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Archives for Tax Tips and Traps

CPP Enhancements: Higher Contributions and Higher Benefits

In 2019, the government commenced a two-part enhancement to the Canada Pension Plan (CPP), with full implementation to be completed in 2025. Phase 1 occurred from 2019-2023; phase 2 will occur from 2024-2025. Overall, the changes will require larger contributions but also will provide larger benefits.

Pre-CPP enhancement

CPP contributions for employees and employers under the pre-enhancement CPP model (referred to as base contributions) were calculated as 4.95% of the employee’s pensionable earnings to a maximum of the year’s maximum pensionable earnings (YMPE; for 2023, $66,600), less the $3,500 basic exemption.

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Underused Housing Tax

The new Underused Housing Tax (UHT) imposes a 1% annual tax on the value of residential real estate considered to be vacant or underused that is owned on December 31 of each year. The government indicated that the tax would target property owned by non-Canadians; however, the scope of filing requirements extends to many Canadian entities and individuals, including private corporations, and trustees of a trust. The first filings and taxes are due on April 30, 2023.[1]

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2022 Personal Income Tax Return Checklist

A. Information – All Clients Must Provide

Please check all boxes that apply and provide supporting information.

  • COVID-19 related information – All income, support and benefits received under COVID-19 relief programs. Some of these benefits are taxable, while others are not. Official tax slips may have been issued for some, but not all. For support where no slip is available, details surrounding the amount and types of payment are required. Please provide details on all federal, provincial/territorial and other support received. Please also provide any details on any repayments of these benefits.

Key COVID-19 related federal personal support programs:

 

Taxable?

Canada Recovery Sickness Benefit (CRSB) Yes
Canada Recovery Caregiving Benefit (CRCB) Yes
Canada Worker Lockdown Benefit (CWLB) Yes

 

Key COVID-19 related federal government support for business, rental or other income:

 

Taxable?

Canada Rent and Wage Subsidies Yes
Canada Recovery Hiring Program (CRHP) Yes

As no slips are provided for some of these programs, please provide the amounts received and the period to which they relate.

 

Repayments of COVID-19 benefits

Please also advise if you repaid COVID-19 support payments previously received. This includes both individual support benefits and benefits received in respect of a business. A deduction may be available in respect of the repayment.

NEW! Where a repayment was previously included in income (such as for CERB or CRB), the deduction can be claimed in the year the amount was originally included in income (2020, 2021 or 2022) or the year the repayment was made.

NEW! Students who incorrectly applied for Canada Emergency Response Benefit (CERB) when they should have applied for the Canada Emergency Student Benefit (CESB) can apply to offset CERB repayments with CESB that they would have been eligible for during the same benefit period. To qualify, the student must have filed their 2019 and 2020 personal tax return by the end of 2022.

  • All information slips, such as: T3, T4, T4A, T4A(OAS), T4A(P), T4E, T4PS, T4RIF, T4RSP, T5, T10, T2200, T2202, T101, T1163, T1164, TL11A, B, C and D, T5003, T5007, T5008, T5013, T5018 (subcontractors) and corresponding provincial slips.
  1. Details of income or receipts for which no T-slips have been received, in respect of items such as:
  • other employment income (including any severance or termination pay, retiring allowance, tips or gratuities received, details on stock option plans and Form T1212),
  • business, professional, partnership, farm and rental income, including all amounts received from the sharing economy (such as Airbnb, VRBO, Uber, etc.), and internet-based provisions (e.g. payments from social media subscribers, product placement, advertising, etc.),
  • alimony, separation allowances, child maintenance (including divorce/separation agreement),
  • pensions (certain pension income may be split between spouses),
  • interest income earned but not yet received (such as amounts from Canada savings bonds, deferred annuities, term deposits, treasury bills, mutual funds, strip bonds, compound interest bonds),
  • scholarships, fellowships and bursaries, and
  • any other income received (e.g. director fees, executor fees, etc.).
  1. Details of other investments, such as:
  • capital gains/losses realized (this may be obtained, in some circumstances, from your investment advisor)
  • real estate, or oil and gas investments – including financial statements,
  • bitcoin or other cryptocurrency transactions, and
  • any other investments.
  1. Details of other expenses, such as:
  • business, professional, farm, investment and rental expenses (including capital purchases, such as vehicles and equipment, including the invoice or bill of sale), and
  • employment related expenses – provide Form T2200, signed by your employer, as well as the invoices and receipts for required employment expenses. See item 6 for details on working from home.
  1. Details related to working from home.

Due to the COVID-19 pandemic, many individuals worked from home during 2022. In some cases, a deduction may be available. If applicable, what method would you like to use to make your claim?

  • Temporary flat rate method (simple) – The method is available for employees that worked from home more than 50% of the time for at least four consecutive weeks in the year due to COVID-19 and were not fully reimbursed for their expenses. $2/day can be claimed for each day that they worked from home.

If you choose this method, how many days did you work from home in 2022? _______ days.

  • Detailed method – This method permits individuals to make a claim based on actual expenses incurred.

To be deductible under this method, the individual must have worked from home due to the pandemic or been required to work from home by the employer. In addition, one of the following has to be met:

  • the home was where the individual mainly (more than 50% of the time) did their work for a period of at least four consecutive weeks in the year, or
  • the individual used the space exclusively to earn business/employment income, and used it on a regular and ongoing basis for meeting clients, customers or other people in respect of the business/ employment.

To make a claim under this method, a T2200 or T2200s is required from your employer. Please provide it to us.

If these tests are meta reasonable claim can be made.

To make a claim, please provide details on the portion of your home that was used as a workspace (e.g. approx. square footage of work space versus other space). If the space was not used exclusively for business/employment purposes, provide the approx. time it was used for business/employment purposes. Also, provide the period that you worked from home and met one of the above tests, and the expenses incurred that related to working from home. Such expenses include, for example, home internet access fees, rent, utilities and office supplies.

  1. Details and receipts for other deductions and tax credits, such as:
  • moving expenses (please advise us if you have, or may have, immigrated or emigrated to/from Canada),
  • child care expenses (if the services are provided by an individual, their SIN should be on the receipt),
  • alimony, separation allowances, child maintenance (including divorce/separation agreement),
  • adoption related expenses,
  • interest paid on qualifying student loans,
  • professional and union dues,
  • medical expenses for you, your spouse and any dependent persons,
  • charitable donations (including those to registered journalism organizations) and political contributions,
  • clergy residence deduction information (including Form T1223),
  • tuition fees for both full-time and part-time courses for you or a dependant – including mandatory ancillary fees and Forms T2202, TL11A, B, C and D where applicable,
  • disability supports expenses (speech, sight, hearing, learning aids for impaired individuals and attendant care expenses),
  • flow-through share expenses (NEW! A 30% critical mineral exploration tax credit is available for expenditures renounced under eligible flow-through share agreements entered into after April 7, 2022. The specified minerals in which the new enhanced credit is available are copper, nickel, lithium, cobalt, graphite, rare earth elements, scandium, titanium, gallium, vanadium, tellurium, magnesium, zinc, platinum group metals and uranium),
  • registered retirement savings plan and any other pension plan contributions and withdrawals (including withdrawals and repayments for the home buyers plan and lifelong learning plan),
  • film and video production expenditures eligible for a tax credit,
  • tools acquired by tradespersons and eligible apprentice mechanics,
  • scientific research and experimental development expenses,
  • home accessibility tax credit – certain expenditures (increased from $10,000 to $20,000 for 2022) may be eligible for a tax credit if made in relation to a renovation or alteration of your home to enhance mobility or reduce the risk of harm for an individual who is either, eligible for the disability tax credit, or 65 years of age or older at December 31, 2022. Examples of eligible expenditures include amounts relating to wheelchair ramps, walk-in bathtubs, wheel-in showers and grab bars,
  • eligible educator school supply tax credit – if you are a teacher or early childhood educator, please provide receipts (up to $1,000) for eligible school supplies purchased in the year. Please also provide a certification from your employer attesting to the eligible supplies expense,
  • digital news subscription tax credit receipts,
  • NEW! air quality improvement tax credit – a 25% credit is available on qualifying expenditures between September 1, 2021 and December 31, 2022 related to the purchase or upgrade of mechanical heating, ventilation and air conditioning (HVAC) systems and the purchase of standalone devices designed to filter air using high-efficiency particulate air (HEPA) filters in the course of commercial activity,
  • NEW! labour mobility deduction – a deductionfor up to $4,000 of certain personally-incurred travel and temporary lodging expenses for employed tradespeople and apprentices in the construction industry that performs duties at a temporary work location. To qualify, the employee must not also receive a non-taxable allowance or be reimbursed by their employer in respect of these costs.
  • Details on the disposition of your principal residence or other real property. Please provide: proceeds of disposition, a description of the property, and the year the property was acquired. If disposing of other real property, please provide the cost of the property in addition to the requirements listed above. This is required even if there is no gain on the disposition of the property. Please also provide details of assignment sales (where the purchase contract is sold/assigned to another party).In addition, please indicate if you have a change-in-use of your property. This could include, for example, converting some or all of your principal residence into an income-earning property, such as a rental suite. It could also include converting a property used for short-term rentals, such as Airbnb or VRBO, to long-term rentals.
  • Name, address, date of birth, social insurance number (SIN), and province of residence on December 31, 2022, if changed in the year.
  • Personal status – single, married, common-law, separated, divorced or widowed. If there has been a status change in the year, please provide the date of the change.
  • List of dependants/children including their income, birth date and SIN.
  • Details regarding residence in a prescribed area which qualifies for the northern residents deduction.
  • Details on 2022 income tax instalments or payments of tax.
  • 2021 notice of assessment/reassessment and any other correspondence from CRA (including correspondence received after filing this personal tax return).
  • Details of foreign property owned at any time in 2022 including cash, stocks, digital currency (such as Bitcoin), trusts, partnerships, real estate, tangible and intangible property, contingent interests, convertible property, etc. Required details include: description of the property, related country, maximum cost in the year, cost at year-end, income, and capital gain/loss for each particular property.For property held in an account with a Canadian securities dealer or Canadian trust company, please provide the country for each investment, fair market value of the investments at each month-end, income or loss on the property, and gain/loss on disposition of the property.
  • Details of income from, or distributions to, foreign entities such as foreign affiliates and trusts.
  • Copy of any foreign tax returns filed and any associated tax assessments.
  • If we are not preparing your spouse or common-law partner’s personal tax return, please provide their return for review and tax planning.
  • Internet business activities – If you have business, professional, farming or fishing income, please indicate whether you have Internet business activities. According to CRA, Internet business activities include any activity where you earn income from your webpages, websites or apps. Information-only webpages and websites like directories or ads will not generally trigger this information requirement.

If you have Internet business activities, please provide:

  • the number and address of webpages or websites that your business generates income from. If you have more than 5, provide the 5 that generate the most income, and
  • the percentage of income generated from the Internet (if you do not know the exact percentage, provide an estimate).

B. Questions to Answer

If yes, please provide details.

  1. Did you receive interest, dividends, or benefits from a business where a relative is a key party (in terms of ownership or involvement)?
  2. Are you a U.S. citizen, Green Card Holder, or were you, or your parents born in the United States? You may have U.S. filing obligations.

Are you an indigenous person? Special tax rules may apply.

  1. Are you or any of your dependants disabled? If so, provide Form T2201, Disability Tax Credit Certificate. The transfer rules allow claims for certain dependent relatives. In addition, are you, or would you like to provide support to a disabled person? Tax planning opportunities may be available, such as establishing a registered disability savings plan.

Persons with disabilities may also receive tax relief for the cost of disability supports (e.g. sign language services, talking textbooks, etc.) incurred for employment or education. If you or your dependents are disabled but do not have a Form T2201, please provide details so we can explore whether you are eligible for special credits or benefits.

NEW! Individuals with type 1 diabetes will be effectively deemed eligible for the disability tax credit. While this change was legislated in 2022, it is retroactive to 2021 and subsequent years.

  1. Are you the caregiver for any infirm family members? Did you provide in-home care for an infirm dependent relative?
  1. If you have children up to the age of 17, have you received the Canada child benefit (CCB)?
  1. Have there been any other significant life events in the past year, such as the death or impairment of a loved one? There can be tax planning opportunities.
  1. Did you incur costs to access medical intervention required to conceive a child that was not previously allowed as a medical expense? Amounts may be claimed for any such expense for the previous 10 years (if amounts were incurred in 2011, a claim must be made by the end of 2022). NEW! As of 2022, certain costs reimbursed to surrogate mothers and for fertility, are eligible medical expenses.
  1. Did you purchase a new home in 2022? If so, you may be eligible for the new residential property GST/HST rebate. Also, are you a first-time home buyer in 2022? A federal tax credit based on $10,000 (@15% = $1,500) may be available.
  1. Have you spent more than 200 hours acting as a volunteer firefighter or a search and rescue volunteer? You may be eligible for a federal tax credit.
  1. Have you made any contributions to a gifting tax shelter?
  1. Did you receive any significant prizes or awards from your or a related person’s employment?
  2. Did you receive a retroactive lump-sum payment over $3,000 (for example, spousal support)? In certain cases, some tax relief may be available.
  1. Do you want your tax refund deposited directly into your account at a financial institution?
  1. Are you a Canadian citizen?
  2. Do you authorize CRA to give your name, address, date of birth, and citizenship to Elections Canada to update the National Register of Electors?

C. Additional Information – New Clients Must Provide

Please check all boxes that apply and provide supporting information.

  • All CRA correspondence for the past three years.
  • Details of previously claimed capital gain exemptions, business investment losses and cumulative net investment loss accounts.
  • A listing or copy of receipts for significant capital assets purchased previously, which are currently held.
  • Details of carry-forward amounts from previous years (ex. losses, donations, forward averaging amounts, RRSP).

D. Other

  1. NEW! Underused Housing Tax (UHT) – The UHT imposes a national annual 1% tax on the value of non-resident (for immigration purposes), non-Canadian owned residential real estate considered to be vacant or underused. Legal ownership of real estate must be considered as of December 31, 2022, with filings and/or taxes first being due on April 30, 2023.
  2. NEW! Canada Dental Benefit – The Canada dental benefit provides an up-front, tax-free payment to cover dental expenses for children under the age of 12 without dental coverage. The benefit is only available to families whose adjusted family net income is under $90,000. Applications for this benefit can be made online on CRA’s My Account.
  3. NEW! Canada Housing Benefit Top-up Payment – A one-time $500 tax-free payment would be provided to low-income renters (those who filed 2021 returns with adjusted net incomes below $35,000 for families or $20,000 for individuals). Applications for this benefit can be made online on CRA’s My Account.
  4. Instalments required for 2023 – A pre-authorized debit arrangement is an online service-payment option which authorizes CRA to withdraw a pre-determined payment amount directly from a bank account on a specific date to pay taxes. This may help avoid penalties on late and/or missing instalment payments.
  5. MyCRA mobile App – This web app allows you to access and view key portions of your tax information such as your notice of assessment, tax return status, benefit and credit information, and RRSP and TFSA contribution room.
  6. CRA’s My Account – Taxpayers can set up an online account with CRA that provides tax filing information and communications in addition to the information in MyCRA mobile App.
  7. CRA Online Services – Account alerts – Individuals can register with CRA to be notified by email when CRA’s record of an individual’s address has changed, banking information for direct deposit has changed or if mail sent by CRA was returned.
  8. Additional provincial/territorial credits and programs may be available.

 

 

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Tax Tidbits

Some quick points to consider…

· For 2023, the maximum amount that may be deducted for non-taxable allowances paid to an employee using a personal vehicle for business purposes has increased by 7₵ to 68₵/km for the first 5,000 kms driven and to 62₵ for each additional km. For Yukon, the Northwest Territories and Nunavut, the tax-exempt allowance will continue to be 4₵/km higher.

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YEAR-END TAX PLANNING

December 31, 2022 is fast approaching… see below for a list of tax planning considerations. Please contact us for further details or to discuss whether these may apply to your tax situation.

SOME 2022 YEAR-END TAX PLANNING TIPS INCLUDE:

1) Certain expenditures made by individuals by December 31, 2022 will be eligible for 2022 tax deductions or credits, including digital news subscriptions, moving expenses, labour mobility tax credit expenditures (NEW), child care expenses, charitable donations, political contributions, registered journalism organization contributions, medical expenses, alimony, eligible employment expenses, union, professional or like dues, carrying charges, air quality improvement expenditures (NEW) and interest expense. Ensure you keep all receipts that may relate to these expenses.
2) Certain expenditures for surrogate mothers and fertility treatments are proposed to be eligible for the medical expense tax credit as of January 1, 2022.

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Tax Tidbits

  • The interest rate on overdue taxes for the fourth quarter of 2022 (October 1 – December 31, 2022) has increased by 1% to 7%. Make sure to get those payments in to CRA on time!
  • No input tax credit (ITC) can be claimed if the vendor does not have a valid GST/HST number at the time of the transaction. You can check the validity of an entity’s GST/HST business number at CRA’s online “GST/HST registry.”
  • There are approximately $1.4 billion in uncashed cheques in CRA’s bank accounts. Even cheques that are over a decade old can be reissued. Call CRA or visit your CRA “My Account” online to check whether you have an uncashed cheque.
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Tax Tidbits

Some quick points to consider…

  • On June 19, 2022, individuals suffering from Type 1 diabetes became automatically entitled to the disability tax credit. This change is retroactive to 2021.
  • The Tax Gap, which measures the difference between what is actually collected and the taxes that would be paid if all obligations were fully met, is between $18.1 billion and $23.4 billion
  • On June 23, 2022, legislation was passed which would allow the full and immediate expensing of many capital assets purchased on or after April 19, 2021.
  • CRA is currently reviewing how and when crypto asset holdings need to be disclosed on form T1135.
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Tax Tips and Traps

Tax Tidbits

Some quick points to consider…

  • The luxury tax affecting new vehicles and aircraft retailing for more than $100,000 and new boats over $250,000 has been rescheduled to commence on September 1, 2022.
  • The Office of the Auditor General of Canada noted that $3.7 billion of overpaid COVID-19 benefits had been identified.
  • The program that has offered purchase incentives of up to $5,000 for zero-emission vehicles since 2019 is proposed to be extended until March 2025, and eligibility would be broadened to include other vehicle models, including more vans, trucks and SUVs.
  • For 2018 and 2019, the CRA audit hit rate (percentage of audits resulting in an audit adjustment) was close to 60%.

This publication is a high-level summary of the most recent tax developments applicable to business owners, investors and high net worth individuals. Enjoy!

Buying and Selling a Home: Budget 2022 Proposals

The 2022 Federal Budget included several proposals that would significantly change the taxation environment when buying and selling a home. Broadly, the government proposed various incentives for first-time buyers and extended family units in addition to bright-line tests/restrictions for those purchasing homes for profit (e.g. home flippers). Taxpayers should consider how the changes will affect their intended purchases and sales. In some cases, it may be beneficial to expedite a purchase or sale, while in others, it may be prudent to delay.

New possibilities and enhanced programs include the following:

  • Home accessibility tax credit – The annual expense limit would be doubled to $20,000 such that the maximum non-refundable tax credit would be $3,000, proposed to be effective for 2022 and subsequent taxation years. This credit applies to enduring and integral home renovations in respect of a taxpayer, or a relative who is (or will be) living with the taxpayer, that is either a senior or eligible for the disability tax credit. The renovation must enable the individual to gain access to the home, be more mobile or functional in the home, or reduce the risk of harm within, or in gaining access to, the home.
  • Home buyers’ tax credit – The amount would be doubled such that eligible first-time home buyers could access tax relief of $1,500, proposed to be effective for acquisitions of a qualifying home on or after January 1, 2022.
  • Tax-free first home savings account – A new registered account would allow for tax-deductible contributions of up to $8,000 annually and up to $40,000 in total; withdrawals from the plan (including income earned in the plan) to purchase a first home would not be taxable. This initiative is expected to become available in 2023.
  • Multigenerational home renovation tax credit – A new tax credit would provide relief on up to $50,000 of eligible expenses to construct a secondary suite for a senior or person with a disability to live with a relative. This initiative is expected to become available in 2023.

New cautions and restrictions include the following:

  • Residential property flipping rule – A new rule would be introduced to deem all gains arising from the disposition of a residential property (including rental property) that was owned for less than 12 months to be business income, other than any disposition for which an exception would apply (such as where a death or addition to the family necessitates a move). Sales on homes owned for 12 months or more would follow the traditional rules. This means that such sales could still be classified as fully taxable business income and not be eligible for the principal residence exemption. This measure would apply to residential properties sold on or after January 1, 2023.
  • Foreign buyer property banForeign commercial enterprises and people who are not Canadian citizens or permanent residents would be prohibited from acquiring non-recreational residential property in Canada for two years. This would not apply to refugees and people authorized to come to Canada while fleeing international crises, certain international students on the path to permanent residency or individuals on work permits residing in Canada.
  • GST/HST on assignment sales by individuals – All assignment sales in respect of newly constructed or substantially renovated residential housing would be taxable for GST/HST

In addition to the above tax measures, Budget 2022 proposed to develop and implement a Home Buyers’ Bill of Rights and national plan to end blind bidding. This Bill of Rights could also include items such as ensuring a legal right to a home inspection and ensuring transparency on the history of sales prices on title searches.

ACTION: Consider the expected timing of implementation for each of these measures and the impacts on purchases or sales.

Principal Residence Exemption: CRA Project

In early 2022, CRA began to send out education letters in respect of individuals claiming the principal residence exemption (PRE) in the British Columbia region. Often, regional projects such as this are used as pilots for subsequent national projects. As CRA has indicated that they have a larger overall focus on real estate transactions, similar or extended versions of the project may be coming.          

The letters advised that the taxpayer or their representative review the return and adjust it if necessary. The letters also stated that an agent would follow up with a phone call to answer any questions.

There appears to be multiple versions of the letters, with multiple triggers. For example, one version noted that it was sent because the taxpayer claimed the PRE for two different properties over two years (2018 and 2019, potentially reviewing whether business income was being generated from flipping activities). Another version was sent because the taxpayer claimed the PRE and also reported a reduction in gross rental revenue (presumably looking at whether the residence was actually a rental property).
ACTION: If such communications are received, a tax advisor should be promptly advised. Letters that appear strictly educational can turn into costly audits. Inappropriate and untimely responses may lead to adverse assessments in addition to penalty and interest charges.

CERB/CRB:  Eligibility Verification

Over the last year, CRA has increased verification activity in respect of eligibility for the Canada Emergency Response Benefit (CERB) and the Canada Recovery Benefit (CRB). As a result, a number of disputes have hit the judicial system. One of the focus areas has been the prior earnings test. To be eligible for either CERB or CRB, an individual must have earned at least $5,000 of income from certain sources (such as employment, self-employment or parental benefits) in 2019 or in the 12-month period preceding the day on which the application was made (or in 2020 for CRB claims made in 2021).

Acceptable evidence to substantiate a claim can include the following:

  • for self-employed individuals or subcontractors, detailed invoices for services rendered, which include the date of the service, who the service was for and the applicant’s or company’s name;
  • documentation for receipt of payment for the service provided, e.g. statement of account or bill of sale showing payment and the remaining balance owed;
  • documentation showing income was earned from carrying on a “trade or business” as a sole proprietor, an independent contractor or some form of partnership;
  • contracts;
  • a list of expenses to support the net result of earnings;
  • proof of advertising; and
  • any other documentation substantiating $5,000 in self-employment income.

Where an individual is denied benefits, they can request a second-level review from CRA. If this is still not successful, the taxpayer’s only recourse is to apply to the Federal Court for a judicial review of CRA’s decision.

In the cases below, the courts found that CRA’s decision to deny benefits was reasonable. In one case, the court stated that the above list of acceptable proof to substantiate a claim is not an exhaustive list and that CRA may ask for further support. Specifically, the Canada Recovery Benefits Act states that “an applicant must provide the Minister with any information that the Minister may require in respect of the application.”

Case #1
The taxpayer claimed to have earned $5,250 from tutoring activities in January and February 2020; however, he ceased operations shortly after due to COVID-19 and applied for CERB. No business income was reported in 2019. The taxpayer tried to prove his earnings of $5,250 by providing invoices for tutoring on which the word “paid” was stamped. The CRA agent was unable to match the names and addresses on the invoices to those on CRA’s computer systems. Also, the taxpayer could not support that the amounts were paid; the taxpayer argued that the amounts were paid in cash and never deposited into his bank account. The Court ruled that the taxpayer did not provide sufficient support to demonstrate that he actually earned the amounts.
Case #2
In a similar case, the taxpayer was unsuccessful in supporting her alleged earnings of $5,350 in the twelve-month period prior to application regarding home services (cleaning, food preparation, washing dishes, etc.). The taxpayer did not provide invoices for the alleged earnings or bank statements showing the deposits, both of which the agent stated would be needed to verify the prior period income. The Court agreed with CRA that a taxpayer’s notice of assessment including the relevant income was insufficient to substantiate that the prior period earning requirement had been met.
ACTION: Where eligibility for these supports is at risk, make sure that documentation is retained which demonstrates both the performance of an income-earning activity and also the receipt of funds.

Estimated Sales by CRA: Audit File Selection and Assessment

In an attempt to identify unreported revenue, CRA and Revenu Québec may compare a business’ reported revenue to what would be expected given the business’ level of purchases. The analysis is based on industry-specific profit and revenue ratios.

In a January 31, 2022 French Court of Quebec case, Revenu Québec had assessed QST on additional income for a pizzeria by applying industry revenue ratios to purchases made by the restaurant between 2013 and 2017.

The restaurant argued that it purchased supplies not only for itself but also as an agent for other restaurants so that better deals could be maintained. Further, it argued that it did not have the capacity to generate the level of gross revenue that Revenu Québec assessed based on its available resources.

Taxpayer loses

While the taxpayer argued that it did not have sufficient staffing capacity to generate the assessed level of revenues, evidence was presented that indicated that not all staffing hours were recorded and reported. Further, one of the parties for whom the taxpayer allegedly purchased supplies contradicted the taxpayer’s position. As such, the Court found Revenu Québec’s estimated assessment of gross revenues correct.

Another case

In another case, Revenu Québec noted that the sales records for a used car dealership indicated prices as low as $25. Therefore, the auditors took a sample of 15 sales and followed up with calls to the customers, finding that several had paid prices that were significantly higher than those reported on the sales records. The values of all vehicles sold were then redetermined primarily by using the values included in a regionally recognized auto price/valuation publication (Hebdo Mag guide). The Court upheld Revenu Québec’s assessment.
ACTION: CRA and Revenu Québec often use these and similar techniques to estimate underreported sales. Consider establishing similar tests and metrics to ensure that your revenue is accurately recorded.

Auditing Old Tax Returns:  CRA Abilities and Limitations

CRA may reassess the tax returns for CCPCs and individuals within three years from the sending of the notice of assessment. Returns for which this three year period have expired are commonly referred to as being “statute-barred.” However, CRA may reassess a return beyond this period in certain cases, such as where:

  • a waiver of the normal time limits has been timely filed, or
  • the taxpayer has made a misrepresentation attributable to neglect, carelessness, or willful default or has committed fraud in filing the return or in supplying any relevant information.

Although there are restrictions on when a (re)assessment can be made, these limits do not apply to the periods that CRA may audit. In other words, while a taxpayer may believe that they cannot be assessed for periods beyond three years, CRA still has the ability to analyze those prior years and ask for information, as long as it is reasonable. Likewise, although taxpayers are only generally required to retain support for six years after last being applicable, CRA can still request older documents. If the older documents are available, they must be provided.

In a January 10, 2022 Federal Court case, the Court addressed an application for judicial review of CRA’s decision to expand its audit of the taxpayer and his professional corporation to encompass the 2003 to 2018 taxation years.

The audit, which was initially limited to the 2010 to 2016 tax years, was prompted by information obtained from Citibank and the Royal Bank of Canada under an unnamed persons’ requirement for information on transactions involving the Cayman National Bank. The information identified funds entering Canada, including bank drafts to car dealerships for vehicle purchases. CRA’s initial review identified a Cayman Islands corporation (“COG”) in which the taxpayer and a number of other Canadians, also screened for audit, were involved.

Taxpayer loses
The Court noted the following:

  • the taxpayer was involved in COG from its incorporation in 1996, eventually becoming its president and sole shareholder, but had never declared any offshore income;
  • while it was true that records are generally only required to be retained for six years, COG’s general ledger for the 2003 to 2018 tax years was known to be on a USB key, so the records were known to exist and were accessible;
  • the taxpayer’s long association with COG justified CRA’s requirement for accounting information for that entity; and
  • the documents and other information sought were sufficiently detailed in CRA’s correspondence.

CRA’s requests were held to be reasonable, so the application for judicial review was dismissed.
ACTION: Review document retention and destruction policies to ensure that they align with CRA guidance and the applicable law. CRA may review filings for years even though they appear to be statute-barred.

Money Received from Abroad: CRA Reviews

As of 2015, financial institutions must report electronic fund transfers (EFT) into Canada of $10,000 or more not only to FINTRAC but also to CRA. Where two or more EFTs of less than $10,000 each are made within 24 consecutive hours by or on behalf of the same individual or entity, and the total is $10,000 or more, they are considered to be a single transaction and must be reported. CRA may use this data to identify and audit taxpayers, with the goal of reassessing the receipts as taxable business income.

In a December 14, 2021 French Court of Quebec case, a married couple had received funds from China totalling just over $600,000 from 2009 to 2011. The taxpayers owned a small restaurant in Montreal. Revenu Québec took the position that, since they could not verify where the funds came from and why, the funds were undeclared income. The taxpayers argued that they were gifts and loans from family members in China.

Taxpayers win
Although the taxpayers were not able to obtain banking records from China supporting their argument, they were able to have the parties in China corroborate their representations via video conference. The Court determined that this was sufficient to transfer the burden of proof to Revenu Québec, who was not able to demonstrate that the funds were undeclared income. Therefore, the funds received were determined to be non-taxable.
ACTION: Often, support beyond the taxpayer testimony is required to demonstrate that funds received from offshore accounts are not taxable. Recipients of such funds should obtain and retain support demonstrating what the funds were for and who they were from.

Digital Adoption Program: Grants, Loans and Professional Assistance

On March 3, 2022, the Canada Digital Adoption Program (CDAP) was launched and opened for application. This $4 billion program provides funding through two initiatives.

Grow Your Business Online Initiative
This initiative provides $2,400 micro-grants and access to e-commerce advisors to help applicants adopt digital technology. Grants can cover costs such as website development, search engine optimization, subscription fees for e-commerce platforms and social media advertising. To be eligible, businesses must be for-profit (including for-profit social enterprises and co-operatives), be registered or incorporated, have at least one employee, commit to maintaining a digital adoption strategy for six months after participation and partake in post-program surveys, share information with the government

(e.g. Statistics Canada) and allow the business’ name to be published as a recipient of funding. Corporate chains, franchises or registered charities, representatives of multi-level marketing companies and real estate brokerages are ineligible.

Boost Your Business Technology Initiative
This initiative provides Canadian-owned small and medium-sized enterprises grants to develop a digital plan and leverage funded work placements to help applicants with their digital transformation. The grant can cover up to 90% (to a maximum of $15,000) of the cost of developing a digital adoption plan. Businesses can also apply for an interest-free loan of up to $100,000 from the Business Development Bank of Canada. Eligible businesses must be a Canadian sole proprietor or corporation, be a for-profit privately owned business, have between 1 and 499 full-time employees and have had an annual revenue of at least $500,000 in one of the three previous tax years.

Applicants will also need to complete a digital needs assessment that will generate a report outlining the applicant’s digital maturity and compare it to an industry-specific benchmark. Once the assessment is completed, applicants can select a digital advisor from those registered with CDAP and determine the specific terms of work and cost for the digital application plan. Once the advisor has completed the digital application plan, it can be submitted for grant payment. Organizations that meet specific criteria to deliver digital advisory services can register with CDAP to provide these services to eligible applicants.

ACTION: Review eligibility for these supports to help with digital commerce and apply as soon as possible.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.

If you have any questions, please email us at : elaine@elainemcmahoncpa.ca

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents.

If you have any questions, give us a call! INSERT YOUR CONTACT INFORMATION HERE.

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Personal Income Tax Checklist – 2021 Returns

SECTIONS:
A. Information – All Clients Must Provide
B. Questions To Answer
C. Additional Information – New Clients Must Provide
D. Other

2021 saw the continuation of the COVID-19 pandemic, along with the related government supports and tax issues.
For example, some may have changed how they carried on their employment duties or business operations, including working from home or using their vehicle for employment or business reasons. We have outlined the key tax issues in the checklist below. Please let us know if you have received other support or incurred other costs related to your incomeearning activities due to the COVID-19 pandemic.

Read more

2021 Personal Income Tax Return Checklist

SECTIONS:
A. Information – All Clients Must Provide
B. Questions to Answer
C. Additional Information – New Clients Must Provide
D. Other

2021 saw the continuation of the COVID-19 pandemic, along with the related government supports and tax issues. For example, some may have changed how they carried on their employment duties or business operations, including working from home or using their vehicle for employment or business reasons. We have outlined the key tax issues in the checklist below. Please let us know if you have received other support or incurred other costs related to your income-earning activities due to the COVID-19 pandemic.

Read more