On December 8, 2020, Bill 213, Better for People, Smarter for Business Act, 2020 received royal assent. The bill includes significant amendments to the Business Corporation Act (Ontario)[1] (the “OBCA”). The amendments to the OBCA in Bill 213 were proclaimed into force on July 5, 2021.
Bill 213 eliminates the requirement that 25% of the directors of an Ontario corporation must be resident Canadians.[2] This means that non-residents may incorporate an Ontario corporation without necessarily retaining a Canadian resident as a director of the corporation (as already permissible in other jurisdictions).
In light of the new changes, many non-residents will likely consider incorporating an Ontario subsidiary to facilitate acquisitions, tax planning, and investment-related activities. This article highlights some of the (new) corporate and tax advantages of incorporating an Ontario subsidiary by such persons.
The 2021 Federal Budget devoted an additional $304.1 million to the CRA to help it combat tax evasion and aggressive tax avoidance. The federal government expects to recover $810 million in revenues over five years.
Based on public documents and information gathered from the CRA and DOJ, we have generated the below list of CRA audit activities already underway and expected to increase over the next couple of years. Even if a taxpayer has done nothing wrong, they may still have to convince eager auditors that they have complied with the law.
CEWS Applications
As of March 25, 2021, the CRA has processed and approved more than 2.7 million Canada Emergency Wage Subsidy (“CEWS”) applications for businesses, charities, and organizations in the not-for-profit sector, delivering over $71 billion in payments to support over 5 million workers.
The CRA started post-payment CEWS audits in August 2020 and is looking for deliberate non-compliance. Should CEWS funds have been misused, the penalties can include repayment of the wage subsidy, an additional 25% penalty, and potentially imprisonment in cases of fraud.
As this is new audit subject matter, CRA auditors may be inexperienced and skeptical. Even if a taxpayer did not intend non-compliance, they will need help convincing the CRA that any mistakes were honest.
2. Gains or Income from Cryptocurrency Transactions
The CRA is pursuing persons who have transacted with cryptocurrency to ensure that the proper taxes have been paid. The Federal Court recently granted the Minister of National Revenue’s application to require a major cryptocurrency trading platform to produce to the CRA a list of customer accounts along with details of transactions involving cryptocurrency.
Cryptocurrency (e.g., Bitcoin) is not legal tender. Instead, it is a digital representation of value – a digital asset. For purposes of the Income Tax Act, the CRA generally treats cryptocurrency like a commodity and will tax income from cryptocurrency transactions as business income or as a capital gain, depending on the circumstances.
3. Transfer Pricing Transactions
The federal government wants to ensure that the appropriate amount of profit is reported in Canada and plans to strengthen transfer pricing legislation. The CRA is ramping up transfer pricing audits and scrutinizing Canadian taxpayers who buy or sell goods or services with another entity within the same multinational group to determine if these transactions are priced properly. These types of transactions are required to occur under arm’s length terms and conditions and Canadian taxpayers are required to keep all relevant records. Taxpayers engaged in non-arm’s length cross-border transactions should be vigilant in determining appropriate pricing and maintaining supporting documentation.
4. Transactions Involving Treaties
Over the last decade the media has spotlighted the use and misuse of international treaties to reduce or avoid taxes. The international tax community has been working to close loopholes and tighten up treaty language to reduce aggressive tax avoidance and evasion. The CRA is increasing its scrutinization of cross-border transactions involving the application of treaties that result in distorted and questionable tax positions.
5. GST/HST Avoidance and Evasion
The CRA is looking for unwarranted and fraudulent GST/HST refund and rebate claims. It is increasing its audits of large businesses identified as having a high risk of non-compliance and others operating in industries considered high risk, such as the real estate development industry. The CRA has consistently been actively auditing with respect to the GST/HST New Housing Rebate.
6. Tax Evasion Involving Trusts
The CRA is enhancing its abilities to identify tax evasion involving trusts, particularly in non-arm’s length transactions, cross-border activities, and transactions involving low/nil tax countries.
7. Shareholder Benefits
Recently, there has been an uptick in the CRA auditing the use by officers and employees of corporate assets, such as private jets and yachts. If business is being conducted on these assets, the taxpayer needs to gather contemporaneous documents and maintain accurate log books to support their filing positions.
Sept secteurs sous la loupe de L’agence du revenu du Canada
Le budget fédéral pour l’année 2021 a alloué un montant additionnel de 304.1 millions de dollars à l’ARC afin de l’aider dans sa lutte contre l’évasion fiscale et l’évitement fiscal agressif. Ce faisant, le gouvernement fédéral prévoit récupérer 810 millions de dollars au cours des cinq prochaines années.
À partir de la documentation et des informations publiques provenant de l’ARC et du Ministère de la Justice du Canada, nous avons mis en place la liste ci-dessous présentant les activités de vérification actuelles de l’ARC et qui sont sujettes à s’intensifier aux cours des prochaines années. Même si un contribuable n’a rien à se reprocher, il risque d’être tenu de convaincre les vérificateurs soucieux qu’il s’est véritablement conformé à la loi.
1. Demandes de subvention salariale d’urgence du Canada
En date du 25 mars 2021, l’ARC a traité et approuvé plus de 2.7 millions de demandes de Subvention Salariale d’Urgence du Canada (« SSUC ») provenant d’entreprises, de fondations, et d’organisations sans but lucratif et à payer plus de 71 milliards de dollars en guise de support à plus de 5 millions de travailleurs.
L’ARC a débuté ses vérifications à la suite de l’émission des paiements de SSUC en août 2020 dans l’optique d’intercepter des cas délibérés de non-conformité. En cas d’utilisation des sommes reçues à titre de SSUC à d’autres fins, des pénalités telles que le remboursement de la subvention salariale, une pénalité additionnelle de 25% ainsi qu’un emprisonnement possible en cas de fraude pourront être applicables.
Compte tenu du caractère nouveau et récent des activités de vérification à cet égard, les vérificateurs de l’ARC peuvent encore s’avérer inexpérimentés et sceptiques. Dans l’éventualité où un contribuable n’avait pas l’intention d’être en situation de non-conformité, il aura besoin de soutien afin de convaincre l’ARC que toute erreur de sa part qui aurait pu créer la situation de non-conformité était honnête et involontaire.
2. Gains ou revenu provenant des transactions de cryptomonnaie
L’ARC s’intéresse aux contribuables qui ont effectué des transactions avec de la cryptomonnaie afin de s’assurer que le traitement fiscal y afférent a été respecté. Récemment, la Cour fédérale a approuvé la demande de la Ministre du Revenu pour instaurer une vaste plateforme de négociation de cryptomonnaie dans le but de permettre à l’ARC d’obtenir une liste des comptes clients et davantage de détails concernant les transactions impliquant la cryptomonnaie.
La cryptomonnaie (e.g. Bitcoin) n’est pas une monnaie légale. Elle est plutôt la représentation numérique d’une valeur (un actif numérique). Aux fins de la Loi de l’impôt sur le revenu, l’ARC traite généralement les cryptomonnaies comme de la marchandise et qualifiera le revenu provenant des transactions de cryptomonnaie à titre de gain en capital ou de revenu d’entreprise, et ce, en fonction des circonstances propres à la situation du contribuable.
3. Opérations de prix de transfert
Le gouvernement fédéral souhaite s’assurer que le montant véritable des profits soit déclaré au Canada et planifie renforcer la législation sur les prix de transfert. L’ARC continue d’accroître ses vérifications sur les prix de transfert et de surveiller les contribuables canadiens qui achètent ou vendent des biens ou des services d’une autre entité au sein d’un même groupe multinational afin de déterminer si le prix de leurs opérations est correctement fixé. Ces types d’opérations sont tenus d’être réalisés aux mêmes termes et conditions que des personnes sans lien de dépendance et les contribuables canadiens ont le devoir de conserver tous les documents pertinents y afférent. Les contribuables ayant un lien de dépendance qui transigent de manière transfrontalière doivent également prêter une attention particulière à la détermination d’un prix approprié de transaction et à la conservation des documents justificatifs.
4. Examen et vérification des transactions impliquant des conventions fiscales
Au cours de la dernière décennie, les médias ont dévoilé l’utilisation à bon et à mauvais escient des conventions fiscales comme outils pour réduire ou éviter de payer de l’impôt. La communauté fiscale internationale continue de travailler à l’élimination des échappatoires fiscales et du resserrement des textes des conventions fiscales afin de réduire l’évitement fiscal agressif et l’évasion fiscale. L’ARC veille à accroître sa surveillance des transactions transfrontalières impliquant l’application des conventions fiscales qui aboutirait à des positions fiscales déformées et discutables.
5. Vérification de la TPS/TVH contre l’évitement et l’évasion
L’ARC lutte présentement contre les réclamations illicites et frauduleuses concernant les remboursements relatifs à la TPS/TVH. Elle continue de renforcer ses vérifications à l’endroit des grandes entreprises qui sont identifiées comme comportant un haut risque de non-conformité et d’autres industries, également perçues comme comportant un haut risque de non-conformité, telles que l’industrie du développement immobilier. L’ARC demeure active dans sa vérification des remboursements de la TPS/TVH pour les habitations neuves.
6. Enquête sur l’évasion fiscale impliquant des fiducies
L’ARC continue de renforcer ses capacités à identifier les tactiques d’évasion fiscale impliquant des fiducies, tout particulièrement au sein des transactions conclues entre les personnes ayant un lien de dépendance, les activités transfrontalières et les opérations impliquant des pays avec des taux d’imposition bas ou inexistant.
7. Vérification des avantages aux actionnaires
Récemment, il y a eu une augmentation des activités de vérification de la part de l’ARC à l’encontre de l’utilisation par les dirigeants et employés des sociétés des actifs corporatifs tels que les jets privés et les yachts. Dans l’éventualité où ces actifs sont utilisés dans le cadre de l’entreprise, le contribuable est requis de conserver toute la documentation pertinente y afférent et de tenir ses registres à jour au soutien de sa position fiscale telle que contenue dans sa déclaration d’impôts.
Unsurprisingly, the Canada Revenue Agency (“CRA”) followed the Internal Revenue Service (“IRS”) in seeking a court order for records from cryptocurrency exchanges. The tax authorities prevailed in both cases, increasing the transparency of cryptocurrency trading and investing.
Especially in its earlier days, cryptocurrency had a reputation as an underground currency providing secrecy and facilitating black-market transactions. This notoriety began to recede when in November 2016 the IRS (the US tax authority) filed a generic request, known as a “John Doe” summons, on all U.S. Coinbase customers who had transferred Bitcoin between 2013 and 2015. The IRS initially sought all records, including third party information.
While the US District Court – California Northern District (San Francisco) (Case 3:17-cv-01431-JSC) found that the IRS request was broader than necessary, it nonetheless ordered significant disclosure from accounts having a minimum of $20,000 in any one transaction during the 2013 to 2015 time period. The disclosure included the taxpayer’s identification number, name, birthdate, address, records of account activity, and all periodic statements of account.
Remote work has become a new normal for many employees and employers, offering benefits to both parties. However, the prevalence of remote work has created new legal and regulatory challenges for employers and, in particular, employers with employees working in new jurisdictions.
A non-resident employer may, for example, become subject to Canadian income tax if the employer has employees working remotely from a location in Canada. Canadian employers may also have additional tax considerations if they have employees working remotely in other provinces.
This article outlines some of the potential Canadian tax issues for employees working remotely in Canada and the Canada Revenue Agency’s (the “CRA”) guidance and administrative concessions for non-residents during the COVID-19 pandemic.
Accountants, engineers, lawyers, doctors, dentists. Now real estate professionals join the Ontario regulated professionals who are able to personally incorporate their business. Following several other provinces,[1] on October 1 2020, the Ontario government passed O/Reg 536/20: Personal Real Estate Corporations, under the Real Estate and Business Brokers Act, 2002, which provides that real estate salespeople and brokers may incorporate in Ontario. Incorporation allows a real estate professional to have their self-employed revenue paid directly into their personal real estate corporation (“PREC”), offering some tax advantages.
Tax Advantage
The key tax advantage of incorporation is that income earned in a PREC is taxed at the corporate tax rate, which is substantially lower than the personal tax rate.
In Ontario the combined federal and provincial corporate tax rate is 12.5% on the first $500,000 of active business income (a threshold amount that is shared among associated corporations), and 26.5% on income above that threshold. In contrast, the highest personal tax rate is 53.52% on income over $220,000. As a result, when income is retained in a PREC and taxed at the corporate rate, a greater amount of money is available for investment.
For example, if a real estate professional earned $500,000 in a year, without a corporation the professional would have approximately $266,344 of after tax income that could be invested. In contrast, making use of a PREC, the same income would result in approximately $437,500 of funds available for investment within the corporation.
This may increase the investment growth and allow an investment portfolio or a retirement portfolio to grow more quickly, keeping in mind that within the corporation the investment income itself will likely be taxed a higher rate than the active business income.
An additional tax advantage is that the real estate professional can distribute their career earnings over their lifetime. Rather than pay the highest personal tax rate in peak earning years, the real estate professional can extract income from the corporation in leaner years, or in retirement, at a lower marginal tax rate. For example:
As the chart indicates, using a PREC allows a real estate professional to distribute income earned over multiple years, in turn allowing the professional to access lower marginal tax rates. This can reduce the total amount of taxes paid over a lifetime.
Life Insurance
A further benefit offered by a PREC is that life insurance for the controlling shareholder can be held within the corporation, reducing the amount of pre-tax earnings required to cover the premiums. In addition, life insurance benefits, less the adjusted cost base of the policy, are credited to a corporation’s capital dividend account (“CDA”) and can be extracted from a corporation free of tax. The reduction of the credit to the CDA by the policy’s adjusted cost base is intended to offset the advantage of paying insurance premiums with corporate income, instead of personal income taxed a personal tax rates. Real estate professionals considering having a PREC purchase life insurance should also note that in most cases the PREC will not be entitled to deduct the expense of the insurance premiums.
Income Splitting
The 2017 amendments to the Income Tax Act introduced the tax on split income rules, know as “TOSI”, which have significantly curtailed the ability of professionals to use professional corporations to split their income with low earning family members. Previously, professionals could pay dividends from their corporations to family members with low income, allowing the family to benefit from the lower tax rate applicable to the professional’s spouse or children. The TOSI rules now require that in order for corporate dividends to be taxed in the hands of a lower earning family member, that family member must be actively engaged in the professional’s business, meaning, for example, that the family member works in the business at least an average of twenty hours per week.
Restrictions
A PREC can limit a controlling shareholder from standard corporate financial liabilities. However, a PREC does not limit professional liability, which is governed by the Real Estate Council of Ontario pursuant to the Real Estate and Business Brokers Act, 2002.
In addition, like other professional corporations, PRECs are subject to restrictions. In particular, all of the equity shares of a PREC must be held directly or indirectly by the controlling shareholder, being an individual salesperson or broker registered with the Real Estate Council of Ontario;[2] the controlling shareholder must be employed by a brokerage; the controlling shareholder, must be the sole director and officer of the corporation;[3] and family members of the registrant can only hold non-voting and non-equity shares of the corporation.
Conclusion
Given the current “heat” of the Toronto real estate market, incorporation may be an attractive option for real estate agents or brokers. However, unless a real estate professional is earning substantially more than their everyday expenses, incorporation may not be beneficial. Additionally, real estate professionals should take the TOSI rules into account when deciding whether or not to incorporate. Anyone considering establishing a PREC should consult with their tax professionals for specific advice.
[1] British Columbia 2008 – Real Estate Services Regulation – Real Estate Services Act
Saskatchewan – see, Section 5 The Professional Corporations Regulations, 2002 under the Professional Corporations Act.
Quebec see section 34.1 of Regulation respecting brokerage requirements, professional conduct of brokers and advertising under the Real Estate Brokerage Act.
