Author Segal LLP

Avert Penalties, Confirm Customer GST Registrations

When your company sells a commercial property, one party must pay a Goods and Services Tax (GST). And occasionally, the burden of responsibility can create a problem. If the buyer isn’t registered for GST, it’s your company’s responsibility to collect the GST on the sale and remit it to Canada Revenue Agency (CRA).


The GST Advantage

Even if your company qualifies as a small supplier that may not have to register for GST, it can make economic sense to get a number.

Generally, a business doesn’t have to register for GST if it is a sole proprietorship, partnership, or corporation whose total taxable revenues before expenses are $30,000 or less annually ($50,000 for such public service bodies as charities, non-profit organizations, municipalities, or universities.)

However, registration may give your company a tax advantage: It can claim tax credits for the GST/HST paid on such operating expenses as commercial rent, utilities, office supplies, as well as meal and entertainment expenses, reimbursements to employees or partners and capital property. And that can lead to a GST refund.

But if the buyer is registered, the responsibility shifts to the buyer who must report the tax and can claim any available Input Tax Credits to offset the GST (see right-hand box). On the face of it, this is an uncomplicated transaction and your company is in the clear.

But a Tax Court ruling suggests that you might want to double check the accuracy and validity of GST numbers to avoid an unpleasant surprise.

In the court case, the buyer of a commercial property claimed the company was registered for GST and provided a number. During an audit of the sale, however, the number was discovered to be invalid. The CRA had cancelled the purchaser’s registration.

But it wasn’t the buyer who wound up having to pay the GST — it was the seller. The Tax Court ordered the seller not only to pay the tax that should have been collected, but also to pay penalties and interest, despite the buyer’s misrepresentation in the deed of the sale about the validity of its GST number. (Lee Hutton Kaye Maloff & Paul Henriksen v. The Queen)

In theory, of course, the seller could bring a civil court action against the buyer to recover the GST it was forced to pay. In practice, however, that would mean incurring more expenses for legal fees. Moreover, the seller would still be liable for the penalties and interest. The Excise Tax Law doesn’t provide for the recovery of those costs.

A simple way to avoid this problem is to request CRA confirmation of a purchaser’s GST registration status.

There are other tax and GST issues involved in the sale of real estate and other commercial goods, so consult with your professional advisor before your company completes a major sale to make sure everyone understands the consequences of the transaction.

File Timely Returns or Risk Losing Refunds

lores_hourglass_blue_timer_bzFailing to file a tax return is not an option in Canada when you owe taxes.

Eventually Canada Revenue Agency (CRA) will ask for the returns to be sent in. Sometimes, taxpayers simply ignore the requests. If this goes on long enough, the CRA will mail an arbitrary estimated assessment of income earned and taxes owed. The assessments can be quite generous in favour of the agency and eye-opening for the taxpayer.

At that point, taxpayers usually start to make payments on their arrears to avoid collection proceedings. By making payments the taxpayers get time to file their late returns and correct the balances owed to the actual tax liability, which is generally lower than the assessment.

On the surface, this seems like a good strategy: The CRA starts getting some of the money it is owed and the wage earner avoids collections calls. Once the returns are filed the balance owed is adjusted, usually down to the actual amount you owed. And all is right with the world. Or is it?

There can be a downside to this tactic. The CRA is becoming increasingly tough on late returns and has refused to issue refunds for tax returns that are filed after the three-year limit allowed by the Income Tax Act. So, taxpayers can still be denied a refund of overpayments when they file their returns more than three years late.

On top of that, there are filing deadlines that also apply to allow CRA to deny refunds of overpayments of Canada Pension Plan or Employment Insurance that were either a result of employer payroll deductions or CPP calculated on self-employment income.

Individual taxpayers can appeal the refund denial or to ask the CRA to consider applying overpayments to other balances owed. This is not possible for corporations, however. Corporate taxpayers must be very careful before making payments on accounts for any returns filed more than three years after the filing date.

Taxpayers can also file a formal Notice of Objection. In that case, the facts will be reviewed and the CRA may issue a reassessment. If taxpayers are still not satisfied they can take the issue to court, but the costs of battling the tax agency in court can be high.

It is also to file a request under taxpayer relief, if there were extenuating circumstances that prevented the filing the return within the three year time period if a taxpayer is experiencing financial hardship. This could result in a reduction of some penalties or interest, or the CRA could decide to pay refunds beyond the three-year limit.

If you have fallen behind in your tax filings, received a demand to file or estimated tax assessments, especially for any taxes due more than three years ago, discuss the issue with your accountant who can help assess your situation and determine the best course of action.

U.S. Protectionism Tops List of Canadian Business Leaders’ Concerns

060117_Thinkstock_610668524_lores_kwFirst it was the lumber spat. Then came the milk battle. Trade issues with the United States are a hot spot these days.

And now, after U.S. President Trump backed a G7 pledge to fight protectionism, we head into negotiations starting in August for the retooling of the North American Free Trade Agreement (NAFTA). Meanwhile, a new IMF statement warns of major shocks to the Canadian economy that could come from a revised NAFTA.

Biggest Worries

In the midst of all this talk about trade, those in leadership positions at public and private businesses were asked in a recent survey: What is the top challenge to growth of the Canadian economy? U.S. trade protectionism was the top answer. Some 23% of Canadian chief executives, chief financial officers and chief operating officers cited “protectionist trade sentiments in the United States” as their top economic concern, according to the CPA Canada Business Monitor (Q1 2017).

The Harris Poll conducted the survey from March 30 to April 18, a time when Trump appeared to have softened his position on the North American Free Trade Agreement.

Trump was elected in 2016 with a campaign promise to renegotiate NAFTA, which comprises Canada, the United States and Mexico. Yet in February, when meeting with Prime Minister Trudeau, the U.S. president publicly said he would only “tweak” Canada’s side of the agreement and focus on the “unfair” U.S. commercial relationship with Mexico.

Since the Business Monitor survey ended, however, Trump has boosted tariffs on Canadian lumber shipments and came close to signing an executive order to pull the U.S. out of NAFTA. At the last minute, he reportedly told reporters: “I decided rather than terminating NAFTA, which would be a pretty big, you know, shock to the system, we will renegotiate.” Trump added that if he is “unable to make a fair deal,” he will terminate the trade pact.

Oil and Economies

Second on the list of threats to the Canadian economy, the survey showed, is oil prices, with 17% of respondents saying they’re concerned about this. Tied in third place at 14% were “uncertainty surrounding the Canadian economy” and “the state of the U.S. economy.”

Still, the national economy seems less threatening to executives than it did a year ago: 38% of respondents described themselves as optimistic about the economy, up from 32% in the previous quarter and significantly higher than 22% a year earlier. Another 47% said they are neutral and only15% said they are pessimistic. Despite potential volatility, a cautiously optimistic mood still prevails.

“This quarter’s results reinforce Canada’s underlying economic momentum,” says Joy Thomas, president and CEO of CPA Canada. “Uncertainty remains a constant shadow over the country’s growth prospects because of trade and oil prices but the business leaders are not allowing themselves to be paralyzed by it as demonstrated by the climb in optimism.”

Respondents to the Business Monitor survey appear quite bullish about when it comes to expectations about their own companies:

  • 58% are optimistic about the next twelve months, up from 54% in the previous quarter.
  • 69% said they’re anticipating revenue growth over the next year.
  • 63% reported they expect an increase in profits, up from 57% in the previous quarter.

Canada’s Tax System

The survey also asked if the leaders would welcome a comprehensive review of Canada’s tax system. There was overwhelming support for the idea. More than 7 in 10 (72%) agreed that such a review is required. Of the responses, when asked what a review could accomplish:

  • 89% said it would keep Canada’s “personal and corporate tax rates competitive with other advanced economies.”
  • 88% said it would “reduce complexity, while maintaining a fair and efficient tax system.”
  • 86% said it would “modernize the tax system in line with current business and economic realities” and attract investment.
  • 84% expected it would “reduce administrative costs for business and government.”
  • 72% said it would “keep the tax base broad, with fewer tax preferences.”
  • 71% said it would “reduce the possibility of unacceptable tax planning.”
  • 68% said it would “increase compliance by taxpayers.”

IMF Issues Statement about Canada

Meanwhile, the International Monetary Fund (IMF), in its latest report on the state of the Canadian economy, noted that the imposition by the U.S. of higher tariffs or new non-tariff barriers under a revised NAFTA “would undercut growth prospects in Canada, leading to a permanent reduction in investment and consumption.” It added that if the U.S. administration pushes ahead with its plans to cut the U.S. corporate tax rate, Canada may become “less attractive as an investment destination.”

The IMF explained: “While the global economy has improved with stronger manufacturing activity, the renegotiation of NAFTA, U.S. policies on tax reform and climate change, and the timing and form of the U.K.’s withdrawal from the EU could tilt policies toward protectionism and economic fragmentation. This would have significant consequences for Canada, an economy that is highly reliant on trade and cross border flows.”

Regarding the Canadian tax system, the IMF said: “A more simple and efficient tax system is important to encourage greater participation in the labor market, and promote investment and innovation, so that Canada’s tax competitiveness will be preserved with the rest of the world.”

The IMF also warned that the property transfer taxes on purchases by foreign residents introduced by the British Columbia and Ontario governments target capital flows and discriminate against non-resident buyers. It said the provinces should replace these measures, with possible alternatives including “a combination of prudential and tax-based measures that discourage speculative activity without discriminating between residents and non-residents.”

Four Tips for Global-Thinking Businesses

If you’re among those who see the winds of potential U.S. trade protectionism as a threat, but you’re still considering expanding beyond Canada, here are four tips that may help you:

1. Decide if your business is ready. Some products sell well in foreign markets, but others aren’t so welcome. There are cultural differences, so conduct market research very carefully. Understanding supply and demand for your product or service can help you forecast potential sales and decide whether you can reach a reasonable profit margin.

2. Plan a global strategy. For some companies, expanding globally is as simple as setting up an e-commerce website and marketing to customers in a target area. Others may require an overseas branch. Either way, you need a detailed plan that includes a thorough risk assessment. Working with established logistics partners that have experience in your markets can help you establish a clear strategy.

It’s also important to ensure your business is equipped to handle the demands of international trading. Consider starting in just one or two markets that offer low risks and high potential. Overexpansion could derail your international ambitions.

3. Know the laws. You must follow local regulations governing the import and export of goods. It’s simple enough to ship goods, but the laws can be complex and violating them can be costly. Rules governing foreign ownership of assets and taxation can be particularly high hurdles.

4. Play the long game. Your company’s senior management should be committed to any overseas move, including functions in human resources, operations and finance — then be prepared to wait. It’s not uncommon for companies in a foreign market to work with negative cash flow for up to five years, if not more. Be ready to sustain operations if they’re losing money and possibly put up even more money for unpredicted challenges and potentially more complex bureaucracies. And don’t underestimate the effect of currency fluctuations on profit.

Consult with your tax and other advisors. They can help you sort out a global plan as well as understand the laws and taxes in the countries where you may want to expand.

Smart Planning Can Lead to Owning Your Own Lakeside Cottage

060917_Thinkstock_153499887_lores_kwThe Victoria Day long weekend recently kicked cottage season into gear and many taxpayers are thinking about whether to buy a summer cottage, sell one or give one to the kids.

Each of these choices has tax implications.

First, let’s say you’ve been renting the same cottage each summer for years and now the owner is settling some affairs and has asked if you’d like to buy it. You’ve spent many years there, your children have built up memories there and you plan to continue spending summers at the lake. You take the owner’s offer.

There are no tax implications for you that result from the purchase. There are issues, however, for the owner, which may apply to you later, as you’ll see below.

Canada Revenue Agency (CRA) will consider the cottage a personal-use property provided it’s used primarily by you or your relatives.

Adjusted Cost Base

However, you’ll want to start tracking the adjusted cost base (ACB) of the cottage. The higher that figure, the lower any taxable gain you’ll have to report once you dispose of the property either by selling it or transferring ownership through gifting or inheritance.

The adjusted cost base includes the original purchase price plus qualifying capital outlays such as:

  • Upgrades to the property (you’ll have to demonstrate that the original purchase price would have been higher if the repairs hadn’t been necessary),
  • Renovating to winterize a property or add new elements to the structure such as additional bedrooms or new bathrooms,
  • Building a new deck,
  • Installing windows or a roof that are better than the originals, and
  • Putting in a new well or pump.

General repairs don’t count as capital improvements and you can’t value any work you personally perform on the home.

The excess of the proceeds of disposition deemed or realized over the ACB (and any selling costs) is generally a capital gain for income tax purposes.

If you simply sell the property, you can designate it as your principal residence, take the exemption on any capital gain and sell it tax-free. A cottage can be designated as your principal residence for each year in which you, your spouse or common-law partner, and/or your children were residents in Canada and ordinarily lived in it for some time during the particular year.

To optimize the benefit of the exemption, taxpayers generally apply it to the property with the greatest accrued gain. Keep in mind, however, the property can’t be income-producing during the years it is designated as a principal residence.

In the past, when you disposed of your principal residence, you didn’t have to report the sale on your tax return if you were eligible for the full exemption. That has changed. Starting with the 2016 tax year, the CRA grants that exemption only if you report the sale and designation of principal residence on Schedule 3, Capital Gains of your income tax return. You’ll be required to report basic information such as a description of the property, the date you sold it and the proceeds of disposition.

The rules of the principal residence exemption are complex, so consult with your tax advisor.

Capital Losses

You generally can’t deduct a capital loss on your cottage when you calculate your income for the year. You also can’t use a loss to decrease capital gains on other personal-use property. When property depreciates through general use, the loss on its disposition is a personal expense.

If you’re primarily renting out the cottage, however, you may be able to claim a capital loss. But keep in mind that you may lose the personal-use exemption if you rent it out for most of the year. That exemption can come in handy to help shelter any gain from the disposition if the cottage appreciates in value.

If you rent it out only occasionally to help defray some costs of ownership, talk with your tax advisor about how to report income and expenses on your tax return.

Change of Use

This brings up the issue of the changing use of the property. On the day you begin to rent the place, CRA considers that you sold the cottage and, on that same day, reacquired it — with both transactions at the fair market value of the property on the day. Normally, the CRA won’t apply the change-in-use rule if you meet three conditions:

1) Your rental of the property is secondary to your use of it as the family vacation property,

2) You make no structural changes to earn income, and

3) You don’t claim depreciation (capital cost allowance) on the property.

If you don’t meet those three conditions, you’ll need to calculate and report a capital gains tax or loss on the difference between the fair market value and the property’s adjusted cost base (ACB). Under the new reporting requirements that started for the 2016 tax year, you’ll have to report the deemed sale on Schedule 3, Capital Gains or Loses, of your tax return for the year of the deemed sale.

Rental income is taxable, but you can claim some expenses to offset the income, including:

  • A reasonable portion of the operating expenses, and
  • Costs directly associated with renting the property (such as cleaning, advertising, commissions or fees paid to rental agents, and property management fees).

Estate Planning

Another choice to make is whether you want to pass the cottage on to your heirs. If that is your goal, first check with them to determine if they want the cottage. If they do want it, you need to decide who gets it, how they get it and how they’re going to pay for maintaining it. If you can’t claim the principal residence exemption on the vacation home, the children will need to pay a capital gains tax when the second parent dies.

They should be prepared for a shock. Although the capital gains tax is 50% of the gain, the hit could be significant if you’ve owned the cottage for years given the rise in property prices.

You could transfer the property before you die — or gift it — and pay the tax. To avoid other potential complications, for example an ex-spouse of one of the kids makes a claim on the property, you may consider creating a trust.

Consult with your tax advisor, who can help you sort through all the financial and estate-planning implications.

Need to Increase Your Retirement Cash Flow?

lores_mortgage_options_types_rates_lengths_terms_mbRetired people sometimes find themselves in a cash bind, but there might be a solution for homeowners in the form of a reverse mortgage. You’ve probably seen ads on television or in magazines about this type of mortgage and wondered if it could work for you. Reverse mortgages can be a useful tool for seniors who have built up equity in their home and are looking to supplement their cash flow in retirement but they are not for everyone.

What Is a Reverse Mortgage?

A reverse mortgage is a loan secured by a home, like any other mortgage. Unlike a regular mortgage, no re-payment of the loan is required until the home is sold, the last surviving spouse dies, or the owner moves out.

Additional Requirements:

  • You must be at least 62 years of age.
  • The home must be your principal residence.
  • Any existing mortgage must be paid off by the proceeds of the reverse mortgage.

Why Is It Called a “Reverse” Mortgage?

A regular mortgage balance decreases over time as payments are made, until finally it is paid off. In a reverse mortgage, the balance increases over time due to interest charges. This is the reverse of a regular mortgage.

How it works: Depending on your age, marital status, and the property, you can unlock as much as 40 per cent of the appraised value of your home. (See right-hand box for additional requirements.)

Let’s say you’ve paid off – or nearly paid off – a conventional mortgage and the home is valued at $300,000. You could wind up with a tax-free $120,000 cash advance. You can take the money in a lump sum or in instalments over the time you remain in the home.

Payments aren’t due until the home is sold or the surviving spouse dies, although you can opt to pay the mortgage earlier. The lender makes its money by recovering the principal and interest when the home is eventually sold.

On the face of it, these mortgages appear to be a good deal for several reasons:

  • The money received is not taxable.
  • The cash advance doesn’t affect government benefits programs such as Old Age Security and the Guaranteed Annual Supplement.
  • Payments are deferred as long as you remain in the house.
  • The mortgage will never exceed the fair market value when the house is eventually sold.
  • You can use the money any way you want (in fact, you can use the money to buy an annuity or purchase life insurance to pay off the reverse mortgage, which means you can still leave the home free of debt to your heirs).
  • You can still sell the house if that becomes necessary, although there may be an early repayment penalty.
  • If you choose to pay the mortgage interest annually, the payment may be tax deductible if the borrowed money is invested.

However, before deciding a reverse mortgage is the tool for you, there are some disadvantages to consider:

  • Interest rates are as much as two percentage points higher than on a conventional mortgage. For example, if conventional mortgage rates are five per cent, a reverse mortgage could cost you seven per cent. The rates are set annually and based on the rate for one-year Government of Canada bonds.
  • Interest continues to accumulate, so in theory the loan, plus interest, could eventually exceed the value of your home. If you sell the house, proceeds will be used to repay the debt and you would have nothing left.
  • Set-up, appraisal and legal fees can run from about $1,800 to as much as $2,300.
  • You cannot move to another home and keep the loan, which means you can’t rent out the place and still keep the reverse mortgage cash advance.

Proceed with Caution: If you think a reverse mortgage might work for you, consult with your accountant first. Generally, a reverse mortgage is a last resort alternative for homeowners.