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:
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:
ACTION ITEM: Consider whether starting CPP before, after, or at age 65, would be the most advantageous.
REASONABLE MEAL ALLOWANCES: Moving, Medical and More!
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:
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.
ACTION ITEM: Keep a list of all medical and moving travel. Retain associated receipts so that the actual costs can be compared against claims available under the simplified method rates.
COMMINGLING OF PERSONAL EXPENSES IN THE BUSINESS: The Cost Could Be Very High
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:
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.
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 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.
ACTION ITEM: As best as possible, keep business and personal expenses separate. Deducting personal expenses in a corporation can lead to a very costly bill, well in excess of the tax should the amounts have been reported correctly.
UNREPORTED INCOME: Statute-Barred Periods
In a June 10, 2020 French Court of Quebec case, the taxpayer had been assessed with unreported income of $68,162, $66,192 and $31,540 for 2004, 2005 and 2006, respectively, all beyond the normal reassessment period (generally 3 years). The amounts were computed using the cash flow analysis method, meaning that cash received was considered taxable income unless it could be shown that it was from a non-taxable source, such as a gift or a loan.
Originally, the taxpayer’s son was under audit. After it was noted that several transactions had occurred between the taxpayer and his son, the taxpayer came under audit.
The taxpayer argued that several items were not taxable. They included:
The taxpayer argued that he had safety deposit boxes with large sums of money which was deposited over time to prevent his first wife, who had struggled with mental health issues and addictions, from stealing the money and supporting her drug habit. He also noted that he continued to collect money in the boxes following the divorce of the first wife and on into the relationship with his second wife. It was implied that the cash deposits above came from these safety deposit boxes.
In order to assess outside of the normal reassessment period for Quebec purposes, similar to federal law, the taxpayer must have misrepresented the facts through carelessness or wilful omission, or have committed fraud in filing the statement or in providing information.
The Court noted the following which indicated that the criteria for reassessment outside of the normal reassessment period were not met:
As Revenu Québec did not demonstrate that the requisite level of misrepresentation was present, their reassessments were overturned. Further, the Court noted that, even if the test had been met, using the cash flow method in such a case, where many of the receipts were reasonably explained, would not have been justified.
ACTION ITEM: An audit of one person can trigger audits of others around them. Ensure to maintain proper documentation and comply with auditor requests as best as possible (with professional assistance) to conclude and contain the audit efficiently.
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:
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.
ACTION ITEM: Ensure all source deductions are made in a timely manner. Failing to make source deductions may expose directors personally to the liability.
U.S. TRANSITION TAX: IRS Starting Compliance Work
In general, U.S. shareholders were required to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. This tax could apply to a U.S. citizen, resident or Green Card holders who own an interest in a private Canadian corporation. This tax applied with respect to the last taxable year of the relevant specified foreign corporation that began before January 1, 2018. The tax was includible in the U.S. shareholder’s year in which or with which such a specified foreign corporation’s year ended.
The IRS Commissioner of Large Business and International recently stated that the following two enforcement streams will commence in October 2020:
The audits may focus on a number of issues, including, for example, the calculation of historic earnings and profits, cash vs. non-cash assets, and foreign tax credits.
ACTION ITEM: If you are a U.S. person potentially subject to this tax, but have not filed as such, contact us to discuss your options.
RRIF/RRSP ON DEATH: Rollover to a Child or Grandchild’s RDSP
Normally we think about rolling RRIFs and RRSPs to the surviving spouse upon death, however, there are other options. One such option is to roll it on a tax-deferred basis to a child or grandchild’s Registered Disability Savings Plan (RDSP).
A June 26, 2020 Technical Interpretation discussed the ability to roll funds from a deceased taxpayer’s RRIF to an RDSP for a financially dependent child or grandchild eligible for the disability tax credit. This results in the RRIF funds not being taxable to the deceased and only being taxable to the beneficiary when funds are withdrawn from the RDSP.
CRA noted that there is a rebuttable presumption that the child is not financially dependent if their income for the year prior to the parent’s death exceeds the basic personal amount plus the disability amount. For 2020, the basic personal amount ranges from $12,298 to $13,229, while the disability amount is $8,576. Where the child’s income exceeds the threshold and/or the child did not reside with the deceased, they may still qualify, depending on all of the facts and circumstances.
Based on the facts of the specific case CRA reviewed, they indicated that it was reasonable to consider this child to be financially dependent on the taxpayer, such that the rollover would be available. The facts included:
CRA noted that, in addition to funds from a RRIF, an RRSP or a pooled registered pension plan (PRPP), and some registered pension plan (RPP) receipts, can be similarly transferred to an RDSP for a financially dependent child on the death of the taxpayer.
ACTION ITEM: If you have a child or grandchild that is financially dependent on you and eligible for the disability tax credit, consider leaving your RRIF/RRSP to them in their RDSP.