The underground economy has always been a source of lost tax revenues, and consequently has always been a concern for both federal and provincial governments. Whether it's cash wages paid for casual labour or a "cash discount" for payments for goods or services supplied, transactions which go unrecorded mean lost tax revenue, whether on the income tax or sales tax side.

The process of recording income and sales transactions has, along with everything else, become more sophisticated with the evolution of technology. That technology has also created increasingly sophisticated products which hide or falsify sales transactions. In the recent budget, the federal government proposed measures specifically to target one such type of product.

The product of concern to the federal government is electronic suppression of sales (ESS) software, known more colloquially as "zapper software". By either name, the software is used to selectively delete or modify sales transactions, both from the records of point-of-sales equipment (electronic cash registers) and from the business' accounting systems. Even worse, from the revenue authorities' point of view, is that such changes are carried out without any record of them having been made, making them virtually impossible to detect.

Concern about the use of such software has reached a point that the federal government will be implementing both new administrative monetary penalties and new criminal offences for those involved with ESS software. The consequences range from a fine of $5,000 to a jail term of up to 5 years. Significantly, both the administrative penalties and the criminal offences will apply, not just to those found to be engaged in the manufacture or sale of ESS software, but also to those who use or even possess it. The new penalties are as follows.

New Administrative Monetary Penalties

• For the use of ESS software, an administrative monetary penalty of $5,000 on the first infraction and $50,000 on any subsequent infraction.
• For the possession or acquisition of ESS software, an administrative monetary penalty of $5,000 on the first infraction and $50,000 on any subsequent infraction, except where a person exercised due diligence.
• For the manufacture, development, sale, possession for sale, offer for sale, or otherwise making available of ESS software, an administrative monetary penalty of $10,000 on the first infraction and $100,000 on any subsequent infraction, except where a person exercised due diligence.

New Criminal Offences

• For the use, possession, acquisition, manufacture, development, sale, possession for sale, offer for sale, or otherwise making available of ESS software:
• on summary conviction, a fine of not less than $10,000 and not more than $500,000 or imprisonment for a term of not more than 2 years, or both; or
• on conviction by indictment, a fine of not less than $50,000 and not more than $1,000,000 or imprisonment for a term of not more than 5 years, or both.

The due diligence defence to the imposition of administrative sanctions will generally require that, to avoid those penalties, the taxpayer must show that he or she exercised the degree of care, diligence, and skill to prevent the contravention with respect to ESS software that a reasonably prudent person would have exercised in comparable circumstances. 

The announcement of the new measures in this year's budget was, in effect, an early warning to those are involved with the manufacture, sale, or use of ESS software. The new measures will take effect January 1, 2014. Between now and then, the federal government will undertake a communications effort to alert businesses to the need to take steps to ensure that they do not use or possess ESS software, leaving business owners to determine their best course of action and to act accordingly.

Spring and summer are, in any year, typically the busiest season for real estate sales and, consequently, the time when most moves take place. It's also the season when many post-secondary students are moving home for the summer and back to school as fall approaches. For any number of reasons, therefore, a lot of people will be moving this summer.

Whether the move is a long-distance one to another province, or just a short-haul move to a nearby city, moving is both stressful and expensive. While our tax system can't do anything to help with the non-financial costs and general stress of moving, it does, in some circumstances, minimize the financial hit by providing a deduction from income for moving expenses incurred.

The general rules governing the deductibility of moving expenses haven't really changed in quite some time. However, there are always situations which involve the application of those rules to novel situations, and the Canada Revenue Agency (CRA) was recently asked to rule on the application of the rules to one such situation.

First, some general background on the rules governing the deduction of moving expenses. Not all moves will qualify for tax relief, as the tax rules provide that most moving costs will be deductible from employment or business income only 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 Vancouver or Regina or Ottawa).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, again assuming that all other required criteria are met.

The situation which the CRA was asked to consider in the recent technical interpretation involved a taxpayer who had moved more than once during a single taxation year, with some of those moves being temporary ones. Making multiple moves during a single tax year for work-related reasons isn't common, but it's no longer rare. For Canadians, especially younger Canadians starting out, the economic reality is increasingly one of short-term or contract positions and the need to be mobile in order to take advantage of such positions whenever and wherever they become available.

The CRA was asked whether the fact that a taxpayer had moved several times in one year and that at least some of those moves were temporary in nature would disqualify related expenses from being deducted. The answer, generally, was that it would not. The CRA's view was that each move would be treated as separate and would need to qualify as an "eligible relocation" (that is, would need to be for the purpose of obtaining employment and would have to meet the 40-kilometre criteria) to allow a claim for moving-related expenses. In other words, no matter how many moves a taxpayer might make during the year, expenses related to those moves will be deductible as long as the usual criteria for such a deduction is met.

The CRA also indicated that the temporary nature of a move would not in and of itself invalidate the deductibility of related moving expenses. Once again, the Agency referred back to the general rules on moving expense deductibility, indicating that in order for a move to qualify as an eligible relocation, the taxpayer must have "ordinarily resided" in both the old and new locations. Even if the taxpayer does not intend to stay in the new location permanently, he or she must settle into the new location and centralize his or her mode of living in that location to be considered as ordinarily residing there.  Where, however, the taxpayer is not considered to ordinarily reside at a location, the move will be temporary and will not be treated as a separate move. To illustrate different scenarios, the CRA provided the following example.

•  X moves from House A to House B to take on a new job.
•  X moves to House C eleven months later but remains with the same employment.

If X ordinarily resided in the three houses, only moving expenses related to the first move from House A to House B are deductible. Expenses for the move to House C are disallowed because the move did not occur to enable X to take on a new job and therefore is not considered an eligible relocation.

If X did not ordinarily reside in House B, the move from House A to House B is a temporary one and the move from House A to House C is the eligible relocation. Therefore, all moving expenses related to the move from House A to House C are deductible.

Finally, as part of its technical interpretation, the CRA was asked to consider whether long-term storage costs for the taxpayer's belongings would qualify as a deductible moving cost. The answer was no. While the rules on the deduction of moving costs do allow for the deduction of the cost of transporting or storing household effects during the move between two residences, the CRA's view was that such costs related only to short-term storage related to the move. Long-term storage costs were not likely to be ones incurred "in the course of moving" and, consequently, would not be deductible as moving expenses.

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, which was updated early in 2013, can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t1-m/README.html, and more information on the tax treatment of moving costs is available on the same Web site 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 Web site can be directed to the CRA's individual enquiries line at 1-800-959-8281.

By early June, the Canada Revenue Agency (CRA) has issued millions of Notices of Assessment for 2012 individual income tax returns which were filed earlier this year. When a taxpayer files his or her income tax return, the figures reported on that return— income, deductions, credits and, at the end, total tax payable for the year—represent the taxpayer's best understanding of what each of those amounts are for the year. The Notice of Assessment, in turn, outlines the CRA's conclusions with respect to the same amounts.

In most cases, the Notice of Assessment issued will simply confirm the information which the taxpayer provided on the return, perhaps with some minor arithmetical corrections. However, not infrequently, the Notice of Assessment will indicate that the CRA has disallowed or changed the amount of certain deductions or credits, or has included in income amounts not declared by the taxpayer on his or her return. When that happens, it's time for the taxpayer to decide whether to dispute the CRA's assessment of his or her tax situation.

Once the CRA has issued an actual Notice of Assessment, and it indicates that the Agency's assessment differs from the information provided by the taxpayer on the return, the first thing to consider is why the CRA does not agree with the return as filed. In some cases, it's very simple—e.g., the CRA has included in income an amount received by the taxpayer but not reported, perhaps because the related information slip was mislaid or never received. In such cases, disputing the Notice of Assessment really doesn't make sense. Although it is common for taxpayers to think that if they didn't receive an information slip, they don't have to report the income, that's not the case. Each taxpayer is responsible for keeping track of and reporting his or her own income, regardless of any administrative or other errors which may result in the taxpayer not receiving an information slip.

If the source of the disagreement is not as straightforward, the next step is for the taxpayer to contact the CRA to indicate that they disagree with the assessment and to provide the reasons for their disagreement. Taxpayers can visit their local Tax Services Office (a listing of such offices is available on the CRA Web site at http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html to meet with a CRA representative. The CRA does not provide "walk-in" service at their TSOs, and so it's necessary to call ahead to make an appointment and to bring a copy of the return filed and the Notice of Assessment to the meeting. In many cases, a face-to-face meeting with a CRA representative, with all the relevant documents in front of you, is the quickest way to resolve a dispute.

If the situation still isn't resolved by communication with the CRA, it's time for the taxpayer to consider filing an Objection. Filing an Objection formally advises the CRA that the taxpayer is disputing his or her tax liability for the taxation year in question. Not incidentally, the filing of an Objection also brings to a halt any efforts undertaken by the CRA to collect taxes which it considers owing for the taxation year under dispute (although, if the taxpayer is eventually found to owe the amount in dispute, interest will have accumulated in the interim).

Taxpayers who have registered with the CRA's online services feature My Account can file their Notice of Objection online at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html. The taxpayer provides information with respect to the reasons why the assessment is being disputed and submits those reasons. The message which then appears thanking the taxpayer for the submission indicates that it was successfully received. The submission is then routed to a CRA employee who may contact the taxpayer directly for more information, especially as it is not possible for the taxpayer to attach any supporting documents when filing a formal dispute online. Needless to say, any documents relating to the dispute should be kept by the taxpayer.

While filing a dispute through My Account is certainly faster than mailing hard copy of the Notice of Objection, not all taxpayers want to take advantage of that option. In particular, those who are not already registered with My Account may not wish to undertake the registration process simply in order to file a single Notice of Objection. Taxpayers who choose instead to mail hard copy of a Notice of Objection can find the CRA's standardized form—the T400A Objection—on the Agency's Web site at http://www.cra-arc.gc.ca/E/pbg/tf/t400a/README.html). While use of the CRA's form is not obligatory, it's a good idea. Using the standardized form will make it clear to the CRA that a formal objection is being filed, will present the necessary information in a format with which the Agency is familiar, and will also mean that no required information is inadvertently omitted. It's also helpful to include a copy of the Notice of Assessment which is being disputed. Since the CRA does not always acknowledge receipt of an Objection, taxpayers should consider ensuring proof of both delivery and time of delivery by sending the form by registered mail. The Objection should be sent to the Chief of Appeals at the taxpayer's Tax Services Office or the Tax Center at which the return was originally filed.

No matter which method is used to advise the CRA of the taxpayer's intention to dispute his or her assessment, there is a time limit by which any Objection must be filed, albeit a reasonably generous one. Individual taxpayers must file an Objection by the later of 90 days from the mailing date of the Notice of Assessment (the date found at the top of page 1) or one year from the due date of the return which is being disputed. So, for 2012 tax year returns, the one-year deadline (which is usually, but not always, the later of those two dates) would be April 30, 2014 (or June 15, 2014 for self-employed taxpayers and their spouses).  As with most things related to taxes, it's best not to put it off. At the very least, if the taxpayer is ultimately found to owe some or all of the taxes assessed by the CRA, interest will have accrued on those taxes for the entire period since the filing due date and, if the filing of the Objection is delayed, the CRA may well have already commenced its collection efforts.

Eventually (at least several weeks being the usual time frame) the CRA will respond to the Objection. In the course of making its decision, the Agency may or may not contact the taxpayer for further discussions of the issues in dispute. Should the taxpayer be contacted, he or she may be asked to provide representations outlining his or her position, in writing or at a meeting. Through such representations and meetings, it may be possible for the taxpayer and the CRA to come to an agreement on the taxpayer's tax liability. In either case, the CRA will either confirm its original assessment or change it. If the original assessment is changed, the CRA will issue a Notice of Reassessment outlining the changes. If the taxpayer continues to disagree with the CRA's position, the next step is an appeal to the Tax Court of Canada. While in many instances taxpayers are allowed by law to represent themselves before the Tax Court, it's generally a good idea, once things reach his point, to consult a tax lawyer before taking that next step.

The CRA also publishes a useful pamphlet entitled Resolving Your Dispute: Objection and Appeal Rights under the Income Tax Act, and that publication can be found on the CRA Web site at http://www.cra-arc.gc.ca/E/pub/tg/p148/README.html.
 
Taxpayers who have filed a return for the 2012 tax year but have not yet received a Notice of Assessment can check on the progress of their return on the CRA Web site. It's not necessary to have registered for My Account to do so, as this service is provided through a feature called Quick Access, which is found at http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/qckccss/menu-eng.html. The taxpayer must provide his or her social insurance number and date of birth, along with information from a prior year tax return, and can then receive a status update on the progress of a 2012 tax return just filed.

A final note: many taxpayers, when they receive a Notice of Assessment and determine that the CRA agrees with their return as filed, consign the Notice to the nearest garbage can or recycling container. Neither is a good idea. A Notice of Assessment, in addition to outlining the CRA's assessment of the taxpayer's income and tax position for the year, thus serving as an official record of their tax situation, contains useful and necessary information on the taxpayer's RRSP current year and carryforward contribution amounts. The Notice of Assessment should be treated as part of a taxpayer's tax records, and filed away accordingly.

The availability and type of benefits offered by an employer can be a significant factor in a prospective employee's decision on whether to accept a particular job offer. One of the considerations governing choices made by an employee is whether a particular benefit is taxable or not. As of the 2013 taxation year, new considerations will come into play as changes in the assessing policies of the Canada Revenue Agency (CRA) will make some formerly non-taxable benefit amounts taxable to Canadian employees.

Since every employee's situation is different, most employers now provide at least some flexibility in the choice of benefits available to employees—the so-called "cafeteria plan" approach to benefits. Health care spending accounts (HCSAs) are part of that approach, in that they allow an employee some latitude in choosing the benefit structure which best suits his or her particular circumstances. With an HCSA, the employer provides a fixed amount, which the employee can then use to pay for any qualifying medical expense (i.e., prescription drugs, physiotherapy costs, and medical care costs not covered by a government plan), up to the amount of the coverage. Some plans also permit employees to augment the amount which is available for the coverage of medical expenses by allocating additional amounts to their HCSA to purchase additional "flex credits". And, until this year, some of those allocations could be made on a tax-favoured basis.

In recent years, the CRA has issued a number of rulings providing that where an employee allocated all or part of a bonus to be received from the employer to the employee's HCSA, in order to obtain additional flex credits in that account, the amount allocated was essentially tax-free—it was not taxed either as employment income or as a taxable employment benefit when the credits were used. That has changed as of January 1, 2013, and all such bonus amounts allocated to an HCSA will be taxed as employment income in the year the allocation takes place. The CRA did not specifically identify the reason for the about-face in its position, stating only that, in its current view, "the allocation of a bonus to obtain additional flex credits in a[n] HCSA is an allocation of forgone cash remuneration and should be subject to tax".

While the CRA's assessing position on the tax treatment of amounts contributed to an HCSA is still evolving, the critical factor for the CRA seems to be that where an employee allocates to an HCSA an amount which could have been received as cash, that amount will be treated as employment income for the year. Consequently, taxpayers who can look forward to receiving such amounts, whether by way of annual bonuses or other non-performance related incentive awards from their employer during 2013 and were planning to allocate some or all of those amounts to an HCSA, will need to be aware of the new tax implications of that decision.

Two quarterly newsletters have been added—one about personal issues, and one about corporate issues. They can be accessed below.

 Corporate:

Issue #22 Corporate

Personal:

Issue #22 Personal