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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.


Marijuana: A Growing Industry

As the legislation to legalize marijuana for non-medical purposes works its way through parliament (Bill C-45 entered the Senate phase on November 27, 2017), producers, vendors, regulators, enforcement, and potential customers are seriously considering the implications. Although it has been expected legalization would occur by July, 2018, the timeline is not certain (as the Senate has recently been scrutinizing draft legislation and other stakeholders have noted concerns).

Where are we at from a tax perspective?

On December 11, 2017, the federal and provincial/territorial Finance Ministers reached an Agreement in principal regarding the taxation of cannabis for the initial two years after legalization. This agreement followed a consultation with stakeholders.

The Agreement noted that in addition to general sales taxes, the combined rate of all federal and provincial/territorial cannabis-specific taxes will not exceed the higher of $1 per gram, or 10% of a producer’s selling price. Of the tax generated, 75% will go to provincial/territorial Governments, while 25% will go to the federal Government. The federal portion of cannabis excise tax revenue will be capped at $100 million annually with the excess going to the provinces and territories.

The exact allocation, rates, and method for taxation are dependent on the final legislation.

Where will it be retailed?

While retailing cannabis will vary across the country, many provinces are currently looking to either sell, or at least regulate sales through provincial liquor boards or commissions.

For example, in Ontario, the Liquor Control Board of Ontario (LCBO) itself will oversee the sale and distribution of recreational cannabis through a subsidiary corporation. Standalone stores, which would not also sell liquor, will be set up and online distribution will be made available. Approximately 150 standalone locations are expected to be open by 2020.

In Alberta, in-person sales are planned to occur through private corporations but regulated provincially, while on-line sales will be conducted directly by the province.

Most provinces/territories are still working out the details.

Getting compliant?

CRA has significant, and rapidly improving tools for detecting the underground economy. In addition, they have methods for estimating yields and unreported income having to do with grow operations.

If one wanted to get compliant and onside with CRA, a voluntary disclosure may be made. However, it is important to note that the Voluntary Disclosure Program is changing March 1, 2018 such that reduced relief will apply in some cases, and no relief will be available in others.

Monitor provincial/territorial regulations to determine if your industry will be impacted.