Employee transfers – Corporate considerations
E-filing tax returns: take note of error messages
Income trusts: the notion of “normal growth”
Ontario corporate taxes
Did you know that…

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Employee transfers – Corporate considerations

Times have changed — not long ago, when executives or employees were sent on a foreign assignment or business trip, compliance with policies and procedures was far from being a priority. This is no longer the case: in light of various scandals in the business community, the Sarbanes-Oxley Act has forced companies to make rapid changes to their accounting practices with regard to employee transfers. The Securities and Exchange Commission and the Canadian Securities Administrators have been cracking down on companies who do not ensure proper compliance with their regulations. One area under increased scrutiny in Canada and the United States is compliance for business travellers.

Employee transfers
There is now heightened sensitivity about cross-border travel for visa and taxation requirements, together with better data sharing between government tax departments. It is not uncommon for business travellers to be questioned about tax compliance at airports.

Most companies focus only on relocation costs and their own policies surrounding foreign assignments. Even when they have been transferred to a foreign country, many transferring employees remain on their home country payroll, potentially leading to severe repercussions in both the home and visiting country. Sadly, many companies are unaware that they are not compliant.

For example, in the case where a U.S. company transfers an employee to work in Canada for a short period, the individual continues to remain on the U.S. payroll because he or she is still technically an employee of the U.S. company. However, the Canadian company may not know that it is required to include the transferred individual on the Canadian payroll also and remit the proper federal and provincial taxes, in addition to social and health taxes, on the employee’s behalf.

Canadian Income Tax Regulation 102(1) states that an employer must withhold an amount on any payment of remuneration made to an employee in his or her taxation year where he or she reports for work at an establishment of the employer in a province, in Canada beyond the limits of any province, or outside Canada.

Despite the employee’s being paid from a foreign office, a Canadian employer is required to make proper tax submissions to the government. In addition, the Canadian company must prepare a T4 for the employee working in Canada and comply with the February 28 deadline of the following year.

It may be possible, under one of the social benefits agreements between Canada and various other countries, for social security taxes to continue to be paid in the employee’s home country.

Business travellers
The taxation issues surrounding business travellers are becoming a priority for some companies. However, many companies are still unaware of their obligations. The tax implications for the business traveller and the company are numerous. A critical component in avoiding tax problems is to track and monitor the business traveller. This information can be used to determine appropriate procedures for dealing with immigration, human resources and tax compliance issues.

Corporate considerations
International payroll audits by the Canada Revenue Agency are becoming as common as payroll audits. In today’s competitive business environment, companies cannot afford to be unaware of the repercussions of non-compliance with regard to employee transfers and business travellers. Failure to manage the tax issues arising from cross-border activities properly can result in serious consequences for the company and the employee.

Fatima Laher and Annesley Hogg, Toronto

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E-filing tax returns: take note of error messages

If you e-file your tax return, take any error messages you receive very seriously. If you e-file your return, it will not be considered as filed if the computer system of the Canada Revenue Agency (CRA) rejects it because of an error. As a result, you could be assessed for late-filing interest and penalties. 

A taxpayer learned this, to her inconvenience, when her accountant e-filed her return for the 2003 taxation year on April 29, 2004, without paying attention to the error message transmitted by the CRA computer system. The return had been rejected because the taxpayer’s surname did not match the CRA’s records. It was not until May 26, 2004, that the accountant, who was not familiar with the e-filing process, became aware of his mistake. He immediately re-filed the return, again electronically, which this time was accepted by the CRA. 

As the Income Tax Act provides that an e-filed return is deemed to be filed on the day the Minister acknowledges acceptance of it — rather than on the day it is transmitted — the CRA assessed the taxpayer for late-filing penalties. She appealed this assessment. The Court found that the taxpayer, through her accountant, acted with sufficient due diligence to justify lifting the late-filing penalties. Indeed, the accountant honestly believed that the original return had been e-filed on time, and had acted immediately on learning of the non-acceptance.

Had the same return, but in a printed form, been sent to a CRA office on April 29, no late-filing penalty would have been assessed because it would have been considered as filed on time. A tax return in a printed form is deemed to be filed on the day it is posted, with the postmark attesting to the date.

CRA administrative practice provides a grace period of a few days for taxpayers to re-file, again electronically, a return that is initially rejected, without any late penalty. This grace period is made public around the end of the tax season, and only applies to tax returns initially transmitted on time, i.e. by midnight on April 30.

Although electronic filing appears to ease the annual return process, taxpayers must keep in mind that the rules are different than those for tax returns delivered by post.

Taxpayers who choose to e-file their tax return must be vigilant to ensure that no error message has been sent by the CRA computer system. If you receive a non-acceptance notice, you must act immediately to re-file correctly. Indeed, it would be unwise to count on meeting such judicial sympathy as the taxpayer above, once the grace period is over.

Marielle Domercq, Montreal

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Income trusts: the notion of “normal growth”

The bombshell dropped by Minister of Finance Jim Flaherty on October 31, 2006, about the new tax on trusts distributions, raised a storm of protest from the income trust sector.

In that announcement, the Minister said existing specified investment flow-through (SIFT) entities would not be subject to the new Distribution Tax until 2011. However, he warned that if a SIFT did not respect the policy objectives of the Tax Fairness Plan (for example, by undue expansion) it could see its four-year deferral taken away. A SIFT includes income trusts but not real estate investment trusts.

Immediately, financing plans and mergers and acquisitions went on hold while the sector tried to determine what would qualify as undue expansion, as opposed to the “normal growth” that was permitted. On December 15, 2006, in response to calls for clarification, the Department of Finance released guidance on what constitutes normal growth for SIFTs.

The guidance allows for equity capital growth of $50 million a year or 100% over four years, broken into “safe harbour” percentages of 40% for the first year and 20% each for the remaining years. These safe harbour percentages are cumulative and based on a SIFT’s market capitalization at end of trading on October 31, 2006. Included in equity capital growth are units, debt convertible into units, and any substitutes for equity that may be developed.

The guidance indicates that mergers or reorganizations of existing SIFTS will not be considered growth for the purpose of calculating the above limits if there is no net addition of capital. Also left out of the growth calculation are conversions into equity of debt outstanding on October 31, 2006, issuance of new non-convertible debt and new equity issued under a contract that was in place on October 31, 2006.

The prescribed normal growth for SIFTs is much better than many had feared, though certainly not sufficient for all.

The following highlights some of the uncertainties in the guidance provided on “normal growth”:

• The guidelines set a maximum permitted dollar value of growth, so it appears that even slightly exceeding the set limit may throw the SIFT offside.
• Units issued as a distribution of income in excess of cash available for distribution or units issued pursuant to dividend reinvestment plans may be considered new equity for purposes of the guidelines.
• The guidelines do not comment on the treatment of stock options outstanding as of October 31, 2006, or the issuance of new options after October 31, 2006.
• It is unclear what types of mergers would not be considered growth and how the guidelines apply to the merged entity.

In the long run, this guidance on normal growth will not have an impact on the fate of SIFTs in four year’s time. Deloitte’s informal surveys of income trust management show that a majority believes there will be fewer than 50 trusts remaining in Canada in 2011, most of them having been converted into corporations, compared to the 256 that exist now.

The new draft legislation released on December 21, 2006, was consistent with the October 31 announcements. It did not cover the guidance issued relating to the transitional rules, to “normal growth” or to the conversion from SIFT to corporation.

In the news release accompanying the draft legislation, the government invited all interested parties to provide comments on the technical aspects of the draft legislation by January 31, 2007. The CICA-CBA Joint Committee on Taxation was one of the many parties that made a formal submission. Given the complexity of the draft legislation, and the areas where draft legislation has not yet been issued, we expect that it may take some time before the proposals ultimately become law.

Standing Committee on Finance – Study on income trusts
The House of Commons Standing Committee on Finance held hearings on January 30 and February 1, 2007, on the income trust proposals. During these hearings, Finance Minister Jim Flaherty made it clear that the government has no intention of extending the four-year transitional period. A number of trust advocates had asked for an extension of the transitional period to ten years. Further, Mr. Flaherty indicated that energy trusts would not be carved out of the proposals, unlike the beneficial treatment received by similar entities in the United States.

Andrew Dunn and Anna Di Minno, Toronto

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Ontario corporate taxes

Currently, the Canada Revenue Agency (CRA) administers personal income taxes for the Ontario government, but the province administers its own corporate income taxes. In October 2006, the government of Canada and Ontario signed a memorandum of agreement to transfer administration of certain Ontario corporate taxes to the CRA effective for taxation years ending after 2008. Under a single tax administration, corporate taxpayers will:

• File a single federal and Ontario tax return.
• Pay combined federal and Ontario tax instalments to a single tax authority, the CRA. (For taxpayers with taxation years ending in 2009, combined corporate tax instalments begin in 2008.)
• Be subject to CRA audit that includes Ontario taxes.
• Make appeals to the CRA for both federal and Ontario taxes.
• Benefit from the harmonization of Ontario tax rules with federal ones.

To implement these measures, Bill 174 was introduced on December 13, 2006, and is now considered substantively enacted.

For more information concerning this transfer and the corporate income tax base harmonization, look for an article by Arthur Driedger and Day Duong, of our Toronto office, in an upcoming issue of TaxBreaks on our web site.

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Did you know that…

Giving can pay
Did you know that you can reduce your federal income tax by donating to a registered charitable organization? In 2006, the first $200 donated is eligible for a federal tax credit of 15.25% (12.7% in Quebec). This tax credit increases to 29% (24.2% in Quebec) for donations over $200. In Quebec, the tax credit is 20% on the first $200 and 24% on donations over $200.

Direct financial support for parents
Parents with children under the age of six can receive the Universal Child Care Benefit (UCCB). The benefit, paid in instalments of $100 per month per child, is taxable. It is paid separately from the Canada Child Tax Benefit (CCTB). If you already receive the CCTB for your children under six years of age, then you do not need to apply for the UCCB; you will receive it automatically.

QST rebate for hybrid vehicles
If you buy, lease for a long term (at least 12 months) or bring into Quebec a prescribed new hybrid vehicle after March 23, 2006, and before January 1, 2009, you may be eligible for a partial refund of the Quebec sales tax (QST) paid. If the vehicle was purchased, leased or brought in after March 23, 2006, and before February 1, 2007, the maximum rebate is $1,000. If the vehicle was purchased, leased or brought in after February 20, 2007, and before January 1, 2009, the maximum rebate is $2,000. The prescribed vehicles are the 2005 and 2006 Honda Insight; the 2005, 2006 and 2007 Honda Civic Hybrid; the 2005 Honda Accord Hybrid; the 2005, 2006 and 2007 Toyota Prius; the 2007 Toyota Camry Hybrid; and the recently added 2007 Nissan Altima Hybrid.

New excise tax on fuel-inefficient vehicles
As announced in the federal budget of March 19, 2007, changes have been made to the Excise Tax Act to impose a new tax on certain fuel-inefficient vehicles. The new excise tax replaces the heavy vehicles weight tax which no longer applies after March 20, 2007. The new excise tax applies to automobiles designed primarily for use as passenger vehicles, including station wagons, vans and sport utility vehicles, delivered or imported after March 19, 2007. It does not apply to pickup trucks, vans equipped to accommodate 10 or more passengers, ambulances or hearses.

Filing taxes electronically
The Canada Revenue Agency is encouraging taxpayers to file their income tax returns electronically or by telephone. You can file your return over the Internet by using NETFILE or by asking your tax preparer to use EFILE. If you prefer the telephone, you can file your return using TELEFILE. Filing electronically can mean that you receive your refund more quickly, in as little as eight business days. Quebec taxpayers can, since February 14, 2007, file their returns electronically with NetFile Quebec if they use software approved by Revenu Québec.

Public transit passes
The non-refundable tax credit for the cost of public transit passes for travel that occurred after June 30, 2006, can be claimed in your 2006 income tax return. The credit is for monthly or longer duration transit passes for travel on buses, streetcars, subways, commuter trains and local ferries. You can include the cost of passes for yourself, your spouse or common-law partner, or your children under 19 year of age.

Children’s fitness tax credit
Beginning in 2007, a credit of up to $500 per child under the age of 16 can be claimed by parents to cover the costs of eligible physical fitness programs and sporting activities for their children. The credit is calculated by multiplying the eligible amount by the lowest marginal tax rate, which is 15.5% in 2007. Don’t forget to ask for a receipt; the government may ask for it.

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