Author: margento

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!

When is it better to pay a salary vs. a dividend as the owner/manager of a corporation?  There are pros and cons to each method and as the owner of a business you should be aware of your options before deciding on what is better for your unique tax situation and why.  The following article will help you understand the difference between your options and why one might be better for your tax situation.

Salary – Pros

• Salary is considered employment income which will increase RRSP contribution room and allow you to contribute to CPP.
• Paying a salary allows the owner to take advantage of certain personal tax deductions, such as childcare expenses.
• When a bonus is declared at year-end there is the opportunity for a personal tax deferral since the salary does not need to be paid for 6 months.
• Declaring a salary can reduce corporate taxable income and is used in tax planning to decrease income below the $500k small business limit or so the company has nil taxable income.

Salary – Cons

• If the company is considering obtaining financing, it could be affected since a salary would decrease the financial results of the company.
• If a bonus is declared and not paid right away, some people run into issues 6 months later if they have cash flow issues and are unable to pay the bonus at that time.
• Salaries do not have a preferential tax treatment so they will likely pay more personal tax than if a dividend is declared.
• Paying a bonus or salary comes with a higher cost, since you must factor in employer and employee portions of CPP.
• There are more compliance costs and hassles because of operating a payroll account.

Dividends – Pros

• Earning dividend income personally has a preferential tax rate.
• If the company is considering obtaining financing for the business, having a higher net profit on the financial statements would be preferable to show potential lenders that the company is more profitable.
• Depending on the year-end of the company, declaring a dividend could provide a personal tax deferral till the personal tax deadline in April.
• It is easier to pay a dividend than a salary (no source deductions required).
• Dividends can be declared at any time, allowing the you to optimize your tax situation.

Dividends – Cons

• Earning dividend income does not create RRSP room nor will the you be contributing to CPP.
• Declaring a dividend does not provide a deduction to reduce corporate income.
• The taxpayer would loss out on certain personal tax deductions if no salary is earned, such as childcare expenses.

Summary

There is no easy answer to which is better between salary and dividends.  The answer depends on each taxpayers’ preferences, how much cash you require personally from your company, corporate tax results, personal tax deductions, and retirement planning.  If you are struggling to determine which method is best for you or would like assistance with analyzing your tax situation, this is where we come in.  After assessing your life situation and goals, we are be able to point you into the right direction, so you are set for success! 

Contact Argento CPA today!

If you are the owner-manager of a corporation, understanding the concept of the shareholder loan is essential to running your business. Below I will explain what a shareholder is and how to use it. After reading this article you will become familiar with potential tax-traps and how to avoid them.

I will discuss the following topics:

• What is a shareholder loan?
• What are the tax implications of the shareholder loan and how to use it to your advantage?
• How to avoid problems with the CRA

What is a shareholder loan?

In general, the balance of your shareholder loan represents the total owner cash draws from your company minus funds you have contributed.

Your shareholder loan will appear on the balance sheet as either an asset or liability. If you contributed more cash into your company vs. what you draw out, the shareholder loan will be a liability on the balance sheet. When your owner cash draws exceed contributions, the shareholder loan will be an asset on the balance sheet.

There are various types of transactions that will affect the shareholder loan account. Below are a few examples.

CASH CONTRIBUTIONS

If the shareholder deposits cash into the company bank account, this money can be repaid to the shareholder tax-free at some point. The company owes the shareholder this money and the balance will appear as a liability on the balance sheet called “due to shareholder.”

PAYING FOR COMPANY EXPENSES WITH A PERSONAL CREDIT CARD

It is common for owner-managed companies to pay for company expenses with a personal credit card. This type of transaction is treated like a cash contribution. The company gets a tax deduction and the shareholder can be reimbursed at some point.

CASH WITHDRAWLS

If an owner draws cash from the company bank account which is not dividends or salary, they are considered a shareholder loan and debt owing to the company. The total draws will appear as an asset on the balance sheet called “due from shareholder.”

PAYING FOR PERSONAL EXPENSES WITH COMPANY FUNDS

We often see owners of the company pay for some interesting things using their company funds. For example, a family trip to Mexico paid for on the company credit card is not tax deductible. When this happens, and it happens quite often, the transaction is treated like a cash withdrawal. The company cannot deduct the expense and the amount will become a debt owing back to the company. We advise all our clients to pay for personal expenses with a personal credit card. By doing so, you will have accurate bookkeeping records and spend less time explaining questionable transactions to your accountant or bookkeeper.

What are the tax implications of the shareholder loan and how to use it to your advantage?

Many clients ask, “how do I pay myself from the company? and the answer is dividends or salary. However, you do not have to designate cash draws as a dividend or salary until fiscal year-end. In the meantime, you treat cash draws as a shareholder loan.

In many start-up companies, the owner puts more cash into the business vs. what they take out. Therefore, the running balance of the shareholder loan at fiscal year-end has a credit balance and appears as a liability on the balance sheet. Meaning, the company owes the shareholder money. If this is the case, the owner does not have to declare any draws as dividends or salary and the balance of the shareholder loan at year-end can be taken out of the company tax-free.

If the running balance of your shareholder loan is in a debit position, which appears as an asset on your balance sheet, you typically declare the amount as dividends or a salary. Depending on your specific tax situation and business/personal goals, dividends or salary or a combination of both will be discussed with your CPA to determine what method is best for you.

Shareholder loans provide opportunities for tax planning. At Argento CPA, we will assess your tax situation to determine the timing of dividends or salary that will minimize the amount you pay for personal and corporate tax combined.

How to avoid problems with the CRA

You may be thinking, “why don’t I repay the shareholder loan right before fiscal year-end, then borrow it again in the new year?” CRA is aware of this technicality and placed rules to prevent you from doing this. So, do not even think about trying it!

There is one final option if you owe your company money at the end of the year. You have one year from your fiscal year-end date to pay it back. This can be repaid as a direct repayment, salary, or dividend. Be careful doing so since your shareholder loan will be reported to CRA as an asset on your balance sheet at fiscal year-end. By reporting your shareholder loan as an asset on the balance sheet for 2 consecutive years in a row, you signal a red flag to CRA that you may not have included your shareholder loan as personal income.

Summary

The shareholder loan is a useful tool for tax planning and cash management between the owner and their company. If used correctly, the timing of cash draws, dividends or salary can be used to your advantage.

If you are looking for expert advice on shareholder loans, contact us today. We will get an in-depth understanding of your specific situation and make sure you are set for success!

Discuss your specific needs and challenges. Book a one-on-one strategy session with our experts today!