TaxMatters@EY – March 2022

Alan Roth, Toronto

As the 2021 personal income tax return (T1 return) filing deadline quickly approaches, it’s time to reflect on the year that ended and complete your tax return. That means it’s also time for EY’s annual list of tax filing tips and reminders that may save you time and money.

Personal tax filing tips for 2021 tax returns

No matter what, file on time: Generally, your personal income tax return has to be filed on or before April 30. If you, or your spouse or common-law partner, are self-employed, your return deadline is June 15, but any taxes owing must be paid by the April 30 deadline. Since April 30 falls on a Saturday in 2022, the 2021 personal income tax return filing and tax payment deadlines are extended to Monday, May 2, 2022.

Failure to file a return on time can result in penalties and interest charges. Even if you are not able to pay your balance by the deadline, you should still file your return on time to avoid penalties. And even if you expect a refund, you should still file on time in case a future change or assessment results in a tax liability for the year. Filing on time also ensures you receive any benefit or credit entitlements (such as the Canada Child Benefit or GST/HST credit) in a timely manner. Remember, if you wait more than three years after the end of the year to file a return claiming a refund, your right to the refund expires and will be subject to the Canada Revenue Agency’s (CRA’s) discretion.¹

Review your 2020 return: Reviewing your 2020 return and notice of assessment is a great starting point before you complete and file your return. Determine if you have any carryforward balances that may be used as deductions or credits in your 2021 return.

Carryforward amounts could include unused registered retirement savings plan (RRSP) contributions, unused tuition, education and textbook amounts,² interest on student loans, capital losses or other losses of prior years, resource pool balances and investment tax credits.

COVID-19 benefit payments: Payments received in 2021 from various federal, provincial and territorial COVID-19 support programs are taxable and must be reported on Line 13000 of your 2021 income tax return.³ These programs include the Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB), Canada Recovery Caregiving Benefit (CRCB) and the Canada Worker Lockdown Benefit (CWLB).⁴ The amount of each benefit to include on your 2021 income tax return is reported on Form T4A, Statement of Pension, Retirement, Annuity, and Other Income, copies of which you should have received by the end of February 2022 in respect of the 2021 taxation year.

For details about the CRB, CRSB and CRCB, see EY Tax Alert Issue 2020 No. 45, Transition plan for the CERB announced, and TaxMatters@EY, November 2020, Transition from the Canada Emergency Response Benefit: Bill C-4 receives Royal Assent. For information about the CWLB, see the CRA webpage Canada Worker Lockdown Benefit (CWLB).

If you operated an unincorporated business in 2021 and were entitled to wage and rent subsidies under the federal Canada Emergency Wage subsidy (CEWS), Canada Recovery Hiring Program (CRHP), Canada Emergency Rent Subsidy (CERS) COVID-19 relief programs, the more narrowly targeted Tourism and Hospitality Recovery (THRP) or Hardest-Hit Business Recovery (HHBRP) programs that replaced the CEWS and CERS in October 2021, or the local lockdown program, the amounts are considered to be government assistance and are required to be reported as income on your income tax return. In addition, the forgivable portion of loans received under the Canada Emergency Business Account (CEBA) program are taxable. Other financial assistance benefits received under a provincial or territorial COVID-19 relief program for your business should also be included in income. These benefits are generally reported on Form T2125, Statement of Business or Professional Activities.

CEWS, CERS, CRHP, THRP, HHBRP and local lockdown program subsidies are considered to be received — and therefore taxable — in the year that includes the qualifying periods to which they relate.⁵ The forgivable portion of loans received under the CEBA are taxable in the year in which the loans are received.⁶

• 2020 Issue No. 42, Redesign and extension of the Canada Emergency Wage Subsidy
• 2020 Issue No. 52, Bill C-9 introduced to implement new rent subsidy and amend current wage subsidy
• 2020 Issue No. 57, Income tax measures from the 2020 federal Fall Economic Statement
• 2021 Issue No. 19, Federal budget 2021–22: A recovery plan for jobs, growth and resilience

For details on the CERS, see the following EY Tax Alerts:

• 2020 Issue No. 52, Bill C-9 introduced: new CERS and amended CEWS
• 2020 Issue No. 54, Federal government releases emergency support for commercial property renters and owners: an analysis of the Canada Emergency Rent Subsidy
• 2021 Issue No. 19, Federal budget 2021-22

For details on the CRHP, THRP, HHBRP and the local lockdown program, see the following EY Tax Alerts:

• 2021 Issue No.19, Federal budget 2021–22: A recovery plan for jobs, growth and resilience
• 2021 Issue No. 24, 2021 Budget implementation bill receives Royal Assent
• 2021 Issue No. 30, Targeted COVID-19 support measures announced
• 2022 Issue No. 1, Finance announces temporary expanded eligibility for the Local Lockdown Program

Repayment of COVID-19 benefits: As discussed in TaxMatters@EY, December 2021, Asking better year-end tax planning questions – part 2, recent amendments allow individuals who repay certain COVID-19 benefits before 2023 to claim a deduction in computing income for the year in which the benefit was received, rather than in the year the repayment was made. If the individual makes the repayment after filing their income tax return reporting the income inclusion, the individual who claimed the deduction will be able to file an adjustment. 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.

For example, if you received CRB payments in 2021, the amount received must be included in income on your 2021 T1 return. However, if the CRA later determines that you were not eligible to receive those payments and you repay the amounts in 2022 but before you file your 2021 T1 return, you can claim a corresponding deduction on Line 23210 of the 2021 return for the amounts repaid. If you repay the amounts later in 2022 after filing your 2021 T1 return, you can file an adjustment⁷ to claim the deduction on your 2021 return. Note that repayments of provincial or territorial COVID-19 benefit program amounts are deducted on Line 23200 of the T1 return.

Home office expenses: In response to the significant number of employees working from home during 2020 and 2021 as a result of the COVID-19 pandemic, a temporary flat rate method is available for employees to claim up to $500 for home office expenses on their 2021 T1 return.⁸ The maximum claim for the 2020 taxation year was $400. Under this method, an employee may deduct $2 for each day they worked from home in 2021 due to the pandemic (up to a maximum of 250 working days) for a maximum deduction of $500. A maximum deduction of $500 will also be available for the 2022 taxation year. A partial day worked from home counts as a full day for purposes of this calculation. Other conditions apply.⁹ Under this method, home office expenses that are incurred do not need to be tracked or substantiated and the employer is not required to complete and sign any forms. However, the claimant should have information to substantiate the number of days worked from home if asked at a later date by the CRA. This method may be advantageous to employees who do not incur home office expenses that exceed the $2 daily amount, or for those who prefer a simple approach.

Alternatively, the traditional detailed method may be chosen to deduct specific eligible home office expenses incurred in the course of earning employment income. The types of expenses that may be claimed by employees are very limited, although the CRA has recently expanded the list of eligible expenses to include a reasonable portion of internet access fees. Other conditions apply.¹⁰

In addition, to apply the detailed method, the employee must obtain from their employer a completed and signed Form T2200S, Declaration of conditions of employment for working at home due to COVID-19, or Form T2200, Declaration of conditions of employment. If an employee needs to claim other types of employment expenses in addition to home office expenses (e.g., motor vehicle expenses), or if the employee was normally required to work from home under their employment contract, the employer must complete and sign Form T2200.

The computation of the deductible portion of expenses is calculated on Form T777S, Statement of employment expenses for working at home due to COVID-19, if the detailed method is used and the employee is only claiming home office expenses, or if the employee is claiming expenses under the temporary flat rate method. Form T777S has been updated for the 2021 taxation year to provide the option to carry forward an amount of home office expenses from the previous taxation year. Otherwise, Form T777, Statement of employment expenses, must be used. Either form must be filed with the T1 return.

For further details, see the following EY Tax Alerts:

• 2020 Issue No. 62, CRA issues guidance on employee home office expenses and Form T2200
• 2021 Issue No. 35, Federal government delivers its Economic and Fiscal Update 2021
• 2022 Issue No. 2, CRA provides update on home office expense deduction

Also see EY’s webcast, Important updates on work from home expenses and Form T2200

Stock option deduction: Amendments to the stock option deduction rules have taken effect for stock options granted on or after July 1, 2021, subject to certain exceptions. The amendments introduced a $200,000 annual limit on employee stock options that may qualify for the 50% deduction from the amount of the stock option benefit required to be included in employment income. This limit does not apply to stock options granted by Canadian-controlled private corporations (CCPCs) or non-CCPCs with annual gross revenue of $500 million or less, or non-CCPCs whose corporate group has annual gross revenue of $500 million or less. The amendments are intended to restrict the preferential treatment of stock options for employees of large, long-established, mature firms, while continuing to provide full tax benefits for persons employed in connection with startup, scale-up or emerging Canadian businesses.

For further details, see EY Tax Alert 2020, Issue No. 59, Stock option proposals reintroduced, EY Tax Alert 2021 Issue No. 26, Proposed changes to taxation of employee stock options now law, and TaxMatters@EY, May 2021, Proposed limitations to the security option deduction.

Automobile standby charge: If your employer provides you with an automobile for both business and personal use, you will be required to include in income a standby charge, which is a calculated taxable benefit representing the benefit obtained for the personal use of the vehicle. Likewise, an operating expense benefit is a taxable benefit that arises if an employer pays the operating costs (e.g., fuel, insurance) that relate to your personal use of the employer-provided automobile. Reduced standby charge and operating expense benefit amounts may be available if the automobile is driven primarily (more than 50%) for business purposes. Under recent amendments enacted in June 2021, if you qualified for the reduced charges in 2019, you may qualify for the reduced standby charge and operating expense benefits in 2020 and 2021 if you still have the same employer as you did in 2019. These taxable benefits are reported in box 34 of Form T4, Statement of Remuneration Paid, copies of which you should have received by the end of February 2022 in respect of the 2021 taxation year.

Tax on split income: The tax on split income rules limit income splitting opportunities with children and certain adult family members for income derived directly or indirectly from a private corporation. Income that is subject to tax on split income is taxed at the highest marginal personal income tax rate and is calculated on Form T1206, Tax on Split Income. For more information on the revised rules, see the February 2018, February 2020, and November 2020 issues of TaxMatters@EY.

Principal residence sale — reporting required, even if all gains are exempt: Capital gains realized on the sale of your residence may be exempt from tax if the residence qualifies as, and is designated as, your principal residence. No tax is owed, for example, if your residence is designated as your principal residence for each year that you owned it. However, you are required to report the disposition of a principal residence on your income tax return, whether the gain is fully sheltered or not.

The sale of your principal residence must be reported, along with the principal residence designation, on Schedule 3, Capital Gains (or Losses), of your income tax return. In addition, you must also complete Form T2091, Designation of a property as a principal residence by an individual (other than a personal trust). The year of acquisition, proceeds of disposition and a description of the property must be included on the form.

If the gain is fully sheltered, you only need to complete the first page of Form T2091 and no gain needs to be reported on Schedule 3. However, the appropriate box (box 1) still needs to be ticked in the principal residence designation section on page 2 of Schedule 3. If the gain is not fully sheltered, then any capital gain remaining after applying any available principal residence exemption (as calculated on Form T2091) must be reported on Schedule 3.

There is generally a time limit for the CRA to reassess an income tax return. The normal reassessment period for an individual taxpayer generally ends three years from the date the CRA issues its initial notice of assessment. However, if you do not report the sale of your principal residence (or any other disposition of real property) in your tax return for the year in which the sale occurred, the CRA will be able to reassess your return for the real property disposition beyond the normal reassessment period.

T1135 — remember your foreign reporting: If at any time in the year you own certain specified foreign property with a total cost of more than CDN$100,000, you are required to file Form T1135, Foreign Income Verification Statement. This form may be filed electronically. Failure to report foreign property on the required information return may result in a penalty. Failure to file Form T1135 on time may result in a penalty equal to $25 for each day the failure continues, for a maximum of 100 days ($2,500), or $100, whichever amount is greater. More significant penalties may apply if a person knowingly, or under circumstances amounting to gross negligence, fails to file the form. In addition, if Form T1135 is not filed on time or includes incorrect or incomplete information, the CRA can reassess your income tax return for up to three years beyond the normal reassessment period.

Reportable property generally includes amounts in foreign bank accounts and shares or debts of foreign companies, as well as other property situated outside Canada. It does not include property used in an active business, shares or debt of a foreign affiliate or personal-use property.

Capital losses: Capital losses realized in the year may only be applied against capital gains. Net capital losses may be carried back three years, and losses that cannot be carried back can be carried forward indefinitely.

Where capital losses are incurred on certain shares or debt of a small business corporation, they may qualify as business investment losses that may be claimed against any income in the year, not just capital gains.

Pension income splitting: If you received pension income in 2021 that is eligible for the pension income credit, up to half of this income can be reported on your spouse’s or common-law partner’s tax return. Note that amendments, applicable retroactively to 2015 and later years, include amounts received out of a retirement income security benefit (RISB) as pension income eligible for the pension income credit and eligible for pension income-splitting purposes, in certain circumstances.

You’ll reap the greatest benefits when one member of the couple earns significant pension income while the other has little or no income. In some cases, transferring income from a lower-income pension recipient to a higher-income spouse can carry a tax benefit.¹¹

Home buyers’ plan: The home buyers’ plan (HBP) permits first-time home buyers¹² to withdraw amounts from an RRSP on a tax-free basis, to finance the purchase of a qualifying home. The withdrawal limit was increased from $25,000 to $35,000 for 2019 and later years in respect of amounts withdrawn after March 19, 2019. More than one withdrawal may be made, as long as the total amount of all withdrawals does not exceed $35,000. Generally, all withdrawals must be made in the same calendar year, and the withdrawn funds must be repaid to your RRSP over a period not exceeding 15 years.

Climate action incentive benefit: This federal benefit was previously available as a refundable tax credit for the 2018, 2019 and 2020 taxation years. Effective for the 2021 and later taxation years, payments will be delivered quarterly through the benefit system, rather than claimed annually as a tax credit. Eligible individuals 19 years of age or older who are resident in Alberta, Ontario, Manitoba or Saskatchewan on the first day of the payment month and the last day of the previous month may automatically receive the benefit in respect of the 2021 taxation year in the form of quarterly payments, beginning in July 2022. However, they must file their 2021 T1 income tax return to receive these payments. The amount of the benefit varies according to the province of residence, and additional amounts may be claimed for a cohabiting spouse or common-law partner and for any children under the age of 18. A supplement equal to 10% of the baseline credit amount may be claimed on Schedule 14, Climate action incentive, of the T1 income tax return by an eligible individual who resides in a small or rural community.

File returns for children: Although often unnecessary, in many cases there are benefits to filing tax returns for children. If your children had part-time jobs during the year or have been paid for various small jobs, such as babysitting, snow removal or lawn care, by filing a tax return they report earned income and thus establish contribution room for purposes of making RRSP contributions in the future.

Another advantage of filing a return for teenagers is the availability of refundable tax credits. Several provinces offer such credits to low- or no-income individuals. When there is no provincial tax to be reduced, the credit is paid out to the taxpayer. There is also a GST/HST credit available for low- or no-income individuals over age 18.

Claim all your deductions and credits: Remember to take advantage of the various family-related tax credits that might apply to you. See “Spotlight on personal tax deductions and credits” for details.

…or not: You may be able to increase the tax benefit of certain discretionary deductions if you defer them to a later date:

• Discretionary deductions that may be deferred include RRSP contributions and capital cost allowance.
• Similarly, consider accumulating donations over a few years and claiming them all in one year to increase your benefit from the high-rate donation credit which is available for donations made within the five preceding years.
• Deferring deductions and certain credits makes sense if you are unable to use all applicable non-refundable tax credits in 2021 (and they cannot be transferred), or if you expect to earn higher income in the future.

Capital cost allowance claims: If you are a self-employed individual earning unincorporated business or professional income, you are required to report your income and deductible expenses on Form T2125, Statement of Business or Professional Activities. Likewise, if you earn income from a rental property, your rental income and deductible expenses are reported on Form T776, Statement of Real Estate Rentals. Capital cost allowance (CCA) on depreciable capital property owned may be deducted and claimed on Form T2125 or T776 if the property is available for use to earn business, professional or rental income.

Legislative amendments significantly accelerate CCA for most depreciable capital properties until, and including, 2027. 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).¹³ The accelerated CCA rules apply to eligible property acquired and available for use after November 20, 2018, subject to certain restrictions.

Legislative amendments also provide for full expensing of “zero emission” vehicles for eligible vehicles that are purchased and become available for use in a business or profession on or after March 19, 2019, and before 2024, subject to certain restrictions such as a cap on the cost of passenger vehicles.¹⁴ Eligible vehicles include electric battery, plug-in hybrid (with a battery capacity of at least 7 kWh) or hydrogen fuel cell vehicles, including light-, medium- and heavy-duty vehicles purchased by a business. Accelerated CCA deductions will be available for zero-emission vehicles that become available for use between 2024 and the end of 2027. Additional amendments expand these rules to include other types of equipment or vehicles that are automotive (i.e., self-propelled) and fully electric or powered by hydrogen. Equipment or vehicles that are powered partially by any means other than electricity or hydrogen for propulsion — such as gasoline, diesel, human or animal power — are not eligible. Eligible equipment or vehicles under these amendments must be acquired on or after March 2, 2020 and become available for use before 2028.

For further details on these rules, see the following EY Tax Alerts:

• 2018 Issue No. 40, Federal Fall Economic Statement announces significant acceleration of CCA for most capital investments
• 2019 Issue No. 27, CCA acceleration measures enacted as part of 2019 budget implementation bill
• 2021 Issue No. 24, 2021 Budget implementation bill receives Royal Assent.

Get a head start on 2022 savings

Early in 2022 is a great time to think of ways to save on your 2022 taxes. Here are some ideas to help you increase your savings in April 2023:

• Contribute early to your RRSP or RESP to increase tax-deferred growth, and to your TFSA to increase tax-free growth. The 2022 TFSA contribution limit is $6,000, and the 2022 RRSP contribution limit is equal to the lesser of 18% of earned income for 2021 and a maximum amount of $29,210.
• Consider tax deferral opportunities using corporations (such as revisiting your salary/dividend/remuneration needs) or other planning opportunities involving corporations. However, keep in mind that income splitting opportunities with certain adult family members for income derived directly or indirectly from a private corporation are limited. For more information, see the February 2018, February 2020 and November 2020 issues of TaxMatters@EY.
• In addition, a private corporation’s ability to benefit from the small business deduction if the private corporation earns too much passive income is limited.¹⁵ For more information, see the May 2018 issue of TaxMatters@EY.
• Consider income-splitting opportunities such as prescribed-rate loans or reasonable salaries to a spouse or child for services provided to your business.¹⁶
• If you’re planning on selling an investment or earning income from a new source in the year, consider opportunities to realize and use losses to offset that income.
• Consider converting non-deductible interest into deductible interest by using available cash (perhaps a tax refund) to pay down personal loans, and then borrowing for investment or business purposes.
• If you expect to have substantial tax deductions in 2022, consider requesting CRA authorization to decrease tax withheld from your salary.

Make time for tax planning

When your return is done, you can step back and reflect on your progress toward your financial goals in the year that just ended. It’s a great primer for a meaningful conversation about tax and estate planning.

An estate plan is an arrangement of your financial affairs designed to accomplish several essential financial objectives, both during your lifetime and on your death. The plan should: provide tax-efficient income during your lifetime, provide tax-efficient dependant support after your death, provide tax-efficient transfer of your wealth and protect your assets.

Make time to review and update your will(s) and estate plan to reflect changes in your family status and financial situation as well as changes in the law. Don’t underestimate the benefits of financial spring cleaning. Tax season is a time when many focus a little more closely on their financial affairs. So this really is a good time to at least take a new look at the components of your financial and estate plan that could most impact your financial future and those who depend on you.

Spotlight on personal tax deductions and credits

A good way to save tax is by understanding the deductions and credits that are available to you. To enhance the benefit of tax deductions and credits, consider these tips and reminders while you’re preparing your tax return.

Family-related and other special tax credits: Claim all credits that apply, including the adoption expense credit, tuition credit (including transfers from a child), credit for the costs of exams or accreditation as a professional, volunteer firefighting or search-and-rescue credits, Canada caregiver amount, homebuyers’ amount, eligible educator school supply credit and the home accessibility credit.

Canada training credit: Effective for the 2020 and later taxation years, a new refundable tax credit is available to help you cover the cost of up to one-half of eligible tuition and fees associated with training. Eligible individuals¹⁷ who have either employment or business income may accumulate $250 each year in a special notional account (your “training amount limit”) which can be used to cover the training costs. The amount of the credit that you are able to claim in a taxation year is equal to the lesser of one-half of the eligible tuition and fees paid in respect of the year and your balance in the notional account. For purposes of this credit, eligible tuition and fees must be levied by a Canadian educational institution. The Canada training credit claimed reduces the amount that would otherwise qualify as an eligible expense for the tuition tax credit.

The $250 amount may only be added to your notional account each year if you file your personal income tax return for the preceding tax year. Therefore, you must file your 2021 personal income tax return in order to have $250 added to your notional account for the 2022 taxation year.

Charitable donations: The federal tax credit for donations is available in two stages ― a low-rate 15% credit on the first $200 of donations and a high-rate (33% and/or 29%) credit on the remainder. Higher-income donors can claim a 33% tax credit on the portion of donations made from income that is subject to the 33% highest marginal tax rate.¹⁸ Otherwise, the 29% rate applies.

Child care expenses: If you paid qualifying child care expenses for an eligible child to allow you to work or attend certain educational programs, you may be able to claim a deduction. The limits are generally $8,000 for each child under 7 years of age and $5,000 for each child between 7 and 16 years of age. A higher amount may be claimed for a child who has a disability. The total deduction claimed for all children cannot exceed two-thirds of your earned income. Earned income for this purpose includes employment income or net self-employment income (either alone or as an active partner) and certain financial assistance payments, including COVID-19-related federal, provincial, or territorial relief benefits. Recent amendments have added employment insurance (EI) benefits, EI special benefits, and Québec Parental Insurance Plan (QPIP) benefits to this definition of earned income for the 2020 and 2021 taxation years.²⁰

Digital news subscription tax credit: If you meet certain conditions, you may claim a temporary 15% non-refundable tax credit for eligible digital news subscriptions, for a maximum annual amount of $500 (a maximum annual federal tax credit of $75). The credit applies to eligible amounts paid after 2019 and before 2025. Eligible digital news subscriptions are subscriptions that entitle an individual to access content that is primarily original written news provided in digital form by a qualified Canadian journalism organization (as defined under the relevant legislation), if the organization does not hold a broadcasting licence. The credit is limited to the cost of a comparable standalone digital subscription where the subscription is a combined digital and newsprint subscription. If there is no such comparable subscription, individuals are limited to claiming one-half of the amount actually paid.²¹

Interest expense: If you’ve borrowed money for the purpose of making an income-earning investment, the interest expense incurred should be deductible.

Moving expenses: If you moved in 2021 to start a new job or a new business, or to attend university or college on a full-time basis, you may be able to claim expenses relating to the move.

Medical expenses: The claim for the medical expense tax credit is limited by an income threshold. In other words, the lower your net income, the more you can claim in eligible medical expenses. For 2021, this credit may be claimed for eligible expenses in excess of the lower of $2,421 and 3% of net income. Because one spouse or common-law partner can claim medical expenses on behalf of the entire family, it generally makes sense to claim all expenses in the lower-income spouse’s return (unless the lower-income spouse owes no tax), including the expenses of dependent children under the age of 18. You might be able to claim the medical expenses paid for other dependent relatives such as elderly parents or grandparents or children 18 years of age or older, but in this case, the income threshold for 2021 is equal to eligible expenses in excess of the lower of $2,421 and 3% of the dependent’s net income.

Take advantage of technology: Use software to prepare your tax return and file electronically. The CRA offers several online services to make managing your taxes faster and easier.

Registering for the CRA’s My Account will allow you to view prior-year returns and assessments, check carryover amounts, view tax slips filed in your name, view account balances and statements of account, file returns, make payments and track the status of your return. It also allows you to register to receive online correspondence from the CRA within My Account, including notices of assessment, benefit notices and slips, and instalment reminders. My Account will also allow you to use the “Auto-fill my return” service, which pre-populates your return with figures from tax information slips and other information from CRA records if you are using NETFILE-certified software for preparing your return. My Account may still be used to apply for the temporary CRSB, CRCB and CWLB COVID-19 relief benefit programs in respect of eligible periods (see COVID-19 benefit payments above for information about these programs) As of February 2022, you will need to provide the CRA with an e-mail address to access My Account

The MyCRA mobile app allows you to access and view on your mobile device personalized tax information such as your notice of assessment, return status, benefits and credits, and TFSA and RRSP contribution limits, or make payments from your mobile device. The MyBenefits CRA mobile app allows you to view all your benefit and credit information on your mobile device. For further details, see https://www.canada.ca/en/revenue-agency/services/e-services/cra-mobile-apps.html.

Certain tax preparation software products offer the CRA’s Express NOA service, which can provide you with your notice of assessment immediately after you file your tax return electronically. You must be registered for both My Account and online correspondence with the CRA to use the Express NOA service.

Draft legislation will permit the CRA to issue electronic notices of assessment or reassessment to individuals who filed their T1 returns electronically (or a tax preparer that filed the individual’s personal income tax return electronically on behalf of the individual), effective January 1, 2023. The CRA has noted that it will start the process of switching to electronically provided notices of assessment or reassessment in 2023.

The CRA’s ReFILE service allows you to file adjustments to your tax return using NETFILE certified tax preparation software, provided your original tax return is also filed electronically. Adjustments can be made to your 2020, 2019, 2018, or 2017 tax return. You should receive your notice of assessment on your original return first before using ReFILE to file any adjustments.

The CRA’s Check CRA Processing Times tool provides you with general processing times for tax returns and other tax-related requests sent to the CRA. Examples include processing times for personal income tax returns, T1 adjustment requests, tax objections and taxpayer relief requests, and applications for Canada child benefits and the Form T2201, Disability Tax Credit Certificate. The tool may be accessed on the CRA website and through My Account. A future service will include an account-specific tracking service in which you will be able to track the progress of your tax filings.

Lindsay Turcotte and Marie-Claude Marcil, Montréal

In a recent decision by the Tax Court of Canada (TCC), Justice Hogan highlighted various interpretive difficulties with regards to subsection 84(2) of the Income Tax Act (the Act) in the context of post-mortem pipeline planning, which allows a deceased taxpayer’s estate to extract the assets of a private company without triggering any additional tax.

Bound by the principle that a court must follow a previous decision of a higher court¹ and given the Federal Court of Appeal’s (FCA’s) decision in R v MacDonald, 2013 FCA 110, the TCC confirmed that subsection 84(2) of the Act applied to such indirect distributions. However, the TCC was quick to comment on the implications of an overly restrictive interpretation of the subsection. In its view, the MacDonald decision created several uncertainties, including the required timeframe for subsection 84(2) not to apply to the implementation of a post-mortem pipeline.

Facts of the case

Mr. X was the sole shareholder of Holdco. On his death in 2012, the shares he held in Holdco were deemed to have been disposed of at their fair market value, resulting in a capital gain on Mr. X’s final return, as well as an increase in the adjusted cost base (ACB) of the shares now held by the estate.

To avoid the double taxation resulting from this deemed disposition and the subsequent distribution of the assets to the estate — and to take advantage of the high ACB of the shares — the estate’s executors implemented post-mortem pipeline planning. A new legal entity, Newco, was incorporated and the Holdco shares were sold to it in exchange for a promissory note with a face value equal to the ACB and the shares’ fair market value. The next day, Holdco was wound up into Newco (i.e., the new corporation holding its shares). Only three weeks later, Newco repaid the promissory note to the estate.

The Minister of National Revenue (the Minister) assessed on the basis that this type of planning was subject to the application of subsection 84(2) of the Act, since Holdco’s assets had in fact been distributed or otherwise appropriated to its original shareholder, the estate, notwithstanding that the shareholder of Holdco was at that time Newco. Drawing a parallel with the FCA decision in MacDonald, the Minister was apparently of the view that the series of transactions resulted in an appropriation of Holdco’s assets to the estate, specifically because Newco’s repayment of the promissory note to the estate was made too quickly following Holdco’s windup.² Thus, Newco’s repayment of the promissory note resulted in a deemed dividend for the estate within the meaning of subsection 84(2)^.3

Analysis

In its decision, the Court agreed that subsection 84(2) applied but allowed the deduction of distributions to the estate’s legatees from the deemed dividend. However, Justice Hogan’s comments raised a number of issues relating to the MacDonald decision. The Court stressed that there was uncertainty caused by the FCA’s decision in MacDonald stemming not only from the delay in the distribution of assets on windup, but also from the interpretation to be given to the phrase “in any manner whatever” used in this section of the Act. Such uncertainty, in the Court’s view, risks undermining the principles of predictability, certainty and fairness applicable in tax matters and repeatedly upheld by the Supreme Court of Canada in Canada Trustco Mortgages v Canada, 2005 SCC 54, and more recently in Canada v Alta Energy Luxembourg S.A.R.L, 2021 SCC 49.

In the Court’s view, the text of subsection 84(2) is clear. A textual interpretation leads to a conclusion as to when a dividend is deemed to have been paid, and only then is the identification of the corporation’s shareholders relevant. Due to the repeated use of the words “at that time,” a dividend must be deemed to have been paid only when the distribution of the property of the particular corporation is completed and to the persons who are shareholders of the corporation at that time. Moreover, since the text is much more precise than earlier versions with respect to this time requirement, it implies that the time of the distribution of funds should be paramount in applying the provision.

A contextual interpretation would also have allowed the FCA to conclude otherwise in MacDonald. Where a transaction meets the criteria set out in subsection 88(2), subsection 84(2) becomes inapplicable to such a transaction (paragraph 88(2)(b) of the Act). In the present case, when Holdco was wound up into Newco, the requirements of subsection 88(2) were met and subsection 84(2) could not deem any dividend to be paid on a future distribution of the funds.

Further, the ability of the executors to rely on subsection 164(6) of the Act in the deceased’s final return demonstrates Parliament’s desire to counteract the double taxation that can occur on a taxpayer’s death. In the Court’s view, it is not realistic to argue that Parliament intended double taxation of the same property on death when it enacted subsection 84(2).

Last, according to the Court, the MacDonald decision relies on Merritt v Canada (Minister of National Revenue), [1941] S.C.R. 175 and Smythe et al v Minister of National Revenue, [1970] S.C.R. 64, which were rendered prior to the taxation of capital gains and therefore may not serve as useful precedents. Since then, multiple decisions have dealt with the tax treatment of capital gains and the legal relationships established by taxpayers.

It would thus be appropriate to consider the weight to be given to these decisions in the current tax context. Moreover, at that time, transactions considered “artificial” could lead to the application of subsection 81(1) (the predecessor of subsection 84(2)). However, since the decision in Shell Canada Ltd. v Canada, [1999] 3 S.C.R. 622, it is now established that, in the absence of a sham, the legal relationships established by the taxpayer must be respected in tax matters.

Lessons learned

In light of Justice Hogan’s comments, it will be interesting to see if the estate appeals the decision and, if so, if the FCA will attempt to reconcile the diverging interpretations of the provision and the extent of its application, particularly to post-mortem pipeline planning.

Since the MacDonald decision, post-mortem pipeline planning has had to deal with some uncertainty, because there is no clear guidance from the courts as to the appropriate length of time between the winding up of the company and the repayment of the promissory note.⁴ According to Justice Hogan, the position taken by the CRA and the Minister in the present case only increases the uncertainty of taxpayers with respect to this type of planning. “[Unofficial translation] …should one wait 12 months, 24 months or 36 months before completing the transaction and distributing the assets of the holding company?” (para. 28).

Subsection 84(2) does not provide for a time condition, suggesting that the CRA may have overridden its authority by requiring taxpayers to repay the promissory note months, if not years, after the original company has been wound up. If this was Parliament’s intent, it should have added this time requirement by way of legislative amendment. In its decision, the Court seemed to agree that it is not role of the courts or the government [unofficial translation] “to restrict the language of a provision by exceptions not contained specifically in the Act” (para. 31).

It will be interesting to see whether the FCA will distinguish its position and re-evaluate the first instance decision in MacDonald (i.e., the TCC decision which found for the taxpayer) in a post-mortem pipeline context.

In the present situation, the only way to gain certainty appears to be, as Justice Hogan said, to seek a ruling from the CRA. For the time being, taxpayers will have to remain patient and continue to consider the CRA’s position as set out in the 2011 STEP Conference (2011-0401861C6) and the MacDonald decision.

Tax Alerts – Canada

Tax Alert 2022 No. 2 – CRA provides update on home office expense deduction
On 18 January 2022, the Canada Revenue Agency (CRA) provided a long-awaited update on the process for claiming home office expenses for the 2021 taxation year.       

Tax Alert 2022 No. 3 – Finance releases draft legislation for 2021 budget measures
On 4 February 2022, the Department of Finance released for public comment draft legislative proposals (and accompanying explanatory notes) to implement most of the remaining measures from the 2021 federal budget.

Tax Alert 2022 No. 4 – Proposed trust additional reporting requirements
On 4 February 2022, the Department of Finance released for public comment draft legislative proposals (and accompanying explanatory notes) to implement most of the remaining measures from the 2021 federal budget.

Tax Alert 2022 No. 5 – Finance releases proposed measures: avoidance of tax debts and audit authorities
On 4 February 2022, the Department of Finance (Finance) released draft legislation to amend the Income Tax Act and the Excise Tax Act to reflect certain measures announced in the Canada 2021 federal budget. The following tax alert explains income tax proposals included in the draft legislation concerning the avoidance of tax debts and audit authorities in further detail.

Tax Alert 2022 No. 6 – Proposed rate reduction for zero-emission technology manufacturers
The 2021 federal budget proposed a temporary reduction in the corporate income tax rate for qualifying zero-emission technology manufacturers, applicable for taxation years beginning after 2021.

Tax Alert 2022 No. 7 – British Columbia budget

Tax Alert 2022 No. 8 – Northwest Territories budget

Tax Alert 2022 No. 9 – Alberta budget

Tax Alert 2022 No. 10 – PEI budget

Tax Alert 2022 No. 11 – Canada imposes sanctions on and restricts exports to Russia
On 24 February 2022, the Government of Canada announced the imposition of additional sanctions under the Special Economic Measures (Russia) Regulations and the Special Economic Measures (Ukraine) Regulations, in response to ongoing events in the Russia-Ukraine conflict.

Summary

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