2023 Trust Reporting Requirements (T3 Return)
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Cryptocurrencies have taken the financial world by storm, offering new and exciting opportunities for investors and businesses. However, as with any financial asset, it’s essential to understand the tax implications involved, especially in the ever-evolving landscape of Canadian tax law. In this blog post, we’ll explore the key considerations and guidelines for handling cryptocurrencies from a tax perspective in Canada.
Transactions with Cryptocurrencies like Bitcoin, Ethereum, and others may result in either business income (loss) or capital gain (loss)for tax purposes in Canada. As there is nuance in determining how crypto transactions should be recorded it is important to understand the basics before entering into these transactions.
Business Indicators:
Per CRA, “The following factors may indicate that you are carrying on a business:
When the factors indicate that you are carrying on a business the full amount of the gain on the disposition of crypto will be included as business revenue. You will be able to deduce and expenses related to the business against this revenue to reduce your taxable income.
Buying and Selling Cryptocurrencies as Investment:
When you purchase or sell cryptocurrencies, it triggers a capital gain or loss. The capital gain or loss is calculated based on the difference between the purchase price (adjusted cost base) and the selling price. This applies when there is no indication of business income. The advantage is only ½ of the capital gain is included in income for tax purposes.
Cryptocurrency Mining:
For individuals or businesses involved in cryptocurrency mining activities, the mined coins are considered income at their fair market value at the time they are acquired. Subsequently, any future selling of these coins would result in capital gains or losses.
Cryptocurrency as Payment:
If you accept cryptocurrencies as payment for goods or services, the fair market value of the cryptocurrency received needs to be reported as income for tax purposes.
Annual Reporting:
Canadians are required to report their cryptocurrency transactions on their annual tax returns. This includes detailing each transaction, the date of acquisition or disposition, the amount involved, and any associated costs.
Keeping Records:
It’s crucial to keep meticulous records of all cryptocurrency transactions, including receipts, invoices, and details of wallet addresses. This information will be invaluable when reporting to the Canada Revenue Agency (CRA).
Foreign Exchange Gains and Losses:
Cryptocurrency transactions involving foreign exchanges may also result in foreign exchange gains or losses, which should be reported for tax purposes.
Capital Losses and Offsetting Gains:
Consider strategic planning to offset capital gains from cryptocurrency transactions with capital losses from other investments, helping to minimize overall tax liability.
Use of Tax-Advantaged Accounts:
Explore the possibility of holding cryptocurrencies within tax-advantaged accounts like Tax-Free Savings Accounts (TFSAs) or Registered Retirement Savings Plans (RRSPs) to defer taxes.
As cryptocurrencies continue to gain prominence, understanding the tax implications becomes increasingly important. It’s recommended to consult with a qualified tax professional to ensure compliance with Canadian tax laws and to develop effective tax planning strategies. Stay informed, keep accurate records, and navigate the complexities of cryptocurrency taxation with confidence.
Remember, this blog post provides general information and should not be considered as professional advice tailored to your specific situation. Always consult with a tax professional for personalized guidance.
[1] https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html
A personal services business (PSB) exists where the individual performing the work would be considered to be an employee of the payer if it were not for the existence of the corporation. A corporation may be a PSB if the following criteria are met:
Tax Implications for Personal Service Businesses and its Owner:
Risk Mitigation Strategies:
Conclusion:
Operating a personal service business in Canada comes with unique tax implications and potential risks due to the distinct tax treatment. To mitigate these risks, it’s essential to diversify your client base, document your relationship, consider offering goods alongside services, manage your compensation wisely, and focus on business growth. Feel free to contact our office if you have any questions about personal service businesses or feel you may be at risk.
In Budget 2021, the Canadian government introduced the Underused Housing Tax (UHT), a 1% annual tax on the value of non-resident, non-Canadian-owned vacant or underused residential real estate. In response to feedback on the onerous filing, the government is proposing significant changes to streamline compliance. These changes have not yet been passed with federal legislation but are expected to be passed and enacted in the coming months.
One notable proposal is the elimination of filing requirements for certain owners. “Specified Canadian corporations,” partners of “specified Canadian partnerships,” and trustees of “specified Canadian trusts” are slated to become “excluded owners,” relieving them of UHT reporting obligations. The government aims to expand these definitions to include a broader range of Canadian ownership structures, reducing the compliance burden for eligible entities starting from the 2023 calendar year.
This means that most Canadians should not have to file a UHT return in 2023.
To further ease the transition, the government is also suggesting a reduction in minimum failure-to-file penalties. The minimum penalties for individuals and corporations for late filing UHT returns are proposed to decrease from $5,000 to $1,000 and from $10,000 to $2,000, respectively, beginning in 2022.
The requirement to file UHT returns for 2022 under the original legislation will continue and the deadline has been extended to April 30, 2024. If you have not filed your UHT returns yet or are unsure if you have a filing obligation, please contact Fulcrum Group.
*The information contained in this post reflects the standards and rules applicable at the date posted and may or may not be relevant at future dates
The Canada Revenue Agency (CRA) recently released technical interpretation UHTN-15, which discusses co-ownership of residential rental properties and its potential impact on the filing requirements for the Underused Housing Tax (UHT).
In accordance with UHTN-15, the term “partnership” for UHT purposes is not explicitly defined in the Underused Housing Tax Act (UHTA). Instead, the CRA relies on the definition provided by provincial partnership legislation, which is consistent with the legal understanding of a valid partnership.
The key criteria for a relationship to be considered a partnership for UHT purposes are:
These three criteria closely mirror the fundamental elements required for a valid partnership under provincial partnership legislation. If any of these criteria are not met, the relationship would not qualify as a valid partnership for UHT purposes.
Given the self-assessment nature of Canada’s tax system, it is crucial for co-owners to determine whether their residential rental property arrangement meets these criteria. Should the co-ownership structure align with the conditions outlined in UHTN-15, filing a UHT return as a partnership may be necessary. The deadline to file is Oct 31, 2023, for 2022 returns and will be April 30 for future years. The late filing penalty is $5,000 per form.
To ensure compliance and explore any potential implications for your specific situation, contact our office and/or schedule a meeting at your earliest convenience. This will allow us to discuss the particulars of your residential property holdings and formulate a tailored strategy to address any UHT filing requirements that may arise.
As a shareholder of your corporation, your shareholder’s loan is an important account that indicates how much the company owes to you or how much you owe to the company. It is important to know how the shareholder’s loan works and how it can affect your personal taxes. You should ensure that you are aware of what transactions impact your shareholder’s loan balance and where the balance is at the end of every year.
When an owner takes cash out of the company, it is considered to be an owner withdrawal and is money that is owed back to the company if not repaid. If, as a shareholder, you use company funds to make a personal purchase, the purchase price is considered a withdrawal of company funds for personal use and is also owed back to the company.
Sometimes the company will not have enough cash to operate. If this is the case, the shareholder may lend money to the company. These amounts are owed back to the shareholder and can be repaid at any time. There are no personal tax consequences to repaying them. The contributions can also offset any personal withdrawals of company funds. If, as a shareholder, you were to contribute or sell equipment to the company without receiving any reimbursement directly, it would also be considered a contribution.
If at the end of your fiscal year, your shareholder’s loan is overdrawn, the overdrawn amount must be repaid by the end of the following year. If you intend to repay the overdrawn amount by the end of the following year, no additional steps may be necessary. Alternatively, if you choose not to or are unable to repay the overdrawn amount, a dividend can be issued to clear up the shareholder’s loan balance. These dividends are reported on a T5 slip and are included as taxable income on your personal tax return in the year they are declared.
If the overdrawn shareholder’s loan is not repaid by the end of the following year and dividends are not recorded, CRA could consider this to be personal income and require an adjustment to your personal tax return for the year in which the amount became overdrawn. If, in later years, you repay any portion of the overdrawn amount, you can record a deduction equal to the amount repaid to offset your income in that year. This scenario can often result in significant tax in the year of income inclusion and include additional interest and penalties, so it is best to avoid this scenario if possible.
Something to be aware of is that you cannot repay an overdrawn shareholder’s loan at your year-end date and then take the money back out the following day. CRA will consider this to not be repaid and taxation can still occur. For example, if you have a December 31st year-end and repay the overdrawn amount on December 31st but then take it back out again on January 1st, CRA will likely consider it to not have been repaid.
If you feel like you may be running into a shareholder’s loan issue, or would like to learn more about how it works, please contact us to discuss how it may impact you.
Passing on businesses to family members or employees in Canada has historically come with tax challenges. Budget 2023 introduced new tax rules to address these issues, making it easier for business owners to transfer their businesses. This post aims to explain these changes in simple terms and how they might affect business succession from 2024 onwards.
Family Business Transfers:
Before Bill C-208, there was a tax difference between selling a business to a family member and selling it to someone unrelated. Selling to a family member could result in higher taxes due to certain rules. Bill C-208 aimed to fix this disparity by excluding certain transactions from these tax rules. Budget 2023 builds on these changes and sets conditions for a “genuine intergenerational business transfer” to qualify for tax benefits (Bruce Ball, 2023).
Budget 2023 proposes several conditions for such transfers, including immediate transfers made within 36 months and gradual transfers made over 5 to 10 years (Bruce Ball, 2023). If the conditions are met and an election is made, the transfer would be exempt from certain tax rules.
Budget 2023 also suggests other changes to simplify the process, such as eliminating the need for independent assessments and affidavits, extending timeframes for capital gains exemptions, and introducing joint and several liability for tax payment under certain circumstances (Bruce Ball, 2023).
Employee Ownership Trusts (EOTs):
Existing tax rules have made it challenging to create Employee Ownership Trusts (EOTs) in Canada (Bruce Ball, 2023). However, Budget 2023 proposes new rules to overcome these obstacles and offer a succession planning option for business owners.
An EOT involves selling a business to employees through a trust that holds the shares on their behalf. This simplifies matters compared to each employee owning shares individually.
How do Employee Ownership Trusts work?
Here is a simplified explanation of the EOT process (Bruce Ball, 2023):
Budget 2023 proposes new rules to allow the creation of EOTs in Canada. The rules specify conditions for the trust’s holdings, employee eligibility, distribution limitations, and trustee appointments.
Tax Benefits of EOTs:
The proposed EOT rules offer the following tax benefits (Bruce Ball, 2023):
Future Steps:
If approved, the new tax rules for family business transfers and EOTs will come into effect from January 1, 2024 (Bruce Ball, 2023).
Conclusion:
Budget 2023 introduces important tax changes to facilitate the transfer of businesses to family members and employees. The new rules aim to promote fair transfers and simplify the establishment of EOTs as a succession planning option. While this approach focuses on removing tax barriers, it still offers a valuable alternative for business owners. By understanding these new tax rules, business owners can make informed decisions when planning for business succession in 2024 and beyond.
Stay Informed:
For assistance or further information on this topic please reach out to our office at 780-532-4641 or e-mail office@fulcrumgroup.ca.
References
Bruce Ball, FCPA, FCA, CFP (2023, May 16). Business succession — New tax rules to consider for family business transfers. Retrieved from Chartered Professional Accountants Canada: https://www.cpacanada.ca/en/business-and-accounting-resources/taxation/~/link.aspx?_id=51946591F32B45D39E7EB58FD292CF71&_z=z
Blog Post Contributed by Matthew Kozlowski, CPA
By Samantha Sandy
The government introduced a new Tax-Free First Home Savings Account (FHSA) effective April 1, 2023, that allows you to save up to $8,000 tax-free annually towards the purchase of your first home with a lifetime contribution limit of $40,000. Contributions made to an FHSA may be deducted on your personal tax return similar to RRSPs. Although the federal government has made this announcement effective April 1st, most banks have announced that the accounts will not be available to open until the summer of 2023 as they work through the complexities surrounding these accounts and the reporting guidelines of government agencies.
To be a qualifying individual, you must meet all of the following requirements:
For purposes of opening an FHSA, you are considered to be a first-time home buyer if, at any time in the calendar year before the account is opened or at any time in the preceding four calendar years, you did not live in a qualifying home as your principal place of residence that either you owned or jointly owned or your spouse or common-law partner (at the time the account is opened) owned or jointly owned.
FHSA’s can only be opened through issuers such as banks, credit unions, or trusts, or insurance companies. You can have more than one FHSA at a time, but you must ensure that the total contributions for the calendar year do not exceed your maximum contribution room.
To open an FHSA, simply contact your issuer. Please ensure you have the following information so the can register your FHSA:
If incorrect information is provided, and you are deemed to not be eligible for the FHSA, it may be revoked from the date the account was opened, and the following will apply:
FHSAs have an annual contribution limit of $8,000, with a maximum lifetime contribution limit of $40,000. Any and all contributions to the account will reduce contribution room. This includes transfers from RRSPs. If you do not contribute the full $8,000, the remaining contribution room will be carried forward to the next year. This amount will not continue past one year though. For example, if you opened the account in 2023, but did not make contributions until 2028, your amount for 2028 would only be the unused amount from 2027 and 2028, making your total contribution room for 2028 $16,000.
Unlike RRSPs, there is no ability for tax planning in the first 60 days of the year. Contributions are only deductible in the calendar year in which they are made.
You are not permitted to participate directly in your spouse’s or common-law partner’s FHSA. If the FHSA is in their name, you cannot transfer your RRSPs or claim the FHSA tax deductions that correspond with their account.
If you contribute too more than the maximum amount, tax will be assessed on the excess amount at a rate of 1% per month on the highest excess FHSA amount that month. This will continue until the excess amount is eliminated by withdrawing it or sufficient additional room being available at the beginning of the next calendar year.
If the excess amount is still in the account as of January 1st of the following year, your contribution room for that year will be reduced by the excess amount. For example, if you over contribute by $2,000, your contribution room for the following year will be $6,000 ($8,000-$2,000).
If you would like to remove the excess amount immediately, you may:
Please discuss with your issuer to find what is best for your situation.
If you meet the qualifying withdrawal conditions, you can withdraw all of the funds from your FHSAs tax-free. You can do this either in a single withdrawal or a series of withdrawals.
For a withdrawal to qualify, it must meet all of the following conditions:
There is a maximum participation period that starts when you open your first FHSA and ends December 31 of the year in which the earliest occurs:
In order to avoid any issues, ensure your account is closed before the applicable period ends.
For more details, please see https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html
Sources
As part of the 2022 federal budget, the government passed the new Underused Housing Tax Act. This legislation creates a new 1% tax on the value of ‘underused housing’. While the underused housing tax (UHT) is intended to target foreign ownership, many Canadians through partnerships, trusts and small businesses will be required to file an annual return (Form UHT-2900) even though there are many exemptions from the tax itself. If you own residential property other than your principal residence, it will be essential to review any filing obligations.
Residential property of is defined as one of the following:
Unaffected property includes properties with 4 or more dwellings such as 4-plexes and apartments.
There are two types of owners in regard to the UHT. Type of ownership is based on December 31 of the calendar year.
These are owners that DO NOT have to file the UHT-2900 and include:
These are owners that MUST FILE the UHT-2900 regardless of tax obligation and include:
All Affected Owners MUST file a separate return for EACH property even if they are exempt from the tax. Similarly, EACH member of a partnership MUST file a separate return for EACH property.
***Rental properties owned jointly with spouse (common-law partner). There is a possible obligation to file returns for personally owned property including property owned jointly with your spouse. Depending on circumstances, this arrangement can be considered a partnership. We encourage you to consult with your Fulcrum Group advisor to determine your filing obligations.
****Property held in trust (cosigning and estate planning). There is an obligation to file a return when you are listed as the legal owner of a property but do not have beneficial ownership and are then deemed to own the property in trust. Below are two common examples of this but other do exist. Please consult Fulcrum staff if you might be a trust owner.
Scenario 1
A child is unable to qualify for a mortgage and a parent cosigned. Banks requires cosigners to be on title so now the parent is listed in fact as a legal owner. The child is the beneficial owner. The parent owns the property in trust and is deemed to be a trustee. The parent must file a UHT-2900 return (but will generally be exempt from tax). The child does not have a filing obligation for their personal residence.
Scenario 2
An aging parent is now the sole owner of their home. In order to simplify the estate a child/children are added to the title of the home. This is often done so the property can avoid probate. The child/children are now legal owners of the property but beneficial ownership is still solely that of the parent. The child/children have become trustees and must file a UHT-2900 return (but will generally be exempt from tax). The parent does not have a filing obligation for their personal residence.
Affected owners have several exemptions that will remove any tax obligations. However, even where exemptions apply, the affected owner will still be required to file the UHT-2900 return. The exemptions are classified in 3 parts as defined on Form UHT-2900.
The property must be the primary place of residence for any of the following:
The property must have one or more qualifying occupancy periods totaling at least 180 days where each day is part of increments of at least 1 month. (Short term rentals do not qualify for this exemption).
You will need to provide the total number of days on UHT – 2900 if claiming one of the following exemptions.
For individual owners who are neither Canadian citizens nor permanent residents, if between you and your spouse you own multiple residential properties, your ownership may not qualify for Part 4 or Part 5 exemptions. You and your spouse must each file an election with the CRA to designate only one property (the same property) for the purposes of the Part 4 and Part 5 exemptions.
If you qualify for any one of the part 4, part 5 or part 6 exemptions, then there is no tax obligation.
If you do not qualify for an exemption, you must calculate the tax owing for the calendar year.
Taxable value of the residential property x 1% x ownership %
Taxable value of the property is determined as follows:
Greater of:
Assessed value (obtain from property tax assessment)
OR Most recent sale price on or before December 31 of the calendar year
A Fair Market Value election can also be done to use the fair market value of the property rather than the taxable value. The amount reported as the fair market value of the residential property must be supported by a written appraisal prepared by an accredited real estate appraiser that was done specifically for the purposes of the UHT. This appraisal must be prepared between January 1 and April 30 of the following year.
The filling deadline for all UHT-2900 forms is April 30th of the year following; however, an extension was granted for all 2022 returns to October 31, 2023. For future years, the deadline will remain April 30th.
Several pieces of information are needed to file your UHT return, including a valid CRA tax identifier number (such as Social Insurance Number or Business Number). Corporations will also need to register for an Underused Housing Tax (RU) program account identifier code.
If you engage Fulcrum group to file the UHT 2900 on your behalf we will need the following for each property you or your spouse or common-law partner own:
A separate UHT-2900 return will be required for each property in which you have affected ownership. The forms can be submitted to CRA either through your CRA My Account or by mail to your designated tax centre (Winnipeg Tax Centre for Alberta residents).
[i] Fair rent is 5% of the taxable value of the residential property for the calendar year
[ii] A specified Canadian partnership is where all partners are either an excluded owner, and would be an excluded owner if they were not part of a partnership, or specified Canadian corporations (below)
[iii] A specified Canadian trust is a trust were each beneficiary on December 31 of the calendar year is either an excluded owner or a specified Canadian corporation.
[iv] A specified Canadian corporation is a corporation incorporated under federal or provincial laws in Canada and at least 90% of the equity and voting shares are owned by Canadian citizens, permanent residents or specified Canadian corporations.,
When preparing a will, one of the most important considerations is selecting an executor to administer your estate after you have passed away. Fulfilling the executor’s role is often complex and involves legal, financial, and tax planning decisions. A will can have more than one executor, and sometimes there are jointly appointed executors as in the case of multiple children being chosen to fulfill the role. Further, there are often replacement executors named in the case that the original executor is unable to fulfill their role. Additionally, there are several terms that are synonymous with the term executor, including executrix (feminine form), estate trustee, estate trustee with a will (Ontario), and liquidator in Quebec (Heath, 2023).
There are several steps that the executor must perform upon the passing of an individual (Heath, 2023):
Some important considerations regarding the selection of an executor (Heath, 2023):
There are also additional considerations for the executors themselves (Heath, 2023):
Other general considerations and situations that arise may include (Heath, 2023):
Choosing and executor for your estate requires careful consideration regarding the above points and should be undertaken with due care. Additionally, the executor should be made aware of their responsibilities and what may be required of them. Further, the executor should be made aware that should the job prove to be too complex for them, outside assistance can be engaged for a fee.
Heath, J. (2023, January 26). Here’s what you need to know about picking an executor for your will. Retrieved from FInancial Post: https://financialpost.com/personal-finance/family-finance/what-you-need-to-know-picking-executor-for-your-will
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