Topic: Tax Tip

The Canada Emergency Wage Subsidy – The Cavalry Is Coming

The Canada Emergency Wage Subsidy (“CEWS”) legislation has been released and is now law.  In general, the CEWS will reimburse eligible employers 75 per cent of the amount of remuneration paid to eligible employees (to a maximum benefit of $847 per week).

The legislation was prepared under less than ideal circumstances so it is not surprising that there are a number of questions and observations we hope the government will address.  However, we can now provide more answers than in our April 7, 2020 Tax Tip.

What Entities are Eligible

The following entities qualify for the CEWS, if other conditions, discussed below, are met:

  • corporations that are not public institutions or tax exempt;
  • individuals;
  • registered charities that are not public institutions;
  • most Not-for-Profit entities that are not public institutions; and
  • partnerships where all of the members are any of the above.

Public bodies such as municipalities, local governments, Crown corporations, wholly owned municipal corporations, public educational institutions and hospitals do not qualify for the CEWS.

What Eligible Entities Qualify

If you determine you are an eligible entity you must then determine if you are an eligible entity that qualifies for the CEWS (“Qualifying Entity”). This requires that:

  • the eligible entity suffered a decrease in revenue of at least 15% in March 2020 and at least 30% for April and May when compared to revenue earned in the same period in 2019; or
  • when compared to the average revenue earned in January and February 2020 if the entity was not carrying on business on March 1, 2019 or, if it was, it elects to use this period instead of March, April and May 2020; and
  • the entity had a valid account number with the Canada Revenue Agency (“CRA”) on March 15, 2020 in relation to payroll remittances. This is typically a 9 digit business number with the program code RP affixed to it (e.g., 12345 6789 RP 0001). 
  • the individual who has principle responsibility for the financial affairs of the eligible entity attests that the entire application is complete and accurate (e.g., the decline in revenue); and
  • Application for the CEWS is submitted in prescribed form and manner before October 2020

There are no prescribed forms or procedures yet but, according to the CRA press release , employers will be able to apply through the CRA’s “My Business Account” portal (must register for this service) or a web-based application that, at the time of writing, has not been released. Signing up for direct deposit should expedite the receipt of funds once an application is approved.

Employers will be required to apply for each qualifying period in which they feel they are eligible for the subsidy. Applications can be made up until September 30, 2020 so, for companies that can weather the storm for a while, they may want to wait so they can determine what eligibility method is best for them. The first method used is the one that must be used for subsequent claims.

Qualifying Revenue

There are some inconsistencies in the wording of some of the legislation regarding how revenue is to be calculated.  It seems that qualifying revenue is intended to be arm’s length revenue earned in the course of ordinary activities in Canada, calculated using normal accounting methods.  Employers must select an accounting method when first applying for the CEWS and are required to use that method for the duration of the program. It excludes extraordinary items or items on account of capital (e.g., capital gain).

Alternatively, employers can calculate revenue using the cash method.  No matter what the choice is, employers must use the same method consistently when determining eligibility.  

The previous announcements did not address circumstances where an employer would be an intended beneficiary of the CEWS but is blocked for a variety of reasons, such as an inappropriate corporate structure.  Concerns were raised to the government and the legislation now provides relief for some of these situations:

For a group of eligible entities that normally prepares consolidated financial statements, each member of the group may determine its qualifying revenue separately but the same method must be applied for all other members of the group.

Similarly, all members of an affiliated group (e.g., common control by a person or the person’s spouse) may jointly elect to use the same consolidated revenue for the comparison.

Where a non-arm’s length group of companies pays its employees through a single company (for a fee), the entity can calculate revenue using a formula that, essentially, applies the pro-rata changes in the arm’s length revenues earned by the operating entities to the fee charged by the payroll entity.

Reference Periods

The reduction in revenue percentage is calculated by comparing revenue earned in specified periods to defined “reference periods”. 

The following table illustrates the choices of reference periods for each “claiming period”. Please note that an applicant can use the average revenue of the first two months of 2020 if the employer did not operate during the regular reference period or if they elect to use this method.

Eligible Periods

An employer’s eligibility is generally determined by the change in monthly revenues, year over year, for the calendar month in which the claiming period began. Alternatively, employers can elect to compare their monthly revenues to their average revenues for January and February 2020. Employers must select an approach when first applying for the CEWS and use that approach for the entire duration of the program.

To provide greater certainty to employers, once an employer is found eligible for a specific claiming period, the employer would automatically qualify for the next period.

This table outlines each claiming period and the month in which a decline in revenue would be required to qualify for the subsidy.

  Claiming period Required reduction in revenue Reference period for revenue comparisons
Period 1 March 15 – April 11 15% March 2020 over:
  • March 2019 or
  • Average of January and February 2020
Period 2 April 12 – May 9 30% April 2020 over:
  • April 2019 or
  • Average of January and February 2020
Be eligible for Period 1
Period 3 May 10 – June 6 30% May 2020 over:
  • May 2019 or
  • Average of January and February 2020
Be eligible for Period 2

The legislation includes a welcomed provision that deems an applicant to meet the declining revenue test for the current claim period if it met the test for the immediately prior claim period.  This rule ensures that employers will have one month’s notice before losing eligibility. 

For example, an employer that increases its revenues (or did not have a 30% decline in revenue) in Period 3, will be eligible in Period 3 if it met the declining revenue test in Period 2. Note that eligibility in Period 3 cannot be based on eligibility in Period 1 as it is not the immediately preceding period.

There are currently 3 qualifying periods but the government can extend the program until the end of September 2020.

Eligible Employees

The CEWS is only available for remuneration paid to eligible employees.  Eligible employees are individuals employed in Canada other than those who have not been remunerated for 14 or more consecutive days within the qualifying period.

This 14 day exception ensures that the CEWS will not be paid for employees who were eligible for the Canada Emergency Response Benefit (“CREB”) in the qualifying period. 

Amount of Subsidy

The subsidy amount for a given employee on eligible remuneration paid for the period between March 15 and June 6, 2020 is be the greater of:

  • 75 per cent of the amount of remuneration paid, up to a maximum benefit of $847 per week; and
  • the amount of remuneration paid, up to a maximum benefit of $847 per week or 75 per cent of the employee’s baseline remuneration (defined below), whichever is less.

To avoid abuse, the CEWS is only available for non-arm’s length employees employed prior to March 15, 2020.  For these employees the subsidy is the least of:

  • eligible remuneration paid in any pay period between March 15 and June 6, 2020,
  • 75 per cent of the employee’s baseline remuneration for that week; and
  • $847

The baseline remuneration is defined to be the average weekly eligible remuneration paid to the employee from January 1 to March 15, 2020.  Employers can exclude, when calculating this average remuneration, any period of seven or more consecutive days (between January 1, 2020 and March 15, 2020) for which the employee was not remunerated.  It is only the subsidy on any amount above the baseline remuneration that is denied for non-arm’s length employees that is not allowed.

The baseline remuneration can actually be helpful to any employee that is hired back for less than they were paid prior to March 14, 2020.  For these situations, the CEWS will be calculated on the baseline remuneration as it will be higher than the post March 15, 2020 wages.  The benefit actually accrues to the employer because they receive the subsidy but the government has stated that they strongly encourage employers benefiting from this baseline bump to top up employees’ post March 15, 2020 salaries accordingly.

Eligible Remuneration

Only eligible remuneration paid to an eligible employee can qualify for the CEWS.  Eligible remuneration includes salary, wages, commissions, fees, or other amounts for services.  Eligible remuneration does not include retiring allowances, stock option benefits and amounts that can reasonably be expected to be paid back to the employer (or a person related to the employer). 

Furthermore, there is an anti-avoidance rule that excludes from eligible remuneration, amounts above the baseline amount where the employer increases the pay of an employee during the qualifying periods with the intent to reduce the pay afterwards where one of the main purposes was to increase the amount of CEWS available. 

The object of the anti-avoidance rule appears to focus on questionable behaviour of employers trying to gain an advantage during this period of distress.  It does not appear to target situations where an employer has bona fide reasons to increase the pay (e.g., paying higher than normal salary due to risk of contracting COVID-19).

Compliance and “Getting Cute”

Applicants will have to keep records demonstrating their eligibility to claim the CEWS and employee remuneration and attest to eligibility for the CEWS. 

If it is subsequently determined that an employer did not meet the eligibility requirements repayment of the amounts received under the program will be required. 

Applicants that engage in artificial transactions to reduce revenue for the purpose of claiming the CEWS will be subject to a penalty equal to 25% of the value of the subsidy claimed; on top of repaying the entire subsidy.  In addition, employers could be charged a 200% penalty and face up to 5 years in prison under the regular tax avoidance provisions in the Income Tax Act.

The government also has the option to disclose any applicants’ identity to the public.  This deviation from confidentiality seems to be included as a deterrent to abusing the program but its use is not limited to those situations.  Absent any other laws to the contrary, the government could, for example, disclose identities to promote the program and its successes.

Interaction with Other Relief Programs

Things have not changed since our previous release.  Employers that have claimed the 10% wage subsidy, must reduce the subsidy from the wages claimed for CEWS purposes.

The CEWS will be reduced by EI benefits received by the employees participating in the Work-Sharing program

Government Assistance

The CEWS will be taxable to the employer as government assistance.

Beyond the CEWS: Refund for Payroll Contributions

The government has expanded the CEWS to a 100% refund of certain employer-paid contributions to Employment Insurance, Canada Pension Plan, Québec Pension Plan, and Québec Parental Insurance Plan. This refund covers 100% of these amounts for each week throughout which an employee is on leave with pay and for which the employer is eligible to claim the CEWS for that employee.

The Cavalry has started to arrive.  We hope the government will continue to send it out to help Canadians coast to coast until the economy begins to recover from the COVID-19 pandemic.

If you have any questions regarding this release, please feel free to contact one of the Cadesky Tax professionals.

The Canada Emergency Wage Subsidy – Is The Cavalry On Its Way?

The Federal government recently announced a number of measures to assist Canadians during the current COVID-19 crisis.  Two measures were introduced to assist businesses with retaining, rather than laying off, employees.

The 10% Temporary Wage Subsidy (“TWS”) is a three-month measure that will allow eligible employers to reduce the amount of payroll deductions required to be remitted to the Canada Revenue Agency (the “CRA”).  The subsidy is 10% of remuneration paid by eligible employers (from March 18, 2020 to June 19, 2020) of up to $1,375 per employee, and a maximum of $25,000 per employer.  Given its limited value, Canadians were disappointed with this support program.

In response, the government subsequently announced The Canadian Emergency Wage Subsidy (“CEWS”).  This is a more meaningful subsidy which, when implemented, is intended to subsidize 75% of wages paid by eligible employers (a trust may be an eligible employer for the CEWS but is not, for TWS purposes)  for up to 12 weeks, retroactive to March 15, 2020,  to a maximum of $847 per week per employee (including new employees).  This means the government will subsidize up to 75% of wages for any employee, but based on a maximum annualized wage of $58,725. The subsidy for employees earning less than this amount would be based on the actual earnings whereas the subsidy for employees earning more than this amount would capped at this amount (yielding $847 per week). 

The devil will be in the details but here is what we know about the CEWS, so far.


To qualify, an employer must meet the following conditions:

  1. The employer pays remuneration to an employee between March 15, 2020 and June 6, 2020. Remuneration here refers to amounts which the employer would generally be required to withhold deductions at source.  Basic salaries and wages are included but severance pay is not. Neither are items such as stock option benefits or the taxable benefit for personal use of a corporate vehicle.
  1. Eligible employers include individuals, taxable corporations, and partnerships consisting of only eligible employers as well as non-profit organizations and registered charities. Public bodies such as municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals are not eligible for the CEWS.
  1. The employer must experience at least a 30% drop in arm’s length monthly revenue year-over-year (for the calendar month in which the period began) from business carried on in Canada. Revenue is to be calculated using the employer’s normal accounting method, and excludes revenues from extraordinary items and amounts on account of capital. The subsidy will be taxable to the employer but will not be considered to be revenue for the purpose of measuring year-over-year changes in monthly revenue.

The claim period and the reference revenue period are outlined as follows:

  Claim Period Reference Revenue Period
Period 1 March 15 to April 11 March 2020 over March 2019
Period 2 April 12 to May 9 April 2020 over April 2019
Period 3 May 10 to June 16 May 2020 over May 2019


The maximum subsidy for an arm’s length employee on salary, wages, and other remuneration paid between March 15, 2020 and June 6, 2020 would be the greater of:

  1. 75% of remuneration paid, up to a maximum of $847 per week; and
  2. the amount of remuneration paid, up to a maximum of $847 per week or 75% of the employee’s pre-crisis weekly remuneration, whichever is less.

For a non-arm’s length employee, the subsidy amount for the employee is the amount of salary, wages, and other remuneration paid between March 15, 2020 and June 6, 2020, up to a maximum of $847 per week or 75% of the employee’s pre-crisis weekly remuneration.

According to the government’s news release, employers may be eligible for a subsidy of up to 100 per cent of the first 75 per cent of pre-crisis wages or salaries of existing employees.  These employers would be expected where possible to maintain existing employees’ pre-crisis employment earnings.

Employers will also be eligible for a subsidy of up to 75 per cent of salaries and wages paid to new employees.

This subsidy has no overall limits per employer, unlike the TWS.


Employers can be eligible for both the CEWS and TWS, but any benefit from the TWS for a specific period will reduce the amount available under the CEWS for the same period.  The CEWS will also reduce an employer’s federal tax credits that are based on the same remuneration (e.g., SRE&D credits).

The CEWS is not available to an employer for remuneration paid to an employee in a week that falls within a 4-week period for which the employee is eligible for the Canadian Emergency Response Benefit (“CERB”).


The CEWS subsidy, like the TWS, is considered to be government assistance and will be fully taxable as income to the employer. 


First and foremost, legislation to implement the CEWS has yet to be released as there are a number of issues the government has to work out before taking any meaningful steps forward.  The problems we believe are being addressed include;

  1. How to define “arm’s length”. If it follows the meaning for income tax purposes, then related entities will not be arm’s length.  This could make some employers ineligible for the CEWS.  For example, if all employees of a related group of companies are centralized through a related management company, the revenues earned by the management company (the fee to administer payroll) would not be arm’s length, and the subsidy would not be available.
  1. How will revenue be calculated? For many employers, accounting adjustments are processed at the year end, as opposed to monthly. It is unclear whether employers will be required to make special adjustments in computing revenue for this claim. 
  1. Only revenue from a business carried on in Canada is included in the revenue computation. Will the revenue from sales to customers outside of Canada be eligible?  There may be some ambiguity as to whether this is a revenue from a business carried on in  We suspect in this case it should still be a business carried on in Canada if the activities giving rise to the sale are performed in Canada (e.g., negotiating, etc.). 
  1. Since the CEWS is based on remuneration paid, an employer cannot reduce remuneration first and apply for the CEWS for a top-up.

  2. Will the CEWS be available to companies that remunerate employees with dividends rather than salary?

The Canadian Tax Foundation and CPA Canada have published their observations in a document dated April 6, 2020.


The CEWS was announced on March 18, 2020 and requires legislative approval. However, it is now April 7th and the government has yet to release draft legislation. The most recent government comments tell eligible employers to expect to be able to apply for the CEWS within 3 to 6 weeks, with the funding coming some time after that. This could be a case of too little too late. The cavalry is not yet on its way.

Carryback of Post Mortem Charitable Donations – Timelines and Conditions

Author: Jeannie Lim CPA, CA, TEP, MMPA
Editors: Peter Weissman  FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP

It is well understood that qualified donations made by an individual generate donation tax credits in the year the donation is made or the subsequent five taxation years. What are less known are donation “carryback” rules that are available when a donation is made in the year of an individual’s death or certain subsequent years.

Donations Made by Deceased in the Year of Death

Individuals who made donations in the year of death, before they died, can utilize the donation tax credit against their taxes owing in the year before death or the year of death without any income limitation. In general, donations in a year are limited to 75% of the individual’s income for the year. This limit is increased to 100% of the individual’s income for the year before death and the year of death.

Donations Made by an Individual’s Graduated Rate Estate (“GRE”)

Donations made by a GRE in a year can be carried back to the deceased’s year before death, the year of death and any year the estate qualified as a GRE, provided the following conditions are met:

  1. The estate meets the condition of a GRE without considering the 36 month GRE limitation period;
  2. The gift is made no more than 60 months after the individual’s death; and
  3. The gift was property that was acquired by the estate on and as a consequence of death or is property substituted for that property.

Care must be taken to ensure that donations are funded appropriately as funding donations with cash or other assets that were not acquired by the GRE on death will not meet the carryback conditions.

Consider a situation where a GRE holds shares of Opco. Can the GRE use dividends paid to it by Opco to fund a donation?  The answer is no.  The dividend was not an asset of the deceased on death, and is not considered substituted property held by the deceased (i.e. the shares of Opco).  As such, the GRE will not be able to carryback the donation to an eligible year.  However, if the shares of Opco are redeemed instead, the proceeds on the redemption will qualify as substituted property for the shares owned at death and the donation can be carried back.

The terms of the decedent’s Will also need to provide the trustees with the power to make donations and the flexibility to meet the required time conditions.

Donations Made by an Alter Ego Trust, Spousal Trust or a Joint Spousal Trust

Occasionally, individuals create these special trusts to facilitate certain objectives.  On the death of a contributor, the spouse or the later to die of the contributor and spouse, there will be a deemed disposition of all capital properties held by the trust and all accrued gains will be realized.  A deemed year-end will also result.  In such cases, subsequent donations made by the trust may be carried back to the deemed year-end caused by death, provided the following two conditions are met:

  1. The donation is made within 90 days from the trust tax return filing due date for the deemed year-end resulting from death; and
  2. The gift was property of the trust at the time of the individual’s death or is property substituted for that property.

The filing due date for the trust tax return as a result of the deemed year-end is 90 days from the end of the calendar year in which the relevant taxpayer died.  As such, the trustees must ensure the donation is made by this deadline so it can qualify for carryback treatment and be matched appropriately to the tax liability triggered on the deemed disposition.


The tax rules provide some flexibility when dealing with post-mortem donations to allow donation tax credits to be matched appropriately with the tax generated on death. However, care must be taken by estate trustees and their advisors to ensure the conditions for the carryback are met.  There are time sensitive restrictions and potentially inescapable traps lying in wait.  In short, the benefit of these rules can only be realized with proper planning and execution. 

If you have situations involving post-mortem donation planning, a Cadesky Tax representative would be happy to assist you.

Post-Fairmont Rectification – A Small Measure of Guidance

Author: Henry Shew CPA, CA, TEP, CPA (Washington), MAcc
Editors: Peter Weissman  FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP

Rectification, in simple terms, is a legal process where an entity petitions the court to change previously executed written documents.  In the tax world, rectification may be used by a taxpayer to change the terms of a legal document to alter the tax results of a transaction, but is generally regarded by practitioners as a bit of a “Hail Mary” as it is an expensive and time consuming exercise with uncertain results.  The fact that the threshold for granting a rectification order is quite high does not help the cause.  This threshold was further elevated by the judgement in Fairmont Hotels, 2016 SCC 56, which narrowed the scope of rectification.  However, it appears that at least one provincial court is showing a willingness to interpret the tests laid out in Fairmont in a taxpayer friendly manner. 

Two weeks ago, the British Columbia Court of Appeal confirmed a win for taxpayers on rectification (5551928 Manitoba, 2019 BCCA 376).  This case was tried after the Fairmont decision.  In the Fairmont case, the Supreme Court of Canada required the taxpayers to demonstrate prior agreement with “definite and ascertainable” terms in order to grant rectification.  It was once famously said by Justice Brown that “rectification is not equity’s version of a mulligan.”

The case facts in 5551928 Manitoba were rather straight forward. Before the repeal of the eligible capital property (ECP) regime in 2017, the taxpayer had an addition to its capital dividend account (CDA) through a disposition of ECP. The taxpayer did not know that the non-taxable portion of the capital gain was not credited to CDA until the end of the taxpayer’s taxation year.  Based on advice of its advisors, capital dividends were declared before the said taxation year-end. CRA assessed a penalty under Part III and the taxpayer sought a rectification order to reverse the director’s resolution regarding the payment of the capital dividend.

One important point about this case is the wording of the director’s resolution. The resolution shows 1) the purported CDA balance, 2) the intention that the dividend is to be paid from CDA and 3) the directors intend to apply the election on the full amount of CDA. The trial judge believes that the three elements shown in the director’s resolution demonstrated that the agreement to “clean out” the CDA was “sufficiently precise, definite and ascertainable.” The trial judge also closed the case with a few comments worth noting: 1) the case involved was not “bold tax planning”, 2) the taxpayer was not seeking to reverse any unplanned tax liability because the premise of the agreement was to issue a planned tax-free capital dividend, 3) the taxpayer was not reckless as he acted with due diligence, 4) there was no “error in judgement” and 5) there was no need to unwind a complex transaction.

The British Columbia Court of Appeal re-affirmed the decision of the lower court. The appellate judge confirmed that the intention was properly recorded from the three crucial sentences in the director’s resolution. The appellate judge does not believe that Fairmont prevents the court from granting rectification simply because the motive in passing a resolution is to obtain a particular tax result. It appears that as long the original intention is present, the narrow test in Fairmont may still provide a remedy to the taxpayer.

Rectification is not only limited to “fixing” CDA elections. It may also apply to other situations.   The case of 5551928 Manitoba  shows us that rectification is possible in situations where the original intention is appropriately documented, reflected in legal documents and taxpayers undertake due diligence, and that the rectification is to achieve the original intention.  Although this case does not set a legal precedent outside of British Columbia, it is welcoming to know that at least one provincial court applied the Fairmont test in a taxpayer friendly fashion.  Certainly, given the resources required in a rectification request, taxpayers should exhaust alternate remedies before considering it.   If you have situations that you believe rectification may be the only choice, a Cadesky Tax representative would be happy to assist you.

The Principal Residence Exemption – Some Quirks

Author: Marco Jotic CPA, CGA
Editors: Peter Weissman  FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP

The principal residence exemption allows Canadians to reduce or eliminate Canadian income tax on gains resulting from the disposition of a home or vacation property a Canadian “ordinarily inhabits”.  Eligibility for the exemption is being scrutinized more than in the past, by the CRA.   

The following is a brief discussion of two situations that could lead to unexpected consequences (both good and bad).

Portion of Property Qualifies as Principal Residence

The fact that a property has multiple uses may or may not affect its eligibility for the Principal Residence exemption.  Duplexes are a good example.

In CRA Views in Focus, Conference, 2016-0625141C6 – Principal Residence-Duplex, the CRA was asked whether a duplex, where one unit was occupied by the owner and the other occupied by her parents, would be considered a principal residence.  The two units were completely independent of each other with distinct addresses and separate hydro meters.  The CRA concluded that each unit was a separate housing unit and only the unit occupied/”ordinarily inhabited” by the daughter qualified as her principal residence. 

The parents were not able to use their principal residence exemption on the unit they lived in as they were not owners or co-owners of the duplex. The daughter did not have the ability to use her exemption on the unit occupied by her parents because she did not ordinarily inhabit that particular housing unit. 

If the daughter and her parents required access to the entire property the conclusion might be different.  In CRA Views in Focus, 2012-0445241E5 – Principal Residence, the CRA commented that where units of a duplex are integrated in a manner where access to one is a condition to the full enjoyment of the other, the units will be considered a single dwelling. 

Renting to a Child

In CRA Views in Focus, 2015-0567791I7 – Exemption re: principal residence leased to a child, a taxpayer was able to designate a property he owned as his principal residence while it was rented to his child.  This position was reiterated in CRA Views in Focus, Conference, 2016-0625161C6 – Principal Residence Rented by Child, where CRA was asked if a taxpayer can designate a property he owns as his principal residence even if it is being rented to his adult child at below fair market value.  The CRA concluded that the taxpayer would be able to designate this property as his principal residence during such time.

The CRA came to this conclusion because, provided all other conditions are met, a property can be a principal residence if it is ordinarily inhabited by the taxpayer, his/her spouse or former spouse, or by his/her child.  Parents are not included in the list and therefore, the daughter was not able to claim the exemption on the unit occupied by her parents in the duplex situation discussed above. 

While the principal residence exemption is a common topic of discussion amongst taxpayers and advisors, there are still many small quirks that are known to few.  If you have situations involving special cases dealing with the principal residence exemption, a Cadesky Tax representative would be happy to assist you.

Health Spending Accounts

Author: Peter Weissman FCPA, FCA, TEP
Editor: Matthew Cho CPA, CA, TEP

In 2008 we published a tax tip regarding the use of Health and Welfare Trusts (“HWTs”) to fund uninsured medical expenses. 

HWTs must conform to the Private Health Service Plan rules in the Income Tax Act as well as CRA administrative rules. In theory, a HWT allows a company to deduct payments to fund the HWT and the shareholder/employee is not taxable on eligible medical expenses reimbursed to him or her by the HWT.

In the context of incorporated companies, assessing practice seems to have allowed HWTs for wholly owned, single employee corporations such as professional corporations.  Even in an April 2019 Press Release the CRA acknowledged that a HWT can be used by a corporation with one employee even if the employee is the only shareholder. 

“Incorporated businesses, including shareholder employees and all other corporate employees are eligible to participate in an HWT.  Corporations with as few as one employee can be eligible as well.  However, the HWT cannot be solely for shareholders unless the shareholders are also employees earning a T4 income”­­­

This statement implies that a single employee corporate HWT will be effective if the shareholder also earns employment income from the company.  However, the press release uses the term “can be eligible” rather than “is eligible”. 

Single employee HWTs (and perhaps others) have always involved risk of double taxation. In particular, there has always been a risk that the corporate deduction may be denied by the CRA to the extent it is considered to be more than a reasonable amount and assess a shareholder benefit for the same amount. 

We have not seen any CRA audits of HWTs but this “audit holiday” may be over. We have learned that the CRA is beginning to review HWTs for these issues. One arm’s length HWT administrator has advised its clients that it has

“become aware of a number of CRA audits relating to healthcare plans established by professionals and other small and medium sized family run business corporations”.

This same administrator is now requiring its plan holders to sign indemnities in the event that plan holders are reassessed by the CRA. 

Ironically, this apparent increase in audit activity has begun just as the sun is setting on the use of HWTs.  In its 2018 Federal Budget, the government announced that, after 2020, the CRA will no longer abide by its administrative position regarding HWTs for those created on or prior to February 27, 2018.  The withdrawal of the administrative rules was immediate for HWTs created after February 27, 2018.

In May 2019, draft legislation to implement these changes and detailing the process for converting existing HWTs into Employee Life and Health Trusts (“ELHTs”) was released.  ELHTs are more formal HWTs that were legislated in 2010 and do not include single employee HWTs.

If you have an HWT, a Cadesky Tax representative would be happy to discuss any related issues with you.

Section 116 – A Case Study

Author: Jeannie Lim, CA, CPA, TEP, MMPA
Editors: Peter Weissman FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP

A non-resident of Canada is subject to Canadian taxation on gains arising from the disposition of taxable Canadian property (“TCP”).  TCP includes many items but the most common one we see in practice is Canadian real estate.  Many non-residents selling Canadian real property often discover the purchaser is withholding 25% of the gross proceeds pending receipt of a “compliance certificate”[1] from the non-resident.  In some cases, the withholding is 50%.  Our discussion today focuses on a non-resident’s reporting and withholding tax requirements under section 116 of the Income Tax Act (the “Act”) upon the sale of TCP and more importantly, how to reduce the withholding tax amounts. 

In this case study, a non-resident taxpayer (the “vendor”) is looking to sell rental property in Canada. The rental property consists of land and building.  For tax purposes, the land portion is considered to be a non-depreciable property while the building is considered to be a depreciable property.  It is important to distinguish between the two as the process is slightly different.

Sale of Land

At any time prior to a sale, the vendor may choose to report the disposition of the land to the Canada Revenue Agency (“CRA”)[2].  If such pre-disclosure is not made, the Act requires the vendor to report the land disposition to the CRA within 10 days of the sale[3] on Form T2062. If Form T2062 is filed after the 10 day deadline, late filing penalties of up to $2,500 can apply.

If Form T2062 is not filed with the CRA, or if it was filed but the CRA has not yet accepted it at the closing date, the purchaser must withhold 25% of the gross purchase price of the land and remit it to the CRA within 30 days after the end of the month in which the sale occurred.  However, this payment can be avoided if a comfort letter is obtained. If a comfort letter is issued by the CRA the purchaser can hold the required taxes (25% of the purchase price for non-depreciable TCP and 50% for depreciable TCP) beyond the remittance deadline until the CRA has completed its review of the certificate. Any excess taxes above the amount listed in Form 2068 can then be released to the vendor.

It can take more than 6 months for the CRA to process a compliance certificate application. Without a comfort letter[4], the purchaser must remit the full taxes to the CRA by the stipulated deadline and the vendor will have to wait until its tax return is filed and processed by the CRA to get its refund back.

If Form T2062 is accepted by the CRA, they will issue Form T2068 (commonly known as a compliance certificate) stating that the application was accepted and will request 25% of the capital gain amount (rather than 25% of gross purchase price) of the land sale.  Once the Form T2068 is issued, the purchaser can release any excess withholding taxes to the vendor and remit the required amount to the CRA.

Sale of Building

If the vendor does nothing regarding the building portion, the purchaser is required to withhold 50% of the gross purchase price of the building and remit it to the CRA within 30 days after the end of the month in which the sale occurred. We note there is no legal obligation for the vendor to report the sale.  

However, the vendor should report the disposition to the CRA using Form T2062A in order to reduce the 50% withholding requirement.  If the application is accepted, the CRA will issue Form T2068 outlining the required amount of taxes on the building sale.  The vendor can then forward the compliance certificate to the buyer. The buyer can then release the excess withholdings and remit the required taxes to the CRA.

The amount of taxes that is required by CRA as outlined in IC72-17R6 is 25% of the capital gain amount on the sale of the building plus the amount of taxes applicable on any recapture. If the actual recapture amount cannot be determined, the CRA will assume maximum recapture (i.e. as if the vendor claimed maximum capital cost allowance during the period of ownership).


If a non-resident disposes of a real property in Canada they should apply for a compliance certificate from the CRA and where necessary, a comfort letter.  Failure to do so could result in the purchaser remitting the full withholding required with the vendor having to wait until its tax return is processed to receive the excess withholdings back. 

If you have situations involving a non-resident disposing TCP, a Cadesky Tax representative would be happy to assist you.


[1] Colloquially referred to as a “clearance certificate”
[2] Subsection 116(1) of the Act.
[3] Subsection 116(3) of the Act.
[4] Although not technically correct, we have seen situations where buyers were willing to hold onto the required withholding taxes past the 30 day remittance deadline pending receipt of a comfort letter/T2068. Granted, CRA can apply a penalty on the buyer on the late tax remittance under subsection 227(9), however the CRA has not been actively enforcing this due to their backlog in processing compliance certificates.

Earnout – Earn More on Your Way Out

Author: Nancy Thandi, CPA, CA, MTax 
Editors: Peter Weissman FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP

It is not uncommon for the sale price of a business to be partially based on future events.  In these cases, an earnout is often used as a mechanism to determine a portion of the sale price based on achieving certain results for a period of time after closing of the sale.  For example, the parties may agree to an initial sale price of $5,000,000, with an additional $100,000 per year in any of the subsequent 5 years, if revenues increase by at least 5% in the year.  To keep things “simple” we will assume shares, not assets, are being sold.

Unlike the defined portion of the sale price, taxed as a capital gain, the earnout portion is taxed as regular income in the year it is received because it is based on performance.  In the above example, the vendor would report a $5,000,000 capital gain (assuming the shares have no cost base), 50% of which is taxable, in the year of sale and regular income of $100,000 (or less if the full earnout is not earned) in each of the subsequent 5 years.

In Information Bulletin IT-426R (now archived),  the CRA details an administrative concession, referred to as the cost-recovery method, intended to allow earnouts to be treated as capital gains to the extent they exceed the tax cost.  However, this method only applies to share transactions and several conditions must be met, including the submission of a formal request to use the cost-recovery method and a copy of the sale agreement with the vendor’s tax return for the year of sale.

Where the transaction does not meet the CRA’s conditions for the cost-recovery method (e.g., an asset sale) vendors should consider a reverse earnout.  This technique sets a maximum purchase price that is later adjusted downwards if certain targets are not met.  To the extent the full proceeds (including the reverse earnout portion) exceed the tax cost the vendor will report a capital gain. 

In our example, the vendor and purchaser would set the purchase price to be $5,500,000.  The purchaser would pay $5,000,000 cash on closing and issue a promissory note for the remaining $500,000.  The vendor would agree to reduce the $500,000 receivable[1] from the purchaser by $100,000 in any of the subsequent 5 years, in which revenues do not increase by at least 5% in the year.  Even though not all the proceeds are received in cash at closing, the full sale price is taxable in the year of sale, with no reserve being available for the reverse earnout portion. 

To the extent a portion must be repaid under the reverse earnout, the vendor can claim a capital loss that can be carried back against capital gains in any of the prior 3 taxation years or carried forward indefinitely to be used against future capital gains.  If the capital loss is recognized within the three taxation years after the year in which the capital gain was recognized, the capital loss can be carried back to offset the initial gain.  To the extent the reverse earnout portion of the proceeds is forgiven after the three-year carryback period, the reduction in the sale price will generate a capital loss that can be carried forward indefinitely, but it cannot be carried back to the year of the sale.

Purchasers are often indifferent to the tax treatment of an earnout or reverse earnout because future adjustments, under both methods, simply change the tax cost of the investment (whether shares or assets), although there may be some complications with capital cost allowance if the cost of a depreciable property is adjusted subsequent to the sale.  Their issues tend to be more business related such as timing of cash flow.

If you have situations involving earnouts, a Cadesky Tax representative would be happy to assist you.

[1] In some cases the reverse earnout amount is held in escrow to be paid out only to the extent the milestones are achieved.

Change in Use – The Unexpected Change

Author: Marco Jotic, CPA, CGA 
Editors: Peter Weissman FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP

Occasionally, a taxpayer moves from his/her principal home into a new home and rents the old home out, or converts part of the home for a different purpose.  Alternatively, he/she may move into one of his/her rental properties and turn it into a principal home.  While this may not be an issue if the change is short term and temporary, a permanent change could give rise to a deemed disposition of the property for tax purposes.  If not carefully managed, this deemed disposition can create undesirable results for these taxpayers.

Complete change in use

Where a taxpayer owns real property and converts it entirely from personal to income-producing (e.g., rental) purpose or the other way around, the taxpayer is deemed to have disposed of the property at the time of conversion at its fair market value and reacquired it for the same amount. 

The result is not troublesome if any accrued gain on the property is fully sheltered by the principal residence exemption but in cases where a full exemption is not available or the exemption is not an option (e.g., the change is from rental to personal), the resulting capital gain and/or recapture will give rise to unexpected tax liabilities.

Thankfully, there are two elections available to taxpayers to avoid this change in use deemed disposition.  The first election, under subsection 45(2) of the Income Tax Act (the “Act”), overrides the deemed disposition when the change is from personal to income-producing use unless the taxpayer rescinds the election in a later year or claims capital cost allowance (“CCA”) on the property.  This election allows the gain upon conversion to be deferred until an actual disposition.  An additional benefit is that the property may be eligible for the principal residence exemption for up to 4 years after the year the election was made.  This 4 year limit may be extended if certain conditions are met.

This election should be filed with the taxpayer’s income tax return for the year that includes the change in use.  The Canada Revenue Agency (the “CRA”) may accept a late election if CCA is not claimed at any time.

When the change is from income-producing to personal use, the second election, under subsection 45(3) of the Act, can be used to prevent the application of the change in use rules.  Unlike the first election, this election is filed with the tax return for the year when the property is actually disposed of (or within 90 days after a formal demand is issued by the Minister).  However, this election is not available if CCA has been claimed at any time prior to the conversion.  This election also allows the property to be eligible for the principal residence exemption for up to 4 years prior to the change.  The CRA may also allow late filing if it meets the criteria for taxpayer relief.

Partial changes in use

When only a portion of the property undergoes a change in use, the deemed disposition will only apply to that portion of the property.  The elections under subsections 45(2) or 45(3) cannot be made as they only apply to a complete change in use.  Therefore, a thorough analysis should be conducted for situations when a taxpayer contemplates changing a single use property into multiple uses or vice versa, in order to fully appreciate and plan for any tax consequences arising from the change.

CRA Practice

For principal residences, the CRA considers a partial change in use to occur where there have been significant modifications to the property that are permanent in nature.  In addition, the CRA will not apply the deemed disposition rules with respect to a principal residence (and takes the view that the entire property remains a principal residence) where the following conditions are met:

  • There have been no structural changes to the property
  • CCA has not been claimed on the property; and
  • The main use of the property is as a residence and the income producing use is ancillary.

The change in use rules are often considered after the fact.  Even though some relief is available to defer the resulting tax, there are conditions attached to them that may not be reversible.  As a result, taxpayers should consider the impact of these rules when they are considering changing or expanding the use of a property, particularly with respect to their principal residences.  If you have situations involving the application of these rules, a Cadesky Tax representative would be happy to assist you.

T4A: The Compliance Conundrum of Fees Paid for Services

Author: Navi Grewal, CPA, CA
Editors: Peter Weissman FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP

In accordance with regulation 200(1) of the Income Tax Act, every person paying commissions, fees or other amounts for services shall report these payments on a prescribed information return (i.e., the T4A slip). Over the years, the Canada Revenue Agency (the “CRA”) has not provided  clear guidance on how the fees are to be reported on the T4A slip.

Many people are under the impression that T4A slips are only necessary for unincorporated individuals. However, this is not the case and the CRA is beginning to enforce the reporting requirement for fees for services regardless of whether the services were rendered by a corporation, partnership, trust or individual.

The CRA in their publication RC4157 (the “Guide”) only states, for box 048:

“Enter any fees or other amounts paid for services. Do not include GST/HST paid to the recipient for these services.”

The only exemption mentioned in the Guide is for total payments less than $500, made in a calendar year to a service provider, on which no tax was deducted. In question 1B from the 2016 APFF Roundtable, the CRA stated that it will not require the issuance of T4As for professional or business services provided to an individual in a personal capacity or a person whose services were provided to repair or maintain an individual’s principal residence.

Where the services are provided to a corporation, the CRA made the following statement at the 2017 APFF Roundtable (Question 2):

“The administrative relief provided since 2010 is an interim measure related to a change on the T4A of the box where these amounts should be indicated and not one relieving from the obligation of payers from filing T4A slips for services rendered”.

Despite the foregoing, the most current version of the Guide (2018) states that fees for services“should be reported in Box 048” and “the CRA is not assessing penalties for failures relating to the completion of Box 048”.

As a result, non-compliance of T4A reporting for service payments is more widespread than any other income.  Although the CRA has stated they will waive the penalties, they are not obligated to do so and their position can change at any time.  The CRA is currently presenting seminars about these reporting requirements to various industry groups, so a change could be coming.

The CRA recently tried to subtly change administrative and assessing positions with no advance notice. For example, in the fall of 2017 the CRA began denying shareholders-employees employment expenses.  This was a change made without notice.  The CRA subsequently back tracked and has stated they will come out with a position for the 2019 tax year.  Around the same time, the CRA changed their position on employee discounts to make them taxable.  After significant backlash, the CRA reversed the change.

Given the CRA’s track record, taxpayers should not be surprised if the administrative relief from penalties for not filing T4A slips in the circumstances noted above is cancelled.  If you have an issue regarding the issuance of T4A slips for fees for services, a Cadesky Tax representative would be happy to assist you.