FEDERAL CARBON TAX: Costs and Rebates

On October 23, 2018, draft amendments to the Federal Fuel Charge Regulations and the Greenhouse Gas Pricing Act were released. As of April 1, 2019, a federal carbon tax is scheduled to be imposed in respect of Ontario, New Brunswick, Manitoba, and Saskatchewan. The federal backstop legislation will be partially used in Prince Edward Island, Yukon, and Nunavut. The other provinces and territory are not subject to this regime as they have, or are, instituting their own custom carbon pricing structures.

In the first year, the federal tax will, for example, subject gasoline purchases to a 4.42 cents/L tax while 3.91 cents/cubic meter will be assessed on marketable natural gas. The rates will be increased annually until 2024.

According to a Government Backgrounder entitled “Ensuring Transparency” the direct proceeds from the federal carbon tax will be returned to the territory or province of origin. For the provinces subject to the federal carbon tax, approximately 90% of funds will be returned directly to individuals and families through a Climate Action Incentive (CAI) payment. The remainder will be returned through electricity generation support in remote communities; support for small and medium enterprises; and support for municipalities, universities, schools, colleges, hospitals, non-profit-organizations, and indigenous communities.

The following are sample published payout amounts and estimated costs for 2019.

 

Province	Climate Action Incentive Payments ($)					Carbon Tax Cost ($)
	Family of 4	Avg. House-hold	1st Adult	2nd Adult	Each Child	Avg. House-hold
Ontario	307	300	154	77	38	244
Manitoba	339	336	170	85	42	232
Saskatchewan	609	598	305	152	76	403
New Brunswick	256	248	128	64	32	202

 

Also note that a 10% top-up will apply for those residing in rural areas.

The legislation does not set out the amounts of the payments. Rather, it provides that the amounts for each year may be specified by the Minister of Finance. Absent amounts specified for any specific province, the amounts are nil. It is not clear whether the amounts included in the above release are estimates, or are the amounts specified in accordance with this provision. Payments are expected to increase annually to reflect increases in the federal carbon tax, until at least 2022.

 

The Government of Canada website (https://www.canada.ca/en/

environment-climate-change/services/climate-change/pricing-

pollution-how-it-will-work.html) provides additional information specific to each jurisdiction.

 

The other provinces which are not subject to the federal program generally have similar systems in place which include the collection of levies, and a partial refund to individuals, with the remainder being used to fund the programs or other credits and direct expenditures. For example, in Alberta, the carbon levy is applied at a rate of $30/ton in 2019 to diesel, gasoline, natural gas and propane at the gas station and on heating bills. It does not apply to electricity. A carbon rebate valued at $300 for the first taxpayer, $150 for the spouse, and $45 for each child will be available with the payments beginning to be phased out at an income of $47,500 for individuals ($95,000 for families).

 

ACTION ITEM: Review the above website to review exposure and potential rebates in your particular jurisdiction. Businesses may want to budget for increased costs to operate.

 

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 or for any consequences arising from its use.

TAX TICKLERS . . . at a glance

 

• The annual TFSA contribution limit for 2019 will be increased to $6,000 (from $5,500) due to indexation. For those who have been eligible to build contribution room since inception of the program in 2009 and have never contributed, the total maximum room as of January 1, 2019 is $63,500

 

• For 2019, the Employment Insurance premium rate is reduced to 1.62% (from 1.66%). The maximum insurable earnings is $53,100 (from $51,700), resulting in a maximum employee premium of $860 (a net increase of $2) and maximum employer premium of $1,204 (a net increase of $3).

 

• Registered charities will now be able to pursue their charitable purpose by engaging in non-partisan political activities in the development of public policy without limitation. These rule charges are largely retroactive to January 1, 2008. Previously, a registered charity must have limited their non-partisan political activities to 10% of their resources.

 

• CRA recently opined that investment management fees in respect of tax-sheltered accounts (like RRSPs, RRIFs and TFSAs) paid outside of the account (e.g. management fees charged to a non-registered account), would be subject to a 100% advantage tax. That is, a tax equal to the full value of the management fee would be levied. It was recently announced that the implementation date of this policy was extended indefinitely until a review had been completed.

 

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 or for any consequences arising from its use.

CHILDCARE COSTS: Art, Sport and Educational Camps

A September 11, 2018 Tax Court of Canada case examined the eligibility of a number of child care costs with a recreational and educational component. The taxpayer and his spouse worked full time and had two children, aged 10 and 12.

The Court acknowledged two separate lines of cases related to eligibility of child care expenses (all informal and, therefore, not binding on CRA).

The first set, argues that the definition of a “child care expense” is restrictive such that recreational or educational activities do not qualify. The reasoning is that expenses to develop the physical, social and artistic abilities of the child would have been incurred whether or not the parents had been working.

The second line of cases requires that one evaluate whether the purpose of the expense was to allow the parent(s) to work. A bona fide expense would not be denied solely because the activity was recreational or educational in nature.

 

Taxpayer Wins, Mostly

The Court accepted the second set of cases as guidance, noting that if Parliament had intended to limit such activities, it would have said so in more specific and restrictive language. As such, the Court accepted the majority of the taxpayer’s child care expenses that contained a recreational and educational component.

Parental Discretion

The Court found that the taxpayer’s decision to engage university students, who were paid $5/hour more than what was paid to high school students, was irrelevant as “it is not for the state to decide who minds the appellant’s children as long as the expenses are reasonable.” In other words, it is the parents that are responsible for choosing who they wish to use, and they do so, based on the child’s needs; this choice is an exercise of parental discretion.

The Minister also suggested that the child who was 12 years of age in the year may not have needed some of these expenditures due to his age, to which the Court responded that Parliament grants child care expenses for eligible children up to age 16 – it is up to the parent to decide whether a child 12 or older should stay home alone.

 Limitations

Costs related to activities on a Saturday, and during school hours, were denied as they did not facilitate the taxpayers’ ability to work. Amounts related to camp were limited to a weekly amount of $125 (as the child was over 7), as specifically provided for in the Income Tax Act. Camp costs for children under 7 are limited to a weekly amount of $200. A higher amount may be available for those with a disability.

CRA Administrative Policy

As this case was informal, it is not precedential. While it may provide a filing position, CRA may still challenge these types of child care expenses. CRA’s webpage continues to state that fees for leisure or recreational activities, and fees related to education costs, cannot be claimed as a child care expense.

 

ACTION ITEM: If incurring child care costs with a recreational or educational component, consideration

 

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 or for any consequences arising from its use.

TRAVEL EXPENSES: Home to Work Site

Travel from home to a regular place of employment is usually a personal expenditure, the costs of which cannot be claimed as an employment expense. However, if the taxpayer is required to travel away from the employer’s place of business, amounts may be deductible by the employee.

A June 29, 2018 Tax Court of Canada case examined this issue. The taxpayer travelled from home to three different construction sites to carry on employment duties. Specifically, the taxpayer’s work for a Toronto construction corporation required frequent travel to sites requiring round trips of 167 km (Hamilton) and 92 km (Aurora), and infrequently to a site requiring a 94 km round trip (Whitby).

CRA argued that each was a regular place of employment, such that no deduction was available. The Court, however, concluded that this was travel “away from the employer’s place of business or in different places”, as required by the Income Tax Act. As such, the costs of this travel could qualify as deductible employment expenses.

While the taxpayer was not ultimately successful in his claim due to his receipt of an allowance from his employer, the case may provide a basis for business travel from home to a construction site.

As implied above, there are other conditions that must be met in order to deduct amounts against employment income. For example, the employee must not receive a non-taxable allowance in respect of the travel, and an appropriately completed T2200 from their employer must have been issued.

 

CAUTION ITEM: Although it may be possible deduct travel amounts against employment income, such amounts are often challenged by CRA.

 

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 or for any consequences arising from its use.

CANADA PENSION PLAN (CPP) CHANGES: Costs and Benefits are Increasing

 

Starting January 1, 2019, the CPP will be enhanced. This means that both employees and employers will be required to contribute more, but, retirement, survivor, and disability pensions will also increase. The changes will be gradually phased in over 7 years: Phase 1 will take place from 2019 to 2023; and Phase 2 will take place in 2024 and 2025.

Phase 1 – The prior 4.95% base employer/employee contribution rate will increase annually to 2023, as follows, 5.10%, 5.25%, 5.45%, 5.70%, 5.95%.

Phase 2 – In 2024, an additional 4% contribution will be required on earnings in excess of the Year’s Maximum Pensionable Earnings (YMPE), up to 107% of the YMPE. For example, if the YMPE is $70,100, the additional limit will be approximately $75,000 ($70,100 x 107%). The 4% rate will be applied to the difference between the two numbers: $4,900 ($75,000 – $70,100). For 2025 and later, the 107% multiplier will be increased to 114%.

Eligibility for CPP benefits will not be affected, however, some benefits will increase. In 2019, the CPP retirement benefits will begin to grow, eventually covering 1/3 of average earnings up to the maximum amount (which will also be increasing by 14%). One’s benefits will depend on how much and how long they contributed to the enhanced CPP. Post-retirement benefits will also be increased. Disability benefits will be increased depending on one’s contributions, and the survivor’s benefit will also be increased based on the deceased spouse or common-law partner’s contribution.

 

ACTION ITEM: Employers should budget for higher CPP costs on continual increases over the coming seven years.

 

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 or for any consequences arising from its use.

 

YEAR-END TAX PLANNING

December 31, 2018 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 2018 YEAR-END TAX PLANNING TIPS INCLUDE:

1)      Certain expenditures made by individuals by December 31, 2018 will be eligible for 2018 tax deductions or credits including: moving expenses, child care expenses, charitable donations, political contributions, medical expenses, alimony, eligible employment expenses, union, professional, or like dues, carrying charges and interest expense. Ensure you keep all receipts that may relate to these expenses.

2)      If you own a business or rental property, consider paying a reasonable salary to family members for services rendered. Examples of services include website maintenance, administrative support, and janitorial services. Salary payments require source deductions (such as CPP, EI and payroll taxes) to be remitted to CRA on a timely basis, in addition to T4 filings.

3)      If you own a business or rental property, also consider making a capital asset purchase by the end of the year.  Although not yet passed into law, the Federal Government has announced that most capital assets purchased after November 20, 2018 will be eligible for accelerated depreciation (generally three times the deduction to which they would normally be entitled in the first year).  For example, a piece of equipment normally eligible for a 10% deduction in the first year (Class 8), would be entitled to a 30% deduction.  This benefit is available even if purchased just before year-end.

4)      A senior whose 2018 net income exceeds $75,910 will lose all, or part, of their Old Age Security. Senior citizens will also begin to lose their age credit if their net income exceeds $36,976. Consider limiting income in excess of 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.

5)      You have until Friday, March 1, 2019 to make tax deductible Registered Retirement Savings Plan (RRSP) contributions for the 2018 year. Consider the higher income earning individual contributing to their spouse’s RRSP via a “spousal RRSP” for greater tax savings.

6)      Individuals 18 years of age and older may deposit up to $5,500 into a Tax-Free Savings Account in 2018. The annual limit will increase to $6,000 for 2019. Consider a catch-up contribution if you have not contributed the maximum amounts for prior years. An individual’s contribution room can be found online on CRA’s My Account.

7)      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.

8)      A Registered Disability Savings Plan (RDSP) may be established for a person who is under the age of 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.

9)      Consideration may be given to selling non-registered securities, such as a stock, mutual fund, or exchange traded fund, that has declined in value since it was bought to trigger a capital loss which can be used to offset capital gains in the year. Anti-avoidance rules may apply when selling and buying the same security.

10) 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.

11)    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).

12)    Teacher and early childhood educators – A federal refundable tax credit of 15% on purchases of up to $1,000 of eligible school supplies by a teacher or early childhood educator used in the performance of their employment duties may be available. Receipts for school supplies as well as certification from employer will be required.

13)    Home accessibility tax credit – A federal non-refundable tax credit of 15% on up to $10,000 of eligible expenditures (renovations to a qualified dwelling to enhance mobility or reduce the risk of harm) may be available each calendar year, if a person 65 years or older, or a person eligible for the disability tax credit, resides in the home.

14)    Did you incur costs to access medical intervention required in order to conceive a child which was not previously allowed as a medical expense? Certain expenses for the previous 10 years may now be eligible (amounts incurred in 2008 must be claimed by the end of 2018).

16)    A number of employment insurance (EI) changes have been enacted. These include:   

• A new caregiving benefit for up to 15 weeks for those who are temporarily away from work to support or care for a critically ill or injured family member.
• The option to extend parental benefits up to 18 months (from the current 12 months) at a lower rate.
• The ability to claim EI benefits up to 12 weeks before a mother’s due date (from the current 8 weeks).
• A new parental sharing benefit which will increase the total EI parental leave available to both parents by up to five weeks, to 40 weeks. This will require each parent agree to take a minimum of 5 weeks of the combined 40 weeks available. This assumes the standard parental option (55% of earnings for 12 months). Families opting for extended parental leave at 33% of earnings for up to 61 weeks can access up to 8 additional weeks, provided each take at least 8 weeks. The benefit will commence in March of 2019.
• The prior EI Working While on Claim pilot project is now permanent. This allow claimants to keep $0.50 of their EI benefits for every dollar they earn, up to a maximum of 90% of the weekly insurable earnings. This is available for those receiving most types of EI benefits, including maternity and sickness (both effective August 12, 2018).

17)    If EI premiums were paid in error in respect of certain non-arm’s length employees, a refund may be available upon application to CRA.

18)    Effective July 1, 2017, self-employed commercial ride-sharing drivers (such as Uber drivers), have been required to register for (regardless of their total annual revenues), collect, report and remit GST/HST.

19)    Employers of eligible apprentices are entitled to an investment tax credit. Also, a $1,000 Incentive Grant per year is available for the first and second year as apprentices. A $2,000 Apprenticeship Completion Grant may also be available.

20)    If income, forms, or elections have been missed in the past, a Voluntary Disclosure to CRA may be available to avoid penalties.

21)    Are you a U.S. Resident, Citizen or Green Card Holder? Consider U.S. filing obligations with regards to 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 CRA and the IRS. Collection agreements enable CRA to collect amounts on behalf of the IRS.

 

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 or for any consequences arising from its use.

CONTRACTOR VS. EMPLOYEE: Agreement on Contractor Status Is Not Enough

 

In a May 8, 2018 Tax Court of Canada case, the Court reviewed whether the taxpayer was earning insurable and pensionable amounts related to her work at a health care clinic for 2015 and part of 2016 up to her termination. Classification as an employee would subject the business to various CPP, EI, and other withholdings for past and future years. Such classification could also subject the payer to other significant non-withholding liabilities such as employment benefits, wrongful dismissal, vacation pay, and sick pay.

 

The taxpayer’s work commenced at the clinic in 2008, at which point both the taxpayer and the clinic agreed that the taxpayer was an independent contractor. She originally 

provided clerical services and over time took on additional duties which included acting as a chiropractic and physiotherapist assistant and a Pilates instructor. In 2016 the taxpayer realized she should have been collecting and remitting GST/HST on services performed for the clinic. The taxpayer filed a voluntary disclosure related to this GST/HST matter. At this point the taxpayer and clinic decided that the taxpayer and similar workers should become employees.

 

Taxpayer determined to be an employee

The Court stated that while it appeared that the taxpayer believed she was an independent contractor (evidenced, as an example, by her efforts regarding GST/HST collection), the objective reality must be examined. The Court looked to the following factors to find that the individual was an employee:

• Control – With the exception of the Pilates sessions, the services were supervised either directly by the payer or by a referring health professional, as required by the legislation governing the services she provided. The taxpayer had no discretion as to how those services were to be offered and followed the exercise routine established by the health professional. The taxpayer was in a subordinate position. While the taxpayer had some autonomy (she was not required to be at the clinic if no appointment was booked), there were other restrictions on her. She was required to operate under the clinic brand and was not allowed to operate out of her home studio when seeing clinic patients. While there was a relaxed work culture at the clinic, the ultimate authority rested with the owner of the clinic. This indicated an employment relationship.

 

• Ownership of Tools – The clinic owned the equipment used by the worker in addition to bearing the costs associated with the equipment, consistent with employment status.

 

• Chance of Profit and Risk of Loss – The worker was paid an hourly rate for clerical work and a percentage of client billings for work as an assistant and Pilates instructor. Apart from the hourly rate, the Court found that the earnings were primarily a result of the success of the clinic, the flow of patients, and referrals received. Likewise, the risks borne by the taxpayer were no different than an ordinary employee whose future is tied to the success or failure of the business. While the taxpayer did pay for additional training, it was not necessarily indicative of a contractor relationship as ambitious employees may take similar steps to advance their career. The clinic was responsible for mishaps or liability issues – the taxpayer was not required to maintain any type of insurance coverage. Finally, the taxpayer was not expected to actively seek out clients as they were provided in a regular and predictable fashion through referrals by the clinic. The fact that the taxpayer could seek out clients to see at her home studio was not highly relevant. This weighed in favour of employment.

 

• Integration of Work into Payer’s Business – While the taxpayer had a wide latitude with respect to her Pilates sessions, the Court found that this was ancillary to the health services provided by the clinic, which was fully integrated with the clinic. The Court stated that she could not have gone out and “hung out her own shingle.” The owner of the clinic conceded that to the outside world the taxpayer would have been perceived to be an employee as, for example, the taxpayer was referred to as “staff” and attended office functions and parties. This indicated employment status.

 

It appeared that the taxpayer was led to believe that she could be an independent contractor if she agreed and chose to do so. However, the Court found that the express intention of the parties as to the nature of their relationship was fundamentally flawed from the beginning and should be disregarded.

 

The Court determined that the taxpayer was an employee, earning insurable and pensionable amounts for the years in question.

 

ACTION ITEM: Even though there is a clear understanding between the worker and the payor/business that services will be performed as an independent contractor, the reality and conditions of the working relationship must be examined to determine if it truly is an independent contractor relationship. Consider reviewing terms of worker engagement with a professional.

 

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 or for any consequences arising from its use.

TAX ON SPLIT INCOME (TOSI): Can I Take a Salary Instead of a Dividend?

 

Dividends received by individuals from private corporations as of January 1, 2018 may be subject to taxation at top marginal tax rates (due to the new TOSI rules) if, in general, they are determined to be unreasonable. Salaries, however, are not specifically subject to these rules. As such, some may consider replacing potentially unreasonable dividends with large salaries or bonuses. This article considers some implications and risks when deciding to pay a salary instead of a dividend (or vice versa), in context of the new TOSI rules.

First, to be deductible against corporate income, salaries or bonuses must be reasonable. In the past, CRA has considered most salaries paid to heavily involved key owner-managers of active businesses reasonable regardless of size. However, it is uncertain whether CRA would continue to provide such tolerance, and what level of ownership or involvement in the business would be required. While unreasonable salaries may result in loss of deductibility, it is also possible (although not common) that CRA may take the position that they are shareholder benefits. Such reclassification could once again make the receipts subject to TOSI in the same way that dividends are. This result would generally put the shareholder in a worse position than if they had simply received dividends subject to TOSI.

 

As such, it is key to determine whether the dividend or salary is reasonable. Generally, if one’s labour contributions are sufficient to indicate that the salary is reasonable, it would also mean that a dividend paid instead would be reasonable (since labour is one of the factors to consider when determining dividend reasonability). However, reasonability in respect of a salary only considers labour in the period for which the salary is paid. For dividends, reasonability is considered in context of the recipient’s entire historical involvement. For example, consider a shareholder that contributes $50,000 in effort each year and receives $50,000 salary, however, last year he received a $200,000 dividend as well. A $50,000 salary in the current year would be reasonable, however, a $50,000 dividend may not be since the individual had already received total compensation far in excess of contributions. Individuals that have received large amounts in previous years may be more inclined to receive salaries.

 

In addition, one may also prefer to receive salaries in order to avoid the uncertainties and complication related to larger and more complex dividend reasonability calculations. On the other hand, credit for risk borne, capital provided and other contributions can increase the quantum that may be paid as a reasonable dividend, but would not increase the amount that would be a reasonable salary.

 

Beyond TOSI, there are a number of other considerations to weigh. Some of them include:

• Salaries require T4 filings and payroll remittances such as CPP.
• Salaries generate RRSP contribution room.
• Salaries could trigger a health payroll tax for the employer (Manitoba, Newfoundland and Labrador, Ontario, Quebec, and starting in 2019, British Columbia) or employee (Northwest Territories and Nunavut).
• When evaluating how much credit will be offered to an individual, financial institutions may give greater weight to salaries.
• Payment of a dividend may expose the individual recipient to corporate tax liabilities.
• The overall tax burden differs slightly between salaries and dividends. This difference changes annually. It is primarily a function of provincial jurisdiction, changes to tax rates and credits, and variances in income level.

   

  In summary, various factors should be balanced when determining whether a dividend, salary, or combination of the two should be paid. Also note that dividends may receive special protection from the TOSI rules depending on a number of factors such as age, levels/types of corporate contributions, whether shares were inherited, and the type of relationship that one has with key participants in the corporation.

   

  ACTION ITEM: The facts of each situation must be considered to determine whether an exception from TOSI is available, and whether remuneration in the form of dividend, salary or both is most appropriate. Consider reviewing remuneration structures with your professional advisors.

 

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 or for any consequences arising from its use.

DIRECTOR’S LIABILITY: Helping Out Family

Being a director of a corporation comes with many responsibilities. Failing to exercise due diligence in ensuring source deductions (such as EI, CPP, and income tax) are properly withheld from wages and remitted to CRA may result in a director’s personal liability for the corporation’s outstanding amount. A June 12, 2018 Tax Court of Canada case examined whether an individual who set up a corporation (along with a bank account) for his brother to operate would be held liable for unremitted source deductions, penalties and interest totaling $37,536. The individual testified that he was not personally involved in the operations and that he had participated in this manner because his brother had “zero credit”. The operation went out of business after approximately a year and a half with wages and source deductions outstanding.

 

The taxpayer argued that he had exercised due diligence by requiring his brother to sign an agreement at the onset to “keep deductions current” and to “keep everything in good standing”. The taxpayer indicated that while he never asked to see the records, he did enquire from time to time “if things were going ok”.

 

Taxpayer loses

The Court determined that a reasonably prudent person would have done more to keep abreast of the corporation’s financial affairs, especially given that his brother had either little financial knowledge or financial problems in the past. Entering into the initial agreement without follow-up indicated that the taxpayer did not act with due diligence. He was, therefore, held personally liable for the unremitted amounts and associated interest and penalties.

 

ACTION ITEM: Be cautious when acting as a director or taking responsibility for loans when not directly involved in a corporation’s activities. Failing to take certain actions may result in personal liability for certain corporate tax debts.

 

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 or for any consequences arising from its use.

ACTIVE BUSINESS VS. PROPERTY INCOME: Music Royalties

 

A private corporation’s income from a specified investment business (SIB) is not eligible for the active business tax rates (varying from 10% to 31%, depending on a number of factors, including the total earnings from operations and the province or territory in which it is located). Rather, a corporate investment tax rate of around 50% is levied (again, it varies by jurisdiction). In a July 10, 2018 Tax Court of Canada case, at issue was whether royalties received by a taxpayer for usage of its musical works (used in television shows such as “Curious George”, and CBC’s “The National”) was income from an SIB. The royalties were paid from the Society of Composers, Authors and Music Publishers of Canada (SOCAN), an organization composed of approximately 150,000 members that licenses musical works for use in public performances and public telecommunications (e.g. broadcast television, radio, internet, etc.) across Canada and globally. Fees are collected and then distributed by formula to SOCAN’s members.

 

An SIB exists where the principal purpose of the business is to derive income (including interest, dividends, rents and royalties) from property. CRA has previously indicated that royalty income which is related to an active business carried on by the corporation in the year, or which is received by a corporation which is in the business of originating property from which royalties are received, would be considered active income and not income from an SIB. It is unclear why their position in this case was different.

Taxpayer wins

The Court determined that the principal purpose of the taxpayer’s business was to engage in the writing and recording of music for television shows. The sole shareholder, who was also the sole employee, worked an average of 30 hours per week pitching work, attending viewing sessions with producers, and writing/recording music. During the years in dispute, roughly 6,000 music tracks were composed.

 

The Court stated that income received in the form of royalties is not automatically income from an SIB. The principal purpose of the corporation’s music composing business was to derive income from the provision of services, not from property such as music copyrights. The royalties were therefore part of the taxpayer’s active business income, and not income from an SIB.

 

Finally, the Court addressed whether residual royalties (primarily generated from re-runs) would also be active business income. The Court opined that this income was “incident to and pertained to” the taxpayer’s active business and, therefore, was also considered active business income eligible for the active business rates.

 

ACTION ITEM: CRA frequently reviews the business purpose and activities of corporations to determine whether the small business tax rate is available. In most cases, corporate earnings from royalties, rents, interest or dividends, will not be eligible for the small business deduction, however, some opportunities may be available where the activity level is sufficiently substantial.

 

 

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 or for any consequences arising from its use.