Insurance Journal – Page 2

Electric cars and charging stations as employee benefits

At issue

It’s sometimes said that our society has a love affair with the car. Personally I don’t feel any emotional attachment to those lug nuts, but when it comes to getting to, from and around my work activities, I’m as committed as the next commuter (like it or not).

The car is so prevalent that our tax system keeps an active eye on it, to make sure that employers don’t use transportation perks as a back-door way to provide employee benefits. While the rules have been in place a very long time, technological developments – specifically the entry of electric cars into mainstream usage – can lead to uncertainty as to what is exposed to tax, and how to calculate it.

These challenges were brought before the Canada Revenue Agency (CRA) at a recent financial industry conference, and the agency provided some updated guidance on its approach.

Automobile benefits

As foundation (and this barely scratches the surface of the complexities in practice), there are two main ways that an employee may have a taxable automobile benefit:

A standby charge applies when an automobile owned or leased by an employer is made available for the employee’s personal use.
An operating expense benefit applies when an employer provides an automobile and pays expenses such as gas, oil, maintenance and licencing related to personal use of the vehicle.
Good recordkeeping is a must, in large part to distinguish business from personal use. If the employee reimburses the employer for personal use, that would reduce or eliminate the taxable benefit.

CRA 2017-0703881C6 – Electric vehicle taxable benefits

At an accounting organization conference, CRA was asked about its current views on electric vehicles. Unlike an internal combustion engine that can use any gas station, it is common, if not imperative, for the driver of an electric vehicle to have a charging station in the home. How does the charging station fit within the automobile benefits framework?

For starters, CRA advised that the charging station is not part of the vehicle price, nor does it fall within the operating expense benefit. It is a separate capital asset, for which capital cost allowance (CCA) may be claimed. Of course to the extent the vehicle is for personal use (though CRA did not comment further on the point), presumably there can be no CCA claim.

Beyond the automobile rules, there is the potential that the charging station would be considered a general taxable employee benefit. However, if it could be shown that the primary beneficiary of the charging station is the employer, for example if there is a clear business purpose and it relates to a condition of employment, then no benefit arises. This assumes the station is owned by the employer, and is not intended to be transferred to the employee. In the case of a shareholder-employee, there could potentially be a shareholder benefit even if the employer owns the station.

Finally there is the matter of electricity usage. Employee payments to the electric company for personal use of an employer vehicle may be used to reduce the operating expense benefit for the employee. Furthermore, an employer reimbursement for an employee’s electricity cost to charge up an employer vehicle will not be a taxable benefit. There is still the practical matter of calculating the electrical charges, for which the CRA offered no guidance.

Practice points

Taxation of automobile benefits is complex, and is likely to get even more challenging as new transportation technology develops. Keep clear and up-to-date automobile records.
A taxable employee benefit can arise if an electric car charging station is installed in an employee’s home for an employer vehicle. This can be rebutted if the employer is the owner of the station and is the primary beneficiary of its use.
As a final (and simpler) note for employees using their own cars, they may receive a non-taxable reimbursement from an employer for work-related mileage, though not for commuting to or from a workplace. For 2018, the “reasonable allowance” per CRA is 55 cents for the first 5,000 km driven, and 49 cents thereafter. That’s up a penny from 54 and 48 cents respectively that applied in 2017.

A policy loan and capitalized interest may be taxable, as well as a debt to the insurer

At issue

Life insurance is almost always tax-free on death of the life insured. While that person is living and where the insurance is primarily designed to fund a death benefit, the policyholder still has no income tax concerns.

Where a policy has investment and savings features, the policyholder can be exposed to tax. Accessing a policy’s cash surrender value by way of a withdrawal will be a partial disposition, a portion of which will be taxable if the cash surrender value (CSV) exceeds the adjusted cost basis (ACB) at the time.

By comparison, generally no tax applies on a policy loan up to the ACB, but any amount over that would be taxable. And when a policy loan is used to investment outside the policy, there can be not-so-favourable tax implications. This was outlined in a CRA letter from mid-2017 in response to a taxpayer inquiry initiated about a year earlier.

Income Tax Act ss.20(1)(c) & (d), s.148(9) and Income Tax Regulation s.308

ITA ss.20(1)(c) & (d) allow a deduction for interest (simple and compound, respectively), where borrowed funds are used to gain or produce income. The relevance of this will become clear in the following discussion of the CRA letter.

There are numerous sections of our tax legislation and regulations that are networked together to address the complexity of life insurance. At the heart of it is s.148(9), and the many definitions contained therein, including what constitutes a disposition of a policy, how to calculate the proceeds on a disposition, and how to determine the portion of the disposition that is taxable.

As discussed in brief above, the determination of taxability depends on a policy’s ACB, also defined under s.148(9). The key components of ACB are paid premiums that increase it, and the annual charge of net cost of pure insurance (NCPI, as defined in ITR s.308) that reduce it. Importantly, taking a policy loan decreases ACB, whereas repaying the loan generally increases ACB.

CRA 2016-0658641E5 – What are the tax implications of capitalized loan interest?)

A policyholder contacted the CRA with concerns about the fairness of the tax treatment of life insurance. The policyholder’s loans and accrued interest comprised a debt owed to the insurer that will be deducted from any payout on the policy if still unrepaid at death. Even so, the policyholder received a T5 tax slip reporting taxable policy gains related to the policy loan.

The CRA representative outlined the key definitions in s.148(9) and elsewhere before turning to the details of this particular policy loan. The borrowed money was invested for the purpose of generating income, and the policyholder/taxpayer claimed the interest as a deduction pursuant to ITA s.20(1)(c) and/or (d). Furthermore, interest on the loan was not being paid by the policyholder directly; rather the interest was being capitalized within the policy.

The writer confirmed that the combination of claiming the interest deduction and capitalizing the interest resulted in a disposition pursuant to the definition of that term in s.148(9). In turn, the ACB must have been reduced to nil in the course of these dealings, as the disposition was confirmed as taxable.

Practice points

Life insurance generally accumulates tax-free, and pays out tax-free.
A policyholder is more likely to face tax on a withdrawal than a policy loan.
Sometimes a policy loan can result in tax, even though interest must be paid to the insurer and the loan amount reduces the death benefit.
In a closing point in the 2017 CRA letter, the writer noted that many rules have been modified for policies issued after 2016. Check with your insurer how this may affect your policy dealings.

Advertising on social media – Deduction complication … and simplification

At issue

We are about two decades into the commercial internet age. Alongside the expanding list of never-before-seen online goods and services, traditional bricks-and-mortar businesses are simultaneously being transformed by this digital revolution. The lines have blurred in terms of physical production, as have geographic and regulatory borders.

When it comes to taxes, some may find it appealing (possibly amusing) to see our authorities playing catch-up, but that means uncertainty for entrepreneurs. To make viable financial plans, businesses need to know whether and how existing rules will map over into their digital activities, or if they have entirely new compliance requirements to contend with.

Early on much of the focus was simply on what is subject to tax, and as new offerings emerge those determinations continue. Equally important is the question of what may be deducted from that income, to which the Canada Revenue Agency has recently provided some clarity in the area of advertising on social media.

Income Tax Act (ITA) Canada – Deductions generally

The general ability to take a tax deduction is expressed first as a denial, followed an exception:

18 (1) In computing the income of a taxpayer from a business or property no deduction shall be made in respect of (a) an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property [my emphasis obviously]

Of course, numerous provisions constrain the application of that general exception. Some of those are overarching such as the reasonableness requirement in s. 67. Others are more targeted, in particular for our purposes the sections dealing with advertising.

ITA – Limitation on advertising expense

The advertising limitations are expressed in s.19 for newspapers (including any “comics supplement”), s.19.01 for periodicals, and s.19.1 for a broadcasting undertaking.

Much of these rules address cross-border issues: from the citizenship of the publisher; to the degree to which editorial activity occurs in Canada; to the geographic location of typesetting or physical printing; to the proportion of editorial-to-advertising space, and more. Depending on the resolution of these issues, advertising may be fully deductible, half-deductible, or not at all – and in some cases a reference to the Department of Canadian Heritage may be called for.

It requires a great deal of interpretation to apply that language and those concepts in a dynamic new media industry, not to mention the due diligence burden placed upon the taxpayer to ascertain the necessary information to work with. In fact, it would not be unreasonable to characterize that traditional framework as antiquated, and in many ways unmanageable.

CRA letters 2017-0708891M4 (August 2017) and 2017-0719471E5 (September 2017)

In August 2017, the Minister of National Revenue Diane Lebouthillier personally responded to a taxpayer inquiry sent to a Member of Parliament. The question was whether foreign online advertising was deductible. The Minister acknowledged the general s.18 deductibility and the constraints of ss. 19, 19.01, and 19.1. She then advised, as head of the CRA, that those limiting rules would not be applied to the deductibility of advertising expenses on foreign Internet websites.

Another letter was issued by the CRA in September 2017, responding to a similar issue. The question was about the treatment of advertising on social media. The agency confirmed that the Canadian content and ownership rules would not apply to social media sites or networks, including foreign websites.

Practice points

Expenses are generally deductible if an outlay is incurred to generate income from a business or from property, and it is reasonable in the circumstances.
There are rules that limit deductibility of advertising expenses, contingent on whether certain Canadian content or Canadian ownership requirements have been met.
The CRA has confirmed that Canadian content / foreign rules will not apply to advertising on social media networks or foreign websites.