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New CRA Audit Project: Car Expenses

It appears that the Canadian Revenue Agency (CRA) has a new project: corporate car expenses. This change comes as a surprise as previous correspondence from CRA was proposing to disallow personal car expenses for owner-managers.

In CRA correspondence that we have seen of late, the focus is on those companies that had an expense in the vehicle expense line of the tax return. The standard letter is asking for the following items:
  1. A detailed list of the general ledger transactions for vehicle expenses.
  2. Invoices of the ten largest items in one month in the year.
  3. A listing of the vehicles with clarification as to who owns the vehicles.
  4. The make and model of the vehicles that the company leased.
  5. The percentage allocation between personal use and business use as well as a copy of the log used to track the business and personal use.
  6. An explanation of how the business and personal use is dealt with. For example, they are asking if expenses were reduced or reimbursed or if there is an employee benefit or standby charge.

They appear to be dealing with the years 2016 and 2017, which will shortly be statute barred.

One of the main issues being dealt with by accountants is that many clients do not keep very good travel logs. Additionally, there are a number of clients who purchased cars in the owner’s name and not the corporation’s name, even though the corporation is deducting the expenses. Another issue is that the only backup for expenses is credit card statements and not the actual invoices or receipts. This could be a problem, as CRA has stated that they will not accept credit card statements because the statements do not provide sufficient detail. To date, we have not received correspondence from CRA that they will not accept the credit card statements, but we have reason to believe that this will be the case.

General Car Rules


In general, there are a set of rules depending on whether an individual or corporation owns the car. Where the company owns the car, there may be requirements for calculations on both the operating benefit and the standby charge. The operating benefit is a per kilometer benefit for every personal-use kilometer used ($0.28 per km). This amount should be included in the income of the individual who uses the corporate car. There is also the concept of a standby charge. If the car is corporate-owned, it is 2% of the original cost of the vehicle. If the car is corporate leased, it is 2/3 of the monthly lease cost. Both of these numbers are then multiplied by the number of months that the vehicle is available during the year. There is, however, a reduction of the standby charge where the car is used more than 50% business use and less than 20,000 km of personal use. In those cases, the standby charge is prorated based on personal use versus the total use.

The challenge that many clients and taxpayers have is poor record keeping. One of the things to consider, in order to reduce the level of record-keeping, is for the corporation to pay a “reasonable allowance”. Based on CRA rules, a reasonable allowance is a per kilometer allowance of $0.58 for the first 5,000 kilometers and $0.52 for each kilometer thereafter. The record-keeping required is to submit the number of business kilometers driven each month. In this way, receipts and other backup are not required for the actual operating expenses.

When a reasonable allowance is paid, it does not show up on an individual’s T4 and the individual does not need to report it. The corporation deducts this expense as a car expense.

The key takeaway is to ensure that clients and taxpayers keep sufficient records to justify their business car expenses.

Contributed by Howard Wasserman CPA, CA, CFP, TEP, a Tax Partner at Segal LLP.

This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.

Pre-Employee Share Ownership Plans (“ESOP”)

Developing an ESOP is new territory for both employer and employee. Many owners may already have a clear plan mapped out and have shared this plan with their employees, whilst others are less advanced in the ESOP process.

It is important for the business valuator engaged in the ESOP process to determine which end of the spectrum their client is on as this will have a bearing on the terms of the valuation engagement and the assistance required.

Irrespective of where your client is on their ESOP journey, the following key principles should be followed throughout all stages of the valuation process:

  • Transparency – through an independent valuation;
  • Communication – through regular updates to employees on the valuation process;
  • Setting and Managing Expectations – communicating any changes to % ownership offered, price, terms, etc. in real-time.

Engaging the Business Valuator – the “When and “Why”

When should you engage a Business Valuator? – It is never too early…

Early Planning Considerations from the Owner’s Perspective:

  • Purification of Company (for tax purposes) if the owner is selling their shares;
  • Is a share freeze required if the value of shares may be too high (expensive) for an employee to buy-in;
  • Corporate Reorganization – removal of non-operating assets from the company;
  • Adequacy of share structure – what if issued share capital is only 1 share?
  • Early indication of value may help determine how an employee is buying shares:
  • Purchase from Owner – can the employee afford the shares?
  • Purchase from Treasury – is there a need for a share freeze prior to buy-in?
  • Potentially an early reality check on Value from the owner’s perspective.

Early Planning Considerations from the Employee’s Perspective:

The sooner in the process Value is established, the sooner the employee can determine:

  • Can they afford to buy in; and,
  • Do they want to buy in.
It may also help determine how the shares are going to be purchased:<
  • Purchase for Cash – employee savings, RSP’s, TFSA’s
  • Purchase in lieu of bonuses;
  • Purchase through payroll deductions;

Employer Financing or Corporate Guarantees to employees:

Why should you engage an Independent Business Valuator? It is extremely important to get the initial valuation RIGHT as:
  • It establishes the initial buy-in price for the employees;
  • It sets the benchmark for measuring future growth and increase in share value.
Owners often resist or question the need for an independent valuation based on cost. So why is it so important? It IS Independent:
  • Eliminates owner bias as to Value;
  • Provides transparency to employees – it is not the owner’s number!
  • The Business Valuator is available to provide independent information and analysis to both employer and employee without professional conflict.
  • Lends credibility to the determination of Value – important to employees as potential investors and to third party lenders.
Independent Valuation establishes a credible basis for future valuations and a formula/methodology going forward.

Valuation Engagement Process

Who is engaging and paying the Business Valuator? Irrespective of whom, the concept of independence must be clearly communicated.

What Level of Report is required? A higher level of assurance may be more important to the employee than the employer. Two most common types of Report:

  • Calculation of Value – basically uses the owner’s numbers with little or no corroboration;
  • An estimate of Value – an independent assessment of business and economy – a higher level of corroboration.

Other Valuation Considerations:

  • Valuation Date – should be current;
  • What is being valued – 100% of shares (en bloc) of specific percentage;
  • Basis of Valuation – Fair Market Value, Fair Value, Net Book Value?

In conclusion, the valuation process will ultimately be driven by the circumstances in each specific situation, and the likelihood of a smoother process and positive outcome increases the earlier in the process the Business Valuator is engaged.

Contributed by Andrew Dey from Mowbrey Gil. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.

Revenue Diversification by Non-Profit Organizations

The Canadian Income Tax Act defines a non-profit organization as “a club, society or association that, in the opinion of the Minister, was not a charity within the meaning assigned by subsection 149.1(1) and that was organized and operated exclusively for social welfare, civic improvement, pleasure or recreation or for any other purpose except profit….”

On several occasions over recent years, the Canada Revenue Agency has had to issue interpretations on this subsection in order to offer its opinion on whether activities carried out by non-profit organizations, such as the rental of parking spaces, income generated through fibre-optic networks or other similar activities, could have an impact on the tax status of such organizations. In any case, the CRA has deferred to the courts in each of its interpretative notes, in holding that the profit must be ancillary and in support of the organization’s objectives.

Possible Changes to the Income Tax Act
During the presentation of the 2014 Federal Budget, the Minister of Finance made known his intention to reexamine the tax-exempt status of non-profit organizations. The review would be to determine whether such an exemption continued to be properly targeted and whether sufficient transparency and accountability provisions were in place. At the moment, it is still unclear if the liberal government, elected in 2015, will hold this review. In November 2016, the Minister of Finance stated that such a consultation remained possible but was not a priority at the time.

Case-law

The courts have clarified that a non-profit organization can diversify its income sources while still maintaining its tax-exempt status under the Income Tax Act. However, the courts have stated that, to avoid a change in tax status, the activities of the organization must be linked to its mission as well as be ancillary to it.

For some years now, the Canada Revenue Agency has taken the same stance as the courts. However, the CRA often takes a far more restrictive interpretation of what can be considered an ancillary activity with a link to the mission of the organization.

Conclusion In our opinion, non-profit organizations should exercise a certain amount of caution before diversifying their activities. It would seem astute to first show that the new activities have a connection with their mission and that they are ancillary to those main activities. This would help ensure that your status as a non-profit organization will not be later disputed by the Canada Revenue Agency.

Contributed by Marcil Lavallée. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.

Partnership Announcement

Segal LLP is pleased to announce the firm’s two new partners.

Dora Mariani, CPA, CA, CFP, TEP, and Howard Wasserman, CPA, CA, CFP, TEP, will join the firm’s partnership group, effective July 1st, 2019.

Dora Mariani joined Segal as a Principal in the Segal Tax Group in 2015. She consults on Canadian and international tax matters for private corporations, high net worth clients and advises U.S. and international clients on appropriate tax structures for their Canadian operations. Her advisory expertise includes corporate reorganizations, purchase and sale of a business, tax planning for individuals immigrating to and emigrating from Canada and personal tax and estate planning.

As an expert in her field, Dora has presented at various tax seminars and conferences throughout North America. She is a member of the Chartered Professional Accountants of Ontario, Chartered Professional Accountants of Canada, Canadian Tax Foundation, International Fiscal Association, Society of Tax and Estate Practitioners and of the Financial Planning Standards Council.

Howard Wasserman has worked in tax for more than twenty-five years, specializing in both Canadian and international tax matters. Howard advises on a diverse range of tax issues including estate planning, mergers and acquisitions and purchase/sale of a business. He has a very successful track record in presenting appeals and managing tax negotiations with CRA on behalf of Segal clients.

Howard is a highly sought-after speaker and has presented at the Canadian Tax Foundation, various local CPA associations, seminars and other conferences throughout Canada. In 2016 Howard introduced the Segal Tax Series, an annual CPD series focused on providing CPA’s tax learning and tools to support their clients.

We extend our sincere congratulations to both Dora and Howard and welcome them to the Segal partner group.

Dora Mariani

416-490-3452
dmariani@segalllp.com

Howard Wasserman

416-490-3465
hwasserman@segalllp.com

Cloud Accounting

The Internet Age has revolutionized every industry and accounting is no exception. Introducing, cloud accounting; a faster and more efficient method of tracking your business’ expenses and financial reporting.

Cloud accounting is the process of migrating financial accounting systems into a cloud-based platform, away from a server. In terms of the accessibility and benefits to your business, this means having access to your accounting data- accounts payable and receivable, expense account, etc.- from anywhere and at any time. All you need is Internet access and you can simply log in to access all your financial reporting documents with the same ease of logging into Facebook.

The benefits of moving into cloud-based accounting are numerous and the demand for it is growing, particularly among small to mid-size companies. It simplifies account software and maintenance meaning business owners/managers will no longer need to look after hardware and software upgrade. It also eliminates the concern that clients won’t be able to access their documents because of an error on your end. It also offers efficient means of business management by enabling users to upload documents as easily and simply as taking a photo of an invoice and uploading it to the cloud.

Many features of cloud accounting are also automated, such as paying invoices, accepting payments, and grouping expenses. The addition of artificial intelligence can also automate regular business tasks by gauging your usage habits and tailoring the program in ways that best suit you and/or your business’ individual needs. Tools can be added to your cloud accounting solution, giving you a real-time view of all transactions appearing on your bank and credit card statements. By creating rules, the tool can automatically post transactions it recognizes.

By centralizing your reports, documents and expenses, this also makes the process much more collaborative, efficient and streamlined for accountants, CFOs and bookkeepers.

Understandably, some business owners and managers are apprehensive to switch to cloud accounting out of concern for security. However, rest assured these cloud solutions have security on par with that of online banking. Major companies, including Microsoft, are developing software for cloud-based accounting. Not only do they have endless resources to develop top-notch and secure software but, also, it’s important to remember that trusted names in technology will not risk their reputation on anything at risk of being hacked. The bigger risk is that users have their passwords stolen, however, this is an easily avoidable risk that can be reduced by creating strong passwords that utilize numbers, a mix of uppercase and lowercase letters, and symbols.

If you are interested in further exploring cloud-based accounting, the next step is to look into companies and software that offer the tools best suited to your business. QuickBooks has been a long-standing favourite of smaller companies and can be expected to add more features to their cloud-based solutions over the next few years. Xero and Wave are two other software companies that specialize in cloud accounting software. Net Suites has been offering cloud-based solutions since 1999 and, as previously mentioned, Microsoft is rolling out new cloud solutions for accounting.

Ultimately, cloud accounting holds a promising future of the modernization and improved efficiency of accounting. It has the potential to be a top tool for both accountants and business owners alike and its value to business operations should to be embraced.

Written by Giles Osborne, CPA,CA from Segal LLP and Alain St-Laurent from Demers Beaulne.

This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.