TaxMatters@EY – December 2022

Alan Roth, Toronto

In last month’s edition of TaxMatters@EY, we included Part 1 of “Asking better year-end tax planning questions,” which looked at the questions, topics and tax planning techniques that may apply to you each year. In Part 2, we focus on the questions and topics that are specific to the 2022 taxation year and recent personal tax changes.

Specifically, in Part 2 we look at the personal tax implications of receiving COVID-19-related relief benefits and working from home. We also look at the availability for the immediate expensing of certain assets used in an unincorporated business or profession, and tax credits or deductions that are either new or revised for 2022. Finally, we discuss certain changes to the personal tax rules that will apply in 2023 so you can consider the potential impact of these changes in your personal circumstances. Addressing these points can help you with the forward-looking planning process described in Part 1.

Did you receive COVID-19-related relief benefits from the government in 2022?

COVID-19-related relief benefits provided by the government — such as the Canada Recovery Sickness Benefit (CRSB), Canada Recovery Caregiving Benefit (CRCB) and the Canada Worker Lockdown Benefit — are taxable. These programs were available until May 7, 2022.

Financial assistance payments received under a provincial or territorial COVID-19 relief program are also taxable. If you received benefits under any of these programs in 2022, you will be required to include the total amount in income on your 2022 income tax return.

If you operated an unincorporated business in 2022 and received any benefits under the Canada Recovery Hiring Program (CRHP), or the Tourism and Hospitality Recovery, Hardest-Hit Business Recovery, or Local lockdown programs — all of which were also available until May 7, 2022 — the amounts received are deemed to be government assistance, and therefore taxable.¹

For these programs, the benefits are deemed to be received — and therefore taxable — in the year that includes the qualifying period to which they relate. Each qualifying period is four weeks long. The subsidy is considered to be received on the last day of the qualifying period(s) that it related to. If your business received subsidies under any of these programs in respect of qualifying periods ending in 2022, the amounts received will need to be included in income for the 2022 taxation year and reported on your 2022 income tax return.

Because these benefits are all taxable, you will need to take them into account when estimating the amount of taxes you’ll owe for the 2022 taxation year.²

Were you required to repay any COVID-19 related benefits?

If you received COVID-19-related benefits in 2020 or 2021, you are generally taxed on those benefits in the year of receipt. But if you are required to repay any benefits — for example, if it’s determined later that you were not eligible for them — you can claim a deduction in the year of repayment. If the benefit was not repaid in the same year that it was received, the income inclusion and related tax liability would be in a different year than the deduction for repayment.

However, if you repay certain COVID-19- related benefits before 2023, you have the option of claiming the deduction for the repayment amount in the year in which you received the benefit, rather than in the year you made the repayment. If you make the repayment after filing your tax return that reports the income inclusion, you can file an adjustment to that return. For repayments made in 2022, the adjustments can be made by completing and filing Form T1B (as noted below) with your 2022 income tax return. You can also split the deduction between the year you received the benefit and the year it was repaid, as long as the total deduction does not exceed the amount repaid. These rules apply to repayments of the Canada Recovery Benefit (CRB), CRCB, CRSB, the Canada Emergency Student Benefit (CESB), and the Canada Emergency Response Benefit (CERB). The CESB and CERB programs applied during the 2020 taxation year. The CRB program applied during the 2020 and 2021 taxation years.

You can complete Form T1B, Request to Deduct Federal COVID-19 Benefits Repayment in a Prior Year, and submit it with your 2022 income tax return. This form, which will be available by January 2023, allows you to choose in which tax year (e.g., the year the benefits were received) you would like to apply the deduction in respect of 2022 repayments. The income tax return(s) for those prior year(s) will then be automatically reassessed to apply the deduction. As a result, separate requests to adjust prior-year returns will not be required.

Consider reviewing your 2020 and 2021 tax positions to determine when it would be optimal to claim the deduction for repayments of these benefits.

Have you been working from home as a result of the COVID-19 pandemic?

If you’ve continued or even started to work from home in 2022 as a result of the COVID-19 pandemic, you may wonder to what extent you may deduct any related home office expenses. The Income Tax Act specifies the types of expenses incurred in a home office that employees or the self-employed may deduct and the conditions that must first be met to be able to deduct them.

For more information, see Managing your Personal Taxes, Chapter 7: Employees.

The pandemic dramatically changed the work-from-home landscape for millions of Canadians and the government responded by introducing simplified temporary rules allowing employees who were working from home because of the pandemic to claim home office expenses.

The CRA introduced a new temporary flat-rate claim method for claiming home office expenses on 2020 personal tax returns and extended this method to also apply for the 2021 and 2022 taxation years. Claims are based on the amount of time spent working from home, without the need to track detailed expenses, and the CRA generally does not require employees to provide a signed form from their employers (e.g., a Form T2200) for these costs.

New eligibility criteria,³ a new addition to the list of eligible expenses (internet access fees) and a new streamlined process with simplified forms were also announced. The new claim method is optional and employees who are eligible for both may choose either the temporary flat-rate method or the traditional detailed method. For further details, see EY Tax Alert 2020 Issue No. 62, and EY Tax Alert 2022 Issue No. 2.⁴

For 2022, the maximum deductible amount under the flat-rate method is $2 per workday at home, to a maximum of $500 that may be claimed on your 2022 personal income tax return if you are eligible.⁵

The CRA has also implemented a temporary administrative position on the taxation of certain benefits provided by employers to employees working from home because of the pandemic. The CRA has stated that the reimbursement of up to $500 for all or part of the cost of personal computer or home office equipment to enable an employee to work remotely as a result of the pandemic is considered a tax-free benefit if the purchase is supported with receipts. The policy covers items such as computer equipment and home office furniture such as desks and chairs, provided they are needed for the employee to carry out their duties of employment from home. The CRA also clarified that the $500 limit applies per employee, and not for each purchase of equipment. As an example, the CRA noted that an employee who purchases both a work desk and a computer monitor may receive a reimbursement of up to $500 in respect of both purchases collectively without incurring a taxable benefit, provided the conditions of the administrative policy are otherwise met.⁶

The CRA’s position applies to purchases made between March 15, 2020 and December 31, 2022, but reimbursements in excess of the $500 limit must be included in the employee’s income as a taxable benefit. Revenu Québec has harmonized its position with the CRA for these expenses. The relief does not extend to allowances provided for the purchase of computer or home office equipment.

The CRA also stated that if your regular place of employment was closed during the pandemic, including situations in which you were sent home by the employer or were given the option to work from home on a full-time basis because of the pandemic, the CRA would not consider employer-provided parking at that location to be a taxable benefit to you. However, once you return to your regular place of employment on a regular basis to perform your duties, even on a part-time basis, the CRA will consider employer-provided parking there to be a taxable benefit to you.

In addition, if you were working from home while your regular place of employment was closed, the CRA noted it would not consider a reimbursement or reasonable allowance for travel expenses related to commuting in a motor vehicle from an employee’s home to a regular place of employment to be a taxable benefit if it enabled you to perform your duties from home (e.g., to bring work equipment or necessary supplies home).

If you continued to work from the office, “additional travel costs” incurred to minimize the risk of exposures to COVID-19 would not be taxable benefits. For example, if you normally commute via public transit, the extra cost incurred to use your car for safety reasons would be considered an additional travel cost in this context.

In addition, travel expenses incurred from the employee’s home to their place of work using a motor vehicle provided by the employer under similar circumstances to those outlined above would be considered to be business mileage and, therefore, would not be included as a taxable benefit.

The CRA stated these administrative positions are also effective from March 15, 2020 to December 31, 2022.

For further information, see EY Tax Alert 2020 Issue No. 50.

If your employer reimbursed you for computer equipment or furniture to enable you to work from home during the pandemic, ensure you keep your receipts from your purchases. If you have been going to work at your employer’s place of employment, ensure you also retain a log of kilometres driven that were related to your travel from home to work.

Are you self-employed and deducting capital expenditures in your business or profession?

If you are a self-employed individual earning unincorporated business, professional or rental income, you are entitled to claim capital cost allowance (CCA) on depreciable capital property if the property is available for use to earn business, professional or rental income.

The accelerated investment incentive property rules significantly accelerate CCA claims for most new depreciable capital property acquisitions made before 2028. Certain properties such as manufacturing and processing machinery and equipment are eligible for full expensing in the year of acquisition on a temporary basis, up to and including 2023. The accelerated CCA rules apply to eligible property acquired and available for use after November 20, 2018 and before 2028, subject to certain restrictions. For full details of these measures, see EY Tax Alert 2019 Issue No. 27 and EY Tax Alert 2018 Issue No. 40.

Under newly enacted immediate expensing measures, there is a temporary expansion of assets eligible for full (i.e., immediate) expensing to a maximum of $1.5 million per taxation year, for certain classes of depreciable capital property acquired by a Canadian-resident individual after December 31, 2021 that become available for use before January 1, 2025.⁷ Many types of assets are eligible for immediate expensing but certain classes of assets (generally for long-lived assets) are specifically excluded, including buildings and intangible assets such as goodwill. No carryforward is available if the full $1.5 million amount is not used in a particular taxation year.

You must choose which immediate expensing property, if any, you wish to expense under these special rules by designating the property as a designated immediate expensing property in respect of the year it becomes available for use in your business or profession. Capital assets not subject to, or designated for, immediate expensing may continue to be depreciated using either the regular or accelerated (if eligible) CCA rates.

For further details, see EY Tax Alert 2022 Issue No. 30.

Do you qualify for any of the tax credits or deductions that are either new or revised for 2022?

Air quality improvement tax credit: A new temporary 25% refundable tax credit has been introduced to encourage eligible small businesses to invest in better ventilation and air filtration to improve indoor air quality.

Eligible entities include unincorporated sole proprietors as well as Canadian-controlled private corporations (CCPCs) with taxable capital employed in Canada of less than $15 million in the preceding taxation year, and partnerships with qualifying members. The credit is limited to a maximum of $10,000 in qualifying expenditures per qualifying location and a maximum of $50,000 across all qualifying locations incurred between September 1, 2021 and December 31, 2022. These limits must be shared among affiliated entities.

Qualified expenditures include expenses directly attributable to the purchase, installation, upgrade or conversion of mechanical heating, ventilation and air conditioning systems, and the purchase of standalone devices designed to filter air using high-efficiency particulate air filters.

The credit must be claimed in your 2022 income tax return. If your business had qualifying expenditures that were incurred between September 1, 2021 and December 31, 2021, you must claim these expenditures on your 2022 income tax return, along with qualifying expenditures incurred in 2022.

First-time home buyers’ tax credit: First-time home buyers who acquire a qualifying home may be eligible to claim this non-refundable federal income tax credit. As announced in the 2022 federal budget, the maximum credit is doubled from $750 to $1,500, effective for qualifying homes purchased on or after January 1, 2022.

You are considered a first-time home buyer if neither you nor your spouse or partner owned a home and lived in it as your principal place of residence in the calendar year of purchase or in the preceding four calendar years. In addition, the property must be occupied as your principal place of residence within one year of its acquisition. The credit may be split with your spouse or common law partner, or with another individual, if any, who jointly owns the property with you, which may be your spouse or common-law partner, as long as the total credit claimed by you and the other individual does not exceed the maximum credit.

Home accessibility tax credit: The home accessibility tax credit is a non-refundable tax credit designed to help seniors and persons with disabilities live more independently in their own homes by encouraging home renovations that improve accessibility, safety and functionality.

The credit is equal to 15% of eligible renovation or alteration expenditures incurred, up to an annual limit. The annual limit on qualifying expenditures has been doubled from $10,000 to $20,000, effective for qualifying expenditures incurred in 2022 and later years. Therefore, the maximum credit that may be claimed for a year has increased from $1,500 to $3,000. Examples of renovations or alterations that would qualify for the credit include walk-in bathtubs, wheelchair ramps, wheel-in showers and grab bars. If your renovation or alteration expenses qualify for the medical expense tax credit (METC), you can claim both the home accessibility tax credit and the METC for those expenses.

For further details on eligibility and other conditions, see Managing Your Personal Taxes, Chapter 10: Tax assistance for long-term elder care.

Medical expense tax credit: As announced in the 2022 federal budget, medical expenses incurred in Canada and paid by a taxpayer or their spouse or common-law partner with respect to a surrogate mother (e.g., expenses paid by the intended parent to a fertility clinic for an in vitro fertilization procedure with respect to a surrogate mother) or a donor of sperm, ova or embryos are eligible for the METC for 2022 and later years.

Certain reimbursements made by the taxpayer of related expenses to the surrogate mother or donor will also qualify. Fees paid to fertility clinics and donor banks to obtain donor sperm or ova to become a parent will also be eligible for the credit.

For further details, see TaxMatters@EY, June 2022, “Expanded availability of medical expense tax credit will facilitate providing fertility and surrogacy benefits to employees on a tax-free basis”.

Labour mobility deduction for tradespeople: Effective for 2022 and later years, if you work as a tradesperson or apprentice in the construction industry, you may be able to claim a deduction for certain travel and relocation expenses you incur in connection with a temporary relocation. You can even claim the costs of several temporary relocations in the same taxation year, provided the total amount does not exceed the maximum annual amount allowed.

The amount you can claim as a deduction for each temporary relocation is limited to half of your employment income as a tradesperson or apprentice from worksites at the temporary location. You can claim up to $4,000 per year as a deduction in respect of all temporary relocations (combined) for a particular year. If your eligible expenses exceed these limits, they may potentially be claimed in the following taxation year. There are several conditions that apply.

For further details, see Managing your Personal Taxes, Chapter 8: Employees.

Did you know that recent amendments improve access to the disability tax credit?

In very general terms, the non-refundable disability tax credit (DTC) is available when an individual is certified by an appropriate medical practitioner as having a severe and prolonged mental or physical impairment — or a number of ailments — such that the individual’s ability to perform a basic activity of daily living is markedly restricted or would be without life-sustaining therapy.

The government has improved access to the DTC and other tax-related measures that require a DTC certificate. Most notably, individuals with type 1 diabetes will now automatically be deemed to satisfy the required time spent on therapy condition to qualify for the DTC (i.e., the requirement that therapy be administered at least two times each week for a total duration averaging not less than 14 hours a week). These amendments apply retroactively to 2021 and later years in respect of DTC certificates that are filed with the CRA after June 23, 2022. For information about the other improvements, see TaxMatters@EY, May 2022, “Long-term eldercare – attendant care and the proposed disability tax credit rules.”

Can the underused housing tax impact you if you are a Canadian citizen or permanent resident?

The government has introduced an annual 1% tax on the value of vacant or underused residential property that is directly or indirectly owned by nonresident non-Canadians (i.e., individuals who are neither Canadian citizens nor permanent residents of Canada), effective January 1, 2022. The legislation also includes a broad annual tax filing requirement for the filing of a return in respect of each residential property.

If you own a residential property in Canada that is vacant or underused and you are a Canadian citizen or permanent resident of Canada, you won’t be subject to this new tax or the annual filing requirement. But if the property is held on your behalf, for example, by a trust under a bare trustee arrangement,⁸ the bare trustee will be exempt from the annual underused housing tax but will be required to file an annual return in respect of the property. This may also be the case if the property is held on your behalf by a partnership or privately owned corporation.

A return for a calendar year is due on or before April 30 of the following calendar year. As a result, a return for the 2022 calendar year must be filed on or before April 30, 2023. Failure to file a return as and when required may result in the imposition of significant penalties.

For further details, see EY Tax Alert 2022 Issue No. 35.

Have you considered the impact of any changes to personal tax rules that are effective in 2023?

Tax-free first home savings account: The 2022 federal budget announced the introduction of the Tax-Free First Home Savings Account (FHSA), a new type of registered account to help Canadians save for a down payment for their first home.

Generally speaking, you are considered a first-time home buyer for purposes of the FHSA if you did not live in a qualifying home as your principal place of residence in any of the four previous calendar years or during the time in the current year before you open the FHSA. Beginning after March 2023, you will be able to contribute up to $8,000 each year to an FHSA, subject to a lifetime limit of $40,000.

Contributions to an FHSA will be tax deductible, and income earned in the account will not be subject to tax. Qualifying withdrawals made to purchase a first home will be non-taxable.

For further information about the general design of the FHSA, see TaxMatters@EY, October 2022, “What’s new for first-time home buyers.” However, please note there have been some changes made to the FHSA rules since the publication of this article. Most notably, the rules will now apply as of April 1, 2023 instead of January 1, 2023, and it now appears that you can make withdrawals from both your FHSA and your RRSP under the home buyers’ plan (HBP) for the same qualifying home purchase.

Multigenerational home renovation tax credit: A new refundable credit, the multigenerational home renovation tax credit (MHRTC), has been introduced for 2023 and later years. The MHRTC will provide financial support to families for the construction of a secondary suite for a senior or an adult family member with a disability to enable them to live with a qualifying relation.

The credit is equal to 15% of qualifying renovation or alteration expenses of up to $50,000, for a maximum credit of $7,500 (i.e., 15% x $50,000). Qualifying expenses must be paid after December 31, 2022 for services performed and goods acquired on or after January 1, 2023.

If you are a senior, an individual with a disability or a family member who is considering the construction of a secondary suite, you may want to consider delaying the start of the renovation project until 2023 when the credit takes effect.

For further information about the MHRTC, see TaxMatters@EY, September 2022, “What is the multigenerational home renovation tax credit?”

Residential property anti-flipping rule: The 2022 federal budget announced a new rule to ensure profits from flipping residential real estate are subject to full taxation. The rule applies to dispositions occurring in 2023 and later years. Profits arising from the disposition of residential real estate in Canada, including a rental property, that was owned for fewer than 365 consecutive days will, subject to certain exceptions,⁹ be treated as business income. As a result, neither the 50% capital gains inclusion rate nor the principal residence exemption will be available for these dispositions.

The November 3, 2022 federal economic and fiscal update proposed to expand the rule to apply also to profits from assignment sales, applicable to transactions occurring on or after January 1, 2023. See EY Tax Alert 2022 Issue No. 42.

Conclusion

There are two benefits to doing year-end tax planning while there is enough time left in the year to do it well. First, you’re more likely to avoid surprises next April that can be both financially and emotionally stressful. Second, if done from the wide-angle perspective of comprehensive financial and estate planning (as discussed in Part 1 of “Asking better year-end tax planning questions”), year-end tax planning can help you understand whether you’re doing the right things in the right way, not just to minimize income taxes, but also to make it that much easier to achieve your longer-term financial goals.

The suggestions made in both Part 1 and Part 2 of “Asking better year-end tax planning questions” should help you set the agenda for a comprehensive discussion with your tax advisor this year and in years to come.

1. If the business was operated through a corporation, the amounts would be taxable in the corporation’s income.
   
   
2. Although there is a 10% withholding of tax on the payment of the Canada Worker Lockdown Benefit, CRSB and CRCB, the final amount of taxes payable on these benefits may be considerably higher, depending on the marginal rate of income tax applicable to you in 2022.
   
   
3. Employees who worked more than 50% of the time from home for a period of at least four consecutive weeks in the year would generally be considered eligible for a home office deduction in the taxation year, provided certain other criteria were also met.
   
   
4. Québec has harmonized its rules with the federal government to also offer the temporary flat-rate method, including the extension of this method to both the 2021 and 2022 taxation years. Where the flat rate method is chosen, the employee does not have to obtain a Form TP-64.3, General Employment Conditions (the Québec equivalent of Form T2200), from their employer, and they do not have to keep supporting documentation to substantiate their claim.
   
   
5. The maximum deductible amount was $400 for the 2020 taxation year and $500 for 2021.
   
   
6. See CRA document 2020-0848111E5.
   
   
7. The immediate expensing measure is also available to CCPCs for eligible assets acquired on or after April 19, 2021 that become available for use before January 1, 2024, or to a Canadian partnership where all the members are CCPCs or Canadian-resident individuals for property acquired after December 31, 2021 that becomes available for use before January 1, 2025 (or before January 1, 2024 for partnerships where not all the members are individuals). These measures are not available to trusts.
   
   
8. Bare trust arrangements are commonly used in real estate and property management. Under these arrangements, the bare trustee, such as a nominee corporation, will hold legal title of the property on the beneficiary’s behalf. These arrangements are commonly used to minimize probate fees on death.
   
   
9. The exceptions pertain to certain life events, such as the death of the taxpayer or a related person, the birth of a child, a separation, a serious illness or disability, and certain employment changes, as well as involuntary dispositions (e.g., an expropriation).

Wes Unger, Saskatoon

Corporate business owners have great flexibility in making decisions about their remuneration from a private company. This flexibility is available to all types of businesses, including incorporated professionals and business consultants. However, the planning process is not a simple one, as there are many tax issues that must be addressed. It’s important that decisions about remuneration be considered before year end, as well as during the business’s financial statement and tax return finalization processes.

Basic considerations

In general, if a corporate owner-manager does not need personal funds for spending, earnings should be left in the corporation to generate additional income and defer personal tax until a later date when personal funds are needed. For 2022, this tax deferral benefit resulting from the difference between corporate tax rates and personal tax rates can range, for individuals taxed at the highest marginal tax rate, from as little as 20.4% in Prince Edward Island when applying the general corporate tax rate, to as high as 42.8% when applying the small business corporate tax rate in Newfoundland and Labrador.

Deferring personal tax allows you to reinvest the corporate earnings and earn a rate of return on the personal tax you would have otherwise paid if you had extracted the funds from the business.

For fiscal years starting in 2019, the amount of income eligible for the federal small business deduction is generally reduced if the corporation (together with all associated corporations) has passive investment income greater than $50,000 in the previous year and is eliminated entirely if the amount of passive investment income exceeds $150,000, similar to the reduction that is applied to a corporation whose taxable capital exceeds $10m in the prior year.

The reduction in the federal small business deduction is equal to the greater of the taxable capital and passive investment income grinds. See the May 2018 issue of TaxMatters@EY. The 2022 federal budget has increased the upper limit of taxable capital to $50m (from $15m) before which the small business deduction is completely eliminated. This change applies for fiscal years beginning after April 7, 2022. Refer to EY Tax Alert 2022 Issue No. 37.

A corporation with too much passive investment income in the prior year will be taxable on its active business income at the general corporate rate.1 Paying tax at the higher general corporate tax rate will decrease the amount of the tax deferral benefit but will allow the corporation to pay out eligible dividends in the future. Not all provinces have decided to follow this federal provision.2

Even if funds are not required for personal consumption, business owners may want enough salary to create sufficient earned income to maximize their RRSP contribution and use tax savings associated with graduated income tax rates. Whether or not this is an appropriate strategy depends on an overall review of the owner-manager’s financial plan for the near future and the long term.

To contribute the maximum RRSP amount of $30,780 for 2023, business owners will need 2022 earned income of at least $171,000. One method to generate earned income is to receive a salary in the year. Note that salary must be earned and received in the calendar year. Receipt of a salary would also allow the business owner to maximize CPP pensionable earnings for the year (based on maximum pensionable earnings of $64,900 for 2022).

If funds are needed for personal consumption, the CRA has a longstanding policy of not challenging the reasonableness of remuneration where the recipient is active in the business and is a direct or indirect shareholder. This criterion of reasonableness is relevant when considering if the remuneration is deductible to the paying corporation.

It’s generally more advantageous to distribute corporate profits as a salary or bonus to an active owner-manager based on current provincial corporate and personal tax rates. However, this may not be applicable for all provinces, and certain provinces levy additional payroll taxes, such as Ontario’s employer health tax, which may impact an analysis of the optimal compensation strategy.

In almost all provinces there is an overall “tax cost” to distributing business profits in the form of a dividend, meaning the total corporate and personal tax paid on fully distributed business earnings exceeds the amount of personal tax that would be paid in that province if the individual earned the same amount of income directly. However, business owners may still wish to earn money through a corporation and defer the tax if future cash needs can be satisfied by salaries or bonuses from future profits.

Earnings subject to a large deferral of tax can remain reinvested in the business or corporate environment for many years, sometimes indefinitely. However, this strategy has to be used carefully, because accumulating excessive business earnings could impact the corporation’s ability to claim the small business deduction on its active business income in the future. See the previous discussion on passive investment income changes. It could also affect a shareholder’s ability to claim the lifetime capital gains exemption (see comments on QSBC shares below).

Advanced considerations

Shareholder loans made to the corporation can be repaid tax free and represent an important component of remuneration planning. Advance tax planning may permit the creation of tax-free shareholder loans.

Complex tax rules associated with otherwise tax-free intercorporate dividends could result in the dividends being recharacterized as capital gains. However, advance tax planning may be available to mitigate this issue, and it also may be possible to benefit from corporate distributions taxed at reduced tax rates associated with capital gains.

A business owner who holds personal investments such as marketable securities can sell them to a private corporation in exchange for a tax-paid note or shareholder loan. While capital gains may arise on the transfer, the personal tax rate on capital gains is generally lower than the personal tax rate on eligible or non-eligible dividends. Advance tax planning may also allow recognition of the capital gain to be deferred, but tax losses may not be realized on a transfer to an affiliated corporation.

Corporate-level merger and acquisition transactions, such as the divestiture of a business or real estate, may also generate favourable tax attributes such as tax-free capital dividend account (CDA) balances or refundable taxes. These attributes form an important component of remuneration planning.

A business can claim a capital cost allowance (CCA) deduction for the purchase of depreciable assets that are available for business use on or before the business’s fiscal year end. A business that is contemplating a future asset purchase and has discretion in the timing of acquisition may choose to make the purchase sooner rather than later and then bring the asset into use to allow CCA to be claimed. This strategy should be carefully considered in light of the opportunities for an enhanced CCA deduction currently available. Refer to EY Tax Alerts 2019 Issue No. 15 and 2018 Issue No. 40.

The 2021 federal budget announced new immediate expensing rules that enhance the CCA deduction for certain assets acquired by a CCPC after April 18, 2021. These rules allow a CCPC to deduct the full cost of certain assets purchased up to a maximum of $1.5 million per year (to be shared with other members of an associated group of CCPCs) provided the asset is available for use prior to January 1, 2024. Refer to EY Tax Alert 2021 Issue No. 19.

Prior to being enacted, certain adjustments were made to these rules to also allow eligible partnerships and individuals to benefit from enhanced CCA deductions. Refer to EY Tax Alert 2022 Issue No. 34 and 2022 Issue No. 30.

Retaining earnings in a corporation may affect a CCPC’s entitlement to refundable scientific research and experimental development (SR&ED) investment tax credits. A business should compare the investment return from deferring tax on corporate earnings against the forgone benefit of high-rate refundable SR&ED investment tax credits.

Leaving earnings in the corporation may also impact the status of the corporation’s shares as qualified small business corporation (QSBC) shares for the purpose of the shareholder’s lifetime capital gains exemption (currently $913,630). Advance tax planning may be available to mitigate this issue and permit continued accumulation of corporate profits at low rates without impacting the QSBC status of the shares.

New income tax rules have been introduced to facilitate intergenerational transfers of family businesses.³ However, changes to these rules are expected to be introduced in the future to address unintended tax avoidance loopholes. Refer to EY Tax Alert 2021 Issue No. 25 and EY Tax Alert 2022 Issue No. 23^.4

Paying dividends may occasionally be a tax-efficient way of getting funds out of a company. Capital dividends are completely tax free, and eligible dividends are subject to a preferential tax rate. For fiscal years that begin after 2018, eligible dividends are only eligible to generate a dividend refund out of the eligible refundable dividend tax on hand (ERDTOH) account.

Non-eligible dividends can generate a dividend refund out of the ERDTOH and the non-eligible refundable dividend tax on hand (NERDTOH) account. A review of the company’s tax attributes will identify whether these advantageous dividends can be paid.5

Dividends and other forms of investment income from private corporations do not represent earned income and so do not create RRSP contribution room for the recipient. An individual also requires earned income to be able to claim other personal tax deductions, such as child care and moving expenses. Business owners should consider how much earned income they need in light of the RRSP contributions they wish to make or personal tax deductions they wish to claim.

Rules limiting income splitting

The tax on split income (TOSI) rules introduced in 2017 broadened the base of individuals affected and increased the types of income subject to the existing rules, (formerly known as “the kiddie tax”) aimed at preventing income splitting. In essence, the TOSI rules limit income splitting opportunities with most adult family members through the use of private corporations after 2017.

Beginning in 2018, any income received by an individual that is derived directly or indirectly from a related private company (with the exception of salary) could be subject to the TOSI rules. Any income subject to TOSI will be taxed at the highest marginal tax rate, which eliminates any tax advantage. To avoid application of the TOSI, the type of income needs to meet one of the exceptions or the individual receiving the income must fall into one of the exclusions. The application of the rules will also depend on the age of the individual receiving the income.

Exclusions are provided to recipients who are actively engaged in the business, as well as to payments that represent a reasonable return (based on a number of factors) and payments received by certain shareholders. Certain other exclusions are also provided. For more information, refer to Appendix E: The revised tax on split income rules in EY’s Managing Your Personal Taxes 2021-22.

Income splitting considerations (subject to TOSI)

Consider paying a reasonable salary to a spouse or adult child who provides services (e.g., bookkeeping, administrative, marketing) to the business in order to split income.

If a spouse or adult child (older than 24 years of age) is not active in the business and has no other sources of income, consider an income-splitting corporate reorganization whereby the family members become direct shareholders in the business, owning 10% or more of the votes and value of the corporation. This planning is still available even with the TOSI rules in effect, as long as the corporation is not a professional corporation and has less than 90% of its gross business income from the provision of services and at least 90% of the company’s income is not derived directly or indirectly from one or more related businesses.

For non-active family members, there generally must be a direct shareholding as described above.6 Non-active family members are no longer able to be indirect shareholders and avoid the TOSI rules. Active family members can be indirect shareholders and avoid the TOSI rules, as long as they fit into one of the exclusions under the rules.

Depending on the province of residence, an individual who has no other source of income can receive a certain amount of dividends tax free. For eligible dividends, the range would be $25,755 to $54,400, and for non-eligible dividends the range would be $10,435 to $31,460. These amounts increase where the recipient has access to tax credits such as the tuition tax credit in the case of adult-children students.

Commercial and family law considerations, in conjunction with the tax benefits, will determine whether it’s worthwhile pursuing such a strategy. In select cases, a low-interest family loan can be advantageous for permissible income splitting. The recent increases in interest rates have increased the “prescribed rate” from 1% to 3% during 2022, so this strategy may not achieve substantial tax benefits. The return on investment would need to exceed the prescribed rate of 3%.

Managing tax cash flow7

If there’s a plan to pay a salary, remember that bonuses can be accrued and deducted by the business in 2022, but not included in the business owner’s personal income until paid in 2023. To be deductible to a corporation, the accrued bonus must be paid within 180 days after the company’s year end, permitting a deferral of tax on salaries of up to six months.8

If earnings left in the corporation exceeded the available small business deduction limit for the preceding tax year, corporate taxes for the current year will be due two months, rather than three months, after the year end. The current rate for late payment arrears interest is 7% and is not deductible for income tax purposes.

Monthly and quarterly tax instalments (for corporate and personal income, respectively) must be managed to avoid arrears interest and penalty interest. A single midyear payment strategy can be used to simplify the obligation of making recurring payments, and generally reduce or eliminate interest and penalties.

Use of a shareholder “debit” loan account (where the corporation has a receivable from the individual shareholder) may simplify the need to project exact owner-manager remuneration requirements. Shareholder debit loans must be repaid within one year after the end of the year in which the loan was made, or else the loan will be included in the business owner’s income in the year funds were withdrawn. The repayment of a shareholder loan cannot constitute a series of loans or other transactions and repayments if the one-year repayment is to be considered valid.9

Borrowing from the company within the permissible time limits will cause a nominal income inclusion at the prescribed rate, which is currently only 3%. The cost of financing from the corporation using shareholder loans can therefore currently be achieved at tax-effected rates of 1.425% to 1.644% at the highest marginal tax rates, depending on your province of residence.

For more information on remuneration planning and other tax-planning and tax-saving ideas, contact your EY advisor.

Caitlin Morin and Lawrence Levin, Toronto

In Mason v The Queen, the Tax Court of Canada recently found that an employee was entitled to deduct motor vehicle expenses incurred while travelling from his home to various worksites of his employer and vice versa. The Court held that the employee was ordinarily required to carry on his employment duties in different places, including his home, and that the expenses at issue were incurred for travelling in the course of his employment.

Background and facts

The employee was employed as a foreman for a construction business. As part of his employment duties, he was required to bring his employer’s tools, equipment and materials home with him each night to store in his garage to avoid theft, to clean and repair the tools and equipment as needed, and to deliver to the employer’s worksites the next morning for work.

The employee used a designated spot in his garage to store and repair the employer’s tools, equipment and materials. He regularly had to repair tools that had been broken during the workday, and he made these repairs in his garage at night. In addition, the employee’s employment duties included ensuring that workers were in place each workday at a designated construction site and supplied with properly functioning tools, equipment and materials.

When filing his income tax return for 2017, the employee claimed as a deduction in computing his employment income motor vehicle expenses he incurred using his personal vehicle. The Minister of National Revenue disallowed the portion of the expenses the employee incurred while travelling between his home and the various construction sites on the basis that they were personal expenses and therefore were not deductible under paragraph 8(1)(h.1) of the Income Tax Act (the Act).

The employee appealed the reassessment.

Court’s analysis and decision

The issue before the Court was whether expenses the employee incurred while travelling between his home and various worksites were deductible under paragraph 8(1)(h.1) of the Act.

Paragraph 8(1)(h.1) allows an eligible employee to deduct motor vehicle expenses incurred in the performance of employment duties where certain criteria are met, including that the employee is ordinarily required to carry on employment duties away from the employer’s place of business or in different places.

Carrying on employment duties in different places

The Court found that the employee’s duties of repairing, cleaning and storing tools, equipment and materials in his garage were requirements of his employment and that he was “…ordinarily required to carry on the duties of the… employment… in different places.”

The Court rejected the argument that subparagraph 8(1)(h.1)(i) of the Act requires that the majority of the employment duties be carried on in different places — in this case, in the employee’s garage — and held that a person will be considered to ordinarily carry on employment duties in different places for the purpose of that subparagraph if he or she “is carrying out employment duties at different places in the ordinary or usual course of events or states of things.”

The Court found that the employee was ordinarily required to store the employer’s tools, equipment and materials in his garage to avoid theft, to maintain and repair those tools and equipment in his garage, and to transport the tools, equipment and materials to the worksites the following day. Although the employee performed the majority of his work at the construction sites, the garage was a place where he ordinarily performed duties the employer required.

The Court gave weight to Form T2200, Declaration of Conditions of Employment, introduced in evidence, which stated that the employee was required to transport the employer’s tools home for storage in his garage, pay expenses related to this storage and use his garage for this purpose.

Expenses incurred for travelling in the course of employment

The Court reviewed the applicable jurisprudence and concluded that the employee’s employment situation was similar to situations considered by courts in other cases in which an exception was found to the general rule that expenses incurred to travel between an employee’s home and place of work are personal expenses and are therefore not deductible. The Court made the following remarks:

            [38] […] Mr. Mason’s workday did not finish when he left [the] construction sites to go home. His workday continued in the designated spot in his garage and only finished when [the] tools and equipment were repaired and all tools, equipment and materials were safely stored for the night. Mr. Mason’s workday did not start when he arrived at [the] construction sites. His workday started when he loaded [the] tools, equipment and materials in his truck and transported them to the designated worksite for his crew to use.

The Court rejected the argument that a determination that expenses were incurred in the performance of employment duties would require evidence that the employee would face unfavourable reviews and negative job evaluations if he did not comply with the requirement to transport the tools, equipment and materials to and from his home. Nevertheless, the Court found that it could be inferred that there was a reasonable possibility that the employee could have faced negative consequences if he failed to comply with that requirement.

The Court allowed the appeal and referred the reassessment back to the Minister for reconsideration and reassessment on the basis that in computing his employment income for the 2017 taxation year, the employee was entitled to deduct the motor vehicle expenses under paragraph 8(1)(h.1) of the Act.

Lessons learned

This decision provides helpful commentary on the meaning of “ordinarily required to carry on the duties of the office or employment away from the employer’s place of business or in different places” in subparagraph 8(1)(h.1)(i) of the Act.

The Court clarified that this provision does not require that the majority of the employment duties be carried on away from the employer’s place of business or in different places. Rather, this requirement may be met if the employee is carrying on employment duties at different places “in the ordinary or usual course of events or states of things.” Thus, the regularity of the required action would appear to carry more weight than its frequency.

Similar reasoning may be expected to apply in determining whether a location is an employee’s regular place of employment, such that where the cost of travel between that location and another regular place of employment is reimbursed by the employer, the reimbursement would not give rise to a taxable benefit because the travel would be considered employment related.

A key finding in this decision was that the employee did not make a personal choice to conduct his required employment duties at home in his garage. Courts could be expected to distinguish Mason where the evidence shows that the employee chose to work from home out of convenience or personal preference but could have carried out the employment duties at the employer’s premises.

Further, as Mason is an informal procedure case, the results are not binding on the CRA or any other court, even where the facts are very similar. However, informal procedure decisions often have influential value for other judges.

Tax Alerts – Canada

Tax Alert 2022 No. 42 – Federal Fall Economic Statement 2022

Tax Alert 2022 No. 43 – Revised EIFEL proposals

Tax Alert 2022 No. 44 – Government of Canada announces withdrawal of Most-Favoured-Nation tariff benefit on goods originating in Russia and Belarus

Summary

For more information on EY’s tax services, visit us at https://www.ey.com/en_ca/tax. For questions or comments about this newsletter, email Tax.Matters@ca.ey.com.  And follow us on Twitter @EYCanada.