Phone: 780.814.7474
* Toll free: 1.877.814.7474
* Fax: 780.814.7409
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EXTENDED OFFICE HOURS
For your convenience Deverdenne Davis Cyr LLP will have extended office hours of 8:00 am to 5:00 pm from March 12th through April 30th. Please note that we will be closed on Tuesday, May 1st; regular hours of 8:30 am to 4:30 pm will resume on Wednesday, May 2nd.
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DEVERDENNE DAVIS CYR WELCOMES: Shawn Little
Deverdenne Davis Cyr LLP would like to welcome
Shawn Little, CPA
to our firm!
Shawn graduated from the University of Lethbridge in 2013 with a Bachelor of Management degree. Shawn articled in Peace River and earned his Chartered Professional Accountant designation in 2017. Shawn returned to Grande Prairie and joined our firm in October 2017. He brings with him a wealth of knowledge and experience growing up in a family with business interests in our community.
Shawn is a fourth generation resident of Grande Prairie with his family having come to Grande Prairie in 1912. Shawn enjoys travelling to a variety of countries and has lived in Africa for more than a year. Closer to home Shawn enjoys spending time outdoors with his family at their cabin at Sturgeon Lake.
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PERSONAL TAX RESOURCES
The Resources page of our website
www.ddcllp.ca/resources
has been updated to include a 2017 personal tax checklist to assist you in gathering information to prepare your income tax return. Among the resources, you will also find a detailed tax checklist and links to helpful CRA information.
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HOW TO PAY YOUR BALANCE OWING TO CRA
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IN OUR COMMUNITY
The 8th Annual STARS Hangar Dance was held in January in Grande Prairie. Deverdenne Davis Cyr LLP is pleased to support this important community fundraising event. STARS offers life-saving transport to critically ill and injured patients.
Deverdenne Davis Cyr LLP is proud to support The Big Hearts for Big Kids concert fundraiser held in February. Local musician Tenille Townes coordinates this annual event to support youth who depend on the Grande Prairie Youth Emergency Shelter.
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TAX TICKLERS...some quick points to consider...
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INCOME SPRINKLING: Where Are We Now?
On December 13, 2017, the Department of Finance released a number of
updates
relating to the
income sprinkling proposals (originally announced on July 18, 2017). Below is a summary of the proposals as they are currently drafted.
Individuals that receive certain types of income derived from a "related business" will be subject to Tax on Split Income (TOSI) unless an exclusion applies. TOSI is subject to the highest personal tax rate with no benefit of personal credits.
Commencing on January 1, 2018 TOSI will potentially apply in respect of amounts that are received by adults, not just those under 18 years. The application of TOSI to individuals under age 18 (commonly known as the "kiddie tax") would not generally change.
Income Streams at Risk
Private corporation dividends, partnership allocations, trust allocations, capital gains, and income from debt may all be subject to TOSI.
Related Business
A related business
includes any business, where another individual related to the recipient of income does any ofthe following:
- personally carries on the business (this means income from a sole proprietorship to a related person can be subject to TOSI);
- is actively engaged in the business carried on by a partnership, corporation or trust;
- owns shares of the corporation carrying on the business;
- owns property the value of which is derived from shares of the corporation having a fair market value not less than 10% of the fair market value of all of the shares of the corporation; or
- is a member of a partnership which carries on the business.
The definition is broadly drafted to capture income derived directly or indirectly from the business.
Exceptions and Exclusions
Several exclusions
from the TOSI rules for adult individuals have been introduced.
Some exclusions depend on the age of the taxpayer at the start of the taxation year. Different rules apply to taxpayers at least 17 years of age at the start of the year (i.e. these exceptions are first available in the year the taxpayer turns 18) and to those at least 24 years of age at the start of the year (i.e. these exceptions are first available in the year the taxpayer turns 25). For the purposes of this analysis, the first age group will be referred to as those "over age 17" while the second group will be referred to as those "over age 24".
The exclusions are as follows:
- Excluded Business: A taxpayer over age 17 will not be subject to TOSI on amounts received from an excluded business. An excluded business is one where the taxpayer is actively engaged on a regular, continuous and substantial basis in either the year in which the income is received, or in any five previous years. The five taxation years need not be consecutive.
An individual will be deemed to be actively engaged in any year where the individual works in the business at least an average of 20 hours/week during the portion of the taxation year that the business operates. A person not meeting this bright line test may also be "actively engaged" depending on the facts, but this will carry greater risk of challenge by CRA.
- Excluded Shares: A taxpayer over age 24 will be exempt from TOSI in respect of income received from excluded shares, including capital gains realized on such shares.
Many restrictions apply to qualify for this exclusion, which makes it quite complex and uncertain. The taxpayer must directly own shares accounting for at least 10% of the votes and value of the corporation's total share capital. For 2018, this test can be met by December 31. In later years, it must be met when the income is received. Also, the corporation can not be a professional corporation (i.e. a corporation carrying on the business of an accountant, chiropractor, lawyer, dentist, medical doctor or veterinarian). Further, it must earn less than 90% of its business income from provision of services. Finally, substantially all of its income (generally interpreted as 90% or more) must be derived from sources other than related businesses, which will be problematic for holding companies.
- Reasonable Return: TOSI will not apply to amounts which reflect a reasonable return.
- For taxpayers over age 24, an amount which is reasonable is based on work performed, property contributed, risks assumed, amounts paid or payable from the business, and any other factors in respect of the business which may be applicable.
- For taxpayers over age 17, but not over age 24, the rules are more restrictive. Only a reasonable return in respect of contributions of capital will be considered.
- Certain Capital Gains: Although TOSI will be expanded to apply to capital gains of interests in entities through which a related business is carried on, some gains will be excluded. For example, capital gains arising due to a deemed disposition on death. Also, capital gains on qualified farm or fishing property, or qualified small business corporation shares will generally be excluded from TOSI.
- Retirement Income Splitting: The TOSI rules will not apply to income received by an individual from a related business if the recipient's spouse was age 65 in or before the year in which the amounts are received and the amount would have been excluded from TOSI had it been received by the recipient's spouse.
- Additional exclusions apply for some income from inherited property and property acquired as a result of a relationship breakdown.
This new draft legislation is a substantial change from the current rules. The provisions are lengthy, complex and nuanced, and it is likely that additional concerns and challenges will be identified. It is uncertain whether there will be further changes, given the concerns which have already been identified, as well as the recommendations of the Senate Finance Committee released on the same date as these proposals.
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INPUT TAX CREDITS: Checking Up On Suppliers
Do I have to check up on a supplier when paying them GST/HST? Yes!
In a January 29, 2016
Tax Court of Canada
case it was noted that CRA had
denied
over $500,000 of input tax credits (
ITCs)
, and assessed
penalties and interest
, in respect of GST and QST paid to
twelve suppliers
. Unknown to the taxpayer, the
suppliers did not remit the tax
.
The taxpayer, a scrap metal dealer,
obtained evidence
of prospective
suppliers'
GST
and QST
registration
prior to accepting them as suppliers.
Taxpayer wins - mostly
A taxpayer must use
reasonable procedures
to verify that suppliers are v
alid registrants
, their
registration numbers
actually
exist,
and that they are in the
name of that person or business
.
The Court held that the
taxpayer's procedures
(reviewing the suppliers' registrations, stamped by Revenue Quebec) were
generally sufficient
. It was
not relevant
that some suppliers did not have
scrapyards and/or vehicles
to carry on scrap businesses, nor that
payment
was often made
in cash
, making it difficult to verify the suppliers' revenues. The taxpayer could not be expected to query government officials to ensure that GST registrations were properly issued.
However, in respect of
one supplier
, the facts showed that the taxpayer had been
sloppy
to the point of
gross negligence
in accepting evidence of registration where it was
clear
that the
registered supplier
was
not acting on their own account
. Those
ITCs
were
denied
, and the related
gross negligence penalty upheld
.
As well, one purchase was made
on the date the supplier's registration was cancelled
, so the supplier was
not a registrant
on that date, and the
ITC was properly denied
. However, the related
gross negligence penalty
was
reversed
, based on the due diligence undertaken in respect of the supplier previously.
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LOANS TO A RELATIVE'S BUSINESS: What Happens When It Goes Bad?
You've loaned money to a family member's corporation. Perhaps it was an investment, maybe it was a favor, or both. Or, perhaps, it was made for a completely separate reason. Regardless, sometimes the loan may go bad and you are not able to collect on the debt. What happens from a tax perspective when this occurs?
If the loan was made to earn income and other conditions are met, you may be able to write-off half against your regular income as an allowable business investment loss (ABIL). A recent tax court case shed some light on defining whether the loan was made to earn income.
In a November 3, 2016
Tax Court of Canada
case, at issue was whether an ABIL could be claimed in respect of the
loan from a taxpayer to his daughter's start-up company
. Within approximately two years, operations had ceased and the daughter had claimed personal bankruptcy.
The loan agreement stipulated that
interest at 6%
was to be charged from the onset, but no payments would be made for approximately the first two years, which, as it would turn out, was after the business eventually ceased. The Minister argued that
no interest was charged
, and therefore, there was no intent to earn income. This was partially
based on accounting records
of the daughter's company which were inconsistent in their reflection of accrued interest.
Taxpayer wins
Despite the
conflicting records,
the Court opined that the interest rate included in the agreement was legitimate and that there was an
intent to earn income
. The
ABIL was allowed
.
The Court
did not opine
on whether the
intention to earn income
requirement would have been met if the agreement only stipulated that interest would begin to be charged or accrued at the time that repayment commenced (i.e. interest-free loan for first two years, but interest generating thereafter).
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BUSINESS FAILURE: Personal Liability for Corporate Tax Debt
There are special laws which hold a director personally liable for certain amounts that their corporation fails to deduct, withhold, remit, or pay. Most commonly, these amounts include federal sales tax (GST/HST) and payroll withholdings (income tax, EI and CPP). It does not generally include normal corporate income tax liabilities.
In a June 22, 2017
Tax Court of Canada case,
at issue was whether the
director of a corporation
could be held liable for $66,865 in unremitted source deductions, related penalties, and interest
six years after
the corporation went
bankrupt
. The taxpayer presented various defenses.
Two-Year Limitation
In general,
CRA must issue an assessment
against the director
within two years
from the time they
last ceased to be a director
. The taxpayer argued he should not be liable since he was
forced off the property
and
denied access
by the Trustee in bankruptcy more than two years before the assessment. However, the Court determined that
only once one is removed as director
under the
governing corporations act
will such liability be absolved. In this case (under the Ontario Business Corporations Act),
bankruptcy
does
not remove directors
from their position. As the taxpayer
never officially ceased to be a director
, the two-year period had not commenced, and therefore, had not expired at the date of assessment.
Due Diligence
Liability c
an be absolved
if the director
can show due diligence
. In this case, the director argued that
he was waiting for large investment tax refunds
to fund the liability, and also,
entered into a creditor proposal
so as to enable the corporation to continue to pay off the liability. However, the Court noted that
diligence was required
to
prevent non-remittance
rather than simply diligence to pay after the fact. As there was
insufficient proof
to demonstrate diligence at the
prevention stage
, this argument was also unsuccessful.
With All Due Dispatch
Finally, the taxpayer argued that the issuance of the assessment
6 years after bankruptcy was inordinate
and
unreasonable
, thereby contravening the requirement to assess with
all due dispatch
. The Court, however, found that
this requirement
related to the
assessment of a filed tax return
as opposed to the assessment of director liability. In particular, the law allowing CRA to hold the director liable states that "the Minister may
at any time assess any amount payable
". This defense was also unsuccessful.
The Minister's
assessment of liability
to the director
was upheld
.
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COMMISSION PAID TO A CORPORATION: Any Issues?
Consider the successful real estate or insurance agent, the financial product vendor, the area sales representative, or any other person earning commission income. One day they are asked, if they ever considered running their activities through a corporation as opposed to providing the services personally. There are definitely some valuable possibilities, but there are dangers too.
In a July 11, 2017
Technical Interpretation
, CRA opined that whether a
corporation
is actually
carrying on a business
and
earning commission income
is a question of fact and
requires m
ore than
a mere
assignment of income
.
CRA noted that "if insurance agents, realtors, mutual fund salespersons, or other professionals are legally... precluded from assigning their commissions to a corporation, then the commission income must be reported by the individuals, and cannot be reported through a corporation, regardless of the documentation provided". Care must be taken to document that it is truly the corporation providing the services and not just an individual. Commission contracts identifying the corporation as the service provider rather than simply the individual would be valuable.
While
some professionals
earning commission income are legally
prohibited from incorporating
(due to the provincial/ territorial laws), others may be practically precluded from doing so due to, for example, a refusal by customers or key suppliers to contract with a corporation.
If a corporation does earn commission income, one must ensure that the corporation would not be considered a personal services business (PSB). A PSB is essentially an individual acting as an employee for a third party, but for the presence of their own personal corporation as an intermediary. For example, consider John, an employee of a car manufacturer (CarCo). If John set up a new corporation, had CarCo pay his corporation, but kept on doing the same things under the same terms and conditions as his previous employment contract, he would likely be conducting a PSB. If classified as a PSB, the worker and their corporation could be subject to substantially higher taxes, plus the denial of several types of deductions.
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BUSINESS LOSS OR PERSONAL VENTURE: Can I Deduct Losses Against Other Income?
In order for an individual to apply their business loss (where reasonable expenses exceed revenues) to another source of income such as employment earnings (thereby reducing the overall tax liability), the taxpayer must be able to prove that they are truly running a business. That is, they have to show that the undertaking was in the pursuit of profit.
An April 28, 2017 Tax Court of Canada case considered whether a practicing lawyer had a source of business income in respect of her law practice for the 2011-2014 years.
The taxpayer incurred losses in all of the years in question ranging from $4,014 to $12,613 and reported annual revenues ranging from $0 to $3,850. The taxpayer reported that the time she spent on the proprietorship was diverse, however, on average she worked about 5 to 10 hours per week. The taxpayer testified that she did no pro bono or volunteer work, but rather, charged clients depending on their circumstances. In some cases, the clients did not end up paying for the services.
Taxpayer Loses
The Court found that while the lawyer's work was very commendable,
the practice did not have a view to profit
. For example, the
gross revenue per hour
for the 2011-2014 years were,
$5, $1.70, $1.70 and $7.70
(assuming 50 weeks at 10 hours/week for the year). These amounts were not even minimum wage, much less amounts which could sustain a law practice operating with a view to profit.
Although the taxpayer's work was not strictly volunteering, it was very close. As the venture was not carried out with a view to profit, there was no business, so the losses were not deductible against other sources of the taxpayer's income.
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GUARANTEED INCOME SUPPLEMENT: Change in an Individual's Circumstance
The guaranteed income supplement (GIS) provides a monthly benefit payment to lower income individuals resident in Canada. Payments
from July of one year to June
of the next, are
based on income of the previous calendar year (i.e. 2016 income is used to determine July 2017 to June 2018 payments).
Where an individual is married or in a common-law relationship, GIS entitlements are based on the combined income of a couple. Where an individual enters into a spousal relationship, the payment issued in the following month will be modified to account for the combined income and new GIS reduction threshold.
An estimate of current year income may be used to calculate the GIS rather than using the base year if a major event affecting income occurs in the year (e.g. job loss, business loss, loss of pension). This is commonly referred to as the "Option Method". The "Option Method" may also be used part way through a payment year when a marital status change occurs. The recalculation would occur for the second payment after the event occurred. This option may provide for increased monthly payments immediately rather than waiting until the following July when the payments are revised based on the prior year income.
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DYING WITHOUT A WILL: Who Can Manage the Deceased's Tax Affairs?
Where a family member of a deceased individual would like to be recognized by CRA as the
person or persons who will
manage the tax affairs
of the person who died
without a last will
and testament, they can now do so by completing a CRA Form (Affidavit for intestate situation,Forms RC549 to RC561, with no form for Quebec, and no RC554).
Only certain people can register to manage these affairs. The form lists the priority order for those that may apply to be the representative. If another person ranks higher than the applicant, consent and a signature must be obtained from the higher ranking person(s). The priority orderis generally:
-
Spouse or common-law partner
-
Adult children
-
Parents
-
Siblings
- Grandparents
CRA aims to process the application within 4 weeks.
This new procedure comes as welcome relief. Previously, when a person died without a will, the applicant would normally have to go to Court to be appointed as the Administrator. The costs of this process could cause hardship, especially if the only reason for the appointment in Court is to file tax returns.
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NON-COMPLIANT GST/HST REGISTRANTS: Impact On Tax Refunds Or Credits
In a recent
release
(Excise and GST/HST News No. 102),
CRA
reminded taxpayers that they may place a
non-compliance hold on a taxpayer's account if they are a
non-compliant GST/HST registrant
. That is, for example, if income tax or GST/HST returns are outstanding. This would
prevent
the provision of any
refund or credit to the taxpayer. In other words, refunds or credits will be held if
returns are outstanding
.
This may be the case, for example, if a taxpayer that is a quarterly GST/HST filer, prepares their GST/HST returns with their year-end work. The first quarter of the next year is generally late by the time the year-end is filed, so GST/HST or income tax refunds may not get paid out.
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UNDERGROUND ECONOMY: Contractors, Online Sales, Farmers Markets...
In recent years, CRA has particularly focused on tracking underground economy activities. One way they are doing this is by
obtaining information from key 3rd parties
.
For example, recently CRA obtained details from contractor credit applications submitted to Rona. Consider the type of information that Rona would have: name, address, and other specifics that would help determine whether credit should be given. Presumably CRA could compare information reported on a credit application to the contractors' tax returns.
CRA has also recently obtained information from Square Canada. Many smaller vendors accept payment by swiping the customer's credit card through a little square plastic device connected to the audio jack of a phone or IPad. Square Canada provides this payment processing device, a Square Reader. Through a Federal Court Order issued to Square Canada, CRA obtained identifying vendor information and sale details associated with individuals or entities using these devices. The information request primarily focused on those with annual revenues of $20,000 or greater, for the 2012-2015 and part of the 2016 year.
It would not be unreasonable to expect that CRA could obtain similar information from other websites, web-based apps and organizations.
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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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Suite 109, 9824 - 97 Avenue Grande Prairie, AB T8V 7K2
Phone 780-814-7474 | Toll free 1-877-814-7474 | Fax 780-814-7409
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Copyright © 2017. All Rights Reserved.
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