Canadian Taxes A to Z (2018): "H" is for HST

Today, H is for Harmonized Sales Tax (HST). Eight down, 18 to go!

Yeah, I know it was only yesterday that we talked about GST. And that HST is a lot like GST, except that H is worth four points in Scrabble, while G is only worth two points. But given the grief that my clients suffer over GST/HST problems, I figured it was worth another post.

A VERY SHORT HST HISTORY

For those not in the know, in 1996 Nova Scotia, New Brunswick and Newfoundland & Labrador cut a deal with the feds to blend (and reduce) the provincial sales tax with the federal GST. Provincial sales taxes in Canada were cascading or turnover taxes. Meaning that you got hit with the tax every time ownership of the same items (or their earlier components) changed in the supply chain. The taxes artificially encouraged vertical integration of business, rather than sensible organization of business according to sound economics, in order to avoid getting hit with the tax multiple times in the manufacturing process.

AN EVEN SHORTER ECONOMIC ANALYSIS OF HST

Sound economic studies, not political smoke and mirrors, show that HST encourages business investment, whereas PST slows economic growth. Most of the western industrialized world has now moved to HST-type taxes (often called VAT - Value Added Tax).

As a tax lawyer, I'm all for a lower tax burden. From both a business and consumer perspective, HST does equal a lower tax burden when combined with its effect on greater economic growth. Supposedly leading to more money in everyone's pockets at the end of the day.

Most studies show HST to be tax revenue neutral, and some suggest that everyone will pay less tax under an HST system. Certainly life is easier for business - especially small business - in collecting and remitting only one sales tax, and being able to claim input tax credits on business purchases.

THE CONTINUING HST BAD REP

In 2010 HST was implemented in both Ontario and British Columbia, but in 2011 a referendum in British Columbia voted 55% in favour of abolishing the HST and reverting back to the GST/PST system, effective in 2013. This resulted in BC having to pay back $1.6 billion in implementation funding to the federal government.

Don't mistake me for some government cheerleader. There are lots of wacky things about our tax system, and unfortunately taxpayers do sometimes need to fight for their rights (either by themselves or through hiring folks like me). But the theory of the HST is good economic and business policy. Full stop. The problems lie in its interpretation and application.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "G" is for GST

Today in the continuing Canadian Taxes A to Z saga, I present to you the letter G, representing the Goods and Services Tax. Better known to its friends and foes alike as GST. Also sometimes going by the name Harmonized Sales Tax (HST) in provinces where it has merged with provincial sales taxes.

THE GST IMAGE PROBLEM

Since its introduction in 1991, the GST has become almost as much of a target for critics as the dating way back to 1917 income tax is itself. Although GST replaced a higher (13%) hidden manufacturers sales tax with a 7% tax, and promised rebate credits to low and middle income Canadians, sticking an obvious consumption tax on top of pre-existing provincial sales taxes proved to be deeply unpopular among Canadians. I've got an undergrad background in economics, and the math remains far beyond me as to just how revenue neutral the GST really was, notwithstanding government claims at the time.

THE THINGS ONE COULD GET AWAY WITH UNDER THE GST

I can tell you that during the early years of its implementation, when I was responsible in Toronto for prosecuting offences under Part IX of the Excise Tax Act (the rather poorly named place where GST rules reside), we had folks do things like submit an input tax credit application for a rebate on the GST supposedly paid on the purchase of a 737 jetliner, notwithstanding the taxpayer was living in his mother's basement with no real business, and the government simply mailed him a gigantic cheque! Which he quickly spent.

Yes, he did go to jail. And no, you can't get away with this any more. The system and oversight of GST/HST rebates has been improved. But arguably the rules surrounding GST/HST remain more uncertain than those covering income tax.

ONGOING GST LEGAL UNCERTAINTY

Part of the uncertainly is that we have only 25 years of GST history under our belts. Another part of the problem is that the relatively well developed principles of income tax law aren't all that relevant in the GST world.

I'm a tax lawyer, and I can tell you that I get stumped by far more GST questions than income tax questions. I'll eventually figure out the answer to the GST questions - that's my job - but they usually require more research and discussions with the CRA than would be required for even esoteric income tax questions.

FIVE THINGS YOU NEED TO KNOW ABOUT THE GST (HST)

Five important things you need to know about the GST are:

1. you should always apply for personal credits, and let the CRA tell you no, rather than assuming you won't qualify;
2. even if your self-employment income is under $30,000 annually (the threshold where registration becomes mandatory), you should still consider registering for GST, as you'll be able to recover GST you pay for business supplies;
3. if you are GST registered, make sure you do your required filings (even if you have no business sales, you still need to file or deregister);
4. if you do collect GST from clients, keep careful track of all the GST you pay out (or use the simple method if permitted) to minimize the GST you need to remit to the CRA;
5. if you are obligated to remit GST, don't instead divert the funds to prop up your failing business; the CRA will find you, and GST audits are very easy from the CRA perspective compared to income tax audits, because there's very little room for grey areas.

Canadian Taxes A to Z (2018): "F" is for Fraud

Today's instalment of Taxes A to Z brings us to the letter F. F is for Fraud. Six letters down, 20 to go!

WHAT TAX FRAUD REALLY MEANS

You occasionally hear the words "tax" and "fraud" used together, but more common is "tax evasion." Fraud is a very broad term, encompassing any deception intended to result in financial or other gain. It's probably the best umbrella term covering everything and anything intentionally intended to cheat the tax system. 

The reason you don't see the F word all the time in the tax context is because it's already used in the Criminal Code (Code) for the big C criminal offence of fraud. According to s. 380 of the Code, fraud over $5000 dollars can net you 14 years in prison! That's a lot of heavy time by criminal offence standards. By comparison, tax evasion under s. 239 of the Income Tax Act (ITA) can only net you 5 years imprisonment at most. 

WHY TAX CHEATS CAN BE CRIMINALLY PROSECUTED

What most people don't know is that tax fraud can be prosecuted under s. 380 of the Code, instead of s. 239 of the Income Tax Act, exposing accused to almost three times the penal jeopardy!

I spent the first few years of my legal career as a Federal Crown with the Revenue Prosecutions Unit of the Department of Justice, and worked on hybridized cases where sometimes we'd proceed jointly under the Code and ITA if investors were also defrauded along with the government, lots of money was at stake, or we needed to make a mutual legal assistance request work in a foreign state like Switzerland who would share information with us only if the allegations were criminal fraud, but not tax evasion (which at least at the time it perceived as an administrative matter). 

WHY YOU CAN'T ACCIDENTALLY COMMIT TAX FRAUD

Fortunately for those worried about getting a little too creative in preparing their taxes, both fraud (under the Code) and tax evasion (under the ITA) are mens rea offences, meaning to convict a court needs to find the accused actually intended to defraud or evade, and wasn't just careless with his taxes. This can get a bit nuanced, since intent can be implied from all the circumstances, but mere tax avoidance isn't a crime - even if the CRA later rules that what you believed to be legitimate avoidance isn't permissible.

Tax evasion is thus distinct from all other offences under the ITA, which don't require proof of mens rea. They generally are "strict liability" offences, meaning that the burden of proof shifts to the accused to demonstrate "due diligence" once the government has established the actus reus (the basic facts underpinning that the offence took place). 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "E" is for Employment Income

Today, E for for Employment Income. Five letters down, 21 to go!

WHY THE DIFFERENCE BETWEEN EMPLOYMENT & SELF-EMPLOYMENT IS SO FUNDAMENTAL

The concept of what is, and is not, "employment" income may be the most fundamental tax concept of all for most Canadians. When I was an employed lawyer I couldn't deduct much against my employment income, because my employer was supposed to be paying for all my expenses. Once I became self-employed, I could claim all sorts of deductions like home office use or computer purchase.

Confusing the employment income and self-employment income concepts can lead to great mischief at tax time. In a world of increasing "independent" contractors, you need to avoid the CRA coming after you claiming that you are in fact an employee not entitled to deductions, or that you're an employer with employees who isn't taking source deductions like you are supposed to be doing. 

The four principal factors examined by the CRA in determining employee versus self-employed status are:

1. control;
2. chance of profit/risk of loss;
3. integration (with larger business unit);
4. tool & equipment ownership and repair.

Many perceive this difference between employed and self-employed deductions to be unfair, but like a lot of things under the Income Tax Act the best that can be said is that's just the way it is.

Regardless of whether you are an employee or self-employed, you need to be working from a position of knowledge to take advantage of all the deductions that are available to you. 

SELF-EMPLOYMENT LOSSES CAN OFFSET EMPLOYMENT INCOME

An example of what you need to know is that sometimes being both employed and self-employed can work in your favour. Even if you only earn a small amount of self-employment income, you can usually apply any losses you incur in self-employment against employment earnings to reduce you overall net income.

There are technical rules around how great those losses can be, but what this practically means is that you may be better off reporting a few thousand dollars in side income, rather than just "forgetting" about it and hoping no one notices because it is so small.

DO I NEED AN ACCOUNTANT & WHAT IS AN ACCOUNTANT

Some employees may not need a designated accountant to do their taxes for them (though it's never a bad idea), whereas most of the self-employed definitely need a designated accountant.

Everyone should be very clear on the reality that the simple term "accountant" (without any initials attached at the end) does not imply any designation (unlike lawyer, where we prosecute you if you use the term without being properly qualified). You should look for an accounting firm with a designation, as those without designations may not carry any insurance and definitely aren't subject to professional regulation. Accountants in Canada are increasingly switching to a common CPA designation (from CA/CMA/CGA). 

AT LEAST USE GOOD TAX PREPARATION SOFTWARE

Everyone, employee or self-employed, can benefit from good tax preparation software. For years now I've been using http://www.taxfreeway.ca/, which I love. It's cheap, they offer great support (I've emailed them esoteric questions 24 hours before tax deadline and received an answer within the hour), and Mac and iPad versions are available (in addition to Windows). No, they aren't paying me to say that, they just deserve some appreciation. 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "D" is for Deemed Disposition

Today, D is for Deemed Disposition. Four letters down, 22 to go!

THE MAGIC OF SELLING WITHOUT SELLING

When can you be considered to have sold property, when you didn't actually sell it? Under the Income Tax Act, of course!

You might know that you're subject to capital gains tax (or can claim a capital loss) when you sell a piece of property, and that property has either gone up in value from its original purchase price, or dropped in value below its depreciated (capital cost allowance) value.

What not everyone realizes is that such gain or loss tax rules kick in for many circumstances when you don't actually sell the property. These are called deemed dispositions.

THE FIVE DEEMED DISPOSITION SITUATIONS

Such sales that aren't really sales apply in principally five situations.

1. You transfer securities from a non-registered investment account to a registered account like an RRSP, RDSP, TFSA or RRIF. Deemed proceeds will be market value of securities at time of transfer. Thus trying to save tax can cost you tax.

2. You make a gift of the property to someone else. Deemed proceeds are fair market value of property at time of transfer. Thus a "free" gift could become very costly for the giver.

3. You change the property's use from personal to business, or from business to personal. For example, you change a personal residence into a rental property. Thus trying to generate more income leads to paying your existing income in taxes.

4. You die. All of your capital property is deemed to have been disposed of at the time of your death.

5. You cease to be a resident of Canada. While some people go to a lot of effort to sufficiently cut their ties to Canada so as to be free of its tax regime, that cutting could cost them dearly in deemed disposition taxes.

TOP REASON TO AVOID DEEMED DISPOSITIONS

The reason you need to be very wary about triggering deemed dispositions is that you could get hit with a huge tax bill that might have been deferred until the much later date of the time you actually sell the property (and thus have cash available to pay all those taxes). 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.

Canadian Taxes A to Z (2018): "C" is for Capital Cost Allowance

Today, C is for Capital Cost Allowance. Three letters down, 23 to go!

WHY DID THEY HAVE TO INVENT THE CCA TERM

Capital Cost Allowance (aka CCA to its friends) is a perfect example of why the drafters of the Income Tax Act sow needless confusion by using three legal words to describe one accounting term: depreciation. Because that's exactly what CCA is, tax deductible depreciation which will reduce your net income due to you having purchased capital items for the purpose of earning income. 

It takes long enough for any of us to learn accountant-speak. Why should we then have to learn yet another language: tax law-speak? Because the government says so, full stop. 

Don't ask me why the government in its wisdom decided to change the name of depreciation to CCA for tax purposes. There was probably some meeting in some Ottawa boardroom at the Department of Finance (bereft of even coffee and muffins, because we in government were always told such things were an extravagance, notwithstanding other waste). A few plain language folks with common sense may have been fighting a rear guard action in defence of using the term "depreciation," but alas the Assistant Deputy Minister had his heart set on Capital Cost Allowance. He thought it sounded modern, and sexy, and unique. And so CCA was born. 

WHY CAPITAL VERSUS OPERATING EXPENSES ARE DEBATED AT THE TAX COURT

You'll mostly have two kinds of expenses to claim on your tax return to reduce your self-employed income: operating and capital. Operating expenses you can usually claim at 100% in the tax year they're incurred. They constitute things like rent, utilities, pencils and salaries. 

By contrast, capital expenses need to be depreciated, because they're supposed to last you for longer than just the year you bought them in. Vehicles, computers and desks are all capital items.

There are lots of CRA fights over whether expenses are capital or operating. Fights that can means hundreds of thousands of dollars of difference in business taxes payable. Fight caused by issues like the taxpayer claiming engine replacement in mining trucks as an operating expenses fully deductible in the year incurred because it was simply a repair, and the CRA claiming them an improvement which required multi-year CCA. 

WHY BOATS OUTLIVE PLANES WHICH OUTLIVE CARS

The most important thing to know about CCA is that it varies greatly by "class" of asset. For instance, you get 15% per year CCA on boats placed in Class 7, an improved 25% on aircraft residing in Class 9, and a princely 30% on automobiles. The theory is that planes last longer than cars, but shorter than boats. Not sure if that's true, but that's what the government's decided, so we're stuck with it. 

WHY BUYING IN DECEMBER IS ALWAYS BETTER THAN JANUARY

The second most important thing to know about CCA is that you only get to claim half of it in the year you acquire the capital item. This is known as the Half Year Rule. So that 25% deduction on your new Learjet becomes only 12.5% in its first year. Thus picking up capital items in December (where you can effectively claim for six months but only own for one month) is a far better idea than in January (where you're again stuck with a six month claim, even though you'll own for the entire year). 

WHY DEFERRING TAX IS BETTER THAN PAYING IT

Last in the CCA greatest hits list is that you need to beware of "recapture," where if you sell a capital item for a value greater than its remaining undepreciated value, you'll have to pay tax on the difference between the remaining undepreciated value and the sale price up to a maximum of the original acquisition price.

This can be a particularly touchy issue for buildings. While they depreciate at a few percent per year, in reality their resale price may keep going up and up, meaning you'll pay tax later on all that depreciation you've claimed - but deferring tax until later is still a good thing, even if you can't avoid ultimately it. 

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.