TaxMatters@EY – November 2024

Maureen De Lisser and Alan Roth, Toronto

Have you ever found yourself looking for tax savings while completing your tax return in April? If so, you’ve probably realized that at that point there’s not much you can do to reduce your balance owing or increase your refund balance. By the time you prepare your tax return, you’re looking back and simply reporting on the year that has ended.

But don’t worry. As we approach the end of the year, there’s still some time left for forward-looking planning. You can approach year-end planning by asking yourself questions or going through a checklist. Following a framework for year-end tax planning, such as the one we suggest at the end of this article, can also be helpful.

Taking time out of your busy November and December to think about these questions can help you find better answers that may save you money on your 2024 tax bill and beyond.

Part 1 of “Asking better year-end tax planning questions” looks at the questions, topics and tax planning techniques that may apply to you each year.

Part 2, which will appear in next month’s edition, will focus on both upcoming and recent personal tax changes, including an increase in the capital gains inclusion rate, the impact of that increase on employee stock option deductions, increases to the lifetime capital gains exemption, measures denying deductions for non-compliant short-term rentals, new rules for intergenerational business transfers, employee ownership trusts, the new Canadian entrepreneurs’ incentive and the broadening of the base for the alternative minimum tax.

Are there any income-splitting techniques available to you?

You may be able to reduce your family’s overall tax burden by taking advantage of differences in your family members’ marginal income tax brackets using one or a combination of the following:

• Income-splitting loans – You can loan funds to a family member at the prescribed interest rate of 5% (for loans made after June 30, 2024).¹ The family member can invest the money and the investment income will not be attributed to you (i.e., treated as your income for tax purposes), as long as the interest for each calendar year is paid no later than January 30 of the following year.
  
  
• Reasonable salaries to family members – If you have a business, consider employing your spouse or partner and/or your children to take advantage of income-splitting opportunities. Their salaries must be reasonable for the work they perform.² However, other income-splitting opportunities involving your business may be limited (see below re: income-splitting private corporation business earnings).
  
  
• Spousal RRSPs – In addition to splitting income in retirement years, spousal RRSPs may be used to split income before retirement. The higher-income spouse or partner can get the benefit of making contributions to a spousal plan at a high tax rate and, after a three-year non-contribution period, the lower- or no-income spouse can withdraw funds and pay little or no tax.
  
  
• Pension income splitting – If you are receiving certain eligible types of pension income in 2024, you may be able to elect to transfer up to one half of your eligible pension income to your spouse or common-law partner, or vice versa. Pension income splitting can produce significant tax savings for some couples. However, the magnitude of the savings will depend on a number of factors.³

Have you paid your 2024 tax-deductible or tax-creditable expenses yet?

• Tax-deductible expenses – A variety of expenses, including interest and child-care costs, can only be claimed as deductions in a tax return if the amounts are paid by the end of the calendar year.
  
  
• Expenditures that give rise to tax credits – Charitable donations, political contributions, medical expenses, home accessibility renovation expenses, digital news subscription expenses, and tuition fees must be paid in the year (or, in the case of medical expenses, in any 12-month period ending in the year) in order to be creditable.
  
  
• Consider whether deductions or credits may be worth more to you this year or next year – If you can control the timing of deductions or credits, consider any expected changes in your income level and tax bracket or marginal personal income tax rate. Deductions will be worth more when you are subject to a higher marginal rate. In addition, your income level may affect the availability or value of certain tax credits (such as the medical expense credit and donation credit).⁴

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 (e.g., computers, office furniture, and tools and machinery) if the property is acquired and available for use before the end of the year to earn such income. The amount deductible for the year depends on the CCA class to which the property belongs.

The accelerated investment incentive property rules significantly accelerate CCA claims for most new depreciable capital property acquisitions made before 2028. The rules apply to eligible property acquired and available for use after November 20, 2018 and before 2028, subject to certain restrictions.

The temporary immediate expensing rules currently allow an unincorporated business carried on by a Canadian-resident individual to immediately expense certain designated assets, up to a maximum value of $1.5 million per year. The immediate expensing rules apply to certain classes of depreciable capital property acquired after December 31, 2021 and available for use before January 1, 2025. Specifically excluded from these rules are long-lived assets such as buildings, and intangible assets such as goodwill.⁵

As well, the federal government has proposed to allow for the temporary immediate expensing of certain productivity-enhancing assets — including patents, data network infrastructure equipment and related systems software, and general-purpose electronic data-processing equipment and systems software — provided the eligible property is acquired on or after April 16, 2024 and becomes available for use before 2027. Property that becomes available for use after 2026 and before 2028 would continue to benefit from the existing accelerated investment incentive.

For more details on these measures, see Chapter 6, Professionals and Business Owners, in the latest version of Managing Your Personal Taxes: a Canadian Perspective, EY Tax Alert 2022 Issue No. 30 and EY Tax Alert 2024 Issue No. 42.

Do you hold passive investments in your private corporation?

A Canadian-controlled private corporation’s (CCPC’s) access to the small business deduction and, accordingly, the small business tax rate,⁶ may be limited by the amount of passive investment income earned in the preceding year. Consult your tax advisor for possible strategies to mitigate the adverse impact of these rules.

For example, if you are considering realizing accrued gains in the corporation’s investment portfolio before its 2024 taxation year end and the company is likely to cross the $50,000 income threshold by doing so, consider deferring the gains to the following year so that the 2025 taxation year is not impacted. You may also consider the pros and cons of holding a portion or all of the portfolio personally instead of in the company.

These rules were not adopted by Ontario and New Brunswick for purposes of determining the provincial small business deduction limit. Therefore, the impact of these rules on CCPCs in Ontario and New Brunswick is smaller than in other provinces.

For more information, see Chapter 6, Professionals and Business Owners, in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Do you income-split private corporation business earnings with adult family members?

Income tax rules may limit income splitting opportunities with certain adult family members through the use of private corporations.

For example, a business is operated through a private corporation, and an adult family member in a low income tax bracket subscribes for shares in the corporation. A portion of the business’s earnings is distributed to the family member by paying dividends. The tax on split income rules apply the highest marginal personal income tax rate (federal rate of 33% for 2024) to the dividend income received unless the family member meets one of the legislated exceptions to the application of this tax. For example, if the adult family member is actively engaged in the business on a regular basis by working an average of at least 20 hours per week during the year (or in any five previous, not necessarily consecutive, years), the tax on split income may not apply.

Consult with your tax advisor to learn more about how these rules might apply in your specific circumstances.⁷

Have you maximized your tax-sheltered investments by contributing to a TFSA or an RRSP?

Tax-free savings account (TFSA) – Make your contribution for 2024 and catch up on prior non-contributory years. You won’t get a deduction for the contribution, but you will benefit from tax-free earnings on invested funds. Also, to maximize tax-free earnings, consider making your 2025 contribution in January.

TFSA withdrawals and recontributions – TFSA withdrawals are tax-free and any funds withdrawn in the year are added to your contribution room in the following year. But if you have made the maximum amount of TFSA contributions each year⁸ and withdraw an amount in the year, recontributions made in the same year may result in an overcontribution, which would be subject to a penalty tax. If you have no available contribution room and are planning to withdraw an amount from your TFSA, consider doing so before the end of 2024, so that it’s possible to recontribute in 2025 without affecting your 2025 contribution limit. For more information about the adverse consequences of overcontributing to your TFSA, see TaxMatters@EY, October 2021, “TFSAs: inability to rectify unintended overcontribution may lead to penalties.”⁹

Registered retirement savings plan (RRSP) – The earlier you contribute, the more time your investments have to grow. So consider making your 2025 contribution in early 2025 to maximize the tax-deferred growth. If your income is low in 2024, but you expect to be in a higher bracket in 2025 or beyond, consider contributing to your RRSP as early as possible, but holding off on taking the deduction until a future year when you will be in a higher tax bracket.

If you turn, or have turned, 71 years old in 2024, you must make any final contributions to your RRSP on or before December 31, 2024 to obtain a tax deduction on your 2024 personal tax return. In addition, you need to close your RRSP by the end of the year. For information on RRSP maturity options, see TaxMatters@EY: Family Wealth Edition, April 2024, “Preparing for retirement: your RRSP and you.”

If you have any remaining unused RRSP deduction room after your final RRSP contribution and your spouse or common-law partner is younger, you may continue to contribute to a spousal or common-law partner RRSP until the end of the year in which your spouse or common-law partner turns 71.

For additional tax planning tips relating to RRSPs, see Chapter 11: Retirement Planning in the latest version of Managing Your Personal Taxes: a Canadian Perspective.¹⁰

Are you considering becoming a first-time home buyer?

Home buyers’ plan (HBP) – If you’re a first-time home buyer,¹¹ the HBP allows you to withdraw up to $60,000¹² from your RRSP to finance the purchase of a home. No tax is withheld on RRSP withdrawals made under this plan. If you withdraw funds from your RRSP under the HBP, you must acquire a home by October 1 of the year following the year of withdrawal, and you must repay the withdrawn funds to your RRSP over a period of up to 15 years, starting generally in the second calendar year after withdrawal. However, for HBP withdrawals made between January 1, 2022 and December 31, 2025, a three-year extension is granted, meaning you do not have to begin making repayments to your RRSP until the fifth calendar year after withdrawal. If possible, consider waiting until after the end of the year before making a withdrawal under the HBP to extend both the home purchase and repayment deadlines by one year.

Tax-free first home savings account (FHSA) – The FHSA, a registered account, is also available to help individuals save for a down payment on their first home. You may contribute up to $8,000 each year to an FHSA, subject to a lifetime limit of $40,000, and unused FHSA contribution room can be carried forward. Contributions to an FHSA are tax deductible, and income earned in the account is not subject to tax. Qualifying withdrawals made to purchase a first home are non-taxable.

You are considered a first-time buyer for purposes of the FHSA if you did not live in a qualifying home as your principal place of residence that was owned by either you or your spouse or common law partner in any of the four previous calendar years or during the time in the current year before you open the FHSA. This means that you may be able to requalify as a "first time" buyer if you have not owned a home for several years.

A first-time home buyer may make withdrawals under both the FHSA and the HBP in respect of the same qualifying home purchase. Amounts borrowed under the HBP must be repaid to your RRSP but amounts withdrawn under the FHSA do not need to be repaid.   

If you expect to be a first-time home buyer in the next few years, consider opening an FHSA in 2024 so you can start accumulating contribution room. For more information about FHSAs, see Chapter 9, Families, in the latest version of Managing Your Personal Taxes: a Canadian Perspective, and TaxMatters@EY: Family Wealth Edition, February 2023, “Focus on housing.”

First-time home buyers’ tax credit – Also, first-time home buyers who acquire a qualifying home may be eligible to claim a non-refundable federal income tax credit of up to $1,500.¹³

You are considered a first-time home buyer for purposes of this credit if neither you nor your spouse or common-law 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.

Are you planning to sell a home owned for a short period?

Residential property anti-flipping rule – If you’re planning to sell a home you’ve owned for only a short period of time, be aware that the residential property anti-flipping rule may apply.

Under this rule, profits arising from the disposition of residential real estate in Canada, including a rental property, that was owned for fewer than 365 consecutive days is, subject to exceptions for certain life events,¹⁴ treated as business income.

Similarly, profits arising from the disposition of rights to purchase residential property — also known as assignment sales — are treated as business income if the rights are held for fewer than 365 consecutive days before disposition, subject to the exceptions noted above. As a result, neither the prevailing capital gains inclusion rate nor the principal residence exemption is available for these dispositions.

This rule applies to dispositions occurring in 2023 and later years.

If these dispositions result in a loss, it is treated as a denied business loss. This loss denial rule does not apply if the property is otherwise treated as inventory of a business carried on by the individual. Therefore, individuals in the business of flipping property who record all gains and losses on income account should not be subject to this rule.

For more information, see Chapter 8, The principal residence exemption, in the latest edition of Managing Your Personal Taxes: a Canadian Perspective, and TaxMatters@EY: Family Wealth Edition, February 2023, "Focus on housing."

Have you maximized your education savings by contributing to an RESP for your child or grandchild?

Contributions – Make registered education savings plan (RESP) contributions for your child or grandchild before the end of the year. With a contribution of $2,500 per child under age 18, the federal government will contribute a grant of $500 annually up to a lifetime maximum of $7,200 per beneficiary.¹⁵

Non-contributory years – If you have prior non-contributory years, the annual grant can be as much as $1,000 in respect of a $5,000 contribution.¹⁶

Is there a way to reduce or eliminate your non-deductible interest?

Interest on funds borrowed for personal purposes is not deductible. Where possible, consider using available cash to repay personal debt before repaying loans for investment or business purposes on which interest may be deductible.

Have you reviewed your investment portfolio?

Increase in capital gains inclusion rate – The 2024 federal budget and corresponding draft legislation introduced an increase in the capital gains inclusion rate (the proportion of realized capital gains that is included in calculating your income) from one half (i.e., 50% inclusion rate) to two thirds, effective for dispositions of property occurring on or after June 25, 2024.

However, for individuals and certain trusts, a proposed annual capital gains reduction will effectively reduce the capital gains inclusion rate to one half on up to $250,000 in net capital gains realized in a year. As well, certain transitional rules apply for tax years that straddle the June 25, 2024 effective date (or the 2024 tax year for individuals).

We'll elaborate further in Part 2 of “Asking better year-end tax planning questions” in next month's edition of TaxMatters@EY. See also TaxMatters@EY, September 2024, “Spotlight on recent changes to the taxation of capital gains and employee stock options” and TaxMatters@EY, October 2024, “How could the capital gains inclusion rate increase affect you?”

Accrued losses to use against realized gains – While taxes should not drive your investment decisions, it may make sense to sell loss securities to offset capital gains realized earlier in the year. If the losses realized exceed gains realized in the year, they can be carried back and claimed against net gains in the preceding three years. Note that the last stock trading date for settlement of a securities trade in 2024 is Monday, December 30, 2024 for securities listed on Canadian or US stock exchanges.

Just remember to be careful of the superficial loss rules, which may apply to deny a capital loss on the disposition of a security. These rules may apply if you, your spouse or common-law partner, a company either of you controls, or an affiliated partnership or trust (such as your RRSP, RRIF, TFSA or RESP) acquires the same or an identical security within the period beginning 30 days before and ending 30 days after the disposition, and the security is still owned at the end of that period.

Realized losses to carry forward – If you have capital loss carryforwards from prior years, you might consider cashing in on some of the winners in your portfolio. As noted above, be aware of the December 30, 2024 deadline for selling securities listed on a Canadian or US stock exchange to ensure that the trade is settled in 2024. Or consider transferring qualified securities with accrued gains to your TFSA or RRSP (up to your contribution limit). The resulting capital gain will be offset by available capital losses, and you will benefit from tax-free (TFSA) or tax-deferred (RRSP) future earnings on these securities.

While typical year-end planning may involve the sale of loss securities to offset capital gains or the realization of capital gains to use up loss carryforwards, it is recommended that individuals consult with a tax advisor to determine how the changes in the capital gains inclusion rate (see above), particularly the complex transitional rules, may affect the implementation of this planning in 2024.

Donation of securities with accrued gains – You may also want to consider donating publicly traded securities (e.g., stocks, bonds, Canadian mutual fund units or shares) with accrued gains to a charitable organization or foundation. If you do, the resulting capital gain will not be subject to tax and you will also receive a donation receipt equal to the fair market value of the donated securities.

Can you improve the cash flow impact of your income taxes?

Make sure you filed your prior-year return – If you didn’t file your 2023 personal income tax return because you didn’t owe any taxes, you may be missing out on certain refundable tax credits and benefits to which you may be entitled, such as the GST/HST credit and Canada Carbon Rebate payments. You must reside in Alberta, Ontario, Manitoba, Saskatchewan, Newfoundland and Labrador, Nova Scotia, Prince Edward Island or New Brunswick to be eligible for this rebate, the payment of which does not depend on income level.¹⁷

Request reduced source deductions – If you regularly receive tax refunds because of deductible RRSP contributions, child-care costs or spousal support payments, consider requesting CRA authorization to allow your employer to reduce the tax withheld from your salary (Form T1213). Although it won’t help for your 2024 taxes, in 2025 you’ll receive the tax benefit of those deductions all year instead of waiting until after your 2025 tax return is filed.

Determine requirement to make a December 15 instalment payment – If you expect your 2024 final tax liability to be significantly lower than your 2023 liability (for example, due to lower income from a particular source, losses realized in 2024 or additional deductions available in 2024) you may have already paid enough in instalments. You are not required to follow the CRA’s suggested schedule and are entitled to base your instalments on your expected 2024 liability. However, if you underestimate your 2024 balance and your instalments end up being insufficient, or the first two instalments (due in March and June) were too low, you will be faced with interest and possibly a penalty.¹⁸

Have you thought about estate planning?

Review your will – You should review and update your will periodically to ensure that it reflects changes in your family status and financial situation, as well as changes in the law.

Consider your life insurance needs – Life insurance is an important tool to provide for the payment of various debts (including taxes) that may be payable as a result of your death, as well as to provide your dependants with money to replace your earnings. Review your coverage to ensure that it remains appropriate for your financial situation.

Consider an estate freeze to manage tax on death and/or probate fees – An estate freeze is the primary tool used to manage the amount of tax that may arise on death and involves locking in (i.e., “freezing”) the value of a business, investments or other assets and transferring the future growth of those assets to family members. Consider the impact of the tax rules for testamentary trusts, graduated rate estates and charitable planned giving, and the impact of the tax on split income rules (see above – Do you income-split private corporation business earnings with adult family members?) on income-splitting strategies using estate freezes.

For example, an estate freeze is set up where parents transfer the future growth in value of a business to the next generation. Dividends paid to an adult child may be subject to the highest marginal personal income tax rate under the tax on split income rules unless the individual meets one of the legislated exceptions to the application of this tax.

For details, see Chapter 12, Estate Planning, in the latest version of Managing Your Personal Taxes: a Canadian Perspective.

Consider a succession plan for your business – A succession plan involves devising a strategy to ensure that the benefit of your business assets passes to the right people at the right time.

These questions may seem familiar, but as tax rules become more complex, it becomes more important to think of the bigger tax picture continuously throughout the year, as well as from year to year as your personal circumstances change. Start a conversation with your tax advisor to find better answers.

Year-end tax to-do list

Before December 31, 2024:

• Make 2024 TFSA contribution.
• Make 2024 RESP contribution.
• Make 2024 FHSA contribution if you are saving to buy your first home.
• Make final RRSP contribution if you are 71 years old at the end of the year, and wind-up your RRSP by choosing to withdraw the funds, transfer the assets to a RRIF or purchase an annuity.
• Pay tax-deductible or tax-creditable expenses.
• Advise employer in writing if eligible for reduced automobile benefit.¹⁹
• Request CRA authorization to decrease tax withheld from salary in 2025.
• Review your investment portfolio for potential dispositions to realize gains or losses in 2024 and to determine the impact of any dispositions on your capital gains inclusion rate for 2024 (note the last day for settlement of a trade in 2024 is December 30 on both Canadian and US stock exchanges).
• Make capital acquisitions for business.
• Evaluate owner-manager remuneration strategy (for more information see TaxMatters@EY, December 2023 “Year-end remuneration planning”).
• Consider allowable income-splitting strategies.

Early 2025:

• Interest on income splitting loans must be paid on or before January 30.
• Make 2024 RRSP contribution (if not already made) by March 3.
• Make 2025 RRSP contribution.
• Make 2025 TFSA contribution.
• Make 2025 RESP contribution.
• Make 2025 FHSA contribution if you are saving to buy your first home.

A framework for year-end tax planning

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, 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.

Consider how you can approach current year-end planning with an eye to the future. By assessing any major step taken today for its effect on the tax, financial and estate planning in the next stage(s) of your life, you may preclude choices that will reduce planning flexibility and could increase taxable income in the future.

You should also determine if there will be any significant change in the amount and/or composition of your income next year. Among other things, changes in your personal life (such as changes in your marital or parental status) need to be considered. This information could prove to be important when selecting and designing particular tax planning steps.

Planning with income

You should understand the composition of your employment, business or professional income (salary, bonus, options, self-employment income, etc.), how each component is taxed in the current or future years and the extent to which you can control the timing and amount of each type of income.

Taxes are only one of the factors to be considered in deciding whether to do some loss planning in your portfolio. But there may be capital losses that can be triggered and/or used to offset gains. You should also understand the composition of your investment income (i.e., interest, dividends and capital gains) and the extent to which you can control the timing, amount and character of each item.

Another tax planning issue associated with investing is “asset location,” meaning selecting the right investments to hold in taxable versus tax-deferred accounts. Even some minor tweaking here could create significant benefits down the road.

Planning with deductions and credits

On the other side of the ledger from income are deductions. Here again, you should understand what deductions you are entitled to and the extent to which you can control the timing of those deductions. If you can benefit from a deduction or credit this year, make sure you pay the amount before year end (or in the case of RRSP contributions, no later than March 3, 2025). Or, if you expect to be in a higher tax bracket next year, consider deferring deductions until next year, when they will be worth more.

Consider reviewing and re-assessing the tax and financial implications of your major deductions and credits. For example, can you plan to minimize non-deductible interest expense or replace it with deductible interest expense? Or can you plan your usual charitable contributions to maximize their tax benefit? If you will incur significant medical expenses in 2025, will you be able to use all the credits? (If not, consider other options such as choosing a different 12-month period ending in the year for computing medical expenses, or having your spouse claim the credit).

Also, if you’re thinking about making a gift to an adult child, it pays to do your homework. In Canada, gifts to adult children are generally received tax free, but there may be tax implications for the parent. For example, the gift of a capital property may trigger a taxable capital gain for the parent.

Estate planning

Your estate plan should start as soon as you begin to accumulate your estate. It should protect your assets and provide tax-efficient income before and after your retirement, as well as a tax-efficient transfer of your wealth to the next generation.

Your will is a key part of your estate plan. You and your spouse or partner should each have a will and keep it current to reflect changes in your family status and financial situation as well as changes in the law.

Remember that the tax on split income rules may limit income-splitting strategies using estate freezes. It’s generally a good idea to review your estate planning goals and wills on a regular basis, especially in light of these rules.

These suggestions for year-end tax planning should help you set the agenda for a comprehensive discussion with your tax advisor this year and in years to come.

Candra Anttila, Toronto, and Gael Melville, Vancouver

Recently announced technical amendments to the Income Tax Act include a relieving change for residential tenants paying rent to a nonresident landlord.

On August 12, 2024, the Department of Finance released draft technical amendments to the Income Tax Act (the Act) and Income Tax Regulations. Among these amendments are changes to section 215 of the Act that exclude an individual from the requirement to withhold and remit tax on rent paid to a nonresident of Canada for the use of residential property.

Under Part XIII of the Act, an amount paid to a nonresident of Canada as rent or for the right to use property in Canada is generally subject to withholding tax.¹ The payer of an amount that is subject to Part XIII tax must withhold and remit the tax on behalf of the nonresident recipient.²

The proposed change to the Act provides that the requirement to withhold and remit Part XIII tax will not apply to an amount paid or credited by an individual to a nonresident person as rent for the use of a residential property in which an individual resides.³ Instead, the responsibility for remitting Part XIII tax is generally shifted to the nonresident recipient of the payment, unless the payment was made to the nonresident’s agent, in which case the agent would be required to withhold and remit the Part XIII tax.

For these purposes, a residential property includes a house, apartment, condominium unit, cottage, mobile home, trailer, houseboat or other property located in Canada, the use of which is permitted for residential purposes. Once enacted, these proposed amendments will be effective as of August 12, 2024.

These proposed amendments appear to address a situation that arose in the case of 3792391 Canada Inc. v The King, 2023 TCC 37, in which the Tax Court of Canada confirmed that a tenant was liable for Part XIII withholding tax on the payment of rent to a nonresident, even though the tenant was not aware of the landlord's nonresident status. For further details of this case, see “Tenant liable for withholding tax on rents paid to landlord he did not know was nonresident” in the June 2023 edition of TaxMatters@EY.

The proposed amendments provide welcome relief from the requirement to withhold and remit Part XIII tax for residential tenants who make rental payments to nonresident landlords, and who may have faced an unexpected tax liability if they were not aware their landlord was nonresident.

However, it should be noted that the proposed exception from the Part XIII withholding tax requirement will not apply to rent paid by an individual for property used for nonresidential purposes, such as commercial purposes. In addition, the exception will not apply to rent paid to a nonresident by a corporation, trust or other entity. In each of these circumstances, the payer will continue to have liability for Part XIII tax if the tax is not withheld and remitted as required by the Act. Taxpayers in these circumstances will need to continue to exercise due diligence in determining the residency status of the recipient of rental payments to comply with any Part XIII tax requirements.

Vikram Sandhu and Jeanne Posey, Vancouver
Milgram Foundation v AGC et al, 2024 FC 1405

In Milgram Foundation v AGC et al, the Federal Court was asked to review the Minister of National Revenue’s decision to reassess the taxpayer.

The Milgram Foundation sought a judicial review from the court to consider whether in exercising its administrative powers, the Minister had breached an agreement with the applicant, citing reasons of legitimate expectations, unreasonableness and abuse of process.

The court referenced the Income Tax Act (the Act) while analyzing the Minister’s reassessment process following the applicant’s submission under the Canada Revenue Agency’s (CRA’s) Voluntary Disclosure Program (VDP).

Facts and issues

The applicant was a nonresident entity that was considered a deemed resident of Canada for income tax purposes. The applicant had not filed tax returns in Canada prior to 2015.

In 2015, the applicant submitted a disclosure for the 2003 to 2014 tax years (the relevant years) under the VDP. In a letter dated December 18, 2015, the Minister informed the applicant of the acceptance of the disclosure, but reserved the right to audit or verify the relevant years.

The Minister then issued notices of assessment for the relevant years and the applicant paid the respective amounts accordingly. Following the issuance of these initial assessments, the Minister issued a revised assessment for the 2003 year, which included a refund to the applicant.

In July 2016, the Minister initiated a further audit in which the Minister concluded there were no errors in the tax returns for the relevant years.

In a 2018 letter, the Minister informed the applicant that undisclosed investment income had been discovered upon further review. The proposal indicated that the CRA planned to reassess the applicant for the 1998 to 2002 tax years based on “misrepresentation attributable to neglect, carelessness or wilful default.” As a result of the proposed adjustments, the applicant was subject to additional tax and a penalty.

The applicant sought a judicial review of the Minister’s decision. The court was asked to determine whether the decision breached the applicant’s legitimate expectations and amounted to an abuse of process.

The Minister argued that the proposal was not reviewable, and the application was barred by section 18.5 of the Federal Courts Act on the basis that the court lacked jurisdiction to hear the matter.

This case brought forward five main issues:

• Whether the decision in question was reviewable
• Whether the application was a collateral attack on a tax assessment
• Whether the Minister’s acceptance of the disclosure resulted in a binding agreement
• Whether the decision was an abuse of process
• What relief the court should provide¹

Court’s decision and analysis

In general, the Minister has a duty to administer and enforce the Act as set out in subsection 220(1). The Act provides the Minister some administrative and discretionary powers, including subsection 220(3.1), which allows the Minister to “waive or cancel all or any portion of any penalty or interest otherwise payable” under the Act for a period of 10 years.

The VDP is designed to promote compliance with tax laws without penalties and prosecution. 

For a disclosure to be accepted, it must be voluntary, accurate and complete. If the Minister confirms through a VDP officer that these conditions have been met, it will consider the disclosure as valid and complete and the taxpayer will only be subject to taxes and interest, but not penalties or prosecution.

As explained below, the court concluded that the application should be granted on the basis that the Minister’s decision to reassess the applicant’s tax liability, after the Minister’s acceptance of the disclosure, was an abuse of process.

Decision and matter under review?

While the Minister maintained its position that the proposal was not a reviewable decision since it was not a “final decision,” the applicant noted that the Federal Courts Act allows the court to review a “matter” which is broader than a “decision.”² The applicant cited Rosenberg v CRA, 2015 FC 549, in which the court stated that “the decision to undertake an audit and to request documents and information in the context of that audit constitutes a “matter” within the meaning of subsection 18.1(1) of the [Federal Courts Act]....”

Subsection 18.1(1) provides that “An application for judicial review may be made by the Attorney General of Canada or by anyone directly affected by the matter in respect of which relief is sought.”

In determining whether this was a reviewable matter, the court concluded that the matter the applicant raised fell under subsection 18.1(1) of the Federal Courts Act as it pertained to the Minister’s decision-making process. 

In other words, the court found that the Minister’s conduct, in deciding to reassess the applicant after accepting the applicant’s disclosure, was a reviewable matter.

Was this application an attack on a tax assessment?

The Minister argued that the court could not consider the application because it was an attack on the tax assessments’ legal validity, which is a matter to be decided upon by the Tax Court of Canada rather than the Federal Court.

The court rejected the Minister’s arguments.

In particular, the court found that the application was within its jurisdiction because it concerned the Minister's process leading to the proposed reassessment, which was based on the discretionary power granted under subsection 220(3.1) of the Act, and because the applicant raised allegations of unfairness.

Did the acceptance of the disclosure under the VDP result in a binding agreement?

The applicant argued that the Minister’s acceptance of the disclosure had given rise to a contract, and the proposal was therefore a breach of a binding agreement.

The court rejected the applicant’s argument that there was any binding agreement stemming from the VDP on the basis that there was no evidence of a detailed agreement entered into between the parties. Rather, the Minister’s acceptance of the disclosure was an exercise of the Minister’s administrative powers under the Act.

The court also noted that when the disclosure was accepted, the applicant was informed that the Minister reserved the right to audit or verify the relevant years.

Was there an abuse of process?

The applicant argued that the Minister’s decision to breach the VDP agreement amounted to an abuse of process and was inconsistent with past administrative practices.

The doctrine of abuse of process has been described at common law as proceedings “unfair to the point that they are contrary to the interest of justice.”³

The court found that the doctrine of abuse of process applies in the context of a judicial review of the Minister’s exercise of discretionary powers, but questioned whether the Minister’s decision to reassess the applicant amounted to an abuse of process.

While the court did not find that the acceptance of the disclosure created a binding contract, it did find that the Minister reneging on the prior acceptance of the disclosure by alleging misrepresentation by the applicant violated a sense of fair play and amounted to an abuse of process. The court concluded that the Minister’s ability to reopen the application without reason at any moment, after the Minister had accepted the disclosure and then subsequently had completed a second audit, caused the process to lack finality and amounted to an abuse of process that warranted court intervention.

What relief could the court provide?

The court, in finding that the Minister’s decision to reassess the applicant was an abuse of process, found it appropriate to quash the Minister’s decision to reassess and to grant the applicant declaratory relief. The Minister was ordered “to take such actions as are necessary to give effect to the reconsidered decision.”

Takeaways

This case demonstrates that taxpayers may seek a judicial review where the application aims to challenge the Minister’s process or conduct when exercising discretionary powers, such as the discretion to waive or cancel penalties or interest under the VDP.

It also highlights the court’s view on what it considers to be acceptable conduct from an audit perspective once a voluntary disclosure application is made and accepted.

However, this case also serves as a warning to taxpayers that just because a voluntary disclosure request is accepted as complete and voluntary, it does not mean the risk of audit is over. That being said, any subsequent actions by the Minister once the disclosure is accepted must ensure that the principle of fair play is also achieved.

The Minister has filed a notice of appeal, and therefore we will wait to see if the court's decision is upheld. If it is upheld on appeal, it could signal the potential for more challenges of the Minister’s decisions.