In August 2019, CRA released guidance on when an employee of a company, who is also a shareholder of the company, can deduct employment expenses on their personal income tax return.
But, before we get into those requirements, let's look at how this all started.
In about September 2017, CRA began asking employees of corporations, who were also major or sole shareholders of the corporations and who were claiming employment expenses, to support their claim for those employment expenses. They ended up reassessing those employees/shareholders on the basis that the expenses could not be a requirement of employment since the shareholder was not going to fire himself for refusing to incur those expenses.
In February 2018, after backlash from the public and the tax community and media interest, CRA backed down from the program and reversed any reassessments that had taken place. They also promised consultation with stakeholders in the tax professional community to provide clarification.
That clarification is as follows: if you are an employee and a shareholder, you must satisfy two key conditions before you can deduct employment expenses on your personal income tax return.
1. The expenses were incurred as part of your employment duties, and not as a shareholder.
If you are a shareholder, you must establish that the expenses were incurred in your capacity as an employee and not a shareholder. To do this, you must be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company, or at other businesses similar to your company in size, industry and services provided. You do not need to include this information on your tax return or the Form T2200 Declaration of Conditions of Employment, however, the CRA could ask you to provide this later.
2. You were required to pay for the expenses yourself as part of your employment duties.
Usually, a written contract of employment specifies the expenses a non-shareholder employee must pay. Sometimes there is no written contract or the requirement to incur expenses is not clearly identified in the contract, but there is an implied requirement for the employee to pay the expenses. For example, an employee can demonstrate an implied requirement by showing they face possible disciplinary action from their employer if they do not meet the requirement.
If you are a shareholder-employee however, an implied requirement may be more difficult to demonstrate, and a written contract may not be adequate to establish that you were required to pay for the expenses as part of your employment duties.
To satisfy this condition, you must therefore be able to establish that the expenses are comparable to expenses incurred by employees (who are not shareholders or related to a shareholder) with similar duties at your company, or at other businesses similar to your company in size, industry and services provided. This will support that you were required to pay the expenses to fulfill your obligations in your capacity as an employee.
You must satisfy both key conditions to deduct the expenses on your personal tax return. If both conditions are met, you may, as a shareholder, have the authority to certify Form T2200 Declaration of Conditions of Employment, for yourself or a related employee.
Tax planning between your corporation and shareholder(s) can be challenging and fraught with unforeseen consequences to both the corporation and the owner-managers. A CPA can help navigate ever changing tax legislation to ensure you stay compliant. Contact Ryan Rawluk, CPA, CGA or Eric Robert, CPA, CGA to get the proper advice.
The Disability Tax Credit (DTC) is an important tax credit that provides financial support for persons with disabilities or their supporting persons. Before anyone can claim the DTC, they must first apply for the DTC with Canada Revenue Agency to determine their eligibility. The application process can be long and complex.
A person may be eligible for the DTC if one of the following situations applies: be blind, be marketly restricted in speaking, hearing, walking, eliminating (bowel or bladder functions), feeding, dressing, or mental functions necessary for everyday life, or require life sustaining therapy.
If you think you, or someone you know, may be eligible for the DTC, you must first complete an application form. The form is called T2201 Disability Tax Credit Certificate. It is completed by the person with the disability or their legal representative and a medical practitioner. A medical practitioner can include a medical doctor, nurse practitioner, optometrist, audiologist, occupational therapist, physiotherapist, psychologist or a speech-language pathologist.
Once completed, the original form is submitted to Canada Revenue Agency where they will review the application and either approve or deny the application. CRA will mail a Notice of Determination informing you of their decision. CRA's service standard for this application process is eight weeks, however, it usually takes longer.
If the DTC application is approved, we request to have the tax returns amended for the applicable years to include the Disability Tax Credit. In Manitoba, the DTC credit is worth almost $2,000 in tax savings per year as well as opening up other tax advantages such as the ability to claim certain medical expenses and the ability to open a Registered Disability Savings Plan (RDSP).
If the DTC application is denied by CRA, they will explain why in the Notice of Determination. If you disagree with the decision, you have the option of discussing it with CRA, submitting additional information that may be relevant, requesting a review of the application or filing a formal objection. The formal objection has to be filed within 90 days.
Every year, we help our clients through this process. We charge $175 plus tax to discuss eligibility with our clients or their representatives, help with completing the form, reviewing the application and submitting to CRA, and amending the returns upon approval. This is a far better value for clients than those firms that work on contingency, which may cost up to $5,000 for the same work.
So, if you think that you or a family member, or someone you know, may qualify for the Disability Tax Credit, please discuss it with them or us or their accountant or tax preparer. It is a very important tax advantage.
My Account for Individuals is a secure portal that lets you view personal income tax
and benefit return information and manage your tax affairs online.
This is a great way to keep track of your important documents, stay organized and keep up to date with all your tax information.
My Account is:
Some of the many things you can track when you register are; your refund, view or change your return, check your benefit and credit payments, view your RRSP, set up direct deposit, receive e-mail and so much more.
You will need:
To register for My Account, select CRA register at the following link:
Step 1 – Provide Personal Information
Step 2 – CRA Security Code
After completion of step one, you will have access to limited information until you enter your CRA security code. You will receive your CRA security code in the mail within two weeks or less. After you enter your CRA security code, you will have access to the full suite of service in My Account.
Step 3 – Enter CRA Security Code
Last month, the Federal Court of Appeal heard an appeal from an Ontario lawyer who operated a private law practice on a part time basis in addition to her full time employment with the Government of Canada. This is a common situation in Canada and we often see people working full time that set up 'side businesses'. Sometimes the intent is to start a business, build it up, make big profits and retire. Other times the intent is to write off otherwise non-deductible or personal expenses to create a business loss which can be applied against their employment income creating a 'tax refund'. A cautionary tale follows.
Ms. Renaud began working for the Government of Canada in 2000 and moved to the Ottawa region at that time. Prior to 2000, she ran her own full time law practice in Repentigny, but reduced her hours after taking on the new position.
From the years 2001 to 2014, she claimed business losses every year, ranging from $1,956 in 2003 to $15,680 in 2012. In addition to the losses, her gross billings were quite low with her maximum gross income reported in a year was $3,850. In three of those years (2005, 2009, and 2010), she reported no gross income.
At issue were the years 2011, 2012, 2013, and 2014. In those years she reported gross income of $2,500, $850, $850, and $3,850 respectively. Her losses for those four years were $12,613, $15,680, $4,014, and $6,662 respectively.
Ms. Renaud made assertions that she spent on average about 5 to 10 hours working in her private practice per week. She did not take on more work than she had time available and made sure there were no conflicts with her full-time job.
Her practice was varied; she practices family, civil, administrative and criminal law. She does consultations, gives legal advice and participates in negotiations.
Some of her answers to questions were vague. When asked how many clients she had or how many cases she handled, her answers were not very specific.
Ms. Renaud testified that she does not work on a volunteer or pro bono basis. She does, however, adjust her rates based somewhat on a client's ability to pay. She also testified that she does not advertise as she receives enough clients from word of mouth.
The issue in this case was whether Ms. Renaud had a 'source of income'. CRA didn't challenge the legitimacy of her expenses but challenged whether or not she actually was operating a business. If they can prove she didn't have a business, they could deny her losses.
To determine whether she had a 'source of income', the court turns to the Supreme Court of Canada and the 2002 case Stewart v. Canada. In this case, the Supreme Court determined a two-step process for determining if a 'source of income' exists. The first step equates 'Source of income' with an activity undertaken 'in pursuit of profit', which is consistent with the traditional common law definition of 'business'.
After considering the facts of the case, the judge stated that the practice "is quite simply not undertaken in pursuit of profit." He came to this conclusion partly by looking at the hours worked by the appellant. She claimed to work an average of 5 to 10 hours per week. At 50 weeks per year, the judge concluded she worked at most 500 hours per year. In the four years at issue, she billed $2,500, $850, $850 and $3,850 respectively. This works out to $5 per hour in the first year, $1.70 per hour in the second and third, and $7.70 per hour in the fourth year for each hour worked. He stated "This is not at all like a law practice as normally understood, even in the wildest sense."
Further, the judge pointed out that Ms. Renaud made no mention of cases that could be highly profitable later on and no evidence was provided to show Ms. Renaud sought to change her billing practices or make changes to her client base to increase income.
So if you are in a similar position to Ms. Renaud where you are operating a small business with multiple years of losses and deducting those losses from other sources of income, you may want to consider whether you have a 'source of income' and are operating 'in pursuit of profit'. If not, you should be aware that CRA can simply wipe out your losses for tax years that are not statuted barred.
Canadian's annual Tax Free Savings Account (TFSA) contribution limit will increase by $6,000 in 2019. The annual increase in contribution limit has been $5,500 each year since 2013 (except for 2015 when the limit was raised to $10,000 for the year) and, thanks to inflation, will be $6,000 per year for the next couple of years.
The cumulative limit for Canadians who were at least 18 years old in 2009 and who hold a valid social insurance number will be $63,500 in 2019.
Beginning on January 1st, 2019, Canadians will begin contributing more to the Canada Pension Plan (“CPP”). This change is referred to as the CPP Enhancement and is being introduced in two phases, over the next seven years. The purpose of the Enhancement is to increase pension benefits to recipients by approximately 50% over current benefit levels.
Since 2003, Canadians have contributed 4.95% (9.9% if self-employed) of their earnings (up to an annual maximum) to the Canada Pension Plan. Beginning January 1st, 2019, that rate will increase to 5.1% and will increase each year until January 1st, 2023 when Canadians will begin paying at a rate of 5.95% (11.9% for self-employed individuals), a 20% increase over 2018 contribution levels (excluding the increase in contribution limits).
For an employee earning $45,000 per year, the employee will pay CPP premiums of $2,116.50 for the year in 2019 whereas they would have paid $2,054.25 in 2018; an increase $62.25 per year. By 2023, the same employee on the same earnings would be paying $2,469.25 per year, or $415 more than they would have paid in 2018.
The same increase applies to businesses and organizations with employees. A business with 10 employees each earning $45,000 per year will pay an additional $622.50 in 2019 and an additional $4,150 per year by 2023 before any increases in pay. This would bring the total CPP costs to $24,692.50 for that business.
Phase 2 will begin in 2024 with the introduction of a higher annual limit for higher income earners. This higher limit will be set at 7% higher than the normal 2024 annual limit and 14% higher in 2025. Canadians and businesses will pay CPP at a rate of 4% (8% if self-employed) on this higher limit. The government projects this higher limit in 2025 will be $79,400 but that will change based on increases in the average wage in Canada between now and then.
To assess the full impact of the changes, we can look at an employee earning $79,400 under 2018 rules and under 2025 rules. The annual maximum earnings in 2025 is projected to be $69,700 and an employee would have otherwise paid $3,276.90 in CPP premiums under 2018 rates. Under the Enhanced CPP, the same employee would end up paying $4,326.90 for a total increase of $1,050 per year, a 32% increase.
On November 21, 2017, the Auditor General for Canada released its 2017 Fall Reports and one section of this report was particularly scathing about Canada Revenue Agency's Call Centres.
The Agency's call centres are in place to give individuals and businesses timely and accurate information about their taxes, credits and benefits. CRA currently operates nine call centres across Canada.
CRA publishes service standards each year and reports on its own results compared to these service standards. For example, when a caller calls the general enquiries 1-800 phone number and indicates they want to speak to an agent, CRA's goal is to have an agent answer the call within two minutes, 80% of the time. In fact, the Agency's own published results for the 2016-2017 fiscal year indicate this happened 81.2% of the time.
The Auditor General's findings were that if CRA could not handle the call volume, they would block calls. This means you would get a recorded message that instructed you to call back later and then ended the call. The Auditor General found that more than half of the calls to CRA call centres ended up being blocked.
The Auditor General also tested the Agency's accuracy as far as how it answered general tax related questions that people may have. The Auditor General found that almost 30% of the time, the Agency gave incorrect information.
For example, one of the questions asked was "When will the interest begin to be charged on my 2015 initial assessment?" The correct answer is May 2, 2016 but a CRA agent gave a different answer 84% of the time.
Obviously, Canadians expect and deserve better service than this. That's why at Rawluk & Robert Chartered Professional Accountants Inc, our clients rely on us to answer the phone promptly and to give them accurate and reliable information. This Auditor General report just reconfirms what our clients already knew.
Tax time is not too far away, and if you operate your own business as a sole proprietor you know that the time is now to start gathering your paperwork together. Sometime, though, it’s hard to know what is needed, so you toss it all into a shopping bag and drop it off to the accountant’s office. Personally, I like to dig to the bottom of the bag, sort it out and get to work on the data entry; however, this takes time to do and time costs you money. If you want to reduce the amount of time that we spend organizing your information, here are some simple tips to help:
A little organization on your part will only be to your benefit, but if you just can’t find the time to get it all together, don’t worry! I’ll just slip on my diving suit and swim right to the bottom and get started!
Your friendly bookkeeper.