New Penalties for Businesses that Use Illegal Electronic Sales Suppression Software

The Canada Revenue Agency (CRA) is aware that electronic sales suppression (ESS) software is being marketed and sold to Canadian businesses. As part of its efforts to combat the underground economy, the Government of Canada has introduced new measures to address this problem. ESS software (commonly known as zapper software) is illegal. Designed to work with point of sale systems and electronic cash registers, businesses use this software to knowingly delete part of their sales from their computer records to reduce their GST/HST and income tax obligations. 

Using ESS software offers an unfair advantage to those who use it to circumvent Canada’s tax laws, which in turn undermines the competitiveness of businesses that follow the rules. The Government of Canada is committed to protecting the integrity of Canada’s tax system.

 New measures took effect on January 1, 2014 that allow the CRA to impose civil penalties for designing, using, possessing, acquiring, manufacturing, developing, selling, possessing for sale, offering for sale, or otherwise making available ESS software. These measures also include new criminal offences. 

The new penalties and offences are as follows: Administrative monetary penalties Under the new legislation, businesses that use, possess, or acquire ESS software will face the following administrative monetary penalties:

• $5,000 on the first infraction; and 

• $50,000 on any subsequent infraction. Anyone who manufactures, develops, sells, possesses for sale, offers for sale or otherwise makes available ESS software will face $10,000 on the first infraction, and $100,000 on any subsequent infraction. Criminal offences Under the new legislation, businesses or others that use, possess, acquire, manufacture, develop, sell, offer for sale, or otherwise make available ESS software will now face: 

• on summary conviction, a fine of not less than $10,000 and not more than $500,000, or imprisonment for a term of not more than two years, or both; or 

• on conviction by indictment, a fine of not less than $50,000 and not more than $1 million or imprisonment for a term of not more than five years, or both. 

The CRA is working hard to detect and deter those who choose not to comply with tax laws, so that all income is reported, the proper amount of taxes is paid, and the tax system is fair for everyone. This includes working to identify those who design, use, possess, acquire, manufacture, develop, sell, possess for sale, offer for sale, or otherwise make available ESS software. By discouraging the use of ESS software and penalizing those who continue to use it, the CRA is helping to ensure a level playing field for all businesses and taxpayers. Although customers may not notice if a business is using ESS software, they can still do their part by always asking for a copy of their receipt. If you know of any taxpayer who is not complying with the tax laws, let us know. We will review the information and, when warranted, take appropriate action. For further information and a contact number, go to Informant Leads Program. If you have been using ESS software and want a second chance to correct your tax affairs, you can make things right through the CRA’s Voluntary Disclosures Program (VDP). 

The VDP allows taxpayers to correct inaccurate or incomplete information or disclose information they have not previously reported to the CRA. If they make a valid disclosure before they become aware that the CRA is taking action against them, they may only have to pay the taxes owing plus interest. Go to Voluntary Disclosures Program for more information on the program. If your business has been contacted about ESS software or if you have information that could help the CRA identify someone who develops, sells, or uses the software, you are encouraged to contact the CRA Informant Leads Program where you will find information on how to report suspected tax evasion. Get it right from the start—don’t zap! Visit About the underground economy to learn more about what the CRA is doing to address the underground economy. For more information on the new measures to combat the use of ESS software, read the questions and answers or visit Electronic suppression of sales. 

 Please consult the Canada Revenue Agency website should you have any questions or concerns. http://www.cra-arc.gc.ca For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at 613-747-2459 x 304 or at hboisvert@hazlolaw.com

The capital dividend account (CDA) is an important tax planning device for private Canadian corporations and their shareholders.

The capital dividend account (CDA) is an important tax planning device for private Canadian corporations and their shareholders. The amount of the CDA can be paid out tax-free to Canadian shareholders as a “capital dividend".

The CDA is a notional account that is calculated at any point in time and is composed of various items. The principal component is the “untaxed half” of a corporation’s capital gains, net of the non-deductible half of its capital losses. Any capital dividend that the corporation pays out reduces the CDA by the amount of the dividend.

For example, suppose a corporation with no CDA sells property on December 1 for a $1,000 capital gain. Immediately after the sale, the corporation's CDA will be $500, and this amount can be paid out tax-free to shareholders as a capital dividend.

Suppose the corporation does not pay out the above capital dividend, but sells property on December 10 for a $1,300 capital loss. The CDA will be reduced by $650 so, immediately after the sale on December 10, the CDA balance will be reduced to negative $150.

A negative CDA balance does not trigger any tax. However, it remains negative, and until the corporation realizes enough capital gains (or other items as per below) to bring the CDA balance back to a positive amount, no tax-free capital dividends can be paid out.

Capital gains are not the only way the CDA can increase. The CDA definition is extremely complex, and includes capital dividends received from other corporations, certain life insurance proceeds and certain amounts from eligible capital property dispositions (e.g. goodwill).

Consideration should be given to paying out capital dividends before capital losses are realized.  Such planning will allow shareholders to access corporate funds tax-free before the CDA is reduced.  For example, using the above example, the corporation can pay out $500 tax-free, after the sale on December 1 through to immediately before the sale on December 10. After the sale on December 10 it cannot pay out any capital dividend. Paying out $500 prior to the sale on December 10 would provide the shareholders with $500 tax-free and later leave the corporation with a $650 negative balance in its CDA.  This is a better result than no tax-free money to the shareholders until future realized taxable capital gains exceed $300.

If, over time, capital gains exceed the capital losses, this strategy provides tax-free money earlier rather than later, but the total amount will be the same. The time value of money is reason enough to try to pay out positive CDA balances before they are ground down. However, if the corporation will not have future capital gains to offset future capital losses, there is a permanent benefit, as otherwise no capital dividend could be paid out at all.

For example, corporations are often dissolved after a shareholder dies as part of the post-mortem planning process. Selling the "winners" before liquidating the "losers", and paying out the CDA in between, can yield substantial permanent tax savings.

For more information on the above, please contact HazloLaw, Founder & Business Lawyer, Hugues Boisvert at 613-747-2459 begin_of_the_skype_highlighting 613-747-2459 FREE  end_of_the_skype_highlighting x 304 or hboisvert@hazlolaw.com

Do you need a Business Number (BN)?

If you need at least one CRA business accounts (RT, RP, RC or RM), you will need a BN.

However, before you register for a BN, you need to know a few things about the business you plan to operate. For example, you should know the name of the business, its location, its legal structure (sole proprietorship, partnership, or corporation), and its fiscal year-end. You should also have some idea of what the sales of your business will be. Without this information, you will not be able to complete Form RC1, Request for Business Number (BN).

If you are registering for a GST/HST account, it is important that you provide all of the information required to register. If you register for the GST/HST and your business claims a net tax refund, the refund may not be paid if this information is inaccurate or incomplete.

Notes

If you are a sole proprietor or a partner in a partnership, you will continue to use your social insurance number to file your income tax and benefit return, even though you may have a BN for your GST/HST, payroll deductions, and import/export accounts.

If you decide to incorporate, you will need a BN to pay your corporation income tax and to make instalment payments to your corporation income tax account.

For more information about the BN, go to Business Number registration, see Booklet RC2, The Business Number and Your Canada Revenue Agency Program Accounts, or call 1-800-959-5525.

For more information on the above, please contact HazloLaw Founder & Business Lawyer, Hugues Boisvert at 613-747-2459 x 304 or at hboisvert@hazlolaw.com

New Permanent Residents: Tax-related issues and obligations you should know about before and after you immigrate to Canada

In Marcil Lavallee LLP's most recent Tax Letter, they did a fantastic job summarizing the tax-related considerations and obligations for new immigrants (Permanent Residents) living in Canada and before moving to Canada. 

Tax on worldwide income

The most important thing to know is that, once a person becomes resident in Canada, they are taxable on their worldwide income from all sources, including foreign income. This will include, for example:

• Pensions from the home country;

• Interest being earned in bank accounts in the home country;

• Gains from selling property in the home country.

You should also know that Canada now has tax treaties or “tax information exchange agreements” with over 100 countries. More such agreements are being signed all the time, specifically for the purposes of exchanging information; and new mechanisms for computerized exchange of information are going to be introduced in at least some situations.

Expect the Canada Revenue Agency to find out about pension income, bank interest, sales of real property and other sources of income in the home country. Taxpayers who do not report their income can be subject to severe penalties and even prison.

Reporting foreign assets and trusts

All Canadian residents must state, on their annual income tax return, whether they have foreign investments (cost exceeding $100,000), or, in some cases, whether they are beneficiaries of foreign trusts or own shares (directly or indirectly) in foreign corporations. Starting next year, the information required for foreign assets and investments will be very detailed.

New immigrants need to take particular note of this requirement, and disclose assets or investments they have left behind in the home country.

Steps before immigrating to Canada

There are a number of tax planning steps that the prospective immigrant should consider before

moving to Canada.

• Arrange to receive all payments for pre- immigration employment outside Canada before immigrating. If employment income is received after immigration, Canada will tax it.

• For immigrants with substantial assets, consider setting up an “immigration trust”.

 If structured properly, this can allow the immigrant to keep funds offshore and not pay any Canadian tax on the income for five years.

• Note that capital property (e.g., real estate)  is generally deemed disposed of and  reacquired at fair market value on  immigration. This will boost the cost base of the property up to its current value, for purposes of future capital gain or loss calculations. The immigrant may want to obtain a formal evaluation of such properties to document the value for later.

• Any Canadian professionals who are advising the immigrant (e.g., lawyers or accountants) should render an account for  time spent to date before the immigrant  moves to Canada. The account will not  bear GST or HST.

Tax issues after becoming resident

If you are a new immigrant, you should consider the following:

• As noted above, you will pay tax on your worldwide income from all sources. Make sure to identify and report these to the CRA, even if you have left the income offshore. Note that some forms of income (e.g., pension income) may be given special relief by the tax treaty between Canada and your home country.

• Obtain a Social Insurance Number upon arriving in Canada. This number will be used as your Canada Revenue Agency account number.

• If you are carrying on business, consider whether you need to register for GST/HST, and to collect and remit GST or HST on your revenues.

• Have you become resident in Canada for tax purposes? Aside from the ordinary meaning of “resident”, if Canada has a tax treaty with the home country, check how the “tie-breaker” rule applies if you might still be resident in both countries.

 For example, if you still have a home in both countries and travel back and forth, the answer may not be obvious.

• If you control a foreign corporation, you generally have to report its passive income as “foreign accrual property income” (FAPI), and pay Canadian tax on it each year. The FAPI rules are very complex and you will need professional advice.

• If you receive income that is subject to foreign tax (e.g., foreign withholding tax  on interest or pension income), you can normally claim a “foreign tax credit” for  this tax on your Canadian return, up to a  limit of your Canadian tax on the same  income. The rules can become complex, but in general you end up paying the higher of the two countries’ tax rates in total.

• If you are a US citizen, you must continue to file US tax returns even though you are no longer resident there. To reduce the impact of double taxation, you will want to claim the US “foreign earned income exclusion” against your employment or self-employment income in Canada, as well as US foreign tax credits and any relief provided by the Canada-US tax treaty.

 Professional advice from a specialist in both Canadian and US tax law is usually recommended. Note also that the US and Canadian tax systems differ in many ways, and your calculation of income for the two systems may be very different.

• Consider setting up a TFSA (Tax-Free Savings Account) and contributing funds to it so that you can earn a certain amount of investment income tax-free. (If you are a US citizen, this is normally not advisable.)

• After your first year of earning employment or business income, set up a registered  retirement savings plan (RRSP) and  contribute the maximum possible to it  (unless you are planning to emigrate from  Canada within a few years, in which case  there could be negative consequences).

• If you have children under 6, apply to the CRA for the Universal Child Care Benefit. If you have children under 18 and your family is relatively low-income, apply for the Canada Child Tax Benefit. If your family is low-income, apply for the GST/HST Credit. (See cra.gc.ca for more information.)

• Payments under pre-existing spousal support obligations may be deductible for Canadian tax purposes. If the payments qualify, keep good records and make the claim on your Canadian tax return. 

• A person who dies while owning property in the US, or a US citizen who dies, is subject to US estate taxes. A credit to reduce or eliminate this tax is provided by the Canada-US tax treaty. 

The Canada Revenue Agency: protecting Canadians from gifting tax shelter schemes

Ottawa ON, October 30, 2012 - The Canada Revenue Agency (CRA) is taking steps to better inform and protect taxpayers from gifting tax shelter schemes.

This is the time of year when promoters are heavily marketing their tax schemes to Canadians. For this reason, the CRA is reminding Canadians that if it seems too good to be true, it probably is. If a tax shelter promoter offers a tax receipt for a larger amount than the donation or payment, it is very likely not a valid donation.

Starting with the 2012 tax year, the CRA will put on hold the assessment of returns for individuals where a taxpayer is claiming a credit by participating in a gifting tax shelter scheme. This will avoid the issuance of invalid refunds and discourage participation in these abusive schemes. Assessments and refunds will not proceed until the completion of the audit of the tax shelter, which may take up to two years. All gifting tax shelter schemes are audited and the CRA has not found any that comply with Canadian tax laws. A taxpayer whose return is on hold will be able to have their return assessed if they remove the claim for the gifting tax shelter receipt in question.

The CRA has to date denied more than $5.5 billion in donation claims and reassessed over 167,000 taxpayers who participated in gifting tax shelter schemes. In addition, the CRA has revoked the charitable status of 44 charitable organizations that participated in these gifting tax shelter schemes. Since June 2000, the CRA has also assessed $63.5 million in third-party penalties against promoters and tax preparers.

The CRA urges Canadians who are considering entering into a tax shelter arrangement to obtain independent, professional advice before signing any documents. Independent advice means advice from a tax professional who is not connected to the tax shelter or to the promoter.

Single Administration of Ontario Corporate Tax

The Governments of Canada and Ontario signed a Memorandum of Agreement on October 6, 2006, that will lead to the Canada Revenue Agency (CRA) administering most of Ontario's corporate taxes.

Ontario businesses will benefit from one form, one set of rules, one audit, one appeals process and one point of contact.

The CRA will administer the following corporate taxes on behalf of Ontario:
Corporate income tax
Corporate minimum tax
Capital tax
Special additional tax on life insurers

Ontario will continue to administer:
Mining tax
Insurance premiums tax
Electricity Act payments-in-lieu of federal and Ontario corporate taxes

Single administration will take effect for taxation years ending after December 31, 2008. This means that:

The CRA is now accepting blended provincial and federal instalment payments for the 2009 taxation year; and

The CRA will be ready to accept a single, harmonized T2 Corporation Income Tax Return (including the Ontario Corporations Information Act Annual Return) for taxation years ending after December 31, 2008.

for more information click here