Understanding the Basics of VDP

The first thing to understand about VDP is that you have to come forward before you hear from the CRA. This is a key factor, because if they have already contacted you then it can be argued that it’s not entirely voluntary. Beyond that, there are a number of other criteria that every application has to meet in order to be eligible. It’s also important to understand when you should apply to the VDP rather than for a simple T1 adjustment.

Completeness

The application has to include every piece of documentation and information necessary to resolve the issue. You have to disclose every taxation year that might be affected by the error or omission, and include each return, every form, and all the schedules involved.

Age

The big difference between the VDP and a T1 adjustment has to do with the year or years you are applying for. A T1 adjustment applies to the current taxation year, while you can only apply for VDP when you’re dealing with information that’s at least one year past its filing due date.

Penalty

In order to make an application you also have to be facing at least a potential penalty. This part is simple; you don’t need relief when there isn’t a penalty.

Payment

Finally, you need to include a payment of the estimated tax outstanding. This is not a way to gain relief from your existing tax debts, but only a way to help offset additional penalties that would be applied over and above your existing liabilities. Taxpayers who cannot make payment in full can submit a request for a payment arrangement.

Changes to the VDP

In December of 2017, the Honourable Diane Lebouthillier, then Minister of National Revenue, announced a series of changes to the program in order to make it fairer for the average Canadian. In addition to introducing the payment requirements referenced above, these changes also split the program into two: a General Program for taxpayers seeking assistance resolving unintentional errors and omissions, and a Limited Program for those who had intentionally sought to avoid their tax liability. In addition to the introduction of the payment requirement and the Limited Program, the revised program also included the following changes:

Relief Cancellation

Under the new program, the CRA is empowered to cancel a taxpayer’s relief if it subsequently determined that the taxpayer provided an incomplete application due to misrepresentation of their circumstances.

Anonymity

In the first iteration of the program, taxpayers and their authorized representatives were able to make disclosures without revealing names. That shield of anonymity is no longer present under the new program that came into effect on March 1, 2018.

What Kind of Relief is Offered?

The VDP offers three basic forms of relief, all of which are available to taxpayers on the General Program track. Those on the Limited Program track receive less relief, but they do receive enough relief that it is worth entering the program regardless of which track any particular taxpayer qualifies for. The base types of relief are:

Criminal Prosecution Relief

All taxpayers accepted into either track of the current program are eligible for relief from prosecution on criminal tax evasion charges. This is probably the biggest factor.

Penalty Relief

Taxpayers on the General Program are eligible for penalty relief as well as relief from criminal prosecution. Those on the Limited Program will only be eligible for relief from gross negligence penalties.

Interest Relief

General Program taxpayers are also eligible for partial interest relief. However, those on the Limited Program are not eligible for any interest relief.

So How Do You Know Which Track You Qualify For?

While most individual taxpayers who qualify for the VDP are eligible for the General Program, there are cases where a person may only be able to take advantage of the Limited Program. The core differentiation depends on two factors: Intention and scale. In general the Limited Program applies when there is an element of intentional conduct, or when the application is made by a large corporation, one with over $250 million of gross revenues.

Looking at the case of individual taxpayers, there are four factors that CRA uses in order to evaluate whether to offer a taxpayer access to the General Program or insist that they only disclose their tax information under the Limited Program:

• Amount: In general, the CRA is more likely to consider the Limited Program for cases where larger amounts of money are involved.
• Duration: The CRA also considers the number of years the taxpayer was out of compliance before making a decision.
• Concealment: Whether the taxpayer made any efforts to conceal the non-compliance from the CRA will also be taken into account.
• Sophistication: The taxpayer’s knowledge and understanding of applicable tax codes is also a factor. The more sophisticated the taxpayer, the less likely they are to make a simple mistake out of ignorance.

Conclusion

While the VDP can be a very powerful tool for anyone with past tax issues that they are looking to deal with, it is not something you should undertake lightly. It is a serious matter and you need to contact an accountant or tax professional before moving forward. Take the time to put yourself in the best place to bring yourself back into compliance by getting the help and guidance you need before contacting the CRA.

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As expected, no changes were made to tax rates generally, although the phase-out threshold for the small business rate for eligible corporations was increased. Some of the key tax changes announced today, which take effect on varying dates, are summarized below. Please see the Department of Finance Canada’s budget documents for details of these changes.

Corporate and business tax changes

Small business phase-out threshold increased – Under current rules, Canadian-controlled private corporations (CCPC) are eligible for a lower corporate income tax rate on their first $500,000 of business income. Access to the lower rate begins to be phased out when taxable capital exceeds $10 million and is fully phased out at $15 million. The budget proposes to increase these threshold amounts to $10 million and $50 million respectively, allowing more medium-sized businesses to benefit from the small business rate.

Investment tax credit for carbon capture, utilization and storage – The budget introduces a refundable investment tax credit for eligible carbon capture, utilization and storage expenses. The credit rates range from 37.5 to 60 per cent through 2030 and lower rates apply in later years.

New investment tax credit for clean technology – Budget 2022 announces that the government will engage with experts to establish an investment tax credit of up to 30 per cent, focused on net-zero technologies, battery storage solutions and clean hydrogen. Details of the investment tax credit will be provided in the 2022 fall economic and fiscal update.

Clean technology tax incentives – CCA classes 43.1 and 43.2 would be expanded to include air-source heat pumps and their manufacturing would also be eligible for the reduced tax rate for zero-emission technology manufacturing or processing activity proposed in last year’s budget.

Critical mineral exploration tax credit – The government proposes a new 30 per cent credit for renounced exploration expenses that will be incurred as part of an exploration project that targets specified minerals used to produce batteries and magnets. Eligible expenses would not benefit from both the proposed credit and the existing mineral exploration tax credit.

Flow-through shares for oil, gas and coal activities – The government proposes to eliminate the flow-through share regime for oil, gas and coal activities by no longer allowing related exploration or development expenditures to be renounced to a flow-through share investor.

Measures for financial institutions – Budget 2022 proposes to increase corporate income tax rates for banking and life insurance groups to 16.5 per cent (from 15 per cent) on taxable income over $100 million. These companies would also be subject to a temporary Canada Recovery Dividend, a one-time, 15 per cent tax on taxable income above $1 billion for the 2021 tax year, which would be payable over five years. Finally, specific legislation will be introduced to prevent taxpayers from realizing artificial tax deductions using hedging and short selling arrangements.

Inter-generational transfers: Bill C-208 follow-up – The government plans to consult with stakeholders on how the rules introduced in Bill C-208 should be amended to allow for genuine inter-generational business transfers while protecting tax system integrity. New legislation to address these issues is expected to be tabled in the fall after the consultation.

Substantive CCPCs – The budget proposes targeted amendments that would prevent taxpayers from manipulating the status of their corporations in an attempt to avoid being classified as a CCPC to achieve a tax deferral on investment income earned in their corporations.

Scientific Research and Experimental Development program review – The government intends to review this program to ensure that it is effective in encouraging research and development and to explore opportunities to modernize and simplify it, including the eligibility criteria.

Patent box review – The government will consider and seek views on the suitability of adopting a patent box regime in Canada.

Rollover for small business investments – The government is reviewing whether the tax system delivers adequate support for investments in growing businesses. In particular, the review will examine the capital gain deferral for small business investments.

Employee ownership trusts – Based on feedback from consultations, the budget proposes to create rules for employee ownership trusts to support employee ownership of a business. The government will continue to engage with stakeholders as it develops and finalizes the rules.

Personal tax changes

Tax-Free First Home Savings Account introduced – Budget 2022 proposes to introduce a new Tax-Free First Home Savings Account that would allow prospective first-time home buyers to save up to $40,000. Like an RRSP, contributions would be tax-deductible and withdrawals used to purchase a first home, including investment income, would be non-taxable, like a TFSA. A number of additional rules will apply.

First-Time Home Buyers’ Tax Credit increased – Budget 2022 proposes to double the amount for this credit to $10,000, for a maximum credit of $1,500.

Home Accessibility Tax Credit increased – The budget proposes to double the qualifying expense limit of this

credit to $20,000, for a maximum tax credit of up to $3,000 for eligible accessibility renovations or alterations.

Multi-generational Home Renovation Tax Credit introduced – To support multi-generational families living under one roof, this new credit would provide up to $7,500 for constructing a secondary unit for a senior or an adult with a disability.

Residential property flipping rule announced – To ensure profits from flipping properties are fully taxed, any person who sells a residential property they have held for less than 12 months would be fully taxed on their profits as business income. Exemptions would apply if the sale is for certain reasons, such as a death, disability, the birth of a child, a new job or separation. The government plans to release draft legislation for consultation before finalizing these rules.

Labour mobility deduction for tradespeople introduced – The government proposes to provide a tax deduction for up to $4,000 per year in eligible travel and temporary relocation expenses to eligible trades-persons and apprentices.

Medical expense credit for surrogacy and other expenses – Eligibility for this tax credit would be extended to:

• medical expenses related to a surrogate mother or a sperm, ova or embryo donor, including expenses
• reimbursed to a surrogate for in vitro fertilization expenses
• certain fees paid to fertility clinics and donor banks in Canada
• Minimum tax for high earners – The government plans to examine a new minimum tax regime targeting high-income Canadians and to release details on a proposed approach in its 2022 fall economic and fiscal update.

International and other income tax changes

OECD Pillar 1/Pillar 2 update – Canada is one of 137 members of the Organization for Economic Co-operation and Development (OECD) that have joined a two-pillar plan for international tax reform. In the budget, the government outlined next steps. On Pillar 2, which proposes a global minimum tax, the budget papers set out a detailed outline of a consultation that ends July 7, 2022.

Other international tax announcements – The government plans to implement reporting rules based on the OECD’s model rules for reporting by digital platform operators with respect to platform sellers. Withholding tax changes will be introduced to deal with coupon stripping arrangements.

General anti-avoidance rule (GAAR) developments – The government intends to expand the GAAR so it applies to situations where unused tax attributes are created. The government will conduct a consultation on the GAAR over the summer with a goal to release tax legislation by the end of 2022.

Other income tax changes – Proposed changes to other income tax rules include:

• increasing the disbursement quota for charities to 5 per cent (from 3.5 per cent), among other administrative changes
• improving the operation of the tax rules for charitable partnerships
• requiring financial institutions to report the fair market value of RRSPs and RRIFs they administer
• confirming that the government intends to follow through on a long list of outstanding income tax and
• other initiatives previously announced (while generally providing no further updates)

GST/HST and other indirect tax changes

Targeted indirect tax measures – Among this budget’s indirect tax changes, the government announced plans to:

• allow additional nurse practitioners to qualify for the expanded GST/HST health care rebate by eliminating the geographical restriction for nurse practitioners
• make all assignment sales of newly constructed or substantially renovated residential housing taxable for GST/HST purposes so that the tax would apply to the total amount paid for a new home by its first occupant
• refine the excise duty framework for vaping products introduced in Budget 2021
• refine the excise duty framework for cannabis products by, among other changes, allowing certain producers to remit the duties quarterly instead of monthly

More news on the budget

*reproduced from https://www.cpacanada.ca/en/news

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What is a Principal Residence?

The conventional wisdom is that a principal residence is simply a term for where you live, but it’s not that simple. While you can only have one principal residence for tax purposes, if you do own multiple homes you do have some latitude when it comes to which one you count as that primary residence provided it meets the necessary criteria. The basic rules are that you have to own the home, reside in it for at least part of the year, and can only claim it for years for which that holds true.

How Does it Work?

Property sales are generally counted as capital gains when it comes to taxation, however the Principal Residence Exemption gives you the ability to legally reduce the amount of tax you have to pay on certain transactions provided you meet the necessary criteria. Note that this is not a one-time exemption, you can claim it a second time in later years if you met the required criteria for both sales.

The basic formula is one plus the number of years you are claiming divided by the total number of years you have owned the property and then multiplied by the amount of the capital gains realised from the sale. What this means is that you benefit the most if you claim the same property as your principal residence for the entirety of your ownership. You can split things up if you have two properties that can both be treated as a principal residence and your ownership overlaps, but you gain the largest benefit by claiming the exemption for the entire time you own a property.

Basically this is a way to ensure you can’t claim the exemption for a particular property for years when you didn’t treat it as your primary residence.

Principal Residence Exemption and Your Spouse

While normally you and your spouse are treated as a unit for purposes of the Principal Residence Exemption in that you can only claim one property between the two of you in most cases, there is an exception. Specifically, each spouse can designate a separate property as principal residence for years before 1982. While it’s still legal, most taxpayers are not able to take advantage of this particular loophole in the law.

Other Criteria

While the basic rules are simple, there are other factors you may also need to take into account when determining PRE eligibility for any property you may own, ranging from the land it sits on to the use to which you put it.

What About the Land?

While the PRE can easily be applied to a single-family residential property of any size, there are limits to the amount of land that qualifies for the exemption. As a general rule, you’re allowed to claim 0.5 hectares along with the residence that sits on it. This means that if you’re selling a family farm, you can only claim the land immediately around the residence. It is possible to apply for an exception to include a larger piece of property but the CRA tends to scrutinize such requests very seriously and rarely applies such exceptions. This is just one of the areas in which an accountant or tax professional can assist you.

How About Income Generating Properties?

The whole purpose of the PRE is to give you a tax break on your primary residence, not on rental properties. This means it does not apply to properties where you live in one unit and rent out the others. It also doesn’t apply to properties bought for flipping purposes even if you live in them for a short period during or after the flip as they are considered inventory.

One case where you can claim an income generating property for the PRE is if you use the property as an Airbnb, or occasionally rent it out in the summer. The key here is that you have to be primarily using the property as a personal residence.

Another situation where you may be able to generate income from your principal residence and still retain eligibility for the PRE is if you are required to move due your or your spouse’s place of employment relocating. You cannot be related to the employer and you can maintain the designation for a maximum of four years. This does require that you write a letter to the CRA, there is no form. The rules here can be quite complex, so always check with a professional.

What About Reporting?

Over the last several years, the CRA has taken an ever-tougher stance on reporting requirements and the PRE is no exception. Under current rules, if you do not report a sale you can be liable for a late filing fee of $100 per month up to a maximum of $8,000. More to the point, this can also cause you to lose the exemption; in which case you would be liable for the full amount of capital gains tax in addition to any penalties. Some people labor under the impression that reporting is not necessary if your principal residence is your only property. That is not the case. This is just one reason why it’s so important to listen to the advice of your accountant and tax professionals.

Conclusion

With property prices rising all the time, getting the most out of your Principal Residence Exemption is becoming ever more important as the years go on. As with so many other tax decisions it is really important to get the details right so you should always check with your accountant before making a decision.

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As far as accounting and tax liability is concerned, the most important thing the federal government does every year is pass the budget, and the 2021 Federal Budget is no exception to this rule. Every business owner needs to be aware of the changes in each federal budget because they directly affect their bottom line. The more you understand what’s going on with the new budget, the more able you will be to work with your accountant to maximise your benefits from the changes to the budget and associated tax laws.

The Pandemic

You cannot understand the changes in the 2021 Federal Budget without considering the context under which it was passed, and that means the COVID-19 pandemic. The pandemic and the associated lockdowns has had a massive impact on every economy in the world and Canada is no exception. Businesses have suffered significant losses, which will translate directly into a reduction of the Federal Government’s tax revenue. However, rather than doubling down to try and claw back more revenue, the Federal Government has decided to accept further reductions in tax revenue in order to help the economy recover from the effects of the pandemic. Thus, many of this budget’s provisions are designed to provide a temporary boost to businesses and the economy.

Highlights of the Budget

In the following sections we will look at some of the highlights of the 2021 Federal Budget as it applies to small businesses in Canada.

Changes to Capital Expensing

In order to help drive the economy, the 2021 Federal Budget has introduced a new $1.5 million immediate expensing allowance for eligible purchases made after April 18, 2021 that will become available for use before 2024. This property must be subject to Capital Cost Allowance rules, and the benefit can only be applied in the taxation year in which the property becomes available for use.

It is impossible to understate the importance of this benefit. It helps level the playing field against foreign competition by ensuring that you can continue to grow your business despite the challenges of the current economic and health care situation.

Note that not all properties are eligible so it is important to discuss any such purchases with your accountant or tax advisor in order to make the best use of it.

More Mandatory Reporting

One thing the Federal Government is doing, is changing the rules around reporting. It only makes sense that in a taxation year when ever more Federal support is available the government is going to take steps to monitor business financial activity more closely. It’s all part of a general push to strengthen the CRA’s anti-avoidance policies.

Reportable Transactions

Traditionally, transaction reporting has been required when the transaction displays two of the hallmarks of an “avoidance transaction,” which basically refers to any transaction that is entered into for the specific purpose of reducing the associated tax burden. It does not mean that you cannot enter into transactions that will reduce your tax burden, only that the transaction must have a primary business purpose other than simply reducing tax liability. The new proposals require reporting when only one of the three traditional hallmarks are present.

These transactions will have to be reported within 45 days of either entering into the transaction or entering into a contract for the transaction. Both the taxpayer and any promoter or advisor who might benefit from the transaction are subject to these rules.

Notifiable Transactions

The new category of notifiable transactions refers to transactions that are either a type that has previously been seen as abusive, or are seen as “transactions of interest.” These are types of transactions that have been previously identified as being worth further investigation for possible tax avoidance abuse.

It’s important to note that these particular transactions are being highlighted in order to provide information to the CRA so that a proper determination can be made. The same reporting rules that apply to reportable transactions also apply here.

Uncertain Tax Treatments

At the present time, there is no requirement to report uncertain tax treatments to the CRA, but the new budget is implementing new requirements to report these treatments when certain conditions are met. Most small businesses do not have to worry about this, as it is only applicable to corporations with over $50 million in assets, but larger corporations do have to pay attention to these new rules.

The best way to deal with these new and more stringent requirements is to ensure that your accountants and tax professionals are kept in the loop throughout the year. You should also be aware that the reassessment period does not start until the transaction has been reported.

Capital Cost Allowances

The 2021 Federal Budget also includes a number of changes to CCA eligibility for various kinds of energy generation and storage equipment. These changes generally reflect the Federal Government’s support of clean energy policies. In most cases, new clean energy generation equipment is being added to Classes 43.1 and 43.2 of the CCA regime while new fossil-fuel equipment is being removed from the same classes.

Other Aspects

There are a large number of other changes in the 2021 budget that reflect the pandemic and the worldwide response to it on both a personal and business level. Some industries have been harder hit than others and the budget contains a number of elements to try and offset those issues as well as others that reflect the current focus on tax avoidance.

For example, the budget contains an additional twelve-month timeline extension for various production tax credits for the film and television industry, often extending the timeline from twenty-four to thirty-six months.

The budget also includes new provisions to clarify the authority of CRA officials in the course of their official duties. Taxpayers are now required to answer questions in the form the officials require and also provide all reasonable assistance to them.

Conclusion

A reading of the 2021 Federal Budget shows a focus on two complementary areas of the economy. On the one hand, the federal government is actively working to provide more resources to businesses to help the economy recover from the ravages of the pandemic. On the other hand, the government is also strengthening its audit policies to help ensure that these tax benefits are not taken advantage of.

This is why it is so important to work with your accountant to develop an effective tax strategy that will allow you to get the most out of these programs without exposing yourself to any unnecessary liabilities.

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