CRA Audit

You’ve Been Chosen for a CRA audit. Now what?

You filed your return on time, but now you have received a letter from the Canada Revenue Agency (CRA) asking for more info about the return. A CRA audit. Should you be concerned? Not necessarily. As long as you have kept the information the CRA needs to review, the process can be smooth and headache-free. 

Here’s what you need to know.

How are tax returns selected for review?

As Jean-Sébastien Gosselin, founder and president of JSG CPA, points out, individuals are generally less likely to be selected for review than businesses because the amounts involved are smaller.

“However, since tax returns are completed on the basis of voluntary disclosure, the public would lose confidence if there was no system of accountability,” he says. “Everyone is presumed to know the law.”

Sylvie Branch, media relations adviser at the CRA, adds that while a small number of returns are selected at random, most are chosen “using a sophisticated system that incorporates multiple factors to identify returns with the highest potential for misstatement.” 

It’s important to note that being reviewed once doesn’t mean you won’t be reviewed again. “Although returns are selected taking into account the results of previous reviews (to avoid repeated reviews of compliant taxpayers), it is possible for a taxpayer to be selected several years in a row, depending on their compliance history and the types of claims made on their returns each year,” says Branch.

In the event of a review, it’s also important to distinguish what will be examined according to the types of returns that are likely to be selected. “Income and expenses, for example, will be examined more closely for self-employed workers, who are more targeted than employees,” says CPA Marc-André Couët, auditor, assurance manager at JSG CPA. 

In addition, certain types of deductions or credits may be reviewed as well, such as donations and medical expenses, adds FCPA Bruce Ball, vice-president of taxation at CPA Canada.

Couët agrees. “When individuals request large donations or large medical expenses, the government requests a copy of either the donation receipt or the medical bills along with the details,” he says. 

Here are other things the CRA may review for accuracy: 

  1. Capital gain related to the disposition of property for taxpayers who flip real estate.
  2. Consistent losses from self-employment income to check if there is a reasonable expectation of profit in the future, for those who report losses year after year.
  3. Vehicle expenses for business purposes for those who claim 100 per cent of their expenses, to make sure their numbers are accurate.
  4. If an income-splitting system is in place, salary reasonability will be checked for those who have family members as employees, to ensure that the expense is fair and reasonable in relation to the workload and compared to other employees.

“There is also a good chance that CRA will ask for proof if [you are] claiming a foreign tax credit,” adds Ball.

How do reviews differ from audits?

Although there are several types of reviews, the process itself is simple and fast in comparison to an audit. 

The review process starts when the taxpayer receives a letter from the CRA explaining that they want to verify the accuracy of certain information, such as the amounts entered, says Gosselin. “Even if tax filing was done perfectly,” adds Ball, “there will still be spot checks to make sure the deduction or credit actually exists. In some cases, the CRA just wants a copy of the receipts, like donations.”

“However, in some cases,” adds Gosselin, “taxpayers who file their own returns may not have all the information to know which expenses are deductible and how to calculate them.” 

Branch notes that these errors occur mainly in the initial claims for certain new deductions, such as medical expenses, tuition fees and moving expenses. There are many reasons why adjustments may be made, particularly since the CRA has to comply with a variety of tax laws (such as the Income Tax Act and Income Tax Regulations, as well as provincial and territorial income tax laws), which require that it request supporting documents.

While a review might be completed in a few weeks, an audit can take months or even years, says Gosselin. “Audits are initiated when something comes to the CRA’s attention, such as an indication of fraud, a serious omission or a major error,” he says.

One major red flag that can trigger an audit, says Gosselin, is a mismatch between a taxpayer’s declared income and their lifestyle – especially if they are also a shareholder of a company and there is a discrepancy between their return and that of the company.

If that is the case, the taxpayer can possibly be asked to provide almost all of the information used to complete the return. From there, the CRA can keep requesting additional supporting documents until it is satisfied that it has everything it needs to issue a new notice of assessment.

“In rare cases, the CRA may even request access to all of a person’s bank accounts, as well as those of spouses and children,” says Gosselin.

Of course, in some cases, there may be a perfectly reasonable explanation for some incongruities. “A person might have won the lottery, received a gift or borrowed money,” says Gosselin. This is why it is important to keep records on these items, explains Ball, in case the CRA does ask.

“While an audit often creates stress for the taxpayer, remember that the auditor is a human being who’s trying to understand the financial story of the years passed,” says Gosselin. “Communication is key: you need to understand what made them think something was wrong and cooperate.” 

What can you do to prepare for a CRA audit?

The CRA has up to three years (sometimes up to four years) from the date of the original notice of assessment to carry out a review but, in the case of suspected fraud or misrepresentation, there is no limitation period.

“That’s why keeping a digital record of everything, especially a justification of every single deposit in your personal bank account, is a good idea,” stresses Gosselin. “Without proof, the situation can become complicated, and a harmless transaction can be difficult to trace and justify years later.”

Gosselin adds that the same principle applies when you lend money to a loved one. “You are allowed to do this, and without charging interest, but how will the auditor know whether the repayments are income?” he says. His advice: “Keep tangible records of all unusual banking transactions, both deposits and withdrawals, for at least seven years.”

How will the pandemic affect the CRA audit process?

Just as the pandemic has changed so many taxpayers’ ways of working, so will it bring its own set of complications for staff conducting CRA audits this year. In lieu of on-site visits for comprehensive audits, explains Branch, the CRA is encouraging virtual meetings. “In-person meetings are reserved for exceptional circumstances,” she says. 

“The CRA will still presumably send letters for reviews,” says Ball. 

Also, since a number of new programs were introduced this year, it remains to be seen how CRA audits will deal with certain issues, like for those who have claimed home office expenses. As Gosselin points out, “We don’t know how far they will go in verifying that those who received it were entitled to it,” he says.

Given that it’s impossible to answer these questions for the time being, it’s probably best to adopt a wait-and-see attitude, just as Gosselin intends to do.

In the meantime, you can help yourself by checking your records and backup. That way, you’ll be prepared no matter what kinds of questions come your way. 

Disclaimer:

Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Canada trade cargo container hanging against dark clouds.

The tax consequences of leaving Canada permanently

From assets and property to personal ties, several factors affect the tax consequences of leaving Canada. As a result, detailed planning needs to be done in advance of the move.

About three million Canadians currently live outside the country. And many others contemplate making a move at some point in their lives – whether it be to pursue a professional opportunity, return to their home country or relax in a warmer climate.

But if you are thinking of moving abroad, it’s important to remember that the process can be complicated. Among other things, you will need to plan for the tax consequences, especially if you expect the move to be permanent. There are many rules to consider – the key considerations below are just a few of them – which is why professional advice is important.

“Having a CPA oversee the process helps avoid unpleasant surprises,” says Virginie Vargel, a CPA who specializes in expatriate and non-resident taxation.

Here are four factors to think about:

Determining your residency status

To determine whether you will need to continue paying tax in Canada, the Government will first check whether you have retained significant ties here, says CPA Annie Poitras, lead senior manager, U.S. and international taxation at Raymond Chabot Grant Thornton. Such ties, she says, might include owning a house in Canada or having a spouse or common-law partner and/or dependents who are minors still residing in the country. The Government will also consider secondary ties, such as owning personal property, bank accounts, or a valid driver’s licence.

“These ties are acceptable as long as they can be justified,” says Poitras. “You can keep your driver’s licence if it is valid in the host country and you can continue to own a residence that you are renting out if conditions are met, such as having a written lease. The Canada Revenue Agency starts to ask more questions, however, if you leave the country but retain a vacant home or if you have dependents, spouse or common-law partner in Canada. Residency status is based on facts and on the taxpayer’s firm intention to leave the country.”

If the Government determines that you are no longer a resident, you will be considered an emigrant and subject to certain restrictions. For example, you will no longer be able to make regular contributions to a tax-free savings account (TFSA). However, as the CRA website explains, “Any withdrawals made during the period that you were a non-resident will be added back to your TFSA contribution room in the following year, but will only be available if you re-establish your Canadian residency status for tax purposes”.

You will still be able to contribute to a registered retirement savings plan (RRSP) if you have unused contributions but it may not make sense to do so. “This is why it is so important to carefully consider the date on which you give up your Canadian residency,” says Poitras.

Avoiding double tax

Switching to non-resident status is crucial because every host country has its own tax rules and, in many cases, an agreement with Canada.

“The goal,” Poitras points out, “is to avoid being taxed twice.” For example, in Canada, the tax rate on an RRSP withdrawal is generally 25 per cent for non-residents. However, depending on tax agreements, this rate could be lowered to 15 per cent depending on how amounts are withdrawn.”

“Whether there is double tax or not depends on whether the foreign country will tax the RRSP,” says FCPA Bruce Ball, vice-president of taxation at CPA Canada. “If the rate is 25 per cent but no tax is paid in the new country of residence, there is no double tax. Also, one may be able to claim a foreign tax credit in the other country based on the Canadian tax depending on the tax rules of that country.

Paying a departure tax

The moment a resident leaves Canada, the CRA deems that they have disposed of certain kinds of property at fair market value and immediately reacquired it at the same price. This is known as a deemed disposition and you may have to report a taxable capital gain that is subject to tax (also known as departure tax). But, that doesn’t mean an individual leaving should rush to liquidate everything.

For example, says Poitras, “furniture and vehicles, are excluded from tax, as are registered plans (such as RRSPs or TFSAs) and CPP and QPP benefit entitlements, because they will be taxed at a later date.” Same for foreign assets, such as, property that generate taxable capital gains, as long as the person has been a resident for 60 months or less during the 10-year period prior to emigration and held the property when residency was established.

Also, there is no immediate need to sell your home, as the deemed disposition does not apply to real property. “There is no deemed capital gain on a principal residence,” Vargel explains. “The property only becomes taxable when you leave the country and it is sold.” At that time, recognition is given to the principal residence designations which apply.

That said, leaving a vacant home can be an issue for residency determination, so it’s common for people to sell or rent the home, says Ball. If the property is rented, there may be a deemed disposition due to a change in use and other issues may arise, such as withholding tax on rental income. Hence, getting professional advice is important.

If the house is sold once the owner has become a non-resident, the vendor must notify the CRA about the disposition or proposed disposition by completing Form T2062 and send the payment or acceptable security to cover the resulting tax payable.

Also, any balance owed under the Home Buyers’ Plan must be repaid before you leave, otherwise it will be included in taxable income, says Vargel.

Poitras adds that it’s also important to communicate your change in status to any financial institutions where you have accounts generating passive income, such as interest or dividends. Also, provide a foreign address.

Final tax return and tax deferral

Since it will include your departure date, the change will be confirmed when you file a final tax return by April 30 of the year following the one you left Canada.

“The tax authorities treat this final tax return much like they would treat the tax return of a deceased person,” says Poitras. “It’s the last chance for the CRA to tax the income and property of a Canadian resident, including foreign assets, such as a condo in Florida.”

When filing their return, the resident can choose to defer the departure tax to be paid on income relating to the deemed disposition of property, says Poitras. This can include some or all the assets with no pre-set time limit, even if the eventual return date to Canada has yet to be decided. “Some may defer, since they might come back,” adds Ball.

“If the person provides guarantees [such as a letter from a bank], they will not pay the tax immediately, but only when the assets that are the subject of the guarantee are actually deemed to be disposed of,” she says. “If the amount of federal tax owing on income from the deemed disposition of property is more than $16,500 ($13,777.50 for former residents of Quebec), you have to provide adequate security to the CRA to cover the amount [see Form T1244].”

“Leaving the country has significant and costly consequences from a taxation standpoint,” reminds Poitras. “However, a CPA can review everything in advance before the tax return is filed. It’s always much cheaper to hire an expert to help you plan than to pay them to fix mistakes.”

Stay updated on taxes

This article includes a general summary of detailed tax rules. Need specific tax advice? Hire a Chartered Professional Accountant (CPA) and get the best working for you. Visit the website of your provincial or regional CPA body to access a CPA directory.

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

small business accountant

How to Choose the Best Small Business Accountant

The difficulty of finding the right small business accountant can be a challenge for both start-up entrepreneurs and the proprietors of more established enterprises.

Now, in truth, it shouldn’t be too hard to find a competent and reputable local firm or individual that can carry out all the necessary functions small businesses require.

These would include bookkeeping, the maintenance of proper tax records, cost-effective inventory and invoice management, cash flow control, payrolls, and a wide variety of other “back office” tasks.

With the help of modern software packages, it’s often possible for these functions to be discharged in-house by an individual or a small team.

Small Business Accountant or Bookkeeper — Why the Difference Matters

But while these day-to-day tasks are essential to the efficient management and even the survival of any business, they’re only a small part of the value that a good small business accountant can add. As a business grows, the pressures of daily financial management grow with it, and there’s only so much that even the best software can do to help.

Caught up in the daily whirlwind of staff and inventory management, marketing, and multiple tasks involved in running a business, it’s all too easy for owners and managers to lose sight of the big picture, and to fail to make the strategic plans that will determine the long-term success of their enterprise.

The Small Business Accountant as Strategic Partner

That’s why the right choice of small business accountant is so important.

A good firm will act not just as a provider of basic services — and, in truth, they may not be the most cost-effective option for this purpose – but as a true strategic partner in the business, helping with a wide range of crucial long-term plans and decisions.  

These may include: 

Strategic tax planning   

Far more than just the timely submission of routine returns, this involves consideration of such matters as if, when, and where to incorporate, the payment of dividends, profit-taking, and perhaps planning for the eventual sale of the business.

A good small business accountant will also be aware of the personal wealth and tax implications for the business owners in such circumstances.

Financing

Debt is a very common element in the growth of businesses, but it’s often much more involved than simply asking a local bank for a loan or overdraft facility. A good small business accountant will be able to advise on all aspects of debt, such as the right kind of debt to take on — be it loans, secured or otherwise, the issue of bonds, or other types.

They will also know the best and most effective sources of financing — including how to raise new equity capital if appropriate for an incorporated business.

And, importantly, they will know exactly how, and to whom, to pitch financing applications.  

Planning for Growth

On a related point, a good accountant can also help with the preparation of the detailed business plans that must accompany any desire to expand. This includes the investigation of possible new markets, the costing of new products, and the preparation of profit and loss projections for consideration by potential finance providers. 

Goal-Setting 

Less clearly defined but just as important is the advice that a small business accountant can give regarding the long-term goals of the business owner and the key performance indicators (KPIs) that need to be monitored in their pursuit.

It may be, for example, that the owner is primarily concerned with maximizing short-term revenues from a single operation or outlet. Or they may, on the other hand, be more interested in the reinvestment of profits for the long-term expansion of the business.

Either way, a strategically-minded small business accountant will be able to help set appropriate KPIs, monitor progress against them, and modify them as changing circumstances may demand.

Acting as a Sounding Board

The life of an entrepreneur or small business owner can be a lonely, albeit exciting, one. The advice of an impartial, trusted, and knowledgeable professional can be invaluable both in helping owners to negotiate tough times and in restraining them from over-exuberant decision-making during the good.

Finding the Right Small Business Accountant

A good small business accountant should be much more than a mere “number cruncher.” They should act as a long-term financial adviser, strategic planner, mentor, and friend.

Book a Free Consultation

The decision to hire an accountant can be daunting, but it’s worth taking some time to get it right. It’s a choice that’s enormously important to the long-term success of your business. Word-of-mouth recommendations and local small business organizations can be a good starting point.

But in the end, for business owners, there is no substitute for meeting one on one with several potential firms to discuss their unique, individual needs. So, to book a free consultation, simply visit us here or call us on (604) 513-5707.

Can I do my own business tax return

Can I Do My Own Business Tax Return? Avoid These 4 Pitfalls

Properly filing taxes for a small business is one of the essential processes in maintaining a business’s financial health.

Small business owners wishing to reduce overhead and expenses may wonder – can I do my own business tax return? Yes, a small business owner can do their own tax return but there are a number of common errors that you should keep in mind if you choose to do your own taxes. Mistakes (innocent or otherwise) when filing a small business tax return independently can result in consequences/penalties from the Canada Revenue Agency (CRA).

If you’re considering doing your own business tax return, you should give yourself lots of time so that you are not under the pressure of a fast-approaching CRA deadline, and keep in mind the many potential issues that may arise from doing taxes without an accountant. We’ll discuss some of the bigger ones here.

Not Filing/Paying Taxes on Time 

Most small businesses are calendar-year filers, which means the tax year ends 12/31. April 30th is tax day, as noted by the Canadian Revenue Agency, with June 15th available for self-employed individuals filing taxes.  

The CRA assesses a late penalty and/or interest on the amount of taxes due until the balance is paid. As of the 2020 tax year, the late filing payment was 5% of the amount owed, plus 1% for each month – with a max of 12 months of fees for unpaid balances. Note, additional fines are set for late installment fees. The late fees are even higher for returns from 2017, 2018, 2019. These steep fees and penalties are the fundamental reason NOT to miss a tax deadline. CRA extensions are available for specific instances but filing an extension does not delay the required payment of those taxes due by the original deadline.

Failing To Pay Estimated Taxes As Required During the Year 

Most self-employed individuals – filing as a sole proprietor, a shareholder in a corporation, a partner, or simply self-employee – are required to make payments towards their estimated taxes if they anticipate their payable taxes will exceed the maximum allowed. Note, minimum amounts will depend on the location of the business, the type of business formation, and the work being done. The CRA offers a calculation chart to help.

An accounting professional or bookkeeper can offer guidance on the appropriate amount that needs to be sent.

Mis-Categorizing Employees As Contractors

The employee vs. contractor issue tends to generate many CRA audits – which is significant because the determined status influences how an employer must manage employment insurance and other entitlement benefit deductions. The CRA’s rules regarding the taxation of contractors can be complex. Even if the contractor works from home and uses their own equipment during the hours they set themselves, they may still be re-characterized as employees under CRA guidelines.

Mis-classifying contractors can be quite costly to a business owner who may miss CPP (Canada Pension Plan) and other required deductions. The bottom line is that independent contractors are defined by their contribution to the business, not where or when they work.

In addition to the above-noted problems created by doing your taxes incorrectly, the following issues may also cause potential problems:

  • Late/Inaccurate Wage Taxes
  • Mis-reported Home Office Deductions
  • Under-Reporting Income
  • Travel Mileage Deducted Without Documentation
  • Inaccurate Inventory Counts
  • Unreasonable Corporation Owner’s Wages Compared to Shareholder Income

Not Choosing to Use a Professional Accountant

Although it can be quite tempting to follow “the road less expensive,” the amount of work required (as an accounting novice) and the potential consequences for making a business tax filing mistake are quite substantial. This makes it worthwhile to avoid making these costly mistakes when possible.

Even if you file your taxes on time without an accountant and remit the required amount, a small business owner may miss deductions for which they qualify simply because they lack the knowledge, experience, and skill to know they exist.

Accountants may seem like an expense you can forego until you realize that tax preparation and filing are complicated and, if done incorrectly, expensive. And while filing a business tax return only needs to be done once per year, the implications for mistakes are far-reaching.

Want to discuss your tax needs with no sales pitch? Schedule a free consultation and we’d be happy to answer any questions you may have, including, can I do my own business tax return?

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Trust Returns: Enhanced Reporting Requirements

There will be new and enhanced trust reporting requirements that will apply to taxation years ending on or after December 31, 2021.

Which Trusts Are Affected?

The requirements are applicable to all express trusts that are resident in Canada. An express trust is a trust created with the settlor’s express intent, such as through a trust deed or a will.

EXCEPTIONS

There are a few trusts that are exempt from the filing requirements, these include:

  • A trust that has been in existence for less than three months,
  • A trust that holds less than $50,000 in assets throughout the taxation year (provided that their holdings are confined to deposits, government debt obligations and listed securities),
  • A trust that is a registered charity,
  • A graduated rate estate, and
  • A qualified disability trust

What Are The Reporting Requirements?

Affected trusts will be required to provide additional information about each person who is a trustee, beneficiary, and settlor. The information to be provided includes:

  • Name,
  • Address,
  • Date of birth,
  • Jurisdiction of residence,
  • Taxpayer identification number (ex. Social insurance number, business number, trust account number or a taxpayer identification number used in a foreign jurisdiction).

Trusts will be required to file an income tax return each year with the above information, even if the trust does not have any income to report.

Since some of the above information may not be readily available, we recommend that Trustees and Executors start compiling this information well in advance of the filing deadline for taxation years ending on or after December 31, 2021.

Penalties

The CRA will apply additional penalties for those who knowingly or due to gross negligence, make a false statement or omission on the trust income tax return. The penalty will also apply to those who fail to comply or fail to file an income tax return.

The additional penalties will be calculated as the greater of:

  • 5% of the total fair market value of all the property held by the trust in the year and
  • $2,500

The current existing penalty for failing to file a trust income tax return is $25 per day with a minimum of $100 and can increase up to $2,500.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Tax Considerations When Buying or Selling a Home

Buying or selling a home is often an exciting, yet stressful time for most. This article highlights several important tax considerations to be mindful of when buying or selling a home.

The Principal Residence Deduction

The principal residence deduction allows individuals and families to avoid paying taxes on the sale of their primary place of residence. Each year, an individual or family can designate one property that they own as their principal residence as long as the property is primarily used to live in by the individual/family.

SALE OF A PRINCIPAL RESIDENCE

CRA now requires individuals to report the sale of their principal residence on their personal income tax return in the year the property was sold. In many cases, the principal residence deduction eliminates any taxes that would otherwise result from the sale.  However, disclosure of the sale is still required.

To report, the taxpayer must disclose the address of the property, the year it was purchased, as well as the proceeds from the sale. Failure to report the sale of a principal residence can result in penalties and/or denial of the principal residence exemption.

Renting & Flipping Property

If a property is purchased with the primary purpose of renting or selling it, the property is not eligible for the principal residence deduction and the subsequent sale will cause a taxable capital gain or loss.

It is the original intention when the property was first acquired which is the determining factor.

Homebuyers’ Amount

The CRA provides a $5,000 tax credit to first-time homebuyers (those who did not live in another home owned either by themselves, their spouse, or common-law partner in any of the four previous years). To qualify, the property must be purchased with the intention of the individual/family occupying it as a principal residence within one year of purchase.

Homebuyers’ Plan

First-time homebuyers may also be able to withdraw up to $35,000 from their RRSPs to help purchase or build a home as long as the withdrawn amount is repaid within 15 years.

GST/HST Rebate for Newly Built Homes

If you have bought a newly built home, or have substantially renovated a house to use as your principal residence, you may qualify to receive a rebate for some of the GST/HST that you paid on the purchase through the CRA’s GST/HST new housing rebate.

By making yourself aware of potential tax planning opportunities before you buy or sell a property, you can avoid an unexpected bill from the taxman. After all, nobody likes surprises at tax time.  

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Federal Budget 2021: Sales & Excise Tax

GST New Housing Rebate

The GST New Housing Rebate entitles homebuyers to recover 36% of the GST (or the federal component of the HST) paid on the purchase of a new home priced up to $350,000. The maximum rebate is $6,300.

The GST New Housing Rebate is phased out for new homes priced between $350,000 and $450,000. There is no GST New Housing Rebate for new homes priced at $450,000 or more. In addition to these price thresholds, several other conditions must be met.

In particular, the purchaser must be acquiring the new home for use as their primary place of residence or as the primary place of residence of a relation (i.e., an individual related by blood, marriage, common-law partnership or adoption, or a former spouse or former common-law partner).

Under the current rules, if two or more individuals who are not considered relations for GST New Housing Rebate purposes buy a new home together, all of those individuals must meet this condition – otherwise none of them will be eligible for the GST New Housing Rebate.

Budget 2021 proposes to make the GST New Housing Rebate available as long as the new home is acquired for use as the primary place of residence of any one of the purchasers or relation of any one of the purchasers.

This measure would apply to agreements of purchase and sale entered into after Budget Day. For owner-built homes, the measure would apply where construction or substantial renovation of the residential complex is substantially completed after Budget Day.

Input Tax Credit (ITC) Information Requirements

Businesses can claim ITCs to recover the GST/HST that they pay for goods and services used as inputs in their commercial activities. Businesses must obtain and retain certain information in order to support their ITC claims, such as invoices or receipts.

The information requirements for these documents are graduated, with progressively more information required when the amount paid or payable in respect of a supply equals or exceeds thresholds of $30 or $150.

Budget 2021 proposes to increase these thresholds to $100 (from $30) and $500 (from $150).

In addition, under the ITC information rules, either the supplier or an intermediary (i.e., a person that causes or facilitates the making of a supply on behalf of the supplier) must provide its business name and, depending on the amount paid or payable in respect of the supply, its GST/HST registration number, on the supporting documents.

However, for the purposes of these rules, an intermediary currently does not include a billing agent (i.e., an agent that collects consideration and tax on behalf of an underlying vendor but does not otherwise cause or facilitate a supply).

Instead, the recipient of the supply must obtain the business name and registration number of the underlying vendor. Budget 2021 proposes to allow billing agents to be treated as intermediaries for purposes of the ITC information rules, removing this complexity.

These measures would come into force on the day after Budget Day.

Application of GST/HST to E-commerce

In the Fall Economic Statement 2020, the government proposed a number of changes to the GST/HST system relating to the digital economy, applicable to non-resident vendors supplying digital products or services, shipping goods from Canadian fulfillment warehouses, or facilitating short-term rental accommodation in Canada.

Under the proposals, GST/HST would be required to be collected and remitted by these entities commencing on July 1, 2021. Simplified registration and remittance frameworks would be available to these entities.

Budget 2021 proposes amendments to these proposals to take stakeholder feedback into account, including safe harbour rules to protect platform operators who reasonably relied on the information provided by a third-party supplier, and clarifying several aspects of the legislation.

Excise Duty on Vaping Products

Budget 2021 proposes to implement a tax on vaping products in 2022 through the introduction of a new excise duty framework. Feedback from industry and stakeholders on these proposals will be accepted until June 30, 2021 at: fin.vaping-taxation-vapotage.fin@canada.ca.

The new excise duty framework would be similar to existing excise duties on tobacco, wine, spirits, and cannabis products. It would apply to vaping liquids that are produced in Canada or imported and that are intended for use in a vaping device in Canada.

These liquids generally contain vegetable glycerin, as well as any combination of propylene glycol, flavouring, nicotine, or other ingredients, all of which must comply with Health Canada regulations. The new duty would apply to these vaping liquids whether or not they contain nicotine.

Cannabis-based vaping products would be explicitly exempt from this framework, as they are already subject to cannabis excise duties under the Act.

The proposed framework would impose a single flat rate duty on every 10 millilitres (ml) of vaping liquid or fraction thereof, within an immediate container (i.e., the container holding the liquid itself).

This rate could be in the order of $1.00 per 10 ml or fraction thereof. The last federal licensee in the supply chain who packaged the vaping product for final retail sale, including vape shops holding an excise licence, as applicable, would be liable to pay the applicable excise duty.

Registration and licensing would not be required for individuals who mix vaping liquids strictly for their own personal consumption.

Tax on Select Luxury Goods

Budget 2021 proposes to introduce a tax on the retail sale of new luxury cars and personal aircraft priced over $100,000, and boats priced over $250,000, effective as of January 1, 2022.

For vehicles, aircraft and boats sold in Canada, the tax would apply at the point of purchase if the final sale price paid by a consumer (not including GST/HST or provincial sales tax) is above the $100,000 or $250,000 price threshold, as the case may be. Importations of vehicles, aircraft and boats would also be subject to the tax.

This tax would apply to the following;

1. LUXURY VEHICLES

New passenger vehicles are typically suitable for personal use, including coupes, sedans, station wagons, sports cars, passenger vans and minivans equipped to accommodate less than 10 passengers, SUVs, and passenger pick-up trucks.

It would not apply to motorcycles and certain off-road vehicles, such as all-terrain vehicles and snowmobiles, racing cars (i.e., vehicles that are not street legal and are owned solely for on-track or off-road racing); and motor homes (commonly known as recreational vehicles, or RVs) that are designed to provide temporary living, sleeping, or eating accommodation for travel, vacation, seasonal camping, or recreational use.

Off-road, construction and farm vehicles would fall outside the scope of the tax. Similarly, certain commercial (e.g., heavy-duty vehicles such as some trucks and cargo vans) and public sector (such as buses, police cars and ambulances) vehicles, as well as hearses, would not be subject to the tax.

2. AIRCRAFT

New aircraft are typically suitable for personal use, including aeroplanes, helicopters and gliders. As a general rule, it would not apply to large aircraft typically used in commercial activities, such as those equipped for the carriage of passengers and having a certified maximum carrying capacity of more than 39 passengers.

Smaller aircraft used in certain commercial (such as public transportation) and public sector (police, military and rescue aircraft, air ambulances) activities would also be excluded.

3. Boats 

New boats such as yachts, recreational motorboats and sailboats, typically suitable for personal use. Smaller personal watercraft (e.g., water scooters) and floating homes, commercial fishing vessels, ferries, and cruise ships would be excluded.

For vehicles and aircraft priced over $100,000, the amount of the tax would be the lesser of 10% of the full value of the vehicle or the aircraft, or 20% of the value above $100,000. For boats priced over $250,000, the amount of the tax would be the lesser of 10% of the full value of the boat or 20% of the value above $250,000.

The tax would generally apply at the final point of purchase of new luxury vehicles, aircraft and boats in Canada.

In the case of imports, the application would generally be either at the time of importation (in cases where there will not be a further sale of the goods in Canada) or at the time of the final point of purchase in Canada following importation.

Upon purchase or lease, the seller or lessor would be responsible for remitting the full amount of the federal tax owing, regardless of whether the good was purchased outright, financed, or leased over a period of time. Exports will not be subject to the tax.

  • GST/HST would apply to the final sale price, inclusive of the proposed tax, so
  • GST/HST would also be payable on this new tax. Further details are to be announced in the coming months.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Clearing The Confusion On Tax Instalments

You may have received an instalment reminder in the mail and are wondering whether you have to make these payments, how much they are, and when they are due. This article aims to clarify some of the confusion surrounding personal and corporate tax instalments.

What Are Instalments?

The CRA requires individuals and businesses to make monthly or quarterly instalments, towards their tax account so that taxes are received throughout the year rather than collecting all of its tax revenue in a lump sum.

Personal Tax Instalments

When you earn income without having tax withheld, or that does not have enough tax withheld for consecutive years, you may be required to make personal tax instalments. Income from self-employment, rental properties, investments, and certain pension payments may not have tax withheld at the source and can result in an unexpected tax bill later in the year.

Similarly, when working at more than one job your employers may not deduct the appropriate amount of tax from your paychecks. Therefore, it is important to review your sources of income regularly to check whether the appropriate amount of income tax is being withheld. If not, consider setting aside some income to cover the tax on this come tax time.  

When must you make personal tax instalments? You must make personal tax instalments if both of the following criteria are met:

  • Your net tax owing for the current tax year will be over $3,000 ($1,800 for residents of Quebec); and
  • Your net tax owing in either of the two previous tax years was over $3,000 ($1,800 for residents of Quebec)

The CRA will send out instalment reminder slips to those individuals who may be required to make instalments based on their prior year taxes owing.

If you are required to make personal tax instalments you may choose one of the following three options to calculate the amount of each instalment:

  • No calculation option – use the amounts listed on your CRA instalment reminder slip. This is the simplest method and is useful if your income, deductions, and credits are similar each year.
  • Prior-year option – use the net tax owing in the previous year and divide the figure by 4 to determine the quarterly payment amount. This option is useful if your current-year income, deductions, and credits will be similar to the prior year, but different from the second previous year.
  • Current-year option – estimate your current-year net tax owing and divide the figure by 4 to determine the quarterly payment amount. This option is best if your current-year income, deductions, and credits will be significantly different than in the last two years.

If you choose to calculate your instalments using option 2 or 3 above, the CRA may charge interest if the estimated net tax owing for the year is less than the actual net tax owing for the year. If your actual net tax owing is less than the estimated amount, any excess payments can either be refunded to you or be applied to the next tax year.

Due date:

Personal tax instalments are due quarterly on March 15, June 15, September 15, and December 15. CRA will start to charge interest on each installment amount from the date it was due if not made.

Corporate Tax Instalments

Similar to individuals, a company is required to make corporate tax instalments if it has Federal taxes payable of $3,000 or more in both the current and previous tax year.  Alberta and Quebec collect corporate taxes separate from the Federal government and have similar thresholds.  Companies in their first year of operations are not required to make instalments.

There are three choices available to calculate the number of total tax instalments a company will have to pay during the year:

  • Current-year option – base the total instalment amount on the estimated current year tax payable balance.
  • Prior-year option – base the total instalment amount on the previous year tax payable balance.
  • Combination of the previous year and second previous year – base the total instalment amount on a combination of the previous two tax year’s tax payable balances. The CRA provides helpful worksheets to calculate this method.

Typically, instalments are due monthly, but some smaller private companies may qualify to make installments quarterly.  All instalments are due at the end of each month or quarter.

GST/HST Instalments

Annual GST/HST filers that have a net GST/HST balance payable over $3,000 in both the current and previous return periods are required to make quarterly instalments that are due one month after each quarter. The filer has the option to calculate each instalment payment as either:

  • 1/4 of the total estimated GST/HST tax payable for the current year; or
  • 1/4 of the GST/HST payable balance in the prior year       

Whether you are an individual or own a company, setting out some time to schedule and understand your tax reporting and payment deadlines can help to reduce the stress and confusion surrounding your taxes and help set yourself up for a smooth tax year.    If you would like to understand your installment requirement better, please contact your Avisar professional.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Avisar Charter Professionals Tax Changes 2020

Personal Tax Changes For 2020 Related to COVID-19

The past year brought changes and challenges for Canadians. Many suffered job losses due to the pandemic, and they may have received federal government support payments; others found themselves working from home for all or part of the year; others may have changed how they commuted to work so that they could minimize their exposure to the virus. Any of these scenarios has implications for your 2020 personal tax return.

Home Office Expenses Deductions For Employees

Before 2020, employees could deduct home office expenses if their home office was the “place where the individual principally performs the duties of employment,” which was interpreted to mean more than 50% of the time, or if the space was used exclusively to earn employment income and was “used on a regular and continuous basis” for meeting customers or clients. Their employer would have to complete Form T2200, Declaration of Conditions of Employment. This document certifies both of the following:

  • the approximate percentage of the employee’s duties performed at a home office
  • whether they were reimbursed for any home office expenses

The COVID-19 pandemic required many more employees to be working from home on at least a temporary basis. In response, the government introduced several changes for 2020 to simplify the process for claiming home office expenses for both employees and employers.

If you worked from home at least 50% of the time over a period of at least four consecutive weeks in 2020 due to COVID-19, you are now eligible to claim home office expenses for 2020. Previously, the determination of whether the employee worked principally out of the home office was generally calculated over the full year. This shorter qualifying period will ensure that more employees can claim the deduction.

TWO CALCULATION METHODS AVAILABLE

A temporary flat rate method is available only in 2020 and is calculated at $2 per day worked at home (part-time or full-time), to a maximum of $400 for the year. If you use this simplified method, the employer does not need to certify the conditions of your employment on the T2200 form.

This deduction can be claimed for multiple individuals in the same household if the other criteria are met. If you use the simplified method, you cannot claim any other employment expenses such as car expenses.

Alternatively, you can use the detailed method if your employer certifies the conditions of employment using Form T2200 (the original version) or T2200S (a streamlined version for those working at home due to COVID-19). You could then deduct a reasonable portion of eligible expenses that are not reimbursed by your employer.

Eligible expenses for all employees include electricity, heat, water, the utility portion of condominium fees, home internet access fees, maintenance and minor repair costs, and rent paid for the house or apartment where you live. Commissioned employees can also claim home insurance, property taxes and the lease of a cellphone, computer, tablet etc. that could reasonably relate to earning commission income.

To calculate the reasonable portion that you can deduct, you must determine the size of your workspace and divide that by the total square footage of all finished areas in your home. If the workspace has other purposes besides work, you must also prorate the expenses by the number of hours the space was used for business in a week divided by the total number of hours in the week.

For example, if you work in your 144-square-foot dining room for 50 hours per week, and the total finished space in your home is 1,500 square feet, the employment use percentage would be 144/1500 x 50/168 = 2.9%. You can thus deduct 2.9% of the eligible expenses listed above for the period during which you were working from home.

The Canada Revenue Agency (CRA) has created a calculator to help employees determine their home office expenses deduction. If you are using the detailed method, the T2200 or T2200S form does not have to be filed with your tax return, but you must keep it for your records.

OTHER CHANGES FOR EMPLOYEES

The CRA has also announced additional flexibility in applying rules for determining taxable benefits for employees. An employee will not be considered to have received a taxable benefit if their employer reimburses them for up to $500, supported by receipts, for computer or office equipment to enable the employee to work from home.

The CRA’s longstanding position has been that travel from your home to, and parking at, an employer’s place of business is normally considered to be a personal expense, and therefore any reimbursement by the employer would be a taxable benefit to you.

However, the CRA announced that where an employee incurred commuting expenses over and above their usual commuting costs as a result of the pandemic, they will not consider it a taxable benefit if the employer reimburses or makes reasonable allowance for these expenses. This would also apply where an employee is working from home and commuted to their employer’s place of business to pick up computer or office equipment.

COVID-19 Support Payments To Individuals

Many of the federal government’s support payments for individuals during the COVID-19 must be reported as taxable income on your 2020 personal tax return. These include the:

  • Canada Emergency Response Benefit (CERB)
  • Canada Emergency Student Benefit
  • Canada Recovery Benefit
  • Canada Recovery Caregiving Benefit
  • Canada Recovery Sickness Benefit

There was some confusion about whether some self-employed individuals actually qualified for the CERB, and especially whether the $5,000 required minimum income in the 12 months before the date of application was based on gross income or net income. Any of the above payments received in 2020 must be included in taxable income in that year. If someone is later found not to be eligible to receive the CERB, they can take a deduction in the year in which they repay the funds.

The federal government announced on February 9, 2021, that self-employed individuals who applied for the CERB and would have qualified based on their gross self-employment income (instead of net self-employment income) in the prior year will not be required to repay the benefit, provided they also met all other eligibility requirements. The CRA and Service Canada will return any amounts to self‑employed individuals who may have already voluntarily repaid the CERB to the government.

To see how these changes affect you, it may be useful to meet with your Chartered Professional Accountant (CPA).

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Other Personal Tax Changes for 2020-21

In addition to the changes related to COVID-19, other significant changes will take effect that has implications to your 2020 personal tax return.

TAX FILING DEADLINE

While the deadline to file your 2019 personal tax return and pay any outstanding balance was extended in 2020, the tax filing deadline for your 2020 tax return remains April 30, 2021. Self-employed individuals and their spouses or common-law partners must file their tax returns by June 15, 2021, but any amount due must still be paid by April 30 to avoid interest charges.

On February 9, 2021, the federal government announced – that individuals with total taxable income of $75,000 or less in 2020 who received COVID‑19-related income support or employment insurance benefits in that year, will not be required to pay interest on any outstanding income tax debt for the 2020 tax year until April 30, 2022. The deadline for filing their tax returns remains unchanged.

ENHANCED BASIC PERSONAL AMOUNT

The basic personal amount (federal amount), which was $12,069 for all taxpayers in 2019, will increase in 2020, and the amount will now depend on your net income:

  • If your net income was greater than or equal to $214,368, the level at which the top 33% marginal tax bracket starts, you will be able to claim a basic personal amount of $12,298.
  • If your net income was lower than or equal to $150,473, the level at which the 29% tax bracket starts, you will be able to claim an enhanced basic personal amount of $13,229.
  • If your net income was between these two amounts, you will have a pro-rated basic personal amount.

This newly enhanced system will also apply to the maximum spousal or common-law partner amounts and the maximum amount for an eligible dependant. The graduated tax brackets and other non-refundable credit amounts (e.g., the age amount and the disability amount) increased by an inflation factor of 1.9% for 2020.

New Digital News Subscription Tax Credit

There is a new, non-refundable digital news subscription tax credit that will be available from 2020 to 2024. This tax credit is calculated at 15% of the eligible amounts paid, to a maximum of $500, to access primarily original written news in a digital format from a qualified Canadian journalism organization (QCJO).

If your subscription provides access to content in a non-digital format, or to content not from a QCJO, only the cost of a stand-alone digital subscription to the content of the QCJO is eligible for the credit; if there is no stand-alone digital subscription, one half of the amount paid is considered an eligible expense.

New Canada Training Credit (CTC)

The CTC is a new refundable tax credit introduced in 2020. If you are between 26 and 65 years old, you will accumulate $250 towards their Canada Training Credit Limit (CTCL) account in 2020 if both of the following apply to you:

  • You had at least $10,000 of “working income” in 2019.
  • Your total 2019 net income was less than or equal to $147,667 (the level at which the 29% tax bracket started that year).

Working income generally includes employment and self-employment income, research grants, scholarships, bursaries, prizes, and maternity and parental EI benefits.

WHO QUALIFIES, AND HOW TO CALCULATE YOUR CTC BALANCE

If you meet both the minimum working income limit and the maximum total income limit in subsequent years, the CTCL account will continue to accumulate over time to a maximum of $5,000; both limits will be indexed to inflation.

You can claim up to 50% of the costs of taking a course or enrolling in a training program against the balance in your account in the year you paid the tuition. The remaining 50% of the program costs may be eligible for the tuition tax credit, as the CTC uses the same eligibility criteria as are used for the tuition tax credit. You would see the balance in your CTC account for 2020 on your notice of assessment for 2019. Any unused CTCL will expire when you turn 65.

For example, Sohil was a 28-year-old Canadian resident in 2020. From 2019 to 2023, he met both the minimum working income limit and the maximum net income limit, so the balance in his notional CTCL account as reported on his 2023 notice of assessment was $1,250 (five years x $250 per year). In 2024, he enrols in a continuing education program at a local community college to upgrade his skills. The tuition he pays for the program is $2,000.

On his 2024 tax return, Sohil can claim a refundable CTC of $1,000 (50% of the $2,000 tuition), and he can claim a non-refundable tuition tax credit of 15% on the remaining $1,000 of tuition fees not eligible for the CTC. Sohil’s CTCL for 2025, assuming he meets both the working income and net income criteria for 2024, would be $500 ($1,250 opening balance – $1,000 CTC claimed in 2025 + $250 added based on his income in 2024).

Tax-Exempt Qualified Donees

Certain not-for-profit journalism organizations were allowed to register with the CRA under a new category of tax-exempt qualified donee. Canadians may claim the charitable donation tax credit for donations to these organizations. 

Other Changes for 2021

TAX BRACKETS AND NON-REFUNDABLE TAX CREDITS

The federal tax brackets and most non-refundable credit amounts will increase by 1.0% for 2021. The enhanced amounts for the basic personal amount and the maximum amounts for spouses and eligible dependants will be $13,808, in order to achieve the government’s target of $15,000 for 2023.

EMPLOYMENT INSURANCE AND CANADA PENSION PLAN

Employment Insurance premiums remain unchanged for 2021, but the maximum insurable earnings have increased from $54,600 in 2020 to $56,300.

The maximum pensionable earnings for the Canada Pension Plan have increased from $58,700 in 2020 to $61,600; the employee and employer contribution rates have also increased from 5.25% to 5.45% in 2021.

The contribution limit for Tax Free Savings Accounts remains unchanged at $6,000 for 2021.

TREATMENT OF CERTAIN STOCK OPTIONS

The 2019 federal budget proposed changes to the preferential tax treatment of stock options for employees of large, long-established, mature companies. As a result of a continuing consultation process, the federal government announced in December 2019 that the implementation of these changes would be delayed. The Fall Economic Statement released on November 30, 2020 further clarified the changes and noted that they will apply to stock options granted after June 2021.

To see how these changes affect you, it may be useful to meet with your Chartered Professional Accountant (CPA).

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.