Talking Tax for Friday, April 5, 2019
Bruce Ball, vice-president of taxation at CPA Canada
TAXES AND THE SHARING ECONOMY
Money earned from renting out your home or driving passengers in your car is taxable despite what many people believe. So, it is much better to report this income net of reasonable expenses now rather than having the Canada Revenue Agency discover this income later as penalties can apply.
Ensure that your expenses are reasonable and keep receipts. You’re allowed to claim reasonable expenses. Also, it will be necessary to prorate some expenses assuming you use an asset such as a car or home for both personal and commercial use. Documentation is always important, but even more so for income from the sharing economy as you may be called upon to prove the expense was genuine and how much of it was personal.
WHAT HAPPENS IF YOU FIND A RECEIPT FROM LAST YEAR?
If you missed a credit or deduction in a prior year, you can still claim it. Many people find receipts or other information for prior years when doing their current year’s return. If you do, you can ask the Canada Revenue Agency to adjust your prior year’s return. Although there are exceptions, you generally can’t just claim the amount this year. One common exception to this is a donation receipt: you can claim a donation made in the past five years.
PRINCIPAL RESIDENCE SALES
One issue I wanted to remind people on is that they now need to report the sale of their principal residence even if they have only one, and it will be non-taxable. In order to deal with individuals who are not treating gains properly, the government decided in 2016 to make it mandatory to report principal residence sales. This will allow them to check to make sure the gain is truly exempt. So it is important to report the transaction.
PUBLIC COMPANY REORGANIZATIONS AND MERGERS
One question that arises regularly is what happens if publicly traded entities merge or enter into other reorganizations such as a spin-off. In particular, will that result in a taxable transaction or will the cost of the investment simply roll over to the new investment? The answer unfortunately is that it depends.
Typically, when planning such a transaction, one of the goals is to find a method that will provide a tax rollover whereby any accrued gain will only be taxed when you sell the investment. However, this won’t always be possible especially if the transaction is international in nature or involves different kinds of entities. So, the three likely outcomes are as follows for Canadian tax purposes: no rollover is available; a rollover is available, but an election or other action is needed for it to apply; or the rollover is automatic.
From an investor’s point of view, the key is to do some digging once you realize one of your investments is entering into one of these transactions, as action may be needed to prevent immediate tax consequences. Also, if a taxable gain is unavoidable, knowing that before the end of the year may allow for planning such as selling other investments with a loss.
Typically, when the corporation (or other publicly-traded entity) sends information to the owners on a major transaction, it will include a tax section that discusses the tax consequences. These documents can be complex, so getting advice can be beneficial where the dollar amounts involved are material.
BUDGET 2019: DAY-TRADING AND TFSAS
A change in the 2019 federal budget is a good reminder of an existing risk for those who do day-trading in their TFSA. Under the budget proposals, liability for tax on business income has been extended to include the holder of the TFSA. Also, the TFSA trustee’s liability will be limited the amount of available TFSA property plus any distributions of TFSA property distributed after the applicable notice of assessment was sent. The goal of the changes is to ensure that the tax is paid by the plan holder.
Despite the change, the underlying day trading issue is not new. Tax applies to a TFSA where it carries on a business. Where the TFSA’s trading activities represent either a business or what’s called “an adventure in the nature of trade”, the TFSA is subject to tax on that income. Whether a line has been crossed is a question of fact, but issues such as the time spent researching day trading activities, the number of trades and the typical holding period are factors that the CRA will consider. This year’s budget change is designed to ensure that CRA can collect the tax from the plan assets, or failing that, from the plan holder. So, with the budget change, there is all the more reason to be careful when investing TFSA funds.
WHY THE CANADIAN TAX SYSTEM NEEDS A REVIEW
The tax system is fundamental to a competitive environment, inclusive growth and a fair society. It affects people's daily lives and it urgently needs an overhaul. Due to that, CPA Canada is calling for the first comprehensive tax review since 1967.
We’re losing our competitive edge internationally, personal income tax rates and thresholds being particularly disadvantageous. Tax complexity is also a big issue that arises in many different ways. For example, compliance costs for businesses can increase as tax rules become more intricate and complexity can have a negative impact on lower income and vulnerable Canadians accessing much-needed tax credits and income supports. The OECD, the IMF, the Canadian Chamber of Commerce and parliamentary committees have all called for a review.