Cryptocurrency and Taxes

Cryptocurrency and Taxes

While merely holding bitcoin, dash, or other cryptocurrency does not give rise to tax, the sale will result in a capital gain or full income inclusion. The use of bitcoin in a transaction will also be considered a disposition for Canadian income tax purposes and will result in income that has to be reported.  If you sell digital currency in 2017 your profits will have to be declared when you file your 2017 tax return by April 30, 2018.

 

 

Unsupported Business Expenses

For small businesses and businesses in general, maintaining organized books and records is essential to the business being able to withstand scrutiny on a thorough CRA tax audit. However, running a business can be time-consuming and exhausting and it is our firm’s experience that ensuring the availability of documentary proof for legitimately incurred business expenses can often take a back seat to other priorities of the business owner(s). Unfortunately, this can cause serious issues for businesses because CRA tax auditors have a nasty habit of denying any expense claimed by a business that is not coupled with proper supporting documentation. However, in tax law, the deductibility of business expenses is not dependent on the availability of a receipt and/or proof of payment. The Income Tax Act contains no statutory requirements with respect to the audit evidence that must be presented to claim business expenses and the internal CRA Audit Manual explicitly acknowledges this fact. While a proper receipt and proof of payment is obviously ideal in all circumstances, it simply does not follow from the lack of such documentation that the expense was never incurred. Our Canadian Tax lawyers are familiar with the burden of proof in tax law and can quickly identify assumptions made by CRA in order to quickly assess a taxpayer’s issues and chances of success.

Deduction of Business Expenses – Indirect Tax Audit Techniques

Absent a specific statutory provision to the contrary, expenses incurred for the purpose of earning income from business or property are deductible for tax purposes. The issue, more often than not, is convincing a CRA tax auditor that an expense was in fact incurred by the business. Although CRA understandably has internal policies that establish what documents a taxpayer should provide to support expenses, these internal policies are not law. In fact, the CRA AuditManual explicitly endorses the use of “indirect audit techniques” by tax auditors in order to determine the reasonableness of expenses that are not supported by documentation. Indirect techniques cover a wide range of approaches, including conducting analysis of a prior years’ books and records or reviewing the bank statements of the taxpayer. Our tax law firm also routinely advocates for indirect techniques with a common sense approach. For instance, if a taxpayer owns and rents out 6 residential properties, the fact that he or she cannot locate property tax statements to support that expense should not lead to the conclusion that they did not spend $20,000 on property tax. If CRA accepts that such a person is on title for the rental properties and earns income as a result, they should accept that the rental properties are each subject to property tax and that the taxpayer had to pay that expense. Likewise, a long haul truck driver should not be denied all unsupported fuel expenses simply because they are unable to provide receipts. While such a taxpayer may not get credit for 100% of the claimed fuel expenses, they should be allowed a reasonable amount of expenses that takes into account the nature of their business and the average gas mileage of the vehicle.

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Tax on Split Income Rules that tax capital gains as Dividends

Tax on Split Income Rules that tax capital gains as Dividends

The Income Tax Act (Canada) (the “Act”)2 deems a person to dispose of his or her capital property, such as shares of a Canadian private or public corporation, as a result of death or emigration from Canada (collectively, “Deemed Dispositions”). These Deemed Dispositions create taxable events where the value of the shares at the time of the Deemed Dispositions is in a gain or loss position even though the shareholder will still own the shares and will not have received any proceeds from the sale that he or she can use to pay the Deemed Disposition taxes.

Under the Proposals, Deemed Dispositions of corporate securities (for this discussion we’ll focus on shares only) of Canadian private corporations will be taxed as top tax rate dividends rather than as capital gains taxed at the shareholders marginal tax rates, regardless of the age3 of the shareholder unless the owner can establish that his or her personal contribution of human and/or financial capital met certain uncertain and difficult-to-meet hurdles in the discretion of the Canada Revenue Agency (CRA).4

The effect of this aspect of the Proposals will be to eliminate marginal tax rate taxation for adults who are subject to this element of the Proposals and to increase the tax rates on Deemed Dispositions for many shareholders of Canadian private corporations from the top marginal tax rate of 26.76% to the top marginal tax rate applicable to dividends of 45.30%.5  This tax increase will apply if the affected shareholder acquired their interest in the Canadian private corporation with no or nominal consideration and, in many cases, the tax increase will also apply even where the acquisition has been made with their own assets and/or borrowed funds.  In their current form, the Proposals will apply to all existing or accumulated value in Canadian private corporations – not just on value that appreciates after July 18, 2017.

The Proposals do not impact the capital gains rate realized by investors in public corporation shares in any way or form.6 As a result, Deemed Dispositions of such shares will continue to attract tax at ordinary marginal capital gains rates subject to a maximum tax rate of 26.76%. This will be true whether the person acquiring the shares received the shares as a gift,7 with his own wealth or whether he acquires the shares with borrowed funds, including borrowed funds from non-arm’s length persons at favourable interest rates.8

 

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Donations to Charity

The First-time donor’s super credit (FDSC) supplements the value of the charitable donations tax credit (CDTC) by 25% on donations made after March 20, 2013, by a first-time donor.

For the purpose of the FDSC, you will be considered a first-time donor if neither you nor your spouse or common-law partner (if you have one) have claimed and been allowed a charitable donations tax credit for any year after 2007.

The FDSC applies to a gift of money made after March 20, 2013, up to a maximum of $1,000, in respect of only one taxation year from 2013 to 2017.

If you have a spouse or common-law partner, you can share the claim for the FDSC, but the total combined donations claimed cannot be more than $1,000.

 

This is a non-refundable tax credit. As such, it can only be used to reduce tax owed; if you don’t owe any tax, you don’t get a refund. Generally, your tax savings will be equal to the amount of the charitable tax credit calculated. The following are exceptions:

  • If you are a resident of Quebec and are entitled to a refundable federal tax abatement, then your actual federal tax savings will be reduced.
  • If you are required to pay provincial income surtax, then your actual saving will be more than the charitable tax credit calculated as the credit will reduce both your base income taxes and provincial surtax.
  • If you made a donation of publicly traded securities, you may increase your tax saving by reducing your capital gains tax.

For a quick estimate of your charitable tax credit for the current tax year, try out the Charitable donation tax credit calculator.

For more information about claiming your charitable donations, see the General Income Tax and Benefits Guide.

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Renouncing U.S. Citizenship Or Giving Up A Green Card: Why And How To Consider It

Unique among global powers, the United States taxes the worldwide income of its citizens and permanent resident status holders no matter where they live. Additionally, the requirement that a U.K-U.S. citizen or green card holder file an annual U.S. income tax return is not waived by the fact that the United States grants a credit for taxes paid to the U.K. In fact, many U.S. citizens living abroad do not actually owe U.S. tax, but they can face very stiff monetary penalties for failing to file required disclosures about non-U.S. assets in a timely manner.

 

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Limits on CRA Collections – GST/HST

Canada’s Excise Tax Act gives sweeping powers to the Canada Revenue Agency (“CRA”), and by extension its tax collection officers, to collect the tax debts of taxpayers. In many cases, taxpayers are taken by surprise when their bank accounts are frozen, assets liened or seized and wages garnisheed. However there are certain limitations on when the CRA can legally take action to collect GST/HST tax debt, which are both situational and based upon strict timeframes. Unlike most debts under the Income Tax Act, there is no initial 90 day period where collection action is barred after a GST/HST assessment. There is however a 10 year limitation period that applies to GST/HST tax debts. This limitation period is ‘restarted’ whenever the CRA takes action to collect the debt or the taxpayer acknowledges the tax debt, which can mean that a GST/HST debt more than 10 years old is still collectible. If you need help dealing with CRA tax collectors, one of our expert Canadian GST/HST tax lawyers can help.

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Gifts from other registered charities

A registered charity should not issue official donation receipts for gifts (cash or gifts in kind) it receives from other registered charities nor should other registered charities insist on receiving official donation receipts. Official donation receipts that bear a charity’s registration number and other information are required for tax deduction or credit purposes only; registered charities do not pay income tax and, therefore, do not need a donation receipt.

A charity can acknowledge gifts received from other registered charities by way of a letter or ordinary receipt – one that does not state that it is an official receipt for income tax purposes.

The charity should still provide its registration number to donor charities for their reporting requirements.

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New Condo Act 2017

1. Records

There will be different types of records, which must be retained for different periods of time and which have different procedures for access by owners. The following are some of the highlights.

Core Records: These records are listed in the regulations. Some examples of these documents are the Record of Owners and Mortgagees, Notices of Leases, Meeting Minutes, Current Budgets and Information Certificates. A corporation’s by-laws will be able to specify additional core records beyond those listed in the regulations.  I doubt, however, that many corporations will add to the burden by increasing their number.

Records will have to be stored either in paper or electronic form and, if in paper, in a place not too far from the condominium.

These core records must be available to owners who request access to them (the “Requester”) on an expedited basis and at reduced fees. The manner of delivery of copies of core records can be either electronic or in paper form as agreed between the Requester and the condominium corporation. The Requester may also ask only to review the records without requiring copies.

Non-Core Records: Non-core records are those documents, which are not defined or included in the by-laws as core records. They are to be available to a Requester who requests them through a somewhat complicated written process. The regulations will include a form for requests, which will have to be delivered to the address of service for the corporation. If the board is not willing to deliver the records, it must respond accordingly to the Requester, who can then deliver a further response challenging the corporation’s position. It is not a simple process and may extend the time for receiving records quite considerably. Hopefully, most boards will be willing to provide records, and a delay in the delivery of records will not become the norm. The regulations set out specific timeframes for compliance with the request process steps, as well as penalties for non-compliance.

Retentions of Records: Different records are subject to different rules regarding access, as discussed above, and must be retained for different periods of time, being: 90 days, 7 years or forever. For example, proxies are to be retained for 90 days; but if a request to review proxies is made and the proxies are not delivered within the applicable timeframe, then the retention period for the proxies is extended beyond the 90 days to a fixed date set by the regulations. This approach is to prevent the situation where a corporation fails or refuses to respond to a record request and then states that it is no longer able to comply because the records in question have been destroyed. In order to comply with all these new obligations, it will be crucial for management and boards of directors to ensure that proper records are kept and that they comply with the request for access process.

The individual seeking access to the records will have to pay different fees and/or costs depending on the records requested. For example, photocopy charges will be limited to 20 cents/page, and the cost of labour for photocopying will be recoverable only if the corporation actually pays it out of pocket to a third party, such as the management company.

2. Information Certificates

In response to owners’ complaints that they are not being kept informed of condominium matters, the government has created an obligation on condominium corporations to issue Information Certificates, which must be delivered to all owners as set out in the regulations. There are three such certificates: the  Periodic Information Certificate, the Updated Information Certificate and the New Owner Information Certificate. The New Owner Information Certificate  is intended to be the same as one of the other two, depending on when someone becomes an owner.

These certificates are designed to ensure that owners are advised of information of which the board might have knowledge (such as information that goes into Status Certificates) so that they are kept apprised of the business of the corporation and are not surprised by disclosures when they list their units for sale or are refinancing. New Owner Information Certificates must be sent to new owners within 15 days of their ownership information being provided to the corporation for inclusion in the Record of Owners and Mortgagees.

3. Board Elections and Candidates

The Condominium Act requires that a pre-notice of a meeting at which directors are to be elected be sent to all owners.  It asks those persons interested in running for positions on the board of directors to submit their names and the mandatory disclosure information. The regulations set out the particulars of what candidates must disclose so that owners can make an informed decision as to which representatives they wish to have on the board of directors. In addition to the mandated disclosure, a corporation’s by-laws can require that additional information be disclosed.

One of the new disclosure obligations mandated by the regulations is whether the candidate is an owner and whether he or she is in arrears of common expenses for greater than 60 days.  Most of the by-laws that our office prepares for condominium corporations now require that board members be owners who live in the building or individuals who live with an owner in the building. By-laws prepared by developers and older by-laws do not typically include this provision. We suggest that the Ministry add to the disclosure requirements whether the candidate is an owner who lives in the building or lives with someone who is an owner-resident in the building. If the government does not include this requirement in the regulations, we recommend that condominiums add this provision when reviewing their by-laws. In our view, owners should know whether the people running for the board have an ownership interest in the building and/or whether they live there.

The regulations are not only lengthy, but also very complex. TheCondominium Act  amendments contain 661 references to regulations. Not all of these references will actually result in regulations being prepared, but what we have seen so far is going to be a challenge for everyone in the industry. They will add significantly to the learning curve for everyone dealing with the Condominium Act and the regulations.

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FINTRAC Guidelines

Effective June 17, 2017, amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and associated Regulations will result in new obligations related to politically exposed persons (domestic and foreign) (PEPs) and heads of international organizations. FINTRAC has published guidance describing these obligations.

 

FINTRAC has also updated guidelines 3A, 3B, 5, 7A, 7B, 8A, 8B, 8C, 10A and 10B to indicate upcoming minor changes to suspicious transaction, large cash transaction, casino disbursement and terrorist property reporting forms, as well as a change to our reference to the Bank of Canada’s exchange rate.

 

In March 2017, FINTRAC published guidance related to amendments to the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations (PCMLTFR) on definitions, signatures, risk assessments and record keeping.

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Federal Budget 2017 Proposed Changes

  1. Using private corporations to sprinkle income among family members who are in lower personal tax brackets;
  2. Holding a passive investment portfolio inside a private corporation which may be financially advantageous for owners of private corporations compared to other investors due primarily to the fact that income, once taxed at a lower rate, can be accumulated in private corporations before being paid out as dividends to the shareholders; and
  3. Converting a private corporation’s regular income into a capital gains, presumably through selling the shares of the corporation rather than distributing its income.
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