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Reasonable Automobile Allowances: GST/HST Claim

A travel allowance paid to an employee for the use of their personal vehicle for business purposes will be non-taxable if it is reasonable.

Where such reasonable allowances are paid, an input tax credit (ITC) may be claimed by the employer. The ITC is computed as the imputed GST/HST in the allowance, without adjustment for the fact that some costs likely did not attract GST/HST. In non-harmonized provinces/territories (such as Alberta and B.C.), the ITC would be 5/105 of the allowance. The ITC in a harmonized province is different. For example, in Ontario, with 13% HST, the ITC would be 13/113 of the allowance. Other HST provinces would apply this formula to their respective rate.

In a November 10, 2017 Tax Court of Canada case, CRA denied ITCs of $4,935 related to motor vehicle allowances paid to employees that were also shareholders. CRA argued that the allowances were not reasonable.

Taxpayer wins

The allowances were based on the maximum per kilometre rates that the employer could deduct. The accounting for the allowances was complicated by the use of fuel cards provided and paid by the customer of the taxpayer. However, a detailed review of the accounting records demonstrated that:

  • detailed logbooks of business and personal driving had been maintained;
  • allowances were paid for business kilometres only, with careful tracking of personal use;
  • fuel paid by the corporate customer had been charged back to the taxpayer; and
  • the allowances paid to the shareholder-employee were effectively reduced by the customer’s fuel payments.

 

Although the accounting for the allowances was quite complicated, the Court concluded that it complied with the law and ensured the employees received reasonable allowances limited to business driving. The ITCs were, therefore, properly claimed.

If paying reasonable allowances to employees, consider claiming an input tax credit in respect of the payment.


Back into Blogging

Tax season ended a few weeks ago, and we’re catching up on everything, including social media! We hope to get back into blogging and tweeting more regularly soon.

We are also proud to announce that for a fourth consecutive year we were chosen Favourite Accountant by the readers of Burnabynow newspaper in the Best of Burnaby 2018 issue! Thank you again, Burnaby!

 


Commission Paid to a Corporation: Any Issues?

Consider the successful real estate or insurance agent, the financial product vendor, the area sales representative, or any other person earning commission income. One day they are asked, if they ever considered running their activities through a corporation as opposed to providing the services personally. There are definitely some valuable possibilities, but there are dangers too.

In a July 11, 2017 Technical Interpretation, CRA opined that whether a corporation is actually carrying on a business and earning commission income is a question of fact and requires more than a mere assignment of income.

CRA noted that “if insurance agents, realtors, mutual fund salespersons, or other professionals are legallyprecluded from assigning their commissions to a corporation, then the commission income must be reported by the individuals, and cannot be reported through a corporation, regardless of the documentation provided”.  Care must be taken to document that it is truly the corporation providing the services and not just an individual. Commission contracts identifying the corporation as the service provider rather than simply the individual would be valuable.

While some professionals earning commission income are legally prohibited from incorporating (due to the provincial/ territorial laws), others may be practically precluded from doing so due to, for example, a refusal by customers or key suppliers to contract with a corporation.

If a corporation does earn commission income, one must ensure that the corporation would not be considered a personal services business (PSB). A PSB is essentially an individual acting as an employee for a third party, but for the presence of their own personal corporation as an intermediary. For example, consider John, an employee of a car manufacturer (CarCo). If John set up a new corporation, had CarCo pay his corporation, but kept on doing the same things under the same terms and conditions as his previous employment contract, he would likely be conducting a PSB. If classified as a PSB, the worker and their corporation could be subject to substantially higher taxes, plus the denial of several types of deductions.

Take care when incorporating a business to earn employment-like commissions. Talk to an advisor to determine if it is right for you.


Business Failure: Personal Liability for Corporate Tax Debt

There are special laws which hold a director personally liable for certain amounts that their corporation fails to deduct, withhold, remit, or pay. Most commonly, these amounts include federal sales tax (GST/HST) and payroll withholdings (income tax, EI and CPP). It does not generally include normal corporate income tax liabilities.

In a June 22, 2017 Tax Court of Canada case, at issue was whether the director of a corporation could be held liable for $66,865 in unremitted source deductions, related penalties, and interest six years after the corporation went bankrupt. The taxpayer presented various defenses.

Two-Year Limitation

In general, CRA must issue an assessment against the director within two years from the time they last ceased to be a director. The taxpayer argued he should not be liable since he was forced off the property and denied access by the Trustee in bankruptcy more than two years before the assessment. However, the Court determined that only once one is removed as director under the governing corporations act will such liability be absolved. In this case (under the Ontario Business Corporations Act), bankruptcy does not remove directors from their position. As the taxpayer never officially ceased to be a director, the two-year period had not commenced, and therefore, had not expired at the date of assessment.

Due Diligence

Liability can be absolved if the director can show due diligence. In this case, the director argued that he was waiting for large investment tax refunds to fund the liability, and also, entered into a creditor proposal so as to enable the corporation to continue to pay off the liability. However, the Court noted that diligence was required to prevent non-remittance rather than simply diligence to pay after the fact. As there was insufficient proof to demonstrate diligence at the prevention stage, this argument was also unsuccessful.

With All Due Dispatch

Finally, the taxpayer argued that the issuance of the assessment 6 years after bankruptcy was inordinate and unreasonable, thereby contravening the requirement to assess with all due dispatch. The Court, however, found that this requirement related to the assessment of a filed tax return as opposed to the assessment of director liability. In particular, the law allowing CRA to hold the director liable states that “the Minister may at any time assess any amount payable”. This defense was also unsuccessful.

The Minister’s assessment of liability to the director was upheld.

Ensure that the charging, collecting, and payment of GST/HST and source deductions is always done properly. Not doing so can result in personal liability for the director. Also, note that CRA has the ability to directly garnish a corporation or person’s bank account for such amounts, even if an objection has been filed.