TaxBreaks, December 2004

The taxman is monitoring your business travels
How to Reduce the Tax You Pay: New Edition
Automobile provided to an employee
Did you know that . . .

Download the full PDF version of this newsletter below.

The taxman is monitoring your business travels
International business travel is at an all-time high, and the trend has companies moving away from expensive long-term foreign assignments and toward short-term assignments and intermittent employee travel. At the same time, border security is under increased scrutiny, and corporate governance is under the microscope.

Obligations and risks
International business travel by employees may be creating income tax filing requirements in foreign jurisdictions for employees and executives travelling outside of Canada. For example, Canadian employees who earn as little as U.S.$10,000 on days spent in the United States, or whose presence there exceeds 183 days in a calendar year and whose remuneration comes from an employer who is a resident of the United States, may be subject to U.S. federal income tax.

Canada and the United States both require a corporate income tax return to claim treaty exemption when employees provide services on an exempt basis — if an employee is not an employee of the host company for tax purposes, then by default he or she must be providing services for the home country employer in the host country. If a tax return is not filed, the United States may disallow all deductions.

In addition, and often much larger than the personal income tax liability risks, are the risks faced by non-compliant employers with respect to corporate governance issues. For example, employers have clear statutory obligations to report taxable compensation and withhold required income and payroll taxes. Employers have statutory obligations to determine who their employees are (versus contractors or suppliers), to track employees’ work days by country/state, to determine what income is earned in each country/state, to determine and report taxable compensation, to withhold and remit the appropriate income taxes, social security and other payroll taxes, and to address visa and other non-tax issues.

In many jurisdictions, there is a developing focus on detecting and taxing business travellers. For example, New York State currently has a significant audit program aimed at identifying failure to withhold New York tax on non-resident taxpayers working in New York.

While historically there has not been much synchronization between the U.S. tax authorities (IRS) and the U.S. immigration authorities (CIS), the benefits of increased information sharing between them is under active consideration. On July 21, 2004, the U.S. Government Accounting Office (GAO) released testimony before the Senate Finance Committee recommending that the IRS and CIS assess the benefits and costs of information sharing to enhance tax compliance and to improve immigration eligibility decisions. The GAO indicated that the IRS might benefit from the use of CIS information to identify non-compliant taxpayers. In a study of 413,723 organizations that applied to sponsor workers from 1997 to 2004, 5% did not report any income to the IRS. The GAO estimated that nearly 20,000 businesses had cumulative unpaid tax of $5.6 billion.

Employers that continue to ignore their corporate obligations may ultimately receive a shock.

What you can do to minimize risks
To meet their obligations efficiently, employers should, among other actions:

• Determine their withholding and reporting obligations and potential exposure.
• Develop procedures to comply effectively with applicable withholding and reporting obligations on a timely basis.
• Develop appropriate compliance policies for each organization that reflect informed business decisions made at an appropriate level of the organization.
• Create web-based tools to track employee work days in numerous jurisdictions and identify exposures.
• Determine whether relief is available under applicable Income Tax Conventions.
• Determine whether individuals should be regarded as employees of the host company, as interpreted under local country laws.
• Calculate income taxable in each country and determine appropriate tax withholding.
• Inform managers and employees regarding their obligations and create awareness.
• Enable employees to comply with applicable tax filing requirements using innovative web-based tools.
• Develop web site applications to enable managers and employees to identify potential exposures.
• Fill in income tax returns, withholding waiver applications, refund applications and tax equalization calculations.
• Fill in withholding returns.
• Plan to minimize future exposures.
• Identify permanent establishment exposures arising from employee business travel and notify the company’s corporate tax department.
• Identify corporate income tax return requirements.

Our Global Employer Services professionals can assist employers with this planning and, thus, help them avoid all tax risks related to international business travellers.

Steve Roberts, Toronto, Canada

Back to top

How to Reduce the Tax You Pay: New Edition
Do you want to save taxes for 2004 and implement effective tax planning throughout 2005? If so, you should obtain a copy of the 17th edition of How to Reduce the Tax You Pay, written by members of our firm. With over 370,000 copies in print, this popular annual book, published by Key Porter Books Limited , will be available in bookstores across Canada in January 2005 for $19.95 a copy.

Back to top

Automobile provided to an employee
Based on current tax legislation, an employer who makes an automobile available to an employee is responsible for determining, on an annual basis, the value of the benefits that the employee must include in his or her income calculation with respect to the automobile.

Calculation of the taxable benefit
The amount of the benefit is calculated in two steps: the value pertaining to the standby charge for the automobile and that relating to its operation. Generally, the value of the standby charge corresponds to 2% of the cost of the automobile, or 2/3 of the automobile’s leasing expense, for each 30-day period during which the automobile was made available to the employee. The benefit pertaining to operating the automobile generally represents 17 cents per kilometre driven for personal use, or, if the employee so chooses, 50% of the standby charge benefit. However, when the automobile is used mainly (i.e., more than 50%) in the course of the employee’s employment or office, and the number of kilometres travelled for personal use is, on average, less than 1,667 kilometres per 30-day period, the value of the standby charge is reduced, based on a predetermined formula.

New requirement for Quebec employees
To allow employers providing an automobile to an employee to meet their Quebec tax obligations, the March 30, 2004, Quebec budget included a proposed amendment to the tax legislation requiring that the employee provide the employer with a logbook regarding the use of the vehicle from January 1, 2005, onward. A copy of this logbook must be provided to the employer no later than the tenth day following the end of the year, or at the end of the period during which the automobile was made available to the employee. Any employee who does not provide his or her employer with the logbook within the prescribed time limit will incur a $200 penalty.

The following information should be recorded in the logbook:

• The number of days during the year that the automobile was made available to the employee or to a person related to him or her.
• The number of kilometres travelled each day, both for the employee's personal use and in relation to, or in the course of, the employee's office or employment.
• Each location the employee travelled to using the automobile, indicating the departure and arrival points and the reason for the travel in detail to establish that the trip was carried out in the course of the employee’s office or employment.
• The number of kilometres travelled to reach each of these locations.
• Only the number of kilometres travelled needs to be recorded in the logbook for days that the employee has not worked (weekends, holidays or sick days).

It is therefore important that employers alert their employees who are affected by this measure as soon as possible, so that this new requirement and the prescribed time limits are respected.

Although this logbook is not mandatory under federal legislation, it could be very useful for checking the accuracy of information for federal purposes.

Vicky Rouillard, Longueuil, Canada

See a free PDF sample of the logbook prepared by our firm. An Excel spreadsheet version of the logbook is also available to help simplify the calculation process. Simply ask your Deloitte partner or contact to send you a complimentary copy.

Back to top

Did you know that . . .

• Deadline for some requests under fairness provisions. December 31, 2004, is the deadline to send in requests for adjustments under the fairness provisions for the 1985 to 1994 taxation years. Under an amendment proposed in the March 2004 federal budget, effective January 1, 2005, requests will only be accepted for adjustments relating to the previous 10 taxation years.
•  Voluntary disclosure to tax authorities. A taxpayer who has failed to file a tax return or to meet other obligations under the tax law may be able to make a voluntary disclosure to the Canada Revenue Agency (CRA) or the Quebec Revenue agency. Provided certain conditions are met, a voluntary disclosure shields the taxpayer from penal proceedings and the penalties provided under fiscal legislation. Under a voluntary disclosure, the taxpayer spontaneously provides information that may have gone unreported earlier because, for example, a tax return was not filed or was incomplete, or tax was not paid as required.
• Online access to your tax information. The Canada Revenue Agency (CRA) has announced that individual taxpayers can now use the electronic service known as "My Account" to change a tax return or to disagree with an assessment or determination made by the CRA. My Account is an online service that allows individuals to examine their personal income tax, Canada Child Tax Benefit, and GST/HST credit information via a secure website. The Quebec Revenue agency offers a similar service, "Clic Revenu ," which permits businesses and business people to review their tax files online.
• Maximum CPP and QPP contributions to rise in 2005. The maximum contribution to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP) by an employer and an employee will increase by about $30 to $1,861.20 in 2005, while the maximum self-employed contribution will increase by about $60 to $3,722.40. For an employee, contributions to the CPP and QPP give rise to a tax credit of 16% federally and 20% in Quebec, respectively. For a self-employed individual, only half of the contributions gives rise to a tax credit; the other half is deductible in calculating net income.
• A charity can lose its registered status. As long as a registered charity acts in accordance with the rules set out in the Income Tax Act , it will continue to enjoy the benefits of its registered charity status, including the ability to issue official receipts for donations. If a charity fails to comply with the law, however, the Canada Revenue Agency (CRA) can revoke the registered charitable status. This can occur, for example, if a charity fails to use enough of its assets for charitable activities, or if there is no supporting documentation for certain expenses.
• New tax credits for families in Quebec. Effective January 1, 2005, family benefits, the tax reduction for families, the tax credit for dependent children, and the parental wage assistance program will be replaced by a new Child Assistance measure and a work premium. The Child Assistance measure, which will take the form of a refundable tax credit, can be up to $2,000 per year for one child, $3,000 for two children, $4,000 for three children, $5,500 for four children, and a further $1,500 for each additional child. It will be paid by cheque four times a year and will not be taxable. Implementation of the Child Assistance measure means that several tax credits relating to dependants will be adjusted: the amounts for children engaged in postsecondary studies, a single-parent family, dependants with an infirmity, other dependants, etc. The work premium will also take the form of a refundable tax credit, and it may be claimed by individuals who have earned income, provided that certain conditions are met.
• Changing Quebec’s tax credit for child-care expenses. Starting January 15, 2005, qualifying families will be able to receive, in advance, quarterly instalments of the tax credit for child-care expenses, provided the estimated credit for the year exceeds $1,000. The rate of this refundable tax credit is calculated on the basis of family income. Starting in 2005, an employer will no longer be able to take this tax credit into account in calculating the amount of an employee’s salary or wages that is subject to source deductions of income tax.
• Canada Education Savings Grant. The Canada Education Savings Grant (CESG) matching rate will be increased, starting January 1, 2005. If a child who is under 18 years of age throughout a year is the beneficiary of a registered education savings plan (RESP), the first $500 contributed will attract a 40% CESG matching rate if the child’s family has qualifying net income for the year of $35,000 or less, or 30% if the family’s qualifying net income is greater than $35,000 but does not exceed $70,000. These income thresholds, which are expressed in 2004 dollars, will be indexed to inflation for 2005 and subsequent taxation years.
• Small Business Deduction Limit. The small business deduction reduces the basic federal corporate income tax rate for the qualifying amount of active business income earned by a Canadian-controlled private corporation. The maximum annual amount of active business income qualifying for the reduced tax rate is the “small business limit”. The increase in the small business limit to $300,000, which was scheduled to become effective only in 2006, has been advanced one year, to become effective for the 2005 taxation year.
• Employment Insurance premiums for 2005. Effective January 1, 2005, a tiny reduction in the employment insurance (EI) premium rate will bring the rate for employees to $1.95 per $100 of insurable earnings, down from the current $1.98. The rate for employers will be $2.73, down from $2.77 this year. Maximum insurable earnings will remain at $39,000. As a result, maximum annual contributions in 2005 will be $761 by an employee (down $12) and $1,065 by an employer (down $16).
• Prescribed interest rates. The Canada Revenue Agency (CRA) has announced the prescribed interest rates that will apply for income tax purposes for the first quarter of 2005. The rates that will be in effect from January 1 to March 31, 2005 are: 7% on overdue taxes, Canada Pension Plan contributions and Employment Insurance premiums; 5% on overpayments; 3% on taxable benefits for employees and shareholders from interest-free or low-interest loans. These rates are the same as the rates in effect during the fourth quarter of 2004. When this issue went to press, the Quebec Revenue agency had not posted prescribed rates for the first quarter of 2005 on its Web site, but according to information obtained from the agency, the respective rates will be 7% (same as the previous quarter), 2% (was 1.25% in the previous quarter), and 3%.

Back to top

About TaxBreaks
A bi-monthly newsletter on corporate and personal tax.

Subscribe
View archives