2023 Q4 Tax Tips and Traps Newsletter
IN THIS EDITION:
1. Tax Tidbits
2. CEba repayemtnt deadline extended: some issues
3. enhanced gst residential rental rebate: increased incentives
4. enhanced first-year cca: phase-out after december 31, 2023
5. surcharge to accept payment via credit card: Gst/hst
6. businesses purchasing from non-residents:gst/hst
7. mandatory disclosure rules: increased cra DISCLOSURE
8. REVIVAL of a corporation: tax collection
9. EMPLOYMENT insurance: misconduct
This publication is a high-level summary of the most recent tax developments applicable to business owners, investors, and high net worth individuals. Enjoy!
1. tax tidbits
Some quick points to consider…
CRA has produced various basic tax education and literacy tools, such as seven learning modules with videos and quizzes.
As of January 1, 2024, where more than five information returns of a particular type (such as T4s, T5s, T3s, T4As, NR4s and T5018s) are filed on paper (as opposed to electrically) for a particular filer, a penalty of $125/form will apply. Businesses filing five or fewer forms can still do so on paper without penalty.
Renovations to create a safe play and therapy area for a child with a mental impairment could be eligible for the home accessibility tax credit.
2. ceba repayment deadline extended: some issues
On September 14, 2023, the Department of Finance provided details on extending the deadline for Canada Emergency Business Account (CEBA) repayments, including the following key elements:
the deadline to qualify for partial loan forgiveness (by paying the non-forgivable portion) has been extended from December 31, 2023 to January 18, 2024;
if a refinancing application is made with the financial institution that provided the CEBA loan by January 18, 2024, the deadline to qualify for partial loan forgiveness will be extended to March 28, 2024;
as of January 19, 2024, outstanding loans will convert to three-year term loans subject to a 5% annual interest rate regardless of whether refinancing is sought; and
the previous final repayment deadline of December 31, 2025 has been extended to December 31, 2026.
Financial institutions will contact CEBA loan holders directly regarding their loans. The above changes also apply to CEBA-equivalent lending through the Regional Relief and Recovery Fund.
ACTION: Ensure you fully understand the deadlines to avoid missing the partial loan forgiveness.
3. enhanced gst residential rental rebate: increased incentives
On September 14, 2023, the Department of Finance provided details on a proposal to enhance the existing GST rental rebate. In general, the existing rebate provides a 36% rebate of the GST component of the price paid by landlords to construct, or purchase newly constructed, rental property. The existing rebate begins to be phased out for properties valued at over $350,000 and is eliminated at $450,000.
The proposal would increase the rebate from 36% to 100% and remove the phase-out thresholds for properties with a value over $350,000. The proposal would apply to certain rental housing projects that begin construction between September 14, 2023 and December 31, 2030, inclusive, and complete construction by December 31, 2035.
To qualify for the enhanced rebate, new residential units would need to meet the requirements for the existing rental rebate and be in buildings meeting the following criteria:
the property must contain at least four private apartment units (units must have a private kitchen, bathroom and living area) or at least 10 private rooms or suites (examples of residences for students, seniors and people with disabilities were provided); and
at least 90% of the residential units in the building must be designated for long-term rental.
Projects that convert existing non-residential real estate, such as an office building, into a residential complex would also be eligible if all other conditions are met. Public service bodies would also be eligible to access the enhanced rebate.
The enhanced rebate will not apply to other properties, such as individually owned condominium units, single-unit housing, duplexes, triplexes or housing co-ops; however, the existing rebate would still be available. Substantial renovations of existing residential complexes would not be eligible.
On September 21, 2023, the Bill to enact these measures was introduced in the House of Commons. This Bill did not include all the criteria for eligible projects but provided that the remaining specifics would be set by regulation in the future.
ACTION: If involved in developing multi-unit residential rental property, consider whether you are eligible for this enhanced GST rental rebate.
4. enhanced first-year CCA: Phase-out after december 31, 2023
Over the past several years, several incentives permitting enhanced CCA claims in the year property first becomes available for use have been implemented. Claiming the enhanced first-year CCA provides a tax deferral by accelerating the deduction. The phase-out of these incentives will begin for assets that become available for use after December 31, 2023.
Immediate expensing property (IEP)
Many capital assets, other than those with particularly long lives (such as buildings), are eligible IEP. This includes assets used in a business such as vehicles and equipment. CCPCs that acquire IEP that becomes available for use by December 31, 2023, can claim up to 100% CCA on the IEP. The same end date applies to property acquired by eligible Canadian partnerships that had at least one member that was not an individual. No claim is available under this provision after this date.
For individuals and other eligible Canadian partnerships (where all members are eligible individuals), the property must be made available for use by December 31, 2024.
Accelerated investment incentive property (AIIP) - general
Most capital assets are eligible AIIP. AIIP property that is not manufacturing and processing (M&P) or clean energy equipment is eligible for triple the usual CCA claim available in the year of acquisition. For property that becomes available for use after December 31, 2023, this will decline to twice the usual CCA available in the first year. For property made available for use after December 31, 2027, no enhancement will be available.
Zero-emission property and manufacturing and processing (M&P) or clean energy equipment
The 100% CCA deduction applicable to zero-emission vehicles, zero-emission automotive equipment and AIIP that is either M&P or clean energy equipment is only available for property that becomes available for use by December 31, 2023. Property that becomes available for use by December 31, 2025 will be subject to a maximum 75% first-year CCA deduction. Property that becomes available for use in the following two years will be subject to a 55% maximum.
ACTION: Many assets acquired and made available for use by December 31, 2023 will be eligible for an enhanced first-year CCA claim. When the asset is made available for use after this date, enhanced CCA may still be available but at a much lower rate.
5.suurcharge to accept payment via credit card: gst/hst
As of October 2022, merchants could charge an additional fee for accepting payment via credit card. In a March 28, 2023 Technical Interpretation, CRA opined that the additional fee would be a separate exempt supply of a financial service and, therefore, not subject to GST/HST if all of the following conditions are met:
the fee is charged to the cardholder solely for the acceptance of the use of the credit card as a payment method and is not charged if another payment method is used;
the fee is imposed by (and is thus the revenue of) the merchant who provides to the cardholder the property or service that is purchased with the use of the credit card and not by a person who acts as a billing agent or payment service provider in facilitating the payment;
the fee is subject to the relevant credit card network rules relating to surcharging, including rules regarding the calculation and level of the surcharge; and
the fee is shown and charged separately to the cardholder.
ACTION: If charging an additional fee to accept credit cards, ensure you satisfy the above conditions to ensure the fee is not subject to GST/HST.
6. businesses purchasing from non-residents: gst/hst
Certain non-resident vendors are required to register for and collect GST/HST under a new simplified GST/HST registration regime that commenced July 1, 2021. While the rules are very complex under the simplified regime, GST/HST is not required to be collected on the supply of goods or services to customers registered for GST/HST. To avoid being charged GST/HST, the customer must provide their GST/HST registration number to the non-resident vendor. Where GST/HST is paid in error to a non-resident vendor registered under the simplified regime, the amount is not recoverable by claiming an input tax credit or filing a claim for tax paid in error.
One challenge business customers face is determining whether a non-resident vendor is registered under this simplified regime.
In the summer of 2023, CRA announced that non-residents registered under the simplified method would have their GST/HST accounts automatically transitioned from an RT0001 identifier to RT9999. This new identifier should be noted on all receipts. When a GST/HST registrant purchases from a vendor with this identifier, the purchaser should provide the vendor with its GST/HST number to prevent being charged GST/HST.
ACTION: if a GST/HST registrant purchases from a non-resident vendor with a GST/HST number ending in RT9999, the purchaser should provide their GST/HST registration number to avoid paying GST/HST.
7. mandatory disclosure rules: increased cra DISCLOSURE
The requirement for taxpayers and their advisors to disclose reportable transactions to CRA has been expanded for transactions entered into after June 21, 2023. This change is part of a broader suite of changes requiring the disclosure of tax strategies considered aggressive by the government. Similar requirements exist in other countries, including the United States, the United Kingdom, the European Union and Australia.
Transactions that must be reported
A transaction or series of transactions must be reported if it is an avoidance transaction and if one hallmark of aggressive tax planning (contingent fee, contractual protection or confidential protection) is present. Where there are no hallmarks, the transaction is not reportable, even if there is a tax benefit.
Avoidance transaction
An avoidance transaction is one where it can be reasonably considered that obtaining a tax benefit was one of the main purposes. This could capture many normal transactions as tax (either alone or with other motivators) is often a main factor.
Contingent fee arrangements hallmark
This hallmark is present if an advisor or promoter (or non-arm’s length person to them) has or had entitlement immediately or in the future and either absolutely or contingently, to a fee based on, or contingent on, a tax benefit.
Contractual protection hallmark
This hallmark is present if the taxpayer, another person who entered into the transaction for the benefit of the taxpayer, an advisor or a promoter or a non-arm’s length person to any of these persons has or had contractual protection in respect of the transaction or series.
Contractual protection means any form of insurance (other than standard professional liability insurance) or other protection. For example, this could include an indemnity, compensation or a guarantee. The insurance or protection must protect against a failure to achieve the tax benefit or provide support in the course of a dispute related to the tax benefit.
Confidential protection hallmark
This hallmark is present if an advisor or promoter (or non-arm’s length person to them) obtains or obtained confidential protection in respect of a tax treatment related to the avoidance transaction or series from a person they sold the plan to or provided assistance or advice to.
Confidential protection prohibits disclosing the details or structure of the transaction or series to any person (including CRA). Disclaiming or restricting an advisor’s liability is not confidential protection if it does not prohibit the disclosure of the details or structure of the transaction or series.
CRA opined that the protection of trade secrets that do not relate to tax does not constitute the presence of the confidential protection hallmark.
Deadline
The deadline for reporting is 90 days after the earlier of the transaction or becoming contractually obligated to undertake the transaction.
Penalties
Penalties of $500 per week, up to the greater of 25% of the tax benefit and $25,000, apply to most taxpayers. For corporations with at least $50 million of assets, the penalty is $2,000 per week up to the greater of 25% of the tax benefit and $100,000.
ACTION: Expanded disclosures to CRA are required when a taxpayer enters into an avoidance transaction and at least one of three hallmarks of aggressive tax planning are present. Ensure you are fully aware of this disclosure requirement and filing if necessary.
8.revival of a corporation: tax collection
June 12, 2023 Court of King’s Bench of Alberta case reviewed CRA’s application to revive a corporation dissolved in 2020. The former sole shareholder opposed the application. The corporation’s capital losses (as quantified during an audit of the 2013 and 2014 years) were used in 2017 and 2018. CRA sought to revive the corporation and issue notices of assessment for 2017 and 2018.
Revival granted
Under the Alberta Business Corporations Act, a creditor has standing to ask that a dissolved corporation be revived. While taxpayers remain liable for tax when income is earned, the liability does not become a debt until taxes are assessed. As no notice of assessment had been issued, CRA had no standing as a creditor. They would only become a creditor if they issued a notice of assessment. This created a circularity issue as an assessment could not be issued to a dissolved corporation. However, the Court has the power to designate someone as an “interested person,” allowing the designated person to revive a dissolved corporation.
The Court found that CRA had a valid interest in the revival and sought this remedy to further its interest; that is, to issue a notice of assessment to convert the taxpayer’s liability for taxes into a debt.
While the revived corporation would have no assets, no property, no directors and no shareholders, a dissolved corporation that has been revived is deemed to always have existed. CRA argued that they could pursue the former shareholders on the basis that assets were transferred on dissolution to non-arm’s length parties for less than fair market value consideration.
Similar rules are applicable in other provinces.
ACTION: Dissolving a corporation may not protect former shareholders from CRA taking measures to collect a tax debt.
9. EMPLOYMENT INSURANCE: misconduct
An August 24, 2023 Federal Court of Canada case reviewed whether the taxpayer’s employment had ceased due to misconduct, which would render the taxpayer ineligible for employment insurance. The taxpayer worked at a community health care centre that required all employees to provide proof of full vaccination against COVID-19 unless they provided evidence of a valid medical reason or they had a valid human rights reason (including religion) in accordance with the Ontario Human Rights Code for not being vaccinated. The Social Security Tribunal found that the taxpayer lost his employment due to his own misconduct because he was aware of his employer’s vaccination policy and the consequences of not complying. The Court found that this decision was not unreasonable.
ACTION: An employee’s cessation of employment due to their failure to comply with the employer’s vaccination policy may result in that individual being ineligible for employment insurance.
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.
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