Key Tax Issues for Corporate Counsel: Identifying and Managing Tax Risk Identifying and Managing Tax Risk Michael Friedman , Partner Michael Friedman , Partner Carl Irvine , Associate Presented at: Offices of McMillan LLP Offices of McMillan LLP Toronto, Ontario October 16, 2012
Agenda CRA Audit Activity: Recent Trends Key Tax Concerns for Corporate Counsel Key Tax Concerns for Corporate Counsel 1) Employee vs. Independent Contractor Characterizations 2) Taxable Benefits from Employment 3) Employee Stock Options 4) Tax Compliance – Audit Management and Disclosures 5) 5) Director’s Liability Director’s Liability 6) Commodity Tax Changes Questions Questions 2
CRA Audit Activity: Recent Trends In 2008-2009, the CRA: • • conducted over 370,000 audit and review actions, and • identified over $7.4 billion in non-compliance among commercial enterprises • • Taxable benefits continue to be a key focus of CRA audit Taxable benefits continue to be a key focus of CRA audit activity • • The CRA is undertaking a series of focused audit projects to The CRA is undertaking a series of focused audit projects to identify systemic under-reporting of income and other acts of non-compliance 3
Key Tax Concerns for Corporate Counsel 1) Employee vs. Independent Contractor Characterizations • One of the most common areas of focus of CRA payroll audits • One of the most common areas of focus of CRA payroll audits • Tests to distinguish an employee from an independent contractor are difficult to apply and are extremely fact-specific 4
Key Tax Concerns for Corporate Counsel 1) Employee vs. Independent Contractor Characterizations • In Sagaz Industries , the Supreme Court: • In Sagaz Industries , the Supreme Court: articulated the central legal test as being “whether the person o who has been engaged to perform the services is performing them as a person in business on his own account”, and them as a person in business on his own account”, and identified certain determining “factors” that distinguish an o employee from an independent contractor employee from an independent contractor 5
Key Tax Concerns for Corporate Counsel 1) Employee vs. Independent Contractor Characterizations Relevant Factors Relevant Factors • Degree of control/autonomy Payer’s right to control worker’s daily activities o • Ownership of tools and equipment • Ownership of tools and equipment • Right to sub-contract work and hire assistants • Financial risk/reward • Financial risk/reward Responsibility for operating expenses o Liability for contractual non -performance o Opportunity for profit Opportunity for profit o o • Responsibility for investment and management 6
Key Tax Concerns for Corporate Counsel 1) Employee vs. Independent Contractor Characterizations • Later jurisprudence has also identified the intention of the parties as • Later jurisprudence has also identified the intention of the parties as a relevant factor ( Royal Winnipeg Ballet ) Implications of the Employee/Independent Contractor Determination 1. Source withholdings and remittances • Income tax, CPP, EI 2. 2. Supplementary employer remittance obligations Supplementary employer remittance obligations • CPP, EI, EHT, WSIB premiums 3. Reporting obligations • T4/T4A returns, EHT, WSIB 4. GST/HST payment obligations 7
Key Tax Concerns for Corporate Counsel 2) Taxable Benefits from Employment • Taxation of non-monetary employee remuneration is frequently • Taxation of non-monetary employee remuneration is frequently a primary focus of CRA audits • The Income Tax Act (the “ ITA ”) contains a detailed set of rules that require most benefits received by virtue of employment to be require most benefits received by virtue of employment to be included in an employee’s income • The fair market value of an employment benefit, as opposed to its • The fair market value of an employment benefit, as opposed to its cost to the employer, is generally required to be included in the income of the employee • In certain cases, applicable GST/HST must be included in • In certain cases, applicable GST/HST must be included in computing the value of a taxable benefit from employment 8
Key Tax Concerns for Corporate Counsel 2) Taxable Benefits from Employment • The CRA Audit Manual identifies a number of “common taxable • The CRA Audit Manual identifies a number of “common taxable benefits” that are to be examined by CRA auditors, including: personal use of employer assets o parking parking o o interest-free or low interest loans o incentives or prizes incentives or prizes o o gifts o stock purchase options o allowances paid to employees allowances paid to employees o o scholarships where the primary beneficiary is the employee o 9
Key Tax Concerns for Corporate Counsel 2) Taxable Benefits from Employment Certain taxable benefits from employment attract special Certain taxable benefits from employment attract special considerations Automobile benefits Standby charge for an automobile • Automobile operating expense benefit • Parking benefits Parking benefits • Assigned vs. “scramble” parking 10
Key Tax Concerns for Corporate Counsel 2) Taxable Benefits from Employment Interest-free or low interest loans Interest-free or low interest loans Amount of taxable benefit based on prescribed interest rates • Commercial interest rate exception • Meals • Generally viewed as a taxable benefit • CRA administrative exception • CRA administrative exception 11
Key Tax Concerns for Corporate Counsel 2) Taxable Benefits from Employment • There are limited statutory/administrative exceptions to the general • There are limited statutory/administrative exceptions to the general requirement to include the value of benefits from employment in income: • • Certain counseling services Certain counseling services Certain restricted, on-site child care services • Certain, non-cash gifts and awards • Required withholdings • Consider whether CPP/EI withholdings required 12
Key Tax Concerns for Corporate Counsel 3) Employee Stock Options • Preferential Canadian tax treatment typically afforded to employee • Preferential Canadian tax treatment typically afforded to employee stock options • Absent special rules contained in the ITA, stock option benefits would generally be treated in the same manner as most other taxable would generally be treated in the same manner as most other taxable benefits from employment 13
Key Tax Concerns for Corporate Counsel 3) Employee Stock Options General Principle General Principle Where a corporation has: 1. agreed to sell or issue its shares (or shares of a corporation with which it does not deal at “arm’s length”), 2. to an employee of the corporation (or of a corporation with which it does not deal at “arm’s length”), does not deal at “arm’s length”), the preferential employee stock option rules in the ITA may apply 14
Key Tax Concerns for Corporate Counsel 3) Employee Stock Options • No taxable benefit is recognized when the option is granted • No taxable benefit is recognized when the option is granted • If the employee acquires shares under the agreement, a taxable benefit is deemed to arise in the year of acquisition that is equal to: (A) the value of the shares at the date of their acquisition, MINUS (A) the value of the shares at the date of their acquisition, MINUS (B) the amount paid or to be paid by the employee to the corporation for the shares, MINUS corporation for the shares, MINUS (C) the amount, if any, paid by the employee to acquire the option 15
Key Tax Concerns for Corporate Counsel 3) Employee Stock Options • Where the corporation is a “Canadian-controlled private • Where the corporation is a “Canadian-controlled private corporation” (a “ CCPC ”), provided the employee satisfies certain “arm’s length” tests, recognition of the stock option benefit is deferred until the shares acquired on the exercise of the option are deferred until the shares acquired on the exercise of the option are disposed of or exchanged (the “ CCPC Deferral ”) • Previous deferral rules in respect of shares of certain non-CCPCs (e.g., options in respect of certain listed shares) were repealed (e.g., options in respect of certain listed shares) were repealed following the 2010 Budget • Special rules apply where the stock option is sold by the employee • Special rules apply where the stock option is sold by the employee 16
Key Tax Concerns for Corporate Counsel 3) Employee Stock Options • Where a stock option benefit is received, the employee may be • Where a stock option benefit is received, the employee may be entitled to claim a deduction equal to 50% of the benefit • Certain elections and filings by the corporation and the employee may be required in order for the employee to claim the 50% deduction may be required in order for the employee to claim the 50% deduction • The tests to be applied to determine eligibility to claim the 50% deduction depend on whether the CCPC Deferral has been claimed deduction depend on whether the CCPC Deferral has been claimed 17
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