In January 2020, the OECD/G20 Inclusive Framework on BEPS, a group of 137 countries including Canada, endorsed a statement, which affirmed their commitment to build a global solution to the tax challenges created by the digitalisation of the economy. This work has been underway since 2015 and is slated to be finalized by the end of 2020.
The statement, itself a political expression of on-going commitment, was accompanied by additional documents which, provide an outline of the “architecture” of the currently agreed upon Unified Approach under Pillar One, a programme of work descriptions, details on the multinational enterprises (“MNEs”) that will be impacted by the initiatives under Pillar One, and a progress report on Pillar Two work (collectively the “January 2020 Statement”). The biggest development presented in this set of documents is the architecture of the Pillar One solution, including a clarified explanation of a new taxing right for market jurisdictions.
The COVID-19 pandemic has created many changes for corporate management throughout Canada. In the past, directors often traveled outside of Canada for purposes of attending board meetings in foreign jurisdictions. Directors often made such travel arrangements in order to maintain a corporation’s residency outside of Canada for tax purposes. However, the ongoing COVID-19 pandemic has significantly restricted directors’ abilities to travel abroad and, in turn, attend meetings in foreign jurisdictions.
Directors have, in response, created alternative local or “virtual” arrangements (i.e. video or teleconferencing) for such meetings. However, these arrangements may have potentially significant income tax consequences for a corporate taxpayer. This bulletin will briefly address some of these consequences:
General Principles of Residency
The Income Tax Act (Canada)[1] (the “ITA”) imposes tax on corporations resident in Canada. The Courts generally determine a corporation’s residency by applying the common law test of “central management and control”. The test provides that a corporation is resident in the country where its central management and control is exercised. This is generally the country where the directors of the corporation exercise their responsibilities.[2] It should also be noted that a corporation may be resident in one or more different countries (e.g. the directors may be exercising their responsibilities in multiple different countries).[3]
In light of the COVID-19 crisis and the travel restrictions implemented by Canada and many other jurisdictions as well as by businesses (the “Travel Restrictions”), the CRA has temporarily relaxed the way it administers certain rules and requirements contained in the Income Tax Act (Canada) (“ITA”) to account for the “forced” and involuntary presence of many non-residents in Canada for an extended period of time. As no one knows how long these Travel Restrictions will remain in effect, the guidelines described below, which apply from March 16, 2020 to June 29, 2020, may be extended by the CRA if necessary.
Deemed Residence: 183-Day Rule
For an individual, being subject to Canadian tax depends on his or her tax residence, which remains essentially a question of fact determined according to connecting factors established in common law. On the other hand, and subject to any applicable tax treaty, a non-resident who, in a calendar year, remains in Canada for more than 183 days is deemed to be a Canadian tax resident for the entire year and as such, becomes subject to Canadian tax on his worldwide source of income.
On April 22, 2020, the Canada Revenue
Agency (“CRA”) indicated that it would allow special favorable tax treatment to
employees working from home during the COVID-19 crisis.[1]
In particular, the CRA will accept that
the reimbursement of an employee, for amounts spent on personal computer
equipment to enable the employee to work from home, mainly benefits the
employer. As a result, the reimbursed amount will not be a taxable benefit to
the employee. This relief is to apply
for amounts up to $500 and only in respect of amounts for which the employee
provides receipts.
In the normal course, an employer can
provide an employee with an allowance for home office expenses, which is a
taxable benefit for the employee.[2] Alternatively, the employer can decide to
reimburse an employee expense upon presentation of an invoice, in which case
the reimbursement will be a taxable benefit if it primarily benefits the
employee rather than the employer.[3] Usually if an employee receives a
reimbursement for home office equipment, it is characterized as a personal
expense, primarily for the employee’s benefit, and therefore a taxable benefit.
The CRA’s announcement does not change
the tax consequences for employers. An
employer providing an employee with reimbursements for home office expenses,
even certain capital expenses such as the acquisition of tools, will normally
be entitled to deduct the full amount of the reimbursements as a business
expense, provided the amount is reasonable in the circumstances.[4]
[2] See CRA Interpretation, 2011-0402581I7 —
Allowance for workspace in the home, July 12, 2011. See also, CRA,
Interpretation Bulletin, IT-352R2 — Employee’s Expenses, Including Work Space
in Home Expenses, August 26, 1994.
[3] See CRA, Tech Interp, 1999-0013955 —
Construction and expenses — workspace, February 3, 2000.
During the week of March 23, 2020, the Canadian and Quebec governments
announced a series of additional tax measures to further strengthen the economy
in the wake of the ongoing COVID-19 pandemic. A number of procedural
announcements relating to statutory deadlines and limitation periods have also
been made by the Canada Revenue Agency (CRA) and Quebec Revenue Agency (Revenu
Québec). A summary of these new measures is provided below. Summaries of
previously announced measures may be accessed here (Canada) and here (Quebec).
Federal
Taxation of the Canada Emergency
Response Benefit (CERB)
The federal
government announced the introduction of the CERB on March 18, 2020. The CERB
will provide a taxable benefit of $2,000 a month for up to 4 months to support
workers (including self-employed individuals) who lose their income as a result
of the COVID-19 pandemic. Following conflicting reports in this regard, the
government confirmed on March 27, 2020 that the CERB will be taxable for
claimants, but that no income tax withholding will be made on the CERB by the
federal government.
Enhanced Temporary Wage Subsidy for
Eligible Employers
On March 18, 2020,
the federal government announced that a temporary wage subsidy (TWS) would be
introduced for eligible employers in an amount equal to 10% of salary and other
remuneration paid to Canadian employees. The stated purpose of the TWS is to
help Canadians remain employed. It improves the cash flow of eligible employers
(which include Canadian-controlled private corporations eligible for the small
business deduction, individuals other than trusts, certain partnerships,
non-profit organizations and registered charities) by allowing them to deduct
the amount of the subsidy from periodic source deduction remittances payable to
the CRA over the coming months. The maximum subsidy was initially set at $1,375
per employee, and $25,000 per employer.
On March 27, 2020,
Prime Minister Trudeau announced that the amount of the TWS will be increased
to 75% (as opposed to 10%) of salary and other remuneration paid to Canadian
employees. It remains to be seen whether the maximum subsidy of $1,375 per
employee and $25,000 per employer will be increased as well.
Further details in
this regard will be provided once they become available.
Postponement of GST/HST Remittances
The federal
government is deferring remittances of the following amounts to June 30, 2020:
Goods and Services Tax (GST)/Harmonized Sales Tax (HST) owing in respect of the February, March and April 2020 reporting periods, for monthly filers;
GST/HST owing in respect of the January 1, 2020 through March 31, 2020 reporting period, for quarterly filers; and
GST/HST owing in respect of the previous fiscal year and installments of GST/HST in respect of the current fiscal year, for annual filers whose GST/HST return or installment is due in March, April or May 2020.
This relief measure
does not clearly address the situation of certain registrants, such as those
who file on a quarterly basis but whose fiscal year-end is not December 31.
Such businesses should contact the CRA to confirm whether they benefit from the
deferral.
The proposed
measure also does not appear to extend the deadline for filing GST/HST returns.
Directors of
corporate taxpayers should bear in mind that they may be held jointly and
severally liable to pay any unremitted GST/HST, as well as any interest or
penalties relating thereto.
Postponement of Import GST and
Customs Duty Payments
The federal
government has also announced that it is deferring the payment deadline for
import GST and customs duties in respect of March, April and May statements of
accounts until June 30, 2020.
Filing Notices of Objection with CRA
On March 28, 2020,
the CRA announced that the deadline for filing notices of objection due March
18, 2020 or later would be extended until June 30, 2020.
Tax Court of Canada Procedures
On March 23, 2020,
the Tax Court of Canada (TCC) released a Practice Direction
and Order announcing that all sittings and conferences calls scheduled
between March 16, 2020 and May 1, 2020 inclusively are cancelled and that the
Court and its Registry offices will be closed until further notice.
The TCC also
announced that it is suspending, from March 16, 2020 to May 1, 2020, the time
limits provided for in the Tax Court of Canada Rules and any TCC orders and directions
made prior to March 16, 2020.
The statutory
deadlines for filing notices of appeal from income tax assessments and
reassessments and GST assessments and reassessments continue to apply.
The notices of appeal required to be filed within these statutory deadlines
must be filed electronically or by telecopier. Where no statutory
deadline applies, taxpayers are asked to wait and file their notices of appeal
once the Court resumes its operations.
Quebec
Postponement of QST Returns and
Remittances
In Information
Bulletin 2020-5 dated March
27, 2020, the Quebec government announced that it would allow businesses to
postpone the filing of Québec Sales Tax (QST) returns and the remittance of QST
due between March 27, 2020 (inclusively) and June 30, 2020. As mentioned above,
it does not appear that the equivalent federal relief measure extends the
filing deadline for GST/HST returns. Given that Quebec taxpayers report GST and
QST on the same return, it is not clear whether any substantial relief will be
afforded to them from a reporting standpoint. Further information regarding the
possible harmonization of the federal and Quebec relief measures is expected in
the coming days.
Directors of
corporate taxpayers should bear in mind that they may be held jointly and
severally liable to pay any unremitted QST, as well as any interest or
penalties relating thereto.
Acceleration of Tax Credits and Tax
Refunds
In a press release dated March
27, 2020, Revenu Québec announced that it would accelerate the processing of
tax credits and tax refunds claimed by businesses. No specific timeline has
been announced in this regard.
Filing Corporate Income Tax Returns
and Notices of Objection with Revenu Québec
Revenu Québec also
announced in the above-mentioned press release that the deadline to take
“administrative tax actions” (gestes fiscaux administratifs)
will be extended to June 1, 2020.
The press release
clarifies that this measure applies to corporate income tax returns that would
otherwise be due between March 27 and June 1, 2020. Interest and penalties are
therefore not expected to apply during such period in respect of such returns.
No further
clarification is provided with respect to other administrative tax actions
targeted by this measure. Although it may arguably include the filing of a
notice of objection, absent specific legislative action or further
clarification from Revenu Québec, it is recommended that taxpayers continue to
file such notices by the 90-day statutory deadline to preserve their right to
challenge any notice of assessment or reassessment.
