Author: margento

Apprenticeship Tax Credits are available for salaries paid to eligible apprentices working under various trades programs. 

Employers who hire apprentices registered in Red Seal programs are eligible to claim:

Tax credit for each apprentice who is in their first 24 months of apprenticeship for 10% of wages up a maximum of $2,000 per year.

Employers who hire apprentices registered in non-Red Seal programs are eligible to claim:

20% of wages up to a maximum of $4,000 per year for each apprentice, for the first 12 months of registration.

20% of wages up to a maximum of $4,000 per year for each apprentice, for the second 12 months of registration.

Completion Tax Credit Amounts for Red Seal and Non-Red Seal Programs are eligible to claim:

Level 3 Completion Tax Credits – Tax credit for 15% of wages paid during the last 12 months prior to completion of the level up to a maximum of $2,500.

Level 4 Completion Tax Credits – Tax credit for 15% of wages paid during the last 12 months prior to completion of the level up to a maximum of $3,000.

Provincial training tax credits provide refundable income tax credits for apprentices registered in Industry Training Authority (ITA) Red Seal and Non-Red Seal apprenticeship programs.

Do not miss out on the opportunity to claim these tax credits!  Many clients who come to Argento CPA were unaware of these tax credits and in some cases, we have reduced a company’s corporate tax bill to zero!

Contact Argento CPA today and we will help claim these credits to minimize your corporate taxes.

For many years, the IRS offered an Offshore Voluntary Disclosure Program (OVDP) for taxpayers with delinquent returns or FBAR to apply for penalty relief by filing three years of Form 1040 “Individual Income Tax Returns” and six years of FBAR. This program came to an end on September 28, 2018 due to a slow down in submissions to the program. However, new programs have replaced the OVDP; IRS Criminal Investigation Voluntary Disclosure Practice (VDP) for personal tax returns and Delinquent FBAR submission Procedures.

IRS Criminal Investigation Voluntary Disclosure Practice (VDP)

The new VDP provides compliance options for an individual that has committed tax or tax-related crimes and have criminal exposure due to their willful violation of the law. This program is intended for individuals who seek protection from potential criminal prosecution and will generally, cover a six-year disclosure period.

Significant differences with the old OVDP are the new program does not provide penalty relief, instead it applies a civil fraud penalty, of 75% of the underpayment of tax, to the one tax year with the highest tax liability. In addition, the taxpayer’s cooperation takes on greater significance during the examination and a lack of cooperation can have a direct bearing on the magnitude of penalties to be imposed.

Filing under this program will not be available for individuals who:

1. Are currently the subject of a criminal investigation or civil examination
2. Have been contacted by the IRS to notify that they intend to commence an examination or investigation
3. Are under investigation by any law enforcement agency
4. Have earned income from illegal activity

The steps for the new program are as follows:

1. Complete and submit to the IRS Criminal Investigation department Part I of Form 14457, Voluntary Disclosure Practice Preclearance request and Application. This is an application to confirm eligibility into the program.
2. Complete and submit Part II of Form 14457, Voluntary Disclosure Practice Application within 45 days of receiving confirmation of eligibility. This is an application to determine approval into the program. This form requires details regarding the taxpayer noncompliance, including a narrative providing the facts and circumstances, assets, entities, related parties, and any professional advisors involved in the noncompliance.
3. Once approval is obtained an examiner will be assigned to the case and the most recent six years of delinquent tax returns will be request to be submitted for review, however, the examiner may expand the disclosure period beyond the normal six years if issues are noted in the submission or for a variety of reasons.

The new VDP has more steps and can be costlier than the old OVDP and it has increased the range of available penalties as compared to the old OVDP program. For these reasons, the new filing procedures may not be appropriate for all taxpayer situation’s, such as, when non-compliance was not willful.

Alternative to VDP

A taxpayer that did not willfully violate the law could consider alternative options for correcting past mistakes. This includes quiet disclosures, filing amended returns or filing past delinquent returns. This option is less time consuming and costly, however, it does not provide protection from potential criminal prosecution and does not guarantee that no penalties will be assessed. The penalties could be significant depending on the situation.  

Delinquent FBAR Submission Procedures and Delinquent International Return Submission Procedures

A U.S. taxpayer that is not delinquent with their personal tax filings that is, however, delinquent with their FBAR filings or other international forms have the option of filing under one of the Delinquent submission procedures. A taxpayer who has not filed one or more FBAR or international information returns, has reasonable cause for not timely filing the forms, is not under civil or criminal investigations and has not been contacted by the IRS regarding the delinquent forms will qualify for one of these two programs. A reasonable cause statement must be included with the delinquent forms, certifying that the delinquent returns were not because of tax evasion.

The IRS will not impose a penalty for the failure to file the forms if the taxpayer properly reported on their U.S. tax returns, and paid all tax on, the foreign income related to the forms.

Contact Argento CPA today if you have any questions about U.S. tax compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Facts about Ashlee’s tax situation

• Ashlee has some great ideas for products and wants to sell them online via Amazon and Shopify. 
• She has a full-time job where she earns a salary of $90,000 annually.
• Wants a tax-efficient business structure that allows her to pay minimal taxes and reinvest her profits.
• Her customers will be in Canada and the U.S.
• Ashlee does not like paperwork and wants a cloud-based recordkeeping system.

Here are a few things we suggest to Ashlee.

Bookkeeping

Ashlee is going to need some accounting software.  As a cloud-based accounting firm, we highly suggest using Quickbooks Online.  This allows Ashlee to work with her accountant and bookkeeper in real-time.  As Ashlee’s bookkeeper, we can assist on monthly bookkeeping and provide monthly reports.  We will make sure Ashlee’s books are organized from day one and Ashlee knows exactly how her company is doing and what taxes are owing.

Sales Tax

Sales tax can be tricky, especially with customers located in various provinces across Canada.  There are different tax rules/rates for each province.  You will need your accountant to review the tax filing rules for each province and make sure you are filing returns if required to do so.  Depending on where your customer is located, the sales tax in that region will apply.

Shopify and Amazon do a great job at tracking sales tax based on your customer’s location, so make sure you integrate these settings in your online stores so that it is easy enough for your accountant/bookkeeper to pull reports and prepare the returns and bookkeeping.

If you are considering fulfillment by Amazon and warehousing your products in the US, you may create a sales tax nexus which triggers the requirement to file US state tax returns.  These rules can be complex and vary state by state.  Contact Argento CPA if you have questions regarding sales tax nexus.

Corporate structure

Since Ashlee’s goal is to have minimal tax, reinvest corporate profits and is already earning $90,000 from her full-time job, it would be best for her to incorporate this business and keep profits in the company.  Corporate tax is much lower than personal tax rates, and if you choose to leave the cash in the company, to reinvest or save, you take advantage of these low rates.  Ashlee should use her cash earned by employment for personal living expenses (since she pays higher personal taxes on that employment income) and retain all her corporate profits in the company to minimize overall tax.  Any initial start-up cash Ashlee invests into her business is treated as a shareholder loan and can be repaid at anytime tax-free.  (for more information on understanding a shareholder loan, check out our recent article “understanding the shareholder loan: how to use it to your advantage and stay compliant with CRA”).

Recordkeeping

We suggest using Receipt Bank in combination with Quickbooks Online.  We will help you digitize your records and integrate this app with your Quickbooks Online account.  No more saving paper receipts in your closet for years and years.  You can simply upload/forward receipts from your phone or email and we will handle the rest.  If CRA ever reviews your expenses, it will be simple enough for us to go online and access all the invoices CRA requests.  This makes a review or audit procedure with CRA painless and time efficient. 

Call Argento CPA today for a free initial consultation

We understand that everyone’s needs are different, and we all have unique tax situations.  One size does not fit all and that is why we tailor our services to exceed your expectations.  Call us today for a free initial consultation so we can explain how we will make your bookkeeping and taxes as simple as possible.  We offer fixed monthly fees that are fair, and we always deliver quality work with clear communication.   

Are you considering purchasing or lease a vehicle for work?  If so, you must be wondering how to claim this expense on your tax return.  It is important for you to determine the cost and benefits as this may have an impact on your choice of vehicle and whether to purchase or lease.

Automobile Deduction

To qualify for vehicle expenses, you must use your vehicle to work in another location other than your regular place of business.  CRA does not consider travel to and from your office/regular place of work as an eligible business trip.  On the other hand, if you travel to the office, then you have sales meetings during the day where you use a vehicle to make various trips during the day, those are considered eligible tax-deductible mileage.  The mileage to and from the office would be considered personal use, then mileage during the day to visit various clients would be considered business use.  You need to track your personal and business mileage to calculate your eligible motor vehicle expenses.  At the end of the year, you take the % of business use and multiply that amount by your total eligible motor vehicle expenses.  We recommend keeping a mileage log and using a digital app such as MileIQ to track each business trip. 

Eligible Motor Vehicle Expenses

Remember to keep your receipts!  The vehicle expenses below are tax-deductible.

• Interest on loans to purchase the vehicle
• Fuel
• Insurance
• Leasing costs
• Repairs and maintenance
• Capital cost allowance

Capital Cost Allowance (CCA)

Capital cost allowance is the amount of depreciation you can claim each year as a eligible vehicle expense.  Generally, the maximum rate you can claim each year is 30%, with the half-year rule applying in the year of purchase.  CRA sets a limit to the maximum cost for passenger vehicles.  Passenger vehicles include coupes, sedans, crossovers, sport-utility vehicles, and if they cost over $30,000, they are considered a luxury vehicle.  For luxury vehicles, the maximum cost for the calculation of claimable CCA is $30,000 + GST/HST + PST.  If you purchase a motor vehicle used primarily for business that does not fall into CRA’s definition of a passenger vehicle, you are able to claim the full amount of the vehicle for the CCA calculation.

 Automobile expenses can be claimed for Self Employed purposes only if:

1. The business requires the individual to work away from its normal place of business; and,
2. Automobile expenses are supported by a detailed travel log, invoices and receipts.

Automobile expenses can be claimed by an Employee only if:

1. The employee is required to work away from his/her employer’s place of business;
2. The employee is required by his/her employer to pay own traveling expenses;
3. A T2200 Declaration of Conditions of Employment is completed and certified by the employer; and,
4. Automobile expenses are supported by a detailed travel log, invoices and receipts.

Contact Argento CPA today if you have any questions on how to claim your vehicles expenses!

Are you an employee or a contractor?  This is a question consistently asked from our clients and business owners.  The CRA has laid out specific criteria for you to know the difference.  However, interpreting their rules can be tricky and getting this wrong can be a costly mistake.

In this blog, here is what we will cover:

• Criteria determined by CRA
• Is it better for you to hire and employee vs. a contractor?
• What is the difference from a tax perspective to the business owner and employee?

Criteria Determined By CRA

Unfortunately, when evaluating the criteria laid out by CRA there is no clear answer to whether you are an employee or contractor.  The answer is determined on a case-by-case basis using the criteria provided by CRA and precedent court cases.

The criteria determined by CRA include:

• Control – over the work that needs to be done and how it is done.
• Tools and equipment – who has ownership of the tools?
• Subcontracting work or hiring assistants – Can the contractor subcontract their work to others?
• Financial risk – Does the contractor make any personal investment to provide the service or do they risk losing money vs. earning a profit?
• Intention – what does the actual contract between the parties say?

Control

Control is the ability for the worker to exercise their say in how the work is done and when it is done.  A certain level of independence exists where the worker can dictate the workflow. 

Below are some common examples from each perspective.

Control – Employee

• The payer determines when the job must be completed.
• The payer determines the hours during the day that the work must be done.
• The worker is directed or trained by the payer on how to complete the job.

Control – Contractor

• Contractors complete the work on their own time under their own direction.
• The worker is free to take on other jobs from other clients.
• The contractor can end the working relationship whenever they like or refuse work.

Tools and Equipment

Was there a significant investment in tools and equipment by the worker to complete the job?  Whether the worker owns their own tools or not is a supporting indicator on the contractor vs. employee relationship. 

Tools and equipment – Employee

• The worker has no tools and is provided tools and equipment by the payer.
• The payer is responsible for maintaining the tools.
• The payer reimburses the worker for any tools purchased and has ownership of tools.

Tools and equipment – Contractor

• The worker provides their own tools and equipment.
• The worker is responsible for maintaining and servicing equipment.
• The worker has invested in their own tools.

Subcontracting Work

Is the worker able to subcontract the job to other workers?  An employee does not have the right to subcontract the job where a contractor can. 

Subcontracting work indicators – Employee

• The worker has no right to hire subcontractors.
• The worker is unable to have someone else perform the job in their place.

Subcontracting work indicators – Contractor

• The worker can hire others to assist on the job.
• The payer has no say in who the worker decides to subcontract the work.

Financial Risk

It is important to determine the degree of risk that the worker assumes.  Consider any financial costs the worker incurs on the job, or risk of potentially running a loss from performing the job.

Financial risk – Employee

• The worker is not responsible for operating costs.
• The worker is not liable if the job is not completed according to the contract.
• The relationship between the worker and payer is continuous.

Financial risk – Contractor

• The worker is hired for specific jobs only.
• The worker hires others to help on the job.
• The worker advertises their services and open to engage with other clients.
• The worker is liable if they do not meet the obligations of the contract.

Intention

One of the most important indicators and first question to ask yourself is “what is the intent of the relationship between payer and worker?” 

The intent is specifically laid out in the contract between payer and worker.  Intent is not the catch-all determining factor, but it is a great starting point.  The parties may have the intent for it to be a contractor relationship, but all factors above may point to an employee relationship.

Request a Ruling From CRA

If you review all the criteria and you are still uncertain as to whether you are an employee or a contractor, you can contact CRA and request a ruling on the matter.

This can be done through your CRA “My Business Account” or by mailing this CRA form to your tax center.

Alternatively, consult with your accountant!  Your CPA should have the expertise to analyze your unique tax situation and help you make the determination whether one is an employee or contractor. 

Employee vs. Contractor – Which is Better?

As a business owner you are wondering which is better for you?  Everyone has a different situation and below are key factors to consider.

Hiring a Contractor Benefits

• Less administrative work – if you hire a contractor, you do not need to enroll in a CRA payroll account and remit monthly payroll tax deductions to CRA.  Payroll complicates things by making the employer responsible for Records of Employment and T4s at the end of each year.
• Lower cost – if you pay a contractor, the payer does not need to match CPP and EI or worry about vacation pay.

Hiring an Employee Benefits

• Retention and loyalty – when you hire an employee, you have someone who is now part of your team.  They are essential to grow your business and in many cases are the most valuable asset to a business.  Their knowledge is your knowledge, and if you find a quality employee and treat them well, the return on that investment is immeasurable.

At the end of the day, if you are looking for someone to help grow your business and lead your company to success.  Hiring a long-term employee is the correct choice.  If you are still growing and can’t quite commit to a full time employee, but you want to engage on new contracts/jobs, then hiring a contractor can fill in that gap until you are ready to hire someone long-term.

What Is the Difference from A Tax Perspective?

Listed below are a few key regulatory differences you should be aware of.

• Payroll Remittances – Employers are required to withhold and remit payroll tax deductions to CRA.  If you hire a contractor, you are not obligated to do so.
• Employment Insurance – Employers need to pay into EI for their employees.  This adds an additional cost to hiring an employee.
• Canada Pension Plan – Employers need to pay into CPP for their employees.  This adds an additional cost to hiring an employee.
• Vacation and Overtime Pay – There are statutory requirements for vacation and overtime pay based on hours worked by your employee. 
• Workers Compensation – Employers will be required to remit WCB on wages paid to employees.
• Severance Pay – There are statutory guidelines to follow when it comes to terminating an employee.

Overall, it is more expensive to hire an employee.  Although, if you find the right employee who is fit for the job, adding them to your team is an essential component to growing your business.  If you are looking for a long-term worker who has the required expertise to do the job and add value to your business, an employment-work relationship is best.  On the other hand, whether someone is an employee or contractor also comes down to facts determined on a case-by-case basis. 

Contact Argento CPA today if you need any assistance determining the difference between contractor vs. employee!

If you are an employer who wishes to claim the full 75% Canada Emergency Wage Subsidy (CEWS) and has not claimed the 10% Temporary Wage Subsidy (TWS), you must complete Form PD27 to make an election for your TWS to be equal to 0%.

Make sure you fill out this form, either by clicking on the hyperlink (print, complete and mail to CRA), through your online CRA business account, or have your accountant file through their representative CRA account.

When filling out the form, indicate “0” for the dollar amount and percentage of the subsidy being claimed for each pay period in Part D.  If you do not enter “0” in Part D, your company will be deemed to have received the full 10% TWS which may cause CRA to reassess your CEWS subsidy applications. 

You do not need to file Form PD27 if your business is not receiving either the CEWS or TWS.

Contact Argento CPA today if you need any assistance!

In response to the Covid-19 crisis, the Canadian government introduced a wage subsidy to enable employers to keep employees working or incentive for employers to re-hire employees that were previous laid off. This program provided a subsidy of 75% of employee’s wages for the period from March 15 to July 4.

To qualify for this subsidy a business needed to determine if they are (1) an eligible employer (2) if their employees are eligible.

1. An eligible employer is an individual, corporation, partnership, charities, and several other types of entities (not including public institutions) that had a payroll account with CRA on March 15, 2020 and that met the revenue reduction threshold:
2. The revenue reduction threshold was 15% for March 2020 and 30% for April 11-July 4. There are two options for calculating the revenue reduction, however, once an option is selected it must be used for all future months:
3. Compare the average of January and February 2020 revenue to the claim month
4. Compare the claim month to the same month in 2019
5. Eligible employees are individuals employed in Canada by the business, except if there was a period of 14 or more consecutive days in the claim period which they were not paid eligible remuneration

On July 27, 2020 changes to the CEWs program as part of Bill C-20 received Royal Assent. This bill provided an extension of the program until December 19, 2020. The updates to the CEWS program that this article will focus on are:

1. Making the subsidy more accessible to employers with less than 30% decrease in revenue by adding a gradual decreasing base subsidy, and
2. Introducing a top-up subsidy up to 25% for employers that are most adversely affected by the Covid-19 crisis

1. More accessibility to the program

One of the more notable changes as a result of Bill C-20, is the removal of the 30% revenue reduction threshold for period 5 (July 7-Aug 1) onward. It is replaced with a two-part calculation for active employees and a separate CEWS calculation for inactive employees.

The two-part calculation for active employee is as follows:

• Employers that experienced a 50% or more decline in revenue as a result of the Covid-19 crisis will be eligible for the maximum wage subsidy percentage
• Employers that experienced less then 50% decline in revenue as a result of the Covid-19 crisis will still have access to the wage subsidy, however, the amount of the subsidy will depend on the employer’s actual revenue reduction

The following table illustrates the base CEWS rates and maximum weekly benefits per active employee

Qualifying Period	July 5-Aug 1	Aug 2-Aug 29	Aug 30-Sept 26	Sept 27-Oct 24	Oct 25-Nov 21
Max weekly benefit per employee	Up to $677	Up to $677	Up to $565	Up to $452	Up to $266
Revenue reduction percentage – Base CEWS Rate
50% and over	60%	60%	50%	40%	20%
0% to 49%	1.2 x revenue reduction percentage	1.2 x revenue reduction percentage	1.0 x revenue reduction percentage	0.8 x revenue reduction percentage	0.4 x revenue reduction percentage

The calculation for non-active employees will remain the same as the period 1-4 (Mar 15-July 4) calculation:

• being 75% of their wages, up to $847 per week or
• 100% of their wages, up to $847 per week, if the employee’s wages has decreased by 25% or more from pre-Covid levels

• Top-up Subsidy

Employers considered to be most adversely affected by the Covid-19 crisis with more than 50% average monthly revenue reduction in the prior three-month period will be eligible for the top-up wage subsidy. The top up subsidy is calculated as 1.25 x the decline in revenue over 50% on the prior three-month period.

Employers that experienced a 70% or more decline in average monthly revenue in the prior three-month period will be eligible for the maximum top-up of 25%, for a maximum of $282 per employee.

The following table illustrates the top-up rates for selected revenue reductions

Revenue reduction percentage	Top-Up CEWS Rate	Top-up calculation = 1.25 x (revenue reduction percentage – 50%)
70% and over	25%	1.25 x (70%-50%) = 25%
65%	18.75%	1.25 x (65%-50%) = 18.75%
60%	12.2%	1.25 x (60%-50%) = 12.5%
55%	6.25%	1.25 x (55%-50%) = 6.25%
50% and under	0.0%	1.25 x (50%-50%) = 0.0%

The following table illustrates the combined CEWS rates and maximum benefits per employee

Qualifying Period	July 5-Aug 1	Aug 2-Aug 29	Aug 30-Sept 26	Sept 27-Oct 24	Oct 25-Nov 21
Max weekly benefit per employee	Up to $960      85%	Up to $960 85%	Up to $847 75%	Up to $734 65%	Up to $508 45%
Combined Maximum  CEWS rate	60% base + 25% top-up	60% base + 25% top-up	50% base + 25% top-up	40% base + 25% top-up	20% base + 25% top-up

Eligible employees

Also, of note is that Bill C-20 eliminates the requirement that an employee not be without remuneration for 14 or more consecutive days in the qualifying period for period 5 onwards.

Wait a minute, period 5 and 6 (July and August) may have negative consequences on the subsidy we were anticipating during these periods, since our revenue drop was just over 30%!

Do not worry, a “safe harbor” provision ensures that an employer will not receive less than the employer would have received if the 75% subsidy continued to apply as it did in Periods 1 – 4. This means eligible employers who have at least a 30% revenue decline in July and August will calculate the subsidy based on the greater of the rate applicable under the new rules and the “old” 75% rate.

Base Subsidy Calculation (Active Employees)

In Periods 5 and 6, the maximum base subsidy is 60% for eligible employers that have experienced a decline of 50% or greater in monthly revenues for the current period. This equates to a maximum weekly base subsidy of $677. The maximum base subsidy rate gradually declines to 20% in Period 9, equivalent to a maximum weekly base subsidy of $226 for that period. The subsidy rate will be lower for employers whose revenue drops by less than 50%. The rate for Period 10 (December) has not been specified and will be set by Regulation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Contact Argento CPA today for a free initial tax consultation!

U.S. Citizens and green card holders living in Canada

Tax filing deadlines and payment deadlines

For U.S. citizens (and green card holders that have not expatriated) that are living in Canada, the personal tax payment deadline is April 15^th. The actual filing deadline is automatically extended to June 15^th. This means if you anticipate you will owe any taxes to the IRS, a payment is due before the actual return is due.

If the return cannot be filed for any reason by June 15^th, an application to extend the deadline to October 15^th can be filed before the June 15^th deadline.

If the return still cannot be filed by October 15^th for a good reason, a letter can be sent to the IRS before the October 15^th deadline to extend the deadline to December 15^th. The letter must explain the reasons why you need the extra two months and the extension is granted at the discretion of the IRS.

Required tax forms

U.S. citizens and green card holders are required to file an annual Form 1040 “U.S. Individual Income Tax Return” to report their worldwide income for the year. There are additional forms that could be required depending on the individual’s situation, common examples are as follows:

1. FBAR “Foreign Bank Account Report”, this form is required when a US citizen or green card holder has an aggregate of US$10,000 in all non-US financial accounts. This includes but is not limited to, chequing, savings, investment accounts, RRSP, TFSA, etc.
2. Form 8938 “Statement of Specified Foreign Financial Assets”, this form is similar to the FBAR however, the threshold is US$200,000 for a single individual and US$400,000 for a married individual filing jointly
3. Form 5471 “Information Return of U.S. Persons with Respect to Certain Foreign Corporations”, this form is required if a shareholder owned 10% or greater in the shares of a non-U.S. corporation. This threshold can be met if related individuals collectively own 10% or more shares the same non-U.S. corporation
4. Form 8865 “Return of U.S. Persons with Respect to Certain Foreign Partnerships”, this form is required if a partner owned 10% or greater interest in the partnership while the partnership was controlled (greater than 50%) by U.S. persons each owning at least a 10% interest. 

Penalties deadline

Individual Tax return: Failure to file penalty is 5% of unpaid tax charged each month the return is late or if filed later than 60 days after the return is due, the penalty is the lesser of (1) 100% of the tax that is owing or (2) a specific dollar amount set by the IRS, which is $435 for returns due on or after 1/1/2020. If the failure to file is fraudulent the maximum penalty is 75% of the tax due.

Failure to pay penalty is usually 0.5% of unpaid tax, charged monthly, however, it can be as much as 25% of the unpaid amount.

Required tax forms: Failure to file penalties for not filing completed and correct forms (ie FBAR, 8938, 5471, 8865) may be subject to a penalty of US$10,000 per form per each tax year it is required to be filed.

Canadian residents with U.S. sourced income

Tax filing deadlines and payment deadlines

Canadian residents that have U.S. sourced income (including employment or self-employment income earned while physically present in the U.S., rental income earned from a U.S. real property, investment income (dividends and capital gains) earned within a U.S. based financial account, may be required to file a form 1040NR “U.S. Nonresident Alien Income Tax Return”.

The deadline for filing this return is April 15^th for employees who received wages subject to U.S. income tax withholding, for all other individual filers the deadline is June 15^th.

If the return cannot be filed for any reason by April 15^th or June 15^th (depending on your deadline), an application to extend the deadline to October 15^th can be filed before the April 15^th or June 15^th deadline.

If a taxpayer filing deadline is April 15^th, then the payment deadline is the same date, if a taxpayer filing deadline is June 15^th then the payment deadline is also June 15^th. The extensions to file do not extend the payment deadlines.

Closer connection tax form

If a Canadian resident meets the U.S. substantial presence test for a calendar year, they may be deemed a resident of the U.S. for tax purposes and may be required to report their worldwide income on a U.S. return. This could also create reporting requirements for the tax forms listed in the “Required Tax Forms” section of this article. The following are the criteria for meeting the substantial presence test:

• The individual must have been physically present in the U.S. for at least 31 days in the year for which the tax return is being filed; and
• The total of (number of days present in the tax year) + (1/3)(number of days in the year before the tax year) + (1/6)(number of days in the year two years before the tax year) must be at least 183.
  
  

If an individual meets this test but has spent less than 183 days in the U.S. in the current calendar year, has a tax home in Canada and is able to establish that he or she has a closer connection to Canada than to the U.S. during the year, they can file form 8840 “Closer Connection Exception Statement for Aliens” to apply for an exemption to not be deemed a resident of the U.S. This form follows the Form 1040NR due date (including extensions) and is filed annually with the Form 1040NR or on its own if no Form 1040NR is required.

Penalties deadline

Non-resident individual tax return: Failure to file penalty is usually 5% of amount due charged each month the return is late. The penalty can be as much as 25% of the tax due and if filed later than 60 days after the return is due, the penalty is the lesser of (1) 100% of the tax that is owing or (2) a specific dollar amount set by the IRS, which is $435 for returns due on or after 1/1/2020. If the failure to file is fraudulent the maximum penalty is 75% of the tax due.

Failure to pay penalty is usually 0.5% of unpaid tax, charged monthly, however, it can be as much as 25% of the unpaid amount.

If Form 8840 is not timely filed, the individual will not be eligible to claim the closer connections exception and may be treated as a U.S. resident, therefore, it is very important to timely file this form each year.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Contact Argento CPA today for a free initial tax consultation!

The COVID-19 pandemic has taken us all by surprise and the business landscape as we know it is changing rapidly.  It is normal for us to feel stressed, worried, or overwhelmed, especially when it comes to our finances and growth of our business.  During these times of uncertainty, what should we focus on?

In Japanese, the word “crisis” (危機) is in fact positive.  The first character (危) means “dangerous” and the second (機) means “opportunity.”  Although these are scary times, now is a time to plant seeds for change.

Current developments have sparked a massive shift in the global economy and as business owners it is now more important than ever to ask ourselves the right questions.  Rather than dwelling on limitations outside our control or waiting for the world to return to “normal”, we need to pay attention to what we can control.  To stay productive, we must strive to be more creative.

For some, this will mean revamping their current business model to comply with the new guidelines set out by Work Safe BC.  For others, it is an opportunity to launch an entirely new business – a business that can thrive in and serve the “new” economy.

Starting a business or changing your business model is challenging. A key to moving ahead is asking the right questions. Start by asking problem solving questions.  What does a Post-Coronavirus World look like?  What services will be in demand?  How has the supply chain fragmented?  What does it mean for our economy to become self-sufficient and more localized?  How can you maintain workplace efficiency and support your employees who now work from a home-based office, while simultaneously raising children who at the same time have web-based home schooling?  Seniors in Canada are a segment of the population that is rapidly growing as we live longer and healthier lives than previous generations, how do we accommodate and support Canada’s aging demographic?

These are just a few examples of gaps that need to be filled through entrepreneurial ingenuity.  Now is a time for us as entrepreneurs to shape the future of the business landscape.  We are presented with an opportunity to widen our horizons. For entrepreneurs this means being aware of the consequences of the COVID-19 pandemic and anticipate what the business environment may look like after. Therein lie immense possibilities to be of help to society as well as to serve our best interests.

Adaptability has always been a key for success in business, and keeping pace with technological change is more essential than ever.  Personally, I have experienced this first-hand and capitalized on this opportunity in the accounting world.  Digital apps have revolutionized bookkeeping for our clients and cloud-computing has made virtual-based workflow between our staff seamlessly more efficient.  We educate our clients on how to be 100% cloud-based, increase administrative efficiency, while obtaining significantly more value from their accountant.  This means value in the form of mobile access to their financials at any time, providing our clients with a clear overview of their financial position in real-time, and the ability to collaborate and share information with ease.  In other words: first-class on-going customer service, clear and timely communication with our clients, and a quality final product.

By way of conclusion, I offer some thoughts that you may find useful. 

• Digital transformation of your business model:  The physical world of business is changing quickly and our ability to utilize technology is transforming industries, schools, as well as retail brick and mortar stores.  The organizations that can adapt well will shift their business model to an online approach.  Yes B.C. is now in phase 3 and we see many of our storefronts now reopen under new conditions.  However, we still face the looming threat of another economic shutdown from a second wave of the pandemic or mutation of the novel coronavirus. 
  
  
• Focus on employees and company talent:  With staff working from home, organizations face a new spectrum of challenges.  Firms will need to deal with employees as people and understand the hardships they too are facing during the pandemic.  Mental health of staff must not be overlooked.  Ask your employees what their needs are during this time.  Acknowledge the emotions your employees are facing and focus on well-being.  Encourage balance and flexibility with work hours and encourage days off so everyone can devote time to their mental and physical health.

• Leadership:  Leadership will determine if you adapt well and create opportunities during crisis.  We need to think in terms of a win-win approach with not only our customers, but also our staff.  It is up to the organization’s leader to conduct positive change.  To do so means that as a leader you must master the art exceptional decision making.  The leader must navigate an environment filled with risk and uncertainty and most of all take decisive action for decisions on where to take the company.  It is impossible to make the right decision every time. Sometimes we need to experiment so that we can adjust our approach to what works and know with more certainty what may not work. 

Winston Churchill once said, “never let a good crisis go to waste.”  We must re-think our traditional ways and embrace the fact that the coronavirus pandemic has brought into being a new reality.  As entrepreneurs, we must let go of limiting beliefs which inhibit our creativity and ability to adapt to change.  This new reality calls for new conceptual maps; maps that will help us navigate unchartered waters full of challenges as well as opportunities for us as individuals and world citizens.

By now everyone has either heard of or applied for the 75% Canada Emergency Wage Subsidy (CEWS).  The program was originally intended to cover a 12-week period, from March 15 to June 6, 2020.  Finance Minister Bill Morneau announced an extension of this program by an additional 12 weeks to August 29, 2020.  If you are a Canadian employer whose business has been affected by COVID-19, you may be eligible for the 75% wage subsidy, retroactive from March 15, 2020, to August 29, 2020.

As of June 30, 2020, the Government is in the process of consulting with key business and labor representatives on whether there will be any changes to the program or eligibility requirements.  For now, they have announced that period 4, June 7 to July 4, 2020, will follow the same eligibility criteria as claim periods 1-3.  Please see the chart below.

Claim period	Start and end dates	Baseline revenue	Claim period revenue	Required reduction
1	March 15 to April 11, 2020	March 2019, or average of January and February 2020	March 2020	15%
2	April 12 to May 9, 2020	April 2019, or average of January and February 2020	April 2020	30%
3	May 10 to June 6, 2020	May 2019, or average of January and February 2020	May 2020	30%
4	June 7 to July 4, 2020	June 2019, or average of January and February 2020	June 2020	30%

To be eligible to receive the wage subsidy, you must:

• Be an eligible employer  
• Have experienced an eligible reduction in revenue, and
• Have had a CRA payroll account on March 15, 2020

To clarify, you must calculate whether your company has experienced a reduction in revenues for any claim period.  Compare your 2020 claim period revenue to your baseline revenue. 

Baseline revenue is either a) the revenue you earned in the corresponding month in 2019, or b) the average of the revenue you earned in January and February 2020.  You must choose a or b for your method of comparison and will not be able to change it for your calculations for any other periods.  Essentially, this means no going back and forth between which method you use to calculate the revenue decline.

The CRA will ensure compliance on these applications so expect either follow-up phone calls to verify certain elements of your claim, or even more comprehensive post-payment reviews or audits.  Make sure you have documented your claims and your payroll records.  This means showing proof of work for your calculation of the revenue decline and analysis of eligible remuneration paid to employees.  

Watch for Anti-avoidance Rules on Qualifying Revenues

You will not be eligible for the 75% wage subsidy if the entity participates in a plan that has one of the main purposes of effectively reducing the employer’s qualifying revenue to qualify for the subsidy.  Any entity caught doing so will be subject to a penalty equal to 25% of the amount of the wage subsidy under the anti-avoidance rules, in addition to repayment of the subsidy received. 

CRA has prepared a helpful Q&A on the Canada Emergency Wage Subsidy.  If you need assistance with your CEWS application or concerned you may not have prepared the application correctly, contact us today and we will ensure your application is accurate and audit proofed! 

Contact Argento CPA today!