Abacus Chartered Accountant

Tax Alerts

The responsibilities—and risks—of being a corporate director (June 2014)

The picture that many Canadians have of corporate directors is that of a highly-paid director of a blue-chip multinational, travelling on the company jet to attend directors meetings in exotic locations. While there are certainly corporate directors who fulfill that perception, the reality is most Canadian companies are small or medium-sized owner-managed businesses. In such small operations, it’s not unusual for family members or friends to be asked to become directors of the company—often, when the business is first incorporated. In other instances, someone may agree to sit on the board of a local non-profit organization, as a way of supporting the activities of that organization. While many directors, especially first-time directors of small companies, view their position as purely nominal or honorary, the fact is that taking a position as a corporate director means taking on very real responsibilities. And, no matter what size the company or organization may be, the responsibilities of those directors are the same.

Every Canadian company must meet a variety of reporting, filing, and payment obligations, at both federal and provincial levels. However, the area which most often causes problems for the directors of a corporation is the obligations of that corporation to the Canada Revenue Agency (CRA). The CRA recently updated and re-issued its publication on the obligations and potential liability of corporate directors, and that publication, Information Circular IC89-2R3, is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tp/ic89-2r3/ic89-2r3-14e.pdf. As outlined in the CRA’s updated release, the obligations of directors generally come down to four questions:

Who can be held liable?
What can they be held liable for?
How can liability be avoided?
What are the potential consequences where liability is established?

On the first question, the net is cast very, very broadly. Or, in the CRA’s wording, “[T]he statutes do not distinguish between directors, whether active, passive, nominee or outside directors.” Anyone who holds the title of director can face personal liability for the company’s failure to fulfill its obligations to the CRA. It’s a common misconception that a director who is not involved in the affairs of the company—who doesn’t, for instance, attend directors’ meetings, read minutes of the meetings, or sign directors’ resolutions—can’t be held liable for decisions made at meetings he or she didn’t attend or implemented through resolutions of which he or she was unaware. In fact, the opposite is true—not only does a lack in involvement in the affairs of the company generally not absolve a director of potential liability, that very lack of involvement can be seen a evidence of a failure to meet the obligations that come with a position as a company director. And, finally, it’s not even necessary to formally hold a position as director in order to be held liable for company failures—the CRA’s position is that “[O]fficers, employees and others who are not legally appointed or elected as directors, but who perform the functions that directors would perform, may be liable.”

What, then, can directors be held liable for? A company, depending on its size and the industry in which it operates, can have a variety of legal and tax obligations, with the latter usually including the obligation to remit amounts on a regular basis to the federal government. Again, depending on the industry and activities of the corporation, those remittance obligations can involve excise duty, refundable tax for scientific research and experimental development or share-purchase tax credits, or payments to non-residents, and corporate directors can be held liable for a company’s failure to remit any or all such amounts. However, the one remittance obligation common to virtually all companies is that of remittance of employee source deductions. Any corporation which has employees must withhold income tax, Canada Pension Plan contributions, and Employment Insurance premiums from the employees wages, and must remit those amounts, together with any required employer contribution, to the CRA on a regular basis. It’s not surprising, therefore, that the majority of cases in which directors have been held personally liable for a corporation’s failure to remit have involved employee source deductions.

The actual mechanics of making source deductions and remitting them to the CRA on time is a function usually carried out by a company’s payroll department or, in smaller companies, a bookkeeper or accountant. While company directors don’t have to be directly involved in that process, what they must do is to make sure that the company is properly withholding deductions or, in the CRA’s words, they “must make every reasonable effort to ensure that source deductions … are withheld, collected, remitted and paid.” That reasonable effort is also known as a director’s “due diligence” responsibility—the director’s obligation to take the care that a reasonably prudent person would take in similar circumstances to make sure that the corporation deducts, withholds, collects, remits, and pays amounts due on a timely basis.

Numerous court decisions have addressed the question of just what constitutes “due diligence” on the part of a corporate director, and the CRA has summarized that duty, as it relates to corporate remittances, as follows.

To ensure that he or she has fulfilled the due diligence obligation, a corporate director should use methods such as:

establishing a separate account for withholdings from employees and remittances of source deductions and other amounts owed to the CRA;
calling on financial officers of the corporation to report regularly on the status of the account; and
obtaining regular confirmation that withholdings, remittances, or payments have in fact been made during all relevant periods.

In practical terms, a corporate director could fulfill this responsibility by requiring the company employee who looks after source deductions and remittances to set up a separate account in which source deductions are deposited, and to provide a regular report to the Board of Directors, with documentary evidence in the form of receipts and/or statements of account from the CRA, confirming that all source deductions have been made and remitted as required. A director who does so is very likely to be seen to have made all reasonable efforts to ensure that the company is in compliance with its obligations.

Where there is a failure to meet those obligations, however, the CRA will look first to the company to make good on any deficiency. It is only where the company is unable to do so—a judgment against the corporation cannot be realized on, or the company has been dissolved or liquidated, or is bankrupt with no assets to pay its obligations—that the CRA will advise the directors, with a “pre-assessment proposal” that they may face liability for the company’s outstanding debts. A director who receives such a communication from the CRA should respond in writing within the time frame set out in the proposal, outlining the steps which he or she had taken to ensure that the corporation was in compliance with its obligations, and should provide documentary evidence of the steps taken. The CRA will then consider that response before deciding whether to issue an assessment against the director personally for amounts owed by the company to the CRA.

Where the CRA does decide that the directors can be held personally responsible for corporate debts, that liability is “joint and several”, meaning that each director can be assessed for the full amount of any amount owed by the company to the CRA, including penalties and interest—assessments for such debts are not issued on a pro-rata basis.

While a director’s potential liability for amounts owed by the corporation to the CRA is significant, it’s not, fortunately, open-ended. The CRA must issue any assessment against a director within two years of the time that a director resigned his or her position with the company. So, in other words, leaving a position as a company director will not insulate that director from liability for actions or omissions which occurred during his or her time as director. However, any assessment in respect of those actions or omissions must, in order to be valid, be issued by the CRA within two years after the date the director resigned.

Most corporate directors, whether in large, small, or medium-sized companies, will never face the prospect of being held personally liable for amounts owed by the corporation to the CRA. Nonetheless, anyone who agrees to act as a corporate director for a company of any size, or for a non-profit organization, should understand that such a position is never simply a nominal or honorary one. Becoming a corporate director means taking on very real ongoing responsibilities and, as the CRA makes clear in its recent publication, ignorance of those responsibilities will not serve as a defence to any potential personal liability.

The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.

Moving expenses—what’s deductible and when? (June 2014)

The spring and summer months are the traditional time for moving in Canada. Moving during these months allows Canadians to both take advantage of the warmer weather and to get settled into the new location in time for the upcoming school year. Canadians move for a lot of reasons—a new job or a job transfer, moving to be closer to family, moving when a growing family needs a larger home or, conversely, downsizing in anticipation of retirement. Whatever the reasons and whatever the distance, however, moving always involves costs and stress. Whether it’s the cost involved in preparing the current home to be put on the market, trips to the new location to search for a home, or just the cost of packing and transporting one’s belongings and driving to the new location, the financial outlay of moving can be considerable. In some circumstances, however, our tax system will provide for a deduction to help offset moving costs.

Not all moves will qualify for tax relief, but where a taxpayer moves to be at least 40 kilometres closer to his or her place of work (for example, a taxpayer who moves from Toronto to take a job in Calgary or Regina or Ottawa), most moving costs will be deductible from employment or business income earned at the new location. The 40 kilometre distance is measured using the shortest route normally available to the travelling public, which in most cases would mean the distance by road. And, moving to be closer to work doesn’t have to mean moving to a new company—a job transfer to another city while continuing to work for the same employer will qualify, assuming the 40-kilometre criterion is met. A deduction is also available where someone who is unemployed moves to start a new job or business, again assuming that all other required criteria are met.

The list of expenses which may be deducted is fairly comprehensive, but not all moving- related costs are deductible. Under the administrative policies of the Canada Revenue Agency (CRA), as outlined in their Form T1-M, Moving Expenses Deduction, the following are considered eligible moving expenses:

traveling expenses, including vehicle expenses, meals and accommodation, to move the taxpayer and members of his or her family to their new residence (note that not all members of the household have to travel together or at the same time);
transportation and storage costs (such as packing, hauling, in-transit storage, and insurance) for household effects, including items such as boats and trailers;
costs for up to 15 days for meals and temporary accommodation near the old and the new residences for the members of the household;
lease cancellation charges (but not rent) on the old residence;
legal fees incurred for the purchase of the new residence, together with any taxes paid for the transfer or registration of title to the new residence (but excluding GST or HST and property taxes);
the cost of selling the old residence, including advertising, notary or legal fees, real estate commissions, and any mortgage penalties paid when a mortgage is paid off before maturity; and
the cost of changing an address on legal documents, replacing driving licences and non-commercial vehicle permits (except insurance), and costs related to utility hook-ups and disconnections.

It sometimes happens that a move to the new home has to take place before the old residence is sold. In such circumstances, the taxpayer is entitled to deduct up to $5,000 in costs incurred for the maintenance of that residence while it is vacant and efforts are being made to sell it. Specifically, costs including interest, property taxes, insurance premiums, and heat and utilities expenses paid to maintain the old residence while efforts were being made to sell it may be deducted. If any family members are still living at the old residence, or it is being rented, no deduction is available.

It may seem from the foregoing that virtually all moving-related costs will be deductible; however, there are some costs for which the CRA will not permit a deduction to be claimed, as follows:

expenses for work done to make the old residence more saleable;
any loss incurred on the sale of the old residence;
expenses for job-hunting or house-hunting trips to another city (for example, costs to travel to job interviews or meet with real estate agents);
expenses incurred to clean or repair a rental residence to meet the landlord’s standards;
costs to replace such personal-use items as drapery and carpets; and
mail forwarding costs.

To claim a deduction for any eligible costs incurred, supporting receipts must be obtained. While the receipts do not have to be filed with the return on which the related deduction is claimed, they must be kept in case the CRA wants to review them.

Anyone who has ever moved knows that there are an endless number of details to be dealt with. In some cases, the administrative burden of claiming moving-related expenses can be minimized by choosing to claim a standardized amount for certain types of expenses. Specifically, the CRA allows taxpayers to claim a fixed amount, without the need for detailed receipts, for travel and meal expenses related to a move. Using that standardized, or flat rate method, taxpayers may claim up to $17 per meal, to a maximum of $51 per day, for each person in the household.

Similarly, the taxpayer can claim a set per-kilometre amount for kilometres driven in connection with the move. The per kilometre amount ranges from 45.5 cents for Saskatchewan to 63.5 cents for the Yukon Territory. These standardized expense rates are those which were in effect for the 2013 taxation year—the CRA will be posting the rates for 2014 on its website early in 2015, in time for the tax-filing season. It is in all cases the province or territory in which the travel begins which determines the applicable rate.

Any moving-related expenses can be deducted from employment or self-employment income (but not investment income or employment insurance benefits) earned at the new location. Where a move takes place late in the year, it’s possible, especially where the move is a long distance one, that such expenses will exceed income earned at the new location during the calendar year. In such cases, it’s possible to carry forward the excess expenses, and deduct them from income earned in subsequent years.

The rules governing the deduction of moving expenses are outlined in some detail on the CRA’s T1-M form. The current version of the form can be found on the CRA website at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/t1-m-13e.pdf, and more information on the tax treatment of moving costs is available on the same website at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/ddctns/lns206-236/219/menu-eng.html.

Any questions not answered by the form or on the website can be directed to the CRA’s individual enquiries line at 1-800-959-8281.

When you don’t agree with your tax assessment (June 2014)

By now, most Canadians, (with the exception of the self employed and their spouses, who have until June 16) will have filed their 2013 income tax returns. And, since the goal of the Canada Revenue Agency (CRA) is to have returns processed and assessed within a maximum of six weeks from the time of filing, many of those who have filed will by now have received a Notice of Assessment for their 2013 return from the CRA.

In most cases, there are no surprises on the Notice of Assessment, and the figures submitted by the taxpayer with respect to income tax owed for 2013 are confirmed by the CRA. Sometimes there are small changes—while the CRA will not alter a return to, for instance, provide the taxpayer with additional credits to which he or she was entitled but did not claim—the Agency does correct arithmetical errors made on the return.

In a minority of cases, however, the figures which appear on the Notice of Assessment differ significantly from those submitted on the return. When that happens, the taxpayer has to figure out why, and to decide whether or not to dispute the CRA’s conclusions.

Many such discrepancies are the result of an error made by the taxpayer in completing the return. A lot of information from a variety of sources is reported on even the most straightforward of returns and it’s easy to overlook, for instance, a T5 slip reporting a few hundred dollars in interest income earned. Even where tax software is used to prepare the return, such errors can still occur. Such tax software relies, in the first instance, on information input by the user with respect to amounts found on T4 and T5 information slips. No matter how good the software, it can’t account for income information which the taxpayer hasn’t provided. In other cases, the taxpayer might transpose figures when entering them, such that an income amount of $25,353 on the T4 becomes $23,533 on the tax return. Once again, the tax software has no way of knowing that the information input was incorrect, and calculates tax owing on the basis of the figures provided.

Where the corrections made by the CRA result in less tax payable, it’s a good day for the taxpayer. But even where there is additional tax owing because of an error or omission made by the taxpayer in completing the return, disputing the assessment doesn’t really make sense when the CRA’s figures are correct. There is, as well, a persistent tax “myth” that if a taxpayer doesn’t receive an information slip (T4 or T5, as the case might be) for income received during the year, that income doesn’t have to be reported and therefore isn’t taxable. The myth, however, is just that. All taxpayers are responsible for reporting and paying tax on all income received and the fact that an information slip was lost, mislaid, or never received doesn’t change anything. The CRA receives a copy of all information slips issued to Canadian taxpayers, and its systems will cross-check to ensure that all income is accurately reported.

There are, however, instances in which the CRA and the taxpayer are in disagreement over substantive issues, and those issues most often involve claims for deductions or credits. For instance, the CRA may have disallowed an individual’s claim for a medical expense, or for a deduction claimed for a business expense, which the taxpayer believes to be legitimate. When that happens, the taxpayer has to decide whether to dispute the assessment.

Whatever the nature of the dispute, the first step is always to contact the CRA for an explanation of the reasons why the change was made, if that isn’t clear from the Notice of Assessment. It used to be possible to meet face-to-face with a CRA representative at a Tax Services Office (TSO), on a drop-in basis or, more recently, by appointment. Unfortunately, such meetings are no longer an option, as in the fall of 2013, payment and enquiry counter service at TSOs was discontinued. Taxpayers who want information about their Notice of Assessment must now call or write to the CRA. The first step to be taken would be a call to the Individual Income Tax Enquiries line at 1-800-959-8281. If that call doesn’t resolve the taxpayer’s questions, he or she can write to or fax the Tax Centre which processed their return. The name of that Tax Centre can be found in the top right hand corner of each page of the Notice of Assessment, and fax numbers and mailing addresses for the Tax Centres are available on the CRA website at http://www.cra-arc.gc.ca/cntct/prv/txcntr-eng.html. Communication with a Tax Centre can only be done by fax or mail, as phone numbers for Tax Centres are not available to the public.

If the situation still isn’t resolved by these communications with the CRA, and a dispute remains, it’s time for the taxpayer to consider filing a formal Notice of Objection. Details on how to do that, and the steps which follow, will be summarized in the next issue of this newsletter.

New reporting requirements for internet business activities (June 2014)

ll Canadian businesses must report and pay tax on any income arising from their business activities, whether those activities are carried out from a traditional bricks and mortar office or storefront, or through one or more websites. The Canada Revenue Agency (CRA) has become increasingly concerned, in recent years, about income generated through e-commerce on the Internet, and particularly about the possibility that such income may go unreported and therefore untaxed.

All Canadian businesses must report and pay tax on any income arising from their business activities, whether those activities are carried out from a traditional bricks and mortar office or storefront, or through one or more websites. The Canada Revenue Agency (CRA) has become increasingly concerned, in recent years, about income generated through e-commerce on the Internet, and particularly about the possibility that such income may go unreported and therefore untaxed.

The CRA’s efforts in this area have been stepped up a notch this year. For the first time, most Canadian businesses, incorporated or unincorporated, will be required to provide specific information on the extent of their internet business activities, and the percentage of their income which is derived from such activities, when filing their annual tax return.

Most businesses do, of course, have a website, but not all business websites exist for the purpose of generating income—some are created and maintained only to provide information about the business and the goods or services it provides, together with contact information. The CRA’s new reporting requirement distinguishes between those two kinds of websites, and only those which are income-generating need be reported. For the CRA, examples of webpages or websites that are covered by the new reporting requirements include (but are not limited to):

webpages and websites that allow the completing and submitting of an order form, the checking out of a virtual shopping cart, or similar transactions;
online market place websites where the goods and/or services of the business are sold; and
webpages and websites hosted outside of Canada that generate income.

Websites which do not generate income need not be reported include:

telephone directory websites that list the webpage or website of a business; and
information-only webpages and websites. (Like directories or ads, these pages and sites give basic information such as a business name, address, telephone number, and general information about goods and/or services provided.)

The process by which the new reporting requirements must be fulfilled differs, depending on whether or not a business is incorporated. For those that are not—generally, self-employed individuals—the required information is reported in a new section of the existing form on which business income is reported and business deductions claimed (Form T2125 for most businesses).

Corporations will report the same information on a new schedule—Schedule 88, Internet Business Activities, as part of the corporation’s T2 income tax return, where the required filing date for that return is after December 31, 2014.

On either form, the business must indicate how many income-generating websites it has, must provide the URL of each of those websites, and must provide an estimate of what percentage of the business’s gross income was received from Internet business activities.

There is one kind of business which is, as yet, not subject to the new reporting requirements. The CRA indicates on its website, without explanation, that “[I]f your partnership earns income from one or more webpages or websites, currently you do not have to report Internet income information.”

Finally, some taxpayers may not have to deal with the new reporting requirements until next year. Since the new version of the T2125 was not made available online until around the beginning of April, the CRA website states that self-employed individuals who filed a 2013 return before April 4, 2014 can include their Internet income information with the 2014 return, to be filed in 2015. As well, information provided in a CRA newsletter indicates that if the tax preparation software used by a corporation for its 2013 return does not include new Schedule 88, the corporation can start filing that schedule with its T2 return for 2014.

New Quarterly Newsletters (November 2012)

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues.