Author Segal LLP

If You’re Involved in the Sharing Economy, Know the Tax Implications

042117_Thinkstock_515968676_lores_kwHousehold debt and housing costs are rising and some Canadians — especially Millennials —are turning to the “sharing economy” to help mitigate their expenses.

The sharing economy allows individuals to use technology to arrange transactions so they can earn money from assets such as their homes and cars. There are tax implications for those who engage in these transactions.

The latest numbers from Statistics Canada (StatsCan) show household debt at 167.3% of disposable income, which is a record. That means, on average, Canadians owe $1.67 for every $1 of disposable income.

The New Housing Price Index rose 3.3% over the 12-month period ending in February. This was the largest annual growth at the national level since June 2010. The actual (not seasonally adjusted) national average price for homes sold in February 2017 was $519,521, up 3.5% from where it stood a year earlier, according to the Canadian Real Estate Association.

Making Ends Meet

What’s a person to do to keep up? Some people are turning to short-term rentals to make ends meet, according to survey results recently released by Altus Group. According to Altus, which provides real estate research, its FIRM survey found that in the past year, 4% of all Canadian households of all ages had used a short-term rental accommodation service, such as Airbnb. The number rose to 7% for those with a mortgage.

The survey found that 22% of Canadians under the age of 35 had used a short-term rental service in the past year to rent out all or part of their homes. The four markets are Toronto, Vancouver, Calgary and Montreal.

“There has been a lot of speculation lately about potential investor involvement in short-term accommodation rental services like Airbnb,” Altus stated. “But focusing on households rather investors, how extensive is the practice of short-term rentals of space in principal residences?”

Short-term home rental services such as Airbnb, Flipkey and HomeAway make up part of the sharing, or gig economy. This article deals only with rental services, although the principles also apply to ride-sharing (in services including Uber and Lyft) and other parts of the gig economy.

Gigs Can Be for Renters, Too

Even renters are doing it. In large cities, 12% of millennial renters in the four largest Canadian markets said they had used a short-term service to rent out part of their home. Among the general population, 4% of all renters across the country had sublet part of their homes.

StatsCan data supports these results. The statistics agency reported in February that use of “private accommodation services” was highest among Canadians aged 25 to 34 (8.6%), 35 to 44 (4.8%) and 18 to 24 (4.4%). Use of private accommodation services was lowest among people aged 55 and older (2.1%). The agency defines private accommodation services as those “that connect travellers and hosts through a mobile application or website that acts as an intermediary and processes the payment from the traveller to the host.”

In fact, from November 2015 to October 2016, StatsCan found that Canadians spent $367 million on private accommodation services inside Canada, spending an average of $307.

About 69,000 adults living in Canada indicated that they had offered private accommodation services. Most of them were living in Ontario (31.1%), Quebec (26.4%) or British Columbia (25.1%).

However, using the sharing economy to help pay debts or ease the cost of housing or a mortgage isn’t really sharing in the sense of letting people live in your house for free.

Paying Your Share

Under Canadian tax law, you must declare any income from any source, including any money made through these part-time services.

If you collect more than $30,000 a year, you also have to collect and remit goods and services tax or harmonized sales tax (GST/HST). If you earn $30,000 or less a year, you don’t have to register for a GST/HST account, but you can voluntarily register to recover the tax. Provincial sales tax depends on the province.

Here’s how the CRA defines the sharing economy:

“A technologically fuelled way to consume and access property and services. In this economy, communities pool, loan, and share their resources through networks of trust.”

The tax agency says it’s “co-operating with industries, the provinces, and the territories to identify and address areas in this economy where the tax system and tax compliance might be affected.”

Rental or Business Income?

When it comes to calculating your income tax if you rent out your home on a short-term basis, you must determine if you are earning business or rental income. If you provide only the space, electricity, heat, laundry facilities and parking, you’re earning rental income and should generally file a Form T776, Statement of Real Estate Rentals. Also, the amount of space you rent is important. Two out of five rooms means you’re earning rental income in the eyes of the CRA.

On the other hand, if you provide security, meals or cleaning, you’ll probably be considered to be earning business income. In that case, you file a Form T2125, Statement of Business or Professional Activities. You’ll also have to submit Canada Pension Plan payments. Keep in mind, when you change the use of a property, there could be tax consequences (see lower box).

In either case, you can generally deduct the reasonable expenses you incur to earn the income.

Calculating Expenses

If you rent out only part of your house, you’ll have to calculate what percentage of your home you’ve been using for rental purposes and then multiply that by the number or nights you rented the space.

Keep all of your expense receipts and careful records of your calculations in case the CRA questions your claims.

If you participate in the sharing economy and underreport or don’t report your revenue, you’re participating in the underground economy. That could result in serious consequences.

If you get caught evading tax, you may face fines, penalties, or even jail time, in addition to paying the taxes owed on the unreported amounts. If you have to register for and collect GST/HST on your transactions, but you don’t, the CRA will charge interest or penalties or both, depending on the circumstances.

Making Corrections

Filing taxes and claiming expenses if you participate in the sharing economy can be complex. Consult with your accountant for help avoiding an audit and penalties. Your accountant can also help if you didn’t report revenue from previous years and want to make a correction.

Changes in Use

In certain circumstances, according to the CRA, you can be considered to have sold all or part of your property even if you didn’t actually sell it. This can occur if:

  • You change all or part of your principal residence to a rental or business operation.
  • You change your rental or business operation to a principal residence.

Every time you change the use of a property, for example changing all or part of your principal residence to a rental or business operation, you’re considered to have sold the property at its fair market value and immediately reacquired the property for the same amount. You have to report the resulting capital gain or loss for the year of the change.

If the property was your principal residence for any year you owned it before you changed its use, you don’t have to pay tax on any gain relating to those years. You only have to report the gain that relates to the years your home wasn’t your principal residence. Consult with your accountant about your situation.

Also, keep in mind that your mortgage lender may require you to inform it if you plan to occasionally rent out your home. Moreover, if you’re renting an apartment or condo, you’ll want to check with your landlord or the rules of the condominium corporation. You also should check provincial and other laws to about whether you can legally rent out space in your home, apartment or condo.

Learn more about the “Non-Resident Speculation Tax” (“NRST”) introduced in Ontario April 21, 2017

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2017 Ontario Provincial Budget Commentary

Our tax team presents an analysis of the Ontario provincial budget released on Queens Park on April 27, 2017.

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Regulators Keep Tight Reins on Corporate Behaviour

lores_business_man_building_street_walk_corporate_AMCanadian securities regulators are serious about corporate transparency and the need to maintain investor confidence in capital markets.

To achieve that objective, the regulators follow one set of rules in all provinces and territories and they apply to public companies, income funds, limited partnerships and some other entities. While the guidelines are voluntary – aimed at allowing business to tailor governance to their specific situations — companies that don’t comply with the disclosure rule will be breaking securities law and could face enforcement proceedings, as well as sanctions.

The governance guidelines set out a series of recommended best practices, including:

  • Maintaining a majority of independent directors on the board.
  • Appointing an independent chairman of the board or lead director.
  • Holding regularly scheduled meetings of independent directors without the presence of non-independent directors and management.
  • Adopting a written board mandate.
  • Outlining board responsibilities such as reviewing and showing satisfaction with the integrity of the company’s top officers and their efforts to develop a corporate culture of integrity.
  • Approving strategic plans at least once a year; actively taking part in succession planning; and overseeing internal controls.
  • Developing job descriptions for the board chairman, the chief executive officer and board committees.
  • Providing each new director with a comprehensive orientation, and all directors with continuing education opportunities.
  • Adopting a written code of conduct and ethics that deals with: conflicts of interest; protection of corporate assets; fairness toward shareholders, customers, competitors and employees; confidentiality; legal compliance, and ways to report illegal or unethical behaviour.
  • Appointing a nominating committee and a compensation committee composed entirely of independent directors.
  • Adopting a process for determining the competencies and skills of the board as a whole and applying this to the recruitment of new directors.
  • Assessing on a regular basis the board’s own effectiveness, as well as the contribution of each board committee and individual director.

Under the disclosure rule, companies must file a Corporate Government Disclosure Form with the provincial or territorial securities commission that requires information about each recommended governance practice, including:

  1. Information about the independence of directors and the names of other boards they sit on.
  2. Disclosure of whether the independent directors hold separate meetings and an explanation if they don’t.
  3. Disclosure of whether the board has adopted the recommended governance policy and if not, how their governance practices differ from the recommended standards and why that is appropriate to the company’s circumstances.
  4. Descriptions of the policies in effect and how they achieve the desired governance goals.

Companies are also required to file a copy of their ethics and conduct code (or any change to it) on the System for Electronic Document Analysis and Retrieval (SEDAR) by the date on which the issuer’s next financial statements must be filed.

Outsourcing: Eight Steps to Help Mitigate Risks

thmb_operations_travel_destination_international_business_amAnticipate Problems With Careful Planning

The outsourcing of business processes has helped numerous companies improve their financial performance, as well as increase customer satisfaction. In extreme circumstances, outsourcing can literally ensure a company’s survival.

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However, it can involve a number of risks. In order to determine if outsourcing makes sense for your organization, consider taking the following steps:

1. Identify and document your expectations regarding an outsourcing relationship. For example, by what amount would you like to reduce operating costs? Do outside providers have the expertise or skills that your company does not possess in-house? Is outsourcing consistent with your company’s business model and overall strategy?

2. Prepare a detailed inventory of the processes and procedures that you plan to outsource. While gathering the information, you may identify inefficiencies that need to be addressed before the processes can be outsourced. Alternatively, you may decide that inefficient or ineffective processes would be better outsourced, knowing that they will need to be refined by the provider. In any event, being aware of what you plan to outsource, as well as the state of those processes, is key to a successful outsourcing.

3. Prepare a detailed request for proposal (RFP) that identifies all requirements that need to be met by the provider. This can also serve as the reporting framework once a provider is engaged. In addition to preparing an RFP to be circulated to potential providers, consider documenting the attributes that a “perfect” provider would possess. The profile should include the location, industry experience, type of customers served, level of employee skills and the technology employed.

4. Once a short list of providers has been identified, request references from customers that have worked with the providers for one, three, five and if possible, 10 years. Immediate cost savings from an outsourcing relationship can be straightforward to capture. However, maintaining and improving on those savings over time is considerably harder. Talking with companies that have experience working with the providers can help your company gauge an outsourcing company’s ability to deliver sustained improvements

5. Ensure that the contract with the provider contains sufficient flexibility to respond to changes in the economic environment. Also, incorporate incentives for the provider to improve performance over time. By offering incentives in the contract, you can dramatically increase the chances the provider will meet the expectations. Just as importantly, incentives should reward a balanced approach. For example, invoice processing time should not be rewarded at the expense of accuracy.

6. Establish a cross-divisional team to consider the risks that can result from engaging an outsourcing firm. Your company’s team could include representatives from operations, legal, accounting, finance, human resources, security, fraud and corporate communications etc. The type of risks that can result from an outsourcing relationship include fraud by the provider’s staff members, interruption in service due to terrorist activity, political instability and corruption in the location, and backlash if jobs are transferred overseas. Depending on the size of the proposed outsourcing relationship, sub-teams may need to be created to address specific issues, for example, the impact of outsourcing on employee morale.

7. Find out what tax implications are involved in the relationship. This could involve the rules for independent contractors, if outsourcing locally, or the tax laws of another country, if you are shipping work overseas. Your tax adviser can help ensure your company is in compliance with applicable laws.

8. Determine the infrastructure needed to support the provider once the outsourcing relationship commences. For example, do you need to assign company personnel to work on-site at the provider’s offices? If not, how often do company personnel need to visit the provider’s operations? How much will it cost to send staff to the provider’s location?

Outsourcing can provide considerable savings. But as you can see, it is not without risk. The steps noted above can help your company navigate the process and deliver sustainable long term savings that directly improve the bottom line.