CRA Announces New Simplified Process for Claiming Work From Home Expenses and Formalizes the Tax Treatment of Certain Employer Provided Employee Benefits During the COVID-19 Pandemic
By: Kevin Yip, Devon LaBuik, and Kathryn Walker
On December 15, the Canada Revenue Agency (the “CRA”) released additional details regarding the availability of employee deductions for work from home expenses and the taxation of certain employer provided employee benefits during the COVID-19 pandemic.
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.
Further to the announcement on March 27, 2020 that GST/HST and Customs
Duties payment deadlines would be extended due to the COVID pandemic, the
Canada Revenue Agency has provided some additional guidance in the form of a
Question and Answer document posted on the Canada Revenue Agency website.
The document deals with the delays granted to payments of tax, but also to questions of the processing of returns, the payment of refunds and the granting of rebates. One of the key things for all taxpayers to remember is that the due dates for the filing of returns has not changed, only the requirement to make payments of tax without incurring interest charges or penalties has changed. Excise taxes and duties are all still due at the ordinary times.
Do not hesitate to contact us if you need further information about the changes to your tax obligations during the COVID Pandemic.
