government benefits or tax credits, so saving through a TFSA will ensure that benefits are not at risk.

If you’re torn between RRSPs and TFSAs, we encourage you to give us a call.  By looking at your specific goals and situation, Kerr and Company, Kelowna accounting services, can determine the best strategy.  Contact us today.

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Benefit from Pension Income Splitting

Have you heard of tax planning opportunities that offer the possibility of saving hundreds, or thousands of dollars in tax?  All while increasing eligibility for government benefits with no advance planning, no expenditure of funds or time? This actually describes pension income splitting, a strategy to allow married taxpayers over the age of 65 (or in some cases, 60) to minimize their tax bill by dividing their pension incomes.  Kerr & Company provides Kelowna tax services so that you, too, can benefit from this unique tax planning strategy.

Because of very little coverage in the media, many Canadians have never heard of it.  We’re so focused on the messages regarding contributions to registered retirement savings plans (RRSPs) or tax-free savings accounts (TFSAs).  Pension income splitting is rarely mentioned and gets put on the back burner. It is one of the very few tax planning strategies that solely benefits the taxpayer.

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If you take a look at the information provided with your annual tax return form issued by the Canada Revenue Agency (CRA), you’ll notice that the benefits of pension income splitting aren’t at the forefront. Plus, the form needed to start a pension income splitting strategy isn’t included in the General Income Tax Return package.  You must order it from the CRA or download it from the website.

The Income Tax and Benefit Guide issued by the CRA for 2017 returns does mention the pension income splitting option but it only explains the filing process with no listed of benefits. So, unless you’re knowledgeable in this area, it’s very unlikely that you will proceed which means opportunities and money are being left on the table which could significantly reduce tax bills.

Dividing income between spouses lowers tax bills because Canada’s tax system is a “progressive” tax system, in which the rate of tax levied as income rises.

To explain, the first $46,000 of 2017 taxable income attracts a combined federal-provincial rate of around 25%. The next $46,000 of such income, however, is taxed at a rate of just under 35%. When taxable income exceeds $142,000, the tax rate can be 50%.  Although every provincial rate varies, nearly all provinces and territories increase the tax rate as income increases.  Alberta is an exception with a flat 10% tax rate on all individual taxable income; the federal rates increase as income rises as with other provinces and territories.

Dividing income allows a greater proportion of that income to be taxed at lower rates and the total tax payable will be reduced.  Because of this, our tax laws include a set of rules known as the “attribution rules”.  They prevent strategies to divide income in this way. Pension income splitting is a government-sanctioned exception to those attribution rules.

When it comes to pension income splitting, taxpayers who receive private pension income during the year are entitled to allocate up to half that income with a spouse for tax purposes.  A private pension income includes any pension received from a former employer, payments from an annuity, an RRSP, or a registered retirement income fund (RRIF) and the recipient is over the age of 65.

Government source pensions, like payments from the Canada Pension Plan, Quebec Pension Plan, or Old Age Security payments do not qualify for pension income splitting.

Taxpayers who wish to split eligible pension income received by either of them must each file Form T1032(E)17, Joint Election to Split Pension Income for 2017, with their annual tax return. That form can be found on the CRA website, ordered by calling 1-800-959 8281 or Kerr & Company, Kelowna tax services, can assist you.

Since this strategy affects both spouses’ income and their tax liability, the election must be made and the form filed by both spouses. The spouse who actually receives the pension income must deduct from their income what was allocated to his or her spouse. That deduction is taken on line 210 of their return for the year.

The spouse to whom the pension income is being allocated must add that amount to his or her income on the return, this time on line 116.

In order to provide the best Kelowna tax services, we suggest planning the pension income splitting sooner than later.  By the time spring tax season gets here, it will be too late to reduce taxes for the 2017 tax year.  However, if this is something that may benefit you and your spouse, contact us now so that we can get a tax planning strategy in place now so that you don’t miss out on opportunities in 2019.

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