• Underused housing tax – requirements and exemptions
• Shareholder Agreements
• What if you disagree with the CRA
• Don’t do too much trading in your TFSA
UNDERUSED HOUSING TAX – REQUIREMENTS AND EXEMPTIONS
The Underused Housing Tax (UHT), a new federal tax, generally targeted to foreign/non-resident owners, took effect on January 1, 2022. This tax is separate and apart from the City of Toronto Vacant Home Tax. The UHT may create a potential filing requirement for the 2022 calendar year due on or before April 30, 2023. Failure to file an annual return when it is due for affected owners who are individuals are subject to a minimum penalty of $5,000 and those who are not individuals (corporations, trusts, and partnerships) are subject to a minimum penalty of $10,000. A copy of the annual return (Form UHT-2900) can be accessed here: Underused Housing Tax Return and Election Form.
While the UHT is generally only payable by non-resident non-Canadian owners of vacant or underused housing in Canada, there are certain circumstances in legislation where a filing requirement is still required by Canadian entities including corporations, trusts and bare trusts. If you own a residential property in a corporation, partnership, trust, or bare trust, you may be exempt from the UHT but there is still a requirement to file an annual return.
Please check with your FK advisor to determine how the UHT may impact your particular situation. If you require our assistance in filing the annual return, we are offering this service at $1,000 per annual return filing.
For more general information on the UHT please visit the following link:
For all technical publications related to the UHT, you can locate this under further information at the end of the link.
In Budget 2021, the federal government announced plans for an annual one per cent tax on the value of residential real estate that is:
- owned by any non-resident, non-Canadian, and,
- considered vacant or underused.
What is the UHT?
The UHT is intended to apply to underused housing in Canada owned directly or indirectly and wholly or partly by non-resident, non-Canadians. UHT obligations apply for calendar years (beginning with 2022) to affected owners of residential property in Canada on December 31 of the relevant year.
The UHT rules have two requirements: an annual reporting requirement and, for some of these filers, a tax liability for UHT. The tax is calculated by multiplying the residential property’s value by the 1 per cent tax rate. It must be paid to the CRA by April 30 of the following calendar year, when the annual return is also due.
The UHT rules categorize owners of residential property in three broad groups:
- owners with no UHT reporting or tax obligation (referred to in the UHT legislation as “excluded owners”)
- owners required file the UHT return and pay tax (referred to by the CRA in their guidance as “affected owners”)
- owners required to file the UHT return but with no tax payable (also “affected owners”)
Which owners are excluded?
Excluded owners who are exempt from any UHT obligations include (as of December 31 of a calendar year):
- individual Canadian citizens or permanent residents of Canada (“Canadian individuals”), unless they would be exempt as an owner in their capacity as a trustee or partner (excluding personal representatives of a deceased individual)
- publicly traded Canadian corporations
- persons with title to property in their capacity as a trustee of a mutual fund trust, real estate investment trust or specified investment flow-through trust (SIFT)
- registered charities
- cooperative housing corporations
- municipal organizations and other public institutions and government bodies
- an Indigenous governing body or a corporation
- “prescribed persons” (not yet defined by regulation at the time of writing)
Which owners must file the UHT return and pay the tax?
Affected owners of residential property who must file a return and pay the tax include:
- individuals who are not Canadian citizens or permanent residents who do not qualify for an exemption
- private corporations, including Canadian controlled private corporations (CCPC), partnerships and trusts (other than estates) that own residential property in Canada and are not eligible for an exemption
Which owners must file the UHT return but are exempt from the tax?
This subset of affected owners is generally eligible for one of the available exemptions, but they still need to file the annual return to claim the exemption for a calendar year
How is the UHT calculated?
The UHT formula is one per cent of the property’s value multiplied by that person’s ownership percentage. Where property is held jointly (i.e. no percentage is listed in the land registry), the ownership percentage is based on the number of owners.
There are two ways to determine the value of a residential property:
- Taxable value, which is the greater of:
– the assessed tax value for the year under the related property tax assessment, and
– the most recent sale price on or before December 31 of the calendar year, or
- Fair market value, which can be used if the owner files an election with the CRA to use that method for the property (the election will be included on form UHT-2900).
To elect to use fair market value, the CRA states that the owner must get an appraisal report for the property prepared by an accredited, arm’s length real estate appraiser.
When are UHT returns and payments due?
Every affected owner must file an annual return with the CRA for each residential property they owned on December 31 of a calendar year. The return and any UHT payable are due by April 30 of the following calendar year, with the first annual filings and payments due by May 1, 2023 (since April 30 falls on Sunday) for applicable properties owned on December 31, 2022.
Affected owners who own two or more residential properties in Canada on December 31, must file separate UHT returns for each property. Where ownership is shared, each affected owner must file separate UHT returns for the property and either claim an exemption or pay the tax based on their share of value.
At the time of publishing, the CRA has not yet provided details on how to file the return. We understand that the filing can be done electronically, through My Account, My Business Account or Represent a Client, or directly on the CRA’s website. The UHT return can also be filed by paper.
How is the UHT paid and what if it is paid late?
At the time of publishing, the CRA has yet to provide details on how UHT payments can be made.
Daily compound interest will accrue on unpaid amounts at the CRA’s prescribed rate. A deadline extension for filing and payment to the CRA can be made in writing although the CRA has not explained in what circumstances an extension will actually be allowed as it appears the CRA has the power to allow extensions on a discretionary basis.
What happens if a required UHT return isn’t filed?
Every person who does not file a UHT return as required is liable to a penalty equal to the greater of:
- $5,000 for individuals, or $10,000 otherwise, and
- the total of
– five per cent of the UHT tax payable by the person in respect of the residential property for the calendar year, and
– three per cent of the tax payable times the number of complete months after the due date that the balance is unpaid
Where a return is not filed by December 31 of the following calendar year:
- the penalty is determined as if the exemptions were not available, and
- the penalty in (b) above will be determined as if a tax amount was payable for the property.
Where no return is filed for a calendar year at all, that year will never become statute barred.
Finally, a recent change enacted as part of Bill C-32 allows the CRA to decline a request for a section 116 certificate of compliance where a non-resident vendor has not fully complied with its UHT tax and reporting obligations for all periods up to the date of sale.
What are the exemptions?
Affected owners must first determine whether they qualify for one of the following exemptions from the tax. If they do not, the UHT will be payable.
Exemptions based on qualifying occupancy
An owner of a residential property may be exempt for a calendar year in the following situations.
- Primary place of residence – The residential property is the primary place of residence of:
– the owner or their spouse or common-law partner (referred to as “spouse” in this blog), or
– a child of the owner or owner’s spouse who occupies the residential property for authorized study at an institution designated to host international students.
- Qualifying occupants – The residential property is occupied by one or more qualifying occupants in relation to the owner for at least 180 days of the year (counting only the days of the qualifying occupancy period in the year).
A qualifying occupancy period means a period of at least one month in the calendar year during which a qualifying occupant continuously occupies a dwelling unit that is part of the residential property. A qualifying occupant in relation to the owner includes:
- an arm’s length tenant, under a written agreement
- a non-arm’s length tenant who is given continuous occupancy of the dwelling unit under a written agreement for a fair amount of rent
- an individual owner or their spouse who is in Canada to pursue authorized work under a Canadian work permit and who occupies the dwelling unit for that purpose
- a spouse, parent or child of the owner who is a citizen or permanent resident
If the owner and their spouse jointly own multiple residential properties, their ownership may not qualify for the exemptions for either primary place of residence or qualifying occupancy unless they file an election with the CRA to designate only one property for the exemption. The election must be filed as part of the UHT return by the April 30 of the following year. Where the owners own the property jointly, they must also make the election jointly.
Where an owner or their spouse elect to designate one of the multiple properties as a primary residence, they cannot be qualifying occupants of any other properties they may own. Exemptions based on a property’s limited availability
An exemption may be allowed if the residential property’s availability is limited for any of the following reasons.
- Limited seasonal access – The property is not a suitable residence year-round or not accessible during part of the year.
- Disaster or hazardous condition – The property is uninhabitable for at least 60 consecutive days in the calendar year due to as disaster or hazard caused by circumstances beyond the owner’s reasonable control, and the property was not exempt in a previous year for the same reasons.
- Renovation – The property qualifies for the exemption for residential properties that are uninhabitable for at least 120 consecutive days in the calendar year due to a renovation done without unreasonable delay, and the property was not exempt in a previous year for the same reasons.
- Under construction – The property was not substantially completed (generally, 90 per cent or more) before April of the calendar year, or it was substantially completed in January, February or March, offered for sale to the public during the year, but never occupied by an individual.
- Year of acquisition – The owner first acquired the residential property during the year and did not own the same property during any of the nine preceding years.
Exemption based on type of owner
The following types of owners are exempt from UHT:
- deceased owners and their personal representatives (exempt in the year of owner’s death of the owner or the following year)
- surviving joint owners with at least 25 per cent interest in the property (exempt in the year of the deceased owner’s death)
- specified Canadian corporations, which are generally Canadian corporations having less than 10 per cent of their votes or equity value owned by foreign individuals or corporations
- persons who own the property solely in their capacity as a partner of a specified Canadian partnership, which is one that has, on December 31, only excluded owners or specified Canadian corporation as partners
- a person who owns residential property solely in their capacity as a trustee of a specified Canadian trust, which is a trust that owns a residential property where each beneficiary with an interest in the property is, on December 31, an excluded owner or specified Canadian corporation.
Exemption based on prescribed area and condition or person
Recreational and other properties in less densely populated areas may be exempt from the UHT if the residential property is:
- located in a prescribed area of Canada, and
- used personally by the owner, the owner’s spouse or both for at least 28 days during the calendar year.
You can find out whether a residential property is in a prescribed area of Canada using the CRA’s Underused housing tax vacation property designation tool. The determination is based on periodically updated census data, so you should check whether an area qualifies as a prescribed area for UHT purposes each year.
Finally, “prescribed persons” are also exempt under the UHT legislation, but no regulatory definition of this term has been released to date.
Impact of UHT rules on common ownership scenarios and property uses
Private corporations owning residential property
Private corporations, including Canadian-controlled private corporations (CCPCs), are affected owners that are required to file the annual UHT return. Specified Canadian corporations are exempt from UHT tax. However, as the threshold for foreign ownership is quite low, any level of foreign ownership should be closely monitored.
Affected corporations should also keep in mind that the UHT return and liability are due on April 30. If this is out of line with the corporation’s corporate tax filing deadlines, a separate process should be implemented to ensure the UHT requirements are met.
Trusts holding residential property
Trusts can be set up to hold residential property. For residential property held in trust, the trustee is generally the affected owner who is required to file the annual UHT return (trustees of mutual fund trust, real estate investment trust or SIFTs are excepted from this rule). Additionally, unless the trust is a specified Canadian trust (i.e., all the beneficiaries are excluded owners), the property may be subject to the UHT. The UHT legislation appears to assume that the trustees legally own the property, so they – and not the trust – are required to file the return and pay any taxes. While this is in line with the CRA’s processes for filing UHT returns and remitting the taxes, it is out of step with how T3 tax returns are filed. We have suggested to the CRA that a more consistent approach would reduce confusion.
Non-resident owners who own Canadian residential rental property
Non-resident owners who receive rental income from residential property in Canada are affected owners who will have to file the UHT return and potentially pay UHT (depending on whether they qualify for an exemption).
Affected owners who have elected (under section 216 of the Income Tax Act) to file a Canadian tax return should keep the different filing deadlines in mind – that is, UHT returns and payments are due on April 30 of each year while section 216 tax returns may be due on June 30. We have suggested to the CRA that consolidating these filing requirements could reduce compliance costs.
Things to watch out for
Although the UHT legislation took effect from January 1, 2022, some details are still unclear. As currently written, the UHT is overly broad and certain resident Canadians may have UHT filing and payment obligation. Additional regulations may be introduced in the future to prescribe special treatment for certain persons, properties or areas.
We understand from the CRA that owners can start filing UHT returns and paying UHT for the 2022 calendar year as early as February 6, 2023. The CRA has yet to publish the annual return and election forms, however, and guidance on the CRA’s website is limited.
Whenever a private corporation has shareholders from more than one family (and sometimes even within the same family), a shareholders’ agreement should be considered.
A typical situation is where two or three individuals go into business together, and incorporate their business, with each one owning an equal or unequal number of shares of the corporation.
If you do not have a shareholders’ agreement, the normal rule is that a majority of the voting shares can elect the board of directors, and the board of directors can do pretty much what they want with the management of the company. Whoever controls the board controls the business. A minority shareholder might just as well have no votes at all. (In some cases there is Court action that can be taken if the minority shareholder is being unfairly treated, but this is uncertain, slow and expensive.)
A shareholders’ agreement (sometimes called a Unanimous Shareholders’ Agreement) can protect minority shareholders and allow the parties to deal in a planned way with various contingencies that can arise. It can become quite a complex document, as there may be many conditions to plan for.
Some of the issues that a shareholders’ agreement can cover are the following:
- Control of the corporation:
who will be on the board? A minority shareholder can be guaranteed one or more seats on the board of directors. The agreement can also guarantee that specific individuals will hold specific positions as officers of the company, such as President or Treasurer.
- What happens if a key player dies, becomes disabled, or wants out of the business?
The agreement can provide a mechanism for the remaining shareholders to buy the departing shareholder’s interest, and a method of valuing that interest.
- What if the key owners no longer get along?
For a two-shareholder company, one solution is a “shotgun” arrangement. Either owner (“A”) can at any time trigger the shotgun by offering a price for the shares of the other (“B”). B then chooses between selling their shares for that price, or buying A’s shares for that price. This keeps A honest: if the offer is too low, B will simply take A’s shares at a low price, while if the offer is too high, B will sell out and take the cash.
- Options to acquire more shares from the corporation at a pre-specified price.
- Compensation and incentives such as bonuses.
These are normally decided on by the directors, but a shareholders’ agreement can override this, or can set limits.
- Tax issues, such as ensuring that the corporation’s capital dividend account (which allows certain amounts of dividends to be paid out tax-free) is used fairly; or maintaining the corporation’s assets in a way that will qualify for the capital gains exemption if shareholders sell their shares.
Should the corporation hold, and pay for, life and disability insurance on the key owners? Should the owners cross-hold policies on each other’s lives, so that if one dies the other will have funds to buy the deceased owner’s shares from the estate? Should the directors be insured against liability, including for unremitted income tax source deductions and unremitted GST/HST?
- What happens if an offer comes along from a third party to buy out the controlling shareholder?
The agreement can provide that the controlling shareholder can only accept if the minority shareholders are given the same offer. It can also provide rights of first refusal, so that other shareholders would have the option of matching the third party’s offer.
- Transfers of shares normally require approval of the directors or shareholders of the company.
The agreement can provide that such approval is guaranteed for certain kinds of transfers (e.g., to family members, a holding company or a family trust).
Without an agreement, the board of directors has the discretion to declare whatever dividends they want (provided the company is solvent) — or no dividends at all. The agreement can require minimum dividends based on specific levels of profitability, or can require that certain amounts be reinvested in the business.
Obviously there is a vast range of possible considerations for shareholders’ agreements. The above points highlight only some of them. Anyone entering a new corporate venture should seriously consider such an agreement. Although they are time-consuming and expensive to negotiate and draw up, they help focus the parties up-front on some of the issues that are likely to arise during the life of the business. Without such an agreement, disputes between the parties may become unresolvable.
There are many tax planning issues relating to shareholder agreements as well. For example, the existence of an agreement can change the “control” of the corporation for tax purposes. This can affect its status as a Canadian-controlled private corporation, whether it is “associated” with other corporations for purposes of the small business deduction, and many other things. Careful analysis of all the tax implications is crucial when designing a shareholders’ agreement.
WHAT IF YOU DISAGREE WITH THE CRA?
What do you do if the Canada Revenue Agency issues you an income tax or GST/HST Notice of Assessment (or Reassessment), and you believe the CRA is wrong and that you should not be paying so much?
The CRA’s role
As you may know, the CRA doesn’t create the law. The rules for our income tax system are set out in the Income Tax Act, as amended by Parliament every year. Similarly, the GST and HST rules are enacted in the Excise Tax Act. The Department of Finance Canada is responsible for designing and drafting changes to these Acts.
The CRA’s job is to administer and enforce the system. As such, the CRA is bound by the law. However, sometimes the Agency’s interpretation of the law is different from that of taxpayers, and can successfully be challenged. CRA auditors often make technical mistakes, as the legislation is very complex. Even more often, the CRA reviewer or auditor may not have properly understood the facts of your case.
Objection (appealing within the Canada Revenue Agency)
The first step is to make sure that you understand the rules of the Income Tax Act or Excise Tax Act as they apply to your problem. Sometimes, even though the rules seem unfair, they are being correctly applied. If the rules are clear, then no matter how much you dislike paying the extra tax, you may have no choice.
Don’t hesitate to get professional advice at this stage. An hour spent with an expert tax accountant or lawyer will be well worth it, if as a result you can know whether the assessment is simply a clear application of the law, or whether you have a realistic chance on objection or appeal.
The next step is to contact the CRA and request an adjustment. Sometimes a phone call can help iron out your problem and clarify the issues, though you may wish to put your request in writing. You can request adjustments online using cra.gc.ca/myaccount.
However, you will need to file a Notice of Objection before the deadline for doing so expires. This can be done online or on paper. The deadline is 90 days from the date of sending the notice of assessment or reassessment to which you are objecting (or, for personal income tax, one year from the original April 30 or June 15 deadline for filing the return in question, if that is later). The date showing on the Notice of Assessment is normally presumed to be the date of sending it (Income Tax Act, subsection 244(14)).
Even if you are negotiating a solution and CRA officials have agreed orally or in writing to your position, you should file a Notice of Objection if the deadline is approaching and no reassessment has been issued to your liking. Otherwise you lose your legal right to appeal. The CRA’s promise to correct an assessment will not be binding until the reassessment is actually issued.
Within about 6-12 months after you file the Notice of Objection, your case will be assigned to an Appeals Officer. (The terminology is confusing here: you have filed an objection, not an appeal, but it is an “Appeals Officer” who considers your objection.) This officer is internal to the CRA but is independent of the Audit section that issued the reassessment. Thus your case should be given a “fresh look” by someone who has no preconceptions as to the result. However if at this stage you provide new documents that the auditor had requested from you and not received, the Appeals Officer may be required to send the file back to the auditor to review those documents and analyze them for the Appeals Officer.
The Appeals Officer is required by CRA administrative policy to give you a copy of the auditor’s working papers and other documents in the file (except confidential material relating to third parties, or any legal advice the CRA received that is protected by solicitor-client privilege).
You can also file a request for a copy of the entire file under the Privacy Act by contacting the Access to Information and Privacy (ATIP) Office of the CRA, and making a request online. It can very useful to get copies of all correspondence, memos, email and analysis engaged in by the auditor and other persons the auditor may have consulted. (If your business is incorporated, so that the taxpayer that was assessed is a corporation, the same information is available, for a $5 fee, under the Access to Information Act rather than the Privacy Act.)
You can speak to the Appeals Officer and try to convince him or her of the correctness of your position, or you can make your case in writing, as you should have already done in the Notice of Objection. There is no formal “hearing”. Dealing with the Appeals Officer is similar to dealing with an auditor who is proposing a reassessment.
If the Appeals Officer agrees with you, the reassessment will be “vacated”, or will be “varied” to reflect your position (and a new reassessment issued), and that is the end of the matter. If not, the reassessment will be “confirmed”. You will thus receive a Notice of Decision or Notice of Confirmation by registered mail, or in some cases on your online account. At this point you have exhausted your routes of appeal within the CRA, and must resort to the courts if you are still not satisfied.
Appealing to the Tax Court
You have 90 days from the day the Notice of Confirmation or Notice of Decision is sent to you to appeal to the Tax Court of Canada. If you miss the deadline, an extension of up to one year may be available, but only if certain conditions are met. After the one-year extension, you are completely barred from appealing.
If the amount at stake involves less than $25,000 in total federal tax and penalties for any given taxation year, not counting interest, you may choose to use the Tax Court’s Informal Procedure. (Including provincial tax and interest, this usually covers disputes of up to about $40,000-$50,000 per taxation year assessed.) Otherwise, unless you give up your right to appeal the excess, you are required to use the court’s General Procedure.
The Informal Procedure is informal in terms of paperwork, but there is still a formal hearing before a judge in a courtroom. (The Tax Court has courtrooms in cities across Canada.) You can simply write to the Tax Court to say that you are appealing, though using their standard Notice of Appeal form or filing online is advisable. You can file your appeal online at tcc-cci.gc.ca. There is no filing fee. You do not need to retain a lawyer, though you may if you wish. Many taxpayers want their accountant there to present their case.
An Informal Procedure hearing is still quite formal, and follows a set format. After each side makes a brief opening statement, you must present all your evidence by giving sworn testimony, plus any other witnesses that you bring. You and other witnesses giving evidence will be cross-examined by the Department of Justice lawyer representing the Crown (the CRA). Then the Crown presents any evidence they have, and you (or your representative) can cross-examine their witnesses. Then you make your legal argument, based on the evidence presented. Then the Crown makes its legal argument. Finally you have a rebuttal. (During the argument phase, no new evidence can be presented, though the judge can bend this rule if he/she wishes.) In theory, you are supposed to receive a decision within 12 months of filing your appeal, but it often takes longer, especially since the Court is still recovering from the backlog caused by COVID.
For the General Procedure, you should retain a lawyer. (Technically, you can act for yourself, but given the complex court rules and procedures involved, this is not advisable.) A case under the General Procedure can easily take two years or more to get to trial, and even longer before the judge issues a decision.
Note that the appeal is only about whether the assessment is correct. If the CRA auditor or Collections officer acted unreasonably towards you, that doesn’t matter, and the Tax Court will take no notice of such evidence.
For more information on appealing, see the Tax Court’s web site at tcc-cci.gc.ca.
Do you pay the balance owing?
In general, while your case is under objection or under appeal to the Tax Court, you cannot be forced to pay the balance owing (there are some exceptions to this rule). Interest will continue to accrue on the unpaid balance, however; the current rate is 8%, compounded daily (the rate changes every quarter). This interest is non-deductible.
Should you pay anyway?
If you believe that your case is likely to lose, or if you have the funds available, it is usually a good idea to pay the balance. That will stop the non-deductible interest from accruing in the event you lose. And if you win, you will receive refund interest (currently at a rate of 6% compounded daily for taxpayers that are not corporations) when the overpaid balance is refunded to you.
Paying the balance has no effect on the outcome of the case. Neither the Appeals Officer nor the Tax Court will consider it an admission of liability. In fact, neither the Appeals Officer nor the Tax Court will normally even be aware of whether you have paid or not. Collections and Appeals are quite separate departments within the CRA.
Note that if you have a GST/HST assessment, or an assessment relating to source deductions (such as payroll) that were withheld and not remitted, there are no restrictions on CRA collection action, and the CRA will normally take action to collect the balance even while the assessment is under objection or appeal. (It is possible to get Collections officers to use their discretion to hold off on collection action, if you appear to have a good case and it appears that you will still have assets after the case is resolved.)
Beyond the Tax Court
After the Tax Court of Canada has given its decision, either you or the CRA can appeal to the Federal Court of Appeal. An appeal can be brought only on matters of law; you cannot appeal the judge’s findings of fact (such as whether any evidence you gave was credible), unless you can show that the judge made a “palpable and overriding error”, which in practice is almost impossible to do.
It typically takes over a year from the time an appeal is filed until the Federal Court of Appeal gives its judgment.
In rare cases, an appeal from the Federal Court of Appeal will be heard by the Supreme Court of Canada. That Court accepts appeals only on matters it considers to be of national importance, and typically considers only four or five tax cases a year. You must apply to the Supreme Court for “leave to appeal”. A panel of three justices of the Supreme Court will consider your written application and decide whether the appeal should be heard. Even then, of course, that is no guarantee the appeal will be allowed—it just means that you will be permitted to present your case to the Supreme Court.
Administrative Appeals — The “Taxpayer Relief Package”
There is one set of rules that are within the CRA’s discretion, and for which you cannot file a Notice of Objection or appeal to the Tax Court. These are part of the Agency’s “Taxpayer Relief package” (formerly called “Fairness”).
The “Taxpayer Relief package” has a number of components. One of them allows the CRA to reopen your return and issue a reassessment to reduce your taxes for any past year, going back up to 10 years from the year you apply. If, for example, you discover that you neglected to claim a credit or deduction that you could have claimed six years ago, you can apply to the CRA to reassess your return for this purpose. Once 90 days have passed from the original assessment, and one year has passed from the original due date for the return, you cannot file a Notice of Objection and so you cannot force the CRA to do this. But in many cases the Agency will honour your request, particularly where the failure to make the claim was a result of an oversight on your part. (Your request will generally not be allowed if what you are doing is considered to be retroactive tax planning.)
Another element of the Taxpayer Relief package allows the CRA to waive or cancel interest and penalties, again provided you apply within 10 years of the taxation year during which the interest accrued. Interest is automatically added to payments of tax or instalments that are not made on time, and is compounded daily. Penalties are also applied in certain cases. The CRA may waive these if you can fit into the Agency’s guidelines under its Information Circular (07-1) relating to waiver of interest and penalties. Grounds for waiver include:
• a serious illness or accident that prevented you from filing or making a payment on time
• serious emotional or mental distress, such as caused by illness or death in the immediate family
• disasters such as a flood or fire
• civil disturbances or disruptions in services, such as a postal strike
• processing delays that resulted in you not being informed, within a reasonable time, how much was owing
• incorrect information that you received from the CRA
• “financial hardship”: your inability to pay the total owing due to the amount of accrued interest.
Note that the CRA cannot waive the amount of tax you owe; the waiver applies only to the interest and penalties.
A request for Taxpayer Relief can be made on Form RC4288, by writing a letter, or online from your CRA “My Account” or “My Business Account”.
If you are unhappy with the CRA’s decision on a Taxpayer Relief issue, you can ask for a “second review”, which is undertaken by different officials within the CRA. If you are still unhappy with the next decision, you can apply to the Federal Court for “judicial review” of that decision. This can be done on your own, though it would be wise to consult a tax lawyer, and to retain a lawyer to handle the application if the amount involved is substantial. (In this process, you provide your evidence by way of Affidavit; you cannot actually give live evidence.) However, the Federal Court normally cannot substitute its judgment for that of the CRA. It will only grant relief if you can show that the CRA’s decision was unreasonable — for example, the CRA did not explain the reasons for its decision, or did not act with procedural fairness. If the CRA’s decision was “transparent, intelligible and justified” (the Vavilov test, from a 2019 Supreme Court of Canada decision by that name), you are out of luck. Even if you win, the best the Federal Court can normally do is to send the matter back for a further review by different CRA officials.
If you are considering a Federal Court application, note that the timeframe for filing the application is very short — normally 30 days from when the CRA issues its second-level decision (Federal Courts Act, section 18.1). Note also that it may be useful, once you have started the application process so that you have met the deadline, to file a Privacy Act request as discussed above to get a copy of the CRA’s file on your Taxpayer Relief request. That will allow you to know the reasons why the CRA reached the decision it did, and to provide evidence and argument to respond to those reasons.
By law, neither the CRA nor the Courts can cancel tax that is legally owing. However, there may be unusual circumstances where it is unfair for you to have to pay.
For example, one such situation might be where you relied on CRA misinformation to your detriment, and tax became payable as a result where it would otherwise not have been payable.
In rare cases, it is possible to obtain a remission order that cancels tax. A remission order is actually an Order-in-Council passed by the federal Cabinet.
DON’T DO TOO MUCH TRADING IN YOUR TFSA!
As is well known, the Tax Free Savings Account (TFSA) rules allow you to invest a substantial amount of money in a TFSA, and all interest, dividends and capital gains earned in the account are tax-free.
For 2023, another $6,500 is added to the amount you can contribute.
‘The age of eligibility for the TFSA is 18. It started in 2009 (with $5.000 being the maximum contribution that year and now it is $6500). The cumulative contribution is $88,000 in 2023 for people who were at least 18 in 2009.
You can withdraw funds from a TFSA at any time with no tax cost, and the amount you withdraw becomes available to re-contribute, but only from the following January 1. If you recontribute too soon, a penalty tax applies.
Do not swap securities in or out of your TFSA, i.e., in exchange for money or securities in other investment accounts. Severe penalties apply to a “swap transaction”.
Do not do too much active trading in your TFSA. If you buy and sell securities regularly, the TFSA may be considered to be “carrying on business”, and then it loses its tax exemption and you will have to pay tax, as a trust, at the highest tax rate that applies to individuals (something in the 50% range, depending on your province of residence). Also you will be personally liable for that tax, so the CRA can assess you to collect it if the TFSA doesn’t have sufficient assets to pay.
The line between owning stocks as capital investments and holding them for trading as a business is not always clear. At one extreme, if you buy or sell a stock once a month there should be no problem. At the other extreme, if you are trading almost every day and holding stocks for only a few days at a time, that will be considered carrying on business and the TFSA will be taxed.
So be careful about this!