TaxMatters@EY – March 2021

Alan Roth, Toronto

As the 2020 personal income tax return filing deadline quickly approaches, it’s time to reflect on the year that ended and complete your tax return. That means it’s also time for EY’s annual list of tax filing tips and reminders that may save you time and money.

This year, there are new challenges. For example, COVID-19 benefit payments need to be considered and, unlike last year, the April 30 T1 filing deadline has not been extended.

Personal tax filing tips for 2020 tax returns

No matter what, file on time: Generally, your personal income tax return has to be filed on or before April 30. If you, or your spouse or common-law partner, are self-employed, your return deadline is June 15, but any taxes owing must be paid by the April 30 deadline.

Failure to file a return on time can result in penalties and interest charges. Even if you are not able to pay your balance by the deadline, you should still file your return on time to avoid penalties. And even if you expect a refund, you should still file on time in case a future change or assessment results in a tax liability for the year. Filing on time also ensures you receive any benefit or credit entitlements (such as the Canada Child Benefit or GST/HST credit) in a timely manner. Remember, if you wait more than three years after the end of the year to file a return claiming a refund, your right to the refund expires and will be subject to the Canada Revenue Agency’s (CRA’s) discretion.¹

Review your 2019 return: Reviewing your 2019 return and notice of assessment is a great starting point before you complete and file your return. Determine if you have any carryforward balances that may be used as deductions or credits in your 2020 return.

Carryforward amounts could include unused registered retirement savings plan (RRSP) contributions, unused tuition, education and textbook amounts,² interest on student loans, capital losses or other losses of prior years, resource pool balances and investment tax credits.

COVID-19 benefit payments: Payments received in 2020 from various federal, provincial and territorial COVID-19 support programs are taxable and must be reported on Line 13000 of your 2020 income tax return.³ These programs include the Canada Emergency Response Benefit (CERB), Canada Emergency Student Benefit (CESB), Canada Recovery Benefit (CRB), Canada Recovery Sickness Benefit (CRSB) and the Canada Recovery Caregiving Benefit (CRCB).⁴ The amount of each benefit to include on your 2020 income tax return is reported on Form T4A, Statement of Pension, Retirement, Annuity, and Other Income, copies of which you should have received by the end of February 2021 in respect of the 2020 taxation year.

For information about the CERB, see EY Tax Alert 2020 Issue No. 26, Canada Emergency Response Benefit and Work-Sharing Program update. For details about the transition from the CERB to EI and the CRB, CRSB and CRCB, see EY Tax Alert Issue 2020 No. 45, Transition plan for the CERB announced, and TaxMatters@EY, November 2020, Transition from the Canada Emergency Response Benefit. Bill C-4 receives Royal Assent.

If you operated an unincorporated business in 2020 and were entitled to benefits under the federal Canada Emergency Wage subsidy (CEWS), Temporary Wage Subsidy (TWS) or Canada Emergency Rent Subsidy (CERS) COVID-19 relief programs, the amounts are considered to be government assistance and are required to be reported as income on your income tax return. In addition, forgivable loans under the former Canada Emergency Commercial Rent Assistance (CECRA) program and the forgivable portion of loans received under the Canada Emergency Business Account (CEBA) program are taxable. Other financial assistance benefits under a provincial or territorial COVID-19 relief program for your business should also be included in income. These benefits are generally reported on Form T2125, Statement of Business or Professional Activities.

CEWS and CERS benefits are considered to be received (and, therefore, taxable) in the year that includes the qualifying periods to which they relate.⁵ TWS benefits are taxable in the same year the related payroll remittances are reduced as a result of the benefits. Forgivable loans received under the CECRA and the forgivable portion of loans received under the CEBA are taxable in the year in which the loans are received.⁶

For information about the TWS, see EY Tax Alert 2020 Issue No. 24, Federal Wage Subsidy Program. For information about the current CEWS program, see EY Tax Alert 2020 Issue No. 42, Redesign and extension of the Canada Emergency Wage Subsidy. For details on the CERS, see EY Tax Alert 2020 No. 52, Bill C-9 introduced to implement new rent subsidy and amend current wage subsidy, and No. 54, Federal government releases emergency support for commercial property renters and owners: an analysis of the Canada Emergency Rent Subsidy. For further updates on the CEWS, see EY Tax Alert 2020 No. 52 and No. 57, Income tax measures from the 2020 federal Fall Economic Statement.

Home office expenses: In response to the significant number of employees working from home during 2020 as a result of the COVID-19 pandemic, a new temporary flat rate method is available for employees to claim up to $400 for home office expenses on their 2020 T1 return.⁷ Under this method, an employee may deduct $2 for each day they worked from home in 2020 due to the pandemic for a maximum deduction of $400. A partial day worked from home counts as a full day for purposes of this calculation. Other conditions apply.⁸ Under this method, home office expenses that are incurred do not need to be tracked or substantiated and the employer is not required to complete and sign any forms. However, the claimant should have information to substantiate the number of days worked from home if asked at a later date by the CRA. This method may be advantageous to employees who do not incur home office expenses that exceed the $2 daily amount, or for those who prefer a simple approach.

Alternatively, the traditional detailed method may be chosen to deduct specific eligible home office expenses incurred in the course of earning employment income. The types of expenses that may be claimed by employees are very limited, although the CRA has recently expanded the list of eligible expenses to include a reasonable portion of internet access fees. Other conditions apply.⁹

In addition, the employer must complete and sign Form T2200S, Declaration of conditions of employment for working at home due to COVID-19. However, if an employee needs to claim other types of employment expenses in addition to home office expenses (e.g., motor vehicle expenses), or if the employee was normally required to work from home under their employment contract, the employer must complete and sign Form T2200, Declaration of conditions of employment.

The computation of the deductible portion of expenses is calculated on Form T777S, Statement of employment expenses for working at home due to COVID-19, if the detailed method is used and the employee is only claiming home office expenses, or if the employee is claiming expenses under the temporary flat rate method. Otherwise, Form T777, Statement of employment expenses, must be used. Either form must be filed with the T1 return.

For further details, see EY Tax Alert 2020 No. 62, CRA issues guidance on employee home office expenses and Form T2200, and EY’s webcast: Important updates on work from home expenses and Form T2200.

Did you know? Employer-provided reimbursements of up to $500 for all or part of the cost of purchasing personal computer equipment or home office furniture or equipment to enable an employee to work remotely as a result of the COVID-19 pandemic will be treated as a tax-free benefit for the 2020 taxation year (i.e., the employee won’t need to include them in their 2020 income) if the purchases are supported with receipts. For further details, and other CRA administrative positions on the taxation of certain employment benefits for the 2020 taxation year in light of the pandemic, see EY Tax Alert No. 50, CRA update on CEWS and employee benefits.

Automobile standby charge: If your employer provides you with an automobile for both business and personal use, you will be required to include in income a standby charge, which is a calculated taxable benefit representing the benefit obtained for the personal use of the vehicle. Likewise, an operating expense benefit is a taxable benefit that arises if an employer pays the operating costs (e.g., fuel, insurance) that relate to your personal use of the employer-provided automobile. Reduced standby charge and operating expense benefit amounts may be available if the automobile is driven primarily (more than 50%) for business purposes. Under proposed amendments released on December 21, 2020, if you qualified for the reduced charges in 2019, you may qualify for the reduced standby charge and operating expense benefits in 2020 and 2021 if you still have the same employer as you did in 2019. These taxable benefits are reported in box 34 of Form T4, Statement of Remuneration Paid, copies of which you should have received by the end of February 2021 in respect of the 2020 taxation year.

Tax on split income: Legislative amendments, effective for 2018 and later taxation years, have expanded the tax on split income rules to limit income splitting opportunities with certain adult family members for income derived directly or indirectly from a private corporation. Income that is subject to tax on split income is taxed at the highest marginal personal income tax rate and is calculated on Form T1206, Tax on Split Income. For more information on the revised rules, see the February 2018 , February 2020, and November 2020 issues of TaxMatters@EY.

Principal residence sale — reporting required, even if all gains are exempt: Capital gains realized on the sale of your residence may be exempt from tax if the residence qualifies as, and is designated as, your principal residence. No tax is owed, for example, if your residence is designated as your principal residence for each year that you owned it. However, you are required to report the disposition of a principal residence on your income tax return, whether the gain is fully sheltered or not.

The sale of your principal residence must be reported, along with the principal residence designation, on Schedule 3, Capital Gains (or Losses), of your income tax return. In addition, you must also complete Form T2091, Designation of a property as a principal residence by an individual (other than a personal trust). The year of acquisition, proceeds of disposition and a description of the property must be included on the form.

If the gain is fully sheltered, you only need to complete the first page of Form T2091 and no gain needs to be reported on Schedule 3. However, the appropriate box (box 1) still needs to be ticked in the principal residence designation section on page 2 of Schedule 3. If the gain is not fully sheltered, then any capital gain remaining after applying any available principal residence exemption (as calculated on Form T2091) must be reported on Schedule 3.

There is generally a time limit for the CRA to reassess an income tax return. The normal reassessment period for an individual taxpayer generally ends three years from the date the CRA issues its initial notice of assessment. However, if you do not report the sale of your principal residence (or any other disposition of real property) in your tax return for the year in which the sale occurred, the CRA will be able to reassess your return for the real property disposition beyond the normal reassessment period.

T1135 — remember your foreign reporting: If at any time in the year you own certain specified foreign property with a total cost of more than CDN$100,000, you are required to file Form T1135, Foreign Income Verification Statement. This form may be filed electronically. Failure to report foreign property on the required information return may result in a penalty. Failure to file Form T1135 on time may result in a penalty equal to $25 for each day the failure continues, for a maximum of 100 days ($2,500), or $100, whichever amount is greater. More significant penalties may apply if a person knowingly, or under circumstances amounting to gross negligence, fails to file the form. In addition, if Form T1135 is not filed on time or includes incorrect or incomplete information, the CRA can reassess your income tax return for up to three years beyond the normal reassessment period.

Reportable property generally includes amounts in foreign bank accounts and shares or debts of foreign companies, as well as other property situated outside Canada. It does not include property used in an active business, shares or debt of a foreign affiliate or personal-use property.

Capital losses: Capital losses realized in the year may only be applied against capital gains. Net capital losses may be carried back three years, and losses that cannot be carried back can be carried forward indefinitely.

Where capital losses are incurred on certain shares or debt of a small business corporation, they may qualify as business investment losses that may be claimed against any income in the year, not just capital gains.

Pension income splitting: If you received pension income in 2020 that is eligible for the pension income credit, up to half of this income can be reported on your spouse’s or common-law partner’s tax return. Note that amendments, applicable retroactively to 2015 and later years, include amounts received out of a retirement income security benefit (RISB) as pension income eligible for the pension income credit and eligible for pension income-splitting purposes, in certain circumstances.

You’ll reap the greatest benefits when one member of the couple earns significant pension income while the other has little or no income. In some cases, transferring income from a lower-income pension recipient to a higher-income spouse can carry a tax benefit.¹⁰

Home buyers plan: The home buyers’ plan (HBP) permits first-time home buyers¹¹ to withdraw amounts from an RRSP on a tax-free basis, to finance the purchase of a qualifying home. The withdrawal limit was increased from $25,000 to $35,000 for 2019 and later years in respect of amounts withdrawn after March 19, 2019. More than one withdrawal may be made, as long as the total amount of all withdrawals does not exceed $35,000. Generally, all withdrawals must be made in the same calendar year, and the withdrawn funds must be repaid to your RRSP over a period not exceeding 15 years.

Climate action incentive credit: This refundable tax credit is available for 2018 and later taxation years. For the 2020 taxation year, the credit is available to eligible individuals 18 years of age or older who are resident in Alberta, Ontario, Manitoba or Saskatchewan on the last day of the taxation year. For more information, see the “Spotlight on personal tax deductions and credits” section of this article.

File returns for children: Although often unnecessary, in many cases there are benefits to filing tax returns for children. If your children had part-time jobs during the year or have been paid for various small jobs, such as babysitting, snow removal or lawn care, by filing a tax return they report earned income and thus establish contribution room for purposes of making RRSP contributions in the future.

Another advantage of filing a return for teenagers is the availability of refundable tax credits. Several provinces offer such credits to low- or no-income individuals. When there is no provincial tax to be reduced, the credit is paid out to the taxpayer. There is also a GST/HST credit available for low- or no-income individuals over age 18.

Claim all your deductions and credits: Remember to take advantage of the various family-related tax credits that might apply to you. See “Spotlight on personal tax deductions and credits” for details.

…or not: You may be able to increase the tax benefit of certain discretionary deductions if you defer them to a later date:

• Discretionary deductions that may be deferred include RRSP contributions and capital cost allowance.
• Similarly, consider accumulating donations over a few years and claiming them all in one year to increase your benefit from the high-rate donation credit which is available for donations made within the five preceding years.
• Deferring deductions and certain credits makes sense if you are unable to use all applicable non-refundable tax credits in 2020 (and they cannot be transferred), or if you expect to earn higher income in the future.

Capital cost allowance claims: If you are a self-employed individual earning unincorporated business or professional income, you are required to report your income and deductible expenses on Form T2125, Statement of Business or Professional Activities. Likewise, if you earn income from a rental property, your rental income and deductible expenses are reported on Form T776, Statement of Real Estate Rentals. Capital cost allowance (CCA) on depreciable capital property owned may be deducted and claimed on Form T2125 or T776 if the property is available for use to earn business, professional or rental income.

Recent amendments significantly accelerate CCA for such properties until, and including, 2027. Certain properties such as manufacturing and processing machinery and equipment are eligible for full expensing in the year of acquisition, on a temporary basis (up to and including 2023). The accelerated CCA rules apply to eligible property acquired and available for use after November 20, 2018, subject to certain restrictions.

Recent amendments also provide for full expensing of “zero emission” vehicles for eligible vehicles that are purchased and become available for use in a business or profession on or after March 19, 2019, and before 2024, subject to certain restrictions such as a cap on the cost of passenger vehicles.¹² Eligible vehicles include electric battery, plug-in hybrid (with a battery capacity of at least 7 kWh) or hydrogen fuel cell vehicles, including light-, medium- and heavy-duty vehicles purchased by a business. Accelerated CCA deductions will be available for zero-emission vehicles that become available for use between 2024 and the end of 2027. Proposed amendments released on December 15, 2020 expand these rules to include other types of equipment or vehicles that are automotive (i.e., self-propelled) and fully electric or powered by hydrogen. Eligible equipment or vehicles under the proposed amendments must be acquired on or after March 2, 2020 and become available for use before 2028.

For further details on these rules, see EY Tax Alert 2018 Issue No. 40, Federal Fall Economic Statement announces significant acceleration of CCA for most capital investments, and EY Tax Alert 2019 Issue No. 27, CCA acceleration measures enacted as part of 2019 budget implementation bill.

Get a head start on 2021 savings

Early in 2021 is a great time to think of ways to save on your 2021 taxes. Here are some ideas to help you increase your savings in April 2022:

• Contribute early to your RRSP or RESP to increase tax-deferred growth, and to your TFSA to increase tax-free growth. The 2021 TFSA contribution limit is $6,000, and the 2021 RRSP contribution limit is equal to the lesser of 18% of earned income for 2020 and a maximum amount of $27,830.
• Consider tax deferral opportunities using corporations (such as revisiting your salary/dividend/remuneration needs) or other planning opportunities involving corporations. However, keep in mind that legislative amendments, effective in 2018, limit income splitting opportunities with certain adult family members for income derived directly or indirectly from a private corporation. For more information, see the February 2018, February 2020, and November 2020 issues of TaxMatters@EY.
• In addition, legislative amendments limit a private corporation’s ability to benefit from the small business deduction if the private corporation earns too much passive income for taxation years beginning after 2018.¹³ For more information, see the May 2018 issue of TaxMatters@EY.
• Consider income-splitting opportunities such as prescribed-rate loans or reasonable salaries to a spouse or child for services provided to your business.¹⁴  
• If you’re planning on selling an investment or earning income from a new source in the year, consider opportunities to realize and use losses to offset that income.
• Consider converting non-deductible interest into deductible interest by using available cash (perhaps a tax refund) to pay down personal loans, and then borrowing for investment or business purposes.
• If you expect to have substantial tax deductions in 2021, consider requesting CRA authorization to decrease tax withheld from your salary.
• Changes to the stock option deduction rules will generally take effect for stock options granted on or after July 1, 2021. The proposed rules will introduce a $200,000 annual limit on employee stock options that may qualify for the 50% deduction from the amount of the stock option benefit required to be included in employment income. This limit will not apply to stock options granted by Canadian-controlled private corporations (CCPCs) or non-CCPCs with annual gross revenue of $500 million or less. For details, see EY Tax Alert 2020, Issue No. 59, Stock option proposals reintroduced.

Make time for tax planning

When your return is done, you can step back and reflect on your progress toward your financial goals in the year that just ended. It’s a great primer for a meaningful conversation about tax and estate planning.

An estate plan is an arrangement of your financial affairs designed to accomplish several essential financial objectives, both during your lifetime and on your death. The plan should: provide tax-efficient income during your lifetime, provide tax-efficient dependant support after your death, provide tax-efficient transfer of your wealth and protect your assets.

Make time to review and update your will(s) and estate plan to reflect changes in your family status and financial situation as well as changes in the law. For example, amendments effective in 2018 may limit income splitting opportunities with certain adult family members in the context of an estate freeze.

Don’t underestimate the benefits of financial spring cleaning. Tax season is a time when many focus a little more closely on their financial affairs. So this really is a good time to at least take a new look at the components of your financial and estate plan that could most impact your financial future and those who depend on you.

Spotlight on personal tax deductions and credits

A good way to save tax is by understanding the deductions and credits that are available to you. To enhance the benefit of tax deductions and credits, consider these tips and reminders while you’re preparing your tax return.

Family-related and other special tax credits: Claim all credits that apply, including the adoption expense credit, tuition credit (including transfers from a child), credit for the costs of exams or accreditation as a professional, volunteer firefighting or search-and-rescue credits, Canada caregiver amount, homebuyers’ amount, and the home accessibility credit.

Canada training credit: Effective for the 2020 and later taxation years, a new refundable tax credit is available to help you cover the cost of up to one-half of eligible tuition and fees associated with training. Eligible individuals¹⁶ who have either employment or business income may accumulate $250 each year in a special notional account (your “training amount limit”) which can be used to cover the training costs. The amount of the credit that you are able to claim in a taxation year is equal to the lesser of one-half of the eligible tuition and fees paid in respect of the year and your balance in the notional account. For purposes of this credit, eligible tuition and fees must be levied by a Canadian educational institution. The Canada training credit claimed reduces the amount that would otherwise qualify as an eligible expense for the tuition tax credit.

The $250 amount may only be added to your notional account each year if you file your personal income tax return for the preceding tax year. Therefore, you must file your 2020 personal income tax return in order to have $250 added to your notional account for the 2021 taxation year.

Charitable donations: The federal tax credit for donations is available in two stages ― a low-rate 15% credit on the first $200 of donations and a high-rate (33% and/or 29%) credit on the remainder. Higher-income donors can claim a 33% tax credit on the portion of donations made from income that is subject to the 33% highest marginal tax rate.¹⁷ Otherwise, the 29% rate applies.

Child care expenses: If you paid qualifying child care expenses for an eligible child to allow you to work or attend certain educational programs, you may be able to claim a deduction. The limits are generally $8,000 for each child under 7 years of age and $5,000 for each child between 7 and 16 years of age. A higher amount may be claimed for a child who has a disability. The total deduction claimed for all children cannot exceed two-thirds of your earned income. Earned income for this purpose includes employment income or net self-employment income (either alone or as an active partner) and certain financial assistance payments, including COVID-19-related federal, provincial, or territorial relief benefits. Proposed amendments released on January 19, 2021 will add employment insurance (EI) benefits, EI special benefits, and Québec Parental Insurance Plan (QPIP) benefits to this definition of earned income for the 2020 and 2021 taxation years.¹⁹

Digital news subscription tax credit: Effective for the 2020 taxation year, you may claim a temporary 15% non-refundable tax credit for eligible digital news subscriptions, for a maximum annual amount of $500 (a maximum annual federal tax credit of $75). The credit applies to eligible amounts paid after 2019 and before 2025. Eligible digital news subscriptions are subscriptions that entitle an individual to access content that is primarily original written news provided in digital form by a qualified Canadian journalism organization (as defined under the relevant legislation), if the organization does not hold a broadcasting licence. The credit is limited to the cost of a comparable standalone digital subscription where the subscription is a combined digital and newsprint subscription. If there is no such comparable subscription, individuals are limited to claiming one-half of the amount actually paid.

Interest expense: If you’ve borrowed money for the purpose of making an income-earning investment, the interest expense incurred should be deductible.

Moving expenses: If you moved in 2020 to start a new job or a new business, or to attend university or college on a full-time basis, you may be able to claim expenses relating to the move.

Medical expenses: The claim for the medical expense tax credit is limited by an income threshold. In other words, the lower your net income, the more you can claim in eligible medical expenses. For 2020, this credit may be claimed for eligible expenses in excess of the lower of $2,397 and 3% of net income. Because one spouse or common-law partner can claim medical expenses on behalf of the entire family, it generally makes sense to claim all expenses in the lower-income spouse’s return (unless the lower-income spouse owes no tax), including the expenses of dependent children under the age of 18. You might be able to claim the medical expenses paid for other dependent relatives such as elderly parents or grandparents or children 18 years of age or older, but in this case, the income threshold for 2020 is equal to eligible expenses in excess of the lower of $2,397 and 3% of the dependent’s net income.

Take advantage of technology: Use software to prepare your tax return and file electronically. The CRA offers several online services to make managing your taxes faster and easier.

Registering for the CRA’s My Account will allow you to view prior-year returns and assessments, check carryover amounts, view tax slips filed in your name, view account balances and statements of account, file returns, make payments and track the status of your return. It also allows you to register to receive online correspondence from the CRA within My Account, including notices of assessment, benefit notices and slips, and instalment reminders. My Account will also allow you to use the “Auto-fill my return” service, which pre-populates your return with figures from tax information slips and other information from CRA records.

The MyCRA mobile app allows you to access and view on your mobile device personalized tax information such as your notice of assessment, return status, benefits and credits, and TFSA and RRSP contribution limits, or make payments from your mobile device. The MyBenefits CRA mobile app allows you to view all your benefit and credit information on your mobile device, For further details, see https://www.canada.ca/en/revenue-agency/services/e-services/cra-mobile-apps.html.

Certain tax preparation software products offer the CRA’s Express NOA service, which can provide you with your notice of assessment immediately after you file your tax return electronically. You must be registered for both My Account and online correspondence with the CRA to use the Express NOA service.

The CRA’s ReFILE service allows you to file adjustments to your tax return using NETFILE certified tax preparation software, provided your original tax return is also filed electronically. Adjustments can be made to your 2020, 2019, 2018, 2017 or 2016 tax return. You should receive your notice of assessment on your original return first before using ReFILE to file any adjustments.

The CRA’s Check CRA Processing Times tool provides you with general processing times for tax returns and other tax-related requests sent to the CRA. Examples include processing times for personal income tax returns, T1 adjustment requests, tax objections and taxpayer relief requests, and applications for Canada child benefits and the Form T2201 Disability Tax Credit Certificate. The tool may be accessed on the CRA website and through My Account. A future service will include an account-specific tracking service in which you will be able to track the progress of your tax filings.

Shelley Blasdell, Waterloo

In response to the COVID-19 crisis, the Internal Revenue Service (IRS) introduced a temporary relief measure for situations where foreign individuals present in the US meet the Internal Revenue Code definition of “resident” for tax purposes.

The substantial presence test

A non-US citizen or green card holder is considered a US resident when the “substantial presence” test¹ has been met. One can have a “substantial presence” in the US by spending at least 31 days in the US during the year, and if the result of a prescribed formula for presence in the US is equal to or greater than 183 days.

The prescribed formula for 2020 is as follows:

• The sum of the days spent in the US in 2020
• Plus one-third of the number of days spent in the US in 2019
• Plus one-sixth of the number of days spent in the US in 2018

People who regularly spend four months a year in the US, such as retired snowbirds, will be considered US residents under this test. However, domestic US laws will allow a person to file a closer connection statement (Form 8840) with the IRS to be treated as a nonresident of the US in the case where the individual:

• Was present in the US less than 183 days during the calendar year
• Had a tax home in Canada for the entire year
• Establishes that they had a closer connection to Canada compared to the home they have in the US
• Has not taken steps towards, and doesn’t have an application pending for, lawful permanent resident status (green card)
• Files IRS Form 8840, Closer Connection Exception for Aliens Statement, by the tax return due date, including any valid extensions of time to file

What does US residence mean to a Canadian taxpayer?

A Canadian who meets the substantial presence test and is unable to qualify for the closer connection exception described above will be considered a resident of the US for tax purposes. Where these individuals continue to meet the definition of tax resident under Canadian tax rules, the US-Canada income tax treaty may be used to override residence for US tax purposes, and the individual will, as a result, be treated as a nonresident of the US who is solely subject to US income tax on income from US sources.

The use of the treaty in respect of these residence “tie-breaking” provisions does not override certain US filing obligations for a taxpayer who has otherwise met the US domestic law definition of US resident.

Of particular concern are the reporting obligations under the Financial Crimes and Enforcement Network (FinCEN), which require these “US individuals” to disclose all foreign bank and financial accounts that, when added together, have a total value of more than US$10,000 at any time in the calendar year. Common Canadian accounts that need to be reported on the annual Foreign Bank and Financial Account Report (FBAR) include not only personal bank and brokerage accounts, but Canada’s registered accounts, including RRSPs, RESPs, RPPs and TFSAs.

Noncompliance with FBAR reporting requirements can lead to severe penalties ranging from a flat civil fine of US$1,078 to criminal charges of up to US$500,000 and 10 years in prison in certain cases.

As a result of these daunting penalties, Canadians who spend significant time in the US and do not wish to complicate their tax affairs may be aware that they should avoid exceeding 183 days of presence in the US during any calendar year. By doing so, they can preserve their ability to claim the closer connection exception under the US domestic rules and therefore not be considered a US person under the FBAR requirements.

And then COVID changed everything

In February 2020, the novel coronavirus COVID-19 took hold and caused a number of people to be effectively stranded in the US due to travel restrictions, shelter-in-place orders, quarantines and closures. Even when not physically stranded, some individuals decided to stay in the US to maintain their safety and limit exposure to public spaces. As a result, some Canadian travelers or snowbirds who otherwise would have spent fewer than 183 days in the US during 2020 have now exceeded this limit.

The IRS introduced Revenue Procedure 2020-20 on April 21, 2020 to address these concerns. This exception to the usual rules allows certain individuals the ability to claim an emergency medical exemption for a single period of up to 60 consecutive calendar days of presence in the United States that begins after January 31, 2020 and before April 2, 2020. As a result, a single period of up to 60 consecutive calendar days of US presence that begins during this time can be disregarded for the purpose of the substantial presence test. To be eligible to claim this medical exemption, an individual must meet the following criteria:

• They were not resident in the US at the end of 2019
• They were not a green card holder at any point in 2020
• They were present in the US on each of the days in the 60-day period
• They did not become tax resident in the US in 2020 due to days of presence outside of this period

Canadian travelers who work in the US on business and wish to exclude these days under the exemption will need to include Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition with their tax returns on or before the 2020 tax return filing due date (including any valid extensions of time to file). This medical exemption will also apply for purposes of treaty claims whereby employment income can be exempt from taxation under the dependent personal services clause of the Canada-US income tax treaty (Article XV, now titled “Income from Employment”), in that any days the individual was present in the US on which the individual was not able to leave due to COVID-19 emergency travel disruptions will not be counted.

Snowbirds who otherwise have no US sources of income and generally would not be obligated to file a nonresident income tax return are not required to file Form 8843, although the IRS advises taxpayers to be prepared to furnish support and a completed form on request. Taxpayers should continue to file Form 8840 and treat the excluded days within the 60-day period (described above) as non-US days if they otherwise meet the substantial presence test and qualify under the closer connection exception.

A word to the wise

Non-green card-holder, non-US citizen Canadians who have spent a significant amount of time in the US should always keep track of their US days of presence and consider speaking with a tax advisor on a regular basis to keep apprised of any changing requirements. Although the IRS has not released any additional information on the medical exemption after April 2020, it is possible that additional measures may be announced ahead of the 2020 filing season. Consult with your EY Tax advisor before you file.

Gael Melville, Vancouver; Winnie Szeto, Toronto

This Federal Court of Appeal decision represented a partial win for the taxpayer, who was able to have gross negligence penalties overturned but was unsuccessful in challenging reassessments for statute-barred periods. The outcome of the case underlines the importance of keeping accurate records in connection with a shareholder loan account.

Facts of the case

The taxpayer left his long-term position as a director of engineering in 2000 and began working as a self-employed engineering consultant.

Initially, he set up a numbered company, and then in 2005 he formed another company, MDC, through which he continued his consulting work. In 2000, the taxpayer’s net worth was estimated to be between $3m and $4m, and in September 2005 the balance in the numbered company’s account was around $4.2m. Between 2007 and 2011, several amounts were withdrawn from MDC’s account and deposited in the personal accounts of the taxpayer and several of his family members. MDC also paid a number of personal expenses for the taxpayer.

In 2015, the CRA reassessed the taxpayer to include amounts in the taxpayer’s income as shareholder benefits for the 2007 to 2011 taxation years. The income inclusions related to the amounts withdrawn from MDC’s account and the personal expenses paid by MDC, and totalled over $2m.

The normal reassessment period for the 2007 to 2010 years had expired by the time the reassessments were issued, but the CRA took the position that the additional requirements in subparagraph 152(4)(a)(i)¹ of the Income Tax Act (the Act) were met, allowing the CRA to issue reassessments for these statute-barred years, as well as for 2011. The CRA also assessed gross negligence penalties for all the 2007 to 2011 taxation years under subsection 163(2) of the Act.

Lower court decision

At trial, the taxpayer admitted that he and his family received the amounts in dispute, but he argued that they were withdrawals of amounts he had previously advanced to MDC. Note that if the taxpayer had been able to prove that the amounts were repayments of a valid shareholder loan, they would not have been subject to inclusion in his income as shareholder benefits.

The Tax Court of Canada (TCC) found that although it was clear the taxpayer and his family had transferred substantial sums to MDC at some time before or during the years in issue, the taxpayer had not shown that the amounts he received from MDC represented the repayment of shareholder loans.

The TCC found that the CRA had been justified both in reassessing the taxpayer beyond the normal reassessment period and in imposing gross negligence penalties for the years at issue. In coming to this conclusion, the TCC relied on the earlier Federal Court of Appeal (FCA) decision in Lacroix v Canada,² which discussed how the minister can meet the required burden of proof in relation to the assessment of statute-barred years and gross negligence penalties in a case involving a taxpayer’s net worth reassessment.

The taxpayer then appealed to the FCA.

Appeal decision

The taxpayer put forward three issues in his appeal to the FCA.

In connection with the reassessments for statute-barred years, the taxpayer argued that the minster had shifted the burden of proof to the taxpayer and that the TCC had incorrectly relied on adverse inferences drawn against the taxpayer before the minister had established its case.

In relation to the gross negligence penalties, the taxpayer argued that the TCC had not correctly applied the legal test in Lacroix to the evidence. The taxpayer succeeded in having the gross negligence penalties overturned, but the reassessments for the statute-barred years were upheld.

Statute-barred years

The FCA identified various issues with the evidence, including that there was no support for amounts “due to shareholders” included in MDC’s financial statements. Although a reconciliation of the shareholder loan account was prepared for the objection and appeal, it was incomplete and did not reflect the amounts withdrawn from MDC that were at issue in the appeal. Similarly, the taxpayer’s claim that he had transferred substantial sums to MDC was not supported by the evidence provided.

The FCA found that the TCC should have acknowledged that the onus was on the minister to establish the facts justifying the assessments for the statute-barred years. However, there was still enough evidence for the TCC to have reached the conclusion that the minister had discharged this onus of proof. The FCA also found that the minister had already established its case at the time the TCC drew adverse inferences (from the taxpayer’s failure to call his tax professionals as witnesses and his failure to provide a properly reconciled shareholder loan account). As a result, the taxpayer’s appeal against the reassessments for the statute-barred years could not succeed.

Gross negligence penalties

Under the Act, the requirements for reassessing a taxpayer beyond the normal reassessment period are similar to, but not the same as, the requirements for assessing gross negligence penalties. Under subsection 152(4), neglect or carelessness are sufficient to meet the standard, but under subsection 163(2) “gross negligence” is required. The FCA cautioned that “neglect or carelessness should not be confused with gross negligence,” and went on to state that gross negligence is conduct that amounts to intentional acting.

The FCA found that the TCC judge had wrongly based his confirmation of the gross negligence penalties on a finding that the taxpayer “admittedly knew he received” shareholder benefits. Because the taxpayer had actually maintained throughout the hearing and the appeal that the amounts he received were repayments of a shareholder loan, the TCC had made a “palpable and overriding error,” meaning that the FCA was able to reconsider whether the gross negligence penalties were properly assessed.

The FCA allowed the appeal of the gross negligence penalties and drew attention to a piece of evidence that it considered critical — the fact that MDC had lost money in each of the taxation years under consideration. The court observed that the amounts MDC transferred to the taxpayer and his family could not have originated from profits made by MDC; rather it was reasonable to assume the amounts could have come from previous advances the taxpayer had made to MDC. Even though the taxpayer had not kept proper records to document the origin of the amounts transferred, his failure to include the amounts withdrawn from MDC in his income did not show the level of negligence (or indifference to compliance with the Act) that would allow the CRA to assess gross negligence penalties.

Lessons learned

This case highlights important practical and legal points.

From a practical standpoint, taxpayers need to treat their corporations as distinct entities and make sure they properly record all transactions. In this case, it appears that the taxpayer was unable to substantiate loans he had made in the past, which resulted in a substantial tax liability when he was unable to reconstruct the shareholder loan account after the fact.

On the other hand, the case also emphasizes that the “neglect or carelessness” test under paragraph 152(4)(a) and the “gross negligence test” subsection 163(2) of the Act must be considered separately, even if the same facts may be used to establish the necessary degree of negligence or neglect for each one.

A situation that justifies reassessment beyond the normal reassessment period will not always give rise to gross negligence penalties.

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