The General Anti-Avoidance Rule: Supreme Court Rules that Company Was Illegally Acquired for Tax Avoidance The saying remains true. There are two things you cannot avoid in life: death and taxes. The Supreme Court of Canada (“SCC”) recently released a huge judgment on the case of Deans Knight Income Corp. v. Canada, reiterating one of the most important principles of Canadian tax law: the general anti-avoidance rule (“GAAR”). Background The following sections of the Income Tax Act were at issue in this case: 111(1)(a), which “allows non-capital losses to be carried back 3 years or carried forward 20 years in order to offset income in those years”; and 111(5), which has the following limiting effect on the above à “if control of the corporation has been acquired, non-capital losses from before the acquisition cannot be carried over, unless the corporation continues the same or similar business that incurred the losses”.[i] In 2008, a venture capital company called Matco entered into an investment agreement with a struggling corporation, Deans Knight Income Corporation (“DKIC”) (F.K.A. Forbes Medi-Tech) whereby the former seized control of the latter, restructured it, renamed it, and changed its business operations. Deans Knight Capital Management (“DKCM”) was then brought in by Matco to use DKIC as a corporate vehicle for a stock launch by using its Tax Attributes. The effect of these transactions was the creation of a loophole, offsetting non-capital losses as in s.111(1)(a) of the Income Tax Act, thereby gaining a substantial tax break without triggering the limitation under s.111(5). Though the transactions were highly complex, their essence and goal was tax avoidance. Corporate transactions motivated in this way are subject to certain specific rules against avoidance. S.111(5) is a prime example of a specific anti-avoidance rule. But since it was not triggered by way of a highly convoluted loophole created by DKIC, the SCC held that the GAAR kicks in to nip the avoidance in the bud. What is the GAAR? Section 245 of the Income Tax Act establishes the GAAR, which serves as a “provision of last resort” against tax avoidance, penalizing offenders who abused the system without violating any specific provision of the Act.[ii] Think of the GAAR like a superhero’s sidekick. If a taxpayer can avoid a specific anti-avoidance rule through a loophole, but nevertheless engages in abusive corporate transactions, the sidekick GAAR will swoop in to save the day. This rule is intended for situations that undermine the rationale and objective of those Income Tax Act provisions relied on by the taxpayer.[iii] The SCC reiterated the three questions courts and government officials must ask when determining whether the GAAR applies: Was there a tax benefit? Was the transaction giving rise to the benefit based on avoidance? Was this avoidance-based transaction an abuse of the taxation system? The SCC noted that in situations where there was a series of corporate transactions, the second question can be answered with a ‘yes’ if at least one of the transactions was for tax avoidance.[iv] The question of abuse at inquiry number three is where those evaluating corporate transactions look to the rationale behind the provision of the Income Tax Act avoided by the taxpayer.[v] If the taxpayer undermined the rationale of the provision, then the transaction was abusive and the GAAR was broken. How did DKMI break the GAAR? It was clear on the facts of the case that DKIC received a major tax benefit through an avoidance transaction. So, the SCC honed in on the third step of the GAAR analysis. It was through careful consideration of the “object, spirit and purpose” of s.111(5) that DKIC undermined its rationale. Justice Rowe, writing for an eight-judge majority, explained how s.111(5) vitiates a corporate taxpayer’s ability to carry over past losses only where it has undergone a shift in control and “there is a break from the corporation’s past business”.[vi] Prior to its investment agreement with Matco, DKIC was actually a scientific research company. After Matco gained control over DKIC did DKIC switch its business dealings to the financial sector. This directly opposes s.111(5), which is meant to protect the controlling party’s interest “in strengthening the corporation’s business, rather than using the corporation as a vessel for unrelated activities that would have distorted its identity”.[vii] There was no continuity between the identity of DKIC before and after the series of transactions with Matco and DKCM. DKIC became a corporate vessel for DKCM to use for “an unrelated venture planned by DKCM and selected by Matco”.[viii] Justice Rowe concluded that there was certainly abuse, because the impugned transactions “achieved the very result s.111(5) seeks to prevent” through a series of highly complex dealings which managed to avoid the relevant sections of the Income Tax Act.[ix] Summary The GAAR exists to protect the taxation system from abuse by covering up loopholes discovered by taxpayers when abiding by the terms of specific provisions found in the Income Tax Act. It is meant to be a last resort, applying only where a taxpayer successfully avoided a specific anti-avoidance rule. In DKIC v Canada, the appellant corporation engaged in a number of transactions with two other corporations, resulting in a loophole that allowed DKIC to avoid the rule under s.111(5) of the Income Tax Act. The SCC thus held that the GAAR had to apply, as this abuse undermined the rationale and objective of s.111(5). Corporations cannot stave off taxes, and by applying the GAAR, the SCC was able to hold DKIC accountable for its nefarious operations. If you are considering a scheme that purports to provide you with a huge tax benefit, it is always worth seeking the advice of legal counsel. If you are later on found to have violated the GAAR, severe penalties and interest may apply. Contact a Toronto tax lawyer at DSF today to discuss your tax planning needs. This article was co-authored by law student Rachel Weitz. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” [i] Deans Knight Income Corp. v Canada, 2023 SCC 16 at para 2 [DKIC v Canada] [ii] Ibid at para 62. [iii] Ibid at para 45. [iv] Ibid at para 55. [v] Ibid at para 57. [vi] Ibid at para 82. [vii] Ibid at para 111. [viii] Ibid at para 127. [ix] Ibid at para 140. By AlyssaBlog, TaxOctober 2, 2023May 27, 2024
A Tax Trap for The Unwary! In its April 2021 budget the Trudeau government proposed a new tax on vacant residential properties owned by nonresidents. According to the budget document “This will help to ensure that foreign, non-resident owners, who simply use Canada as a place to passively store their wealth in housing, pay their fair share.” Finance Minister Chrystia Freeland told reporters at the time “The idea here is that homes are for Canadians to live in, they are not assets for parking offshore money.” The Underused Housing Tax Act passed in June of 2022 and introduced an annual 1% tax on the targeted properties. The tax is retroactive to calendar years commencing January 1, 2022. The Canada Revenue Agency published technical details as well as the form of the return on January 31st, 2023. Unfortunately, the legislation has a far greater impact than simply taxing “foreign, non-resident owners” who are “parking offshore money” in Canadian residential real estate. Every Canadian partnership, private corporation and trust which holds title to residential properties MUST file a return each year for each property held on December 31of any calendar year. The filing deadline is the same for all entities regardless of their tax year-end date – April 30 of the subsequent calendar year. Failure to file a return results in a minimum penalty of $5,000 for individuals and $10,000 for corporations for each property. The penalty applies even if the property is not subject to the 1% tax. If the property is taxable, a percentage of the tax may be added to the penalty. In order for a corporation or partnership to file a return, it must first register for an “RU” extension to its Business Number. CRA has indicated that registration will be possible after February 6, 2023. Non-residents who are required to file a return must first obtain an Individual Tax Number from CRA. Individuals who are Canadian citizens or Permanent Residents as defined in the Immigration and Refugee Protection Act, governments, publicly listed companies, REITs, charities, co-ops, mutual funds, municipal governments, schools and some other entities are exempt from both the requirement to file a return and from the tax itself. Every Canadian private corporation, partnership and trust holding residential property on December 31 in a year is required to file a return whether or not tax is payable. A corporation is only exempt from taxation if more than 90% of its shares are held by Canadian citizens or residents. In the case of partnerships holding residential property, the exemption is only available if all of the partners are Canadian citizens or residents. Similarly, in the case of a trust, the threshold is that all of the beneficiaries are Canadian citizens or residents. Many trusts, particularly testamentary trusts – trusts created by a will – may have non-Canadian beneficiaries. Estate trustees must file a return if the estate assets included a residential property on December 31. There is a potential impact on testamentary trusts as the exemption from taxation only applies to the year in which the testator died and the subsequent year. Cottages or other residential property held through a family trust or cottage trust also trigger the filing requirement. It cannot be over-emphasized that there is no exemption from the penalties for failure to file a return for each residential property so owners of private corporations, partners in partnerships, trustees, and executors need to be vigilant if any of the assets of these entities meet the definition of residential property in the Act. Residential property is described as follows: residential property means property (other than prescribed property) that is situated in Canada and that is (a)a detached house or similar building, containing not more than three dwelling units, together with that proportion of the appurtenances to the building and the land subjacent or immediately contiguous to the building that is reasonably necessary for its use and enjoyment as a place of residence for individuals; (b)a part of a building that is a semi-detached house, rowhouse unit, residential condominium unit or other similar premises that is, or is intended to be, a separate parcel or other division of real or immovable property owned, or intended to be owned, apart from any other unit in the building together with that proportion of any common areas and other appurtenances to the building and the land subjacent or immediately contiguous to the building that is attributable to the house, unit or premises and that is reasonably necessary for its use and enjoyment as a place of residence for individuals; or (c)a prescribed property Whether or not a property is “owned” is based on whether it holds legal title or a lease, it is not based on beneficial ownership. Whether or not the tax applies depends on a number of factors set out in the Act which determine whether the property is “underused” in the year. It should be noted however that there is no exemption from taxation for properties that meet the statutory definition of residential property and are not vacant, but are used for non-residential purposes such as offices, hotels, or vacation rentals. If you are an executor trustee or partner or have an interest in a private corporation, partnership or trust that holds residential property you should be prepared to register and file a return, or obtain professional assistance in doing so. Remember that the UHTA is reported on a calendar year basis, so corporations will have to file by the end of April each year even if they have an off-calendar year-end. The filing deadline for this year is May 1st, 2023 as April 30 falls on a Sunday. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situations and needs.” By Fauzan SiddiquiBlog, TaxFebruary 6, 2023June 10, 2023
Income Tax Act and Bill C-208 What is Bill C-208 and what does it attempt to accomplish? On June 29th, 2021, Bill C-208 (“C-208”) received royal assent and amended section 84.1 and section 55 of the Income Tax Act (“ITA”). The objective of C-208 was, ostensibly, to facilitate fairness in our taxation system – previously, certain intergenerational transfers of small businesses would result in the loss of the transferor’s ability to claim the Lifetime Capital Gains Exemption (“LCGE”). The objective of C-208 is to facilitate bona fide intergenerational transfers of a business while preventing tax avoidance that undermines the equity of our tax system.[1] As a result of C-208, several anti-avoidance rules in the ITA were modified to provide specific exceptions that will facilitate the transfer of property between family members, to allow the transferor to claim the same benefits, or close to, that they would receive in an arms-length sale. Section 55 is a specific anti-avoidance rule that is meant to prevent capital gains stripping and has the effect of applying to intergenerational transfers. Amended section 55(2) allows for siblings to convert taxable capital gains into a tax-free intercorporate dividend.[2] Section 84.1 is another anti-avoidance rule designed to prevent converting corporate surplus, which would otherwise be a taxable dividend, into a tax-free return of capital by using non-arm’s length transactions. Now, section 84.1 provides tax relief to those who wish to transfer (sell) shares of their farm, fishing or small family business to their adult children or grandchildren and be treated equally to those who were passing on their businesses to an unrelated (arm’s length) corporation.[3] This means that parents or grandparents selling shares to a non-arm’s length (related) corporation say a corporation owned by a child or grandchild, can now access the LCGE to reduce or eliminate the income tax on the resulting disposition so long as they meet certain specifically enumerated criteria.[4] Concerns surrounding Bill C-208 Although C-208 is officially law, the government expressed its intentions on making changes to it due to the pitfalls and gaps surrounding it. In a press release on July 20th, 2021, the Department of Finance addressed its intention to bring forward amendments to C-208 that will clarify its vagueness and safeguard against tax avoidance loopholes, such as surplus stripping. As an aside, to put it simply, surplus stripping is when retained earnings, which are normally treated as dividends under the Act are converted to capital gains by way of “incestuous” sale between related parties to take advantage of the lower tax rate without any genuine transfer of the business actually taking place. For example, a shareholder seeking to “surplus strip” may incorporate a new holding company and sell their shares of an operating company to realize a capital gain on the sale of shares, but remain the ultimate owner of the same. This allows the shareholder to extract corporate surplus by way of capital gain and results in significant tax savings. Such behaviour is the purpose of many of the anti-avoidance rules in the Act, including section 84.1. With respect to the Department of Finance’s concerns about the vagueness of the language in, C-208, after years of languishing in committees and at various points in the legislative process, it was ultimately passed into law without an “application date”, presumably to prevent its application from the date of passing. However, according to section 5(2) and section 6(2) of the Interpretation Act, a statute or amendment that receives royal assent and does not have an application date is effectively the law and enforceable on an immediate basis. From a technical legal perspective, this means that C-208, including the “vague” language contained therein, is the law. This is a unique circumstance in that the Department of Finance has announced plans to amend the rules, but for now, the law remains as drafted. This type of grey area can lead to aggressive tax plans that could perhaps in some circumstances be “nullified” if the Department of Finance and Parliament choose to enact retroactive changes to C-208 and the ITA. Caution is thus advised for anyone considering utilizing the new rules in a “creative” manner without regard for the CRA’s stated position that there is a “scheme” against surplus stripping inherent in the ITA. The Court to this point has explicitly repudiated CRA’s statement, so some creative planning opportunities may in fact exist. Upcoming amendments to Bill C-208 Evidently, the law hopes to achieve fairness for “genuine” intergenerational transfers, yet it lacks a genuineness test. Questions pertaining to legal control, factual control and duration of control over the company remain unanswered. The Department of Finance attempted to confront the abovementioned concerns in a press release by indicating that amendments would address the following issues:[5] The requirement to transfer legal and factual control of the corporation carrying on the business from the parent to their child or grandchild The level of ownership in the corporation carrying on the business that the parent can maintain for a reasonable time after the transfer The requirements and timeline for the parent to transition their involvement in the business to the next generation The level of involvement of the child or grandchild in the business after the transfer The amendments should apply after Nov. 1, 2021, or “the date of publication of the final draft”.[6] Yet, to the date of this newsletter, the legislation has not been amended to reflect “genuine intergenerational transfers”. Overall, C-208 presents a valuable new opportunity for family businesses and is an improvement to the harsh treatment that small business owners were subject to when choosing to pass a business on to their children. There are now many tax planning opportunities for those businesses, farms or fishery owners that were historically unavailable. With the current state of the law, creative accounting mechanisms are available to gain a tax advantage through carefully planned sales. These opportunities are counterbalanced by the precariousness of C-208’s future amendments, and undoubtedly come with uncertainties. If you are interested in determining if you can take advantage of the new changes, proper legal advice is paramount before implementing any changes. If you have any questions or need more information please contact Nathaniel Hills at Nathaniel.hills@devrylaw.ca or call 416-446-5841. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” [1] “Government of Canada clarifies taxation for intergenerational transfers of small business shares” (July 19 2021), online: The Department of Finance [2] Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 55 [3] The Department of Finance, supra note 1. [4] Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), s. 84.1(2) [5]The Department of Finance, supra note 1. [6] Ibid. By Fauzan SiddiquiBlog, TaxJune 14, 2022June 14, 2022
Tax Court Decision Bank of Nova Scotia v The Queen, 2021 TCC 70: Interest Accrues Until the Date of Post-Audit Loss Carryback Request Takeaway: Tax Court finds that interest accrues until the actual date of loss carryback request: Case Summary: Bank of Nova Scotia v The Queen, 2021 TCC 70 In this recent decision, the Tax Court of Canada was tasked with interpreting paragraph 161(7)(b) of the Income Tax Act (the Act), and the timing of loss carrybacks for the purpose of calculating interest on an outstanding tax balance. When a taxpayer makes a written request to carry back non-capital losses to offset tax payable that arose in a previous taxation year, the Court held that arrears interest accrues from the balance due date of a taxation year to which a loss is applied until the date the carryback request is made. This resulted in a significant cost for the taxpayer due to a carryback request made almost six years after the balance due date. Facts: The taxpayer was a Canadian bank, with a taxation year ending on October 31. On April 28, 2009, the taxpayer filed its 2008 income tax return and reported a non-capital loss of approximately $4 billion. During the 2013-2014 calendar years, the CRA performed an audit of one of the taxpayer’s foreign subsidiaries and reviewed income tax returns for the tax year-ends 2006 to 2010. In February of 2015, the CRA issued a proposal letter to the taxpayer in respect of the audit of the 2006 taxation year. The parties agreed to enter into a settlement agreement involving certain transfer pricing adjustments to the taxpayer’s returns for the period of 2006 to 2014, which would result in an increase to the taxpayer’s 2006 taxable income of roughly $54.9 million. In March of 2015, the taxpayer wrote back to the CRA requesting that $54 million of the non-capital losses that arose in the taxpayer’s 2008 taxation year be carried back to offset the increase of the $54.9 million of income that arose in the 2006 taxation year due to the CRA’s transfer pricing adjustments. Shortly thereafter, the CRA issued a notice of reassessment for the taxpayer’s 2006 taxation year, whereby the taxpayer’s taxable income for 2006 was increased by $54.9 million, in accordance with the agreed-upon terms. Along with this, a corresponding adjustment of the 2008 non-capital loss of $54 million was also carried back and applied to offset the increased income, however, the CRA assessed arrears interest of appropriately $7.9 million, representing interest that accumulated from 2006 to the deemed payment date of March of 2015, the date when the taxpayer requested the loss carryback. The taxpayer disagreed with the CRA’s application and calculation of arrears interest and appealed to the Tax Court. Issue: At issue was for the Court to decide the deemed payment date for the purpose of calculating arrears interest when a loss carryback is applied. Tax Court Decision: On appeal, the Tax Court held – based on the specific wording of the statute – that if an amount of tax payable for a taxation year (i.e., the 2006 taxation year) is reduced because of the carryback of losses from a later year (i.e., from the 2008 taxation year), interest on any unpaid tax for the 2006 taxation year is to be calculated as if no reduction occurred until 30 days after the latest of the following dates: The first day immediately following the loss year = November 1, 2008 The day the taxpayer’s income tax return for the loss year was filed = April 28, 2009 If the CRA reassessed the taxpayer’s tax for the year to take into account the loss deduction as a consequence of a written request, the day on which the request was made = March 12, 2015 Taxpayer’s Argument The taxpayer’s position was that interest arrears should be calculated based on the date that the taxpayer filed its income tax return for the year the loss was filed – April 28, 2009, as opposed to the date on which the loss carryback request was made – March 12, 2015. The taxpayer relied on the authority of the Methanex3 case in support of its position – that interest should be calculated based on the filing date of the loss year return. CRA’s Argument The CRA’s position was that interest should be calculated based on the date on which the taxpayer made its written request for the carryback loss – March 12, 2015. CRA argued that the existence of a loss carryback in a subsequent year does not mean that tax debt from an earlier year was never owed. CRA’s position was that the specific language of paragraph 161(7)(b) is clear in that the tax debt of an earlier year is owed until a formal loss carryback request is filed. The CRA relied on the authority of the Connaught4 case in which the Federal Court ruled that where losses are carried back and result in no tax payable, arrears interest continues to accrue on the tax that would have been payable but for the loss carryback until the formal request is made. The Federal Court in that case also found that the wording of the relevant provision was unambiguous and that the CRA’s interpretation of it did not contravene the object, spirit or purpose of the Act. Tax Court’s Analysis The trial judge disagreed with the taxpayer’s argument, stating that in a self-assessing system, the onus is on the taxpayer to ensure its taxes are paid on time. Despite the fact that the balance was discovered later during an audit, the taxpayer was liable for tax owing regardless by virtue of the operation of the Act. In other words, a formal assessment issued by CRA is not necessarily determinative of a taxpayer’s actual tax liability which is inherently a question of law. The court agreed with the CRA, in that the current instance was more similar to the Connaught case than the Methanex case, and that Methanex was either wrongly decided or its reasoning could not be applied to an appeal under the federal Income Tax Act. It should be noted that the Methanex case was decided by the Alberta Court of Appeal and related to a provincial taxing statute, not the federal Income Tax Act. In sum, the court found that the wording of paragraph 161(7)(b) was unambiguous and that Parliament’s intention was in accordance with the CRA’s position. For these reasons, the appeal was dismissed. Takeaways The end result of this case proved to be costly for the taxpayer. One could argue that this interpretation of the provision results in interest accruing on a balance that did not exist, or at the very least existed only for the period until such time as losses became available to be carried back. Related to this point, the Tax Court noted that the Tax Act contemplates retroactive or retrospective liability following a reassessment in a self-reporting system. However, if a taxpayer does not know about a tax liability until many years later, for example after an audit, it seems unfair that they should have to pay interest for the intervening years. It is worth noting that in the past, the CRA has acknowledged that the purpose of paragraph 161(7)(b) was to prevent situations where a taxpayer deliberately refused to pay taxes in a year, in anticipation of incurring losses in a subsequent year that could be carried back to eliminate the previous year’s tax liability. Where there were no indications of such tax avoidance, the CRA has in some circumstances be willing to accept that arrears interest should accrue only until the filing date of the taxpayer’s loss year tax return, and not until the day of the request for loss carryback. It would thus appear that the CRA has not been consistent over the years in its approach to applying the provision. Taxpayers who are being audited and may have carrybacks or carryforwards available to offset any potential “new” tax liabilities should consult immediately with a tax lawyer to determine what, if anything can be done to try and minimize this unexpected and often costly expense. If you have any questions, please visit our tax law page or contact Nathaniel Hills at Devry Smith Frank LLP. This blog was co-authored by Student-At-Law Amar Gill. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please contact a lawyer. Each case is unique and different and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” Sources [1] Bank of Nova Scotia v. The Queen, 2021 TCC 70 (CanLII) [2] Connaught Laboratories Ltd v. Canada, 1994 CarswellNat 1133 (FCTD). [3] Alberta (Provincial Treasurer) v. Methanex Corporation, 2004 ABCA 304 (CanLII), affirming Methanex [4] Corp v. Alberta (Provincial Treasurer), 2003 ABQB 157 (CanLII) By Fauzan SiddiquiBlog, TaxMarch 10, 2022March 27, 2024
Employee vs. Independent Contractor: What to Expect in a CRA Audit As a part of DSF’s ongoing Employment Law seminar series, I was asked to participate and provide a tax lawyer’s perspective as well as some anecdotal experience. For tax law purposes, the question of employee vs. independent contractor can be a very nuanced issue; provincial labour laws are not determinative as the Canada Revenue Agency (“CRA”) is tasked with applying the framework of federal legislation, such as the Income Tax Act[1], under which specific rules have been developed by the Tax Court of Canada, the Federal Court of Appeal and the Supreme Court of Canada. How is an “Employee” Defined under the Income Tax Act? It may come as some surprise for a piece of legislation as complex as the Income Tax Act (“ITA”), but the act itself contains no specific definition for “employee”. Subsection 248(1) simply reads employee includes officer; So while the definition in the ITA deems a corporate officer to be an employee, it goes no further in providing specific guidance. But where the statute remains silent, the common law has developed over time to fill in the gaps. The main distinction that can be drawn between an employee versus an independent contractor is often summarized as a contract of service vs. a contract for service. To determine the difference, each factor in the relationship ought to be examined. A dash of common sense is often in order, but the concept is defined almost completely by the common law in the taxation sphere. The Common Law Definition of “Employee” for Tax Purposes Although the common law is a creation of judges of Canada’s various Courts, for most taxpayers, the CRA is the ultimate decision-maker with respect to the determination of employee vs. independent contractor. That being said, the CRA must apply the law, and thus the decisions of the Courts when making such a determination. The first and perhaps most important case of note with respect to the contractor versus employee distinction is Wiebe Door v MNR.[2] In Wiebe Door, the Federal Court of Appeal was tasked with reviewing the Tax Court of Canada’s trial decision. The Tax Court judge had ruled that the contractors working for the appellant corporation must have been employees because of the “integral nature” of the workers to the employers’ business. The FCA overturned this decision on the basis that the Tax Court judge had made a mistake by placing too much emphasis on the “integration” test, and had failed to properly consider and weigh other relevant factors. But what are these “relevant factors”? In 671122 Ontario Ltd. v Sagaz Industries[3], Justice Major of the Supreme Court of Canada summarized the relevant factors that are generally to be considered: control – more control is generally exercised by an employer over an employee than by a client over a self-employed person. This control can be time of work, order of tasks, place of work and other similar factors; chance of profit versus risk of loss – self-employed persons usually take some degree of financial risk, and more opportunity for profit than employees; integration – as per the Tax court in Wiebe Door, an employee’s job will be an integral part of an employer’s business, whereas the tasks performed by a self-employed worker will likely be less integrated into the client’s day-to-day operations; and tools and equipment – self-employed contractors are more likely to supply their own tools and equipment, as well as being responsible for their maintenance. Justice Major also summarized the proper approach to reviewing the relationship holistically: “The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account. In making this determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.” The basics laid down in the above-referenced cases have been modified slightly over the years, though arguably not substantively. For example, in 1392644 Ontario Inc. v Canada[4], the Federal Court of Appeal introduced a “two-step” approach to the determination of employee vs. independent contractor for the purposes of the ITA. The two-step approach requires that the decision-maker first examine the parties’ written contract to determine if it creates an independent contractor relationship and if so to move on to considering the underlying “objective reality” of their actual behaviour. In the author’s opinion, this two-step approach makes a procedural, but arguably not a substantive change to the analysis – it has always been the case that all factors (including the written contract) are to be examined from an objective perspective, though forcing a decision-maker to refer first to the parties’ written contract may signal at least some form of deference to intention, though this was not helpful to the appellant in the instant case. It should also be noted that the traditional tax law adage of “form matters” could perhaps be utilized to some effect in “overriding” the finding of an employment relationship. For example in TBT Personnel Services Inc. v Canada[5] the CRA had determined that the appellant corporation’s truck drivers were employees and not independent service providers. Some of the impugned employees however had been operating through their own corporations. The Tax Court of Canada originally ruled that the incorporated drivers were not and could not be employees due to the use of the corporate form. On Appeal to the Federal Court of Appeal, the Crown conceded from the outset that the drivers who had provided services through their corporations could not be deemed to be employees in accordance with the lower court’s decision. Since the Crown conceded this fact from the outset, the FCA technically did not issue any ruling on this point, though in its reasons it appears to react favourably to the Crown’s admission. It seems likely on this basis that had the Court had a chance to rule substantively on this point that its conclusion would have been the same as that of the Tax Court, and that absent some form of sham the use of the corporate form will be determinative.[6] As an aside, those considering incorporation to avoid an employee/employer relationship should be wary of the “personal services business” rules in the ITA and plan accordingly with a professional advisor.[7] Why Does the CRA Care About Employee vs. Contractor? Canada’s system of income taxation is based upon the concept of self-reporting. A taxpayer earns income in the year, calculates their taxes payable by filing a return and pays their balance. While this works in a perfect world, the reality is that most people do not put taxes top of mind; in particular, getting a large bill at the end of the year that could be upwards of half of your earnings may put most in the position of not being able to pay the balance. Administering the taxation system, including collections is time-consuming and expensive, so the payroll system was designed as a first line of defense to protect Canada’s tax base. By placing the obligation to withhold and remit income tax, CPP and EI on employers, the vast majority of Canadians become automatically compliant with their obligations. This of course means that when a payroll amount is not remitted, the employer, not the employee is responsible for the shortfall. In an independent contractor situation, the employer simply makes gross payments to the contractor, and it is the worker’s job to prepare and file their return, as well as pay their taxes by the due date. Although the vast majority do just that, enforcing the obligations of those that don’t require major manpower. Thus it seems obvious that the CRA does have an administrative incentive to classify as many workers as possible as employees. What Can Trigger a CRA Audit? The CRA conducts payroll audits in the normal course of its operations just as it does for all taxes and programs it is tasked with administering. Payroll auditors are referred to as “Trust Examiners” and will often attend the business premises to conduct their payroll reviews. A normal payroll audit will encompass a review of the business’ income tax withholdings as well as amounts required to be withheld and remitted under the Canada Pension Plan[8] and the Employment Insurance Act[9]. While no two audits are identical, based on the author’s anecdotal experience there are a number of common reasons why a business may be selected for a payroll audit: The CRA may have an ongoing project focussing on a certain sector of the economy; There may be a tip provided from a disgruntled former worker or a provincial labour authority that alerts the CRA to investigate; Certain high-risk industries such as construction, spas or hair salons, are often selected for payroll and other types of tax audit, normally owing to those sectors’ large volume of cash transactions; An audit of a different tax account, such as GST/HST reveals discrepancies in payments to contractors or other third parties that will result in a referral to the payroll division; and The ever-present element of random selection or chance, combined with computer algorithms in the CRA’s internal system that analyze irregularities may trigger a closer look. In the course of a payroll audit, the Trust Examiner may come across ambiguities in the business’s relationship with any independent contractors, and possibly some indicia of an employment relationship and decide that further investigation is necessary. If so, the Trust Examiner will refer the issue to the CRA’s “Rulings Directorate” to further investigate the facts and make a final determination on the worker’s status. The Rulings Directorate is a specialized division of CRA that has the task of reviewing all of the evidence and circumstances and issuing an administratively binding opinion on the status of a particular worker as either employee or independent contractor. The Rulings Directorate does not conduct audits itself but acts in a supporting role for the Trust Examiner in these scenarios. The referral of a particular case to the Rulings Directorate is normally done at the behest of a payroll Trust Examiner in the course of an audit, but they will also review proactive requests; in some scenarios, the “employer”, the worker or both may request a ruling on their relationship proactively to avoid future payroll issues. Whether or not an unfavourable decision on such a request could trigger a further review or full payroll audit of the “employer” is not something the author has seen in practice, but could be a potential area of concern if one is considering such a proactive approach. What Happens in an Audit/Ruling? When a referral is made to the Rulings Directorate the assigned officer will generally begin by way of sending a written notice to the business owner. This letter will explain the purpose of the investigation and request that preliminary documentation, such as the contract with the worker, be provided for review. Normally the assigned officer will also ask for a telephone interview to be convened to discuss the relationship with the employer. In some cases, they may also conduct a field visit although this is becoming rarer as the CRA has moved to centralize these specialized divisions at certain specific Tax Services Offices to serve a large geographic area. The rulings officer will then normally contact the workers in question directly, initially via telephone and then to supplement their responses ask that a written questionnaire be answered. They may also ask for some proof of expenses paid related to their work, evidence of reimbursements or similar payments and any other documentary evidence that may be helpful in determining the form of the relationship. Based on the responses and the evidence provided by both the business and the worker, the rulings officer will then summarize the facts, apply the Wiebe Door and Sagaz factors and come to a determination. If a ruling is made that the workers were actually employees, this will normally trigger a full payroll trust examination if one is not already in progress. If an audit is in progress the Trust Examiner will use the ruling as the basis for increasing the income tax, CPP and EI withholdings for the relevant period. The conclusion of the trust examination will result in the issuance of reassessments for the income tax, CPP and EI withholdings, including interest and applicable penalties. The amounts will be due immediately – payroll assessments are not subject to the typical 90-day hold on collections as they are considered “trust funds” by the ITA, and so a referral will usually be made by the Trust Examiner immediately to the CRA’s collection division for follow-up. Additional Tax and Legal Considerations From the “employer’s” perspective, it should be noted that if the newly deemed employee has already reported and paid their taxes this will not relieve the employer of the obligation to pay which is mandated under the ITA; the reassessed amounts will be due and payable regardless. The result is a potential double tax that can be thought of as more akin to a penalty. One way to mitigate this may be to work together with the employee to refile their previous year’s tax returns to claim back a refund, though legal advice in this regard is paramount – if you are considering attempting this type of arrangement with an employee, advice from an experienced employment lawyer is advised due to the possibility of running afoul of the various employment or labour codes. This is beyond the scope of the author’s professional experience, but it is not hard to imagine a dispute arising, particularly in such a stressful context, if the employee is suddenly asked to refile their taxes in a particular way and to forward refunds to their employer – this could be taken by the employee as coercive behaviour for example. How such an issue would be treated under the labour codes and employment statutes is also not immediately clear to the author, but as with any dispute could end up being adding even more costs if litigation, arbitration or a workplace investigation ensues. From the “employee’s” perspective, the ability to deduct many typical business expenses from their income will be severely restricted. Unlike the rules applicable to business income, deductible expenses for employees are limited by section 8 of the ITA to those that are expressly permitted by that section. In addition, the employee will not be capable of claiming any deduction at all if they are not provided with a duly executed Form T2200 by their employer each year, setting out the specific expenses and nominal justification for their incurrence by the employee. This can lead to a higher tax cost for the employee overall and will require the employer’s active participation in creating and issuing the prescribed forms. It may also require that the parties redraft their written agreement. If there are any disputes, it may be wise for the aggrieved party to seek legal assistance in the same manner as advised above in the employers’ scenario. What if You Disagree with a Reassessment or Ruling? While a ruling that one is an employee is a formal administrative decision by the CRA, a taxpayer cannot object directly to the said ruling, rather the resulting reassessment and by extension, the underlying amounts imposed must be disputed. As stated above, a payroll audit encompasses the amounts of income tax withholdings, CPP and EI. Thus, when a “payroll” reassessment is issued, pursuant to a ruling or not, there are technically speaking three reassessments being created simultaneously, one under each of the three respective acts. Disputing these assessments is similar in concept to any other tax debt – a formal Notice of Objection must be filed within a 90-day period beginning on the date of the reassessment. For income tax assessments, as well as GST/HST assessments, it is common knowledge for practitioners that there is also a relieving provision that allows the taxpayer to request an extension of time to the 90-day objection period – so long as a formal extension request is filed within one year of the expiry of the initial 90-day period, the CRA can accept the objection as valid. What is not so widely known is that the Canada Pension Plan and the Employment Insurance Act have no corresponding mechanism; those acts contain no provision for the extension of time to file an objection and so if the initial 90-day period is missed, the reassessed amounts of CPP and EI will be deemed final and payable. The payroll amounts related to income taxes can however still be the subject of an extension of time request, though doing so will only solve part of the problem. Thus, taxpayers need to be extremely cautious with respect to the 90-day deadline to ensure that the amounts of CPP and EI, if incorrect, are objected to on a timely basis. Once the objections have been filed, from experience, the CRA will initially refer the CPP and EI portions of the objection to an Appeals Officer with specific knowledge of those particular acts for an initial decision, and that officer will then forward the file to a second Appeals Officer to handle the income tax portion. This can lead to longer than normal resolution times and may exacerbate collections issues if the account remains delinquent in the meantime. If the taxpayer is unsuccessful, they still retain a statutory right of Appeal to the Tax Court of Canada as with all other tax issues, though the 90-day period is strict for CPP and EI at this stage as well. Is Any Other Relief Available? If the taxpayer is not successful in the dispute process or does not wish to dispute, they can consider filing a Taxpayer Relief request to ask the CRA to cancel penalties or interest associated with the reassessments. Underlying principal amounts are not capable of being eliminated as a matter of law by a Taxpayer Relief request, so depending on the amount of interest and penalties this may or may not be worth the time and expense. The Taxpayer Relief Program and the cancellation of the penalties or interest are completely at the discretion of the CRA, and a high bar for relief is imposed. Those who may be considering such an application should seek legal advice and representation to ensure that their request is as effective and convincing as possible – CRA has published guidelines for when it will offer relief and so a good advocate can ensure the best chances of success. As Always, Seek Professional Representation From experience, a payroll trust examination, and if applicable the involvement of the Rulings Directorate can be an extremely confusing and stressful process. Those businesses that have concerns that there is a potential for the CRA to find an employment relationship, or that are in the midst of a payroll audit should seek advice from a professional that has experience managing the process. Proactive planning to avoid such a situation is obviously the most ideal scenario. That being said, if an audit is already in progress, professional advice and experience can often truncate the timeline and significantly reduce fees if help is brought in at the earliest possible stage. If you have questions about taking proactive steps or are in the midst of a payroll audit the author is happy to discuss how DSF can assist you to achieve the best possible outcome. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please contact a lawyer. Each case is unique and different and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” References: [1] Income Tax Act, RSC 1985, c 1 (5th Supp.). [2] Wiebe Door Services Ltd. v Minister of National Revenue, [1986] 2 CTC 200 (FCA). [3] 671122 Ontario Ltd. v Sagaz Industries, 2001 SCC 59. [4]1392644 Ontario Inc. [Connor Homes] v Canada (National Revenue), 2013 FCA 85. [5] TBT Personnel Services Inc. v Canada (National Revenue), 2011 FCA 256. [6] The original Tax Court decisions were issued under the “Informal Procedure” rules, which are akin to a provincial small claims court with a similar relaxed procedure and rules of evidence. Thus, while the Tax Court’s decision, in this case, is “persuasive” it technically did not set any binding legal precedent. [7] A detailed review of the “personal services business” rules are beyond the scope of this article, but in sum, the rules operate to ensure that those who are connected to a corporation cannot incorporate to achieve income deferral where they otherwise would have been an employee. [8] Canada Pension Plan, RSC 1985, c C-8. [9] Employment Insurance Act, SC 1996, c 23. By Fauzan SiddiquiBlog, Employment Law, TaxFebruary 17, 2022May 27, 2024
A Legal Guide to Cryptocurrency in Canada What is cryptocurrency? Cryptocurrency is decentralized digital money, based on blockchain technology. It is a form of currency that can be exchanged online for goods and services. However, it is not legal tender in Canada as it operates independently of any central bank, central authority or government. The Currency Act defines legal tender as only: Bank notes issued by the Bank of Canada under the Bank of Canada Act Coins issued under the Royal Canadian Mint Act How does the CRA Approach Cryptocurrency? The CRA’s position is that cryptocurrency should be treated as akin to a commodity for the purposes of the Income Tax Act. As a result, crypto transactions are subject to the same rules as barter transactions – transactions where one commodity is exchanged for another. Any income from transactions involving cryptocurrency can be treated as business income/losses or as a capital gain/loss, depending on the taxpayer’s circumstances. When is cryptocurrency taxed? Canadians typically do not pay any taxes to hold a cryptocurrency but doing any of the following can lead to tax liability: Gifting cryptocurrency Selling cryptocurrency Exchanging or trading cryptocurrency, including converting between cryptocurrencies Converting from cryptocurrency to CAD or another fiat currency Buying goods or services with cryptocurrency Do you need to declare your income from cryptocurrency transactions to CRA? Yes. Income or gains from trading in digital currencies are subject to tax under the income tax rules. Gains and losses from buying and selling cryptocurrencies must be reported in a taxpayer’s income when filing a tax return. Depending on the extent of the trading activities, the transactions may be characterizable as being on account of income or capital. Generally, if an individual is in the business of trading cryptocurrency, or is engaged in an “adventure or concern in the nature of trade” any gains or losses ought to be reported as being on account of income. If an individual is not engaged in the business of trading cryptocurrency, gains or losses can be reported as being on account of capital. Business Income: The case law provides guidance to CRA auditors who typically use the following factors to categorize cryptocurrency as business income: Volume of trades – the more a taxpayer trades in a given year may indicate an “active” business A product or service is promoted The overall behaviour is managed in a commercially viable way Activities are done “in a business-like manner” (such as acquiring inventory or capital assets or making a business plan) The net income will be fully included in income and taxed at the individual’s marginal income tax rate. CRA considers cryptocurrency mining, trading, exchanges, and ATMs to all be cryptocurrency businesses. Adventure or Concern in the Nature of Trade The CRA may also consider transactions to be an adventure or concern in the nature of trade, which would also result in a full income inclusion for the taxpayer, even if only a single transaction is undertaken. The relevant factors to consider are: whether the taxpayer dealt with the property in the manner consistent with how a dealer in said property would ordinarily deal with it whether the nature of the property itself precludes the possibility that its sale was a realization of an investment or of a capital nature whether the taxpayer’s intention as deduced is consistent with a trading intention Of the above factors, generally, the courts have held that the taxpayer’s intention is the most important and usually is determinative. The result is the same as business income, meaning that the taxpayer will be required to include 100% of the net gain into income. Capital Gains: Generally, a transaction will be considered on account of capital based on some of the following factors: The property was purchased to generate recurring income such as rent or dividends Evidence of an intention to hold long term There is an absence of evidence of business intention or behaviour related to the asset When characterized as a capital gain, only 50% of the net gain will be included in the taxpayer’s income for the year and will be taxed at the individual’s marginal rate. Reporting Ownership of Cryptocurrency to CRA Because cryptocurrencies are treated in a similar manner to any other type of asset, Canadians who hold bitcoin or other cryptos with an aggregate cost base greater than $100,000 on exchanges or physical wallets outside of Canada will need to report their holdings on the T1135 – Foreign Income Verification Statement which must be filed each year with the income tax return if applicable. Failure to do so results in a strict liability penalty of up to $2,500 per year, and there is the potential for additional Gross-Negligence Penalties in excess of $10,000 per year to be assessed. What if you fail to declare your (taxable) profits? Failure to report income from cryptocurrency transactions, or failure to declare cryptocurrency held offshore is illegal in Canada and can result in prosecution for a criminal offence under the Income Tax Act, the imposition of extremely punitive Gross-Negligence Penalties and more. Depending on your circumstances, however, it may be possible to correct the deficiency with CRA by proactively filing a Voluntary Disclosure Application. Late-filing or amending can be considered but will result in penalties, so seeking specific legal advice in advance is preferred. For all your tax-related queries please contact Nathaniel Hills via email at nathaniel.hills@devrylaw.ca or call 416-446-5841. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please contact a lawyer. Each case is unique and different and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiAdministration and Technology, Blog, TaxDecember 15, 2021May 27, 2024
Get A Tax Refund On Your New or Substantially Renovated Home If you bought a new or substantially renovated home, you may be entitled to a tax refund. As a consumer, you pay 13% Harmonized Sales Tax (HST) on most goods and services in Ontario. HST is a hybrid sales tax consisting of both federal and provincial sales taxes. As of June 2010, HST is now also payable on all new home sales in Ontario. However, you may be entitled to a rebate. Am I eligible? You may be eligible if you bought, built, or substantially renovated an existing house. This could include residential condominium units, duplexes, mobile or modular homes, or floating homes. You may also be eligible if you built a major addition, or if you converted a non-residential property for residential use. You may also be eligible if you bought a share of the capital stock of a co-operative housing corporation (co-op). You may not need to live in this home yourself. You may be eligible if the home is to be occupied by a relation—however, there are particular rules about who qualifies. You are likely not eligible if you are in the business of manufacturing or reselling homes, or if you are a corporation or partnership. How much is the refund? The federal component of the HST rebate is available in every province. Certain provinces—including Ontario—also offer a rebate on the provincial component of the HST. The amount of your refund will vary based on the province in which you live, and the fair market value of your home. In Ontario, where the fair market value of your home falls within the following brackets, you may be entitled to the following rebate: Below $350,000: the potential rebate is 36% of the federal tax, and 75% of the provincial tax. From $350,001 to $449,999: the potential rebate is up to 35.9% of the federal tax on a sliding scale, and up to 75% of the provincial tax to a maximum of $24,000. $450,000 and above: the potential rebate is $24,000. Is there a deadline? Yes! You have two years to apply. The date upon which the clock starts ticking depends on the nature of your situation, and the circumstances of your purchase or renovation. Double-check the rules and do not miss your chance to apply for your refund. How do I apply? For complete instructions, review the official Guide from the Canada Revenue Agency (CRA) on the GST/HST New Housing Rebate. (You can also download it in PDF). There are two separate rebates for the federal and provincial components. If you live in Ontario, be sure to apply for both rebates. For the federal rebate, complete either Form GST191 or Form GST191-WS, depending on your situation. For the Ontario rebate, complete Form RC7191-ON. Due to the COVID pandemic, it is possible that the CRA will be evaluating rebate applications with greater scrutiny. Be certain that you follow the rules and regulations in your application to ensure that you have the greatest chance of successfully claiming your rebate. For more information, assistance, or any other questions regarding new home purchases, renovations, or other real estate transactions, please contact our real estate lawyers today. Do not delay. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Real Estate, TaxAugust 20, 2021May 27, 2024
How Section 116 of the Income Tax Act Can Affect Your Real Estate Transaction Overview When real property is sold by a non-resident of Canada, both the buyer and seller and their advisors should turn their minds to the provisions of section 116 of the Income Tax Act (the “ITA”). These provisions impose obligations and liability on both the buyer and seller, which should be addressed well before the date that the transaction is scheduled to close. In brief, section 116 of the ITA provides that a non-resident seller may notify the Canada Revenue Agency (CRA) of a proposed disposition of property, such notice setting out, among other things, the estimated amount of sale proceeds to be received, as well as the adjusted cost base of the property. This notice must be given using form T2062, “Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property”. If the non-resident has not given such notice to CRA prior to the completion of the transaction (or if the notice was given but the details surrounding the transaction have since changed), the non-resident must notify CRA of the disposition no later than 10 days after closing. In the event that the non-resident seller fails to do so, the seller may have to pay a penalty of up to $2,500, even if the sale of the property does not result in any tax owing. Once CRA has received the non-resident seller’s notice and processed the request for a Certificate of Compliance, CRA will advise the seller of the amount of tax required to be paid and will issue the Certificate of Compliance upon receipt of payment. If no Certificate of Compliance has been issued, section 116 provides that the buyer will be liable to pay 25% (or 50% in some cases) of the purchase price to CRA on behalf of the seller, within 30 days after the end of the month in which the property is acquired (“Remittance Deadline”). The buyer will be entitled to withhold this amount from the purchase price for the purposes of remitting this payment. The Ontario Real Estate Association (OREA) standard form Agreement of Purchase and Sale, used in most residential real estate transactions in Ontario, contains a “residency” clause that is intended to address the requirements of section 116 of the ITA. The Holdback In most cases, the Certificate of Compliance will be issued by CRA after the transaction has been completed, as the tax is normally paid out of the proceeds of the sale. This means that the buyer’s lawyer will have to withhold 25% of the purchase price (or 50% for certain types of property) in trust (the “Holdback Amount”). As the Certificate of Compliance may not be available prior to the Remittance Deadline, the non-resident seller may request a ‘comfort letter’ from CRA which will allow the buyer’s lawyer to continue withholding the Holdback Amount in trust beyond the Remittance Deadline, until otherwise instructed by CRA. Once CRA has advised both parties of the amount of tax payable, the tax can then be paid from the Holdback Amount, and upon the issuance of a Certificate of Compliance, the balance of the funds can then be released to the seller. Accordingly, by applying for a Certificate of Compliance well in advance of the closing date and requesting a comfort letter, the seller may be able to avoid a situation where the entire Holdback Amount is remitted to CRA by the buyer, and avoid having to wait until the seller’s tax returns are filed in order to reconcile this amount with the tax payable as a result of the sale. Buyer’s Liability and “Reasonable Inquiry” into the Seller’s Residence Status If the buyer could have or should have known that the seller is a non-resident, or did not take reasonable steps to investigate the seller’s residence status, the buyer may be liable under section 116. The buyer will not be liable, however, if, after making reasonable inquiry, the buyer had no reason to believe that the non-resident person was not resident in Canada. In a typical purchase and sale transaction, a buyer relies on a statutory declaration made by the seller that the seller is not a non-resident of Canada for the purposes of section 116 of the ITA. In certain circumstances, this declaration may not be available, making it challenging for the buyer to ensure that they are not exposed to liability under section 116. Where a property is being sold by a mortgagee under the power of sale, for example, the registered owner of the property is generally not involved or is uncooperative, and the mortgagee will likely not make any representations or warranties in the agreement of purchase and sale with respect to residency. It is then up to the buyer to make ‘reasonable inquiry’ of the seller’s residence status. What constitutes ‘reasonable inquiry’ is highly circumstantial. In Kau v The Queen, 2018 TCC 156, the buyer of a condominium unit in Toronto was held liable for over $90,000 of tax under section 116 after the Tax Court of Canada determined that he failed to make reasonable inquiry as to whether the seller, who lived primarily in California, was a non-resident. This was despite the fact that the buyer’s lawyer had received a signed but unsworn statement from the seller, in which the seller stated that he was “not a non-resident of Canada within the meaning of section 116 of the Income Tax Act (Canada) and nor will [he] be a non-resident of Canada at the time of closing.” The Court held that this unsworn statement was insufficient to satisfy the purchaser’s obligation to make a reasonable inquiry. The court further held that what is reasonable will be fact-specific. In Kau, the purchaser was aware that the seller owned the unit as an investment property and should have noticed that the seller had an address for service in California. Therefore, in those circumstances, the purchaser should have required more than an unsworn statement to confirm that the seller was not a non-resident. The court noted that the outcome would likely have been different had the seller made such a statement in a solemn declaration or under oath. When the residence status of the seller is unclear, and no assurances are provided by or on behalf of the seller, a prudent buyer may try to err on the side of caution by withholding 25% of the purchase price and remitting the funds to CRA. However, section 116 only entitles the buyer to withhold funds if the seller is in fact a non-resident, and not simply because the buyer has not been able to confirm the seller’s residence status. In these circumstances, it is important for buyers to seek legal advice to ensure that their obligations under section 116 are adequately addressed prior to entering into a binding Agreement of Purchase and Sale. There are some exceptions to the above, and how section 116 of the ITA applies will vary depending on the type of property being disposed of and the circumstances surrounding the transaction. The buyer and seller should consult with their respective lawyers regarding their particular transaction. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please contact a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, Real Estate, TaxNovember 27, 2020March 20, 2024
Estate Freeze – What Is It and What Does It Do? An estate freeze fixes the value of the asset that is frozen, such as shares of a corporation, in the hands of the owner until the time of death, allowing the freezor to calculate the expected tax liability that arises on death. In the usual course of business, the deceased will be deemed to have disposed of all capital assets immediately prior to death at their fair market value determined on that date. The tax, which is now imposed on one-half of the capital gain is based on the difference between the cost base of the relevant asset and its fair market value at the date of death. Without the estate freeze, the amount of the gain would be expected to increase over time. A further benefit of an estate freeze is the accrual of the post-freeze growth in value in the hands of other persons, usually the owner’s family. This makes the estate freeze an effective way of transferring value to the future generation, and hopefully, defer the tax that would accrue on the future growth to the time that the asset is sold by the persons who are to benefit from the future growth. Under certain circumstances, the receiving family member may be able to claim the lifetime capital gains exemption, so that the tax-saving based on that exemption can be multiplied among several family members when the shares the family member receives in the course of the estate freeze transaction qualify as shares of a “qualified small business corporation”. The estate freeze is also worth considering when the market is experiencing a low, as is the case during the ongoing Covid-19 pandemic. This would permit the owner/parent to fix the capital gain at a lower value, attracting less tax on death. A subsequent increase in value is passed on to the beneficiaries of the freeze. However, care needs to be taken that the value of the assets is not too low at the time of the freeze, as the current owner may wish to retain a reasonable amount of value. The balance that needs to be achieved will depend on the amount of the asset value to be frozen, the age of the freezor and a number of other factors that may be of importance to the person who is implementing the freeze. One size does not fit all. If you have any questions related to tax or business law matters, please contact our Tax and Wealth Planning lawyers at 416-449-1400 to book a consultation. The Firm Devry Smith Frank LLP is the largest full-service firm outside of the Toronto downtown core with additional offices in Barry and Whitby. DSF offers its clients a wide range of legal services including litigation, business, real estate, employment, and family law-related services. The firm is comprised of over 175 lawyers with vast expertise and experience. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please contact a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, TaxNovember 4, 2020April 3, 2024
Are You Still Eligible For The CERB? THE CERB & RETURNING TO WORK Amidst the economic challenges of COVID-19, a number of Canadians have relied on financial assistance in the form of the Canadian Emergency Response Benefit (the “CERB”). As businesses now slowly prepare to reopen in a phased approach, individuals must consider if they are still eligible to receive the CERB benefit if they are recalled to work. In doing so, they should keep in mind the potential consequences of receiving the CERB if no longer eligible. With continued relief being provided by both the Federal and Provincial governments, through measures such as the 75 percent Canada Emergency Wage Subsidy, employers have slowly begun to recall their workforces as they prepare to reopen. What this means for individuals receiving CERB is that, if re-employed, they may be ineligible for future CERB benefit payments. ARE YOU STILL ELIGIBLE? One cannot receive a salary in excess of $1,000 during a CERB payment period while also receiving the CERB benefit. Failure to comply with this can result in penalties and fines. As things begin to normalize, the CRA will begin reviewing all CERB applications and will flag any erroneous, ineligible and fraudulent claims. This will result in correcting and collecting any benefit payments paid out in error. While mistakes can happen, it is always better to err on the side of caution, and if applicable, individuals should self-disclose to the CRA in the event of their receipt of a benefit payment to which they were not entitled. THREE THINGS TO CONSIDER BEFORE REAPPLYING FOR THE CERB Things to consider in the coming days and weeks as it relates to reapplying for the CERB benefit: 1. Individuals who believe they will be recalled to work in the coming weeks may prefer to hold off on reapplying until the next CERB benefit period. If their employment salary exceeds the permitted $1,000.00 cap during the CERB benefit period, they will likely be deemed to have been ineligible for the CERB and will be obliged to repay the benefits received for the relevant period. 2. Remember that the CERB is repayable by a recipient who failed to meet the eligibility requirements for the relevant four-week period. 3. Individuals who received a benefit payment to which they were not entitled should repay the funds. • The CRA’s website sets out steps to help individuals repay benefits received in error. Those who fail to do so will be flagged, and risk the imposition of fines and penalties. If you have additional questions about returning to work and/or about receiving the CERB, feel free to contact the lawyers at Devry Smith Frank LLP to discuss your rights and options. “This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.” By Fauzan SiddiquiBlog, COVID-19, TaxJuly 7, 2020September 29, 2020
