We are providing an update on recent changes to the existing government programs for businesses and individuals followed by our regular tax tips newsletter.
Support for Businesses

CEBA Loan – Deadline Extended and $20,000 Increase

The deadline to apply for the Canada Emergency Business Account (CEBA) has been extended to December 31, 2020. Additionally, businesses and not-for-profits that continue to be seriously impacted by the pandemic will have access to an additional $20,000 of financing, on top of the original loan of $40,000. For those that qualify for the increase, half of the $20,000 increase drawn down would be forgivable if repaid by December 31, 2022. Details of the limit increase have not been released yet. 
There is a new call centre that you can contact if you have submitted an enrollment request for CEBA and have the following questions:

  • What is the status of my application?
  • Why was my application declined?
  • Why was my submitted document rejected?

You can contact the CEBA Call Centre at 1-888-324-4201, and the hours are Monday to Friday from 8:00 am to 7:00 pm MST. 
The link to the CRA website explaining the CEBA loan is here: https://ceba-cuec.ca/
CEBA loans from RBC

Please note that the CEBA loans from the RBC are being issued as a revolving credit line until December 31, 2020. On January 1, 2021, the revolving credit line will convert to a non-revolving term loan, and no further advances may be made going forward. It appears to us that companies that do not draw the $40,000 from the credit line by December 31, 2020 will lose the ability to only repay $30,000. We recommend that you speak to your commercial account manager at RBC for further clarification on this.
RRRF – Regional Relief and Recovery Fund – Alternative to the CEBA loan

The RRRF is a new program that provides funding to western Canada small and medium sized enterprises who do not qualify for the $40,000 CEBA loan. The RRRF program has similar repayment terms when compared to the CEBA, and will forgive 25% of the loan if it is repaid by December 31, 2022. Some examples of businesses that will benefit from this program are pre-revenue firms, businesses without salary employees, and businesses that pay their owners with dividends.

The RRRF also offers additional support for women led businesses and businesses that are not located in a metropolitan region. These specific businesses will receive additional support through the “RRRF – Women’s Enterprise Initiative Stream” and the “RRRF – Community Futures Stream.” If you are interested in learning more, or would like to see if you are eligible, follow this link:

PD27 – Mandatory reporting requirements for employers paying wages

If you were eligible to receive the TWS (10% Temporary Wage Subsidy), you will need to fill out and submit Form PD27, 10% Temporary Wage Subsidy Self-Identification Form for Employers, for each of your payroll program (RP) accounts. The CRA will use the information from your Form PD27 to reconcile the TWS on your payroll program (RP) accounts.

You are encouraged to complete Form PD27 and submit it to the CRA as soon as possible to avoid receiving a discrepancy notice at the end of the year. You do not need to wait until you file your T4 information return. The following is a link to the form which includes more information:

CEWS – Canada Emergency Wage Subsidy

The CEWS will remain at the current subsidy rate of up to a maximum of 65% of eligible wages until December 19, 2020. A proposal has been made to continue the CEWS until June 2021; however there is no additional information on this further extension. Information on applying for the CEWS and all other information can be found here:

CERS – Canada Emergency Rent Subsidy (pending the passage of legislation)

On October 9, the federal government proposed the new CERS to help businesses, charities and non-profits that have suffered a revenue drop due to COVID-19 by subsidizing a percentage of their expenses, on a sliding scale, up to a maximum of 65% of eligible expenses until December 19, 2020. The CERS program includes a subsidy of 25% for organizations temporarily shut down by a mandatory public health order issued by a qualifying public health authority, in addition to the 65% subsidy. The application process is not open yet, but information on the program can be found here:

Support for Individuals

CRB - Canada Recovery Benefit

The CRB is a benefit of $1,000 per two weeks ($900 after taxes withheld) for up to 26 weeks. It is available to workers who are self-employed or are not eligible for EI and who still require income support. CRB covers 13 two week periods, from September 27, 2020 to September 25, 2021. Applications opened on October 12, 2020. If your situation continues past two weeks, you will need to apply again. Please note that if you have employment income greater than $38,000, this program has a 50% clawback rate. See the link below for the eligibility criteria and additional information:

CRSB - Canada Recovery Sickness Benefit

The CRSB provides $500 per week ($450 after taxes withheld) for employed and self-employed people who can’t work because they are sick or must self-isolate due to COVID-19. Individuals can apply for a maximum of 2 weeks of benefit between September 27, 2020 and September 25, 2021. See the link below for the eligibility criteria:

CRCB - Canada Recovery Caregiving Benefit

The CRCB provides income support to individuals who must stop work to care for dependents. CRCB provides $500 per household per week ($450 after taxes withheld) for up to 26 weeks. The benefit is for employed or self-employed people who can’t work because they need to care for children under 12 or other family members who need supervised care due to COVID-19. Individuals can apply through CRA for up to 26 one-week periods between September 27, 2020 and September 25, 2021. See the link below for the eligibility criteria:

Persons with Disabilities – One-Time Tax Free Payment

The government is providing a one-time, tax-free, non-reportable payment of up to $600 to help Canadians with disabilities. See the link for details:

Full List of CRA COVID-19 Programs

For a full list of all programs available including the ones listed above and more can be found here:

In Our Community

During recent months, Deverdenne Davis Cyr LLP has recognized the importance of our continued support of our local community. Donations were made to the Salvation Army Food Bank, Odyssey House and the recent Rotary Club Food Drive held this fall. We have also supported the 3D Children’s Society, the Grande Prairie Boys’ Choir Society as well as STARS.
Tax Tips

Changes to Alberta Payroll Rules

On November 1, 2020, the Alberta Government made some changes to the payroll rules. We encourage all employers and employees to review the changes. See the links for details:

TAX ON SPLIT INCOME: The 20 Hours Test

The tax on split income (TOSI) can subject various income sources, with taxable private corporation dividends being the most common, to personal tax at the highest marginal rate. One of the exceptions from TOSI occurs when the income recipient is actively engaged in the business. An individual will be deemed to be actively engaged in any year in which the individual works in the business at least an average of 20 hours per week during the portion of the taxation year that the business operates.

Statutory Holidays, Sick Days, Vacations

In an August 6, 2019 French Technical Interpretation, CRA opined that days that an individual is paid for time that they do not actually work (such as statutory holidays, sick days, and annual vacations) should not be considered hours worked for the computation. For example, if an individual is paid for five days for a week, but only actually works four days due a statutory holiday on one of the days, only four days of work should be considered in the computation.

Less Than 20 Hours Required

In a June 7, 2019 Technical Interpretation, two spouses contributed an equal amount of effort to a business that only required 10 hours of weekly work (5 hours each per week). Where the 20-hour test is not met, the spouses may still not be subject to TOSI if they can demonstrate that they were actively engaged on a “regular, continuous and substantial basis”.

While it is a question of fact, CRA stated that it is possible for this exception to be available in this scenario. Consideration should be given to the ongoing nature and labour requirements of the business for the particular year. In general, whether an individual is actively involved in a business will depend on the time, work and energy that the individual spends on the business.

The more an individual is involved in the management or day-to-day operations, the more likely they will be sufficiently involved. 

General CRA Activity

Over the last few years, CRA has focused on purchases and sales within the real estate sector. They are reviewing transactions for several items, such as:

  • property flips on account of income;
  • ineligible principal residence claims;
  • commissions on sales;
  • pre-sale condo assignments; and
  • eligibility for the GST/HST new housing and rental rebates.

One method for reviewing such transactions is by requiring taxpayers to respond to a detailed questionnaire. The questionnaire covers items such as:

  • date and details of purchase and sale in sale agreements, statements of adjustments, and mortgage/financial documentation;
  • details of any major renovations, building permits, construction contracts, and municipal approvals;
  • estimates of fair market values at different key points (such as after the completion of a renovation);
  • real estate listing agreements; and
  • invoices, receipts, bank statements, driver’s license, and other items which indicates the address of the property.

The purchaser’s intention for the use of the property is key in determining the appropriate tax treatment upon sale.

U.S. Real Estate

On June 25, 2020, CRA issued a solicitation for engaging one or more third-party suppliers to provide “U.S. real estate and real property data where a Canadian resident is the owner or party to the purchase, sale or transfer” back to, at a minimum, January 1, 2014 with ongoing provision of new data on a monthly basis.

CRA may consider reviewing several issues in this context, including:

  • missed disclosure of real estate not exclusively held for personal use;
  • unreported rental income, whether not reported at all or not reported accurately;
  • unreported real estate sales; and
  • inappropriate claims for the principal residence exemption on such dispositions.
CPP: When To Apply?

While the normal age to begin receiving regular CPP is 65, individuals can apply to start receiving earlier at a cost, or later for a greater benefit:

  • If the individual starts before age 65, payments will decrease by 0.6% each month (or by 7.2% per year), up to a maximum reduction of 36% if started at age 60.
  • If the individual starts after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if started at age 70.

The decision as to when to commence CPP payments can be very complex, with extensive variables to consider, primarily related to personal factors and economic scenarios. While 95% of Canadians have consistently taken CPP payments at normal retirement age (age 65) or earlier since the CPP introduced flexible retirement in the 1980s, a July 27, 2020 report (The CPP Take-Up Decision) by the Canadian Institute of Actuaries and the Society of Actuaries examined whether that is always the best option. 

The report compared receiving CPP commencing at age 65 against pulling funds from RRSP/RRIF savings to replace the CPP Payments and then commencing CPP at age 70. The two primary factors which influence the decision are life expectancy and rate of return. In particular, the report noted the following:

  • A major advantage of increasing CPP payments via postponement is that the increased CPP provides additional secure lifetime income that increases each year alongside the price of consumer goods, thus protecting against inflation, financial market risk, and the risk of outliving retirement savings.
  • Given today’s low-interest-rate environment and general population longevity expectations, the report noted that delaying CPP payments is often a financially advantageous strategy.
  • In the risk-free investment comparison, 75-80% of Canadians within this framework receive more income by delaying their CPP payments.
  • Even in an extreme case that favours not deferring CPP payments (low longevity expectations and very high expected investment returns), a person faces a 50% probability of receiving more income by delaying CPP payments, along with the risk-reduction benefits of a delay mentioned above.
  • Higher-income Canadians have longer life expectancies than lower-income Canadians, and females generally live longer than males; therefore, it would more often be in their best interest to delay CPP payments.

On September 3, 2020, CRA announced that, effective January 1, 2020, the rates allowable under the simplified method related to travel for medical expenses, moving expenses, and the northern residents deduction, as well as meal claims for transport employees, increased to $23 from $17 per meal, for a total of $69/day. This is also the amount that CRA has stated is reasonable for a meal and therefore the non-taxable portion of an overtime meal or allowance, or certain other travel allowances provided to employees.

CRA has previously noted that reasonable allowances paid by employers for meal costs incurred while travelling is a question of fact. Reasonable allowances are generally not taxable. Although they would generally accept $23 per meal (including taxes), higher amounts could be reasonable, provided they are supported by relevant facts, including:

  • cost of ordinary meals in the travel area;
  • availability of meals in proximity to the location of work or lodgings while away;
  • whether some meals will likely be provided to the employee at no cost; and
  • exchange rates where travel is outside of Canada.

CRA has also indicated previously that they consider the meal allowances based on the National Joint Council rates (which well exceed $69/day but are currently less than $23 for breakfast or lunch) to be reasonable for the meal portion of these travel allowances. However, these Council rates are not accepted for the other purposes mentioned above.

In a July 23, 2020 Tax Court of Canada case, at issue were a number of expenses claimed by the taxpayers (a corporation and its sole individual shareholder) in respect of the business of selling financial products and providing financial planning advice. CRA denied various expenses spanning 2007 and 2008 and assessed many of them as shareholder benefits. That is, the amounts were taxable to the individual shareholder and not deductible to the corporation.

CRA also assessed beyond the normal reassessment period on the basis that the taxpayers made a misrepresentation attributable to neglect, carelessness, wilful default or fraud. They also assessed gross negligence penalties which is computed as the greater of 50% of the understated tax or overstated credits related to the false statement or omission, and $100.

The following expenses were reviewed:

  • bonuses paid to family members who were not employees of the taxpayer;
  • payments to family members under an Employee Profit Sharing Plan (EPSP) where there was no evidence that the payments referred to profits;
  • salaries paid to family members (including the shareholder’s daughter who received a salary of $5,000 in 2007 and $400 in 2008);
  • salaries paid to the taxpayer’s children’s care providers;
  • salaries to the taxpayer’s former spouse, which the taxpayer argued was the same as personally paying spousal support;
  • travel costs for the taxpayer and his family to go on a cruise on which the taxpayer made business-related presentations (CRA conceded the taxpayer’s travel costs);
  • significant interest expense with very little support; and
  • many other costs such as clothing, toys, jewelry, personal items, lawncare, maid service, and pet care for the shareholder and family members.

While the taxpayer originally claimed the travel expenses for the taxpayer’s family to travel to Hawaii for a shareholders’ meeting, the taxpayer conceded these amounts.

The taxpayer argued that any benefits taxable to him personally were conferred by virtue of his employment, not his shareholdings, and, therefore, should be deductible to the corporation.

Taxpayer Loses

In dismissing the taxpayer’s argument, the Court found that the vast majority of expenses reviewed were personal in nature and denied the deduction. The Court also found the vast majority of denied expenses to be a shareholder benefit. These expenses were not, by and large, expenses a reasonable employer would otherwise pay for the benefit of an arm’s length employee. The taxpayer, through his unfettered control, chose not to pay salaries or bonuses but rather to deduct the disallowed expenses from the corporate receipts and never report or ascribe any amount of benefit or employment income to himself.

The Court upheld CRA’s assessment beyond the normal limitation period as well as gross negligence penalties, noting:

  • the sole shareholder’s education and training regarding complex tax integration, small business deduction strategies, and corporate/personal lifestyle structuring;
  • the individual unilaterally directed which expenses the corporation should deduct, even though some were clearly personal; and
  • the degree and scope of the upheld assessments were very large – in excess of $700,000 for the corporation and in excess of $1,100,000 for the individual, both spanning a two-year period.

The Court stated that the gross negligence penalties exist for these such situations: sophisticated taxpayers must appreciate that using corporate structures to mask inappropriate deductions and shield personal income from tax should not be done.

The result of these inappropriate deductions was effectively triple taxation – corporate tax on disallowed deductions, personal tax on shareholder benefits, and a 50% gross negligence penalty on both the corporate and personal taxes. It would have been much cheaper had the taxpayer taken additional salaries or dividends, and paid the additional taxes up front, rather than running personal expenses through the corporation.

In the case where personal expenses are paid by the corporation, the accounts should generally be corrected by adjusting the shareholder loan account or having the individual pay the corporation back. This was not done in this case.
UNREMITTED GST/HST OR SOURCE DEDUCTIONS: Directors can be Personally Liable

Directors can be personally liable for employee source deductions (both the employer and employee’s portion of CPP and EI, and income tax withheld) and GST/HST unless they exercise due diligence to prevent failure of the corporation to remit these amounts on a timely basis. As many businesses are struggling with cashflow, it may be attractive to direct these amounts held in trust for the government to satisfy other creditors, such as suppliers. However, in doing so, directors may unknowingly expose themselves to personal liability if the entity is not able to remit the required source deductions and GST/HST.

Director liability can extend beyond directors of a corporation to other directors, such as those of a non-profit organization.

The following recent court cases highlight some of the issues related to this liability exposure:

  • In a July 20, 2020 Tax Court of Canada case, the use of trust funds (employee withholdings and GST/HST collected on revenues) to pay other creditors resulted in the directors being personally liable for the unremitted amounts. Their significant contributions of personal assets to pay other creditors and efforts to remedy the failure after it has occurred could not offset the lack of steps taken to prevent the failure to remit.

  • However, in another July 20, 2020 Tax Court of Canada case, the director was not personally liable as due diligence to prevent failure to remit was demonstrated. In this case, there was no evidence GST/HST funds had been diverted to other expenses, and significant efforts to make remittances was conducted, including prioritizing remittances over opportunities to benefit the business. Racial discrimination and sexual harassment by its customers impeded the business’s efforts to collect revenues including GST/HST. 

Care should also be provided to properly resign as a director to limit future exposure. CRA must issue the assessment against the directors within two years from the time they last ceased to be directors.

In another July 23, 2020 Tax Court of Canada case, failure to comply with all resignation requirements under the relevant provincial corporate law meant that the director’s resignation was not legally effective, even though he had submitted a signed letter of resignation to the corporation. As he was still a director, he was still personally liable for unremitted GST/HST and source deductions. 
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

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

For any questions... give us a call. 
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