Seasons Greetings

Cheryl, Trevor, Pat and the staff at Deverdenne Davis Cyr LLP wish you and your family a Merry Christmas and a happy, healthy and successful New Year.

Holiday Season Office Hours

Our office will be closed for the holidays December 26^th through January 2^nd. We will resume our regular office hours 8:30 am – 4:30 pm on Tuesday, January 3, 2023. Please note this closure if you have a December 31^st tax filing or payment deadline to consider.

In Our Community

For our annual Christmas community sponsorship we have chosen to support families through Helping Hands of Grande Prairie. We donated gifts and groceries to enhance the Christmas season for families in our community. Helping Hands of Grande Prairie began as a Christmas hamper program and has grown into a year round operation to provide food and other necessities to help people in need.

Year End Payroll Reminder

We suggest that you reconcile your 2022 payroll source deductions to your CRA payroll account prior to the payment of your final 2022 remittance. Also confirm that your CPP and EI deductions are correct for the year. The 2022 CPP maximum annual pensionable earnings are $64,900 with the employee maximum contribution of $3,499.80. The EI maximum annual insurable earnings are $60,300 and the EI maximum annual premiums are $952.74 for the employee portion and $1,333.84 employer portion.

If your business made payments to employees or shareholders for employment income, commissions, taxable benefits, dividends, interest or for other services during the year, the income may need to be reported to CRA on a T4, T4A, T5 or other slip. The deadline to file these slips is February 28, 2023.

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.
3. A senior whose 2022 net income exceeds $81,761 will lose all, or part, of their old age security pension. Senior citizens will also begin to lose their age credit if their net income exceeds $39,826.Consider limiting income over these amounts, if possible. Another option would be to defer receiving old age security receipts (for up to 60 months) if it would otherwise be eroded due to high-income levels.
4. If you own a business or rental property, consider making a capital asset purchase by the end of the year. Many capital assets purchased and made available for use in 2022 will be eligible for a 100% CCA write-off under the new immediate expensing rules. Some zero-emission electric vehicles purchased by businesses may be eligible for a 100% write-off (limited in some cases to the first $59,000). Alternatively, zero-emission vehicles purchased in 2022 may be eligible for a federal incentive rebate of up to $5,000.
5. Consider selling non-registered securities, such as stock, mutual fund or exchange-traded fund, that has declined in value since it was bought to trigger a capital loss that can offset capital gains in the year. Anti-avoidance rules may apply when selling and buying the same security, even where the same security is held in different brokerage accounts.
6. Consider restructuring your investment portfolio to convert non-deductible interest into deductible interest. It may also be possible to convert personal interest expense, such as interest on a house mortgage or personal vehicle, into deductible interest.
7. If you have equity investments or loans made to a Canadian small business that has become insolvent or bankrupt, an allowable business investment loss (ABIL) may be available. For loans to corporations to be eligible, the borrower must act at arm's length. ABILs can be used to offset income beyond capital gains, such as interest, business or employment income.
8. If a commercial debt you owe (generally a business loan) has been forgiven, special rules apply that may result in additional taxes or other adjustments to the tax return.
9. You have until Tuesday, March 1, 2023, to make tax-deductible registered retirement savings plan (RRSP) contributions for the 2022 year. Consider having the higher income earning individual contribute to their spouses RRSP via a "spousal RRSP" for greater tax savings. NEW! While it will not affect 2022 income, individuals are expected to be able to begin making contributions to the new tax-free first home savings plan (FHSP) part way through 2023. Eligible contributions are deductible, and withdrawals for eligible purchases (to purchase a new home) are not taxable. Up to $8,000 can be contributed annually, up to a maximum lifetime limit of $40,000.
10. Individuals 18 and older may deposit up to $6,000 into a tax-free savings account in 2022. An additional $6,500 may be contributed starting on January 1, 2023.Consider catch-up contribution if you have not contributed to the maximum amounts for prior years. An individual's contribution room can be found online on CRA's My Account.
11. A Canada education savings grant for registered education savings plan (RESP) contributions equal to 20% of annual contributions for children (maximum $500 per child per year) is available. In addition, lower-income families may be eligible to receive a Canada learning bond.
12. A registered disability savings plan (RDSP) may be established for a person under 60 and eligible for the disability tax credit. Non-deductible contributions to a lifetime maximum of $200,000 are permitted. Grants, bonds and investment income earned in the plan are included in the beneficiary's income when paid out of the RDSP.
13. Canada pension plan (CPP) receipts may be split between spouses aged 65 or over (application to CRA is required). Also, it may be advantageous to apply to receive CPP early (age 60-65) or late (age 65-70).
14. Are you a U.S. resident, citizen or green card holder? Consider U.S. filing obligations concerning income and financial asset holdings. Filing obligations may also apply if you were born in the U.S. Information exchange agreements have increased the flow of information between the CRA and the IRS. Collection agreements enable CRA to collect amounts on behalf of the IRS.
15. If income, forms or elections have been missed in the past, a voluntary disclosure to CRA may be available to avoid penalties.
16. Interest-free loans of up to $40,000 where available to homeowners and landlords who undertake retrofits identified through an authorized EnerGuide energy assessment.
17. NEW! The Underused Housing Tax (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. In general, no disclosure or tax is required for citizens, permanent residents, and publicly traded corporations. However, some taxpayers, such as private corporations, must file an annual declaration, even if they met an exemption such that they do not need to pay the 1% tax. legal ownership of real estate must be considered as of December 31, 2022, with filings and/or taxes first being due onApril 30, 2023.
18. NEW! Tax-free Canada dental benefit payments of up to $650 per child per year are available to cover dental expenses (as of October 1, 2022) for children under 12 if they do not have dental insurance coverage. The benefit is available to families with an adjusted net income less than $90,000. Applications can be made online through CRA's MyAccount.
19. NEW! The tax-free Canada housing benefit provides a one-time top-up of $500 to low-income renters (those with adjusted net income below $35,000 for families for $20,000 for individuals). Applications can be made online through CRA's MyAccount.

2022 Remuneration

Higher personal income levels are taxed at higher personal rates, while lower levels are taxed at lower rates, while lower levels are taxed at lower rates. Therefore, individuals may want to, where possible, adjust income out of high-income years and into low-income years. This is particular useful if the taxpayer is expecting a large fluctuation in income due to, for example, an impending:

• maternity/paternity leave;
• large bonus/dividend; or
• sale of a company or investment assets.

In addition to increases in marginal tax rates, individuals should consider other costs of additional income. For example, an individual with a child may receive reduced Canada child benefit (CCB) payments. Likewise, excessive personal income may reduce receipts of OAS, GIS, GST/HST credit and other provincial/territorial programs.

There are various ways to smooth income over several years to ensure an individual is maximizing access to the lowest marginal tax rates. For example:

• Taking more or less earnings out of the corporation (in respect of owner-managed companies).
• Realizing capital gains/losses by selling investments
• Deciding whether to claim RRSP contributions made in the current year or carry forward the contributions.
• Withdrawing funds from an RRSP to increase income. However, care should be given to the loss in the RRSP room based on the withdrawal.
• Deciding whether or not to claim CCA on assets used to earn rental/business income.

Dividends paid to shareholders of a corporation that do not "meaningfully contribute" to the business may result in higher taxes due to the "tax on split income" rules.

Year-end planning considerations not specifically related to changes in income levels and marginal tax rates include:

1. Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the personal tax is paid when the cash is withdrawn from the company). The effect on the "qualified small business corporation" status should be reviewed before selling the shares where large amounts of capital have accumulated. In addition, changes that may limit access to the small business deduction where significant corporate passive investment income is earned should be reviewed.
2. If dividends are paid out of a struggling business with a tax debt that cannot be paid, the recipient could be held liable for a portion of the corporations tax debt, not exceeding the value of the dividend (Section 160 assessments).
3. Individuals that wish to contribute to the CPP or an RRSP may require a salary to generate earned income. RRSP contribution room increases by 18% of the previous years' earned income up to a yearly prescribed maximum ($29,210 for 2022; $30,780 for 2023).
4. Dividend income, as opposed to a salary, will reduce an individual's cumulative net investment loss balance, thereby potentially providing greater access to the capital gain exemption.
5. Consider paying taxable dividends to obtain a refund from the "refundable dividend tax on hand" account in the corporation. The refund amount may be restricted if "eligible" dividends are paid. Eligible dividends are subject to lower personal tax rates.
6. It is costlier, from a tax perspective, to earn income in a corporation from sales to other private corporations in which the seller or a non-arm's length person has an interest. As such, consideration may be given to paying a bonus to the shareholder and specifically tracking it to those higher taxed sales. Such a payment may reduce the total income taxed at higher rates.
7. Careful tracking of an individual shareholder's labour and capital contribution to the business, as well as risk assumed in respect of the business, should be maintained in a permanent file. Dividends paid that are not reasonable in respect of those contributions may be considered "split income" and taxed at the highest tax rate. Several other exceptions may also apply.
8. Access to the corporate federal small business deduction is reduced where more than $50,000 of passive income is earned in the corporation. Consider whether it is appropriate to remove passive income-generating assets from the corporation and whether a shift in the types of passive assets held is appropriate. In some provinces, it may actually be beneficial to have access to the federal small business deduction reduced. As many variables affect these decisions, consultation with a professional advisor is suggested.
9. If you provide services to a small number of clients through a corporation (that would otherwise be considered your employer), CRA could classify the business as a personal services business. There are significant negative tax implications of such a classification. Consider discussing risk and exposure minimization strategies (such as paying a salary to the incorporated worker) with a professional advisor in such scenarios.

Tax Tidbits

Some quick points to consider…

• 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.

Crowdfunding: Taxable or Not?

A June 2, 2022 Technical Interpretation discussed the taxability of funds received

through crowdfunding campaigns. CRA first noted that amounts received through a

crowdfunding arrangement could represent loans, capital contributions, gifts,

income or a combination of two or more of these. This means that the funds

received could be taxable (such as business income) or not (such as a windfall, gift

or voluntary payment). As the terms and conditions for each campaign vary greatly,

the determination of tax status must be conducted on a case-by-case basis.

Where an amount is not a windfall, gift or other voluntary payment, the amount may

be taxable if it constitutes income from a source. To be a non-taxable gift or other

voluntary payment, the following conditions must be met:

• there is a voluntary transfer of property;
• the donor freely disposes of their property to the donee; and
• the donee confers no right, privilege, material benefit or advantage on the donor or on a person designated by the donor.

CRA opined that contributions would likely be considered nontaxable gifts in the case of a “Go Fund Me” campaign created by family members of an individual with cancer to assist in that individual’s treatment.

In an August 23, 2019 Technical Interpretation, CRA considered whether an employer’s contribution to their employee’s crowdfunding campaign to assist with the cost of additional therapies and support for the employee’s recently born child would be received in the recipient’s capacity as an employee (taxable) or individual (not taxable).

CRA indicated that, where the person is dealing at arm’s length with the employer and is not a person of influence (such as an executive who controls employer decisions), the benefit or amount would generally be received in the person’s capacity as an individual (non-taxable) where the amount is:

• provided for humanitarian or philanthropic reasons;
• provided voluntarily;
• not based on employment factors such as performance, position or years of service; and
• not provided in exchange for employment services.

If considered non-taxable, CRA opined that, as the contribution was not an expense incurred to gain or produce income, it would not be deductible.

Trusts: New and Expanded Disclosure Requirements

Legislation has been proposed for trusts (including estates) with years ending on December 31, 2022 and onwards that would significantly expand the reporting rules. More trusts would be required to file tax returns, and more information would be required to be disclosed in these returns. In addition, sizable penalties would be introduced for non-compliance.

More trusts and estates required to file

Under the existing rules, trusts are exempt from filing a T3 tax return if they have no taxes payable and no dispositions of capital property. However, under the proposals, tax returns will be required for all Canadian resident express trusts (this generally means trusts created deliberately) that do not meet at least one of a number of exceptions. Some of the more common exceptions include the following:

• trusts in existence for less than three months at the end of the year;
• trusts holding only assets within a prescribed listing (including items such as cash and publicly listed shares) with a total fair market value that does not exceed $50,000 at any time in the year;
• trusts required by law or under rules of professional conduct to hold funds related to the activity regulated thereunder, excluding any trust that is maintained as a separate trust for a particular client (this would apply to a lawyer’s general trust account, but not specific client accounts); and
• registered charities and non-profit clubs, societies or associations.

Reporting will be required where a trust acts as an agent for its beneficiaries (referred to as bare trusts in the government’s explanatory notes). No details on the intended breadth of such trusts have been provided by the Department of Finance or CRA to date.

More disclosure of parties to trusts

Where a trust is required to file a tax return, the identity, including residency, of all of the following people must be disclosed:

• trustees, beneficiaries and settlors; and
• anyone that has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the income or capital of the trust.

The requirement to provide information in respect of the beneficiaries would be met if beneficiary information is provided for all whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return. Where there are beneficiaries whose identity is not known or ascertainable with reasonable effort, the person making the return would be required to provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust. For example, where the beneficiaries are both the current and future grandchildren of the settlor, details in respect of the current children must be provided in addition to details of the trust terms describing the future class of beneficiaries.

The new rules would not require the disclosure of information subject to solicitor-client privilege.

Substantial penalties

Failure to make the required filings and disclosures on time attract penalties of $25 per day, to a maximum of $2,500, as well as further penalties on any unpaid taxes. New gross negligence penalties have been proposed, applicable to filings not made on time and inaccurate filings. These penalties are proposed to be the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime, leading to the concern that multiple persons could be subject to these substantial penalties for a single trust.

Trusts: New and Expanded Disclosure Director Liability: Is Asking About Source Deductions Enough?

Directors can be personally liable for payroll source deductions (CPP, EI and income tax withholdings) and GST/HST unless they exercise due diligence to prevent the corporation from failing to remit these amounts on a timely basis.

An August 31, 2022 Tax Court of Canada case found that the director was not duly diligent and therefore was personally liable for the corporation’s unremitted payroll deductions, interest and penalties of $78,121 from January 2011 to April 2012.

The taxpayer argued that he was duly diligent as he asked at the directors’ meeting each month whether the tax remittances were up-to-date and received oral confirmations that they were. The taxpayer stated that he had “checked the box” at each directors’ meeting. He also argued that his decisions were driven by materiality; he focused his efforts on the corporation’s overall well-being and safeguarding the millions of dollars of investment, rather than the payroll remittances that he considered “tiny.”

Taxpayer loses

The Court ruled that the taxpayer was not duly diligent in preventing the failure to make adequate payments. It noted that the taxpayer never contacted CRA to confirm whether payroll remittances were current, which was particularly problematic as he was unable to obtain reliable financial statements and was aware of the difficult financial situation. While it was the taxpayer’s view that this was someone else’s job, there was no evidence of the taxpayer ever asking anyone else to follow up with CRA.

Executor: Whether to Accept This Role

Individuals may be asked to take on various roles in respect of loved ones, friends, clients or others. One role that is particularly riddled with challenges is that of an estate executor. While an individual may carry out their duties in an appropriate manner, it is important to consider the risks of unhappy beneficiaries and any other undesirable outcomes, including litigation and/or strained relationships.

A March 4, 2022 Tax Court of Canada case reviewed whether the taxpayer was personally liable for the estate’s tax debts. On the death of the taxpayer’s father in 1994, the taxpayer and his brother became executors of the estate. The taxpayer argued that he renounced his role of executor two months after the death of his father and therefore should not be held liable for the estate’s tax debts.

The father left most of his estate to the taxpayer’s brother, as well as a portion to grandchildren and great-grandchildren. The taxpayer accepted this decision but wanted to ensure that his daughter received her share of the estate. To this effect, in 2010, the taxpayer and his brother took steps to distribute a balance of $240,000 payable to the taxpayer’s daughter, secured by a mortgage against one of the estate’s properties. That is, the taxpayer’s daughter was essentially provided a $240,000 receivable from the estate. No clearance certificate was obtained, and the estate was in arrears with its taxes. In 2016, the brother died.

While the taxpayer argued that he renounced his role as executor and provided an alleged handwritten note from 1994 to that effect, the Court did not accept that he formally renounced his role. While the Court acknowledged that the taxpayer may not have understood everything about being an executor or every aspect of a land transfer, the Court believed he understood that he was signing as an executor. As he was the executor when the mortgage was secured and did not obtain a clearance certificate, he was held personally liable for the estate’s tax debts.

The Court further stated that even if it did find that the taxpayer had properly renounced his role, the taxpayer acted as a “trustee de son tort” (a person who is not appointed as a trustee but whose course of conduct suggests that he be treated as one), and for income tax purposes, he would have been considered a “legal representative.”

GST/HST Input Tax Credits: Reasonable Expectation of Profit

A July 28, 2022 Tax Court of Canada case considered whether input tax credits (ITCs) in respect of a farming operation’s expenditures were available. The farming activity consisted of breeding and racing various horses and involved at least four full-time employees at one point. Over a nine-year period (2007- 2015), the operations never experienced positive net earnings and more than $4 million in losses were accumulated. The owner partially financed operations with earnings from his law practice.

In order for ITCs to be available, supplies must have been made in the course of a commercial activity. For a commercial activity to have occurred, there must have been a reasonable expectation of profit.

The Court considered the following criteria when determining whether the taxpayer carried on a commercial activity:

• profit and loss experience;
• the taxpayer’s training;
• the taxpayer’s intended course of action; and
• the capability to show a profit.

Taxpayer loses

While the Court noted that the taxpayer was clearly passionate and knowledgeable about horses and had invested significant funds and time, it was insufficient to demonstrate that there was a reasonable expectation of profit. Ultimately, the Court found that the taxpayer’s lack of financial organization (he did not have financial statements) and lack of financial tools left him without the ability to diagnose the causes of his farm losses. Without the ability to understand the losses, he did not have the ability to truly stem them, and therefore he did not have a reasonable expectation of profit. The ITCs were denied.

Tips Collected Electronically: Withholding Requirements

Where tips are “paid” by an employer, they are pensionable and insurable. In such cases, the employer must also withhold income tax and report the amounts on the employee’s T4.

CRA’s current administrative policy is that if the tip is controlled by the employer (controlled tips) and then transferred to the employee, it is considered to be paid by the employer. In contrast, direct tips are considered to have been paid directly by the customer to the employee. Therefore, the tips are neither insurable nor pensionable, income tax deductions are not required to be withheld and amounts are not required to be reported on the T4.

Controlled tips are generally those where the employer has influence over the collection or distribution formula. CRA has provided several examples of controlled tips, including the following:

• the employer adds a mandatory service charge to a customer’s bill to cover tips;
• tips are allocated to employees using a tip-sharing formula determined by the employer; and
• cash tips are deposited into the employer’s bank account and become, or are even commingled with, the property of the employer, and then are paid out to the employees.

Direct tips are paid directly to the employee by the customer, where the employer has no control over the tip amount or its distribution. CRA has also provided several examples of direct tips, including the following:

• a customer leaves money on the table at the end of the meal and the server keeps the whole amount;
• the employees and not the employer decide how the tips are pooled or shared among employees;
• a customer includes an amount for a tip when paying the bill by credit or debit card, and the employer returns the tip amount in cash to the employee at the end of the shift. In exceptional situations, the cash tips could be paid out the day after, for example, if there was not enough available cash on hand; and
• the restaurant owner informs the server that if a customer pays by credit or debit card and includes a voluntary tip, the restaurant will return the full tip amount to the server in cash at the end of each shift.

An August 31, 2022 Federal Court of Appeal case reviewed whether the electronic tips left by restaurant customers (e.g. paid by credit or debit cards) that were distributed by the restaurant to the servers were considered “paid” and therefore pensionable and insurable. Only a portion of the electronic tip was distributed to the servers, based upon the particular tipping arrangement at the restaurant (some funds were retained for items such as credit card fees and tip-outs to the kitchen staff). Amounts were transferred to the servers the day after the particular shift was worked. The Tax Court of Canada (TCC) previously held that the amounts transferred to servers were paid by the employer, and therefore, pensionable and insurable.

Taxpayer loses

The FCA found that the TCC did not err in its finding. In particular, the TCC noted that the electronic tips had not previously been in the server’s possession. Instead, the customers had provided the electronic tips to the employer as part of a single transaction to settle the dining bill. The TCC followed a 1986 Supreme Court of Canada case that found that the word paid could be interpreted broadly to mean the mere distribution of an amount by the employer to the employee. The FCA also stated that factors such as the following are not determinative and might be of little to no relevance when determining whether an amount is paid by an employer:

• when the amount is paid;
• whether the server is paid all or some of their own tips or pooled tips;
• whether the employer keeps a portion of the tips; and
• whether the tips are distributed under a collective agreement, a written contract, an oral agreement or otherwise.

The case did not deal with any cash tips the servers may have received or tip-outs received by kitchen staff, on-site management or support staff. Likewise, the FCA was not concerned with the total electronic tips left for the servers, but only the net amount paid out the next day.

It remains to be seen whether CRA’s administrative policy will be changed to reflect the courts’ rulings. As of October 10, 2022, the CRA website did not have information showing an integration of the courts’ rulings into their administrative policy.