Category: Insights

CRA has provided two new options for claiming employment expenses related to working from home in 2020.

• New – Temporary Flat Rate Method – where employees can claim a flat rate amount of $2/day to a maximum of $400.  Under this method, no employer certification is required.
• Simplified Detailed Method – for employees who claim actual expenses related to working from which must be supported by receipts.  Employer certification is required.

Overview of working from home expenses

	Temporary Flat Rate Method	Simplified Detailed Method – Only working from home expenses	Historical Detailed Method – Any Employment Expenses
Employer certification required?	No	Yes – New T2200S	Yes – T2200
Receipts required?	No	Yes	Yes
Eligible employees	Working from home due to COVID-19	Working from home due to COVID-19	Working from home due to employer requirement
Computation	$2/day worked from home, max $400	Claim actual amounts paid as per receipts	Claim actual amounts paid as per receipts
T1 Form to Complete	New T777S	New T777S	T777
Can you claim other employment expenses if eligible?	No	No	Yes
Can the work space also be used for personal purposes?	Yes – no change to the claim	Yes, expenses are prorated based on space and hours used for employment purposes.	Yes, expenses are prorated based on space and hours used for employment purposes.
Impact of employer reimbursement	No claim if all expenses are reimbursed	Reimbursements will reduce your eligible deduction	Reimbursements will reduce your eligible deduction

New – Temporary Flat Rate (TFR) Method

If employees that worked from home more than 50% of the time for a period of at least 4 consecutive weeks in 2020 due to COVID-19, they can claim $2/day up to a maximum of $400.  Full-time or part-time days will count, while vacation days, sick days, or other leaves of absences do not count.  If you choose to use this new method, you cannot claim other employment expenses.

To claim the TFR, you must meet all the following conditions below:

• You worked from home in 2020 due to COVID-19;
• The employee worked more than 50% of the time from home for more than 4 consecutive weeks in 2020;
• You are not claiming other employment expenses; and
• You did not receive any reimbursement from your employer for home office expenses.  If your employer reimbursed some of the home office expenses, the employee can still make a claim.

If multiple people work from the same home and each meet the above criteria, each person is still eligible to claim a full TFR amount.

Simplified Detailed Method – Only Working from Home Expenses

This method requires the same calculation as done in the past for home office expenses but allows for a simplified T2200S and T777S.

To be eligible, you must meet the following conditions below:

• Worked from home in 2020 due to COVID-19;                          
• Employee was required to pay for expenses related to work space in home;
• Worked more than 50% of the time from home for a period of at least 4 consecutive weeks;
• Signed T2200S from employer; and
• Expenses were used directly in the work during the period.

If multiple employees are working from the same home and share the work space, you should each calculate your respective employment use of the space.

New T2200S Form

Employers must certify that employees are eligible to claim working from home expenses using a new form called T2200S.  The form asks three questions:

1. Did this employee work from home due to COVID-19?
2. Did you or will you reimburse this employee for any home office expenses?
3. Was the amount included on the employees T4 slip?

What are eligible work space in home expenses?

• Electricity, heat, water, maintenance and repair costs related to the use of their work space in home.  Commissioned employees may also claim home insurance and property taxes.
• Internet fees
• Office supplies
• Cell phone or land line

Please note, capital expenditures, such as mortgage interest/principal payments, furniture and equipment, computers and their accessories, and other electronics are not deductible against employment income.

Contact Argento CPA if you have any questions about whether you are earning investment income or business income.

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.

Introduction

Stock option plans are a popular method to attract, motivate, and create loyalty among employees in both Canada and the US. The tax treatment of stock options is complex, and rules vary between different countries.

This article is part-one of a three-part series.  First, we will discuss US tax implications of stock options.  Part-two will explain Canadian stock options and lastly, part-three explores tax treatment of cross border stock options when a resident of Canada is granted stock options from a US company.

US Taxation of Stock Options – Part 1

The US has two types of stock option plans, qualified stock options, also called Incentive Stock options (ISO’s) and non-qualified stock options (NSO’s). Alternatively, US companies can also issue Restricted Stock Units (RSO’s). All three stock incentives will be discussed below.

Incentive Stock Options (ISO)

There are several conditions that need to be met for a stock option plan to be qualified.  If any of the following conditions are not met the options become NSOs:

1. This type of option can only be granted to an employee
2. The employee must be granted the option at fair market value (FMV) as of the date of the grant
3. If the employee is a greater than 10% shareholder of the company, the following additional conditions must be met:
   • The grant date must be 110% of FMV as of the grant date
   • The option term cannot exceed 5 years from the grant date
   • The exercise price cannot be less than the FMV of the stock at the grant date
   • The total value of the stock options cannot exceed $100,000 to each employee as of the grant date and the option must be exercised within 10 years of the grant
4. The holding period between being granted the options and being allowed to exercise must be at least one year
5. Once exercised, the stock cannot be sold for at least a year
6. The options must not be transferable to any other party, and must be granted to, exercised by, and sold by the employee
7. The stock option plan must be approved by the employer’s shareholder within 12 months before or after the date the plan is adopted

The granting of an ISO and the subsequent exercising of the option after one year does not result in tax consequences to the employee. When the options are sold, they receive long term capital gains treatment, resulting in nil tax for the lower tax brackets, 15% for income up to $450,000 (married filing jointly) or $400,000 (single) and 20% for income in the highest tax bracket. The capital gain is calculated as the difference between the proceeds on the sale and the grant price.

Because ISOs have a preferential tax treatment, Alternative Minimum Tax (AMT) might arise as a result of ISO stock options being exercised. AMT is a parallel tax system separate from regular tax law that can be complex and is out of the scope of this article.

There is no income tax deduction for the employer when ISO’s are issued.

Example: Cindy is US citizen who signed an employment contract on Nov 1, 2018 with Dot.com (an American start up company that offered her stock options as part of her employment contract). The contract granted her 1,000 options for $1 each, which was the estimated fair market value of the company’s shares on the grant date. The company had $1 million outstanding shares at that time, and she did not own any shares of the company at the time of the grant. The contract stipulated that she was required to hold the options for one year before she could exercise them and once exercised, she was unable to sell the share for one year. The contract also stipulated that the options were non-transferable, and the option plan was approved by all shareholder on Nov 30, 2018.

On Nov 2, 2019 Cindy exercises all 1,000 options when the fair market value of Dot.com’s shares were $3 per share. On Nov 2, 2020 Cindy sold all 1,000 shares when the stock was worth $10 per share.

Cindy’s stock options are considered ISO because they met all the conditions listed above. Cindy has no tax consequences on the grant date Nov 1, 2018 or one year later, Nov 2, 2019, when she exercised the options. Her only tax consequences are on Nov 2, 2020 when she sold all 1,000 shares. When she files her 2020 US personal tax return, she will report a long-term capital gain of $9,000 (10,000-1,000).

Non-Qualified stock options (NSO)

A stock option that does not meet all the ISO conditions or is issued to a contractor, supplier or director is a non-qualified stock option (NSO). An NSO can be issued at any price and there is no waiting period between grant and exercise.

There are no tax consequences when a NSO is granted. However, ordinary income is triggered at the time of exercise, which is calculated as the difference between the fair market value at exercise date and the grant price. When the shares are eventually sold, a capital gain will be incurred.   The capital gain is calculated as the difference between the proceeds on sale and the exercise price.

The advantage to the employer for issuing NSO’s is they are permitted a tax deduction equal to the ordinary income earned by the recipient when the options are exercised.

Example: Cindy is a contractor for Dot.com that is issued 1,000 stock options at a price of $2 per share on Nov 1, 2018. The company’s stocks are worth $1 per share on the grant date. On Nov 2, 2019 she exercised the options and sells the shares when the share value is $10 per share.

Cindy’s stock options are considered NSO because the options did not meet a number of the conditions for it to be an ISO, including the fact that she is a contractor and ISO’s can only be issued to employees.

There are no tax consequences when the options are granted on Nov 1, 2018. On Nov 2, 2019 she will incur ordinary income of $8,000 ($10,000 – $2,000) that will be reported on her 2019 US personal tax return. Since the options were exercised and subsequently sold at the same price, she will not incur a capital gain on the sale.

Restricted Stock or Restricted Stock Units (RSUs)

When shares are issued to an employee which include a stipulation that a future event occurs, this type of share is called an RSU. These shares are issued to the employee; however, they must be returned if the stipulated future event does not occur. Because there is substantial risk of forfeiture there is no tax effect when the employee is issued the shares. Once the future event occurs and the substantial risk of forfeiture is eliminated the tax consequences are triggered.

At the time that the substantial risk of forfeiture has been eliminated the employee will be considered to have earned ordinary income calculated as the difference between the fair market value of the shares at that time and the amount they were required to pay for them, which is generally nil.

When the shares are eventually sold, they will incur a capital gain, which is the difference between the proceeds on the sale and the fair market value at the time the substantial risk of forfeiture was eliminated. This gain will be subject to long term capital gains treatment if the holding period is longer than one year.

Similar to NSO’s the employer is allowed a tax deduction equal to the ordinary income earned by the recipient when the recipient incurs ordinary income at the time the substantial risk of forfeiture occurs.

Example: Cindy is an employee of Dot.com that was issued 1,000 shares of the company on Nov 1, 2018. At the time of issuance, the stock price was $1 per share. The shares had a stipulation that they must be returned if the stock price was not worth $5 per share in two years. On Nov 2, 2020, the stock price was $6 per share, therefore the substantial risk of forfeiture had been eliminated. On Nov 3, 2021 Cindy sells all 1,000 shares when the stock price is $10 per share.

Cindy will have to report ordinary income of $6,000 on her 2020 US personal tax return, this is because the substantial risk of forfeiture was eliminated when her 1,000 shares were worth $6,000 and she did not pay anything out of pocket for these shares. She will also incur a $4,000 ($10,000-$6,000) long term capital gain that will be reported on her 2021 US personal tax return.

Stay tuned for part-two where we will discuss Canadian stock options!

Contact Argento CPA today if you have any questions or looking for expert advice.

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.

The Government of Canada rolled out a new rent subsidy retroactively covering September 27, 2020 until June 2021. This new rent subsidy is similar to the previous rent subsidy originally announced at the beginning of the pandemic, however, this version does not require the participation of landlords.

Eligibility criteria

To be eligible for the CERS you must meet all four of the following criteria:

1. You had a CRA business number on September 27, 2020, a payroll account on March 15, 2020 or you purchased the business assets from another person that had a business number or payroll account on the required dates listed above
2. You are a corporation that is not exempt from tax, an individual or a charity
3. You experienced a drop in revenue compared to the same month in the previous year or compared to the average revenue earned in January and February 2020. There is no minimum revenue drop required to qualify. The rate your revenue dropped is only used to calculate the subsidy you will receive
4. You own or rent a qualifying property that incurs eligible expenses
   
   
   1. Qualifying property
      1. A qualifying property includes Canadian buildings or land that you own or rent and use in the course of your ordinary activities. Your home, cottage, other residence, or rental property used by a non-arm’s length (related) party do not qualify.
   2. Eligible expenses that can be claimed
      1. Eligible expenses include amounts paid or payable to arm’s length parties during the claim period that were under written agreement in place before October 9, 2020 (or a renewal with substantially similar terms)
      2. The maximum eligible expenses that can be claimed is $75,000 per business location and $300,000 in total for all locations
      3. To claim unpaid eligible expenses, these amounts must be paid within 60 days of receiving the CERS payment

Eligible expenses for qualifying rental properties

If you have a rental property, eligible expenses include base rent, property insurance, utilities, common area maintenance, property taxes and customary ancillary services. You cannot claim tenant insurance, leasehold improvements, sales taxes, damages, interest or penalties on unpaid amount or other special amounts.

Eligible expenses if you own a qualifying property

If you own a qualifying property, eligible expenses include, property taxes, property insurance, and mortgage interest. You cannot claim mortgage interest on mortgages that exceed the cost of the property, paid or payment amounts that fall outside the claim period or payments between non-arm’s length parties. 

Lockdown support

The new rent subsidy includes an additional lockdown support of 25% for business that were required to shut down or significantly limit their activities due to health orders issued under Canada, the province or reginal law.

Claim periods

The CERS applications must be filed within 180 days after the claim period. The current claim periods are as follows:

Claim 1: September 27 to October 24, 2020
Claim 2: October 25, 2020 to November 21, 2020
Claim 3: November 22, 2020 to December 19, 2020 (upcoming)

Calculating the subsidy

The subsidy calculation takes into account your eligible expenses up to the maximum claim amounts listed above, your base rent subsidy rate that is based on your revenue drop (see the tables below) and your lockdown support (if you qualify for this top up rate).

Revenue Decline	Base Subsidy Rate
70% and over	65%
50% to 69%	40% + (revenue drop – 50%) x 1.25 (e.g., 40% + (60% revenue drop – 50%) x 1.25 = 52.5% subsidy rate)
1% to 49%	Revenue drop x 0.8 (e.g., 25% revenue drop x 0.8 = 20% subsidy rate)

How to apply

You can apply for the CERS using your CRA online account. The following Government of Canada link provides additional details about the subsidy and online calculators to assist with determining your allowable claim amount. https://www.canada.ca/en/revenue-agency/services/subsidy/emergency-rent-subsidy/cers-how-apply.html

If you have any questions or would like assistance with the application process, we at Argento CPA would be happy to be of service.  

Global Intangible Low Tax Income (GILTI)was introduced as part of the Tax Cuts and Jobs Act that was signed into law in December 2017. Its purpose is to discourage US taxpayers from shifting corporate profits outside the US to low income tax or zero-tax jurisdictions. GILTI results in tax being imposed on the earnings of a controlled foreign corporation (CFC) that earns income on patents, other intellectual property or services that exceeds a 10% return on depreciable tangible assets. A CFC is a foreign corporation with more than 50% of the combined voting power or value being owned by US taxpayers. Each US shareholder that owns 10% or more of the voting power or value may be subject to a GILTI inclusion. 

US shareholders that are US domestic corporations are able to deduct an amount equal to 50% of the GILTI income inclusion and entitled to a credit for 80% of their pro-rata share of the foreign taxes paid on the foreign income. This can result in the US corporation obtaining a full exemption from GILTI tax if the foreign corporation’s tax rate was at least 13.125%. However, the same treatment is not available if the US shareholder is a US individual. Therefore, double taxation can occur where the CFC earns income, but no dividend is paid during the year for a foreign tax credit to apply.

As an example, Mr. Appleby is a US citizen/resident of Canada that operates a Canadian corporation (“Serviceco”) that provides consulting services to other companies. His corporation has minimal tangible assets, which consist of computer equipment and office furniture with a value of $10,000. Each year the corporate earnings exceeds 10% of Serviceco’s tangible assets.  In 2020, Serviceco earned $200,000 consulting income and paid Mr. Appleby a salary of $70,000.  $129,000 ($200,000-$70,000 – ($10,000 x 10%)) of Serviceco’s income is subject to up to 37% tax on Mr. Appleby’s US personal tax return.  This will result in double taxation.

For Canadian tax purposes Mr. Apply be will be subject to personal tax on the corporate earnings of Serviceco when the corporation pays a dividend. If the dividend is paid in a different year, then no foreign tax credit can be applied against the US personal GILTI income inclusion.  

There are several options available to Mr. Appleby to avoid GILTI tax on his Canadian corporate earnings:

• File a special election with his US personal tax return
• Change his shareholding in Serviceco
• Change the legal structure of Serviceco
• Renounce his US citizenship
• Tax Serivceco at the higher Canadian corporate tax rate

File a special election with his US personal tax return

There is an election available to US individuals under Section 962 of the US tax code. If Mr. Appleby were to file this election with his US personal tax return it will allow him to be subject to GILTI as if he were a US corporation. This would entitle Mr. Appleby to a 50% deduction of the GILTI income inclusion and tax at the lower US corporate rate of 21% rather than the higher US personal tax rate of up to 37%. Using the example from above and assuming Serviceco incurred Canadian corporate tax totalling $15,600, Canadian corporate tax can be claimed as a foreign tax credit to reduce or eliminate the GILTI tax. The downside of this election is that it can result in Mr. Appleby’s being taxed at a higher US tax rate when dividends are eventually paid to him.

Change his shareholding in Serviceco

If Mr. Appleby has a spouse who is a Canadian citizen, he may consider changing his shareholdings of Serviceco so that he owns non-dividend paying shares and issue non-voting dividend shares to his spouse. Serviceco would pay Mr. Appleby a salary that reduces his GILTI income inclusion rather than dividends. Any dividends would be issued to his spouse; however, this dividend income could result in tax on split income rules being applied. This would result in the income being attributed back to Mr. Appleby. This income attribution would only be taxable on his Canadian tax return and not his US tax return.

Change the legal structure of Serviceco

Converting Serviceco into an unlimited liability company (ULC).  This will allow him to apply the Canadian corporate tax paid against US income. However, the negative consequences of this option are that the change to an ULC may result in US tax because of any unrealized gains on the corporation’s assets. In addition, ULC’s do not have access to the small business deduction which will result in the Canadian tax rate being higher than if it remained a regular corporation.

Renounce his US citizenship

If Mr. Appleby has no intention of returning to the US, he may consider renouncing his US citizenship. Mr. Appleby will no longer having a US personal tax return filing requirement and thus would not be subject to GILTI tax. Renouncing his citizenship should not be taken lightly and could result in him being subject to expatriation tax if he is a covered expatriate. A covered expatriate is a taxpayer that meets one of the three requirements. (1) average annual net income tax for the period of 5 tax years ending on the date before relinquishing citizenship is greater than $168,000, for those expatriating in 2019 (this figure is adjusted annually). (2) net worth is at least $2 million on the date of expatriation. (3) failure to certify that 5 preceding tax years of returns have been filed. This certification is done by filing form 8854.

Tax Serivceco at the higher Canadian corporate tax rate

Private Canadian corporations that are controlled by Canadian resident shareholders with income under $500,000 can take advance of the small business deduction that reduces their Canadian corporate tax rate to 11% for BC corporations. This tax rate is less than the 13.125% tax rate threshold discussed above, resulting in the GILTI tax exemptions not applying. Mr. Appleby can consider reducing the small business deduction to increase the Canadian corporate tax rate to above the 13.125% threshold so the exemptions can apply.

Before any of these options are implemented careful consideration should be made.  Contact Argento CPA today for advice on how to optimize your tax situation.

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.

Are you in the market for a new vehicle?  The Government of Canada has come up with tax incentives to steer taxpayers towards purchasing zero-emission vehicles in efforts to reduce greenhouse gas emissions in Canada.

What is a Zero-emission vehicle? 

The CRA has defined zero-emission vehicles into the following categories.

• Plug-in hybrid
• Electric
• Powered by hydrogen

Not only will you be saving our beautiful country from greenhouse gases, but you will also be saving on your tax bill too.  For business owners, the incentive is huge and adds up quickly if you have a fleet of vehicles.  Here is how it works.

Zero-emission vehicles may qualify for a 100% CCA write-off in the year of acquisition up to a maximum cost of $55,000 plus sales tax. 

Also, a new federal purchase incentive of up to $5,000 will be available for zero-emission vehicles with a selling price less than $45,000 for 2019-20.  

Contact Argento CPA if you have any questions about the tax implications of purchasing or leasing zero-emission vehicle!

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.

Since the COVID-19 pandemic many employees now have the option to continue working from home. This leave taxpayers wondering if they can deduct home office expenses related to their employment income on their 2020 tax return. Here is everything you need to know about being eligible for home office deductions.

Typically, an employee can claim home office expenses if the following conditions are met.

• The employee is required by his/her contract of employment to provide and pay for such space;
• A T2200 Declaration of Conditions of Employment is completed and signed by the employer;
• The employee is not reimbursed and is not entitled to be reimbursed from his/her employer for such expenses; and,
• The expenses are incurred solely for the purpose of earning income from an office or employment.

In addition to the rules above, you can deduct home office expenses you paid in 2020 if you meant one of the following conditions.

• The workspace is where you mainly (more than 50% of the time) do your work.
• You use the workspace only to earn your employment income. You also must use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.

Expense deductibility is different for non-commissioned and commissioned employees.

• Commissioned employees may deduct rent, utilities, repairs and maintenance, supplies, property taxes, and home insurance up to the amount of commission income.
• Non-commissioned employees may deduct rent, utilities, repairs and maintenance, and supplies.
  

You can deduct a portion of the above costs in respect to your workspace. We calculate the tax-deductible amount by taking the sq. footage of your office space divided by the sq. footage of your home and multiplying that by your total expenses. It is important to note, that you cannot deduct mortgage interest or depreciation on your home.

What if you are only working at home during the COVID-19 pandemic?

Many people are only working at home because of the pandemic which may add up to them doing less than 50% of their work at home during 2020. CRA does recognize this fact and may be willing to accept that the test apply only to the time they work from home due to COVID-19. CPA Canada and CRA are still in discussion as to how that might look.

A short version of form T2200 is also on the horizon. CRA is looking to simplify this form to address the administrative burden that will arise from many T2200 submissions. This form will focus on home office expenses, instead of including a complete list of other employment expenses.

Contact Argento CPA if you have any questions about whether you are earning investment income or business income.

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.

A growing number of taxpayers are trading on the stock market using online broker accounts. Knowing how to report gains/losses from trading activity accurately on your tax return is especially important since failing to do so can end up being a costly mistake and leave you owing lots of money to CRA.

The most important question you should ask yourself is, are you trading on account of business income vs. capital gains.

What is the difference between business income vs. capital gains and what are the factors to consider?

The reason we care so much about whether your trading activity is on account of business income or capital gains, is because business income gets taxed at 100% whereas capital gains are only taxed at 50%. Also, capital gain losses are only deductible against other capital gains, and business losses can be deducted against other sources of income, even employment income. This has a major impact on the taxes you pay at the end of the day.

Factors to consider:

Frequency of transactions
Period of ownership
How much of your time you spend studying and investigating the securities market
The securities you purchase are speculative in nature
Security purchases are financed primarily on margin or by debt
Intention
For those who have a high frequency of transactions, short period of ownership, spend substantial time researching the markets, make speculative trades, and who finance trading on margin or by debt, would be considered day traders and would include 100% of your gains as income. If you did incur losses, it would be advantageous for you to claim those losses against other sources of income.

Most importantly, the intention of the taxpayer is examined to determine whether to treat transactions as income or capital. It is possible that a taxpayer may have investments which are capital transactions and others that are income transactions. You could do that by having two separate investment accounts. One for day trading and one for long term investing.

Do you invest using your TFSA?

Many taxpayers take advantage of the Tax-Free Savings Account to avoid paying any capital gains or tax on interest and dividend income. However, the TFSA is only a tax haven to those who are investing and not day trading on account of business income. Therefore, if you have dozens and dozens of trades during the year and are in fact day trading, CRA could determine that you will owe tax on 100% of your profits, since tax-free capital gains is only available to those who trade to earn investment income.

What if you already filed your taxes and made an error reporting your transactions?

If you made an error reporting your day trading activity as capital gains/losses, you are still able to amend your return to report your taxes accurately. If you had significant losses from your trading, this will be advantageous for you since you can take those non-capital losses and apply it against other sources of income or carry-back those losses for up to 3 previous tax years to recover any tax paid.

Contact Argento CPA if you have any questions about whether you are earning investment income or business income.

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.