In a June 11, 2018 Court of Queen’s Bench for Saskatchewan case, at issue was whether a $500,000 settlement upon separation was taxable and whether the dispute over its tax status rendered the settlement void. The settlement did not concern a division of marital assets but, rather, rights to income and property forgone or promised during the term of the marriage.
In particular, the recipient (Mr. R) was primarily seeking payment in respect of insufficient remuneration received while working in the spouse’s family business during the marriage, lost opportunity to invest in the business’s agricultural land, lost opportunity to earn income as a heavy-duty mechanic, and lost inheritance which was allegedly tied to his service in the family business.
An agreement was reached for the sum of $500,000 to be paid to Mr. R “in full and final satisfaction of his claims”. Mr. R argued that the amount should be tax-free; treated similar to the receipt of inherited property or a matrimonial property settlement. The defendants argued that it should be fully taxable to the recipient and deductible against corporate income similar to a settlement for underpaid wages. While both parties gave clear evidence as to what was on their mind when settling, the Court noted that their evidence fell short of indicating that their positions and intentions were clearly communicated to the other. Since the effect of the tax status of the payment was significant, and since the Court determined that there was uncertainty and no clear agreement in this respect, no binding settlement was determined to have been reached.
Whenever a settlement is being negotiated, ensure there is mutual understanding on the tax treatment to prevent potential nullification.
In a May 8, 2018 Tax Court of Canada case, the Court reviewed whether the taxpayer was earning insurable and pensionable amounts related to her work at a health care clinic for 2015 and part of 2016 up to her termination. Classification as an employee would subject the business to various CPP, EI, and other withholdings for past and future years. Such classification could also subject the payer to other significant non-withholding liabilities such as employment benefits, wrongful dismissal, vacation pay, and sick pay.
The taxpayer’s work commenced at the clinic in 2008, at which point both the taxpayer and the clinic agreed that the taxpayer was an independent contractor. She originally provided clerical services and over time took on additional duties which included acting as a chiropractic and physiotherapist assistant and a Pilates instructor. In 2016 the taxpayer realized she should have been collecting and remitting GST/HST on services performed for the clinic. The taxpayer filed a voluntary disclosure related to this GST/HST matter. At this point the taxpayer and clinic decided that the taxpayer and similar workers should become employees.
Taxpayer determined to be an employee
The Court stated that while it appeared that the taxpayer believed she was an independent contractor (evidenced, as an example, by her efforts regarding GST/HST collection), the objective reality must be examined. The Court looked to the following factors to find that the individual was an employee:
- Control – With the exception of the Pilates sessions, the services were supervised either directly by the payer or by a referring health professional, as required by the legislation governing the services she provided. The taxpayer had no discretion as to how those services were to be offered and followed the exercise routine established by the health professional. The taxpayer was in a subordinate position. While the taxpayer had some autonomy (she was not required to be at the clinic if no appointment was booked), there were other restrictions on her. She was required to operate under the clinic brand and was not allowed to operate out of her home studio when seeing clinic patients. While there was a relaxed work culture at the clinic, the ultimate authority rested with the owner of the clinic. This indicated an employment relationship.
- Ownership of Tools – The clinic owned the equipment used by the worker in addition to bearing the costs associated with the equipment, consistent with employment status.
- Chance of Profit and Risk of Loss – The worker was paid an hourly rate for clerical work and a percentage of client billings for work as an assistant and Pilates instructor. Apart from the hourly rate, the Court found that the earnings were primarily a result of the success of the clinic, the flow of patients, and referrals received. Likewise, the risks borne by the taxpayer were no different than an ordinary employee whose future is tied to the success or failure of the business. While the taxpayer did pay for additional training, it was not necessarily indicative of a contractor relationship as ambitious employees may take similar steps to advance their career. The clinic was responsible for mishaps or liability issues – the taxpayer was not required to maintain any type of insurance coverage. Finally, the taxpayer was not expected to actively seek out clients as they were provided in a regular and predictable fashion through referrals by the clinic. The fact that the taxpayer could seek out clients to see at her home studio was not highly relevant. This weighed in favour of employment.
- Integration of Work into Payer’s Business – While the taxpayer had a wide latitude with respect to her Pilates sessions, the Court found that this was ancillary to the health services provided by the clinic, which was fully integrated with the clinic. The Court stated that she could not have gone out and “hung out her own shingle.” The owner of the clinic conceded that to the outside world the taxpayer would have been perceived to be an employee as, for example, the taxpayer was referred to as “staff” and attended office functions and parties. This indicated employment status.
It appeared that the taxpayer was led to believe that she could be an independent contractor if she agreed and chose to do so. However, the Court found that the express intention of the parties as to the nature of their relationship was fundamentally flawed from the beginning and should be disregarded.
The Court determined that the taxpayer was an employee, earning insurable and pensionable amounts for the years in question.
Even though there is a clear understanding between the worker and the payor/business that services will be performed as an independent contractor, the reality and conditions of the working relationship must be examined to determine if it truly is an independent contractor relationship. Consider reviewing terms of worker engagement with a professional.
A CRA communication dated March 7, 2018 provided updated commentary on taxable benefits arising from the personal use of a business aircraft.
CRA categorized the types of flights into three groups, as follows:
- Mixed-use flights – If a shareholder or employee takes a flight which has a clear business purpose, they would not generally be subject to a taxable benefit. An individual’s purpose is a question of fact. If others take the same flight (such as a non-employee spouse or child) for purely personal purposes, the taxable benefit would be equal to the highest priced ticket available for an equivalent commercial flight available in the open market for the accompanying individual(s).
- Full personal use flights – Where there is no business purpose to the flight, the shareholders or employees will be considered to have received a taxable benefit equal to the price of a charter on an equivalent aircraft for an equivalent flight in the open market (split amongst relevant individuals on the flight). Limited exceptions may apply where an open market charter is not a viable option.
- Full personal use by non-arm’s length persons – For shareholders or employees who do not act at arm’s length with the business (such as an owner who controls the business), where the aircraft is used primarily for personal purposes relative to the aircraft’s total use, the taxable benefit will equal their portion of the aircraft’s operating costs plus an available-for-use amount. The available-for-use amount is computed as the original cost multiplied by the prescribed interest rate for the percentage of personal usage. The available-for-use amount on leased aircrafts is based on the monthly leasing costs of the actual usage multiplied by the proportion of personal usage.
Taxable benefits in respect of passengers that are non-employee family members or friends would be assessed on the shareholder or employee.
If employees are using a business aircraft for personal use, attention should be paid to whether employment benefits are being properly calculated and reported.
CRA has required PayPal to disclose sales and other transaction records for Business Account Holders from January 1, 2014 to November 10, 2017. It is expected CRA will review records for unreported sales. For more details, see https://www.paypal.com/ca/smarthelp/article/cra-information-request-faq3755
On an unrelated note, you can now also pay your taxes via PayPal. For more information, see https://www.canada.ca/en/revenue-agency/services/about-canada-revenue-agency-cra/pay-credit-card.html